PEOPLES BANCORP INC - 10-Q Quarterly Report

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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____

Commission file number 0-16772

PEOPLES BANCORP INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)

Ohio
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(State or other jurisdiction of incorporation or organization)

31-0987416
------------------------------------
(I.R.S. Employer Identification No.)

138 Putnam Street, P. O. Box 738, Marietta, Ohio
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(Address of principal executive offices)

45750
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(Zip Code)

Registrant's telephone number, including area code: (740) 373-3155
--------------

Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

Yes X No
------------- ------------------

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes X No
------------- ------------------

Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, at November 3, 2003: 10,620,563.

Exhibit Index Appears on Page 35

PART I - FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

The following Condensed Consolidated Balance Sheets, Condensed Consolidated
Statements of Income, Consolidated Statements of Stockholders' Equity, and
Consolidated Statements of Cash Flows of Peoples Bancorp Inc. and subsidiaries
("Peoples"), reflect all adjustments (which include normal recurring accruals)
necessary to present fairly such information for the periods and dates
indicated. Since the following condensed unaudited financial statements have
been prepared in accordance with instructions to Form 10-Q, they do not contain
all information and footnotes necessary for a fair presentation of financial
position in conformity with accounting principles generally accepted in the
United States. Results of operation for the nine months ended September 30,
2003, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003. The balance sheet at December 31, 2002, contained
herein has been derived from the audited balance sheet included in Peoples
Bancorp Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002
("2002 Form 10-K"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted. These
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the 2002 Form 10-K.

The consolidated financial statements include the accounts of Peoples Bancorp
Inc. and its wholly-owned subsidiaries. Material intercompany accounts and
transactions have been eliminated.

PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)
September 30, December 31,
ASSETS 2003 2002

Cash and cash equivalents:
Cash and due from banks $ 29,092 $ 34,034
Interest-bearing deposits in other banks 732 1,016
Federal funds sold - 20,500
- -------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 29,824 55,550
- -------------------------------------------------------------------------------------------------------------

Available-for-sale investment securities, at estimated fair value (amortized
cost of $712,288 and $402,048 at September 30, 2003, and
December 31, 2002, respectively) 719,753 412,100

Loans, net of unearned interest 921,402 850,891
Allowance for loan losses (14,423) (13,086)
- -------------------------------------------------------------------------------------------------------------
Net loans 906,979 837,805
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Bank premises and equipment, net 22,496 18,058
Goodwill 38,908 25,504
Other intangible assets 7,586 5,234
Other assets 46,479 40,110
- -------------------------------------------------------------------------------------------------------------
Total assets $ 1,772,025 $ 1,394,361
=============================================================================================================

LIABILITIES
Deposits:
Non-interest bearing $ 132,977 $ 115,907
Interest bearing 923,352 839,970
- -------------------------------------------------------------------------------------------------------------
Total deposits 1,056,329 955,877
- -------------------------------------------------------------------------------------------------------------

Short-term borrowings:
Federal funds purchased and securities sold under repurchase agreements 22,577 31,183
Federal Home Loan Bank advances 24,300 -
Other short-term borrowings - 17,000
- -------------------------------------------------------------------------------------------------------------
Total short-term borrowings 46,877 48,183
- -------------------------------------------------------------------------------------------------------------

Long-term borrowings 454,568 203,829
Accrued expenses and other liabilities 10,465 10,199
- -------------------------------------------------------------------------------------------------------------
Total liabilities 1,568,239 1,218,088
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Guaranteed preferred beneficial interests in junior subordinated debentures 29,155 29,090

STOCKHOLDERS' EQUITY
Common stock, no par value, 24,000,000 shares authorized - 10,700,582 shares
issued at September 30, 2003, and 9,421,222 issued
at December 31, 2002, including shares in treasury 161,252 129,173
Accumulated comprehensive income, net of deferred income taxes 4,759 6,446
Retained earnings 9,841 12,650
- -------------------------------------------------------------------------------------------------------------
175,852 148,269
Treasury stock, at cost, 67,724 shares at September 30, 2003, and
59,351 shares at December 31, 2002 (1,221) (1,086)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 174,631 147,183
- -------------------------------------------------------------------------------------------------------------
Total liabilities, beneficial interests and stockholders' $ 1,772,025 $ 1,394,361
equity
=============================================================================================================

See notes to the consolidated unaudited financial statements

PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002

Interest income:
Interest and fees on loans $ 15,882 $ 16,357 $ 46,899 $ 46,672
Interest on taxable investment securities 6,881 4,526 20,604 13,493
Interest on tax-exempt investment securities 710 774 2,155 2,101
Other interest income 77 26 161 44
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 23,550 21,683 69,819 62,310
Interest expense:
Interest on deposits 4,438 5,749 14,545 16,448
Interest on short-term borrowings 144 195 386 715
Interest on long-term borrowings 4,298 2,601 12,414 7,339
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 8,880 8,545 27,345 24,502
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 14,670 13,138 42,474 37,808
Provision for loan losses 920 1,182 2,686 3,023
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 13,750 11,956 39,788 34,785
Other income:
Service charges on deposits 2,196 1,958 5,973 4,999
Fiduciary revenues 1,142 626 2,586 1,882
Electronic banking revenues 534 464 1,517 1,246
Mortgage banking income 400 22 967 22
Business owned life insurance 342 384 1,060 1,085
Insurance and investment commissions 338 532 1,100 1,518
Gain (loss) on asset disposals 9 - (229) (14)
Gain (loss) on securities transactions 2 51 (25) 102
Gain on early debt extinguishment - - - 631
Other non-interest income 89 80 320 230
- ---------------------------------------------------------------------------------------------------------------------------------
Total other income 5,052 4,117 13,269 11,701
Other expenses:
Salaries and benefits 5,031 4,771 14,582 13,601
Occupancy and equipment 1,127 988 3,333 2,854
Trust Preferred Securities expense 606 643 1,819 1,827
Amortization of intangible assets 551 208 1,023 431
Professional fees 436 533 1,377 1,416
Data processing and software 385 251 1,035 868
Franchise taxes 284 173 813 533
Marketing 200 242 855 778
Other non-interest expense 1,964 1,670 5,492 4,398
- ---------------------------------------------------------------------------------------------------------------------------------
Total other expenses 10,584 9,479 30,329 26,706
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 8,218 6,594 22,728 19,780
Income taxes 2,278 1,798 6,334 5,528
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 5,940 $ 4,796 $ 16,394 $ 14,252
=================================================================================================================================

Earnings per share:

Basic $ 0.56 $ 0.58 $ 1.58 $ 1.72
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.55 $ 0.56 $ 1.55 $ 1.68
- ---------------------------------------------------------------------------------------------------------------------------------

Weighted average common shares outstanding:
Basic 10,653,999 8,291,496 10,372,617 8,263,928
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted 10,896,461 8,557,503 10,585,655 8,488,445
- ---------------------------------------------------------------------------------------------------------------------------------

Cash dividends declared $ 1,835 $ 1,194 $ 4,916 $ 3,473
- ---------------------------------------------------------------------------------------------------------------------------------
Cash dividend per share $ 0.17 $ 0.14 $ 0.47 $ 0.42
- ---------------------------------------------------------------------------------------------------------------------------------
See notes to the consolidated unaudited financial statements

PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Dollars in thousands) Accumulated
Other
Common Stock Comprehensive Retained Treasury
Shares Amount Income Earnings Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 2002 9,421,222 $ 129,173 $ 6,446 $ 12,650 $ (1,086) $ 147,183
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 16,394 16,394
Unrealized gain on available-for-sale investment
securities, net of reclassification adjustment (1,687) (1,687)
Exercise of common stock options (38,338 shares -
reissued 16,107 treasury shares) 22,231 102 369 471
Tax benefit from exercise of stock options 113 113
Distribution of treasury stock for deferred
compensation plan (reissued 304 treasury 6 6
shares)
Cash dividends declared (4,917) (4,917)
5% stock dividend 466,127 13,128 (14,286) 1,158
Issuance of common shares 216,000 4,794 4,794
Common stock issued under dividend
reinvestment plan 12,047 294 294
Purchase of treasury shares, 94,109 shares (2,327) (2,327)
Issuance of common shares to purchase
Kentucky Bancshares Incorporated (issued
592,648 shares - reissued 29,693 treasury 562,955 13,648 659 14,307
shares)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2003 10,700,582 $ 161,252 $ 4,759 $ 9,841 $ (1,221) $ 174,631
====================================================================================================================================

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollars in thousands) Three Months Ended Nine months Ended
September 30, September 30,
2003 2002 2003 2002

Net income $ 5,940 $ 4,796 $ 16,394 $ 14,252
Other comprehensive income, net of tax:
Unrealized (loss) gain on available-for-sale investment
securities
arising during the period (6,763) 3,209 (1,703) 6,524
Less: reclassification adjustment for securities gain (loss)
included
in net income, net of tax 1 33 (16) 66
- ----------------------------------------------------------------------------------------------------------------------------
Net unrealized (loss) gain on available-for-sale arising during (6,764) 3,176 (1,687) 6,458
the period
- ----------------------------------------------------------------------------------------------------------------------------
Total comprehensive (loss) income $ (824) $ 7,972 $ 14,707 $ 20,710
============================================================================================================================

See notes to the consolidated unaudited financial statements

PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands) Nine Months Ended
September 30,
2003 2002

Cash flows from operating activities:
Net income $ 16,394 $ 14,252
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization, and accretion, net 4,532 2,157
Provision for loan losses 2,686 3,023
Business owned life insurance income (1,060) (1,085)
Loss (gain) on securities transactions 25 (102)
Gain on early debt extinguishment - (631)
Increase in interest receivable (1,064) (175)
Increase in interest payable 918 34
Deferred income tax expense 889 131
Deferral of loan origination fees and costs 208 65
Other, net (3,005) (396)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 20,523 17,273
- ------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
Purchases of available-for-sale securities (592,770) (132,901)
Proceeds from sales of available-for-sale securities 90,409 32,844
Proceeds from maturities and calls of available-for-sale securities 213,136 66,243
Net decrease (increase) in loans 2,528 (32,397)
Expenditures for premises and equipment (1,468) (937)
Proceeds from sale of other real estate owned 505 206
Expenditures for other real estate owned (1,687) -
Acquisitions, net of cash received 12,015 17,463
Investment in tax credit funds (993) (1,315)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (278,325) (50,794)
- ------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
Net (decrease) increase in non-interest bearing deposits (1,489) 2,211
Net (decrease) increase in interest-bearing deposits (11,746) 37,235
Net decrease in short-term borrowings (1,306) (11,192)
Proceeds from long-term borrowings 259,018 17,000
Payments on long-term borrowings (11,337) (5,558)
Cash dividends paid (4,002) (3,080)
Purchase of treasury stock (2,327) (207)
Repurchase of Trust Preferred Securities - (6,150)
Proceeds from issuance of Trust Preferred Securities - 7,000
Proceeds from issuance of common shares 5,265 1,033
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 232,076 38,292
- ------------------------------------------------------------------------------------------------------------------

Net (decrease) increase in cash and cash equivalents (25,726) 4,771
Cash and cash equivalents at beginning of period 55,550 32,838
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 29,824 $ 37,609
==================================================================================================================

Supplemental cash flow information:
Interest paid $ 25,831 $ 24,421
- ------------------------------------------------------------------------------------------------------------------
Income taxes paid $ 4,197 $ 4,055
- ------------------------------------------------------------------------------------------------------------------

See notes to the consolidated unaudited financial statements

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

Basis of Presentation
The accounting and reporting policies of Peoples Bancorp Inc. and Subsidiaries
("Peoples") conform to accounting principles generally accepted in the United
States and to general practices within the financial services industry. Peoples
considers all of its principal activities to be financial services related. The
consolidated financial statements include all accounts of Peoples' parent
company and its wholly-owned subsidiaries. The preparation of the financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates. Certain reclassifications have been
made to prior period amounts, which had no impact on net income or stockholders'
equity, to conform to 2003 presentation. All share and per share information
have been adjusted for a 5% stock dividend issued August 29, 2003. All
significant intercompany accounts and transactions have been eliminated.

1. Mergers and Acquisitions:
On May 9, 2003, Peoples Bancorp completed the acquisition of Kentucky
Bancshares Incorporated ("Kentucky Bancshares"), the holding company of
Kentucky Bank & Trust, for total consideration of $29.1 million ($14.8
million in cash and $14.3 million in Peoples Bancorp's common shares).

The acquisition of Kentucky Bancshares included the merger of Kentucky Bank
& Trust into Peoples Bank, National Association ("Peoples Bank"). As a
result, the five former Kentucky Bank & Trust offices in the northeastern
Kentucky communities of Ashland, Russell, Flatwoods, Greenup and South Shore
now operate as full-service financial service offices of Peoples Bank. In
this transaction, Peoples acquired loans of $75 million, deposits of $113
million, and trust assets under management of $181 million, as well as three
ATMs.

Peoples accounted for the transaction under the purchase method of
accounting. The balances and operations of the acquisition are included in
Peoples' consolidated financial statements from the date of the acquisition,
and do not materially impact Peoples' financial position, results of
operations or cash flows for any period presented. As part of the purchase
price allocation, Peoples recorded goodwill of $13.0 million, core deposit
intangible of $3.5 million and trust relationship intangible of $1.0
million.

Management expects this acquisition to positively impact Peoples' earnings,
from combined cost savings and enhanced efficiencies resulting from the
closure of Peoples Bank's office at 404 Ferry Street in Russell, Kentucky
concurrent with the acquisition and the closure of Peoples Bank's
Catlettsburg, Kentucky office on October 17, 2003. These office closings are
due to the proximity of the newly acquired offices in Russell and Ashland,
Kentucky that will continue to serve these markets.

2. New Accounting Pronouncements:
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46"). The objective of FIN 46 is to provide guidance on how
to identify a variable interest entity and determine when assets,
liabilities, non controlling interests and results of operations of a
variable interest entity need to be included in a company's consolidated
financial statements. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities,
which an enterprise obtains an interest after that date. Initially, FIN 46
applied in the first fiscal year or interim period beginning after June 15,
2003. On October 8, 2003, the FASB agreed to a broad-based deferral of the
effective date of this Interpretation for public companies until the end of
the periods ending after December 15, 2003. Additionally, the FASB agreed to
certain other modifications to the Interpretation during its October 8
meeting. The interpretation may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first applied or
by restating previously issued financial statements for one or more years
with an cumulative-effect adjustment as of the beginning of the first year
restated.

With respect to interests in entities subject to FIN 46, including
low-income housing investments, the adoption of FIN 46 will not have a
material impact on Peoples' financial position. Peoples has determined that
the provisions of FIN 46 may require de-consolidation of the subsidiary
grantor trusts, which issue mandatorily redeemable preferred securities of
the grantor trusts. At adoption of FIN 46, the grantor trusts may be
de-consolidated and the junior subordinated debentures of Peoples owned by
the grantor trusts would be disclosed as a liability. The Trust Preferred
Securities currently qualify as tier 1 capital of Peoples for regulatory
capital purposes. In July 2003, the Board of Governors of the Federal
Reserve System issued a supervisory letter instructing bank holding
companies to continue to include the trust preferred securities in their
Tier 1 capital for regulatory capital purposes until notice is given to the
contrary. The Federal Reserve intends to review the regulatory implications
of any accounting treatment changes and, if necessary or warranted, provide
further appropriate guidance. The banking regulatory agencies have not
issued any guidance, which would change the capital treatment for Trust
Preferred Securities based on the impact of the adoption of FIN 46. However,
there can be no assurance that the Federal Reserve will continue to allow
institutions to include trust preferred securities in Tier 1 capital for
regulatory purposes.

On May 15, 2003, FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("SFAS 150"). SFAS 150 modifies the accounting
for certain financial instruments that issuers could classify as equity.
Under SFAS 150, those instruments with characteristics of both liabilities
and equity must be classified as liabilities in statements of financial
position, with the corresponding payments to holders of the instruments
recognized as interest expense.

Peoples originally adopted the reporting requirements of SFAS 150 on July 1,
2003, as required, which resulted in Peoples reclassifying its Trust
Preferred Securities, presented on the balance sheet as "Guaranteed
preferred beneficial interest in junior subordinated debentures", to
liabilities and recognizing the related expense within the income statement
as interest expense versus Trust Preferred Securities expense. SFAS 150
permits only prospectively application and the adoption was reflected in the
third quarter 2003 balance sheet and income statement.

On October 29, 2003, the FASB agreed to defer indefinitely the application
of the measurement and recognition guidance in SFAS 150 to mandatorily
redeemable non controlling interests that are classified as equity in the
financial statements of the subsidiary but would be classified as a
liability in the parent's financial statements under Statement 150. As a
result of this deferral, Peoples will continue to account for its Trust
Preferred Securities as "Guaranteed preferred beneficial interest in junior
subordinated debentures" in the mezzanine section of the balance sheet, and
recognize the related expense as other expense in the third quarter 2003
financial statements.

3. Stock-Based Compensation:
Peoples accounts for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees". No stock-based employee
compensation cost is reflected in net income, since all options granted
under those plans had an exercise price equal to the market value of the
underlying common shares on the date of grant. The following table
illustrates the effect on net income and earnings per share if Peoples had
applied the fair value recognition provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation.

(Dollars in Thousands, except Per Share Data) Three Months Ended Nine months Ended
September 30, September 30,
2003 2002 2003 2002

Net income, as reported $ 5,940 $ 4,796 $ 16,394 $ 14,252
Deduct: stock-based compensation expense determined
under fair value based method, net of tax 139 108 365 258
- -------------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 5,801 $ 4,688 $ 16,029 $ 13,994
- -------------------------------------------------------------------------------------------------------------------------

Basic Earnings Per Share:
As reported $ 0.56 $ 0.58 $ 1.58 $ 1.72
- -------------------------------------------------------------------------------------------------------------------------
Pro forma $ 0.54 $ 0.57 $ 1.55 $ 1.69
- -------------------------------------------------------------------------------------------------------------------------

Diluted Earnings Per Share:
As reported $ 0.55 $ 0.56 $ 1.55 $ 1.68
- -------------------------------------------------------------------------------------------------------------------------
Pro forma $ 0.53 $ 0.55 $ 1.51 $ 1.65
- -------------------------------------------------------------------------------------------------------------------------

The fair value was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for
2003 and 2002:

2003 2002
Risk-free interest rate 5.50% 5.50%
Dividend yield 2.51% 2.51%
Volatility factor of the market price of parent stock 31% 31%
Weighted average expected life of options 7 years 7 years

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

SELECTED FINANCIAL DATA

The following data should be read in conjunction with the unaudited consolidated
financial statements and the management discussion and analysis that follows:

At or For the Three At or For the Nine
Months Ended September 30, Months Ended September 30,
SIGNIFICANT RATIOS 2003 2002 2003 2002

Return on average equity 13.85 % 17.80 % 13.26 % 18.63 %
Return on average assets 1.34 % 1.43 % 1.29 % 1.50 %
Net interest margin (a) 3.72 % 4.42 % 3.74 % 4.49 %
Non-interest income leverage ratio (b) 50.24 % 43.62 % 46.14 % 41.71 %
Efficiency ratio (c) 49.85 % 52.61 % 51.20 % 52.58 %
Average stockholders' equity to average assets 9.66 % 8.02 % 9.71 % 8.07 %
Average loans to average deposits 85.34 % 91.95 % 87.07 % 93.44 %
Cash dividends to net income 30.89 % 24.90 % 29.99 % 24.37 %
- ------------------------------------------------------------------------------------------------------------------------------------

ASSET QUALITY RATIOS (end of period)
Nonperforming loans as a percent of total loans (d) 0.61 % 0.87 % 0.61 % 0.87 %
Nonperforming assets as a percent of total assets (e) 0.39 % 0.56 % 0.39 % 0.56 %
Allowance for loan losses to loans net of unearned 1.57 % 1.49 % 1.57 % 1.49 %
interest

- ------------------------------------------------------------------------------------------------------------------------------------

CAPITAL RATIOS (end of period)
Tier I capital ratio 14.46 % 11.55 % 14.46 % 11.55 %

Risk-based capital ratio 15.80 % 12.91 % 15.80 % 12.91 %
Leverage ratio 8.82 % 7.96 % 8.82 % 7.96 %
- ------------------------------------------------------------------------------------------------------------------------------------

PER SHARE DATA (f)
Net income per share - basic $ 0.56 0.58 $ 1.58 1.72
Net income per share - diluted 0.55 0.56 1.55 1.68
Cash dividends per share 0.17 0.14 0.47 1.42
Book value per share (end of period) 16.42 13.47 16.42 13.47
Tangible book value per share (end of period) (g) $ 12.05 9.90 $ 12.05 9.90
Weighted average shares outstanding - Basic 10,653,999 8,291,496 10,372,617 8,263,928
Weighted average shares outstanding - Diluted 10,896,461 8,557,503 10,585,655 8,488,445
Common shares outstanding at end of period 10,632,858 8,298,828 10,632,858 8,298,828
- ------------------------------------------------------------------------------------------------------------------------------------

(a) Calculated using fully-tax equivalent net interest income as a percentage
of average earning assets.
(b) Non-interest income (less securities and asset disposal gains and/or
losses) as a percentage of non-interest expense (less intangible
amortization). The ratio for the nine months ended September 30, 2002,
excludes gain on early debt extinguishment of $631,000.
(c) Non-interest expense (less intangible amortization) as a percentage of
fully-tax equivalent net interest income plus non-interest income. The
ratio for the nine months ended September 30, 2002, excludes gain on early
debt extinguishment of $631,000.
(d) Nonperforming loans include loans 90 days past due and accruing,
renegotiated loans and nonaccrual loans.
(e) Nonperforming assets include
nonperforming loans and other real estate owned.
(f) Amounts adjusted for 5% stock dividend issued August 29, 2003.
(g) Tangible book value per share reflects capital calculated for banking
regulatory requirements and excludes balance sheet impact of intangible
assets acquired through acquisitions accounted for using the purchase
method accounting.

INTRODUCTION
The following discussion and analysis of the Consolidated Financial Statements
of Peoples is presented to provide insight into management's assessment of the
financial condition and results of operations. Peoples' primary subsidiaries are
Peoples Bank, National Association ("Peoples Bank"), Peoples Investment Company,
PEBO Capital Trust I and PEBO Capital Trust II. Peoples Bank also operates
Peoples Insurance Agency, Inc. ("Peoples Insurance"), which offers a full range
of life, property, and casualty insurance products to customers in Peoples'
markets, and Peoples Loan Services, Inc., which invests in certain loans
originated in Peoples' markets. Peoples Investment Company also owns Peoples
Capital Corporation.

Peoples Bank is a member of the Federal Reserve System and subject to
regulation, supervision and examination by the Office of the Comptroller of the
Currency. Peoples Bank offers complete financial products and services through
49 financial service locations and 33 ATMs in Ohio, West Virginia and Kentucky.
Peoples Bank's e-banking service, Peoples OnLine Connection, can be found on the
Internet at www.peoplesbancorp.com (this uniform resource locator (URL) is an
inactive, textual reference only). Peoples Bank provides an array of financial
products and services to customers that include traditional banking products
such as deposit accounts, lending products, credit and debit cards, corporate
and personal trust services, and safe deposit rental facilities. Peoples
provides services through ordinary walk-in offices and automobile drive-in
facilities, automated teller machines, banking by phone, and the Internet.

Peoples Bank also makes available other financial services through Peoples
Financial Advisors, which provides customer-tailored services for fiduciary
needs, investment alternatives, financial planning, retirement plans and other
asset management needs. Brokerage services are offered exclusively through
Raymond James Financial Services, member NASD/SIPC and an independent
broker/dealer, located at Peoples Bank offices.

Peoples Investment Company and Peoples Capital Corporation were formed in 2001
to allow management to better deploy investable funds and provide new
opportunities to make investments, including, but not limited to, low-income
housing tax credit funds, that are either limited or restricted at the bank
level.

This discussion and analysis should be read in conjunction with the audited
Consolidated Financial Statements for the year ended December 31, 2002, and
notes thereto, as well as the ratios, statistics and discussions contained
elsewhere in this Form 10-Q. All share and per share information has been
adjusted for stock dividends.

References will be found in this Form 10-Q to the following significant
transactions that have impacted or will impact Peoples' results of operations:

o As discussed in Note 1 of Notes to the Consolidated Unaudited
Financial Statements, on May 9, 2003, Peoples Bancorp completed its
acquisition of Kentucky Bancshares Incorporated ("Kentucky
Bancshares"), the holding company of Kentucky Bank & Trust. In
addition, Peoples Bank closed an office at 404 Ferry Street in
Russell, Kentucky concurrent with this acquisition. Peoples Bank also
closed its Catlettsburg, Kentucky office on October 17, 2003, due to
the proximity of the acquired Ashland, Kentucky office.

o On March 13, 2003, Peoples announced the authorization to repurchase
up to 315,000, or approximately 3%, of Peoples' outstanding common
shares from time to time in open market or privately negotiated
transactions ("2003 Stock Repurchase Program"). The common shares
repurchased will be used for projected stock option exercises granted
under Peoples' stock option plans, a portion of the consideration to
be paid in acquisitions, and other general corporate purposes. The
timing of the purchases and the actual number of common shares
purchased will depend on market conditions and limitations imposed by
applicable federal securities laws. The 2003 Stock Repurchase Program
will expire on December 31, 2003.

o On December 19, 2002, Peoples Bancorp Inc. completed the sale of
1,512,000 common shares through a firm commitment underwritten
offering and on January 3, 2003, sold an additional 226,800 common
shares in conjunction with the option granted to the underwriters to
cover over-allotments (collectively, the "Common Stock Offering"). The
Common Stock Offering generated new capital totaling $36.9 million
after offering expenses. In January 2003, Peoples Bancorp used $16
million of the net proceeds to increase Peoples Bank's capital
position. Peoples intends to use the remaining net proceeds for
general corporate purposes, which may include the repayment of
outstanding indebtedness, mergers and acquisitions or other strategic
investments.

o In December 2002, Peoples initiated an investment growth strategy to
offset the dilutive impact of the Common Stock Offering; thereby
leveraging Peoples' increased capital levels ("Investment Growth
Strategy"). As a result of this Investment Growth Strategy, total
earning assets, particularly mortgage-backed investment securities,
increased by $260 million in January 2003 compared to the year-end
2002 balance. Peoples funded the investment purchases with $187
million of wholesale market repurchase agreements at an average cost
of 2.92%, $58 million of FHLB advances at an average cost of 2.15% and
$15 million from the Common Stock Offering. In March 2003, Peoples
purchased an additional $20 million of mortgage-backed investment
securities as part of this strategy. This purchase was funded using an
$18.6 million wholesale market repurchase agreement at a rate of
2.09%, with the remainder from available corporate funds.

The impact of these transactions, where significant, is discussed in the
applicable sections of this management's discussion and analysis.

CRITICAL ACCOUNTING POLICIES
- ----------------------------
The accounting and reporting policies of Peoples conform to accounting
principles generally accepted in the United States ("US GAAP") and to general
practices within the financial services industry. The preparation of the
financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Management has identified the accounting policies described below as
those that, due to the judgments, estimates and assumptions inherent in those
policies, are critical to an understanding of Peoples' consolidated financial
statements and management's discussion and analysis.

INCOME RECOGNITION
Peoples recognizes interest income by methods that conform to US GAAP that
include general accounting practices within the financial services industry. In
the event management believes collection of all or a portion of contractual
interest on a loan has become doubtful, which generally occurs after the loan is
90 days past due, Peoples discontinues the accrual of interest. In addition,
previously accrued interest deemed uncollectible that was recognized in income
in the current year is reversed, while amounts recognized in income in the prior
year are charged against the allowance for loan losses. Interest received on
nonaccrual loans is included in income only if principal recovery is reasonably
assured. A nonaccrual loan is restored to accrual status when it is brought
current or has performed in accordance with contractual terms for a reasonable
period of time, and the collectibility of the total contractual principal and
interest is no longer doubtful.

ALLOWANCE FOR LOAN LOSSES
In general, determining the amount of the allowance for loan losses requires
significant judgment and the use of estimates by management. Peoples maintains
an allowance for loan losses to absorb probable losses in the loan portfolio
based on a quarterly analysis of the portfolio. This formal analysis determines
an appropriate level and allocation of the allowance for loan losses among loan
types and resulting provision for loan losses by considering factors affecting
loan losses, including specific losses, levels and trends in impaired and
nonperforming loans, historical loan loss experience, current national and local
economic conditions, volume, growth and composition of the portfolio, regulatory
guidance and other relevant factors. Management continually monitors the loan
portfolio through its Loan Review Department and Loan Loss Committee to evaluate
the adequacy of the allowance. The provision expense could increase or decrease
each quarter based upon the results of management's formal analysis.

The amount of the allowance for the various loan types represents management's
estimate of expected losses from existing loans based upon specific allocations
for individual lending relationships and historical loss experience for each
category of homogeneous loans. The allowance for loan losses related to impaired
loans is based on discounted cash flows using the loan's initial effective
interest rate or the fair value of the collateral for certain collateral
dependent loans. This evaluation requires management to make estimates of the
amounts and timing of future cash flows on impaired loans, which consists
primarily of nonaccrual and restructured loans. While allocations are made to
specific loans and pools of loans, the allowance is available for all loan
losses.

Individual loan reviews are based upon specific quantitative and qualitative
criteria, including the size of the loan, loan quality ratings, value of
collateral, repayment ability of borrowers, and historical experience factors.
The historical experience factors utilized are based upon past loss experience,
trends in losses and delinquencies, the growth of loans in particular markets
and industries, and known changes in economic conditions in the particular
lending markets. Allowances for homogeneous loans (such as residential mortgage
loans, credit cards, personal loans, etc.) are evaluated based upon historical
loss experience, trends in losses and delinquencies, growth of loans in
particular markets, and known changes in economic conditions in each lending
market. Consistent with the evaluation of allowances for homogenous loans,
allowances relating to the Overdraft Privilege program are based upon
management's monthly analysis of accounts in the program. This analysis
considers factors that could affect future losses on existing accounts,
including historical loss experience and length of overdraft.

There can be no assurance that the allowance for loan losses will be adequate to
cover all losses, but management believes the allowance for loan losses of $14.4
million at September 30, 2003, was adequate to provide for probable losses from
existing loans based on information currently available. While management uses
available information to provide for loan losses, the ultimate collectibility of
a substantial portion of the loan portfolio and the need for future additions to
the allowance will be based on changes in economic conditions and other relevant
factors. As a result of a slowdown in economic activity that could adversely
affect cash flows for both commercial and individual borrowers, Peoples could
experience increases in problem assets, delinquencies and losses on loans.

INVESTMENT SECURITIES
Investment securities are recorded at cost, which includes premiums and
discounts if purchased at other than par or face value. Peoples amortizes
premiums and accretes discounts as an adjustment to interest income using the
effective interest method over the estimated life of the security. The cost of
investment securities sold, and any resulting gain or loss, is based on the
specific identification method.

Management determines the appropriate classification of investment securities at
the time of purchase. Held-to-maturity securities are those securities that
Peoples has the positive intent and ability to hold to maturity and are recorded
at amortized cost. Available-for-sale securities are those securities that would
be available to be sold in the future in response to Peoples' liquidity needs,
changes in market interest rates, and asset-liability management strategies,
among other considerations. Available-for-sale securities are reported at fair
value, with unrealized holding gains and losses reported in stockholders' equity
as a separate component of other comprehensive income, net of applicable
deferred income taxes.

Presently, Peoples classifies its entire investment portfolio as
available-for-sale. As a result, both the investment and equity sections of
Peoples' balance sheet are more sensitive to changes in the overall market value
of the investment portfolio, due to changes in market interest rates, investor
confidence and other factors affecting market values, than if the investment
portfolio was classified as held-to-maturity.

Management systematically evaluates investment securities for
other-than-temporary declines in fair value on a quarterly basis. Declines in
the fair value of individual investment securities below their amortized cost
that are deemed to be other-than-temporary are written down to current market
value and included in earnings as realized losses. There were no investment
securities identified by management to be other-than-temporarily impaired for
the nine months ended September 30, 2003. If the financial markets experience
deterioration and investments decline in fair value, charges to income could
occur in future periods.

GOODWILL AND OTHER INTANGIBLE ASSETS
Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill
and Other Intangible Assets" ("SFAS 142"), establishes standards for the
amortization of acquired intangible assets and the non-amortization and
impairment assessment of goodwill. In addition, Statement of Financial
Accounting Standards No. 147, "Acquisitions of Certain Financial Institutions"
("SFAS 147"), establishes standards for unidentifiable intangible assets
acquired specifically in branch purchases that qualify as business combinations.
At September 30, 2003, Peoples had $7.2 million of core deposit and trust
relation intangible assets, subject to amortization, and $38.9 million of
goodwill, not subject to periodic amortization.

Goodwill arising from business combinations represents the value attributable to
unidentifiable intangible elements in the business acquired. Goodwill recorded
by Peoples in connection with its acquisitions relates to the value inherent in
the banking business and the value is dependent upon Peoples' ability to provide
quality, cost effective services in a competitive market place. As such,
goodwill value is supported ultimately by revenue that is driven by the volume
of business transacted. A decline in earnings as a result of a lack of growth or
the inability to deliver cost effective services over sustained periods can lead
to impairment of goodwill that could adversely impact earnings in future
periods.

Under US GAAP in effect through December 31, 2001, Peoples amortized goodwill on
a straight-line basis over periods ranging from ten to fifteen years. Effective
January 1, 2002, Peoples was no longer required to amortize previously recorded
goodwill as a result of adopting SFAS 142 and SFAS 147.

Peoples has reviewed its goodwill assets and has concluded the recorded value of
goodwill was not impaired as of September 30, 2003. There are many assumptions
and estimates underlying the determination of impairment and using different,
but still reasonable, assumptions could produce a significantly different
result. Additionally, future events could cause management to conclude
impairment indicators exist and Peoples' goodwill is impaired, which would
result in Peoples' recording an impairment loss. Any resulting impairment loss
could have a material, adverse impact on Peoples' financial condition and
results of operations.

RESULTS OF OPERATIONS

OVERVIEW OF THE INCOME STATEMENT
- --------------------------------
For the three months ended September 30, 2003, net income totaled $5,940,000, up
24% from $4,796,000 a year ago and up 9% from $5,439,000 for the second quarter
of 2003. Diluted earnings per share were $0.55 for the third quarter of 2003
versus $0.56 for the same period last year and $0.51 the second quarter of 2003.
For the nine months ended September 30, 2003, net income totaled $16,394,000,
representing a 15% increase over the $14,252,000 earned a year ago. Earnings per
diluted share were $1.55 for the nine months ended September 30, 2003, versus
$1.68 for the first nine months of 2002.

Peoples' increased net income is largely the result of additional net interest
income attributable to a higher level of earning assets, as well as enhanced
non-interest revenues. However, earnings per share growth continues to be
challenged by significant volumes of assets repricing downward and additional
common shares outstanding, including a full quarter's impact of the shares
issued as part of the Kentucky Bancshares acquisition last quarter.

Net interest income was $14,670,000 in the third quarter of 2003, compared to
$14,161,000 last quarter and $13,138,000 a year ago. Net interest margin was
3.72% in the third quarter of 2003 versus 3.64% and 4.42% for the second quarter
of 2003 and third quarter of 2002, respectively. On a year-to-date basis through
September 30, 2003, net interest income totaled $42,474,000 and net interest
margin was 3.74% compared to $37,808,000 and 4.49% for the same period in 2002.
The higher level of net interest income is primarily the result of an increase
in earning assets although the sustained low interest rate environment
throughout 2003 continues to compress net interest margin.

For the quarter ended September 30, 2003, non-interest income was $5,052,000, up
23% from $4,117,000 for 2002's third quarter and up 18% from $4,282,000 for the
second quarter of 2003. On a year-to-date basis, non-interest income totaled
$13,269,000 through September 30, 2003, compared to $11,701,000 a year ago.
Peoples' increased non-interest income was primarily the result of higher
deposit service charge income and mortgage banking revenues, while revenues from
Peoples' e-banking services and fiduciary activities also contributed to the
increase.

Non-interest expense was $10,584,000 in the third quarter of 2003, up 12%
compared to $9,479,000 for the same period in 2002. On a year-to-date basis,
non-interest expense totaled $30,329,000 through September 30, 2003, up 14% from
$26,706,000 last year. Compared to the second quarter of 2003, non-interest
expense was up $542,000. These increases are largely attributable to recent
acquisitions, which produced additional operating expenses.

INTEREST INCOME AND EXPENSE
- ---------------------------
Peoples derives a majority of its interest income from loans and investment
securities and incurs interest expense on interest-bearing deposits and borrowed
funds. Net interest income, the amount by which interest income exceeds interest
expense, remains Peoples' largest source of revenue. Management periodically
adjusts the mix of assets and liabilities in an attempt to manage and improve
net interest income. However, factors that influence market interest rates, such
as interest rate changes by the Federal Reserve Open Market Committee and
Peoples' competitors, may have a greater impact on net interest income than
adjustments made by management. Consequently, a volatile rate environment or
extended periods of unusually low or high interest rates can make it extremely
difficult to manage net interest margin and income in the short term, much less
anticipate and position the balance sheet for future changes.

In the third quarter of 2003, net interest income grew 12% to $14,670,000, from
$13,138,000 for 2002's third quarter. Interest income totaled $23,550,000 for
the quarter ended September 30, 2003, an increase of $1,867,000 (or 9%) compared
to a year ago. Interest expense was up $335,000 (or 4%) compared to last year's
third quarter, totaling $8,880,000 for the three months ended September 30,
2003. Compared to the second quarter of 2003, net interest income was up 4% in
the third quarter of 2003. On a year-to-date basis through September 30, 2003,
net interest income totaled $42,474,000 compared to $37,808,000 for the first
nine months of 2002, an increase of $4,666,000 (or 12%). For the same period,
total interest income grew 12% to $69,819,000, while interest expense was up 12%
to $27,345,000. These increases are primarily the result of the Investment
Growth Strategy, while acquisitions also contributed to these increases.

Peoples derives a portion of its interest income from loans to and investments
issued by states and political subdivisions. Since these revenues generally are
not subject to income taxes, management believes it is more meaningful to
analyze net interest income on a fully-tax equivalent ("FTE") basis, which
adjusts interest income by converting tax-exempt income to the pre-tax
equivalent of taxable income using an effective tax rate of 35%. For the three
months ended September 30, 2003, interest income was increased by $413,000 for
the impact of the tax-equivalent adjustment, resulting in FTE net interest
income of $15,083,000, up $1,506,000 (or 11%) from $13,577,000 for the same
period in 2002, and up $506,000 (or 3%) from $14,577,000 for the second quarter
of 2003. The FTE yield on Peoples' earning assets was 5.88% for quarter ended
September 30, 2003, versus 5.96% and 7.18% for the second quarter of 2003 and
third quarter of 2002, respectively, while the cost of interest-bearing
liabilities was 2.45%, 2.65% and 3.10% for the same periods, respectively. On a
year-to-date basis, FTE net interest income was $43,713,000 through September
30, 2003, compared to $39,007,000 for the first nine months of 2002, an increase
of $4,706,000 (or 12%). For the nine months ended September 30, 2003, the FTE
yield on earning assets was 6.07% and cost of interest-bearing liabilities was
2.66% versus 7.31% and 3.19%, respectively, for the same period last year.

Net interest margin, calculated by dividing FTE net interest income by average
interest-earning assets, serves as an important measurement of the net revenue
stream generated by the mix and pricing of Peoples' earning assets and
interest-bearing liabilities. In the third quarter of 2003, net interest margin
was 3.72% versus 3.64% last quarter and 4.42% a year ago. For the nine months
ended September 30, 2003, net interest margin was 3.74%, down from 4.49% for the
first nine months of 2002. The lower net interest margin in 2003 is largely the
result of high volumes of prepayments in both the loan and investment portfolios
and subsequent reinvestment of those funds at significantly lower rates due to
the current interest rate environment.

Earning assets averaged $1.63 billion in the third quarter of 2003, up $19.4
million (or 1%) compared to $1.61 billion last quarter, and up $398.2 million
(or 32%) from $1.23 billion for the third quarter of 2002. Net loans accounted
for the largest portion of earning assets, averaging $895.0 million for the
three months ended September 30, 2003, compared to average net loans of $881.6
million and $851.1 million for the second quarter of 2003 and third quarter of
2002, respectively. Loans acquired in acquisitions accounted for a majority of
the loan growth. Investment securities averaged $699.2 million for the third
quarter of 2003 compared to $703.6 million for the prior quarter and $370.0 for
2002's third quarter, with the increase from last year largely attributable to
the Investment Growth Strategy. The FTE yield on net loans was 7.08% for the
quarter ended September 30, 2003, versus 7.14% for the second quarter of 2003
and 7.66% for the three months ended September 30, 2002, while the FTE yield on
investments was 4.56%, 4.63% and 6.18% for the same periods, respectively.
Declining yields on both loans and investment securities were a result of market
interest rates remaining at very low levels.

On a year-to-date basis, average earning assets were $1.56 billion in 2003
compared to $1.16 million in 2002. Net loan balances increased $71.0 million (or
9%), averaging $871.6 million for the nine months ended September 30, 2003,
versus $800.6 million a year ago. The FTE yield on loans through nine months of
2003 was 7.20%, down from 7.80% a year ago. For the nine months ended September
30, 2003, average investment securities totaled $670.6 million versus $355.0
million for the first nine months of 2002, while the FTE yield on investments
was 4.76% and 6.28% for the same periods, respectively. The Investment Growth
Strategy implemented during the first quarter of 2003 accounted for virtually
all of the increase in average balance and much of the decline in yield, due to
the low interest rate environment. In addition, the high rate of prepayments on
mortgage-backed securities through 2003 has caused Peoples to reinvest those
funds in instruments with substantially lower yields.

In the third quarter of 2003, Peoples' average interest-bearing liabilities
totaled $1.43 billion, up from $1.41 billion in the second quarter of 2003 and
$1.09 billion a year ago. For the nine months ended September 30, 2003, average
interest-bearing liabilities were $1.37 billion, up from $1.03 billion a year
ago. Traditional deposits comprise the majority of Peoples' interest-bearing
liabilities, averaging $934.1 million for the three months ended September 30,
2003, compared to $906.9 million and $831.8 million for the second quarter of
2003 and third quarter of 2002, respectively. Through nine months of 2003,
traditional deposits averaged $895.1 million compared to $771.3 million last
year, an increase of $123.8 million (or 16%). These increases were due largely
to deposits acquired as part of acquisitions. In the third quarter of 2003, the
cost of funds from interest-bearing deposits was 1.88%, down from 2.17% in the
prior quarter and 2.74% in third quarter of 2002. The cost of funds from
interest-bearing deposits was 2.17% for the first nine months of 2003, down 68
basis points from 2.85% for the same period in 2002. The lower rates paid on
interest-bearing deposit accounts were a result of market rates remaining at low
levels. However, management continues to price Peoples' longer-term certificates
of deposit competitively as part of a strategy to shift to longer-term funding.

Peoples also utilizes a variety of borrowings as complementary funding sources
to traditional deposits. Total borrowed funds averaged $499.3 million for the
three months ended September 30, 2003, down from $499.9 million in the second
quarter of 2003 and up from $260.3 million a year ago. The majority of the
increase from last year was attributable to borrowed funds used in the
Investment Growth Strategy. The interest cost of Peoples' borrowed funds was
3.51% in third quarter of 2003, down from 3.53% last quarter and 4.26% for the
same period in 2002. For the nine months ended September 30, 2003, borrowed
funds averaged $476.4 million compared to $254.5 million for the first nine
months of 2002, while the average cost was 3.57% and 4.23% for the same periods,
respectively.

Peoples' main sources of borrowed funds are short- and long-term advances from
the FHLB. Short-term FHLB advances are primarily variable rate, LIBOR based
advances that are used to balance Peoples' daily liquidity needs and may be
repaid at any time without a penalty. The long-term FHLB advances consist
largely of 10-year borrowings requiring monthly interest payments, with
principal due at maturity. The rate on these advances are fixed for initial
periods ranging from two to four years, depending on the specific advance. After
the initial fixed rate period, the FHLB has the option to convert each advance
to a LIBOR based, variable rate advance; however, Peoples may repay the advance,
without a penalty, if the FHLB exercises its option. A portion of the long-term
FHLB advances are fixed rate advances that require monthly principal and
interest payments and may not be repaid prior to maturity without a penalty.

Short-term FHLB borrowings averaged $24.3 million for the quarter ended
September 30, 2003, compared to $5.3 million a year ago, with an average cost of
1.56% and 1.90% for the same periods, respectively. The increased balance was
attributable to short-term advances used in the Investment Growth Strategy.
Average long-term FHLB borrowings were up $20.2 million (or 10%) compared to the
third quarter of 2002, totaling $221.6 million for the three months ended
September 30, 2003, while the average cost dropped to 4.62% from 4.81%. The
increase in long-term FHLB advances was mainly due to management's efforts to
secure longer-term funding during this period of low rates. Management intends
to continue using a variety of FHLB borrowings to fund asset growth and manage
interest rate sensitivity, as deemed appropriate. For the nine months ended
September 30, 2002, short-term FHLB borrowings averaged $21.1 million versus
$16.9 million a year ago, while the average cost was 1.55% and 1.82% for the
same periods, respectively. Average long-term FHLB borrowings were $222.9
million through nine months of 2003, at an average cost of 4.65%, versus $196.7
million and average cost of 4.84% a year ago.

In addition to FHLB borrowings, Peoples also accesses national market repurchase
agreements to diversify funding sources. Typically, these repurchase agreements
are for terms of 90 days or less. However, Peoples utilized repurchase
agreements with terms ranging from 2 to 5 years as part of the Investment Growth
Strategy in an effort to match the term of the funding sources with the initial
estimated life of the investments. In the third quarter of 2003, wholesale
market term repurchase agreements averaged $216.3 million at an average cost of
2.91%, up from $9.1 million and an average cost of 3.65% a year ago, due mainly
to the Investment Growth Strategy. On a year-to-date basis through September 30,
2003, wholesale market repurchase agreements averaged $194.6 million, at an
average cost of 2.92%, compared to $8.2 million and an average cost of 3.65% a
year ago.

Peoples offers cash management services to its business customers, which also
provide short-term funding in the form of overnight repurchase agreements. For
the three months ended September 30, 2003, overnight repurchase agreements,
excluding balances of wholesale market term repurchase agreements, averaged
$20.2 million, down from $26.1 million a year ago. The average rate paid on
overnight repurchase agreements was 0.90% in third quarter of 2003, compared to
1.28% in the third quarter of 2002. Average overnight repurchase agreements
totaled $20.8 for the nine months ended September 30, 2003, compared to $24.3
million a year ago, while the average cost dropped 51 basis points to 0.88%.

As is the case with most financial institutions, Peoples continues to experience
net interest margin compression due to interest rates remaining at historically
low levels. Significant volumes of assets continue to reprice downward with
limited flexibility for a corresponding decrease in rates paid on
interest-bearing liabilities. In addition, generally weak economic conditions
and other factors are impacting loan growth. While these conditions challenge
Peoples' ability to enhance net interest income and margin in the short-term,
current asset-liability simulations indicate a sustained increase in interest
rates could cause net interest income to increase modestly based on Peoples'
interest rate risk position at September 30, 2003. Even though management
continues to focus on minimizing the impact of future rate changes on earnings,
Peoples' net interest margin and income remain difficult to predict, and to
manage, since changes in market interest rates remain uncertain.

PROVISION FOR LOAN LOSSES
- -------------------------
In the third quarter of 2003, Peoples' provision for loan losses was $920,000,
down from $935,000 in the prior quarter and down 22% from $1,182,000 a year ago,
which included provisions related to the Overdraft Privilege program of
$260,000, $185,000 and $283,000 for the same periods, respectively. The lower
provisions are largely the result of the overall improvement in Peoples' asset
quality since December 31, 2002. On a year-to-date basis through September 30,
2003, the provision for loan losses was $2,686,000 versus $3,023,000 in 2002, of
which $526,000 and $673,000, respectively, related to the Overdraft Privilege
program.

When expressed as a percentage of average loans, the provision was 0.10% in both
the second and third quarters of 2003 and 0.14% in the third quarter of 2002.
For the nine months ended September 30, the provision was 0.30% of average loans
in 2003 versus 0.37% in 2002. Management believes the provisions were
appropriate for the overall quality, inherent risk and volume concentrations of
Peoples' loan portfolio.

NON-INTEREST INCOME
- -------------------
Peoples generates non-interest income from six primary sources: deposit account
service charges, fiduciary activities, investment and insurance commissions,
electronic banking, mortgage banking and business owned life insurance ("BOLI").
For the quarter ended September 30, 2003, non-interest income was $5,052,000, up
$935,000 (or 23%) from $4,117,000 for the same period last year. On a
year-to-date basis, non-interest income totaled $13,269,000 through September
30, 2003, compared to $11,701,000 last year, an increase of $1,568,000 (or 13%).
Compared to the second quarter of 2003, non-interest income grew $770,000 (or
18%) in the third quarter of 2003. Peoples' enhanced non-interest income was
primarily the result of higher deposit service charge income and mortgage
banking revenues, with e-banking services and fiduciary activities also
contributing to the increase.

Peoples' largest source of non-interest revenue remains service charges and
other fees on deposit accounts, which are based on the recovery of costs
associated with services provided. In the third quarter of 2003, deposit account
service charges totaled $2,196,000, up $238,000 (or 12%) from $1,958,000 in
2002's third quarter and up $144,000 (or 7%) from $2,052,000 in the second
quarter of 2003. These increases were the result of higher volumes of overdraft
and non-sufficient funds fees, due in part to an increased number of checking
accounts from acquisitions. Overdraft and non-sufficient funds fees were up
$182,000 (or 14%) and $74,000 (or 23%), respectively, in the third quarter of
2003 compared to last year. For the nine months ended September 30, 2003,
deposit account service charges totaled $5,973,000 versus $4,999,000 for the
same period last year, an increase of $974,000 (or 19%), as overdraft and
non-sufficient funds fees grew $686,000 (or 22%) and $275,000 (or 36%),
respectively.

Peoples' fiduciary revenues improved $516,000 (or 82%) in the third quarter of
2003, totaling $1,142,000 versus $626,000 a year ago. Compared to the second
quarter of 2003, fiduciary fees increased 33%, from $858,000. On a year-to-date
basis, fiduciary fees were $2,586,000 through September 30, 2003, up $704,000
(or 37%) compared to $1,882,000 last year. These increases are largely
attributable to a one-time fee of $341,000 charged in the third quarter due to a
large special dividend received by several trust customers, as well as an
increase in trust assets under management due to the Kentucky Bancshares
acquisition. However, the sluggish equity markets, upon which a significant
portion of fiduciary fees is based, will continue to challenge Peoples'
fiduciary revenues.

Peoples offers various electronic banking ("e-banking") services, including ATM
and debit cards, direct deposit services and Internet banking, as alternative
delivery channels to traditional sales offices for providing services to
clients. Peoples' electronic banking services generated revenues of $534,000 for
the quarter ended September 30, 2003, up $70,000 (or 15%) from $464,000 a year
ago. For the nine months ended September 30, 2003, e-banking revenues totaled
$1,517,000, an increase of $271,000 (or 22%) compared to $1,246,000 in 2002.
These increased revenues were the result of customers using Peoples' debit cards
to complete more of their payment transactions. In the third quarter of 2003,
Peoples' customers used their debit cards to complete over $15 million of
transactions, up from $11 million in 2002's third quarter, while on a
year-to-date basis, debit card transactions exceeded $40 million in 2003 versus
$30 million a year ago. Compared to the second quarter of 2003, e-banking
revenues were up only $5,000 (or 1%) from $529,000, due to the expected
reduction in fees earned on certain debit card transactions effective August 1,
2003, as a result of the recent VISA and MasterCard litigation settlement.

Late in the third quarter of 2002, Peoples began selling long-term, fixed rate
real estate loans into the secondary market. Peoples has expanded its mortgage
banking activities throughout 2003, which have provided a boost to non-interest
revenues. For the three months ended September 30, 2003, mortgage banking
produced revenues of $400,000 compared to $337,000 last quarter and $22,000 a
year ago. On a year-to-date basis, mortgage banking income was $967,000 in 2003
versus $22,000 in 2002. Prior to the third quarter of 2002, Peoples primarily
originated one- to five-year adjustable rate, fully amortizing real estate loans
rather than long-term, fixed rate loans due to the associated interest rate
risk. Further information regarding Peoples' mortgage banking activities can be
found later in this discussion under "Loans".

Insurance and investment commissions totaled $338,000 in the third quarter of
2003, down $194,000 (or 36%) compared to $532,000 a year ago. For the nine
months ended September 30, 2003, insurance and investment commissions were
$1,100,000 versus $1,518,000 for the same period in 2002, a decline of $418,000
(or 28%). The lower level of insurance and investment income is largely
attributable to lower volumes of fixed annuity sales and related commission
income. In addition, decreased consumer lending opportunities in 2003 continue
to impact Peoples' credit life and accident and health ("A&H") insurance
commissions. Compared to the second quarter of 2003, insurance and investment
commissions were up $18,000 (or 6%) in the third quarter, from $320,000. The
following table details Peoples' insurance and investment commissions for the
periods indicated:

Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2003 2002 2003 2002

Property and casualty insurance $ 115 $ 84 $ 318 $ 262
Fixed annuities 96 311 390 813
Brokerage 71 46 165 174
Credit life and A&H insurance 37 46 107 141
Life and health insurance 19 45 120 128
- ---------------------------------------------------------------------------------------------------
Total $ 338 $ 532 $ 1,100 $ 1,518
- ---------------------------------------------------------------------------------------------------

Peoples' BOLI investment enhances operating efficiency by offsetting rising
employee benefit costs. In the third quarter of 2003, BOLI income totaled
$342,000 versus $353,000 last quarter and $384,000 a year ago. For the nine
months ended September 30, 2003, BOLI produced income of $1,060,00 compared to
$1,085,000 for the same period in 2002.

NON-INTEREST EXPENSE
- --------------------
In the third quarter of 2003, non-interest expense totaled $10,584,000, up
$1,105,000 (or 12%) from $9,479,000 a year ago. On a year-to-date basis
non-interest expense totaled $30,329,000 through September 30, 2003, up
$3,623,000 (or 14%) from $26,706,000 last year. Compared to the second quarter
of 2003, non-interest expense was up $542,000 (or 5%). Recent acquisitions and
strategic investments in technology have resulted in additional operating
expenses in 2003.

Salaries and benefits remain Peoples' largest non-interest expense, which is
inherent in a service-based industry such as financial services. For the quarter
ended September 30, 2003, salaries and benefits totaled $5,031,000 compared to
$4,771,000 the prior year and $4,827,000 for the second quarter of 2003,
increases of $260,000 (or 5%) and $204,000 (or 4%), respectively. For the nine
months ended September 30, 2003, salaries and benefits grew $981,000 (or 7%) to
$14,582,000, from $13,601,000 for the first nine months of 2002. The majority of
the increases were due to the addition of new associates in conjunction with
acquisitions. At September 30, 2003, Peoples had 498 full-time equivalent
associates, up from 486 at June 30, 2003 and 458 a year ago. Management will
continue to leverage Peoples' resources in an effort to optimize customer
service and produce additional future revenue streams.

Recent investments in technology and acquisitions have produced additional net
occupancy and equipment expenses, in particular depreciation expense. In the
third quarter of 2003, net occupancy and equipment expenses increased $139,000
(or 14%), totaling $1,127,000 versus $988,000 last year. For the nine months
ended September 30, 2003, net occupancy and equipment expenses totaled
$3,333,000, up $479,000 (or 17%) from $2,854,000 a year ago. The continued
investment in technology has enhanced Peoples' ability to serve clients and
satisfy their financial needs, while acquisitions have allowed Peoples to expand
its customer base. Compared to the second quarter of 2003, net occupancy and
equipment expense was virtually unchanged.

Professional fees, which include fees for accounting, legal and other
professional services, totaled $436,000 in the third quarter of 2003, down
$97,000 (or 18%) compared to $533,000 a year ago, due primarily to a reduction
in the consulting fees Peoples paid for the implementation of the Overdraft
Privilege program. These fees, which are based on the net improvement in
overdraft fees, were $123,000 in the third quarter of 2003 versus $180,000 in
the third quarter of 2002, as the consulting fee percentage was reduced
beginning in March 2003. Through nine months of 2003, professional fees were
$1,377,000 compared to $1,416,000 for the same period in 2002, a decrease of
$39,000 (or 3%). Compared to the second quarter of 2003, professional fees were
down $63,000 (or 13%). This decline is due primarily to Peoples incurring a
$30,000 filing fee in the second quarter in conjunction with the amendment of
Peoples Bancorp's Articles of Incorporation for the increase in the number of
authorized common shares.

For the three months ended September 30, 2003, marketing expense was $200,000
compared to $242,000 for the same period in 2002, a decrease of $42,000 (or
17%). Compared to the second quarter of 2003, marketing expense declined
$179,000 (or 47%), from $379,000. The lower level of marketing expense reflects
Peoples advertising of various new products and services, including Freedom
Checking and enhanced Internet billpay capabilities, in prior periods. On a
year-to-date basis, marketing expense was $855,000 through September 30, 2003,
versus $778,000, an increase of $77,000 (or 10%). While the recent marketing
initiatives caused an increase in expenses, particularly in the first half of
2003, management believes they have allowed Peoples to attract many new clients
and, as a result, improve revenues and overall market awareness of Peoples'
brand.

In the third quarter of 2003, intangible amortization expense was $551,000
compared to $208,000 last year's third quarter and $271,000 for the second
quarter of 2003. For the nine months ended September 30, 2003, intangible
amortization was $1,023,000 versus $431,000 in 2002. The Kentucky Bancshares
acquisition accounted for the majority of these increases, along with other
recent acquisitions. Intangible amortization expense for the three and nine
months ended September 30, 2002, also reflects the adoption of SFAS 147 and
restatement of goodwill relating to qualifying branch acquisitions.

State franchise taxes totaled $284,000 in the third quarter of 2003, up $111,000
(or 64%) from $173,000 a year ago, and up $12,000 (or 4%) from $272,000 for the
prior quarter. On a year-to-date basis, franchise taxes increased $280,000 (or
53%) in 2003, totaling $813,000 versus $533,000 in 2002. These increases were a
result of additional equity at Peoples Bank, the primary basis for these taxes.

Management uses the non-interest income leverage ratio as a measurement of
non-interest expense leverage. The ratio, defined as non-interest income as a
percentage of operating expenses, excludes gains and losses on securities
transactions and asset disposals, as well as intangible asset amortization. For
the nine months ended September 30, 2003, the non-interest income leverage ratio
was 46.1% compared to 41.7% a year ago. In the third quarter of 2003, the
non-interest income leverage ratio improved to 50.2% from 46.5% for the prior
quarter and 43.9% for 2002's third quarter.

RETURN ON EQUITY
- ----------------
In the third quarter of 2003, Peoples' return on equity ("ROE") was 13.85%
versus 12.92% last quarter and 17.80% a year ago. On a year-to-date basis, ROE
was 13.26% in 2003, down from 18.63% for the first nine months of 2002. The
lower ROE is primarily the result of higher average equity generated by the
Common Stock Offering, the Kentucky Bancshares acquisition and increased
earnings. While ROE remains a key part of the evaluation of Peoples' long-term
performance, management believes earnings per share ("EPS") serves as a more
meaningful measurement of short-term performance due to the impact of changing
market valuations in the investment portfolio.

RETURN ON ASSETS
- ----------------
Return on assets ("ROA") was 1.34% for the quarter ended September 30, 2003,
compared to 1.25% and 1.43% for the second quarter of 2003 and third quarter of
2002, respectively. Through nine months of 2003, ROA was 1.29% versus 1.50% for
the same period in 2002. The reduction in ROA is primarily due to the increase
in total average assets resulting from the Investment Growth Strategy. In recent
years, Peoples' primary focus has shifted to EPS enhancement and ROE while
reducing the emphasis on ROA as a key performance indicator. However, management
continues to monitor ROA and considers it a measurement of Peoples' asset
utilization.

INCOME TAX EXPENSE
- ------------------
Peoples' effective tax rate was 27.9% for the nine months ended September 30,
2003 and 2002. Peoples continues to make tax-advantaged investments in order to
manage its effective tax rate and overall tax burden. At September 30, 2003, the
amount of tax-advantaged investments included in Other Assets totaled $29.8
million compared to $27.3 million at September 30, 2002. Peoples' increased
earnings largely offset the additional benefits derived from the increase in
tax-advantaged investments. Depending on economic and regulatory conditions,
Peoples may make additional investments in various tax credit pools and other
tax-advantaged assets.

FINANCIAL CONDITION

OVERVIEW OF BALANCE SHEET
- -------------------------
At September 30, 2003, total assets were $1.77 billion compared to $1.39 billion
at year-end 2002, an increase of $377.7 million (or 27%). During the third
quarter of 2003, total assets declined $88.1 million (or 5%), due to a lower
level of cash and cash equivalents, which is explained in more detail later in
this discussion under "Cash and Cash Equivalents". The Investment Growth
Strategy contributed to the increase in assets since the prior year-end, as
investment securities totaled $719.8 million at September 30, 2003, up $307.7
million (or 75%) since December 31, 2002. Gross loans were $921.4 million
September 30, 2003, up $70.5 million (or 8%) since December 31, 2002, largely
attributable to the Kentucky Bancshares acquisition.

Total liabilities were $1.57 billion at September 30, 2003, compared to $1.22
billion at year-end 2002, an increase of $350.2 million (or 29%). At September
30, 2003, deposits totaled $1.06 billion versus $955.9 million at year-end, an
increase of $100.5 million (or 11%). This increase was primarily the result of
deposits acquired in the Kentucky Bancshares acquisition. Borrowed funds totaled
$501.4 million at September 30, 2003, up from $252.0 million at December 31,
2002 due to additional borrowings which funded the Investment Growth Strategy.
Stockholders' equity totaled $174.6 million at September 30, 2003, versus $147.2
million at December 31, 2002, an increase of $27.4 million (or 19%). The
majority of this increase is due to common shares issued in conjunction with the
Kentucky Bancshares acquisition and Common Stock Offering, which increased
equity by $19.1 million, while Peoples' earnings, net of dividends paid, was
also a significant contributor.

CASH AND CASH EQUIVALENTS
- -------------------------
Peoples considers cash and cash equivalents to consist of Federal funds sold,
cash and balances due from banks, interest-bearing balances in other
institutions and other short-term investments that are readily liquid. The
amount of cash and cash equivalents fluctuates on a daily basis due to client
activity and Peoples' liquidity needs. At September 30, 2003, cash and cash
equivalents totaled $29.8 million, down $25.7 million (or 46%) compared to $55.6
million at December 31, 2002, and down $125.4 million (or 81%) compared to
$155.2 million at June 30, 2003. These declines were primarily attributable to a
lower level of Federal funds sold, while a reduction in the amount of cash and
balances due from banks was also contributing factor.

At September 30, 2003, Peoples had no Federal funds sold compared to $20.5
million at December 31, 2002 and $93.5 million at June 30, 2003. The decrease
from the prior quarter end was largely the result of Peoples holding $60 million
of funds at June 30, 2003, relating to the liquidation of a trust relationship
associated with the Kentucky Bancshares acquisition. These funds were
transferred to another fiduciary by the customer on July 1, 2003, causing cash
and cash equivalents to return to normal levels. The remaining reduction in
Federal funds sold was due to client activity and Peoples' liquidity needs.

Cash and balances due from banks comprised nearly all of Peoples cash and cash
equivalents at September 30, 2003, totaling $29.1 million. During the third
quarter, the amount of cash and balances due from banks dropped $16.9 million
(or 37%). Compared to the prior year-end, cash and balances due from banks were
down $4.9 million (or 15%). These declines were the result of fewer items in the
process of collection at September 30, 2003.

Management believes the current balance of cash and cash equivalents, along with
the availability of other funding sources, should allow Peoples to meet cash
obligations, special needs and off-balance sheet commitments, specifically
undrawn lines of credit, construction loans and letters of credit, as they come
due. Peoples will actively manage the principal runoff from the investment and
loan portfolios and seek to reinvest those funds appropriately, based on loan
demand and investment opportunities, while maintaining adequate liquidity.
Further information regarding Peoples' liquidity can be found later in this
discussion under "Interest Rate Sensitivity and Liquidity."

INVESTMENT SECURITIES
- ---------------------
At September 30, 2003, the amortized cost of Peoples' investment securities
totaled $712.3 million compared to $402.0 million at year-end 2002, while the
market value of the investment portfolio was $719.8 million at September 30,
2003, up from $412.1 million at December 31, 2002. These increases were
primarily the result of the Investment Growth Strategy initiated in December
2002 and implemented in the first quarter of 2003.

The difference in amortized cost and market value at September 30, 2003,
resulted in unrealized appreciation in the investment portfolio of $7.5 million
and a corresponding increase in Peoples' equity of $4.8 million, net of deferred
taxes. In comparison, the difference in amortized cost and market value at
December 31, 2002, resulted in unrealized appreciation of $10.1 million and an
increase in equity of $6.4 million, net of deferred taxes.

Since December 31, 2002, Peoples' investment in US treasury securities and
obligations of US government agencies and corporations, excluding
mortgage-backed securities, has grown $41.4 million (or 145%). This increase is
the result of management reallocating a portion of the runoff from the
investment portfolio into US agency securities to maintain diversity within the
portfolio, as well as Peoples acquiring approximately $21 million of US agency
securities in the Kentucky Bancshares acquisition. Peoples' investment in
mortgage-backed securities has grown significantly compared to year-end 2002 due
to the Investment Growth Strategy.

Late in the second quarter of 2003, management initiated a plan to improve the
performance of Peoples' investment securities portfolio in response to the high
rate of prepayments on mortgage-backed securities and the corresponding downward
pressure on yields due to accelerated amortization of bond premiums. As part of
this plan, Peoples sold lower yielding mortgage-backed securities, due to
increased prepayment speeds, in late June and early July and reinvested the
proceeds into higher yielding instruments. Due largely to the timing of those
sales and subsequent reinvestments, investment securities were up $30.1 million
(or 4%) at September 30, 2003, from $689.7 million at June 30, 2003. Management
expects this repositioning to improve both the yields and the timing of cash
flows from the investment portfolio.

The following table details Peoples' investment portfolio, at estimated fair
value:

(Dollars in thousands) September 30, June 30, December 31, September 30,
2003 2003 2003 2002

US Treasury securities and obligations of
US government agencies and corporations $ 70,043 $ 66,714 $ 28,647 $ 24,973
Obligations of states and political subdivisions 67,316 68,841 67,806 69,243
Mortgage-backed securities 520,930 493,556 259,811 232,438
Other securities 61,464 60,569 55,836 53,946
- ---------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 719,753 $ 689,680 $ 412,100 $ 380,600
===============================================================================================================

Management monitors the earnings performance and liquidity of the investment
portfolio on a regular basis through Asset/Liability Committee ("ALCO")
meetings. The ALCO also monitors net interest income, sets deposit pricing and
maturity guidelines, and manages Peoples' interest rate risk. Through active
management of the balance sheet and investment portfolio, Peoples seeks to
maintain sufficient liquidity to satisfy depositor demand, other company
liquidity requirements and various credit needs of its customers.

LOANS
- -----
Peoples Bank originates various types of loans, including commercial, financial
and agricultural loans ("commercial loans"), real estate loans and consumer
loans, focusing primarily on lending opportunities in central and southeastern
Ohio, northwestern West Virginia, and northeastern Kentucky markets. At
September 30, 2003, gross loans totaled $921.4 million, up $70.5 million since
year-end 2002 and up $4.8 million since June 30, 2003. While the increase from
the prior year-end was primarily attributable to loans acquired in the Kentucky
Bancshares acquisition, Peoples has also experienced internally generated
commercial loan growth throughout 2003, which partially offset declines in real
estate and consumer loan balances. The following table details total outstanding
loans:

(Dollars in thousands) September 30, June 30, December 31, September 30,
2003 2003 2003 2002

Commercial, financial, and agricultural $ 496,975 $ 475,600 $ 392,528 $ 386,413
Real estate, construction 17,714 10,339 16,231 20,348
Real estate, mortgage 314,303 329,708 331,948 341,131
Consumer 86,108 94,549 103,635 113,533
Credit cards 6,302 6,407 6,549 6,202
- ----------------------------------------------------------------------------------------------------------
Total loans $ 921,402 $ 916,603 $ 850,891 $ 867,627
==========================================================================================================

Commercial loan balances, including loans secured by commercial real estate,
totaled $497.0 million at September 30, 2003, up $104.4 million (or 27%) from
$392.5 million at year-end 2002. While a significant portion of the increase in
commercial loans is attributable to acquiring $49 million of loans in the
Kentucky Bancshares acquisition, Peoples also experienced internally generated
growth from lending opportunities within Peoples' existing markets. During the
third quarter of 2003, commercial loans grew $21.4 million (or 4%), from $475.6
million at June 30, 2003. Commercial loans continued to represent the largest
portion of Peoples' total loan portfolio, comprising 53.9% and 46.1% of total
loans at September 30, 2003 and December 31, 2002, respectively. The portion of
commercial loan balances secured by commercial real estate, excluding
construction loans, was $357.3 million at September 30, 2003, up from $289.6
million at December 31, 2002. Future commercial lending activities will be
dependent on economic and related conditions, such as general demand for loans
in Peoples' primary markets, interest rates offered by Peoples and normal
underwriting requirements. In addition to in-market opportunities, Peoples will
continue to lend selectively to creditworthy customers outside its primary
markets.

While commercial loans comprise the largest portion of Peoples' loan portfolio,
generating residential real estate loans remains a major focus of Peoples'
lending efforts, whether the loans are ultimately sold into the secondary market
or retained on Peoples' balance sheet, which provides opportunities to sell
additional products and services to these consumers. At September 30, 2003, real
estate loans, which include construction loans but exclude loans secured by
commercial real estate, totaled $332.0 million compared to $348.2 million at
December 31, 2002, a decrease of $16.2 million (or 5%). This decline is due
mainly to Peoples' increased secondary market activity, which was partially
offset by Peoples acquiring $21 million of real estate loans in the Kentucky
Bancshares acquisition. Real estate loans comprised 36.0% of Peoples' total loan
portfolio at September 30, 2003, versus 40.9% at year-end 2002. Included in real
estate loans are home equity credit line balances of $29.1 million at September
30, 2003, up from $28.5 million at December 31, 2002 but unchanged from June 30,
2003.

Throughout 2003, real estate loan balances have declined in response to customer
demand for long-term, fixed-rate mortgages, which are sold in the secondary
market with servicing rights retained. In the third quarter of 2003, Peoples
originated and sold 248 long-term, fixed rate mortgage loans, with total loan
amounts of $20 million, compared to 212 loans, with total loan amounts of $19
million, in the second quarter of 2003 and 99 loans, with total loan amounts of
$10 million, in the first quarter of 2003. At September 30, 2003, Peoples was
servicing $63 million of real estate loans sold into the secondary market. In
addition, Peoples had $6.7 million of fixed-rate real estate loans that could be
sold into the secondary market. Management anticipates Peoples' selling these
loans during the fourth quarter.

Excluding credit card balances, consumer loans decreased $17.5 million (or 17%)
since year-end 2002, totaling $86.1 million at September 30, 2003. As part of
the Kentucky Bancshares acquisition, Peoples acquired consumer loan balances of
$4.7 million, which partially offset the decline of $22.2 million (or 21%) in
loan balances since December 31, 2002. The indirect lending area represented a
significant portion of Peoples' consumer loans, with balances of $42.2 million
and $56.2 million at September 30, 2003 and December 31, 2002, respectively.
Sluggish economic conditions and strong competition for loans, particularly
automobile loans, have challenged the performance and growth of Peoples'
consumer loan portfolio, Even so, management remains committed to sound lending
practices and continues to emphasize appropriate discipline in loan pricing and
loan underwriting practices more than loan growth.

At September 30, 2003, Peoples' credit card balances totaled $6.3 million, down
slightly since December 31, 2002. Peoples' ability to grow credit card balances
is impacted by fierce competition for customers. Since management does not
intend to subject Peoples to additional and/or unnecessary risk merely for such
growth, Peoples continues to market its credit card as a complementary product
offering for client relationships.

LOAN CONCENTRATION
- ------------------
Peoples' largest concentration of commercial loans are credits to lodging and
lodging-related companies, which comprised approximately 12.5% of Peoples'
outstanding commercial loans at quarter-end, compared to 11.2% at December 31,
2002. Loans to assisted living facilities and nursing homes also represented a
significant portion of Peoples' commercial loans, comprising 11.5% of Peoples'
outstanding commercial loans at September 30, 2003, versus 13.4% at year-end
2002.

These lending opportunities have arisen due to the growth of these industries in
markets served by Peoples or contiguous areas, as well as sales associates'
efforts to develop these lending relationships. Management believes Peoples'
loans to lodging and lodging-related companies, as well as loans to assisted
living facilities and nursing homes, do not pose abnormal risk when compared to
risk assumed in other types of lending since these credits have been subjected
to Peoples' normal underwriting standards, which includes an evaluation of the
market expertise and experience of the borrowers and principals in these
business relationships. In addition, a sizeable portion of the loans to lodging
and lodging-related companies are spread over various geographic areas and are
guaranteed by principals with substantial net worth.

ALLOWANCE FOR LOAN LOSSES
- -------------------------
Peoples' allowance for loan losses totaled $14.4 million, or 1.57% of total
loans, at September 30, 2003, compared to $13.1 million, or 1.54%, at year-end
2002. Nearly half of the increase in the allowance was the result of the
allowance for loan losses acquired in the Kentucky Bancshares acquisition. The
following table presents changes in Peoples' allowance for loan losses:

Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2003 2002 2003 2002

Balance, beginning of period $ 14,151 $ 12,423 $ 13,086 $ 12,357
chargeoffs (935) (1,223) (2,675) (3,323)
Recoveries 287 199 753 524
- -----------------------------------------------------------------------------------------------------
Net chargeoffs (648) (1,024) (1,922) (2,799)
Provision for loan losses 920 1,182 2,686 3,023
Allowance for loan losses acquired - 305 573 305
- -----------------------------------------------------------------------------------------------------
Balance, end of period $ 14,423 $ 12,886 $ 14,423 $ 12,886
=====================================================================================================

The allowance is allocated among the loan categories based upon the consistent,
quarterly procedural discipline described in the "Critical Accounting Policies"
section of this discussion. However, the entire allowance for loan losses is
available to absorb future loan losses in any loan category. The following
details the allocation of the allowance for loan losses:

(Dollars in thousands) September 30, December 31, September 30,
2003 2002 2002

Commercial $ 10,942 $ 8,846 $ 8,387
Consumer 1,708 2,075 2,292
Real estate 1,306 1,617 1,629
Credit cards 223 342 379
Overdrafts 244 206 199
- ----------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 14,423 $ 13,086 $ 12,886
====================================================================================================

The allowance allocated to commercial loans has increased in recent periods,
reflecting the higher credit risk associated with this type of lending and
continued growth in this portfolio. The allowance allocated to the real estate
and consumer loan portfolios is based upon Peoples' allowance methodology for
homogeneous pools of loans, which includes a consideration of changes in total
balances in those portfolios.

In the third quarter of 2003, net loan chargeoffs were $648,000, a 37% decline
from $1,024,000 a year ago, which is attributable to fewer troubled commercial
loans. Consumer loans, including overdrafts, comprise the largest portion of net
chargeoffs, totaling $370,000 and $474,000 for the three months ended September
30, 2003 and 2002, respectively. Commercial loan net chargeoffs were $39,000 for
the third quarter of 2003, down from $374,000 for 2002's third quarter, while
real estate net chargeoffs totaled $176,000 and $123,000 for the same periods,
respectively. For the nine months ended September 30, 2003, net chargeoffs were
$1.9 million versus $2.8 million a year ago. This decrease is largely the result
of Peoples charging down a group of loans in single client relationship totaling
$1.0 million in the first half of 2002. The following table details Peoples' net
chargeoffs:

Three Months Ended Nine months Ended
September 30, September 30,
(Dollars in thousands) 2003 2002 2003 2002

Overdrafts $ 222 $ 258 $ 488 $ 509
Consumer 148 216 538 451
Real estate 176 123 312 198
Credit card 63 53 149 129
Commercial 39 374 435 1,512
- -----------------------------------------------------------------------------------------------------
Total $ 648 $ 1,024 $ 1,922 $ 2,799
- -----------------------------------------------------------------------------------------------------
As a percent of average loans 0.07% 0.12% 0.22% 0.34%
=====================================================================================================

Asset quality remains a key focus, as management continues to stress quality
rather than growth. Since December 31, 2002, Peoples' asset quality ratios have
improved due to the combination of a lower level of nonperforming loans and an
increase in assets. The following table details Peoples' nonperforming assets:

(Dollars in thousands) September 30, June 30, December 31, September 30,
2003 2003 2002 2002

Loans 90+ days past due and accruing $ 874 $ 569 $ 407 $ 635
Renegotiated loans 684 685 2,439 2,439
Nonaccrual loans 4,105 4,389 4,617 4,455
- --------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 5,663 5,643 7,463 7,529
Other real estate owned 1,279 960 148 124
- --------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 6,942 $ 6,603 $ 7,611 $ 7,653
==========================================================================================================================
Nonperforming loans as a percent of total loans 0.61% 0.62% 0.88% 0.87%
==========================================================================================================================
Nonperforming assets as a percent of total assets 0.39% 0.35% 0.55% 0.56%
==========================================================================================================================

In 2003, the balance of nonperforming loans is down due to a large commercial
loan, which comprised the entire amount of renegotiated loans at December 31,
2002, moving to performing status. In addition, two commercial loans on
nonaccrual status moved into other real estate owned ("OREO") in 2003, which
also accounted for the majority of the increase in OREO. Nonperforming assets
comprise a smaller percentage of total assets at September 30, 2003, as a result
of an increase in assets largely attributable to the completion of the
Investment Growth Strategy and the Kentucky Bancshares acquisition. While the
increase in nonperforming loans in the third quarter of 2003 was due mainly to
loans acquired in the Kentucky Bancshares acquisition, Peoples has recorded
valuation reserves to absorb any probable losses from these acquired loans.

A loan is considered impaired when, based on current information and events, it
is probable that Peoples will be unable to collect the scheduled payments of
principal or interest according to the contractual terms of the loan agreement.
The measurement of potential impaired loan losses is generally based on the
present value of expected future cash flows discounted at the loan's historical
effective interest rate, or the fair value of the collateral if the loan is
collateral dependent. If foreclosure is probable, impairment loss is measured
based on the fair value of the collateral.

At September 30, 2003, the recorded investment in loans that were considered to
be impaired was $15.2 million, of which $13.4 million were accruing interest,
and $1.8 million were nonaccrual loans. Included in this amount were $4.3
million of impaired loans for which the related allowance for loan losses was
$2.1 million. The remaining impaired loan balances do not have a related
allocation of the allowance for loan losses because the loans have been
previously written-down, are well secured, or possess characteristics indicative
of the ability to repay the loan. For the nine months ended September 30, 2003,
Peoples' average recorded investment in impaired loans was approximately $12.1
million and interest income of $681,000 was recognized on impaired loans during
the period, representing 1.0% of Peoples' total interest income.

FUNDING SOURCES
- ---------------
Peoples considers a number of sources when evaluating funding needs, including
but not limited to deposits, short-term borrowings, and long-term borrowings.
Deposits, both interest-bearing and non-interest bearing, continue to be the
most significant source of funds for Peoples, totaling $1.06 billion, or 68% of
total funding sources, at September 30, 2003.

Non-interest bearing deposits serve as a core funding source. At September 30,
2003, non-interest bearing deposit balances totaled $133.0 million, up $17.1
million (or 15%) compared to the prior year-end, with the Kentucky Bancshares
acquisition accounting for substantially all of the increase. Since the end of
the second quarter of 2003, non-interest bearing deposit have declined $63.6
million (or 32%), from $196.6 million, due to Peoples holding $60 million of
trust funds on June 30, 2003. These funds were part of a trust relationship
acquired in the Kentucky Bancshares acquisition that was in the process of being
transferred to a successor fiduciary at the direction of the client. On July 1,
the trust funds were transferred to the new fiduciary causing non-interest
bearing deposits to return to normal levels. Since this transaction caused a
temporary increase in balances at June 30, 2003, management believes a
comparison of average balances to be a more meaningful reflection of the trend
in non-interest bearing deposits. In the third quarter of 2003, non-interest
bearing deposits averaged $131.5 million versus $125.9 in the second quarter of
2003, an increase of $5.6 million (or 4%), and a reflection of management's
commitment to grow core deposits through Freedom Checking campaigns.

Interest-bearing deposits totaled $923.4 million at September 30, 2003, an
increase of $83.4 million (or 10%) compared to $840.0 million at December 31,
2002, all of which was attributable to the Kentucky Bancshares acquisition. In
the third quarter, interest-bearing deposits declined $23.5 million (or 2%),
from $946.8 million at June 30, 2003. The following details Peoples'
interest-bearing deposits:

(Dollars in thousands) September 30, June 30, December 31, 2002 September 30,
2003 2003 2002

Certificates of deposit $ 468,997 $ 479,068 $ 422,715 $ 417,321
Savings accounts 179,590 181,408 143,594 133,234
Interest-bearing transaction accounts 162,752 167,846 139,609 155,838
Money market deposit accounts 112,013 118,521 134,052 136,350
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 923,352 $ 946,843 $ 839,970 $ 842,743
===================================================================================================================

Peoples also accesses other funding sources, including short-term and long-term
borrowings, to fund asset growth and satisfy liquidity needs. Peoples'
short-term borrowings include overnight repurchase agreements and FHLB advances,
while long-term borrowings include 10-year FHLB advances, a loan from an
unrelated financial institution and term repurchase agreements. The majority of
the long-term FHLB advances are convertible rate advances, with the initial rate
fixed for periods ranging from two to four years, depending on the specific
advance. After the initial fixed rate period, these advances have the
opportunity, at the discretion of the FHLB, to convert to a LIBOR based,
variable rate product. Peoples has the option to prepay any converted advance
without penalty or allow the borrowing to reprice. In addition to these
convertible rate advances, recent long-term FHLB advances have included fixed
rate, amortizing advances, which have helped Peoples manage its interest rate
sensitivity. Further information regarding Peoples' management of interest rate
sensitivity can be found later in this discussion under "Interest Rate
Sensitivity and Liquidity."

At September 30, 2003, long-term borrowings totaled $454.6 million, up $250.8
million (or 123%) from $203.8 million at December 31, 2002, with this increase
largely the result of the Investment Growth Strategy. In addition, Peoples
converted a $17 million short-term loan utilized to fund an acquisition in 2002
to a long-term loan with the same unaffiliated financial institution. As a
result, short-term borrowings decreased $1.3 million to $46.9 million, compared
to $48.2 million at year-end 2002.

CAPITAL/STOCKHOLDERS' EQUITY
- ----------------------------
At September 30, 2003, stockholders' equity was $174.6 million, versus $147.2
million at December 31, 2002, an increase of $27.4 million (or 19%). The
majority of this increase is due to common shares issued in conjunction with the
Kentucky Bancshares acquisition and Peoples' earnings, net of dividends paid,
which accounted for $14.3 million and $7.4 million of the increase,
respectively.

For the nine months ended September 30, 2003, Peoples paid dividends of $4.9
million, representing a dividend payout ratio of 30.0% of earnings, compared to
a ratio of 24.4% a year ago. While management anticipates Peoples continuing its
37-year history of consistent dividend growth in future periods, Peoples
Bancorp's ability to pay dividends on its common shares is largely dependent
upon dividends from Peoples Bank. Additionally, Peoples Bancorp has established
two trust subsidiaries to issue preferred securities. If Peoples Bancorp
suspends interest payments relating to the trust preferred securities issued by
either of the two trust subsidiaries, Peoples will be prohibited from paying
dividends on its common shares. Peoples Bancorp or Peoples Bank may decide to
limit the payment of dividends, even when the legal ability to pay them exists,
in order to retain earnings for other strategic purposes.

The adjustment for the net unrealized holding gains on available-for-sale
securities, net of deferred income taxes, impacts Peoples' total equity. At
September 30, 2003, net unrealized holding gains totaled $4.8 million versus
$6.4 million at December 31, 2002, a change of $1.6 million. Since all the
investment securities in Peoples' portfolio are classified as
available-for-sale, both the investment and equity sections of Peoples'
consolidated balance sheet are more sensitive to the changing market values of
investments than if the investment portfolio was classified as held-to-maturity.

At September 30, 2003, Peoples had treasury stock totaling $1.2 million, up
slightly from year-end 2002. Through nine months of 2003, Peoples repurchased
95,340 common shares (or 30% of the total authorized), at an average price of
$23.54 per share, under the 2003 Stock Repurchase Program and 3,455 common
shares, at an average price of $24.01, in conjunction with the deferred
compensation plan for directors of Peoples Bancorp and Peoples Bank. Peoples
reissued nearly all of the shares purchased under the 2003 Stock Repurchase
Program as part of the Kentucky Bancshares acquisition, stock option exercises
and 5% stock dividend. Peoples anticipates repurchasing additional common shares
as authorized in the 2003 Stock Repurchase Program.

Management uses the tangible capital ratio as one measure of the adequacy of
Peoples' equity. The ratio, defined as tangible equity as a percentage of
tangible assets, excludes the balance sheet impact of intangible assets acquired
through acquisitions accounted for using the purchase method accounting. At
September 30, 2003, Peoples tangible capital ratio was 7.43% compared to 7.15%
at June 30, 2003 and 8.54% at December 31, 2002. The lower ratio compared to the
prior year end is the result of an increase in assets due to the Investment
Growth Strategy and intangible assets acquired in the Kentucky Bancshares
acquisition.

In addition to monitoring performance through traditional capital measurements
(i.e., dividend payout ratios and ROE), Peoples has also complied with the
capital adequacy standards mandated by the banking industry. Bank regulators
have established "risk-based" capital requirements designed to measure capital
adequacy. Under the risk-based capital framework, a bank's balance sheet assets
and credit equivalent amounts of off-balance sheet items are typically assigned
to one of four broad risk categories: 0% (lowest risk), 20%, 50% or 100%
(highest risk). The sum of the resulting weighted values from each of the four
risk categories is used in calculating key capital ratios. At September 30,
2003, Peoples' Total Capital, Tier 1 and Leverage ratios were 15.80%, 14.46% and
8.82%, respectively, exceeding the well-capitalized standards of 10%, 6% and 5%,
respectively. In addition, all three risk-based capital ratios for Peoples Bank
were also well above the minimum standards for a well-capitalized institution at
September 30, 2003.

INTEREST RATE SENSITIVITY AND LIQUIDITY
- ---------------------------------------
While Peoples is exposed to various business risks, the risks relating to
interest rate sensitivity and liquidity could materially impact its future
results of operation and financial condition. The objective of Peoples'
asset/liability management ("ALM") function is to measure and manage these risks
in order to optimize net interest income within the constraints of prudent
capital adequacy, liquidity and safety. This objective requires Peoples to focus
on interest rate risk exposure and adequate liquidity as it manages the mix of
assets and liabilities. Ultimately, the ALM function is intended to guide
management in the acquisition of earning assets and selection of the appropriate
funding sources.

INTEREST RATE RISK
- ------------------
Interest rate risk ("IRR") is one of the most significant risks for Peoples, and
the entire financial services industry, primarily arising in the normal course
of business of offering a wide array of financial products to its customers,
including loans and deposits, as well as its investment portfolio and borrowed
funds. IRR is the potential for economic loss due to future interest rate
changes that can impact both the earnings stream as well as market values of
financial assets and liabilities. Peoples' exposure to IRR is primarily due to
differences in the maturity, or repricing, of earning assets and
interest-bearing liabilities. In addition, other factors, such as prepayments of
loans and investment securities or early withdrawal of deposits, can expose
Peoples to IRR and increase interest costs or reduce revenue streams.

Peoples has charged the ALCO with the overall management of Peoples' balance
sheet mix and off-balance sheet hedging transactions related to the management
of IRR. It is the ALCO's responsibility to keep Peoples focused on the future by
evaluating trends and potential future events, researching alternatives, then
recommending and authorizing an appropriate course of action. To this end, the
ALCO has established an IRR management policy that sets the minimum requirements
and guidelines for monitoring and managing the level and amount of IRR. The
objective of the IRR policy is to encourage management to adhere to sound
fundamentals of banking while allowing sufficient flexibility to exercise the
creativity and innovations necessary to meet the challenges and opportunities of
changing markets. The ultimate goal of these policies is to optimize net
interest income within the constraints of prudent capital adequacy, liquidity,
and safety.

Peoples' ALCO relies on different methods of assessing IRR, including
simulations to project future net interest income and to monitor the sensitivity
of the net present market value of equity and the difference, or "gap", between
maturing or repricing of rate-sensitive assets and liabilities over various time
periods. Peoples uses these methods to monitor IRR for both the short- and
long-term. The ALCO places emphasis on simulation modeling as the most
beneficial measurement of IRR because it is a dynamic measure. By employing a
simulation process that estimates the impact of potential changes in interest
rates and balance sheet structures and by establishing limits on these estimated
changes to net income and net market value, the ALCO is better able to evaluate
interest rate risks and their potential impact to earnings and market value of
equity.

The modeling process starts with a base case simulation using the current
balance sheet and current interest rates held constant for the next twelve
months. At least two alternative interest rate scenarios, one with higher
interest rates and one with lower interest rates, assuming parallel, immediate
and sustained changes are also prepared using the same balance sheet structure
as the base scenario. Comparisons produced from the simulation data, showing the
earnings variance from the base interest rate scenario, illustrate the risks
associated with the current balance sheet structure. Additional simulations,
when deemed appropriate, are prepared using different interest rate scenarios
than those used with the base case simulation and/or possible changes in balance
sheet structure. The additional simulations are used to better evaluate risks
and highlight opportunities inherent in the modeled balance sheet. Comparisons
showing the earnings and equity value variance from the base case are provided
to the ALCO for review and discussion. The results from these model simulations
are evaluated for indications of effectiveness of current IRR management
strategies.

As part of the evaluation of IRR, the ALCO has established limits on changes in
net interest income and the net value of the balance sheet. The ALCO limits the
decrease in net interest income of Peoples Bank to 10% or less from base case
for each 100 basis point shift in interest rates measured over a twelve-month
period assuming a static balance sheet. The ALCO limits the negative impact on
net equity to 40% or less given an immediate and sustained 200 basis points
shift in interest rates also assuming a static balance sheet. The ALCO also
reviews static gap measures for specific time periods focusing on a one-year
cumulative gap. At September 30, 2003, Peoples' one-year cumulative gap amount
was positive 6.9% of earning assets, which represented $112.5 million more in
assets than liabilities that may reprice during that period. Based on historical
trends and performance, the ALCO has determined the ratio of the one-year
cumulative gap should be within +/-15% of earning assets. Results that are
greater than any of these limits will prompt a discussion by the ALCO of
appropriate actions, if any, that should be taken.

The following table is provided to illustrate the estimated earnings at risk and
value at risk positions of Peoples, on a pre-tax basis, at September 30, 2003
(dollars in thousands):

Immediate
Interest Rate Estimated Estimated
Increase (Decrease) in (Decrease) Increase (Decrease) Increase in
Basis Points In Net Interest Income Economic Value of Equity
- ---------------------- -------------------------- ---------------------------
300 $ 1,645 3.1 % $ (83,254) (37.1) %
200 1,281 2.4 (53,311) (23.7)
100 875 1.7 (22,642) (10.1)
(50) $ (958) (1.8) % $ 4,138 1.8 %

The interest rate risk analysis shows that Peoples is asset sensitive, which
means that increasing interest rates should favorably impact Peoples' net
interest income while downward moving interest rates should negatively impact
net interest income. Peoples' asset sensitivity decreased in the third quarter
of 2003 due to a reduction in Federal funds sold and other short-term
investments. The ALCO continues to believe it is to the long-term benefit of
Peoples to maintain an asset sensitive position. The interest rate analysis also
shows Peoples is within the established IRR policy limits for all simulations
and all scenarios for the current period.

The ALCO has implemented hedge positions to help protect Peoples' net interest
income streams in the event of rising rates which will complement the current
slightly asset sensitive position. Peoples has a hedge position on a $17 million
long-term, fixed-rate borrowing from the FHLB that may convert to a variable
rate, at the FHLB's discretion. In addition, the ALCO may consider additional
hedging options, including, but not limited to, the purchase of other interest
rate hedge positions, as available and appropriate, that would provide net
interest income protection in a rising rate environment.

LIQUIDITY
- ---------
In addition to IRR management, a primary objective of the ALCO is the
maintenance of a sufficient level of liquidity. The ALCO defines liquidity as
the ability to meet anticipated and unanticipated operating cash needs, loan
demand, and deposit withdrawals, without incurring a sustained negative impact
on profitability. The ALCO's liquidity management policy sets limits on the net
liquidity position of Peoples and the concentration of non-core funding sources,
both total wholesale funding and reliance on brokered deposits.

Typically, the main source of liquidity for Peoples is deposit growth. Liquidity
is also provided from cash generated from earning assets such as maturities,
calls, principal payments and income from loans and investment securities.
Through nine months of 2003, cash provided by financing activities totaled
$232.1 million compared to $38.3 million a year ago, due largely to increased
long-term borrowings used for the Investment Growth Strategy. Cash used in
investing activities totaled $278.3 million versus $50.8 million last year,
primarily due to increased investment securities purchases, net of maturities
and sales. When appropriate, Peoples takes advantage of external sources of
funds, such as advances from the FHLB, national market repurchase agreements,
and brokered funds. These external sources often provide attractive interest
rates and flexible maturity dates that better enable Peoples to match funding
dates and pricing characteristics with contractual maturity dates and pricing
parameters of earning assets. At September 30, 2003, Peoples had available
borrowing capacity of approximately $79 million through these external sources
and unpledged securities in the investment portfolio of approximately $317
million that can be utilized as an additional source of liquidity.

The net liquidity position of Peoples is calculated by subtracting volatile
funds from liquid assets. Peoples' volatile funds consist primarily of
short-term growth in deposits, while liquid assets includes short-term
investments and unpledged available-for-sale securities. At September 30, 2003,
Peoples' net liquidity position was $308.3 million, or 17.4% of total assets,
compared to $189.7 million, or 13.6% of total assets, at December 31, 2002. The
increase in liquidity position as a percent of total assets was primarily the
result of a decrease in volatile funds. The liquidity position as of September
30, 2003, was within Peoples' policy limit of negative 10% of total assets. At
September 30, 2003, total wholesale funding comprised 26.8% of total assets and
brokered funds were 0.6% of total assets, which was within Peoples' policy
limits of 30% and 10%, respectively.

OFF-BALANCE SHEET ACTIVITIES AND CONTRACTUAL OBLIGATIONS
- --------------------------------------------------------
Peoples routinely engages in activities that involve, to varying degrees,
elements of risk that are not reflected in whole or in part in the consolidated
financial statements. These activities are part of Peoples' normal course of
business and include traditional off-balance sheet credit-related financial
instruments, interest rate contracts, operating leases, long-term debt and
commitments to make additional capital contributions in low-income housing
project investments.

Traditional off-balance sheet credit-related financial instruments are primarily
commitments to extend credit, and standby letters of credit. These activities
could require Peoples to make cash payments to third parties in the event
certain specified future events occur. The contractual amounts represent the
extent of Peoples' exposure in these off-balance sheet activities. However,
since certain off-balance sheet commitments, particularly standby letters of
credit, are expected to expire or be only partially used, the total amount of
commitments does not necessarily represent future cash requirements. These
activities are necessary to meet the financing needs of customers. The following
table details the total contractual amount of loan commitments and standby
letters of credit:

(Dollars in thousands) September 30, June 30 December 31, September 30,
2003 2003 2002 2002

Loan commitments $114,653 $119,316 $103,462 $ 99,347
Standby letters of credit 9,313 9,606 7,632 7,489
Unused credit card limits 20,765 22,469 21,216 21,178

Peoples also enters into interest rate contracts where Peoples is required to
either receive cash from or pay cash to counter parties depending on changes in
interest rates. Peoples utilizes interest rate contracts to help manage the risk
of changing interest rates. At September 30, 2003, Peoples held interest rate
contracts with notional amounts totaling $27 million and fair values totaling
$368,000. Interest rate contracts are carried at fair value on the consolidated
balance sheet, with the fair value representing the net present value of
expected future cash receipts or payments based on market interest rates as of
the balance sheet date. As a result, the amounts recorded on the balance sheet
at September 30, 2003, do not represent the amounts that may ultimately be paid
or received under these contracts.

Peoples also has commitments to make additional capital contributions in
low-income housing tax funds, consisting of a pool of low-income housing
projects. As a limited partner in these funds, Peoples receives Federal income
tax benefits which assists Peoples in managing its overall tax burden. At
September 30, 2003, these commitments approximated $9.7 million, with
approximately $2.1 million expected to be paid over the next twelve months.
Management may make additional investments in various tax credit funds.

Management does not anticipate Peoples' current off-balance sheet activities
will have a material impact on future results of operations and financial
condition.

Peoples continues to lease certain banking facilities and equipment under
noncancelable operating leases with terms providing for fixed monthly payments
over periods ranging from two to fifteen years. Many of Peoples' leased banking
facilities are inside retail shopping centers and, as a result, are not
available for purchase. Management believes these leased facilities increase
Peoples' visibility within its markets and afford sales associates additional
access to current and potential clients.

EFFECTS OF INFLATION ON FINANCIAL STATEMENTS
- --------------------------------------------
Substantially all of Peoples' assets relate to banking and are monetary in
nature. As a result, inflation does not impact Peoples to the same degree as
companies in capital-intensive industries in a replacement cost environment.
During a period of rising prices, a net monetary asset position results in a
loss in purchasing power and conversely a net monetary liability position
results in an increase in purchasing power. The opposite would be true during a
period of decreasing prices. In the banking industry, typically monetary assets
exceed monetary liabilities. The current monetary policy targeting low levels of
inflation has resulted in relatively stable price levels. Therefore, inflation
has had little impact on Peoples' net assets.

FUTURE OUTLOOK
- --------------
Peoples' earnings remained strong in the third quarter despite the low interest
rate environment and economic challenges. In the near-term, management will
continue to focus on growing revenues and controlling operating expenses in
order to overcome short-term earnings challenges, as well as enhance Peoples'
long-term value. Once interest rates eventually rise and the economy begins to
strengthen, Peoples should experience some net interest income improvement based
on its current asset-liability position. In addition, management's commitment to
sound underwriting discipline has produced asset quality that compares favorably
to peer levels, which should help to minimize loan losses and loss provisions.

The expansion of Peoples' mortgage banking activities throughout 2003 provided a
boost to short-term earnings growth. However, mortgage banking also is a key
part of Peoples' long-term business strategy. Since it appears the real estate
loan refinancing boom may have peaked, mortgage originations could slow down in
the fourth quarter. Management anticipates future real estate loan opportunities
will be more of a mix between loans which are retained by Peoples (mostly
adjustable rate mortgages) and loans sold to the secondary markets. Although
mortgage banking revenues from sales of loans may decrease, such loss of income
could be partially offset by higher net interest income from retaining select
mortgages.

Controlling expense growth remains an important focus for Peoples during these
uncertain economic times. In addition, management continues to explore
opportunities to grow and further diversify Peoples' revenue to help offset
additional operating expenses from recent strategic investments in technology
and rising employee benefit costs. One such opportunity is the possibility of
Peoples purchasing additional Business Owned Life Insurance, or BOLI, in the
fourth quarter. Management believes BOLI yields, which are tax advantaged, can
provide a better return for absorbing these future benefit costs than
alternative investment opportunities.

As part of the review and rationalization of Peoples' delivery channels,
particularly its sales offices, management determined the building where one of
Peoples' Athens, Ohio, banking centers was located had become too big for its
sales efforts. Thus, Peoples sold the building early in the fourth quarter of
2003, while retaining a long-term lease, and will recognize a gain of
approximately $175,000 before tax (or $0.01 per share after-tax) in the final
three months of 2003. Management is evaluating similar opportunities and could
recognize additional gains in the fourth quarter from the sale of assets or
through proactive tax planning. However, management will not sacrifice Peoples'
long-term success and potential simply for the sake of short-term growth.

While the development and implementation of the Overdraft Privilege program has
increased non-interest revenue, Peoples is obligated to pay professional fees,
based on revenue parameters, to the consultant that assisted in the
implementation of the process with that amount totaling $123,000 in the third
quarter and $387,000 for the first nine months of 2003. Additional net revenues
from Overdraft Privilege (i.e. after provision for bad debt) have more than
offset the professional expenses associated with the new product. In March 2003,
the percentage of revenues paid to the consultant decreased in accordance with
the contract, which has had a positive impact on total professional fees. More
importantly, the contract expires in February 2004, which will further enhance
net revenues going forward, assuming Peoples maintains and/or grows total retail
core deposits and volumes either remain stable or grow.

Mergers and acquisitions have been an integral part of Peoples' efforts to
expand its operations and customer base, thereby continuing to provide
opportunities to build client relationships and sell new products and services
in order to enhance Peoples' earnings potential. Peoples' strong regulatory
capital ratios afford management additional growth opportunities through mergers
and acquisitions and market expansion. With a higher level of tangible equity to
total assets, management believes Peoples is positioned to continue its
disciplined acquisition strategy of the past decade and plans to dedicate more
resources to develop and realize acquisition opportunities in and around
Peoples' markets. However, the evaluation of future acquisitions will focus more
on opportunities that complement Peoples' core competencies and strategic intent
rather than geographic location or proximity to current markets.

In addition to mergers and acquisitions, Peoples routinely explores and
evaluates opportunities to grow within existing markets. One such opportunity is
the expansion of Peoples' operations in central Ohio by converting Peoples' loan
production office in Lancaster, Ohio, to a full-service business banking
facility in the fourth quarter of 2003. The primary focus of the relocated and
expanded office remains business clients in Ohio's Fairfield County and
surrounding markets. However, the Lancaster office will ultimately offer
Peoples' complete line of products and services, including mortgage banking,
insurance and investment services.

Peoples remains a service-oriented company with a sales focus that strives to
satisfy clients through a relationship sales process. Through this process,
sales associates work to anticipate, uncover, and solve their clients' every
financial need, from insurance to banking to investments. In the fourth quarter
of 2003, earnings catalysts include continued loan growth, revenue enhancements
from seasonal shopping, limited opportunities to lower cost of funds, and
possible BOLI purchases. Management remains stakeholder-focused with four key
long-term objectives best achieved in more normal economic conditions and
interest rate environments: 7% to 10% operating EPS growth per year, ROE of 15%
to 16%, consistent dividend growth and a non-interest leverage ratio better than
50%.

FORWARD-LOOKING STATEMENTS
- --------------------------
The statements in this Form 10-Q which are not historical fact are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. Although
management believes Peoples' plans, intentions and expectations reflected in or
suggested by these forward-looking statements are reasonable, Peoples cannot
give any assurance those plans, intentions or expectations will be achieved. The
forward-looking statements involve a number of risks and uncertainties,
including, but not limited to, the effect of changes in interest rates, the
effect of federal and state banking and tax regulations, the effect of
technological changes, the effect of economic conditions, the effect of
competitive products and pricing, and other risks detailed in Peoples'
Securities and Exchange Commission filings. All forward-looking statements are
expressly qualified in their entirety by the cautionary statements. Although
management believes the expectations in these forward-looking statements are
based on reasonable assumptions within the bounds of management's knowledge of
Peoples' business and operations, it is possible that actual results may differ
materially from these projections.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption "Interest
Rate Sensitivity and Liquidity" under Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations in this Form 10-Q, and
is incorporated herein by reference.

CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME

For the Three Months Ended September 30,
2003 2002
------------------------------------ -----------------------------------
(dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS

Securities:
Taxable $ 633,316 6,881 4.31% 303,706 $ 4,526 5.96%
Tax-exempt (1) 65,897 1,092 6.57% 66,335 1,192 7.18%
- -----------------------------------------------------------------------------------------------------------------
Total securities 699,213 7,973 4.56% 370,041 5,718 6.18%
Loans (2):
Commercial (1) 486,675 7,868 6.41% 399,276 6,901 6.91%
Real estate 325,657 5,713 6.96% 346,379 6,545 7.56%
Consumer 97,002 2,332 9.54% 118,269 2,932 9.92%
- -----------------------------------------------------------------------------------------------------------------
Total loans 909,334 15,913 6.94% 863,924 16,378 7.58%
Less: Allowance for loan loss (14,376) (12,800)
- -----------------------------------------------------------------------------------------------------------------
Net loans 894,958 15,913 7.08% 851,124 16,378 7.66%
Interest-bearing deposits with banks 5,038 11 0.83% 1,577 5 1.27%
Federal funds sold 26,512 66 0.99% 4,772 21 1.68%
- -----------------------------------------------------------------------------------------------------------------
Total earning assets 1,625,721 23,963 5.88% 1,227,514 22,122 7.18%
Other assets 150,773 119,208
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,776,494 1,346,722 $
=================================================================================================================

LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 183,508 442 0.96% 128,870 $ 503 1.56%
Interest-bearing demand deposits 276,414 592 0.85% 287,434 1,190 1.66%
Time 474,128 3,404 2.85% 415,473 4,056 3.91%
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 934,050 4,438 1.88% 831,777 5,749 2.74%
Borrowed funds:
Short-term 44,488 144 1.28% 40,494 195 1.93%
Long-term 454,835 4,298 3.75% 219,845 2,601 4.73%
- -----------------------------------------------------------------------------------------------------------------
Total borrowed funds 499,323 4,442 3.51% 260,339 2,796 4.26%
- -----------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,433,373 8,880 2.45% 1,092,116 8,545 3.10%
Non-interest bearing deposits 131,456 105,604
Other liabilities 40,115 41,255
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,604,944 1,238,975
Stockholders' equity 171,550 107,747
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,776,494 1,346,722 $
=================================================================================================================

Interest spread 15,083 3.43% 13,577 4.08%
Interest income to earning assets 5.88% 7.18%
Interest expense to earning assets 2.16% 2.76%
- -----------------------------------------------------------------------------------------------------------------
Net interest margin 3.72% 4.42%
- -----------------------------------------------------------------------------------------------------------------

(1) Interest income and yields are presented on a fully tax-equivalent
basis using a 35% tax rate.
(2) Nonaccrual and impaired loans are included in the average balances.
Related interest income on nonaccrual loans prior to the loan being
placed on nonaccrual is included in loan interest income. Loan fees
included in interest income totaled $145 and $183 for the periods
presented in 2003 and 2002, respectively.

For the Nine months Ended September 30,
2003 2002
------------------------------------ ----------------------------------
(dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS

Securities:
Taxable $ 604,191 20,604 4.56% $ 293,805 13,493 6.12%
Tax-exempt (1) 66,408 3,315 6.67% 61,221 3,233 7.04%
- -----------------------------------------------------------------------------------------------------------------
Total securities 670,599 23,919 4.76% 355,026 16,726 6.28%
Loans (2):
Commercial (1) 455,120 21,931 6.44% 380,250 19,728 6.92%
Real estate 328,893 17,697 7.19% 316,848 18,247 7.68%
Consumer 101,480 7,350 9.68% 116,198 8,765 10.06%
- -----------------------------------------------------------------------------------------------------------------
Total loans 885,493 46,978 7.09% 813,296 46,740 7.66%
Less: Allowance for loan loss (13,916) (12,653)
- -----------------------------------------------------------------------------------------------------------------
Net loans 871,577 46,978 7.20% 800,643 46,740 7.80%
Interest-bearing deposits with banks 3,009 18 0.80% 2,225 23 1.40%
Federal funds sold 17,863 143 1.07% 1,625 20 1.67%
- -----------------------------------------------------------------------------------------------------------------
Total earning assets 1,563,048 71,058 6.07% 1,159,519 63,509 7.31%
Other assets 133,938 104,528
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,696,986 $ 1,264,047
=================================================================================================================

LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 170,000 1,467 1.15% $ 107,579 1,199 1.49%
Interest-bearing demand deposits 274,744 2,135 1.04% 279,259 3,412 1.63%
Time 450,309 10,943 3.25% 384,463 11,837 4.11%
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 895,053 14,545 2.17% 771,301 16,448 2.85%
Borrowed funds:
Short-term 41,935 386 1.23% 49,335 715 1.94%
Long-term 434,442 12,414 3.82% 205,198 7,339 4.77%
- -----------------------------------------------------------------------------------------------------------------
Total borrowed funds 476,377 12,800 3.57% 254,533 8,054 4.23%
- -----------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,371,430 27,345 2.66% 1,025,834 24,502 3.19%
Non-interest bearing deposits 121,983 99,096
Other liabilities 38,756 37,135
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,532,169 1,162,065
Stockholders' equity 164,817 101,982
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,696,986 $ 1,264,047
=================================================================================================================

Interest spread 43,713 3.41% 39,007 4.12%
Interest income to earning assets 6.07% 7.31%
Interest expense to earning assets 2.33% 2.82%
- -----------------------------------------------------------------------------------------------------------------
Net interest margin 3.74% 4.49%
- -----------------------------------------------------------------------------------------------------------------

(1) Interest income and yields are presented on a fully tax-equivalent
basis using a 35% tax rate.
(2) Nonaccrual and impaired loans are included in the average balances.
Related interest income on nonaccrual loans prior to the loan being
placed on nonaccrual is included in loan interest income. Loan fees
included in interest income totaled $523 and $539 for the periods
presented in 2003 and 2002, respectively.

ITEM 4: CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
With the participation of Peoples' management, including Peoples' principal
executive officer and principal financial officer, Peoples has evaluated the
effectiveness of its disclosure controls and procedures (as defined in Rules
13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the "Exchange Act"))
as of the end of the period covered by this report. Based upon that evaluation,
Peoples' principal executive officer and principal financial officer have
concluded that such disclosure controls and procedures are effective as of the
end of the period covered by this report to ensure that material information
relating to Peoples and its consolidated subsidiaries is made known to them,
particularly during the period for which Peoples' periodic reports, including
this report, are being prepared.

CHANGES IN INTERNAL CONTROLS
There were no significant changes during the period covered by this report in
Peoples' internal control over financial reporting (as defined in Rules 13a-15
and 15d-15 of the Exchange Act) that have materially affected, or are reasonably
likely to materially affect, Peoples' internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1: Legal Proceedings.
None.

ITEM 2: Changes in Securities and Use of Proceeds.
None.

ITEM 3: Defaults upon Senior Securities.
None.

ITEM 4: Submission of Matters to a Vote of Security Holders.
None.

ITEM 5: Other Information.
None.

ITEM 6: Exhibits and Reports on Form 8-K.
a) Exhibits:

EXHIBIT INDEX

Exhibit
Number Description Exhibit Location
- --------- ------------------------------------------------ ----------------

11 Computation of Earnings Per Share. Filed herewith

12 Computation of Ratios. Filed herewith

31(a) CEO Certification Pursuant to Rule Filed herewith
13a-14(A)/15d-14(A)

31(b) CFO Certification Pursuant to Rule Filed herewith
13a-14(A)/15d-14(A)

32 Certification Pursuant To Title 18, United Filed herewith
States Code, Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act Of 2002

b) Reports on Form 8-K:
Peoples filed the following reports on Form 8-K during the three months
ended September 30, 2003:

1) Filed July 1, 2003 - News release announcing the planned closure of
Peoples Bank's Catlettsburg, Kentucky office in October 2003.
2) Filed July 7, 2003 - News release announcing Peoples Bancorp was recently
recognized by The Cleveland Plain Dealer as one of the Top 100 businesses
in Ohio.
3) Filed July 15, 2003 - News release announcing earnings for the quarter
ended June 30, 2003.
4) Filed August 11, 2003 - News release announcing the hiring of Donald J.
Landers, Jr. as Controller and Chief Accounting Officer.
5) Filed August 15, 2003 - News release announcing the Board of Directors o
Peoples Bancorp Inc. declared a 5% stock dividend and quarterly dividend
of $0.17 per share.
6) Filed September 3, 2003 - News release announcing Peoples Bancorp Inc.
was recognized in the 13th edition of America's Finest Companies (R).
7) Filed September 26, 2003 - News release announcing a change in auditors
for Peoples Bancorp Inc. Retirement Savings Plan.

SIGNATURES

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

PEOPLES BANCORP INC.

Date: November 12, 2003 By:/s/ ROBERT E. EVANS
-------------------------------------
Robert E. Evans
Chairman
President and Chief Executive Officer

Date: November 12, 2003 By:/s/ JOHN W. CONLON
-------------------------------------
John W. Conlon
Chief Financial Officer

EXHIBIT INDEX

PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR PERIOD ENDED SEPTEMBER 30, 2003

Exhibit
Number Description Exhibit Location
- --------- ------------------------------------------------- ----------------

11 Computation of Earnings Per Share. Filed herewith

12 Computation of Ratios. Filed herewith

31(a) CEO Certification Pursuant to Rule Filed herewith
13a-14(A)/15d-14(A)

31(b) CFO Certification Pursuant to Rule Filed herewith
13a-14(A)/15d-14(A)

32 Certification Pursuant To Title 18, United Filed herewith
States Code, Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act Of 2002