Attached files

file filename
EX-31.1 - PEOPLES BANCORP INC/MDv222656_ex31-1.htm
EX-32.1 - PEOPLES BANCORP INC/MDv222656_ex32-1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC   20549

FORM 10-Q

x      Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended    March 31, 2011

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

For the transition period from _______________ to ________________

Commission File Number:  0-24169

PEOPLES BANCORP, INC.
(Exact name of registrant as specified in its charter)

Maryland
52-2027776
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)

P.O. Box 210, 100 Spring Avenue, Chestertown, Maryland
21620
(Address of Principal Executive Offices)
(Zip Code)

(410) 778-3500
Registrant’s Telephone Number, Including Area Code
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ¨ No ¨ (Not Applicable)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.  See definition of  “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company þ
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No þ

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 779,512 shares of common stock issued and outstanding as of May 1, 2011
 
 
 

 

PEOPLES BANCORP, INC.
 
FORM 10-Q
INDEX
 
   
Page
     
Part I – Financial Information
     
Item 1.
Financial Statements
3
     
 
Consolidated Balance Sheets at March 31, 2011 (unaudited)
 
 
and December 31, 2010
3
     
 
Consolidated Statements of Income (unaudited) for the three months
 
 
ended March 31, 2011 and 2010
4
     
 
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
 
 
for the three months ended March 31, 2011 and 2010
5
     
 
Consolidated Statements of Cash Flows (unaudited) for the three months
 
 
ended March 31, 2011 and 2010
6
     
 
Notes to Financial Statements (unaudited)
8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition
 
 
and Results of Operations
22
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
31
Item 4.
Controls and Procedures
31
     
Part II – Other Information
 
     
Item 1.
Legal Proceedings
31
Item 1A.
Risk Factors
31
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
32
Item 3.
Defaults Upon Senior Securities
32
Item 4.
(Removed and Reserved)
32
Item 5.
Other Information
32
Item 6.
Exhibits
32
     
Signatures
32
Exhibit Index
33
 
 
- 2 -

 

PART I - FINANCIAL INFORMATION

Item 1.      Financial Statements.

PEOPLES BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

   
March 31,
   
December, 31
 
   
2011
   
2010
 
   
(unaudited)
       
ASSETS
           
Cash and due from banks
  $ 16,571,994     $ 10,378,485  
Federal funds sold
    1,016,000       1,016,000  
Cash and cash equivalents
    17,587,994       11,394,485  
Securities available for sale
    9,071,820       8,035,780  
Securities held to maturity (approximate fair value of $1,527,317 and $3,554,315)
    1,508,150       3,510,533  
Federal Home Loan Bank & CBB Financial Corp. stock, at cost
    2,151,600       2,151,600  
Loans, less allowance for loan losses of $3,988,150 and $5,656,788
    204,731,970       207,295,877  
Premises and equipment
    6,352,830       6,389,781  
Goodwill and intangible assets
    587,070       603,988  
Accrued interest receivable
    1,012,580       1,360,708  
Deferred income taxes
    2,369,494       2,367,847  
Foreclosed real estate
    1,370,000       1,201,600  
Other assets
    1,903,318       1,480,216  
Total Assets
  $ 248,646,826     $ 245,792,415  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Deposits
               
Non-interest bearing
  $ 38,556,516     $ 36,219,753  
Interest-bearing
    157,160,800       153,420,977  
      195,717,316       189,640,730  
                 
Securities sold under repurchase agreements
    2,179,654       2,754,321  
Federal Home Loan Bank advances
    22,000,000       24,000,000  
Accrued interest payable
    303,301       414,758  
Other liabilities
    1,526,031       1,590,442  
      221,726,302       218,400,251  
Stockholders’ equity
               
Common stock, par value $10 per share; authorized 1,000,000
               
shares; issued and outstanding 779,512 shares
    7,795,120       7,795,120  
Additional paid-in capital
    2,920,866       2,920,866  
Retained earnings
    16,619,629       17,088,742  
      27,335,615       27,804,728  
Accumulated other comprehensive income (loss)
               
Unrealized gain (loss) on available for sale securities
    8,947       11,474  
Unfunded liability of defined benefit plan
    (424,038 )     (424,038 )
      26,920,524       27,392,164  
Total Liabilities and Stockholders’ Equity
  $ 248,646,826     $ 245,792,415  

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

 
- 3 -

 
 
PEOPLES BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
  
   
For the three months ended March 31,
 
   
2011
   
2010
 
Interest and dividend revenue
           
Loans, including fees
  $ 2,888,493     $ 3,219,351  
U.S. government agency securities
    41,713       108,470  
Deposit in other banks
    8       5  
Federal funds sold
    693       696  
Equity securities
    4,245       1,593  
Total interest and dividend revenue
     2,935,152        3,330,115  
                 
Interest expense
               
Deposits
    672,450       739,813  
Borrowed funds
    181,131       245,149  
Total interest expense
    853,581       984,962  
                 
Net interest income
    2,081,571       2,345,153  
                 
Provision for loan losses
    1,500,000       475,000  
                 
Noninterest revenue
               
Service charges on deposit accounts
    245,185       214,802  
Insurance commissions
    375,314       333,608  
Gain (loss) on sale of foreclosed real estate
    (17,352 )     -  
Other noninterest revenue
    61,185       64,190  
Total noninterest revenue
    664,332       612,600  
                 
Noninterest expense
               
Salaries and employee benefits
    1,024,359       1,065,009  
Occupancy
    120,798       127,715  
Furniture and equipment
    84,702       89,155  
Other operating
    576,031       572,673  
Total noninterest expense
    1,805,890       1,854,552  
                 
Income (loss) before income taxes
    (559,987 )     628,201  
                 
Income tax expense (benefit)
    (262,367 )     226,945  
                 
Net income (loss)
  $ (297,620 )   $ 401,256  
                 
Earnings (loss) per common share - basic and diluted
  $ (0.38 )   $ 0.51  

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

 
- 4 -

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

THREE MONTHS ENDED MARCH 31, 2011 and 2010

                     
Accumulated
       
         
Additional
         
other
       
         
paid-in
   
Retained
   
comprehensive
   
Comprehensive
 
   
Par value
   
capital
   
earnings
   
income
   
income
 
                               
Balance, December 31, 2009
  $ 7,795,120     $ 2,920,866     $ 18,865,399     $ (691,637 )      
                                       
Net income
    -       -       401,256       -     $ 401,256  
Unrealized loss on investment
                                       
securities available for sale net
                                       
of income taxes of $587
    -       -       -       (902 )     (902 )
Comprehensive income
                                  $ 400,354  
                                         
Cash dividend, $.45 per share
    -       -       (350,780 )     -          
                                         
Balance, March 31, 2010
  $ 7,795,120     $ 2,920,866     $ 18,671,133     $ (667,753 )        
                                         
Balance, December 31, 2010
  $ 7,795,120     $ 2,920,866     $ 17,088,742     $ (412,564 )        
                                         
Net income (loss)
    -       -       (297,620 )     -     $ (297,620 )
Unrealized loss on investment
                                       
securities available for sale net
                                       
of income taxes of $1,646
    -       -       -       (2,527 )     (2,527 )
Comprehensive income (loss)
                                  $ (300,147 )
                                         
Cash dividend, $.22 per share
    -       -       (171,493 )     -          
                                         
Balance, March 31, 2011
  $ 7,795,120     $ 2,920,866     $ 16,619,629     $ (415,091 )        

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

 
- 5 -

 
 
PEOPLES BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
 
   
For the three months ended March 31,
 
   
2011
   
2010
 
             
Interest received
  $ 3,305,576     $ 3,548,116  
Fees and commissions received
    681,684       612,600  
Cash paid to suppliers and employees
    (2,191,494 )     (1,546,735 )
Interest paid
    (965,038 )     (1,088,969 )
Taxes paid
    262,367       (226,534 )
      1,093,095       1,298,478  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Cash paid for premises, equipment, and software
    (48,040 )     (69,544 )
Loans made, net of principal collected
    703,240       (2,694,290 )
Proceeds from sale of foreclosed real estate
    164,248       -  
Proceeds from maturities and calls of securities
               
Available for sale
    3,000,000       -  
Held to maturity
    2,000,194       1,500,188  
Purchase of securities available for sale
    (4,049,654 )     (4,003,873 )
Purchase of securities held to maturity
    -       -  
Redemption of FHLB stock, net of purchases
    -       -  
      1,769,988       (5,267,519 )
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase (decrease) in
               
Time deposits
    736,878       1,041,256  
Other deposits
    5,339,708       (5,801,949 )
Securities sold under repurchase agreements
    (574,667 )     (1,295,742 )
Advances under (repayments of) notes payable, net
    (2,000,000 )     (2,000,000 )
Repayments of other borrowings
    -       -  
Dividends paid
    (171,493 )     (350,780 )
      3,330,426       (8,407,215 )
NET INCREASE (DECREASE) IN CASH
    6,193,509       (12,376,256 )
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
    11,394,485       23,004,550  
CASH AND EQUIVALENTS AT END OF PERIOD
  $ 17,587,994     $ 10,628,294  
                 
NON CASH TRANSACTIONS
               
Transfer of foreclosed real estate
  $ 350,000     $ -  
 
 
- 6 -

 

PEOPLES BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued (unaudited)

   
For the three months ended March 31,
 
   
2011
   
2010
 
             
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
           
FROM OPERATING ACTIVITIES
           
Net income
  $ (297,620 )   $ 401,256  
ADJUSTMENTS
               
Depreciation and amortization
    80,281       83,791  
Provision for loan losses
    1,500,000       475,000  
Deferred income taxes
    -       411  
Amortization of intangible assets
    16,918       16,918  
Security discount accretion, net of premium amortization
    11,629       10,353  
Gain of sale of foreclosed real estate
    17,352       -  
Decrease (increase) in
               
Accrued interest receivable
    348,128       181,451  
Income Tax refund receivable
    -       -  
Other assets
    (418,392 )     175,037  
Increase (decrease) in
               
Deferred origination fees and costs, net
    10,667       26,197  
Accrued interest payable
    (111,457 )     (104,007 )
Other Liabilities
    (64,411 )     32,071  
    $ 1,093,095     $ 1,298,478  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
- 7 -

 

Peoples Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

1.
Basis of Presentation

The accompanying unaudited consolidated financial statements of Peoples Bancorp, Inc. and its subsidiaries, The Peoples Bank, a Maryland-chartered bank (the “Bank”), and Fleetwood, Athey, Macbeth & McCown, Inc., a Maryland insurance agency (the “Insurance Agency”), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X of the U.S. Securities and Exchange Commission (the “SEC”).  Accordingly, they do not include all the information and notes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011 or any other future interim period.  The consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and related notes contained in the Annual Report of Peoples Bancorp, Inc. on Form 10-K for the year ended December 31, 2010.  When used in these notes, the term “Company” refers to Peoples Bancorp, Inc. and, unless the context requires otherwise, its consolidated subsidiaries.

The Account Standards Codification (the “ASC”) of the Financial Accounting Standards Board (the “FASB”) became effective on July 1, 2009.  At that date, the ASC became FASB’s officially recognized source of authoritative U. S. generally accepted accounting principles (“GAAP”) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature.  Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  All other accounting literature is considered non-authoritative.  The switch to the ASC affects the way companies refer to GAAP in financial statements and accounting policies.  Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

The Company evaluated subsequent events after the balance sheet date through May 14, 2011.  No significant subsequent events were identified which would affect the presentation of the financial information.

2.
Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and overnight investments in federal funds sold.

3.
Comprehensive income (loss)

For the three months ended March 31, 2011, total comprehensive loss, net of taxes, was $300,147, compared to comprehensive income, net of taxes, of $400,354 for the same period of 2010.  Comprehensive income (loss) is the sum of net income (loss) and the change in the unrealized gain or loss on securities available for sale, net of income taxes.
 
 
- 8 -

 

4.
Loans and Allowance for Loan Losses

Major classifications of loans as of March 31, 2011 and December 31, 2010 are as follows:

   
March 31, 2011
   
December 31,2010
 
             
Real estate
           
Residential
  $ 74,186,183     $ 75,206,074  
Commercial
    89,132,895       89,617,135  
Construction
    13,450,751       13,403,765  
Commercial
    26,690,460       29,052,413  
Consumer
    5,186,050       5,588,830  
      208,646,339       212,868,217  
Deferred costs, net of deferred fees
    73,781       84,448  
Allowance for loan losses
    (3,988,150 )     (5,656,788 )
    $ 204,731,970     $ 207,295,877  

The rate repricing and maturity distribution of the loan portfolio is as follows:

Within ninety days
  $ 44,630,667     $ 41,653,284  
Over ninety days to one year
    85,806,933       96,362,940  
Over one year to five years
    77,460,282       74,464,702  
Over five years
    748,457       387,291  
    $ 208,646,339     $ 212,868,217  
                 
Variable rate loans included in above
  $ 48,939,041     $ 51,208,677  
 
A table of the recorded investment in loans that were impaired and risk rated at March 31, 2011 follows:

Impaired and Risk Rated Loans at March 31, 2011

   
Recorded
   
Unpaid
   
Investment for
   
Investment for
 
   
Investment in
   
Principal
   
which there
   
which there
 
Description of Loans
 
Impaired Loans
   
Balance
   
is related ALLL
   
is no Related ALLL
 
                         
Residential real estate
  $ 2,571,014     $ 2,571,014     $ 1,605,699     $ 965,315  
Commercial real estate
    5,011,092       5,011,092       4,360,951       650,141  
Other real estate
    -       -       -       -  
Construction and land development
    4,537,599       4,537,599       3,911,632       625,967  
Commercial loans
    101,523       101,523       26,523       75,000  
Consumer loans
    -       -       -       -  
Total impaired loans
  $ 12,221,228     $ 12,221,228     $ 9,904,805     $ 2,316,423  
 
 
- 9 -

 

The following tables illustrate total impaired loans segmented by those with and without a related allowance as of March 31, 2011 and December 31, 2010.  Comparable information is not available for March 31, 2010.

Total Impaired Loans Segmented by With and Without a Related Allowance Recorded
March 31, 2011
   
Recorded
   
Current
         
Interest
       
   
Investment in
   
Loan
   
Related
   
Income
   
Average
 
Description of Loans
 
Impaired Loans
   
Balance
   
Allowance
   
Recognized
   
Balance
 
                               
With Related Allowance recorded
 
Residential real estate
  $ 1,605,699     $ 1,605,699     $ 794,111     $ 367,514     $ 1,609,815  
Commercial real estate
    4,360,951       4,360,951       594,952       2,893,290       4,369,670  
Other real estate
    -       -       -       -       -  
Construction and land development
    3,966,355       3,966,355       546,957       832,566       4,169,626  
Commercial loans
    26,523       26,523       26,523       995       26,821  
Consumer loans
    -       -       -       -       -  
Total impaired loans
  $ 9,959,528     $ 9,959,528     $ 1,962,543     $ 4,094,365     $ 10,175,931  
                                         
With No Related Allowance recorded
 
Residential real estate
  $ 965,315     $ 965,315     $ -     $ 316,575     $ 1,020,772  
Commercial real estate
    650,141       650,141       -       250,454       650,141  
Other real estate
    -       -       -       -       -  
Construction and land development
    625,967       625,967       -       191,308       625,968  
Commercial loans
    75,000       75,000       -       8,441       75,000  
Consumer loans
    -       -       -       -       -  
Total impaired loans
  $ 2,316,423     $ 2,316,423     $ -     $ 766,778     $ 2,371,881  
                                         
TOTAL
 
Residential real estate
  $ 2,571,014     $ 2,571,014     $ 794,111     $ 684,089     $ 2,630,587  
Commercial real estate
    5,011,092       5,011,092       594,952       3,143,744       5,019,811  
Other real estate
    -       -       -       -       -  
Construction and land development
    4,592,322       4,592,322       546,957       1,023,873       4,795,593  
Commercial loans
    101,523       101,523       26,523       9,436       101,821  
Consumer loans
    -       -       -       -       -  
Total impaired loans
  $ 12,275,951     $ 12,275,951     $ 1,962,543     $ 4,861,142     $ 12,547,812  
 
 
- 10 -

 
 
Total Impaired Loans Segmented by With and Without a Related Allowance Recorded
December 31, 2010
   
Recorded
   
Current
         
Interest
       
   
Investment in
   
Loan
   
Related
   
Income
   
Average
 
Description of Loans
 
Impaired Loans
   
Balance
   
Allowance
   
Recognized
   
Balance
 
                               
With Related Allowance recorded
 
Residential real estate
  $ 1,092,458     $ 1,092,458     $ 217,644     $ 16,091     $ 1,109,176  
Commercial real estate
    1,670,505       1,670,505       535,044       72,645       1,589,338  
Other real estate
    -       -       -       -       -  
Construction and land development
    5,169,481       5,169,481       2,494,682       239,506       4,726,734  
Commercial loans
    160,283       160,283       46,126       1,511       138,065  
Consumer loans
    -       -       -       -       -  
Total impaired loans
  $ 8,092,727     $ 8,092,727     $ 3,293,496     $ 329,753     $ 7,563,313  
                                         
With No Related Allowance recorded
 
Residential real estate
  $ 1,080,353     $ 1,080,353     $ -     $ 33,360     $ 1,105,548  
Commercial real estate
    1,441,244       1,441,244       -       24,395       2,032,234  
Other real estate
    -       -       -       -       -  
Construction and land development
    625,967       625,967       -       3,552       617,399  
Commercial loans
    385,221       385,221       -       -       385,221  
Consumer loans
    -       -       -       -       -  
Total impaired loans
  $ 3,532,785     $ 3,532,785     $ -     $ 61,307     $ 4,140,402  
                                         
TOTAL
 
Residential real estate
  $ 2,172,811     $ 2,172,811     $ 217,644     $ 49,451     $ 2,214,724  
Commercial real estate
    3,111,749       3,111,749       535,044       97,040       3,621,572  
Other real estate
    -       -       -       -       -  
Construction and land development
    5,795,448       5,795,448       2,494,682       243,058       5,344,133  
Commercial loans
    545,504       545,504       46,126       1,511       523,286  
Consumer loans
    -       -       -       -       -  
Total impaired loans
  $ 11,625,512     $ 11,625,512     $ 3,293,496     $ 391,060     $ 11,703,715  

Transactions in the allowance for loan losses were as follows:

   
March 31, 2011
   
December 31, 2010
   
March 31, 2010
 
                   
Beginning balance
  $ 5,656,788     $ 2,845,364     $ 2,845,364  
Provision charged to operations
    1,500,000       4,910,000       475,000  
Recoveries
    26,477       19,677       2,280  
      7,183,265       7,775,041       3,322,644  
Loans charged off
    3,195,115       2,118,253       623,006  
Ending balance
  $ 3,988,150     $ 5,656,788     $ 2,699,638  
 
 
- 11 -

 

The following table represents the allowance for loan losses and loan balances that are individually evaluated for impairment and loan balances collectively evaluated for possible impairment.

Allowance for Credit Losses and Loan Balances that are Individually and Collectively Evaluated for Possible Impairment
March 31, 2011
                           
Construction
                         
               
Residential
   
Commercial
   
and land
   
Other
                   
   
Unallocated
   
Commercial
   
Real Estate
   
Real Estate
   
Development
   
Real Estate
   
Consumer
   
Overdraft
   
Total
 
Allowance for Credit Losses
                                                     
Beginning Balance
  $ 137,047     $ 676,113     $ 806,728     $ 1,124,851     $ 2,780,148     $ 2,122     $ 126,751     $ 3,028     $ 5,656,788  
Charge-Offs
    -       (491,329 )     (366,626 )     (185,626 )     (2,141,948 )     -       (8,904 )     (682 )     (3,195,115 )
Recoveries
    -       210       1,575       -       -       -       24,084       608       26,477  
Provision
    (134,645 )     350,135       995,276       276,093       38,425       91       (36,053 )     10,678       1,500,000  
Ending Balance
  $ 2,402     $ 535,129     $ 1,436,953     $ 1,215,318     $ 676,625     $ 2,213     $ 105,878     $ 13,632     $ 3,988,150  
                                                                         
Ending Balance allocated to:
                                                                       
Loans individually
                                                                       
evaluated for impairment
  $ -     $ 26,523     $ 794,111     $ 594,952     $ 546,957     $ -     $ -     $ -     $ 1,962,543  
Loans collectively
                                                                       
evaluated for impairment
    2,402       508,606       642,842       620,366       129,668       2,213       105,878       13,632       2,025,607  
    $ 2,402     $ 535,129     $ 1,436,953     $ 1,215,318     $ 676,625     $ 2,213     $ 105,878     $ 13,632     $ 3,988,150  

Allowance for Credit Losses and Loan Balances that are Individually and Collectively Evaluated for Possible Impairment
December 31, 2010
                           
Construction
                         
               
Residential
   
Commercial
   
and land
   
Other
                   
   
Unallocated
   
Commercial
   
Real Estate
   
Real Estate
   
Development
   
Real Estate
   
Consumer
   
Overdraft
   
Total
 
Allowance for Credit Losses
                                                     
Beginning Balance
  $ 140,751     $ 728,049     $ 920,132     $ 643,430     $ 164,539     $ 2,782     $ 245,137     $ 544     $ 2,845,364  
Charge-Offs
    -       (166,779 )     (888,040 )     (951,603 )     (7,040 )     -       (101,162 )     (3,629 )     (2,118,253 )
Recoveries
    -       2,660       374       -       -       -       15,113       1,530       19,677  
Provision
    (3,704 )     112,183       774,262       1,433,024       2,622,649       (660 )     (32,337 )     4,583       4,910,000  
Ending Balance
  $ 137,047     $ 676,113     $ 806,728     $ 1,124,851     $ 2,780,148     $ 2,122     $ 126,751     $ 3,028     $ 5,656,788  
                                                                         
Ending Balance allocated to:
                                                                       
Loans individually
                                                                       
evaluated for impairment
  $ -     $ 46,126     $ 217,644     $ 535,044     $ 2,494,664     $ -     $ -     $ -     $ 3,293,478  
Loans collectively
                                                                       
evaluated for impairment
    137,047       629,987       589,084       589,807       285,484       2,122       126,751       3,028       2,363,310  
    $ 137,047     $ 676,113     $ 806,728     $ 1,124,851     $ 2,780,148     $ 2,122     $ 126,751     $ 3,028     $ 5,656,788  

Allowance for Credit Losses and Loan Balances that are Individually and Collectively Evaluated for Possible Impairment
March 31, 2010
                           
Construction
                         
               
Residential
   
Commercial
   
and land
   
Other
                   
   
Unallocated
   
Commercial
   
Real Estate
   
Real Estate
   
Development
   
Real Estate
   
Consumer
   
Overdraft
   
Total
 
Allowance for Credit Losses
                                                     
Beginning Balance
  $ 140,751     $ 728,049     $ 920,132     $ 643,430     $ 164,539     $ 2,782     $ 245,137     $ 544     $ 2,845,364  
Charge-Offs
    -       (29,442 )     (489,267 )     (92,457 )     -       -       (10,531 )     (1,309 )     (623,006 )
Recoveries
    -       820       -       -       -       -       355       1,105       2,280  
Provision
    (138,362 )     (12,150 )     420,648       185,113       (3,986 )     (1,125 )     22,412       2,449       474,999  
Ending Balance
  $ 2,389     $ 687,277     $ 851,513     $ 736,086     $ 160,553     $ 1,657     $ 257,373     $ 2,789     $ 2,699,637  
                                                                         
Ending Balance allocated to:
                                                                       
Loans individually
                                                                       
evaluated for impairment
  $ -     $ 164,257     $ 383,442     $ 672,576     $ 40,756     $ -     $ 1,578     $ -     $ 1,262,609  
Loans collectively
                                                                       
evaluated for impairment
    2,389       523,020       468,071       63,510       119,797       1,657       255,795       2,789       1,437,028  
    $ 2,389     $ 687,277     $ 851,513     $ 736,086     $ 160,553     $ 1,657     $ 257,373     $ 2,789     $ 2,699,637  
 
 
- 12 -

 

Credit Quality Indicators.  As part of the on-going monitoring of the quality of the Bank’s loan portfolio, management tracks certain credit quality indicators

The Bank does credit-score all loans.  Loans are risk rated on the scale below:

Grades 1 through 4 – These grades include “pass grade” loans to borrowers of acceptable credit quality and risk.

Grade 5 – This grade includes loans that are on Management’s “watch list” and is intended to be utilized on a temporary basis for pass grade borrowers where a significant risk-modifying action is anticipated in the near future.

Grade 6 – This grade is for “Other Assets Especially Mentioned” or “Special Mention” in accordance with regulatory guidelines. This grade is intended to be temporary and includes loans to borrowers whose credit quality has clearly deteriorated and are at risk of further decline unless active measures are taken to correct the situation. This grade may include loans not fully secured where a specific valuation allowance may be necessary.
 
Grades 7 through 9 – These grades include “Substandard” loans, in accordance with regulatory guidelines, for which accrual of interest may have stopped. These grades include loans that are past due or not fully secured where a specific valuation allowance may be necessary.

The following table illustrates classified loans by class.  Classified loans include loans in Risk Grades 5, 6, and 7 through 9.

March 31, 2011
 
Pass Watch
   
Special Mention
   
Substandard
   
Total
 
                         
Commercial
  $ 218,242     $ 39,681     $ 1,847,224     $ 2,105,147  
Residential real estate
    2,225,967       -       4,509,823       6,735,790  
Commercial real estate
    592,398       1,828,743       7,225,936       9,647,077  
Construction and land development
    1,067,251       -       6,449,966       7,517,217  
Other real estate
    -       -       43,318       43,318  
Consumer
    11,569       -       37,390       48,959  
    $ 4,115,427     $ 1,868,424     $ 20,113,657     $ 26,097,508  

December 31, 2010
 
Pass Watch
   
Special Mention
   
Substandard
   
Total
 
                         
Commercial
  $ 159,817     $ 39,722     $ 2,673,725     $ 2,873,264  
Residential real estate
    1,975,178       -       4,448,109       6,423,287  
Commercial real estate
    3,255,868       1,833,303       4,834,487       9,923,658  
Construction and land development
    301,009       -       10,012,172       10,313,181  
Other real estate
    -       -       43,646       43,646  
Consumer
    11,695       -       10,417       22,112  
    $ 5,703,567     $ 1,873,025     $ 22,022,556     $ 29,599,148  
 
 
- 13 -

 

The following table analyzes the age of past due and nonaccruing loans for the years ended March 31, 2011 and 2010.

               
Greater than
                         
   
30-59 Days
   
60-89 Days
   
90 Days or
   
Total
         
Total
   
Loans 90 Days
 
March 31, 2011
 
Past Due
   
Past Due
   
Nonaccruing
   
Past Due
   
Current
   
Loans
   
and Accruing
 
                                           
Residential real estate
  $ 4,355,588     $ 897,789     $ 4,496,886     $ 9,750,263     $ 64,435,920     $ 74,186,183     $ 1,813,757  
Commercial real estate
    964,532       163,584       5,206,757       6,334,873       58,538,075       64,872,948       1,386,885  
Other real estate
    -       -       43,318       43,318       24,216,629       24,259,947       43,318  
Construction and land development
    465,120       240,609       4,100,296       4,806,025       8,644,726       13,450,751       1,022,686  
Commercial loans
    509,101       35,236       238,631       782,968       25,907,492       26,690,460       52,819  
Consumer loans
    133,511       38,325       43,233       215,069       4,970,981       5,186,050       5,843  
Total
  $ 6,427,852     $ 1,375,543     $ 14,129,121     $ 21,932,516     $ 186,713,823     $ 208,646,339     $ 4,325,308  

               
Greater than
                       
   
30-59 Days
   
60-89 Days
   
90 Days or
   
Total
         
Total
   
Loans 90 Days
December 31, 2010
 
Past Due
   
Past Due
   
Nonaccruing
   
Past Due
   
Current
   
Loans
   
and Accruing
                                         
Residential real estate
  $ 1,452,435     $ 1,258,246     $ 4,506,064     $ 7,216,745     $ 67,989,329     $ 75,206,074     $ 2,008,168
Commercial real estate
    980,023       467,285       3,216,515       4,663,823       60,693,365       65,357,188       2,120,564
Other real estate
    -       -       1,130,824       1,130,824       23,129,123       24,259,947       1,130,824
Construction and land development
    -       -       2,180,150       2,180,150       11,223,615       13,403,765       1,022,686
Commercial loans
    54,262       28,545       594,022       676,829       28,375,584       29,052,413       19,838
Consumer loans
    122,969       25,878       66,563       215,410       5,373,420       5,588,830       66,563
Total
  $ 2,609,689     $ 1,779,954     $ 11,694,138     $ 16,083,781     $ 196,784,436     $ 212,868,217     $ 6,368,643

Loans on which the accrual of interest has been discontinued or reduced, and the interest that would have been accrued at March 31, 2011 and 2010, are as follows:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Residential real estate
  $ 2,756,901     $ 2,497,896  
Commercial real estate
    3,819,872       1,095,951  
Other real estate
    -       -  
Construction and land development
    3,077,610       1,157,464  
Commercial loans
    185,813       574,184  
Consumer loans
    37,390       -  
Total
  $ 9,877,586     $ 5,325,495  
                 
Interest not accrued on nonaccrual loans
  $ 591,191     $ 644,566  

As of March 31, 2011, the Bank had classified $5,486,715 of loans as troubled debt restructurings (“TDRs”).  Under a TDR, interest rates may be reduced to current market rates or principal reductions may be deferred for a set period of time.  For each of the current TDRs, the customer is expected to pay the full principal balance owed.
 
 
- 14 -

 

5.
Commitments

Loan commitments are made to accommodate the financial needs of the Company’s customers.  Letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur.  These obligations are not recorded in the Company’s financial statements.  The credit risks inherent in loan commitments and letters of credit are essentially the same as those involved in extending loans to customers, and these arrangements are subject to the Bank’s normal credit policies.  The Bank’s exposure to credit loss in the event the customer does not satisfy the terms of these arrangements equals the notional amount of the obligation less the value of any collateral.  The table below represents unfunded obligations at March 31, 2011 and December 31, 2010.

   
March 31, 2011
   
December 31, 2010
 
             
Check loan lines of credit
  $ 487,622     $ 468,621  
Mortgage lines of credit
    7,455,389       6,727,480  
Other lines of credit
    12,412,420       10,964,947  
Undisbursed construction loan commitments
    1,916,574       2,240,747  
    $ 22,272,005     $ 20,401,795  
                 
Standby letters of credit
  $ 2,877,909     $ 3,016,824  

6.
Earnings Per Share

Earnings (loss) per common share is derived by dividing net income (loss) available to holders of shares of common stock by the weighted average number of shares of common stock outstanding of 779,512 for the three-month periods ended March 31, 2011 and 2010.

7.
Pension

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

During the three months ended March 31, 2011 and 2010, the Bank recognized net periodic costs for this plan of $75,844 and $76,342, respectively.  The Bank contributed $34,088 and $67,571 respectively, to the plan during the first quarters of 2011 and 2010.

8.
Segment Reporting

The Company operates two primary businesses:  (i) Community Banking; and (ii) Insurance Products and Services. Through the Community Banking business, the Company provides services to consumers and small businesses on the upper Eastern Shore of Maryland through its seven branches. Community Banking activities include serving the deposit needs of small business and individual consumers by providing banking products and services to fit their needs. Loan products available to consumers include mortgage, home equity, automobile, marine, and installment loans and other secured and unsecured personal lines of credit. Small business lending includes commercial mortgages, real estate development loans, equipment and operating loans, as well as secured and unsecured lines of credit, accounts receivable financing arrangements, and merchant card services.

 
- 15 -

 
 
Through the Insurance Products and Services business, the Company provides a full range of insurance products and services to businesses and consumers in the Company’s market areas. Products include property and casualty, life, marine, individual health and long-term care insurance.

Selected financial information by line of business is included in the following table:
 
For the three months ended
March 31, 2011
 
Community 
banking
   
Insurance 
products
and services
   
Intersegment
Transactions
   
Consolidated 
Total
 
                         
Net interest income
  $ 2,081,253     $ 318     $ -     $ 2,081,571  
Provision for loan losses
    1,500,000       -       -       1,500,000  
Net interest income after provision
    581,253       318       -       581,571  
                                 
Noninterest revenue
    288,417       375,915       -       664,332  
Noninterest expense
    1,585,507       220,383       -       1,805,890  
Income before income taxes
    (715,837 )     155,850       -       (559,987 )
Income tax expense (benefit)
    (323,842 )     61,475       -       (262,367 )
Net income
  $ (391,995 )   $ 94,375     $ -     $ (297,620 )
                                 
Average assets
  $ 247,669,212     $ 1,718,752     $ (756,434 )   $ 248,631,530  

For the three months ended
March 31, 2010
 
Community 
banking
   
Insurance 
products
and services
   
Intersegment
Transactions
   
Consolidated 
Total
 
                         
Net interest income
  $ 2,344,762     $ 391     $ -     $ 2,345,153  
Provision for loan losses
    475,000       -       -       475,000  
Net interest income after provision
    1,869,762       391       -       1,870,153  
                                 
Noninterest revenue
    278,364       334,236       -       612,600  
Noninterest expense
    1,652,554       201,998       -       1,854,552  
Income before income taxes
    495,572       132,629       -       628,201  
Income tax expense
    174,496       52,499       -       226,995  
Net income
  $ 321,076     $ 80,130     $ -     $ 401,206  
                                 
Average assets
  $ 251,003,285     $ 1,780,331     $ (3,093,976 )   $ 249,689,640  
 
 
- 16 -

 

9.
Fair Value

The fair value of an asset or a liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability.  In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach.  Such valuation techniques are consistently applied.  Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.   FASB ASC valuation techniques include the assumptions that market participants would use in pricing an asset or a liability.  FASB ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The fair value hierarchy is as follows

 
Level 1 inputs — Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 
Level 2 inputs — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates. volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

 
Level 3 inputs — Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
  
In general, fair value is based upon quoted market prices, where available.  If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters.  Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.  These adjustments may include amounts to reflect counterparty credit quality and the issuer’s creditworthiness, among other things, as well as unobservable parameters.  Any such valuation adjustments are applied consistently over time.  The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.  Although management believes the Company’s valuation methodologies are appropriate and consistent with those used by other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.  Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and, therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.  Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer, which generally coincides with the Company’s monthly and quarterly valuation process.
 
 
- 17 -

 

The Company measures securities available for sale at fair value on a recurring basis.  The following table summarizes securities available for sale measured at fair value on a recurring basis as of March 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

Available for Sale
 
Total
   
Level 1 Inputs
   
Level 2 Inputs
   
Level 3 Inputs
 
U. S. Government Agency Securities
  $ 9,071,820     $ 9,071,820     $ -     $ -  

The Company’s foreclosed real estate is measured at fair value on a nonrecurring basis, which means that the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of reduced property value).  Foreclosed real estate measured at fair value on a non-recurring basis during the three months ended March 31, 2011 is reported at the fair value of the underlying collateral, assuming that the sale prices of the properties will be their current appraised values.  Appraised values are estimated using Level 2 inputs based on observable market data and current property tax assessments.  Foreclosed real estate measured at fair value on a nonrecurring basis during the three months ended March 31, 2011 is as follows.

   
Total
   
Level 1 Inputs
   
Level 2 Inputs
   
Level 3 Inputs
 
                         
Foreclosed real estate
  $ 1,370,000     $ -     $ 1,370,000     $ -  

FASB ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis.
 
The Company does not measure the fair value of any of its other financial assets or liabilities on a recurring or nonrecurring basis.  The fair value of financial instruments equals the carrying value of the instruments except as noted.

   
March 31, 2011
   
December 31, 2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
amount
   
value
   
amount
   
value
 
                         
Financial assets
                       
Cash and due from banks
  $ 16,571,994     $ 16,571,994     $ 10,378,485     $ 10,378,485  
Federal funds sold
    1,016,000       1,016,000       1,016,000       1,016,000  
Investment securities (total)
    10,579,970       10,599,137       11,546,313       11,590,095  
Federal Home Loan Bank  and CBB
                               
Financial Corp. stock
    2,151,600       2,151,600       2,151,600       2,151,600  
Loans, net
    204,731,970       205,542,013       207,295,877       208,116,545  
Accrued interest receivable
    1,012,580       1,012,580       1,306,708       1,360,708  
                                 
Financial liabilities
                               
Noninterest-bearing deposits
  $ 38,556,516     $ 38,556,516     $ 35,219,753     $ 35,219,753  
Interest-bearing deposits
    157,160,800       160,656,581       154,420,977       157,626,964  
Short-term borrowings
    2,179,654       2,179,654       2,754,321       2,754,321  
Federal Home Loan
                               
Bank advances
    22,000,000       23,329,464       24,000,000       25,230,768  
Accrued interest payable
    303,301       303,301       414,758       414,758  
 
 
- 18 -

 

The fair value of fixed-rate loans is estimated to be the present value of scheduled payments discounted using interest rates currently in effect.  The fair value of variable-rate loans, including loans with a demand feature, is estimated to equal the carrying amount.  The valuation of loans is adjusted for possible loan losses.

The fair value of interest-bearing checking, savings, and money market deposit accounts is equal to the carrying amount.  The fair value of fixed-maturity time deposits and borrowings is estimated based on interest rates currently offered for deposits and borrowings of similar remaining maturities.

It is not practicable to estimate the fair value of outstanding loan commitments, unused lines of credit, and letters of credit.

10.        Investment Securities

Investment securities are summarized as follows:

   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
cost
   
gains
   
losses
   
value
 
March 31, 2011
                       
Available for sale
                       
U. S. government agency
  $ 9,057,044     $ 16,075     $ 1,299     $ 9,071,820  
                                 
Held to maturity
                               
U. S. government agency
  $ 1,503,092     $ 19,083     $ -     $ 1,522,175  
Mortgage-backed securities
    5,058       84       6       5,136  
    $ 1,508,150     $ 19,167     $ 6     $ 1,527,311  
                                 
December 31, 2010
                               
Available for sale
                               
U. S. government agency
  $ 8,016,831     $ 18,949     $ -     $ 8,035,780  
                                 
Held to maturity
                               
U. S. government agency
  $ 3,505,278     $ 43,757     $ -     $ 3,549,035  
Mortgage-backed securities
    5,255       25       -       5,280  
    $ 3,510,533     $ 43,782     $ -     $ 3,554,315  
 
 
- 19 -

 

Contractual maturities and the amount of pledged securities are shown below.  Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Available for sale
   
Held to maturity
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
cost
   
value
   
cost
   
value
 
March 31, 2011
                       
Maturing
                       
Within one year
  $ 5,012,643     $ 5,025,240     $ 1,503,092     $ 1,522,175  
Over one to five years
    4,044,401       4,046,580       -       -  
Mortgage-backed securities
    -       -       5,058       5,136  
    $ 9,057,044     $ 9,071,820     $ 1,508,150     $ 1,527,311  
                                 
Pledged securities
  $ 2,362,611     $ 2,367,625     $ 319,910     $ 321,994  
                                 
December 31, 2010
                               
Maturing
                               
Within one year
  $ 6,002,966     $ 6,018,760     $ 3,505,278     $ 3,549,035  
Over one to five years
    2,013,865       2,017,020       -       -  
Mortgage-backed securities
    -       -       5,255       5,280  
    $ 8,016,831     $ 8,035,780     $ 3,510,533     $ 3,554,315  
                                 
Pledged securities
  $ 633,593     $ 637,127     $ 2,530,378     $ 2,562,778  

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

11.         Recent Accounting Standards

Recent accounting pronouncements approved by FASB that apply to the Company are discussed below.  These pronouncements did not have, or, if not yet adopted, are not expected to have, a material impact on the financial statements of the Company.
 
ASU No. 2010-20, “Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period became effective for the Company’s financial statements beginning on January 1, 2011.  ASU 2011-01, “Receivables (Topic 310) - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20,” temporarily deferred the effective date for disclosures related to troubled debt restructurings to coincide with the effective date of the then proposed ASU 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” which is further discussed below.

 
- 20 -

 
 
ASU No. 2010-28, “Intangibles - Goodwill and Other (Topic 350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASU 2010-28 became effective for the Company on January 1, 2011.
 
ASU No. 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.”  ASU 2011-02 clarifies which loan modifications constitute TDRs and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a TDR, both for purposes of recording an impairment loss and for disclosure of TDRs.  In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist:  (i) the restructuring constitutes a concession; and (ii) the debtor is experiencing financial difficulties. ASU 2011-02 will be effective for the Company on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011.
 
 
- 21 -

 

Item 2.           Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Peoples Bancorp, Inc. is a Maryland corporation and a financial holding company registered under the Bank Holding Company Act of 1956, as amended, located in Chestertown, Kent County, Maryland.  The Company was incorporated on December 10, 1996 to serve as the holding company of The Peoples Bank (the “Bank”), a Maryland commercial bank, which it acquired on March 24, 1997.  On January 2, 2007, the Company acquired Fleetwood, Athey, Macbeth & McCown, Inc. (the “Insurance Agency”).

The Bank was incorporated on April 13, 1910 and operates five branches located in Kent County, Maryland and two branches located in Queen Anne’s County, Maryland.  The Bank offers a variety of services to satisfy the needs of consumers and small- to medium-sized businesses and professional enterprises.  Most of the Bank’s deposit and loan customers are located in and derived from Kent County, northern Queen Anne’s County, and southern Cecil County, Maryland.  This primary service area is located between the Chesapeake Bay and the western border of Delaware.

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

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

Application of Critical Accounting Policies

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

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

 
- 22 -

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

The following discussion is designed to provide a better understanding of the financial position of the Company and should be read in conjunction with the interim Consolidated Financial Statements and Notes thereto included elsewhere in this report, and in conjunction with the audited Consolidated Financial Statements and Notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Annual Report of Peoples Bancorp, Inc. on Form 10-K for the year ended December 31, 2010.

Forward-Looking Information

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995.  Readers of this quarterly report should be aware of the speculative nature of “forward-looking statements”.  Statements that are not historical in nature, including the words “anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and similar expressions, are based on current expectations, estimates and projections about (among other things) the industry and the markets in which we operate; they are not guarantees of future performance.  Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report, general economic, market or business conditions; changes in interest rates, deposit flow, the cost of funds, and demand for loan products and financial services; changes in our competitive position or competitive actions by other companies; changes in the quality or composition of loan and investment portfolios; the ability to manage growth; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond our control.  These and other risks are discussed in detail in the periodic reports that Peoples Bancorp, Inc. files with the Securities and Exchange Commission (see Item 1A of Part II of this report for further information).  All of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on our business or operations.  Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise.
 
 
- 23 -

 
 
RESULTS OF OPERATIONS

General

For the three-month period ended March 31, 2011, the Company reported a net loss of $297,620 or $(0.38) per share, compared to net income of $401,256 or $0.51 per share for the same period of 2010, which represents a decrease of $698,876 or 174.17%.  The Company’s change in earnings when comparing the first quarter of 2011 to the first quarter of 2010 was the direct result of a $1,025,000 increase in our provision for loan losses to $1,500,000 for the first quarter of 2011 from $475,000 for the first quarter of 2010.  The increased provision was due primarily to the determination during the first quarter of 2011 that the Company would realize additional losses related to a significant borrower.  The Insurance Agency’s year to date income increased $14,250 to $94,375 for the three-month period ended March 31, 2011, compared to $80,130 for the same time period in 2010.

Net Interest Income

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

The key performance measure for net interest income is the “net margin on interest-earning assets”, or net interest income divided by average interest-earning assets.  The Company’s net interest margin for the three-month period ended March 31, 2011 was 3.90%, compared to 4.29% for the same period of 2010.  The net margin may decline if competition increases, loan demand decreases, or the cost of funds rises faster than the return on loans and securities.  The net margin may also be adversely impacted by a number of factors which cannot be predicted and are beyond our control.

Net interest income for the three-month period ended March 31, 2011 was $2,081,571, which represents a decrease of $263,572 or 11.24% over net interest income for the same period of 2010.  The primary contributor to this decrease was the reduction in interest-earning assets.

Interest revenue for the three months ended March 31, 2011 totaled $2,935,152, compared to $3,330,115 for the same period last year, representing a decrease of $394,963 or 11.86%.  We experienced a $330,858 decrease in interest earned on loans as a direct result of nonaccrual loan balances increasing when compared to the first three months of 2010.  Additionally, we realized a $66,757 decrease in income on U.S. Government Agency securities for the first three months of 2011 when compared to the same time period in 2010.  The decrease in U. S. Government securities income was the direct result of the average balance decreasing $3,449,537 over the same period in 2010.

Interest expense for the three-month period ended March 31, 2011 totaled $853,581, compared to $984,962 for the same period last year, representing an decrease of $131,381 or 13.34%.  Deposits were $195,717,316 at March 31, 2011, compared to $189,640,730 at December 31, 2010 and $188,490,215 at March of 2010.  The Company decreased its Federal Home Loan Bank (“FHLB”) borrowings during the first quarter of 2011 from $24,000,000 at December 31, 2010 to $22,000,000 at March 31, 2011.  FHLB borrowings at March 31, 2010 were $26,000,000.  As a result, interest expense on borrowed funds for the first quarter of 2011 dropped $64,018 when compared to the three months ended March 31, 2010.
 
 
- 24 -

 

A table of the Company’s average balances, interest and yields follows.

   
For the Quarter Ended
   
For the Quarter Ended
 
   
March 31, 2011
   
March 31, 2010
 
   
Average
               
Average
             
   
Balance
   
Interest
   
Yield
   
Balance
   
Interest
   
Yield
 
Assets
                                   
Federal funds sold
  $ 1,016,000     $ 693       0.28 %   $ 2,323,879     $ 696       0.12 %
Interest-bearing deposits
    5,103       9       0.67 %     49,293       5       0.04 %
Investment securities:
                                               
U.  S.  government agency
    11,218,568       44,114       1.59 %     14,668,105       113,723       3.14 %
FHLB of Atlanta &
                                               
CBB Financial Corp..  Stock
    2,151,600       4,489       0.85 %     2,401,200       1,670       0.28 %
      13,370,168       48,603       1.47 %     17,069,305       115,393       2.74 %
Loans:
                                               
Demand and time
    27,124,118       390,616       5.84 %     26,380,179       385,582       5.93 %
Mortgage
    177,737,461       2,443,258       5.57 %     175,474,292       2,751,427       6.36 %
Installment
    5,405,876       86,175       6.46 %     6,524,397       110,197       6.85 %
Total loans
    210,267,455       2,920,049       5.63 %     208,378,868       3,247,206       6.32 %
Allowance for loan losses
    4,828,491                       2,895,878                  
Total loans, net of allowance
    205,438,964       2,920,049       5.76 %     205,482,990       3,247,206       6.41 %
Total interest-earning assets
    219,830,235       2,969,354       5.48 %     224,925,467       3,363,300       6.06 %
Non-interest-bearing cash
    15,400,343                       11,750,199                  
Premises and equipment
    6,365,631                       6,523,920                  
Other assets
    7,035,321                       6,490,054                  
Total assets
  $ 248,631,530                     $ 249,689,640                  
Liabilities and Stockholders’ Equity
                                               
Interest-bearing Deposits
                                               
Savings and NOW deposits
  $ 46,626,954     $ 17,037       0.15 %   $ 48,055,941     $ 22,668       0.19 %
Money market and supernow
    10,849,151       7,306       0.27 %     11,106,248       13,354       0.49 %
Other time deposits
    98,610,504       648,107       2.67 %     95,239,534       703,791       3.00 %
Total interest-bearing deposits
    156,086,609       672,450       1.75 %     154,401,723       739,813       1.94 %
Borrowed funds
    25,897,427       181,131       2.84 %     28,738,342       245,149       3.46 %
Total interest-bearing liabilities
    181,984,036       853,581       1.90 %     183,140,065       984,962       2.18 %
Noninterest-bearing deposits
    37,316,794                       35,216,655                  
      219,300,830                       218,356,720                  
Other liabilities
    1,993,817                       2,493,075                  
Stockholders’ equity
    27,336,883                       28,839,845                  
Total liabilities and stockholders equity
  $ 248,631,530                     $ 249,689,640                  
Net interest spread
                    3.58 %                     3.88 %
Net interest income
          $ 2,324,672                     $ 2,378,338          
Net margin on interest-earning assets
                    3.90 %                     4.29 %
 
Interest on tax-exempt loans and investments are reported on fully taxable equivalent basis (a non GAAP financial measure).


 
- 25 -

 

Provision for Loan Losses

The provision for loan losses was $1,500,000 for the first three months of 2011, compared to $475,000 for the same period of 2010.  The increase in the provision was in response to the increase in net charge-offs and specific allocations for impaired loans.  Additional information regarding risk elements in the loan portfolio, the provision for loan losses and management’s assessment of the adequacy of the allowance for loan losses is discussed below in the section entitled “Loan Quality”.

Noninterest Revenue

Noninterest revenue for the three-month period ended March 31, 2011 totaled $664,332, which represents an increase of $51,732 or 8.44% over noninterest revenue for the same period of 2010.  This increase resulted primarily from the $41,706 or 12.50% increase in Insurance Agency contingency income earned during the first quarter of 2011, from $333,608 for the first quarter of 2010 to $375,314 for the first quarter of 2011.  Insurance Agency contingency income is based on sales of new policies to customers and claims against existing policies for the prior year.  In addition, we experienced an increase in service charges on deposit accounts of $30,383 or 14.14% during the first quarter of 2011 when compared to the same period of 2010.  These increases were offset by a net loss on the sale of foreclosed real estate of $17,352.

Noninterest Expense

The Company recorded noninterest expense of $1,805,890 for the three-month period ended March 31, 2011, compared to $1,854,552 for the same period in 2010, a decrease of $48,662 or 2.62%.  This decrease was mainly attributable to decreased salaries and employee benefits of $40,650.

Income Tax Expense

The Company’s effective tax benefit rate for the three-month period ended March 31, 2011 was 46.9%, compared to an effective tax rate of 36.1% for the same period of 2010.  The Company’s income tax benefit for the first quarter of 2011 was $262,367, compared to an income tax expense of $226,945 for the same period of 2010.  Decreases in income before income tax during the three-month period ended March 31, 2011 contributed to the decrease in income tax expense when compared to the same period last year.

FINANCIAL CONDITION

Overview

Total assets of the Company at March 31, 2011 were $248,646,826, compared to $245,792,415 at December 31, 2010, representing an increase of $2,854,411 or 1.16% from December 31, 2010.

Total liabilities at March 31, 2011 were $221,726,302, compared to $218,400,251 at December 31, 2010, representing an increase of $3,326,051 or 1.52%.

Stockholders’ equity was $26,920,524 as of March 31, 2011, compared to $27,392,164 as of December 31, 2010, representing a decrease of $471,640.  The decrease was due to a net loss for the period totaling $297,620, a decrease in the unrealized gain on securities available for sale net of income taxes of $2,527 and dividends paid to stockholders of $171,493.

 
- 26 -

 
 
Return on average equity for the quarter ended March 31, 2011 was (4.42)%, compared to 5.64% for the same period of 2010.  Return on average assets was (0.49)% for the quarter ended March 31, 2011, compared to 0.65% for the same period of 2010.

Composition of Loan Portfolio

At March 31, 2011, loans, net of unearned income, were $204,731,970, a decrease of $2,563,907 since December 31, 2010.  Because loans are expected to produce higher yields than investment securities and other interest-earning assets, the absolute volume of loans and the volume as a percentage of total earning assets is an important determinant of net interest margin.  Average loans, net of the allowance for loan losses, were $205,438,964 and $205,482,990 during the first quarters of 2011 and 2010, respectively, which constituted 93.45% and 91.36% of average interest-earning assets for the respective periods.  For the quarter ended March 31, 2011, our average loan to deposit ratio was 106.22%, compared to 108.37% for the same period in 2010.  The securities sold under repurchase agreements function like deposits, with the securities providing collateral in place of the FDIC insurance.  Our ratio of average loans to deposits plus borrowed funds was 93.68% for the quarter ended March 31, 2011, compared to 94.10% for the same period of 2010.  The Company extends credit primarily to customers located in and near the Maryland counties of Kent County, Queen Anne’s County, and Cecil County.  There are no industry concentrations in our loan portfolio.  A substantial portion of our loans are, however, secured by real estate, and the real estate market in the region, which is directly impacted by the local economy, will influence the performance of the Company’s portfolio and the value of the collateral securing the portfolio.

Loan Quality
 
The allowance for loan losses represents a reserve for potential losses in the loan portfolio.  The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with a particular emphasis on non-accruing, past due, and other loans that management believes require attention.  The determination of the reserve level rests upon management’s judgment about factors affecting loan quality and assumptions about the economy.  Management believes that the allowance as of March 31, 2011 is adequate to cover possible losses in the loan portfolio identified as of that date; however, management’s judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may not prove valid.  Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.

For significant problem loans, management’s review consists of evaluation of the financial strengths of the borrowers and guarantors, the related collateral, and the effects of economic conditions.  The overall evaluation of the adequacy of the total allowance for loan losses is based on an analysis of historical loan loss ratios, loan charge-offs, delinquency trends, and previous collection experience, along with an assessment of the effects of external economic conditions.  The allowance may be increased to accommodate reserves for specific loans identified as substandard during management’s loan review.  Net recoveries and/or decreases in loans may cause the allowance as a percentage of gross loans to exceed our target.  Historically, our regulators have discouraged negative provisions, however, management would consider a negative provision if warranted.

The provision for loan losses is a charge to earnings in the current period to replenish the allowance and maintain it at a level management has determined to be adequate.
 
 
- 27 -

 

The allowance for loan losses decreased to $3,988,150 at March 31, 2011, from $5,656,788 at December 31, 2010.  The provision for loan losses was $1,500,000 for the first three months of 2011, compared to $475,000 for the same period of 2010.  The increase in the provision for loan losses in the first three months of 2011 when compared to the same period of 2010 was in response to the increase in net charge-offs, the results of our quarterly review of the adequacy of the factors discussed previously, and specific allocations for impaired loans.  As of March 31, 2011 and December 31, 2010, the allowance for loan losses compared to gross loans was 1.91% and 1.29%, respectively.  As part of our loan review process, management has noted an increase in foreclosures and bankruptcies in the geographic areas where we operate.  Additionally, the current nationwide recession has had a significant and adverse impact on real estate values and sales over the past 12 months.  Consequently, we have closely reviewed our loan portfolio and applied sensitivity analyses to collateral values to ensure that we are adequately measuring potential future losses.  Where necessary, we have obtained new appraisals on collateral.  Specific allocations of the allowance have been provided in these instances where losses may occur.

The following table sets forth activity in the Company’s allowance for loan losses for the periods indicated:

Allowance for Loan Losses
 
   
Three months ended
March 31,
2011
   
Three months ended
March 31,
2010
   
Year ended
December 31,
2010
 
                   
Balance at beginning of year
  $ 5,656,788     $ 2,845,364     $ 2,845,364  
Loan losses:
                       
Commercial
    491,329       29,442       166,779  
Mortgages
    2,694,200       581,725       1,846,683  
Consumer
    9,586       11,839       104,791  
Total loan losses
    3,195,115       623,006       2.118,253  
Recoveries on loans previously charged off
                       
Commercial
    210       820       2,660  
Mortgages
    1,576       0       374  
Consumer
    24,691       1,460       16,643  
Total loan recoveries
    26,477       2,280       19,677  
Net loan losses
    3,168,638       620,726       2,098,576  
Provision for loan losses charged to expense
    1,500,000       475,000       4,910,000  
Balance at end of year
  $ 3,988,150     $ 2,699,638     $ 5,656,788  
Allowance for loan losses to loans outstanding
                       
At end of period
    1.91 %     1.29 %     2.66 %

Management believes it has identified and charged off all significant losses in the loan portfolio but there can be no assurance that additional losses will not occur in future periods.  The ratio of the allowance for loan losses to loans outstanding has increased due to the economic conditions being felt in our market area.

As a result of management’s ongoing review of the loan portfolio, loans are classified as nonaccrual when it is not reasonable to expect collection of interest under the original terms.  These loans are classified as nonaccrual even though the presence of collateral or the borrower’s financial strength may be sufficient to provide for ultimate repayment.  Interest on nonaccrual loans is recognized only when received. A loan is generally placed in nonaccrual status when it becomes 90 days or more past due. When a loan is placed in nonaccrual status, all interest that had been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income.  No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

The Company had loans past due 90 days or more, including nonaccrual loans, of $14,129,121 and $11,694,139 at March 31, 2011 and December 31, 2010, respectively.  During the first three months of March the Company’s nonaccrual loans increased $4,552,091 or 85.48% from the level at December 31, 2010.  This increase was due to the lack of economic recovery in the real estate market in our lending area.  These loans are detailed below:

 
- 28 -

 
 
Risk Elements of Loan Portfolio
   
March 31,
   
December 31,
 
   
2011
   
2010
 
Nonaccrual Loans
           
Commercial
  $ 185,813     $ 574,184  
Mortgage
    9,654,383       4,751,311  
Consumer
    37,390       -  
      9,877,586       5,325,495  
Accruing Loans Past Due 90 Days or More
               
Commercial
    52,819       19,838  
Mortgage
    4,192,874       6,282,242  
Consumer
    5,843       66,563  
      4,251,535       6,368,643  
    $ 14,129,121     $ 11,694,138  

Gross interest income of $296,701 for the first three months of 2011, $347,046 for fiscal year 2010 and $28,298 for the first three months of 2010 would have been recorded if nonaccrual loans had been current and performing in accordance with their original terms.  Interest actually recorded on such loans was $8,145 for the first three months of 2011, $31,683 for fiscal year 2010 and $253 for the first three months of 2010.

Loans are classified as impaired when the collection of contractual obligations, including principal and interest, is doubtful.  Management believes it has identified all significant impaired loans as of March 31, 2011 and has made the appropriate change to the allowance for loan losses.

Deposits and Other Interest-Bearing Liabilities

Average interest-bearing deposits increased $1,684,886 or 1.09% to $156,086,609 for the three months ended March 31, 2010, from $154,401,723 for the same period of 2010.  Average noninterest-bearing deposits increased $2,100,139 or 5.96% to $37,316,794 for the three months ended March 31, 2011, from $35,216,655 for the same period of 2010.  Average total deposits have increased 2.00% or $3,785,025 to $193,403,403 for the three months ended March 31, 2011 from $189,618,378 for the same period of 2010.  Borrowings, primarily from the FHLB, decreased to $22,000,000 from $24,000,000 at December 31, 2010, representing a decrease of 8.33%.

Deposits, particularly core deposits, have been our primary source of funding and have enabled us to meet both our short-term and long-term liquidity needs.  Management anticipates that such deposits will grow and continue to be our primary source of funding for the foreseeable future.  It should be noted, however, that investor confidence in alternatives to deposit accounts, which may pay yields that are higher than those paid on deposits, typically increases when the economy and stock markets perform well.  Increased investor confidence in nondeposit investment products in future periods would likely have an adverse impact on our deposit growth.  In addition, changes in governmental monetary policy, especially interest rates, may impact our ability to attract and retain deposits.
 
 
- 29 -

 

Short-Term Borrowings
 
The following table sets forth the Company’s position with respect to short-term borrowings at March 31, 2011 and December 31 2010. 

   
March 31, 2011
   
December 31, 2010
 
   
Amount
   
Rate
   
Amount
   
Rate
 
                         
Retail Repurchase Agreements
    2,179,654       .47 %     2,754,321       1.76 %

We may borrow up to approximately 30% of total assets from the FHLB of Atlanta through any combination of notes or line of credit advances.  Both the notes payable and the line of credit are secured by a floating lien on our real estate mortgage loans.  The Bank was required to purchase shares of capital stock in the FHLB of Atlanta as a condition to obtaining the line of credit.

We provide collateral of 105% of the repurchase agreement balances by pledging U.S. Government Agency securities.

The Bank has lines of credit of $13,650,000 in unsecured overnight federal funds and $5,000,000 in overnight federal funds with correspondent banks at March 31, 2011.

Liquidity and Capital Resources

Liquidity describes our ability to meet financial obligations that arise out of the ordinary course of business.  Liquidity is needed primarily to fund loans, meet depositor withdrawal requirements, and fund current and planned expenditures.  The Company derives liquidity through increased customer deposits, maturities in the investment portfolio, loan repayments and income from earning assets.  To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds markets through lines of credit totaling $18,650,000 from correspondent banks.  The Bank is also a member of the FHLB of Atlanta, which provides another source of liquidity through a secured line of credit in the amount of $36,892,755 of which $22,000,000 has been advanced as of March 31, 2011.  We also have the ability to borrow secured funds through the Federal Reserve’s Discount window as necessary.

Bank regulatory agencies have adopted various capital standards, including risk-based capital standards, that apply to financial institutions like the Company.  The primary objectives of the risk-based capital framework are to provide a more consistent system for comparing capital positions of financial institutions and to take into account the different risks among financial institutions’ assets and off-balance sheet items.

Risk-based capital standards have been supplemented with requirements for a minimum Tier 1 capital to assets ratio (leverage ratio).  In addition, regulatory agencies consider the published capital levels as minimum levels and may require a financial institution to maintain capital at higher levels.  A comparison of the Company’s capital ratios as of March 31, 2011 to the minimum ratios required by federal banking regulators is presented below.
 
 
- 30 -

 
 
         
Minimum
   
To be well
 
   
Actual
   
Requirements
   
Capitalized
 
Total risk-based capital ratio
    14.00 %     8.00 %     10.00 %
Tier 1 risk-based capital ratio
    12.74 %     4.00 %     6.00 %
Tier 1 leverage ratio
    10.31 %     4.00 %     5.00 %

Item 3.          Quantitative and Qualitative Disclosures About Market Risk.

The Company is a “smaller reporting company” and is not required to include the information required by this Item.

Item 4.          Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that Peoples Bancorp, Inc. files under the Securities and Exchange Act of 1934 with the Securities and Exchange Commission, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in those rules and forms, and that such information is accumulated and communicated to management, including the President and Chief Executive Officer (the “CEO”), who also serves as the Chief Financial Officer (the “CFO”), to allow for timely decisions regarding required disclosure.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of these disclosure controls was carried out as of March 31, 2011 under the supervision and with the participation of the Company’s management, including the CEO.  Based on that evaluation, the Company’s management, including the CEO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the first quarter of 2011, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our control over financial reporting.

PART II - OTHER INFORMATION
 
Item 1.        Legal Proceedings.

None

Item 1A.     Risk Factors.

The risks and uncertainties to which our Company’s financial condition and operations are subject are discussed in detail in Item 1A of Part I of the Annual Report of Peoples Bancorp, Inc. on Form 10-K for the year ended December 31, 2010.  Management does not believe that any material changes in these risk factors have occurred since December 31, 2010.

 
- 31 -

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

None

Item 3.       Defaults Upon Senior Securities.

Not applicable.

Item 4.       (Removed and Reserved).

Item 5.       Other Information.

None.

Item 6.       Exhibits.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
PEOPLES BANCORP, INC.
       
Date:  May 13, 2011
By:
/s/ Thomas G. Stevenson
 
   
Thomas G. Stevenson
   
President/Chief Executive Officer
   
& Chief Financial Officer
 
 
- 32 -

 

EXHIBIT INDEX

Exhibit No.
 
Description
     
31.1
 
Certifications of the CEO/CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1
  
Certifications of the CEO/ CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
 
 
- 33 -