- Quarterly Report (10-Q)

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, 2009

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

For the transition period from _______________ to ________________

Commission File Number: 0-24169

PEOPLES BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland		52-2027776
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation 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, 2009

PEOPLES BANCORP, INC.

FORM 10-Q

INDEX

		Page

Part I – Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets at September 30, 2009 (unaudited) and December 31, 2008	3

	Consolidated Statements of Income (unaudited) for three and nine months ended September 30, 2009 and 2008	4

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the nine months ended September 30, 2009 and 2008	5

	Consolidated Statements of Cash Flows (unaudited) for nine months ended September 30, 2009 and 2008	6

	Notes to Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23

Part II – Other Information

Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 5.	Other Information	24
Item 6.	Exhibits	24

Signatures		24
Exhibit Index		25

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

PEOPLES BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	September 30,		December 31,
	2009		2008
	(unaudited)
ASSETS

Cash and due from banks	$	12,243,516	$	3,789,925
Federal funds sold		2,713,861		3,896,890
Cash and cash equivalents		14,957,377		7,686,815
Securities available for sale		4,043,620		4,077,898
Securities held to maturity (approximate fair
value of $10,382,685 and $10,430,709)		10,061,685		10,055,715
Federal Home Loan Bank stock, at cost		2,401,200		2,494,000
Loans, less allowance for loan losses
of $2,566,807 and $2,001,739		206,195,123		214,679,949
Premises and equipment		6,571,726		6,523,845
Goodwill and intangible assets		688,578		712,932
Accrued interest receivable		1,537,119		1,582,688
Deferred income taxes		650,464		858,423
Foreclosed real estate		1,380,000		1,407,000
Other assets		1,447,026		1,814,970
Total Assets	$	249,933,918	$	251,894,235

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits
Non-interest-bearing	$	31,669,422	$	34,387,604
Interest-1bearing		151,321,020		131,350,969
		182,990,442		165,738,573
Securities sold under repurchase agreements		2,284,527		9,959,539
Federal funds purchased		0		2,170,000
Federal Home Loan Bank advances		33,000,000		43,000,000
Other borrowings		0		173,216
Accrued interest payable		347,791		441,832
Other liabilities		2,463,488		1,968,151
		221,086,248		223,451,311
Stockholders' equity
Common stock, par value $10 per share, 1,000,000 shares
authorized; issued and outstanding 779,512 shares at
September 30, 2009 and at December 31, 2008		7,795,120		7,795,120
Additional paid in capital		2,920,866		2,920,866
Retained earnings		18,821,116		18,370,797
		29,537,102		29,086,783
Accumulated other comprehensive income (loss)
Unrealized gain (loss) on available for sales securities		6,392		51,965
Unfunded liability of defined benefit plan		-695,824		-695,824
		28,847,670		28,442,924
Total Liabilities and Stockholders’ Equity	$	249,933,918	$	251,894,235

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

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PEOPLES BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)

	For the three months ended				For the nine months ended
	September 30,				September 30,
	2009		2008		2009		2008
Interest and dividend revenue
Loans, including fees	$	3,306,921	$	3,692,342	$	10,139,100	$	11,212,858
U. S. government agencies securities		125,756		184,146		412,307		582,196
Deposits in other banks		18		1,750		54		14,538
Federal funds sold		2,409		17,291		7,780		87,672
Equity securities		4,903		37,797		4,903		124,277
Total interest and dividend revenue		3,440,007		3,933,326		10,564,144		12,021,541

Interest expense
Deposits		785,526		850,687		2,311,635		2,678,583
Borrowed funds		370,079		575,321		1,213,920		1,881,406
Total interest expense		1,155,605		1,426,008		3,525,555		4,559,989

Net interest income		2,284,402		2,507,318		7,038,589		7,461,552

Provision for loan losses		316,000		440,000		1,171,000		1,040,000
Net interest income after
provision for loan losses		1,968,402		2,067,318		5,867,589		6,421,552

Noninterest revenue
Service charges on deposit accounts		255,719		255,534		720,024		747,426
Insurance commissions		344,564		340,621		1,099,439		1,000,897
Other noninterest revenue		73,051		71.024		270,935		241,025
Total noninterest revenue		673,334		667,179		2,090,398		1,989,348

Noninterest expenses
Salaries and employee benefits		1,103,947		1,090,179		3,382,617		3,326,645
Occupancy		125,167		122,453		352,116		310,972
Furniture and equipment		94,931		69,575		255,230		208,906
Other operating		568,415		526,540		1,588,296		1,427,926
Total noninterest expenses		1,892,460		1,808,747		5,578,259		5,274,449

Income before income taxes		749,276		925,750		2,379,728		3,136,451
Income taxes		279,661		338,820		884,863		1,156,243
Net income	$	469,615	$	586,930	$	1,494,865	$	1,980,208

Earnings per common share	$	0.60	$	0.75	$	1.92	$	2.53

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

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PEOPLES BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2009 and 2008

									Accumulated
				Additional					other
				paid-in		Retained			comprehensive			Comprehensive
	Common Stock			capital		earnings			income			income

Balance, December 31, 2007	$	7,855,120		$	2,920,866	$	17,997,286		$	(733,478	)

Net income		-			-		1,980,208			-		$	1,980,208
Unrealized gain on investment
securities available for sale net
of income taxes of $2,387		-			-		-			(3,665	)		(3,665	)
Comprehensive income												$	1,976,543
Repurchase of stock		(60,000	)		-		(420,000	)		-
Cash dividend, $1.25 per share		-			-		(1,026,381	)		-

Balance, September 30, 2008	$	7,795,120		$	2,920,866	$	18,531,113		$	(737,143	)

Balance, December 31, 2008	$	7,795,120		$	2,920,866	$	18,370,797		$	(643,859	)

Net income		-			-		1,494,865			-		$	1,494,865
Unrealized gain on investment
securities available for sale net
of income taxes of $27,338		-			-		-			(45,573	)		(45,573	)
Comprehensive income												$	1,449,292
Repurchase 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	)

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

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PEOPLES BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

	For the nine months ended
	September 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received	$	10,629,687		$	12,269,892
Fees and commissions received		2,061,033			1,989,348
Cash paid to suppliers and employees		(5,002,868	)		(5,380,883	)
Interest paid		(3,619,595	)		(4,599,116	)
Taxes paid		(52,140	)		(967,322	)
		4,016,117			3,311,919
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for premises, equipment, and software		(306,347	)		(990,994	)
Loans made, net of principal collected		6,981,610			4,398,189
Proceeds from sale of foreclosed real estate		371,364			(990,994	)
Proceeds from maturities and calls of securities
Available for sale		3,000,000			1,000,000
Held to maturity		1,000,650			3,501,036
Purchase of securities Available for Sale		(3,049,383	)		0
Purchase of securities held to maturity		(1,000,000	)		(2,505,170	)
Purchase of FHLB Stock		92,800			403,600
Acquisition of Insurance Agency		(25,344	)		0
		7,065,350			5,806,661
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in
Time deposits		11,223,141			1,714,446
Other deposits		6,028,728			(6,400,622	)
Securities sold under repurchase agreements		(9,845,012	)		3,739,044
Advances under (repayments of) notes payable		(10,000,000	)		(10,000,000	)
Repayments of other borrowings		(173,216	)		(15,662	)
Repurchase of Stock		0			(480,000	)
Dividends paid		(1,044,546	)		(1,026,381	)
		(3,810,905	)		(12,469,175	)
NET INCREASE (DECREASE) IN CASH		7,270,562			(3,350,595	)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD		7,686,815			9,840,142
CASH AND EQUIVALENTS AT END OF PERIOD	$	14,957,377		$	6,489,547

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PEOPLES BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited) (continued)

	For the nine months ended
	September 30,
	2009			2008
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
FROM OPERATING ACTIVITIES
Net income	$	1,494,865		$	1,980,208
ADJUSTMENTS
Depreciation and amortization		258,920			211,017
Provision for loan losses		1,171,000			1,040,000
Amortization of intangible assets		49,698			41,250
Security discount accretion, net of premium amortization		2,759			(26,338	)
Gain on sale of foreclosed real estate		(29,365	)		0
Decrease (increase) in
Accrued interest receivable		45,569			202,913
Income tax refund receivable		(288,577	)		188,921
Other assets		892,737			(505,129	)
Increase (decrease) in
Deferred origination fees and costs, net		17,216			71,776
Accrued Interest payable and other liabilities		401,295			107,301
	$	4,016,117		$	3,311,919

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

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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, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009 or any other future interim period. The consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. When used in these notes, the term “Company” refers to Peoples Bancorp, Inc, and, unless the context requires otherwise, its consolidated subsidiaries.

The Account 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.

In connection with preparation of the financial statements and in accordance with the recently issued Statement of Financial Accounting Standards (“SFAS”) No. 165 “ Subsequent Events ” (“SFAS 165”), the Company evaluated subsequent events after the balance sheet date through November 12, 2009. 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, 2009 and 2008, total comprehensive income, net of taxes, was $1,449,292 and $1,976,543, 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

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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, 2009 and December 31, 2008.

	At September 30, 2009		December 31, 2008

Revolving Home Equity Lines	$	3,117,854	$	3,993,375
1-4 Family Residential Construction loans		512,878		1,028,568
Commercial Real Estate		3,340,407		4,262,266
Other Unused Commitments		16,134,093		17,250,351
Commercial Letters of Credit		3,844,378		5,278,824
Total	$	26,949,610	$	31,813,384

5. Earnings Per Share

Earnings per common share is derived by dividing net income available to holders of shares of common stock by the weighted average number of shares of common stock outstanding of 779,512 for the three- and nine-month periods ended September 30, 2009. For the three- and nine-month periods ended September 30, 2008, the weighted average number of shares of common stock outstanding was 779,512 and 784,167, respectively.

6. Pension

The Bank maintains a defined benefit pension plan covering substantially all employees of the Bank. Benefits are based on years of service and the employee’s highest average rate of earnings for five consecutive years during the final 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, 2008 and 2007, the Bank recognized net periodic costs for this plan of $235,101 and $213,846, respectively. During the nine months ended September 30, 2009, the Bank contributed $68,176 to the plan.

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.

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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, 2009	Community banking		Insurance products and services			Intersegment Transactions			Consolidated Total

Net interest income	$	7,043,351	$	(4,762	)	$	0		$	7,038,589
Provision for loan losses		1,171,000		0			0			1,171,000
Net interest income after provision		5,872,351		(4,762	)		0			5,867,589

Noninterest revenue		986,259		1,104,139			0			2,090,398
Noninterest expense		4,822,903		755,356			0			5,578,259
Income before income taxes		2,035,707		344,021			0			2,379,728
Income taxes		754,009		130,854			0			884,863
Net income	$	1,281,698	$	213,167		$	0		$	1,494,865

Average assets	$	250,059,546	$	1,683,194		$	(455,059	)	$	251,287,681

For the nine months ended September 30, 2008	Community banking		Insurance products and services			Intersegment Transactions			Consolidated Total

Net interest income	$	7,470,387	$	(8,835	)	$	0		$	7,461,552
Net interest income	$	7,470,387	$	(8,835	)	$	0		$	7,461,552
Provision for loan losses		1,040,000		0			0			1,040,000
Net interest income after provision		6,430,387		(8,835	)		0			6,421,552

Noninterest revenue		984,816		1,004,532			0			1,989,348
Noninterest expense		4,470,498		803,951			0			5,274,449
Income before income taxes		2,944,705		191,746			0			3,136,451
Income taxes		1,092,627		63,616			0			1,156,243
Net income	$	1,852,078	$	128,130		$	0		$	1,980,208

Average assets	$	254,768,066	$	1,547,267		$	(278,919	)	$	256,036,414

8. Insurance Agency Acquisition

On January 2, 2007, the Company acquired all of the outstanding common stock of the Insurance Agency for approximately $1,000,000. The Insurance Agency has an office located in Chestertown Maryland.

On February 23, 2009, the Insurance Agency acquired certain assets of an insurance agency owned by a director of the Company for approximately $25,000.

During the nine months ended September 30. 2009, the Company recorded amortization of intangible assets of $49,698 related to these acquisitions.

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9. Fair Value

On January 1, 2008, the Company adopted SFAS No. 157, “ Fair Value Measurements” . The adoption of SFAS No. 157 had no material effect on the Company’s December 31, 2008 and September 30, 2009 Consolidated Balance Sheets or on the Company’s Consolidated Statements of Income for the three and nine months ended September 30, 2009.

SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value. SFAS No. 157 also establishes a hierarchy for determining fair value measurement. The hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:

Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;

Level 2 — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and

Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to valuation methodology.

Where quoted prices are available in an active market, securities available for sale are classified within Level 1 of the hierarchy. Level 1 includes securities that have quoted prices in an active market for identical assets. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. The Company has categorized its securities available for sale as follows:

		Total				Level 1 Inputs				Level 2 Inputs				Level 3 Inputs
Securities		$	4,043,620			$	4,043,620			$	-			$	-

Certain other assets are measured at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower of cost or fair value accounting or write-downs of individual assets due to impairment. For assets measured at fair value on a nonrecurring basis during the first nine months of 2009 that were still held in the balance sheet at period-end, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual asset at period-end:

	Total		(Level 1)		(Level 2)		(Level 3)

Foreclosed real estate owned	$	1,380,000	$	-	$	1,380,000	$	-

During the first nine months of 2009, the Company recognized no write-downs of foreclosed properties.

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10. Investment Securities.

Investment securities are summarized as follows:


	Amortized		Unrealized		Unrealized		Fair
September 30, 2009	cost		gains		losses		Value
Available for Sale
U. S. government agency	$	4,032,088	$	11,532	$	0	$	4,043,620

Held to maturity
U. S. government agency	$	10,055,199	$	321,016	$	0	$	10,376,215
Mortgage-backed securities		6,486		0		15		6,471
	$	10,061,685	$	321,016	$	15	$	10,382,686

December 31, 2008
Available for Sale
U. S. government agency	$	3,992,083	$	85,815	$	0	$	4,077,898

Held to maturity
U. S. government agency	$	10,048,570	$	375,170	$	0	$	10,423,740
Mortgage-backed securities		7,145		0		176		6,969
	$	10,055,715	$	375,170	$	176	$	10,430,709

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 maturity
	Amortized		Fair		Amortized		Fair
September 30, 2009	cost		Value		cost		Value
Maturing
Within one year	$	2,026,295	$	2,033,060	$	6,537,325	$	6,721,265
Over one to five years		2,005,793		2,010,560		3,517,874		3,654,950
Mortgage-backed securities		0		0		6,486		6,471
	$	4,032,088	$	4,043,620	$	10,061,685	$	10,382,686

Pledged securities	$	999,430	$	1,004,760	$	6,569,222	$	6,784,765

December 31, 2008
Maturing
Within one year	$	3,992,083	$	4,077,898	$	999,039	$	1,004,100
Over one to five years		0				9,049,531		9,420,640
Mortgage-backed securities		0				7,145		6,969
	$	3,992,083	$	4,077,898	$	10,055,715	$	10,431,709

Pledged securities	$	1,449,341	$	1,484,759	$	6,216,627	$	6,441,060

Investments are pledged to secure the deposits of federal and local governments and as collateral for repurchase agreements.

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11. Recent Accounting Standards

The following are recent accounting pronouncements approved by the FASB. These Statements will not have any material impact on the financial statements of the Company.

As discussed in Note 1 – Significant Accounting Policies, on July 1, 2009, the Accounting Standards Codification became FASB’s officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of 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.

FASB ASC Topic 320, “Investments – Debit and Equity Securities”. New authoritative accounting guidance under ASC Topic 320, “ Investments – Debt and Equity Securities ”, (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under ASC Topic 320, declines in the fair values of held-to-maturity and available-for-sale securities below their costs that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. The Company adopted the provisions of the new authoritative accounting guidance under ASC Topic 320 during the first quarter of 2009. Adoption of the new guidance did not significantly impact the Company’s financial statements.

FASB ASC Topic 715, “Compensation – Retirement Benefits”. New authoritative accounting guidance under ASC topic 715, “ Compensation – Retirement Benefits ”, provides guidance related to an employer’s disclosures about plan assets of defined benefit pension or other post-retirement benefit plans. Under ASC Topic 715, disclosures should provide users of financial statements with an understanding of how investment allocation decisions are made, the factors that are pertinent to an understanding of investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. The disclosures required by ASC Topic 715 will be included in the Company’s financial statements beginning with the financial statements for the year ended December 31, 2009.

FASB ASC Topic 855, “Subsequent Events”. New authoritative accounting guidance under ASC Topic 855, “ Subsequent Events ”, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC Topic 855 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events to transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The new authoritative accounting guidance under ASC Topic 855 became effective for the Company’s financial statements for periods ending after June 15, 2009 and did not have a significant impact on the Company’s financial statements.

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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.

In December 2008, the Bank completed the construction of and opened a branch located in Sudlersville, Queen Anne’s County, Maryland. The cost of construction and opening this branch was approximately $1,635,500. The branch has 2,584 square feet of office/teller space and is staffed with four employees. As a result of this expansion, noninterest expenses are expected to increase in 2009.

The Insurance Agency has roots dating back to the 1920s, when The Fleetwood-Kirby Agency was formed. In 1977, that agency was merged with several other well-respected insurances agencies to form Fleetwood, Athey, Macbeth & McCown, Inc. The Insurance Agency operates from one location in Kent County and provides a full range of insurance products to businesses and consumers. Product lines include property, casualty, life, marine, long term care and health insurance.

Unless the context clearly requires otherwise, the terms “Company”, “we”, “us” and “our” in this report refer collectively to Peoples Bancorp, Inc. and its subsidiaries.

Application of Critical Accounting Policies

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, the unaudited consolidated financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the consolidated financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.

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The policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses as the accounting area that requires the most subjective or complex judgments, and as such should be most subject to revision as new information becomes available.

The allowance for loan losses represents management’s estimate of probable loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review our allowance for loan losses. Such agencies may require us to make additional provisions for estimated loan losses based upon judgments different from those of management. The loan portfolio also represents the largest asset type on the balance sheet. Further information about the methodology used to determine the allowance for loan losses is discussed below under the heading “Loan Quality”.

The following discussion is designed to provide a better understanding of the financial position of the Company and should be read in conjunction with the interim Consolidated Financial Statements and Notes thereto included elsewhere in this report, and in conjunction with the audited Consolidated Financial Statements and Notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Annual Report of Peoples Bancorp, Inc. on Form 10-K for the year ended December 31, 2008.

Forward-Looking Information

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this quarterly report should be aware of the speculative nature of “forward-looking statements”. Statements that are not historical in nature, including the words “anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and similar expressions, are based on current expectations, estimates and projections about (among other things) the industry and the markets in which we operate; they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report, general economic, market or business conditions; changes in interest rates, deposit flow, the cost of funds, and demand for loan products and financial services; changes in our competitive position or competitive actions by other companies; changes in the quality or composition of loan and investment portfolios; the ability to 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.

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RESULTS OF OPERATIONS

Overview

For the three- and nine-month periods ended September 30, 2009, the Company reported net income of $469,615, or $0.60 per share, and $1,494,865, or $1.92 per share, respectively, compared to $586,930, or $0.75 per share, and $1,980,208, or $2.53 per share, respectively, for the same periods in 2008. The decreases for the three months (19.99%) and nine months (24.51%) ended September 30, 2009 over the same period last year resulted primarily from decreased net interest income and increased loan loss reserve. The Insurance Agency produced net income of $60,585 for the three-month period ended September 30, 2009 and net income of $213,167 for the nine-month period ended September 30, 2009, compared to $38,760 and $128,130, respectively, for the corresponding periods last year.

Net Interest Income

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

The key performance measure for net interest income is the “net margin on interest-earning assets,” or net interest income divided by average interest-earning assets. The Company’s net interest margin for the nine-month period ended September 30, 2009 was 4.12%, compared to 4.19% for the same period in 2008. The net margin may decline if competition increases, loan demand decreases, or the cost of funds rises faster than the return on loans and securities. The net margin may also be adversely impacted by a number of factors which cannot be predicted and are beyond our control.

Net interest income for the three-month period ended September 30, 2009 was $2,284,402, which represents a decrease of $222,916 or 8.89% from net interest income for the same period in 2008. Net interest income for the nine-month period ended September 30, 2009 was $7,038,589, which represents a decrease of $422,963 or 5.67% from the net interest income for the first nine months of 2008. The primary contributor to these decreases was lower interest rates on loans and deposits during the 2009 periods, which was a direct result of a reduction in the federal funds rate from 2.00% at September 30, 2008 to 0.25% at September 30, 2009. The 175 basis-point reduction in interest rates by the Federal Reserve in the first nine months of 2009 had a significant and immediate impact on the overall yield on earning assets, while reductions on the rates we pay on deposits have lagged due to certificates of deposit that do not re-price until they mature. We own shares of stock issued by the Federal Home Loan Bank (the “FHLB”) of Atlanta, and another major reduction in interest income resulted from the FHLB of Atlanta’s decision to not pay dividends on its stock during the first and second quarters of 2009.

Interest revenue for the three and nine months ended September 30, 2009 totaled $3,440,007 and $10,564,144, respectively, compared to $3,933,326 and $12,021,541, respectively, for the same periods last year, representing decreases of $493,319 or 12.54% and $1,457,397 or 12.12%, respectively. We have experienced a $1,073,758 decrease in interest earned on loans as a direct result of a $6,106,810 decrease (net of the allowance for loan losses) in our average loan balances when compared to the first nine months of 2008. Additionally, as noted above, the loss of dividend income on the FHLB of Atlanta stock for the first nine months of 2009 reduced interest income by $119,374 over the same time period last year.

Interest expense for the three- and nine-month periods ended September 30, 2009 totaled $1,155,605 and $3,525,555, respectively, compared to $1,426,008 and $4,559,989, respectively, for the same periods last year, representing decreases of $270,403 or 18.96% and $1,034,434 or 22.69%, respectively. The Company decreased its FHLB borrowings during the first nine months of 2009 from $43,000,000 at December 31, 2008 to $33,000,000 at September 30, 2009. FHLB borrowings at September 30, 2008 were $43,000,000. As a result, interest expense on borrowed funds for the first nine months of 2009 dropped $667,486 when compared to the nine months ended September 30, 2008. The Company assumed approximately $450,000 of debt in connection with the acquisition of the Insurance Agency. As of September 30, 2009, this debt was paid off.

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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 Ended
	September 30, 2009							September 30, 2008
	Average							Average
	Balance		Interest		Yield			Balance		Interest		Yield
Assets

Federal funds sold	$	5,562,255	$	7,780		0.19	%	$	4,498,846	$	87,672		2.60	%
Interest-bearing deposits		72,933		57		0.10	%		790,825		15,242		2.57	%
Investment securities:
U. S. government agency		13,425,760		432,270		4.30	%		16,985,593		610,382		4.80	%
Other		0		0		0.00	%		0		0		0.00	%
FHLB of Atlanta Stock		2,370,502		5,141		0.29	%		2,690,997		130,297		6.47	%
Total investment securities		15,796,262		437,411		3.70	%		19,676,590		740,679		5.03	%
Loans:
Demand and time		37,773,582		1,752,831		6.20	%		40,701,755		2,071,033		6.80	%
Mortgage		170,407,006		8,225,417		6.45	%		172,906,349		8,916,216		6.89	%
Installment		3,795,701		228,351		8.04	%		4,526,663		280,406		8.27	%
Total loans		211,976,289		10,206,599		6.44	%		218,134,767		11,267,655		6.90	%
Allowance for loan losses		2,179,094							2,230,762
Total loans, net of allowance		209,797,195		10,206,599		6.50	%		215,904,005		11,267,655		6.97	%
Total interest-earning assets		231,228,645		10,651,847		6.16	%		240,870,266		12,111,248		6.72	%
Non-interest-bearing cash		7,691,839							4,876,536
Premises and equipment		6,534,335							6,067,583
Other assets		5,832,862							4,222,029
Total assets	$	251,287,681						$	256,036,414
Liabilities and Stockholders’ Equity
Interest-bearing Deposits
Savings and NOW deposits	$	34,337,433		59,042		0.23	%	$	36,053,328		78,390		0.29	%
Money market and supernow		17,220,773		61,258		0.48	%		17,274,283		132,380		1.02	%
Other time deposits		86,654,436		2,191,335		3.38	%		80,324,358		2,467,813		4.10	%
Total interest-bearing deposits		138,212,642		2,311,635		2.24	%		133,651,969		2,678,583		2.68	%
Borrowed funds		49,039,870		1,213,919		3.31	%		58,095,060		1,881,406		4.33	%
Total interest-bearing liabilities		187,252,512		3,525,554		2.52	%		191,747,029		4,559,989		3.18	%
Noninterest-bearing deposits		32,712,030							33,748,179
		219,964,542							225,495,208
Other liabilities		2,522,014							1,987,756
Stockholders’ equity		28,801,125							28,553,450
Total liabilities and stockholders’ equity	$	251,287,681						$	256,036,414
Net interest spread						3.64	%						3.54	%
Net interest income			$	7,126,293						$	7,551,259
Net margin on interest-earning assets						4.12	%						4.19	%

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

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Provision for Loan Losses

The provision for loan losses was $1,171,000 for the first nine months of 2009, compared to $1,040,000 for the same period of 2008. The increase in the provision was in response to the increase in net charge-offs, and specific allocations for impaired loans. Additional information regarding risk elements in the loan portfolio, the provision for loan losses and management’s assessment of the adequacy of the allowance for loan losses are discussed below in the section entitled “Loan Quality”.

Noninterest Revenue

Noninterest revenue for the three- and nine-month periods ended September 30, 2009 totaled $673,334 and $2,090,398, respectively, which represent increases of 0.92% and 5.08%, respectively, over the $667,179 and $1,989,348, respectively, recorded for the same periods in 2008. The increases resulted from a $98,542 or 9.85% increase in commission income earned by the Insurance Agency during the first nine months of 2009. In addition, we experienced an increase in other noninterest revenue of $29,910 or 12.41%, offset by a reduction of $27,402 or 3.67% in service charges on deposit accounts, during the first nine months of 2009 when compared to the same period of 2008.

Noninterest Expense

The Company recorded noninterest expense of $1,892,460 and $5,578,259 for the three- and nine-month periods ended September 30, 2009, respectively, compared to $1,808,747 and $5,274,449, respectively, for the same periods in 2008, representing increases of $83,713 or 4.63% and $303,810 or 5.76%, respectively. The increases are mainly attributable to increased salaries and employee benefits of $55,972 and a $194,637 increase in FDIC insurance premiums for the first nine months of 2009 when compared to the same period of last year. As a result of opening our office in Suddlersville and updating our data processing system, occupancy expense increased $41,144 and furniture and equipment expense increased $46,324 during the first nine months of 2009 over the same period in 2008. FDIC insurance premiums for the nine months ended September 30, 2009 were $249,805, compared to $55,168 for the nine months ended September 30, 2008.

Income Tax Expense

The Company’s effective tax rate for the three- and nine-month periods ended September 30, 2009 was 37.3% and 37.2%, respectively, compared to 36.6% and 36.9% respectively, for the same periods in 2008. The Company’s income tax expense was $279,661 and $884,863 for the three- and nine-months ended September 30, 2009, respectively, compared to $338,820 and $1,156,243, respectively, for the same periods in 2008. Decreases in income before income tax during the three- and nine-month periods ended September 30, 2009 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, 2009 were $249,933,918, compared to $251,894,235 at December 31, 2008, representing a decrease of $1,960,317 or 0.78%.

Total liabilities at September 30, 2009 were $221,086,248, compared to $223,451,311 at December 31, 2008, representing a decrease of $2,365,063 or 1.06%.

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Stockholders’ equity was $28,847,670 at September 30, 2009, compared to $28,442,924 at December 31, 2008, representing an increase of $404,746. The increase was due to net income for the period totaling $1,494,865, offset by a $45,573 decrease in the unrealized gains on securities available for sale net of income taxes and dividends paid to stockholders of $1,044,546.

Return on average equity for the nine months ended September 30, 2009 was 6.94%, compared to 9.26% for the same period in 2008. Return on average assets was 0.84% for the nine months ended September 30, 2009, compared to 1.03% for the same period in 2008.

Composition of Loan Portfolio

At September 30, 2009, loans, net of unearned income, were $206,195,123, a decrease of $8,484,826 since December 31, 2008. Because loans are expected to produce higher yields than investment securities and other interest-earning assets, the absolute volume of loans and the volume as a percentage of total earning assets is an important determinant of net interest margin. Average loans, net of the allowance for loan losses, were $209,797,195 and $215,904,005 during the first nine months of 2009 and 2008, respectively, which constituted 90.73% and 89.63% of average interest-earning assets for the respective periods. For the nine months ended September 30, 2009, our average loan to deposit ratio was 122.74%, compared to 128.97% for the nine months ended September 30, 2008. Our ratio of average loans to deposits plus borrowed funds was 95.38% for the nine months ended September 30, 2009, compared to 95.75% for the nine months ended September 30, 2008. 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, 2009 is adequate to cover possible losses in the loan portfolio identified as of that date; however, management's judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may not prove valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.

For significant problem loans, management's review consists of evaluation of the financial 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.

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.

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The allowance for loan losses increased to $2,566,807 at September 30, 2009, from $2,001,739 at December 31, 2008. The provision for loan losses was $1,171,000 for the first nine months of 2009, compared to $1,040,000 for the same period of 2008. The increase in the provision for loan losses in the first nine months of 2009 when compared to the same period of 2008 was in response to the increase in net charge-offs, the results of our quarterly review of the adequacy of the factors discussed previously, and specific allocations for impaired loans. As of September 30, 2009 and December 31, 2008, the allowance for loan losses compared to gross loans was 1.23% and 0.92%, respectively. As part of our loan review process, management has noted an increase in foreclosures and bankruptcies in the geographic areas where we operate. Additionally, the current 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 ended
	September 30,			September 30,			December 31,
	2009			2008			2008
Balance at beginning of year	$	2,001,739		$	2,328,792		$	2,328,792
Loan losses:
Commercial		283,373			1,331,712			1,452,890
Mortgages		295,049			490,000			570,665
Consumer		42,210			26,259			66,142
Total loan losses		620,632			1,847,971			2,089,697
Recoveries on loans previously charged off
Commercial		7,861			3,868			4,688
Mortgages		3,207			0			40,000
Consumer		3,632			2,807			2,956
Total loan recoveries		14,700			6,675			47,644

Net loan losses		605,932			1,841,296			2,042,053
Provision for loan losses charged to expense		1,171,000			1,040,000			1,715,000
Balance at end of year	$	2,566,807		$	1,527,496		$	2,001,739
Allowance for loan losses to loans outstanding at end of period		1.23	%		0.71	%		0.92	%

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 this effort to adequately fund our allowance for losses.

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.

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The Company had loans past due 90 days or more including nonaccrual loans of $8,475,610 and $5,162,535 at September 30, 2009 and December 31, 2007, respectively. These loans are detailed below:

Risk Elements of Loan Portfolio

	September 30,		December 31,
	2009		2008
Nonaccrual Loans
Commercial	$	278,047	$	2,639,972
Mortgage		5,567,820		1,030,685
Consumer		42,688		0
		5,888,555		3,670,657
Accruing Loans Past Due 90 Days or More
Commercial		495,579		19,540
Mortgage		2,091,476		1,447,221
Consumer		0		25,117
		2,587,055		1,491,878
	$	8,475,610	$	5,162,535

Gross interest income of $263,031 for the first nine months of 2009, $217,573 for fiscal year 2008 and $181,683 for the first nine months of 2008 would have been recorded if nonaccrual loans had been current and performing in accordance with their original terms. Interest actually recorded on such loans was $21,277 for the first nine months of 2009, $9,683 for fiscal year 2008 and $6,325 for the first nine months of 2008.

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, 2009 and has made the appropriate change to the loan loss reserve in respect of those impaired loans.

Deposits and Other Interest-Bearing Liabilities

Average interest-bearing deposits increased $4,560,673 or 3.41% to $138,212,642 for the nine months ended September 30, 2009, from $133,651,969 for the same period in 2008. Average noninterest-bearing deposits decreased $1,036,149 or 3.07% to $32,712,030 for the nine months ended September 30, 2009, from $33,748,179 for the same period in 2008. Average total deposits increased 2.11% or $3,524,525 to $170,924,672 for the nine months ended September 30, 2009 from $167,400,148 for the same period in 2008. Borrowings, primarily from the FHLB of Atlanta to fund loan demand, decreased to $33,000,000 from $43,000,000 at December 31, 2008, a decrease of 23.26%.

Deposits, particularly core deposits, and borrowed funds 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.

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Short-term Borrowings

The following table sets forth the our position with respect to short-term borrowings at September 30, 2009 and December 31, 2008

	September 30, 2009					December 31, 2008
	Amount		Rate			Amount		Rate
FHLB (daily re-price)	$	0		-	%	$	5,000,000		.46	%
Retail Repurchase Agreements		2,284,527		1.86	%		9,959,539		2.85	%
Federal Funds Borrowed		0		-	%		2,170,000		.53	%
Total	$	12,780,520				$	9,041,476

We may borrow up to approximately 30% of total assets from the FHLB through any combination of notes or line of credit advances. Both the notes payable and the line of credit are secured by a floating lien on 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, 2009, the Bank had lines of credit of $13,650,000 in unsecured overnight federal funds and $5,000,000 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 $13,650,000 from correspondent banks, namely, Community Bankers Bank and M&T Bank. The Bank is also a member of the FHLB of Atlanta, which provides another source of liquidity through a secured line of credit in the amount of $42,683,952 of which $33,000,000 was advanced as of September 30, 2009. 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, 2009 to the minimum ratios required by federal banking regulators is presented below.

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	Actual			Minimum Requirements			To Be Well Capitalized
Tier 1 risk-based capital		13.32	%		4.00	%		6.00	%
Total risk-based capital		14.56	%		8.00	%		10.00	%
Leverage ratio		11.12	%		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, 2009 under the supervision and with the participation of the Company’s management, including the CEO. Based on that evaluation, the Company’s management, including the CEO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the third quarter of 2009, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

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Item 1A. Risk Factors.

The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of the Annual Report of Peoples Bancorp, Inc. on Form 10-K for the year ended December 31, 2008. Management does not believe that any material changes in these risk factors have occurred since December 31, 2008.

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

None.

Item 3. Defaults Upon Senior Securities.

Not applicable.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

The exhibits filed or furnished with this report are listed in the Exhibit Index that immediately follows the signatures, which Index is incorporated herein by reference.

SIGNATURES

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

	PEOPLES BANCORP, INC.

Date: November 12, 2009	By:	/s/ Thomas G. Stevenson
		Thomas G. Stevenson
		President/Chief Executive Officer
		& Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.		Description

31.1		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)