- 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 June 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. 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 þ 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 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 þ
(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 þ

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 779,512 shares of common stock issued and outstanding as of August 1, 2010

PEOPLES BANCORP, INC.

FORM 10-Q

INDEX

		Page

Part I – Financial Information

Item 1.	Financial Statements	3

	Consolidated Balance Sheets at June 30, 2010 (unaudited)
	and December 31, 2009	3

	Consolidated Statements of Income (unaudited) for three and six months
	ended June 30, 2010 and 2009	4

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
	for the six months ended June 30, 2010 and 2009	5

	Consolidated Statements of Cash Flows (unaudited) for six months
	ended June 30, 2010 and 2009	6

	Notes to Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition
	And Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24

Part II – Other Information

Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	(Removed and Reserved)	26
Item 5.	Other Information	26
Item 6.	Exhibits	26

Signatures		26
Exhibit Index		27

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

PEOPLES BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30,			December, 31
	2010			2009
	(unaudited)
ASSETS
Cash and due from banks	$	10,935,892		$	15,988,739
Federal funds sold		1,015,000			7,015,811
Cash and cash equivalents		11,950,892			23,004,550
Securities available for sale		6,025,280			3,027,700
Securities held to maturity (approximate fair
value of $5,621,167 and $10,312,156)		5,515,050			10,063,376
Federal Home Loan Bank & Community Bankers Bank stock, at cost		2,401,200			2,401,200
Loans, less allowance for loan losses
of $3,550,950 and $2,845,364		208,624,876			203,899,678
Premises and equipment		6,473,627			6,521,504
Goodwill and intangible assets		637,824			671,660
Accrued interest receivable		1,308,670			1,450,155
Deferred income taxes		1,272,487			1,277,611
Foreclosed real estate		1,030,000			1,335,000
Other assets		2,064,962			1,814,991
Total Assets	$	247,304,868		$	255,467,425

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing	$	35,468,685		$	36,951,197
Interest-bearing		152,240,171			156,299,711
		187,708,856			193,250,908
Securities sold under repurchase agreements		2,744,268			2,917,339
Federal Home Loan Bank advances		26,000,000			28,000,000
Accrued interest payable		415,548			439,410
Other liabilities		1,907,308			1,970,020
		218,775,980			226,577,677
Stockholders' equity
Common stock, par value $10 per share; 1,000,000 shares
authorizes; issued and outstanding 779,512 shares at
June 30, 2010 and at December 31, 2009		7,795,120			7,795,120
Additional paid-in capital		2,920,866			2,920,866
Retained earnings		18,497,028			18,865,399
		29,213,014			29,581,385
Accumulated other comprehensive income (loss)
Unrealized gain on available for sale securities		11,098			3,587
Unfunded liability of defined benefit plan		(695,224	)		(695,224	)
		28,528,888			28,889,748
Total Liabilities and Stockholders' Equity	$	247,304,868		$	255,467,425

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

PEOPLES BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)

	For the three months ended					For the six months ended
	June 30					June 30
	2010			2009		2010		2009
Interest and dividend revenue
Loans, including fees	$	3,068,089		$	3,389,288	$	6,287,440	$	6,832,179
U. S. government agency securities		86,796			134,358		195,266		286,551
Deposits in other banks		13			13		18		36
Federal funds sold		579			3,350		1,275		5,371
Equity securities		1,501			0		3,094		0
Total interest and dividend revenue		3,156,978			3,527,009		6,487,093		7,124,137

Interest expense
Deposits		732,967			777,579		1,472,780		1,526,109
Borrowed funds		211,463			399,718		456,612		843,841
Total interest expense		944,430			1,177,297		1,929,392		2,369,950

Net interest income		2,212,548			2,349,712		4,557,701		4,754,187

Provision for loan losses		1,025,000			425,000		1,500,000		855,000
Net interest income after
provision for loan losses		1,187,548			1,924,712		3,057,701		3,899,187

Noninterest revenue
Service charges on deposit accounts		226,369			238,166		441,171		464,305
Insurance commissions		289,787			278,199		623,395		754,874
Other noninterest revenue		114,941			77,893		179,131		197,884
Total noninterest revenue		631,097			594,258		1,243,697		1,417,063

Noninterest expenses
Salaries and employee benefits		1,042,848			1,177,514		2,107,857		2,278,670
Occupancy		113,854			109,434		241,569		226,949
Furniture and equipment		82,324			82,607		171,479		160,299
Other operating		724,793			553,389		1,297,466		1,019,881
Total noninterest expenses		1,963,819			1,922,944		3,818,371		3,685,799

Income before income taxes		(145,174	)		596,026		483,027		1,630,451
Income taxes (benefit)		(77,108	)		214,098		149,837		605,201
Net income (loss)	$	(68,066	)	$	381,928	$	333,190	$	1,025,250

Earnings (loss) per common share	$	(0.08	)	$	0.49	$	0.43	$	1.32

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

PEOPLES BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

SIX MONTHS ENDED JUNE 30, 2010 and 2009

								Accumulated
			Additional					other
			paid-in		Retained			comprehensive			Comprehensive
	Par value		Capital		earnings			income			Income

Balance, December 31, 2008	$	7,855,120	$	2,920,866	$	18,370,797		$	(643,859	)

Net income		-		-		1,025,250			-		$	1,025,250
Unrealized loss on investment
securities available for sale net
Of income taxes of $25,240		-		-		-			(38,748	)		(38,748	)
Comprehensive income											$	986,502
Cash dividend, $0.89 per share		-		-		(693,766	)		-

Balance, June 30, 2009	$	7,795,120	$	2,920,866	$	18,702,281		$	(682,607	)


Balance, December 31, 2009	$	7,795,120	$	2,920,866	$	18,865,399		$	(691,637	)

Net income		-		-		333,190			-		$	333,190
Unrealized gain on investment
securities available for sale net
Of income taxes of ($20,218)		-		-		-			7,511			7,511
Comprehensive income											$	340,701
Cash dividend, $0.90 per share		-		-		(701,561	)		-

Balance, June 30, 2010	$	7,795,120	$	2,920,866	$	18,497,028		$	(684,126	)

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

PEOPLES BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

	For the six months ended
	June 30
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received	$	6,671,080		$	7,271,485
Fees and commissions received		1,348,303			1,417,063
Cash paid to suppliers and employees		(3,925,287	)		(3,293,426	)
Interest paid		(1,953,254	)		(2,371,917	)
Taxes paid		(149,429	)		(423,014	)
		1,991,416			2,600,191
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for premises, equipment, and software		(124,054	)		(274,788	)
Loans made, net of principal collected		(6,251,256	)		6,209,933
Loss (gain) on sale of foreclosed real estate		200,394			83,144
Proceeds from maturities and calls of securities
Available for sale		1,000,000			2,000,000
Held to maturity		4,550,397			1,000,365
Purchase of securities Available for Sale		(4,003,871	)		(1,043,103	)
Purchase of securities held to maturity		0			(1,000,000	)
Redemption of FHLB stock, net of purchases		0			152,800
		(4,628,390	)		7,128,351
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in
Time deposits		2,097,171			(1,640,422	)
Other deposits		(7,639,223	)		14,270,621
Securities sold under repurchase agreements		(173,071	)		(7,050,752	)
Advances under (repayments of) notes payable, net		(2,000,000	)		(8,000,000	)
Repayment of other borrowings		0			(108,607	)
Dividends paid		(701,561	)		(693,766	)
		(8,416,684	)		(3,222,926	)
NET INCREASE (DECREASE) IN CASH		(11,053,658	)		6,505,616
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD		23,004,550			7,686,815
CASH AND EQUIVALENTS AT END OF PERIOD	$	11,950,892		$	14,192,431

PEOPLES BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited) (continued)

	For the six months ended June 30,
	2010			2009

RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
FROM OPERATING ACTIVITIES
Net income	$	333,190		$	1,025,250

ADJUSTMENTS
Depreciation and amortization		171,931			167,921
Provision for loan losses		1,500,000			855,000
Amortization of intangible assets		33,836			32,780
Security discount accretion, net of premium amortization		16,444			(18,471	)
Deferred Income Taxes		411			0
Loss (gain) on sale of foreclosed real estate		104,606			(56,144	)
Decrease (increase) in
Accrued interest receivable		141,485			152,062
Income tax refund receivable		0			182,187
Other assets		(249,971	)		80,658
Increase (decrease) in
Deferred origination fees and costs, net		26,058			13,757
Accrued interest payable and other liabilities		(23,862	)		(1,967	)
Income taxes payable		0			0
Other liabilities		(62,712	)		167,158
	$	1,991,416		$	2,600,191

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

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 six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the full 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 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.

The Company evaluated subsequent events after the balance sheet date through August 11, 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 six months ended June 30, 2010 and 2009, total comprehensive income, net of taxes, was $340,701 and $986,502, respectively. Comprehensive income is the sum of net income and the change in the unrealized gain or loss on securities available for sale, net of income taxes.

4.	Commitments

Loan commitments are made to accommodate the financial needs of the Company’s customers. Letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. These obligations are not recorded in the Company’s financial statements. The credit risks inherent in loan commitments and letters of credit are essentially the same as those involved in extending loans to customers, and these arrangements are subject to the Company’s normal credit policies. The Company’s exposure to credit loss in the event the customer does not satisfy the terms of these arrangements equals the notional amount of the obligation less the value of any collateral. The table below represents unfunded obligations at June 30, 2010 and December 31, 2009.

	At June 30, 2010		December 31, 2009

Check loan lines of credit	$	483,320	$	502,887
Mortgage lines of credit		8,960,705		11,202,534
Other lines of credit		17,051,607		16,776,329
Un-disbursed construction loan commitments		1,103,090		933,503
Standby letters of credit	$	3,432,831	$	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 six-month periods ended June 30, 2010 and 2009.

Pension

The Bank maintains a defined benefit pension plan covering substantially all employees of the Bank. Benefits are based on years of service and the employee’s highest average rate of earnings for five consecutive years during the final 10 full years before retirement. The Bank’s general funding policy is to contribute annually the maximum amount that can be deducted for income tax purposes, determined using the projected unit credit cost method. The assets of the plan are invested in various time deposits and held in trust as required by law.

During the six months ended June 30, 2010 and 2009, the Bank recognized net periodic costs for this plan of $155,301 and $157,515, respectively. The Bank contributed $121,260 to the plan during the six months ended June 30, 2010, compared to no contributions for the first six months of 2009.

7.	Segment Reporting

The Company operates two primary businesses: Community Banking; and Insurance Products & Services. Through the Community Banking business, the Company provides services to consumers and small businesses on the upper Eastern Shore of Maryland through its 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.

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 six months ended June 30 2010	Community Banking		Insurance products and services		Intersegment Transactions		Consolidated Total

Net interest income	$	4,557,160	$	541	$	0	$	4,557,701
Provision for loan losses		1,500,000		0		0		1,500,000
Net interest income after provision		3,057,160		541		0		3,057,701

Noninterest revenue		615,159		628,538		0		1,243,697
Noninterest expense		3,362,596		455,775		0		3,818,371
Income before income taxes		609,723		173,304		0		783,027
Income taxes		81,293		68,544		0		149,837
Net income	$	228,430	$	104,760	$	0	$	333,190

Average assets	$	248,325,510	$	1,643,059	$	-532,662	$	249,435,907

For the six months ended June 30 2009	Community Banking		Insurance products and services			Intersegment Transactions			Consolidated Total

Net interest income (loss)	$	4,758,529	$	(4,342	)	$	0		$	4,754,187
Provision for loan losses		855,000		0			0		$	855,000
Net interest income (loss) after provision		3,903,529		(4,342	)		0			3,899,187

Noninterest revenue		658,938		758,125			0		$	1,417,063
Noninterest expense		3,175,802		509,997			0		$	3,685,799
Income before income taxes		1,386,665		243,786			0			1,630,451
Income taxes		513,997		91,204			0		$	605,201
Net income	$	872,668	$	152,582		$	0		$	1,025,250

Average assets	$	250,019,241	$	1,629,362		$	(393,521	)	$	251,255,082

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:

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 June 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 Inputs
U. S. Government Securities		$	6,025,280			$	6,025,280			$	-			$	-

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 six months ended June 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 six months ended June 30, 2010 are as follows.

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

Foreclosed real estate	$	1,030,000	$	-	$	1,030,000	$	-

During the first six months of 2010 and 2009, the Company recognized no write-downs of foreclosed properties. 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 June 30, 2010 and December 31, 2009 is set forth in the following table:

	June 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value

Financial assets
Cash and due from banks	$	10,935,892	$	10,935,892	$	15,988,739	$	15,988,739
Federal funds sold		1,015,000		1,015,000		7,015,811		7,015,811
Investment securities (total)		11,540,330		11,646,447		13,091,076		13,339,856
Federal Home Loan Bank and Community Bankers Bank stock		2,401,200		2,401,200		2,401,200		2,401,200
Loans, net		208,624,876		209,477,947		203,899,678		204,083,903
Accrued interest receivable		1,308,670		1,308,670		1,450,155		1,450,155

Financial liabilities
Noninterest-bearing deposits	$	35,468,685	$	35,468,685	$	36,951,197	$	36,951,197
Interest-bearing deposits		152,240,171		156,154,685		156,299,711		160,895,134
Short-term borrowings		2,744,268		2,744,268		2,917,339		2,917,339
Federal Home Loan
Bank advances		26,000,000		27,299,458		28,000,000		28,457,862
Accrued interest payable		415,548		415,548		439,410		439,410

9 .	Investment Securities

Investment securities are summarized as follows:

	Amortized		Unrealized		Unrealized		Fair
June 30, 2010	cost		gains		losses		value
Available for sale
U. S. government agency	$	6,006,078	$	19,562	$	360	$	6,025,280

Held to maturity
U. S. government agency	$	5,509,159	$	106,091	$	0	$	5,615,250
Mortgage-backed securities		5,891		26		0		5,917
	$	5,515,050	$	106,117	$	0	$	5,621,167

December 31, 2009
Available for sale
U. S. government agency	$	3,020,741	$	6,959	$	0	$	3,027,700

Held to maturity
U. S. government agency	$	10,057,082	$	248,790	$	0	$	10,305,872
Mortgage-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 maturity
	Amortized		Fair		Amortized		Fair
June 30, 2010	cost		value		cost		value
Maturing
Within one year	$	4,003,361	$	4,012,980	$	5,002,116	$	5,085,900
Over one to five years		2,002,717		2,012,300		507,043		529,350
Mortgage-backed securities		-		-		5,891		5,917
	$	6,006,078	$	6,025,280	$	5,515,050	$	5,621,167

Pledged securities	$	-	$	-	$	2,968,457	$	3,035,096

December 31, 2009
Maturing
Within one year	$	1,015,880	$	1,017,300	$	6,541,691	$	6,663,095
Over one to five years		2,004,861		2,010,400		3,515,391		3,642,777
Mortgage-backed securities		-		-		6,294		6,284
	$	3,020,741	$	3,027,700	$	10,063,376	$	10,312,156

Pledged securities	$	-	$	-	$	2,971,405	$	3,068,439

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

10.	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 2010-11 clarifies 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 830) – 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 Corporation’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 Corporation’s financial statements that include periods beginning on or after January 1, 2011.

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., the Bank and the Insurance Agency.

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.

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 manage growth; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond our control. These and other risks are discussed in detail in the periodic reports that Peoples Bancorp, Inc. files with the Securities and Exchange Commission (see Item 1A of Part II of this report for further information). All of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on our business or operations. Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise.

RESULTS OF OPERATIONS

General

For the three-month period ended June 30, 2010, we reported a net loss of $68,066, or $(0.08) per share, compared to net income of $381,928, or $0.49 per share, for the same period in 2009. Net income for the six months ended June 30, 2010 was $333,190, or $0.43 per share, compared to $1,025,250, or $1.32 per share, for the first six months of 2009. The decreases in net income for the three- and six-month periods ended June 30, 2010 over the corresponding periods of last year (117.82% and 67.50%, respectively) 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 $131,479 over the same time period in 2009 due to a (58.43%) 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 six-month period ended June 30, 2010 was 4.14%, compared to 4.17% 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 June 30, 2010 was $2,212,548, which represents a decrease of $137,164 or 5.84% from net interest income for the same period in 2009. Net interest income for the six-month period ended June 30, 2010 was $4,557,701, which represents a decrease of $196,486 or 4.13% over the net interest income for the first six months of 2009. The primary contributor to the decreases was the reduction in interest earning assets.

Interest revenue for the three and six months ended June 30, 2010 totaled $3,156,978 and $6,487,093, respectively, compared to $3,527,009 and $7,124,137, respectively, for the same periods last year, representing decreases of $370,031 or 10.49% and $637,044 or 8.94%, respectively. We experienced a $544,739 decrease in interest earned on loans as a direct result of our average loan balances decreasing by $5.103,392 (net of the allowance for loan losses) and the interest rate decreasing 35 basis points when compared to the first six months of 2009. Additionally, we recorded a $91,285 decrease in income on U. S. Government Agency securities for the first six months of 2010 when compared to the same time period in 2009.

Interest expense for the three- and six-month periods ended June 30, 2010 totaled $944,430 and $1,929,392, respectively, compared to $1,177,297 and $2,369,950, respectively, for the same periods last year, representing decreases of $232,867 or 19.78% and $440,558 or 18.59%, respectively. The Company decreased its FHLB borrowings during the first six months of 2010 from $28,000,000 at December 31, 2009 to $26,000,000 at June 30, 2010. FHLB borrowings at June 30, 2009 were $35,000,000. As a result, interest expense on borrowed funds for the first six months of 2010 decreased $387,229 when compared to the six months ended June 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.

A table of our average balances, interest and yields follows.

Average Balances, Interest, and Yield

	For the Six Months Ended June 30, 2010							For the Six Months Ended June 30, 2009
	Average Balance		Interest		Yield			Average Balance		Interest		Yield
Assets
Federal funds sold	$	1,665,824	$	1,275		0.15	%	$	5,494,537	$	5,371		0.20	%
Interest-bearing deposits		24,917		19		0.15	%		59,196		38		0.13	%
Investment securities:
U. S. government agency		14,416,315		204,721		2.86	%		13,336,850		300,425		4.54	%
Other		0		0		0.00	%		0		0		0.00	%
FHLB of Atlanta & Community Bankers Bank Stock		2,401,200		3,244		0.27	%		2,369,484		0		0.00	%
Total investment securities		16,817,515		207,965		2.49	%		15,706,334		300,425		3.86	%
Loans:
Demand and time		27,183,191		785,366		5.83	%		38,986,535		1,188,999		6.15	%
Mortgage		175,682,859		5,343,959		6.13	%		170,817,109		5,529,264		6.53	%
Installment		6,455,235		214,171		6.69	%		3,888,055		155,532		8.07	%
Total loans		209,321,285		6,343,496		6.11	%		213,691,699		6,873,795		6.49	%
Allowance for loan losses		2,835,037							2,102,059
Total loans, net of allowance		206,486,248		6,343,496		6.20	%		211,589,640		6,873,795		6.55	%
Total interest-earning assets		224,994,504		6,552,755		5.87	%		232,849,707		7,179,629		6.22	%
Non-interest-bearing cash		11,556,068							6,090,405
Premises and equipment		6,518,370							6,496,206
Other assets		6,366,965							5,818,764
Total assets	$	249,435,907						$	251,255,082
Liabilities and Stockholders’ Equity
Interest-bearing Deposits
Savings and NOW deposits	$	47,153,799		43,892		0.19	%	$	33,334,460		37,674		0.23	%
Money market and supernow		11,070,864		25,006		0.46	%		17,261,210		43,185		0.50	%
Other time deposits		95,656,406		1,403,882		2.96	%		84,740,974		1,445,249		3.44	%
Total interest-bearing deposits		153,881,069		1,472,780		1.93	%		135,336,644		1,526,108		2.27	%
Borrowed funds		28,522,566		456,612		3.23	%		52,178,344		843,841		3.26	%
Total interest-bearing liabilities		182,403,635		1,929,392		2.13	%		187,514,988		2,369,950		2.55	%
Noninterest-bearing deposits		35,672,397							32,608,970
		218,076,032							220,123,958
Other liabilities		2,539,643							2,385,260
Stockholders’ equity		28,820,232							28,745,864
Total liabilities and stockholders equity	$	249,435,907						$	251,255,082
Net interest spread						3.74	%						3.67	%
Net interest income			$	4,623,363						$	4,809,679
Net margin on interest-earning assets						4.14	%						4.17	%

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

Provision for Loan Losses

The provision for loan losses was $1,500,000 for the first six months of 2010, compared to $855,000 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 six-month periods ended June 30, 2010 totaled $631,097 and $1,243,697, respectively, which represent an increase of 6.20% and a decrease of 12.23% over $594,258 and $1,417,063, respectively, for the same periods in 2009. The decrease for the six-month period resulted primarily from the $144,370 or 58.43% decrease in Insurance Agency contingency income earned during the first six months of 2010, from $247,099 for the first six months of 2009 to $102,729 for the first six months of 2010. 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 $18,753 or 9.48% and in service charges on deposit accounts of $23,134 or 4.98% during the first six months of 2010 when compared to the same period of 2009.

Noninterest Expense

The Company recorded noninterest expense of $1,963,819 and $3,818,371 for the three- and six-month periods ended June 30, 2010, respectively, compared to $1,922,944 and $3,685,799, respectively, for the same periods in 2009, representing increases of $40,875 or 2.13% and $132,572 or 3.60%, respectively. The increases are mainly attributable to increased other operating expenses of $277,585 for the first six months of 2010. The items in other operating expenses contributing to this increase are the Bank’s FDIC assessment increase of $26,082, other real estate expenses increase of $104,490 and data processing fees increase of $104,120. These increases were offset by a decrease in salaries and employee benefits of $170,813.

Income Tax Expense

The Company’s effective tax rate for the three- and six-month periods ended June 30, 2010 was 53.1% and 31.0%, respectively, compared to 35.9% and 37.1%, respectively, for the same periods in 2009. The Company recorded an income tax benefit of $77,108 for the three months ended June 30, 2010, compared to an income tax expense of $214,098 for the same period last year. For the six months ended June 30, 2010 and 2009, the Company recorded income tax expenses of $149,836 and $605,201, respectively. Decreases in income before income tax during the three- and six-month periods ended June 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 June 30, 2009 were $247,304,868, compared to $255,467,425 at December 31, 2009, representing a decrease of $8,162,557 or 3.20%.

Total liabilities at June 30, 2010 were $218,775,980, compared to $226,577,677 at December 31, 2009, representing a decrease of $7,801,697 or 3.44%.

Stockholders’ equity was $28,528,888 as of June 30, 2010, compared to $28,889,748 as of December 31, 2009, a decrease of $360,860. The decrease was due to net income for the period totaling $333,190 plus a $7,511 increase in the unrealized gains on securities available for sale net of income taxes offset by dividends paid to stockholders of $701,561.

Return on average equity for the six months ended June 30, 2010 was 2.33%, compared to 7.19% for the same period in 2009. Return on average assets was 0.27% for the six months ended June 30, 2010, compared to 0.82% for the same period in 2009.

Composition of Loan Portfolio

At June 30, 2010, loans, net of unearned income, were $208,624,876, an increase of $4,725,198 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 $206,486,248 and $211,589,640 during the first six months of 2010 and 2009, respectively, which constituted 91.77% and 90.87% of average interest-earning assets for the respective periods. For the six months ended June 30, 2010, our average loan to deposit ratio was 108.93%, compared to 125.99% for the six months ended June 30, 2009. Our ratio of average loans to deposits plus borrowed funds was 94.69% for the six months ended June 30, 2010, compared to 96.12% for the six months ended June 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 June 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 strength of the borrowers and guarantors, the related collateral, and the effects of economic conditions. The overall evaluation of the adequacy of the total allowance for loan losses is based on an analysis of historical loan loss ratios, loan charge-offs, delinquency trends, and previous collection experience, along with an assessment of the effects of external economic conditions. This allowance may be increased to accommodate reserves for specific loans identified as substandard during management's loan review. Net recoveries and/or decreases in loans may cause the allowance as a percentage of gross loans to exceed our target. Historically, our regulators have discouraged negative provisions, however, management would consider a negative provision if warranted.

The provision for loan losses is a charge to earnings in the current period to replenish the allowance and maintain it at a level management has determined to be adequate.

The allowance for loan losses increased to $3,550,950 at June 30, 2010, compared to $2,845,364 at December 31, 2009. The provision for loan losses was $1,500,000 for the first six months of 2010, compared to $855,000 for the same period of 2009. The increase in the provision for loan losses in the first six 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 June 30, 2010 and December 31, 2009, the allowance for loan losses compared to gross loans was 1.67% 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 analysis 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 allowance for loan losses for the periods indicated:

Allowance for Loan Losses

	Six months ended			Six months ended			Year ended
	June 30,			June 30,			December 31,
	2010			2009			2009
Balance at beginning of year	$	2,845,364		$	2,001,739		$	2,001,739
Loan losses:
Commercial		71,965			283,373			290,126
Mortgages		710,728			254,776			490,049
Consumer		27,999			28,769			157,367
Total loan losses		810,692			566,918			937,542
Recoveries on loans previously charged off
Commercial		2,050			6,281			47,501
Mortgages		73			3,207			3,207
Consumer		14,155			3,473			4,459
Total loan recoveries		16,278			12,961			55,167
Net loan losses		794,414			553,957			882,375
Provision for loan losses charged to expense		1,500,000			855,000			1,726,000
Balance at end of year	$	3,550,950		$	2,302,782		$	2,845,364
Allowance for loan losses to gross loans outstanding at end of period		1.67	%		1.10	%		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.

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 is specifically determined to be impaired and 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 $6,967,856 and $8,631,961 at June 30, 2010 and December 31, 2009, respectively. These loans are detailed below:

Risk Elements of Loan Portfolio

	June 30, 2010		December 31, 2009
Nonaccrual Loans
Commercial	$	460,767	$	485,579
Mortgage		2,081,738		1,898,607
Consumer		0		0
		2,542,505		2,384,186

Accruing Loans Past Due 90 Days or More
Commercial		114,113		168,020
Mortgage		4,254,867		6,055,484
Consumer		56,371		24,271
		4,425,351		6,247,775
	$	6,967,856	$	8,631,961

Gross interest income of $80,941 for the first half of 2010, $81,889 for fiscal year 2009 and $12,904 for the first half 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 $253 for the first half of 2010, $25,918 for fiscal year 2009 and $18,236 for the first half of 2009.

Loans are classified as impaired when the collection of contractual obligations, including principal and interest, is doubtful. Management believes it has identified all significant impaired loans as of June 30, 2010 and has made the appropriate charge to the Bank’s loan loss reserve.

Deposits and Other Interest-Bearing Liabilities

Average interest-bearing deposits increased $18,544,425 or 13.70% to $153,881,069 for the six months ended June 30, 2010, from $135,336,644 for the same period in 2009. Average noninterest-bearing deposits increased $3,063,427 or 9.39% to $35,672,397 for the six months ended June 30, 2010, from $32,608,970 for the same period in 2009. Average total deposits have increased 12.87% or $21,607,852 to $189,553,466 for the six months ended June 30, 2010 from $167,945,614 for the same period in 2009. Borrowings, primarily from the FHLB of Atlanta to fund loan demand, decreased to $26,000,000 from $28,000,000 at December 31, 2009, a decrease of 7.14%.

Deposits, particularly core deposits, have been our primary source of funding and have enabled us to meet both our short-term and long-term liquidity needs. Management anticipates that deposits will grow and continue to be our primary source of funding for the foreseeable future. It should be noted, however, that investor confidence in alternatives to deposit accounts, which may pay yields that are higher than those paid on deposits, typically increases when the economy and stock markets perform well. Increased investor confidence in nondeposit investment products in future periods would likely have an adverse impact on our deposit growth. In addition, changes in governmental monetary policy, especially interest rates, may impact our ability to attract and retain deposits.

Short-Term Borrowings

The following table sets forth our position with respect to short-term borrowings for June 30, 2010 and December 31 2009.

	June 30, 2010					December 31, 2009
	Amount		Rate			Amount		Rate

Federal Home Loan Bank (daily re-price)	$	0		-	%	$	0		.00	%
Retail Repurchase Agreements		2,744,268		.90	%		2,917,339		.36	%
Federal Funds Borrowed		0		-	%		0		.00	%
Total	$	2,744,268				$	2,129,539

We may borrow up to approximately 30% of total assets from the FHLB of Atlanta 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 Bank was required to purchase shares of capital stock in the FHLB of Atlanta 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 June 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, namely, the Community 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 $41,346,611 of which $26,000,000 has been advanced as of June 30, 2010. There were no short-term borrowings at June 30, 2010 or December 31, 2009 with the FHLB of Atlanta. 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 June 30, 2010 to the minimum ratios required by federal banking regulators is presented below.

				Minimum			To be well
	Actual			Requirements			capitalized
Tier 1 risk-based capital		13.77	%		4.00	%		6.00	%
Total risk-based capital		15.03	%		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 June 30, 2010 under the supervision and with the participation of 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 second 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 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. Management does not believe that any material changes in these risk factors have occurred since December 31, 2009 except as follows:

The Dodd-Frank Wall Street Reform and Consumer Protection Act may affect our business activities, financial position and profitability by increasing our regulatory compliance burden and associated costs, placing restrictions on certain products and services, and limiting our future capital raising strategies.

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which implements significant changes in the financial regulatory landscape and will impact all financial institutions, including Peoples Bancorp, Inc. and the Bank. The Dodd-Frank Act is likely to increase our regulatory compliance burden. It is too early, however, for us to assess the full impact that the Dodd-Frank Act may have on our business, financial condition or results of operations. Many of the Dodd-Frank Act’s provisions require subsequent regulatory rulemaking.

The Dodd-Frank Act’s significant regulatory changes include the creation of a new financial consumer protection agency, known as the Bureau of Consumer Financial Protection (the “Bureau”), that is empowered to promulgate new consumer protection regulations and revise existing regulations in many areas of consumer compliance, which will increase our regulatory compliance burden and costs and may restrict the financial products and services we offer to our customers. Moreover, the Dodd-Frank Act permits states to adopt stricter consumer protection laws and states’ attorneys general may enforce consumer protection rules issued by the Bureau. The Dodd-Frank Act also imposes more stringent capital requirements on bank holding companies by, among other things, imposing leverage ratios on bank holding companies and prohibiting new trust preferred issuances from counting as Tier 1 capital. These restrictions may limit our future capital strategies. The Dodd-Frank Act also increases regulation of derivatives and hedging transactions, which could limit our ability to enter into, or increase the costs associated with, interest rate and other hedging transactions.

Although certain provisions of the Dodd-Frank Act, such as direct supervision by the Bureau, will not apply to banking organizations with less than $10 billion of assets, such as Peoples Bancorp, Inc. and the Bank, the changes resulting from the legislation will impact our business. These changes will require us to invest significant management attention and resources to evaluate and make necessary changes.

We are currently in the process of evaluating this regulatory change, but have not fully quantified the full impact.

Recent amendments to the FRB’s Regulation E may negatively impact our non-interest income.

On November 12, 2009, the Board of Governors of the Federal Reserve System announced the final rules amending Regulation E that prohibit financial institutions from charging fees to consumers for paying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts-in, to the overdraft service for those types of transactions. Compliance with this regulation is effective July 1, 2010 for new consumer accounts and August 15, 2010 for existing consumer accounts. The impact that these new rules will have on us is unknown at this time, but they do have the potential to reduce our non-interest income and this reduction could be material.

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

	PEOPLES BANCORP, INC.

Date: August 11, 2010	By:	/s/Thomas G. Stevenson
		Thomas G. Stevenson
		President/Chief Executive Officer
		& Chief Financial Officer

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		Certifications of the CEO/CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)