PEOPLES BANCORP INC/MD - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - PEOPLES BANCORP INC/MD	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - PEOPLES BANCORP INC/MD	v312556_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - PEOPLES BANCORP INC/MD	v312556_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2012

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 R 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 R No £

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 R
(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 R

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, 2012

PEOPLES BANCORP, INC.

FORM 10-Q

INDEX

		Page

Part I – Financial Information

Item 1.	Financial Statements	3

	Consolidated Balance Sheets at March 31, 2012 (unaudited) and December 31, 2011	3

	Consolidated Statements of Income (unaudited) for the three months ended March 31, 2012 and 2011	4

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2012 and 2011	6

	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2012 and 2011	7

	Notes to Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38

Part II – Other Information

Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	39

Signatures		40
Exhibit Index		41

-2-

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

PEOPLES BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2012			2011
	(unaudited)
ASSETS
Cash and due from banks	$	33,099,778		$	27,613,717
Federal funds sold		9,019,000			9,018,000
Cash and cash equivalents		42,118,778			36,631,717
Securities available for sale		8,049,200			9,076,990
Securities held to maturity (fair value of $1,014,750 and $4,370)		1,013,192			4,303
Federal Home Loan Bank and CBB Financial Corp. stock, at cost		1,601,400			1,601,400
Loans, less allowance for loan losses of $4,861,379 and $4,295,541		182,385,906			188,876,206
Premises and equipment		6,128,152			6,186,844
Goodwill and intangible assets		534,182			547,932
Accrued interest receivable		759,681			1,087,971
Deferred income taxes		1,683,379			1,678,922
Foreclosed real estate		3,705,473			4,122,400
Other assets		3,808,913			3,343,543
	$	251,788,256		$	253,158,228

		2012			2011
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing checking	$	41,176,800		$	42,207,291
Savings and NOW		50,930,723			50,736,832
Money market		13,791,537			13,095,200
Other time		98,335,524			97,155,945
		204,234,584			203,195,268

Securities sold under repurchase agreements		1,909,668			2,916,900
Federal Home Loan Bank advances		19,000,000			20,000,000
Accrued interest payable		338,364			345,359
Other liabilities		1,988,164			1,886,780
		227,470,780			228,344,307
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		14,354,619			14,844,222
Accumulated other comprehensive income
Unrealized gain on securities available for sale		6,865			13,707
Unfunded liability for defined benefit plan		(759,994	)		(759,994	)
		24,317,476			24,813,921
	$	251,788,256		$	253,158,228

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

-3-

PEOPLES BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	For the three months ended March 31,
	2012			2011

Interest and dividend revenue
Loans, including fees	$	2,691,558		$	2,888,493
U.S. government agency securities		11,550			41,713
Deposit in other banks		3,711			8
Federal funds sold		2,048			693
Equity securities		5,037			4,245
Total interest and dividend revenue		2,713,904			2,935,152

Interest expense
Deposits		543,771			672,450
Borrowed funds		164,899			181,131
Total interest expense		708,670			853,581

Net interest income		2,005,234			2,081,571

Provision for loan losses		1,675,000			1,500,000
Net interest income after provision for loan losses		330,234			581,571
Noninterest revenue
Service charges on deposit accounts		212,539			245,185
Insurance commissions		363,434			375,314
Gain (loss) on sale of foreclosed real estate		3,791			(17,352	)
Other noninterest revenue		110,961			61,185
Total noninterest revenue		690,725			664,332
Noninterest expense
Salaries		751,927			734,010
Employee benefits		294,843			290,349
Occupancy		113,225			120,798
Furniture and equipment		91,064			84,702
Data processing and correspondent fees		177,140			175,246
Forclosed real estate expense		98,826			22,408
Other operating		379,826			378,377
Total noninterest expense		1,906,851			1,805,890

Loss before income tax benefits		(885,892	)		(559,987	)

Income tax (benefit)		(396,289	)		(262,367	)

Net loss	$	(489,603	)	$	(297,620	)

Loss per common share - basic and diluted	$	(0.63	)	$	(0.38	)

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

-4-

PEOPLES BANCORP, INC. AND SUBSIDIARIES

STATEMENTS OF COMPREHENSIVE INCOME

	For the three months ended March 31,
	2012			2011

Net income (loss)	$	(489,603	)	$	(297,620	)

Other comprehensive income
Unrealized gain/loss on securities available for sale		(11,299	)		(4,172	)
Change in underfunded status of defined benefit plan		-			-
		(11,299	)		(4,172	)
Income tax benefit relating to items above		(4,457	)		(1,645	)
Other comprehensive income		(6,842	)		(2,527	)

Total comprehensive income	$	(496,445	)	$	(300,147	)

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

-5-

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

THREE MONTHS ENDED MARCH 31, 2012 and 2011

										Accumulated
					Additional					other			Total
	Common stock				paid-in		Retained			comprehensive			stockholders
	Shares		Par value		capital		earnings			income			equity

Balance, December 31, 2010		779,512	$	7,795,120	$	2,920,866	$	17,088,742		$	(412,564	)	$	27,392,164

Net loss		-		-		-		(297,620	)		-			(297,620	)
Unrealized loss on investment securities available for sale net of income taxes of $1,645		-		-		-		-			(2,527	)		(2,527	)
Cash dividend, $.22 per share		-		-		-		(171,493	)		-			(171,493	)

Balance, March 31, 2011		779,512	$	7,795,120	$	2,920,866	$	16,619,629		$	(415,091	)	$	26,920,524

Balance, December 31, 2011		779,512	$	7,795,120	$	2,920,866	$	14,844,222		$	(746,287	)	$	24,813,921

Net loss		-		-		-		(489,603	)		-			(489,603	)
Unrealized loss on investment securities available for sale net of income taxes of $4,457		-		-		-		-			(6,842	)		(6,842	)
Cash dividend, $.00 per share		-		-		-		-			-			-

Balance, March 31, 2012		779,512	$	7,795,120	$	2,920,866	$	14,354,619		$	(753,129	)	$	24,317,476

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

-6-

PEOPLES BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the three months ended March 31,

	2012			2011

Cash flows from operating activities
Interest received	$	3,062,476		$	3,305,576
Fees and commissions received		686,934			681,684
Interest paid		(625,890	)		(2,191,494	)
Cash paid to suppliers and employees		(2,122,284	)		(965,038	)
Income taxes paid		237,852			262,367
		1,239,088			1,093,095
Cash flows from investing activities
Proceeds from maturities and calls of investment securities
Held to maturity		194			2,000,194
Available for sale		2,000,000			3,000,000
Purchase of investment securities
Held to maturity		(1,009,200	)		-
Available for sale		(998,460	)		(4,049,654	)
Redemption of Federal Home Loan Bank stock		-			-
Loans made, net of principal collected		4,360,796			703,240
Purchase of premises, equipment, and software		(7,449	)		(48,040	)
Proceeds from sale of foreclosed real estate		870,008			164,248
		5,215,889			1,769,988
Cash flows from financing activities
Net increase (decrease) in
Time deposits		879,579			736,878
Other deposits		159,737			5,339,708
Securities sold under repurchase agreements and federal funds purchased		(1,007,232	)		(574,667	)
Federal Home Loan Bank advances, net of repayments		(1,000,000	)		(2,000,000	)
Dividends paid		-			(171,493	)
		(967,916	)		3,330,426

Net increase in cash and cash equivalents		5,487,061			6,193,509

Cash and cash equivalents at beginning of period		36,631,717			11,394,485

Cash and cash equivalents at end of period	$	42,118,778		$	17,587,994

-7-

PEOPLES BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

	For the three months ended March 31,

	2012			2011

Reconciliation of net loss to net cash provided by operating activities
Net loss	$	(489,603	)	$	(297,620	)

Adjustments to reconcile net loss to net cash provided by operating activities
Amortization of premiums and accretion of discounts		15,068			11,629
Provision for loan losses		1,675,000			1,500,000
Depreciation and software amortization		66,141			80,281
Amortization of intangible assets		13,750			16,918
(Gain) loss on sale of foreclosed real estate		(3,791	)		17,352
Deferred income taxes		-			-
Decrease (increase) in
Accrued interest receivable		328,290			348,128
Other assets		(465,370	)		(418,392	)
Increase (decrease) in
Deferred origination fees and costs, net		5,214			10,667
Accrued interest payable		82,780			(111,457	)
Other liabilities		11,609			(64,411	)
	$	1,239,088		$	1,093,095

Non cash transactions
Transfer of foreclosed real estate	$	449,290		$	350,000

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

-8-

Peoples Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Basis of Presentation

The accompanying unaudited consolidated financial statements of Peoples Bancorp, Inc. and its subsidiaries, The Peoples Bank, a Maryland-chartered bank (the “Bank”), and Fleetwood, Athey, Macbeth & McCown, Inc., a Maryland insurance agency (the “Insurance Agency”), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Commission (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, 2012 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012 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, 2011. When used in these notes, the term “Company” refers to Peoples Bancorp, Inc. and unless the context requires otherwise, its consolidated subsidiaries.

Consolidation has resulted in the elimination of all significant intercompany accounts and transactions.

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2012 through May 11, 2012 for items that should potentially be recognized of disclosed in these financial statements. No significant subsequent events were identified that would affect the presentation of the financial information.

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.

Comprehensive loss

For the three months ended March 31, 2012 and 2011, total comprehensive loss, net of taxes was $496,445 and $300,147, respectively. Comprehensive loss is the sum of net loss and the change in the unrealized gain or loss on securities available for sale, net of income taxes.

-9-

Loans and Allowance for Loan Losses

Major classifications of loans as of March 31, 2012 and December 31, 2011 are as follows:

	March 31, 2012			December 31, 2011
Real estate
Residential	$	72,953,766		$	72,620,650
Commercial		57,520,035			64,164,400
Other		21,291,997			19,773,892
Construction		7,684,711			7,919,498
Commercial		23,380,970			23,714,668
Consumer		4,344,297			4,901,916
		187,175,776			193,095,024
Deferred costs, net of deferred fees		71,509			76,723
Allowance for loan losses		(4,861,379	)		(4,295,541	)
	$	182,385,906		$	188,876,206

Loan Origination/Risk Management

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, loan delinquencies and non-performing and potential problem loans.

Real Estate Loans

Real estate loans are segregated into the following categories: Residential; Commercial; Construction and Land Development; and Other Loans.

Residential real estate loans are underwritten based on management’s determination of the borrower’s ability and willingness to repay, and a loan-to-value ratio of offered collateral of not more than 80% of the appraised value of the collateral.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are assessed primarily based on cash flow and secondarily on the underlying real estate collateral. Commercial real estate lending typically involves higher loan principal amounts and, generally, the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Management monitors and evaluates commercial real estate loans based on collateral and cash flow. With respect to loans to developers and builders that are secured by non-owner occupied properties that the Bank may originate from time to time, the Bank generally requires the borrower to have had an existing relationship with the Company and have a proven record of success.

-10-

Construction, including land development, loans are underwritten based on financial analyses of the developers and property owners, and estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are monitored by on-site inspections and are considered to have higher risks than other real estate loans due to the fact that their ultimate repayment is sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Commercial Loans

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and to prudently expand its business. The Bank’s management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis.

Consumer Loans

The Bank originates consumer loans. To monitor and manage consumer loan risk, underwriting policies and procedures are developed and modified as needed. The Bank believes that its monitoring activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.

The Bank obtains an independent loan review from a third party vendor that reviews and evaluates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures. Most of the Bank’s lending activity occurs in Kent County, Northern Queen Anne’s County, and Southern Cecil County in Maryland.

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

	March 31, 2012		December 31, 2011
Within ninety days	$	59,527,941	$	75,837,962
Over ninety days to one year		53,895,252		49,933,835
Over one year to five years		73,661,463		66,925,514
Over five years		91,120		397,713
	$	187,175,776	$	193,095,024

Variable rate loans included in above	$	44,432,760	$	47,509,265

The following table illustrates total impaired loans segmented by those with and without a related allowance as of March 31, 2012, March 31, 2011 and December 31, 2011.

-11-

Total Impaired Loans Segmented With and Without a Related Allowance Recorded

March 31, 2012

	Number				Unpaid				Interest		Average
	of		Recorded		Contractual		Related		Income		Recorded
Description of Loans	loans		Investment		Balance		Allowance		Recognized		Investment

With Related Allowance recorded
Residential real estate		25	$	4,587,280	$	4,966,074	$	707,451	$	28,421	$	4,908,137
Commercial real estate		7		3,630,646		4,084,690		502,800		11,329		3,966,467
Other real estate		4		1,511,659		1,520,751		136,476		14,712		1,632,034
Construction and land development		2		260,027		357,925		123,810		2,253		336,942
Commercial loans		1		149,658		149,701		141,596		507		149,711
Consumer loans		-		-		-		-		-		-
Total impaired loans		39	$	10,139,270	$	11,079,141	$	1,612,133	$	57,222	$	10,993,291

With No Related Allowance recorded
Residential real estate		45	$	5,925,522	$	6,805,309	$	-	$	67,844	$	6,720,979
Commercial real estate		7		1,589,939		1,631,237		-		16,213		1,591,149
Other real estate		1		186,866		186,866		-		3,273		184,984
Construction and land development		5		535,354		691,790		-		1,481		672,966
Commercial loans		-		-		-		-		-		-
Consumer loans		-		-		-		-		-		-
Total impaired loans		58	$	8,237,681	$	9,315,202	$	-	$	88,811	$	9,170,078

TOTAL
Residential real estate		70	$	10,512,802	$	11,771,383	$	707,451	$	96,265	$	11,629,116
Commercial real estate		14		5,220,585		5,715,927		502,800		27,542		5,557,616
Other real estate		5		1,698,525		1,707,617		136,476		17,985		1,817,018
Construction and land development		7		795,381		1,049,715		123,810		3,734		1,009,908
Commercial loans		1		149,658		149,701		141,596		507		149,711
Consumer loans		-		-		-		-		-		-
Total impaired loans		97	$	18,376,951	$	20,394,343	$	1,612,133	$	146,033	$	20,163,369

-12-

Total Impaired Loans Segmented With and Without a Related Allowance Recorded

December 31, 2011

	Number				Unpaid				Interest		Average
	of		Recorded		Contractual		Related		Income		Recorded
Description of Loans	loans		Investment		Balance		Allowance		Recognized		Investment

With Related Allowance recorded
Residential real estate		18	$	3,032,410	$	3,407,124	$	632,496	$	104,883	$	2,649,640
Commercial real estate		3		3,177,730		3,614,975		444,903		102,048		3,497,395
Other real estate		-		-		-		-		-		-
Construction and land development		3		452,549		670,371		154,782		9,604		581,392
Commercial loans		1		149,751		150,420		31,671		3,930		149,751
Consumer loans		-		-		-		-		-		-
Total impaired loans		25	$	6,812,440	$	7,842,890	$	1,263,852	$	220,465	$	6,878,178

With No Related Allowance recorded
Residential real estate		39	$	5,916,089	$	6,644,581	$	-	$	308,487	$	6,484,492
Commercial real estate		6		1,541,699		2,367,015		-		69,761		1,931,087
Other real estate		4		1,028,000		1,031,466		-		74,254		1,014,270
Construction and land development		6		788,183		1,023,929		-		29,667		949,221
Commercial loans		-		-		-		-		-		-
Consumer loans		-		-		-		-		-		-
Total impaired loans		55	$	9,273,971	$	11,066,991	$	-	$	482,169	$	10,379,070

TOTAL
Residential real estate		57	$	8,948,499	$	10,051,705	$	632,496	$	413,370	$	9,134,132
Commercial real estate		9		4,719,429		5,981,990		444,903		171,809		5,428,482
Other real estate		4		1,028,000		1,031,466		-		74,254		1,014,270
Construction and land development		9		1,240,732		1,694,300		154,782		39,271		1,530,613
Commercial loans		1		149,751		150,420		31,671		3,930		149,751
Consumer loans		-		-		-		-		-		-
Total impaired loans		80	$	16,086,411	$	18,909,881	$	1,263,852	$	702,634	$	17,257,248

-13-

Total Impaired Loans Segmented With and Without a Related Allowance Recorded

March 31, 2011

	Number				Unpaid				Interest		Average
	of		Recorded		Contractual		Related		Income		Recorded
Description of Loans	loans		Investment		Balance		Allowance		Recognized		Investment

With Related Allowance recorded
Residential real estate		10	$	1,605,699	$	1,605,699	$	794,111	$	367,514	$	1,609,815
Commercial real estate		6		4,360,951		4,360,951		594,952		2,893,290		4,369,670
Other real estate		-		-		-		-		-		-
Construction and land development		4		3,966,355		3,966,355		546,957		832,566		4,169,626
Commercial loans		1		26,523		26,523		26,523		995		26,821
Consumer loans		-		-		-		-		-		-
Total impaired loans		21	$	9,959,528	$	9,959,528	$	1,962,543	$	4,094,365	$	10,175,932

With No Related Allowance recorded
Residential real estate		10	$	965,315	$	965,315	$	-	$	316,575	$	1,020,772
Commercial real estate		5		650,141		650,141		-		250,454		650,141
Other real estate		-		-		-		-		-		-
Construction and land development		3		625,967		625,967		-		191,308		625,968
Commercial loans		2		75,000		75,000		-		8,441		75,000
Consumer loans		-		-		-		-		-		-
Total impaired loans		20	$	2,316,423	$	2,316,423	$	-	$	766,778	$	2,371,881

TOTAL
Residential real estate		20	$	2,571,014	$	2,571,014	$	794,111	$	684,089	$	2,630,587
Commercial real estate		11		5,011,092		5,011,092		594,952		3,143,744		5,019,811
Other real estate		-		-		-		-		-		-
Construction and land development		7		4,592,322		4,592,322		546,957		1,023,874		4,795,594
Commercial loans		3		101,523		101,523		26,523		9,436		101,821
Consumer loans		-		-		-		-		-		-
Total impaired loans		41	$	12,275,951	$	12,275,951	$	1,962,543	$	4,861,143	$	12,547,813

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 Loan Losses and Loan Balances that are Individually and Collectively Evaluated for Inherent Impairment

March 31, 2012

													Construction
							Residential			Commercial			and land			Other
	Unallocated			Commercial			Real Estate			Real Estate			Development			Real Estate			Consumer			Overdraft			Total
Allowance for loan losses
Beginning balance	$	22,431		$	342,962		$	1,467,947		$	1,608,829		$	777,031		$	9,755		$	65,539		$	1,047		$	4,295,541
Charge-offs		-			(333,874	)		(466,146	)		(45,136	)		(66,907	)		(208,740	)		(19,392	)		(951	)		(1,141,146	)
Recoveries		-			3,300			1,591			18,779			6,000			-			2,051			263			31,984
Provision		(18,035	)		565,857			656,661			78,719			33,460			342,590			15,038			710			1,675,000
Ending balance	$	4,396		$	578,245		$	1,660,053		$	1,661,191		$	749,584		$	143,605		$	63,236		$	1,069		$	4,861,379

Ending balance allocated to:
Loans individually evaluated for impairment	$	-		$	141,596		$	707,451		$	502,800		$	123,810		$	136,476		$	-		$	-		$	1,612,133
Loans collectively evaluated for impairment		4,396			436,649			952,602			1,158,391			625,774			7,129			63,236			1,069			3,249,246
	$	4,396		$	578,245		$	1,660,053		$	1,661,191		$	749,584		$	143,605		$	63,236		$	1,069		$	4,861,379

-14-

Allowance for Loan Losses and Loan Balances that are Individually and Collectively Evaluated for Inherent Impairment
December 31, 2011

													Construction
							Residential			Commercial			and land			Other
	Unallocated			Commercial			Real Estate			Real Estate			Development			Real Estate		Consumer			Overdraft			Total
Allowance for loan 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		-			(669,862	)		(1,780,502	)		(2,786,202	)		(2,743,903	)		-		(17,330	)		(2,520	)		(8,000,319	)
Recoveries		-			6,498			31,414			6,051			16,100			-		27,825			1,184			89,072
Provision		(114,616	)		330,213			2,410,307			3,264,129			724,686			7,633		(71,707	)		(645	)		6,550,000
Ending balance	$	22,431		$	342,962		$	1,467,947		$	1,608,829		$	777,031		$	9,755	$	65,539		$	1,047		$	4,295,541

Ending balance allocated to:
Loans individually evaluated for impairment	$	-		$	31,671		$	632,496		$	444,903		$	154,782		$	-	$	-		$	-		$	1,263,852
Loans collectively evaluated for impairment		22,431			311,291			835,451			1,163,926			622,249			9,755		65,539			1,047			3,031,689
	$	22,431		$	342,962		$	1,467,947		$	1,608,829		$	777,031		$	9,755	$	65,539		$	1,047		$	4,295,541

Allowance for Loan Losses and Loan Balances that are Individually and Collectively Evaluated for Inherent Impairment
March 31, 2011

													Construction
							Residential			Commercial			and land			Other
	Unallocated			Commercial			Real Estate			Real Estate			Development			Real Estate		Consumer			Overdraft			Total
Allowance for loan 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

As part of the on-going monitoring of the quality of the Bank’s loan portfolio, management tracks certain credit quality indicators. The Bank risk rates all loans. Loans are risk rated based on the scale below.

Grade 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.

-15-

Grade 7 through 9 – This grade includes “Substandard” loans, in accordance with regulatory guidelines, for which accrual of interest may have stopped. This grade includes loans where loans 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 included loans in Risk Grades 5, 6, and 7 through 9.

					Special
March 31, 2012	Pass		Pass Watch		Mention		Substandard		Total

Commercial	$	21,913,696	$	213,707	$	-	$	1,253,567	$	23,380,970
Residential real estate		61,909,861		3,781,684		515,880		6,746,341		72,953,766
Commercial real estate		52,992,693		927,749		-		3,599,593		57,520,035
Construction and land development		7,088,918		-		-		595,793		7,684,711
Other real estate		20,024,561		42,020		554,416		671,000		21,291,997
Consumer		4,321,306		22,991		-		-		4,344,297
	$	168,251,035	$	4,988,151	$	1,070,296	$	12,866,294	$	187,175,776

					Special
December 31, 2011	Pass		Pass Watch		Mention		Substandard		Total

Commercial	$	22,146,008	$	675,334	$	-	$	893,326	$	23,714,668
Residential real estate		62,105,761		4,435,904		65,025		6,013,960		72,620,650
Commercial real estate		56,702,227		3,310,503		-		4,151,670		64,164,400
Construction and land development		6,879,087		-		-		1,040,411		7,919,498
Other real estate		17,778,764		-		1,951,473		43,655		19,773,892
Consumer		4,855,566		36,453		-		9,897		4,901,916
	$	170,467,413	$	8,458,194	$	2,016,498	$	12,152,919	$	193,095,024

The following table analyzes the age of past due loans, including both accruing and nonaccruing loans, segregated by class of loans as of the three months ended March 31, 2012, the year ended December 31, 2011 and the three months ended March 31, 2010.

					Greater than
	30-59 Days		60-89 Days		90 Days and		Total				Total		Loans 90 Days
March 31, 2012	Past Due		Past Due		Nonaccruing		Past Due		Current		Loans		and Accruing

Residential real estate	$	2,286,361	$	757,175	$	6,046,844	$	9,090,380	$	63,863,386	$	72,953,766	$	-
Commercial real estate		777,825		-		3,523,621		4,301,446		53,218,589		57,520,035		-
Other real estate		121,579		-		671,000		792,579		20,499,418		21,291,997		-
Construction and land development		19,887		-		595,793		615,680		7,069,031		7,684,711		-
Commercial loans		390,162		82,993		35,244		508,399		22,872,571		23,380,970		-
Consumer loans		51,771		892		54,340		107,003		4,237,294		4,344,297		2,429
Total	$	3,647,585	$	841,060	$	10,926,842	$	15,415,487	$	171,760,289	$	187,175,776	$	2,429

-16-

					Greater than
	30-59 Days		60-89 Days		90 Days and		Total				Total		Loans 90 Days
December 31, 2011	Past Due		Past Due		Nonaccruing		Past Due		Current		Loans		and Accruing

Residential real estate	$	2,435,288	$	942,334	$	3,730,214	$	7,107,836	$	65,512,814	$	72,620,650	$	107,206
Commercial real estate		1,839,733		212,058		5,128,702		7,180,493		56,983,906		64,164,399		-
Other real estate		122,533		-		-		122,533		19,651,359		19,773,892		-
Construction and land development		20,093		-		662,139		682,232		7,237,267		7,919,499		-
Commercial loans		208,884		28,003		13,377		250,264		23,464,404		23,714,668		-
Consumer loans		59,857		49,321		38,204		147,382		4,754,534		4,901,916		-
Total	$	4,686,388	$	1,231,716	$	9,572,636	$	15,490,740	$	177,604,284	$	193,095,024	$	107,206

					Greater than
	30-59 Days		60-89 Days		90 Days and		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	$	1,739,984
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	$	4,251,535

Loans on which the accrual of interest has been discontinued or reduced, and the interest that would have been accrued at March 31, 2012 and December 31, 2011, are as follows:

	March 31, 2012		December 31, 2011

Residential real estate	$	6,046,844	$	3,623,008
Commercial real estate		3,523,621		5,128,702
Other real estate		671,000		-
Construction and land development		595,792		662,139
Commercial loans		35,245		13,377
Consumer loans		51,911		38,204
Total	$	10,924,413	$	9,465,430

Interest not accrued on nonaccrual loans	$	696,660	$	621,287

A loan will be returned to accrual status when all of the principal and interest amounts contractually due are brought current and management believes that future principal and interest amounts contractually due are reasonably assured, which belief is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.

The modification of terms on a loan (restructuring) is considered a “troubled debt restructuring” if it is done to accommodate a borrower who is experiencing financial difficulties. The lender may forgive principal, lower the interest rate or payment amount, or may modify the payment due dates or maturity date of the loan for a troubled borrower. The Bank’s troubled debt restructurings at March 31, 2012, December 31, 2011 and March 31, 2011 are set forth in the following table:

-17-

TROUBLED DEBT RESTRUCTURINGS

					Paying as agreed				Past due
	Number of		Contract		under		Number of		30 days or more
March 31, 2012	Contracts		balance		modified terms		Contracts		Or non-accruing
Troubled Debt restructurings
Residential real estate		57	$	8,891,645	$	4,538,066		29	$	4,353,579
Commercial real estate		15		4,992,256		1,540,349		9		3,451,907
Other real estate		5		1,698,526		1,027,526		1		671,000
Construction and land development		4		585,789		164,660		2		421,130
Commercial loans		1		149,658		149,658		-		-
Consumer loans		1		3,974		-		1		3,974
		83	$	16,321,849	$	7,420,259		42	$	8,901,590

					Paying as agreed				Past due
	Number of		Contract		under		Number of		30 days or more
December 31, 2011	Contracts		balance		modified terms		Contracts		Or non-accruing
Troubled Debt restructurings
Residential real estate		41	$	5,987,534	$	4,090,470		17	$	1,897,065
Commercial real estate		28		6,857,017		2,230,550		17		4,626,466
Other real estate		4		1,028,000		1,028,000		-		-
Construction and land development		1		189,184		-		1		189,184
Commercial loans		2		199,742		199,742		-		-
Consumer loans		-		-		-		-		-
		76	$	14,261,477	$	7,548,762		35	$	6,712,715

					Paying as agreed				Past due
	Number of		Contract		under		Number of		30 days or more
March 31, 2011	Contracts		balance		modified terms		Contracts		Or non-accruing
Troubled Debt restructurings
Residential real estate		34	$	6,191,491	$	3,458,447		12	$	2,733,044
Commercial real estate		20		6,097,347		4,410,926		5		1,686,421
Other real estate		6		1,533,633		1,533,633		-		-
Construction and land development		4		1,134,751		67,500		3		1,067,251
Commercial loans		-		-		-		-		-
Consumer loans		-		-		-		-		-
		64	$	14,957,221	$	9,470,506		20	$	5,486,715

Outstanding loan commitments, unused lines of credit, and letters of credit as of March 31, 2012 and December 31, 2011 are as follows:

	March 31, 2012		December 31, 2011

Check loan lines of credit	$	539,691	$	493,545
Mortgage lines of credit and loan commitments		7,636,129		6,910,187
Other lines of credit and commitments		11,064,942		10,942,715
Undisbursed construction loan commitments		1,844,248		1,381,015
	$	21,085,010	$	19,727,462

Standby letters of credit	$	2,607,138	$	2,685,138

-18-

Loan commitments and lines of credit are agreements to lend to a customer as long as there is no violation of any condition to the contract. Loan commitments generally have interest rates fixed at current market rates, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time.

Letters of credit are commitments issued to guarantee the performance of a customer to a third party.

Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. The Bank’s exposure to credit loss in the event of nonperformance by the borrower is represented by the contract amount of the commitment. Management is not aware of any fact that could cause the Bank to incur an accounting loss as a result of funding these commitments.

The Bank lends to customers located primarily in and near Kent County, Queen Anne’s County, and Cecil County, Maryland. Although the loan portfolio is diversified, its performance will be influenced by the economy of the region.

4. 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, 2012 and 2011.

5. Pension

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

During the three months ended March 31, 2012 and 2011, the Bank recognized net periodic costs for this plan of $75,000 and $75,844, respectively. The Bank contributed nothing to the plan during the first quarter of 2012 compared to $34,088 contributed during the first quarter of 2011.

6. Segment Reporting

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

-19-

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:

				Insurance
For the three months ended	Community			products		Intersegment			Consolidated
March 31, 2012	banking			and services		Transactions			Total

Net interest income	$	2,004,985		$	249	$	-		$	2,005,234
Provision for loan losses		1,675,000			-		-			1,675,000
Net interest income after provision		329,985			249		-			330,234

Noninterest revenue		326,586			364,139		-			690,725
Noninterest expense		1,653,206			253,645		-			1,906,851
Income (loss) before income taxes		(996,635	)		110,743		-			(885,892	)
Income taxes (benefit)		(440,011	)		43,722		-			(396,289	)
Net income (loss)	$	(556,624	)	$	67,021	$	-		$	(489,603	)

Average assets	$	251,555,149		$	1,912,879	$	(1,019,875	)	$	252,448,153

				Insurance
For the three months ended	Community			products		Intersegment			Consolidated
March 31, 2011	banking			and services		Transactions			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 (loss) before income taxes		(715,837	)		155,850		-			(559,987	)
Income taxes (benefit)		(323,842	)		61,475		-			(262,367	)
Net income (loss)	$	(391,995	)	$	94,375	$	-		$	(297,620	)

Average assets	$	247,669,212		$	1,718,752	$	(756,434	)	$	248,631,530

-20-

7. 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. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.

-21-

Fair value measured on a recurring basis

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 the three months ended March 31, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

March 31, 2012
Available for Sale	Total		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
U. S. Government Agency Securities	$	8,049,200	$	8,049,200	$	-	$	-

December 31, 2011
Available for Sale		Total		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
U. S. Government Agency Securities	$	9,076,990	$	9,076,990	$	-	$	-

Fair values on a nonrecurring basis

The Company’s foreclosed real estate and impaired loans are 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 and twelve months ended March 31, 2012 and December 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. Impaired loans were measured at fair value during the same period and are reported at the fair value of the loan’s collateral. Fair value is generally determined using Level 3 inputs based upon independent appraisals of the properties, or discounted cash flows based upon the expected proceeds.

	Level		Level		Level
	1 Inputs		2 Inputs		3 Inputs		Total
March 31, 2012
Foreclosed real estate	$	-	$	3,705,473	$	-	$	3,705,473
Impaired Loans		-		-		16,764,818		18,376,951
	$	-	$	3,705,473	$	16,764,818	$	22,082,424

December 31, 2011
Foreclosed real estate	$	-	$	4,122,400	$	-	$	4,122,400
Impaired Loans		-		-		14,822,559		16,086,411
	$	-	$	4,122,400	$	14,822,559	$	20,208,811

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.

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The Company does not measure the fair value of any of its other financial assets or liabilities on a recurring basis. The fair value of financial instruments equals the carrying value of the instruments except as noted.

	March 31, 2012				December 31, 2011
	Carrying amount		Fair value		Carrying amount		Fair value

Financial assets
Level 2 inputs:
Cash and due from banks	$	33,099,778	$	33,099,778	$	27,613,717	$	27,613,717
Federal funds sold		9,019,000		9,019,000		9,018,000		9,018,000
Securities held to maturity		1,013,192		1,014,750		4,303		4,370
Federal Home Loan Bank and CBB
Financial Corp. stock		1,601,400		1,601,400		1,601,400		1,601,400
Loans, net		182,385,906		182,280,475		188,876,206		189,419,727
Accrued interest receivable		759,681		759,681		1,087,971		1,087,971

Financial liabilities
Level 2 inputs:
Noninterest-bearing deposits	$	41,176,800	$	41,176,800	$	42,207,291	$	42,207,291
Interest-bearing deposits		163,057,784		165,380,227		160,987,977		164,463,824
Short-term borrowings		1,909,668		1,909,668		2,916,900		2,916,900
Federal Home Loan
Bank advances		19,000,000		20,910,576		20,000,000		21,878,280
Accrued interest payable		338,364		338,364		345,359		345,359

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 of the loan. 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.

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Investment Securities

Investment securities are summarized as follows:

March 31, 2012	Amortized cost		Unrealized gains		Unrealized losses		Fair value
Available for sale
U. S. government agency	$	8,037,862	$	16,299	$	4,961	$	8,049,200

Held to maturity
U. S. government agency	$	1,009,084	$	1,516	$	-	$	1,010,600
Mortgage-backed securities		4,108		42		-		4,150
	$	1,013,192	$	1,558	$	-	$	1,014,750

December 31, 2011
Available for sale
U. S. government agency	$	9,054,353	$	22,637	$	-	$	9,076,990

Held to maturity
Mortgage-backed securities	$	4,303	$	67	$	-	$	4,370

The table below shows the gross unrealized loss and fair value of securities that are in an unrealized loss position as of March 31, 2012, aggregated by length of time the individual securities have been in a continuous unrealized loss position.

	Less than 12 months				12 months or more				Total
	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss

U. S. Government Agency	$	3,017,400	$	4,961	$	-	$	-	$	3,017,400	$	4,961

Total	$	3,017,400	$	4,961	$	-	$	-	$	3,017,400	$	4,961

The debt securities for which an unrealized loss is recorded are issues of the U.S. Treasury, Federal Home Loan Bank (a U. S. government agency), and general and highly rated revenue obligations of states and municipalities. Fluctuations in fair value reflect market conditions, and are not indicative of an other-than-temporary impairment of the investment.

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.

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	Available for sale				Held to maturity
March 31, 2012	Amortized cost		Fair value		Amortized cost		Fair value
Maturing
Within one year	$	4,024,351	$	4,030,200	$	-	$	-
Over one to five years		4,013,511		4,019,000		1,009,084		1,010,600
Mortgage-backed securities		-		-		4,108		4,150
	$	8,037,862	$	8,049,200	$	1,013,192	$	1,014,750

Pledged securities	$	2,668,242	$	2,676,811	$	-	$	-

December 31, 2011
Maturing
Within one year	$	4,011,267	$	4,017,270	$	-	$	-
Over one to five years		5,043,086		5,059,720		-		-
Mortgage-backed securities		-		-		4,303		4,370
	$	9,054,353	$	9,076,990	$	4,303	$	4,370

Pledged securities	$	2,671,734	$	2,682,359	$	-	$	-

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

Recent Accounting Standards

The following accounting pronouncements have been approved by the FASB but had not become effective as of March 31, 2012. These pronouncements would apply to the Company if the Company were to enter into an applicable activity.

Accounting Standards Update (“ASU”) No. 2011-11, “Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities,” amends Balance Sheet (Topic 210), to require an entity to disclose both gross and net information about both financial instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The financial instruments and transactions would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and lending arrangements. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013.

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ASU No. 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income,” to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments. An entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. ASU 2011-05 is effective for annual and interim periods beginning after December 15, 2011; however, certain provisions related to the presentation of reclassification adjustments have been deferred by ASU 2011-12 “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” as further discussed below.

ASU No. 2011-12 “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05.” ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to further deliberate whether to require presentation on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12.

The accounting policies adopted by management are consistent with accounting principles generally accepted in the United States of America and are consistent with those followed by peer banks.

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

Peoples Bancorp, Inc. is a Maryland corporation and a financial holding company registered under the Bank Holding Company Act of 1956, as amended, located in Chestertown, Kent County, Maryland. It 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, Peoples Bancorp, Inc. acquired Fleetwood, Athey, Macbeth & McCown, Inc. (the “Insurance Agency”). The Bank has one subsidiary, PB Land Trust, which is a Maryland statutory trust that was organized to acquire, hold and dispose of real estate that the Bank acquires through foreclosure or by deed in lieu of foreclosure.

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

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

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

Application of Critical Accounting Policies

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

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

The allowance for loan losses (“ALL”) represents management’s best estimate of identified and inherent losses in the loan portfolio as of the balance sheet date. Adequacy of the ALL is evaluated no less than quarterly. Determining the amount of the ALL is difficult and calls for numerous subjective judgments as it relies on estimates of potential loss on individual loans, the effects of portfolio trends due to evolving market conditions, and other internal and external factors.

The ALL consists of formula-based reserves for potential losses in the balances of specific segments of the loan portfolio, specific reserve amounts for potential losses on loans management has identified as impaired, and unallocated reserves not associated with a specific loan or portfolio segment.

The Bank evaluates loan portfolio risk for the purpose of establishing an adequate ALL. Management considers historical loss experience for all segments of the loan portfolio in order to determine an adequate level for the formula based portion of the ALL. Different segments of the loan portfolio are evaluated based on loss experience using a 36-month rolling historical loss ratio. Based on this evaluation, management applies a formula to current portfolio balances in the different portfolio segments, giving weight to portfolio segment size and loss experience for real estate construction and land development loans, other real estate secured loans, other loans to commercial borrowers and other personal loans to consumers.

Historical data may not present a complete prediction of loss potential in the current loan portfolio. Bearing this in mind, management also evaluates trends in delinquencies, lending volume, and changes in lending practices and policies. Management further considers external factors such as current local and national economic conditions and trends, reviews by independent loan review vendors, reviews by our outside auditors, and the results of examinations by bank regulatory authorities. Further information about the methodology used to determine the allowance 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 unaudited 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, 2012.

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Forward-Looking Information

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

RESULTS OF OPERATIONS

General

For the three-month period ended March 31, 2012, the Company reported a net loss of $489,603, or net loss attributable to common shareholders of $0.63 per share, compared to a net loss of $297,620, or net loss attributable to common shareholders of $0.38 per share, for the same period of 2011, which represents an increase in loss of $191,983 or 64.51%. This increase was the direct result of increased provision for loan loss and reduced net interest income. The Insurance Agency’s year to date income has decreased $27,354 to $67,021 for the three-month period ended March 31, 2012 over $94,375 for the same time period in 2011.

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, 2012 was 3.84%, compared to 3.90% for the same period of 2011. 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, 2012 was $2,005,234, which represents a decrease of $76,337 or 3.67% over net interest income for the same period of 2011. The primary contributor to this decrease was the reduction in interest earning assets.

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Interest revenue for the three months ended March 31, 2012 totaled $2,713,904, compared to $2,935,152 for the same period last year, representing a decrease of $221,248 or 7.54%. We have experienced a $196,935 decrease in interest earned on loans as the direct result of loan balances decreasing when compared to the first three months of 2011. Additionally, there was a $30,163 decrease in income on U. S. Government Agency securities for the first three months of 2012 over the same time period in 2011. The decrease in U. S. Government securities income was the direct result of maturing securities being replaced with lower yielding securities.

Interest expense for the three-month period ended March 31, 2012 totaled $708,670, compared to $853,581 for the same period last year, representing a decrease of $144,911 or 16.98%. This decrease was the result of maturing deposits being replaced with lower yielding rates. The Bank decreased its FHLB borrowings during the first quarter of 2012 from $20,000,000 at December 31, 2011 to $19,000,000 at March 31, 2012. FHLB borrowings at March 31, 2011 were $22,000,000. As a result, interest expense on borrowed funds for the first quarter of 2012 dropped $16,232 when compared to the three months ended March 31, 2011.

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

	For the Quarter Ended March 31, 2012							For the Quarter Ended March 31, 2011
	Average Balance		Interest		Yield			Average Balance		Interest		Yield
Assets
Federal funds sold	$	9,018,022	$	2,048		0.09	%	$	1,016,000	$	693		0.28	%
Interest-bearing deposits		7,717,448		3,712		0.19	%		5,103		9		0.67	%
Investment securities:
U. S. government agency		8,842,500		12,214		0.56	%		11,218,568		44,114		1.59	%
FHLB of Atlanta &
CBB Financial Corp.. Stock		1,601,400		5,327		1.34	%		2,151,600		4,489		0.85	%
Loans:
Demand and time		23,493,690		351,027		6.01	%		27,124,118		390,616		5.84	%
Mortgage		162,721,480		2,297,418		5.68	%		177,737,461		2,651,306		6.05	%
Installment		4,531,602		74,737		6.63	%		5,405,876		87,026		6.53	%
Total loans		190,746,772		2,723,182		5.74	%		210,267,455		3,128,948		6.03	%
Allowance for loan losses		4,580,765							4,828,491
Total loans, net of allowance		186,166,007		2,723,182		5.88	%		205,438,964		3,128,948		6.18	%
Total interest-earning assets		213,345,377		2,746,483		5.18	%		219,830,235		3,178,253		5.86	%
Non-interest-bearing cash		22,797,827							15,400,343
Premises and equipment		6,165,950							6,365,631
Other assets		10,138,999							7,035,321
Total assets	$	252,448,153						$	248,631,530

Liabilities and Stockholders’ Equity
Interest-bearing Deposits
Savings and NOW deposits	$	49,615,218	$	11,665		0.09	%	$	46,626,954	$	17,037		0.15	%
Money market and supernow		13,699,272		4,777		0.14	%		10,849,151		7,306		0.27	%
Other time deposits		97,824,083		527,329		2.17	%		98,610,504		648,107		2.67	%
Total interest-bearing deposits		161,138,573		543,771		1.36	%		156,086,609		672,450		1.75	%
Borrowed funds		22,327,822		164,899		2.97	%		25,897,427		181,131		2.84	%
Total interest-bearing liabilities		183,466,395		708,670		1.55	%		181,984,036		853,581		1.90	%
Noninterest-bearing deposits		42,036,487							37,316,794
		225,502,882							219,300,830
Other liabilities		2,329,683							1,993,817
Stockholders’ equity		24,615,588							27,336,883
Total liabilities and stockholders equity	$	252,448,153						$	248,631,530
Net interest spread						3.62	%						3.96	%
Net interest income			$	2,037,813						$	2,324,672
Net margin on interest-earning assets						3.84	%						4.29	%

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

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Analysis of Changes in Net Interest Income

	Three months ended March 31, 2012 compared with 2011 variance due to									Three months ended March 31, 2011 compared with 2010 variance due to
	Total			Rate			Volume			Total			Rate			Volume
Earning assets
Federal funds sold	$	1,355		$	(747	)	$	2,102		$	(3	)	$	542		$	(545	)
Interest-bearing deposits		3,703			(11	)		3,714			4			12			(8	)
Investment securities:
U. S. government agency		(31,900	)		(24,049	)		(7,851	)		(69,609	)		(47,122	)		(22,487	)
FHLB & CBB Financial Corp. stock		838			2,191			(1,353	)		2,819			3,010			(191	)
Loans:
Demand and time		(39,589	)		14,225			(53,814	)		5,034			(5,734	)		10,768
Mortgage		(353,888	)		(137,233	)		(216,655	)		(100,121	)		(135,246	)		35,125
Installment		(12,289	)		2,085			(14,374	)		(23,171	)		(4,975	)		(18,196	)
Total interest revenue		(431,770	)		(143,539	)		(288,231	)		(185,047	)		(189,513	)		4,466

Interest-bearing liabilities
Savings and NOW deposits		(5,372	)		(6,405	)		1,033			(5,631	)		(4,975	)		(656	)
Money market and supernow		(2,529	)		(4,122	)		1,593			(6,048	)		(5,746	)		(302	)
Other time deposits		(120,778	)		(115,649	)		(5,129	)		(55,684	)		(79,926	)		24,242
Other borrowed funds		(16,232	)		9,728			(25,960	)		(64,018	)		(41,331	)		(22,687	)
Total interest expense		(144,911	)		(116,448	)		(28,463	)		(131,381	)		(131,978	)		597

Net interest income	$	(286,859	)	$	(27,091	)	$	(259,768	)	$	(53,666	)	$	(57,535	)	$	3,869

Notes:

(1)

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

(2)

The variance that is due both to rate and volume is divided proportionally between the rate and volume variance.

Provision for Loan Losses

The provision for loan losses was $1,675,000 for the first three months of 2012, compared to $1,500,000 for the same period of 2011. The increase in the provision was in response to 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, 2012 totaled $690,725, which represents an increase of $26,393 or 3.97% over noninterest revenue for the same period of 2011. This increase resulted primarily from the $49,766 or 81.35% increase in other noninterest revenue and a gain of $3,791 on the sale of foreclosed real estate over a loss of $17,352 for the same period of 2011. Insurance Agency contingency income earned during the first quarter of 2012 decreased $11,880 or 3.17% to $363,434 for the first quarter of 2012, from $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 a decrease in service charges on deposit accounts of $32,646 or 13.31% during the first quarter of 2012 when compared to the same period of 2011.

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Noninterest Expense

The Company recorded noninterest expense of $1,906,851 for the three-month period ended March 31, 2012, compared to $1,805,890 for the same period in 2011, an increase of $100,961 or 5.59%. This increase was mainly attributable to increased salaries and employee benefits of $22,411 or 2.19%, and foreclosed real estate expense of $76,418 or 341.03%.

Income Tax Expense

The Company’s effective tax rate for the three-month period ended March 31, 2012 was 44.7%, compared to 46.9% for the same period of 2011. The Company’s income tax benefit was $396,289 for the three months ended March 31, 2012, compared to an income tax benefit of $262,367 for the same period of 2011, which represents an increase of $133,922 or 51.04%. Losses before income tax contributed to the increased tax benefit for the first quarter of 2012 when compared to the same quarter of 2011.

FINANCIAL CONDITION

Overview

Total assets of the Company at March 31, 2012 were $251,788,256, compared to $253,158,228 at December 31, 2011, representing a decrease of $1,369,972 or 0.54% from December 31, 2011.

Total liabilities at March 31, 2012 were $227,470,780, compared to $228,344,307 at December 31, 2011, representing a decrease of $873,527 or 0.38%.

Stockholders’ equity was $24,317,476 as of March 31, 2012, compared to $24,813,921 as of December 31, 2011, a decrease of $496,445. The decrease was due to a net loss for the period totaling $489,603 and a decrease in the unrealized gain on securities available for sale net of income taxes of $6,842.

Return on average equity for the quarter ended March 31, 2012 was (4.46)%, compared to (4.42)% for the same period of 2011. Return on average assets was (0.44)% for the quarter ended March 31, 2012, compared to (0.49)% for the same period of 2011.

Composition of Loan Portfolio

At March 31, 2012, loans, net of unearned income, were $182,385,906, a decrease of $6,490,300 since December 31, 2011. 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 $186,166,007 and $205,438,964 during the first quarters of 2012 and 2011, respectively, which constituted 87.26% and 93.45% of average interest-earning assets for the respective periods. For the quarter ended March 31, 2012, our average loan to deposit ratio was 91.63%, compared to 106.22% for the same period in 2011. 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 82.56% for the quarter ended March 31, 2012, compared to 93.68% for the same period of 2011. 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.

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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, 2012 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.

The allowance for loan losses increased to $4,861,379 at March 31, 2012, from $4,295,541 at December 31, 2011. The provision for loan losses was $1,675,000 for the first three months of 2012, compared to $1,500,000 for the same period of 2011. The increase in the provision for loan losses in the first three months of 2012 when compared to the same period of 2011 was in response to the results of our quarterly review of the adequacy of the factors discussed previously, and specific allocations for impaired loans. As of March 31, 2012 and December 31, 2011, the ratio of the allowance for loan losses to gross loans was 2.60% and 2.22%, 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.

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Our policy is to obtain or perform updated collateral valuations on impaired loans at least annually to measure impaired loans for potential future losses. Our valuations use staff evaluations, tax assessments, government assessment information, and evaluations and updated appraisals from licensed appraisers. Impairment measurement is for potential future losses. Collateral valuation is assessed and adjusted quarterly in light of general market conditions, the age and condition of the property, and adjoining property values and conditions. Specific allocations of the allowance have been provided in instances in which management has determined that 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

	Year ended March 31, 2012			Year ended March 31, 2011			Year ended December 31, 2011

Balance at beginning of year	$	4,295,541		$	5,656,788		$	5,656,788
Loan losses:
Commercial		333,875			491,329			669,862
Mortgages		786,928			2,694,200			7,310,607
Consumer		20,343			9,586			19,850
Total loan losses		1,141,146			3,195,115			8,000,319
Recoveries on loans previously charged off
Commercial		3,300			210			6,498
Mortgages		26,370			1,576			53,565
Consumer		2,314			24,691			29,009
Total loan recoveries		31,984			26,477			89,072
Net loan losses		1,109,162			3,168,638			7,911,247
Provision for loan losses charged to expense		1,675,000			1,500,000			6,550,000
Balance at end of year	$	4,861,379		$	3,988,150		$	4,295,541

Allowance for loan losses to loans outstanding		2.60	%		1.91	%		2.22	%

As a general rule, a loan, or a portion thereof, is deemed uncollectable and is charged-off as and when required by bank regulatory guidelines, which provide that the loan, or portion thereof, should be charged-off when the Company becomes aware of the loss. The Company becomes aware of a loss upon the occurrence of one or more triggering events, including, among other things, the receipt of new information about the borrower’s intent and/or ability to repay the loan, the severity of delinquency, the borrower’s bankruptcy, the detection of fraud, or the borrower’s death. 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.

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As a result of management’s ongoing review of the loan portfolio, loans are classified as nonaccrual when it is not reasonable to expect collection of interest under the original terms. These loans are classified as nonaccrual even though the presence of collateral or the borrower’s financial strength may be sufficient to provide for ultimate repayment. Interest on nonaccrual loans is recognized only when received. A loan is generally placed in nonaccrual status when it is specifically determined to be impaired and it becomes 90 days or more past due. When a loan is placed in nonaccrual status, all interest that had been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. A loan will be returned to accrual status when all of the principal and interest amounts contractually due are brought current and management believes that future principal and interest amounts contractually due are reasonably assured, which belief is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.

The Bank had loans past due 90 days or more, including nonaccrual loans, of $10,926,842, $14,129,121, and $9,572,636 at March 31, 2012, March 31, 2011 and December 31, 2011, respectively. These loans are detailed below:

Risk Elements of Loan Portfolio

		Three months Ended March 31, 2012		Three months Ended March 31, 2011		For the Year Ended December 31, 2011
Nonaccrual Loans
	Commercial	$	35,245	$	185,813	$	13,377
	Mortgage		10,837,257		9,654,383		9,413,849
	Consumer		51,911		37,390		38,204
			10,924,413		9,877,586		9,465,430

Accruing Loans Past Due 90 Days or More
	Commercial		-		52,819		-
	Mortgage		-		4,192,874		107,206
	Consumer		2,429		5,842		-
			2,429		4,251,535		107,206
		$	10,926,842	$	14,129,121	$	9,572,636

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, 2012 and has made the appropriate change to the Bank’s loan loss reserve.

Deposits and Other Interest-Bearing Liabilities

Average interest-bearing deposits increased $5,051,964 or 3.24% to $161,138,573 for the three months ended March 31, 2012, from $156,086,609 for the same period of 2011. Average noninterest-bearing deposits increased $4,719,693 or 12.65% to $42,036,487 for the three months ended March 31, 2012, from $37,316,794 for the same period of 2011. Average total deposits have increased 5.05% or $9,771,657 to $203,175,060 for the three months ended March 31, 2012 from $193,403,403 for the same period of 2011. Borrowings, primarily from the FHLB, decreased to $19,000,000 from $20,000,000 at December 31, 2011, representing a decrease of 5.00%.

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.

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Short-Term Borrowings

The following table sets forth the Company’s position with respect to short-term borrowings at March 31, 2012 and December 31 2011.

	Short Term Borrowings March 31, 2012					December 31, 2011
	Amount		Rate			Amount		Rate

Retail Repurchase Agreements	$	1,909,668		0.24	%	$	2,916,900		1.53	%

The Bank may borrow up to approximately 30% of its 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 the Bank’s real estate mortgage loans. The Bank was required to purchase shares of capital stock in the FHLB as a condition to obtaining the line of credit.

The Bank provides collateral of 105% of the repurchase agreement balances by pledging U.S. Government Agency securities.

As of March 31, 2012, the Bank has lines of credit of $6,650,000 in unsecured overnight federal funds and $5,000,000 in overnight federal funds with correspondent banks.

Liquidity and Capital Resources

Liquidity describes our ability to meet financial obligations that arise out of the ordinary course of business. Liquidity is needed primarily to fund loans, meet depositor withdrawal requirements, and fund current and planned expenditures. The Company derives liquidity through increased customer deposits, maturities in the investment portfolio, loan repayments and income from earning assets. To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds markets through lines of credit totaling $11,650,000 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 $29,197,865 of which $19,000,000 has been advanced as of March 31, 2012. 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, 2012 to the minimum ratios required by federal banking regulators is presented below.

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	Actual			Minimum Requirements			To Be Well Capitalized
Total risk -based capital		13.69	%		8.00	%		10.00	%
Tier1 risk-based capital		12.42	%		4.00	%		6.00	%
Tier 1 Leverage ratio		9.19	%		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 its principal executive officer who also serves as the principal accounting officer (the “CEO”), 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, 2012 under the supervision and with the participation of management, including the CEO. Based on that evaluation, the Company’s management, including the CEO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the first quarter of 2012, 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.

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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, 2011. Management does not believe that any material changes in these risk factors have occurred since they were last discussed.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3.

Defaults Upon Senior Securities.

Not applicable.

Item 4.

Mine Safety Disclosures.

Not applicable.

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.

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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 11, 2012	By:	/s/ Thomas G. Stevenson
		Thomas G. Stevenson
		President/Chief Executive Officer
		& Chief Financial Officer
		(Principal Executive Officer)

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EXHIBIT INDEX

Exhibit No.	Description

31.1		Certifications of the Principal Executive Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101.INS		XBRL Instance Document (furnished herewith)

101.SCH		XBRL Taxonomy Extension Schema (furnished herewith)

101.CAL		XBRL Taxonomy Extension Calculation Linkbase (furnished herewith)

101.DEF		XBRL Taxonomy Extension Definition Linkbase (furnished herewith)

101.LAB		XBRL Taxonomy Extension Label Linkbase (furnished herewith)

101.PRE		XBRL Taxonomy Extension Presentation Linkbase (furnished herewith)

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PEOPLES BANCORP INC/MD - FORM 10-Q - May 14, 2012

Attached files

PEOPLES BANCORP INC/MD Reports