- Quarterly Report (10-Q)

Share Name	Share Symbol	Market	Type
Peoples Bancorp Inc (PK)	USOTC:PEBC	OTCMarkets	Common Stock

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	0.00	0.00%	31.11	31.00	40.00				0.00	22:00:00

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

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

For the transition period from _______________ to ________________

Commission File Number: 0-24169

PEOPLES BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

(410) 778-3500

(Registrant’s Telephone Number, Including Area Code)

	N/A
(Former Name, former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x 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 x
(Do not check if a smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨ No x

APPLICABLE ONLY TO CORPORATE ISSUERS

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

PEOPLES BANCORP, INC.

FORM 10-Q

INDEX

		Page

Part I – Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets at September 30, 2011 (unaudited) and December 31, 2010	3

	Consolidated Statements of Income (unaudited) for three and nine months ended September 30, 2011 and 2010	4

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the nine months ended September 30, 2011 and 2010	5

	Consolidated Statements of Cash Flows (unaudited) for nine months ended September 30, 2011 and 2010	6

	Notes to Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37

Part II – Other Information

Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	(Removed and Reserved)	38
Item 5.	Other Information	38
Item 6.	Exhibits	38

Signatures		38
Exhibit Index		39

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

PEOPLES BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets	September 30,			December 31,
	2011			2010
	(unaudited)
ASSETS

CASH AND DUE FROM BANKS	$	21,687,732		$	10,378,485
Federal funds sold		7,017,000			1,016,000
Cash and cash equivalents		28,704,732			11,394,485
Securities available for sale		8,054,300			8,035,780
Securities held to maturity (approximate fair value of $509,367 and $3,554,315)		505,486			3,510,533
Federal Home Loan Bank & Community Bankers Bank stock, at cost		1,764,600			2,151,600
Loans, less allowance for loan losses of $4,220,634 and $5,656,788		193,363,630			207,295,877
Premises and equipment		6,278,056			6,389,781
Goodwill and intangible assets		561,682			603,988
Accrued interest receivable		1,042,394			1,360,708
Deferred income taxes		2,367,923			2,367,847
Foreclosed real estate		4,332,400			1,201,600
Other assets		1,991,682			1,480,216
Total Assets	$	248,966,885		$	245,792,415

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits
Non-interest-bearing	$	38,815,215		$	36,219,753
Interest-bearing		158,333,002			153,420,977
		197,148,217			189,640,730

Securities sold under repurchase agreements		2,672,894			2,754,321
Federal Home Loan Bank advances		21,000,000			24,000,000
Accrued interest payable		268,887			414,758
Other liabilities		1,510,202			1,590,442
		222,600,200			218,400,251
Stockholders' equity
Common stock, par value $10 per share; authorized 1,000,000 shares issued and outstanding 779,512 shares		7,795,120			7,795,120
Additional paid in capital		2,920,866			2,920,866
Retained earnings		16,063,378			17,088,742
		26,779,364			27,804,728
Accumulated other comprehensive income (loss)
Unrealized gain (loss) on available for sales securities		11,359			11,474
Unfunded liability of defined benefit plan		(424,038	)		(424,038	)
		26,366,685			27,392,164
Total Liabilities and Stockholders’ Equity	$	248,966,885		$	245,792,415

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

PEOPLES BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)

	For the three months ended					For the nine months ended
	September 30,					September 30,
	2011			2010		2011			2010
Interest and dividend revenue
Loans, including fees	$	2,906,621		$	2,986,669	$	8,740,170		$	9,274,109
U. S. government agencies securities		18,816			58,589		87,045			253,855
Deposits in other banks		223			42		234			60
Federal funds sold		2,286			587		4,397			1,862
Equity securities		3,690			2,568		12,112			5,662
Total interest and dividend revenue		2,931,636			3,048,455		8,843,958			9,535,548

Interest expense
Deposits		600,488			730,960		1,913,395			2,203,740
Borrowed funds		175,879			205,147		533,791			661,759
Total interest expense		776,367			936,107		2,447,186			2,865,499

Net interest income		2,155,269			2,112,348		6,396,772			6,670,049

Provision for loan losses		1,450,000			485,000		3,875,000			1,985,000
Net interest income after provision for loan losses		705,269			1,627,348		2,521,772			4,685,049

Noninterest revenue
Service charges on deposit accounts		272,009			200,872		790,087			642,043
Insurance commissions		343,494			325,987		990,879			949,382
(Loss) gain on sale of foreclosed real estate		(42,459	)		51,091		(61,107	)		(53,515	)
Other noninterest revenue		34,765			67,337		148,742			246,468
Total noninterest revenue		607,809			645,287		1,868,601			1,784,378

Noninterest expenses
Salaries and employee benefits		1,002,852			969,335		3,051,505			3,077,192
Occupancy		144,582			151,644		376,066			393,213
Furniture and equipment		67,116			87,049		231,124			258,528
Other operating		883,190			619,262		2,181,105			1,812,122
Total noninterest expenses		2,097,740			1,827,290		5,839,800			5,541,055

(Loss) income before income taxes		(784,662	)		445,345		(1,449,427	)		928,372

Income tax (benefit) expense		(354,296	)		157,110		(681,303	)		306,947

Net (loss) income	$	(430,366	)	$	288,235	$	(768,124	)	$	621,425

(Loss) earnings per common share	$	(0.55	)	$	0.37	$	(0.99	)	$	0.80

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

PEOPLES BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2011 and 2010

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

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

Net income		-		-		621,425			-		$	621,425
Unrealized gain on investment securities available for sale net of income taxes of ($7,695)		-		-		-			11,757			11,757
Comprehensive income											$	633,182
Repurchase of stock		-		-		-			-
Cash dividend, $1.32 per share		-		-		(1,052,342	)		-

Balance, September 30, 2010	$	7,795,120	$	2,920,866	$	18,434,482		$	(679,880	)

Balance, December 31, 2010	$	7,795,120	$	2,920,866	$	17,088,742		$	(412,564	)

Net loss		-		-		(768,124	)		-		$	(768,124	)
Unrealized loss on investment securities available for sale net of income taxes of $75		-		-		-			(115	)		(115	)
Comprehensive income											$	(768,239	)
Repurchase of stock		-		-		-			-
Cash dividend, $.33 per share		-		-		(257,240	)		-

Balance, September 30, 2011	$	7,795,120	$	2,920,866	$	16,063,378		$	(412,679	)

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

PEOPLES BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

	For the nine months ended
	September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received	$	9,203,883		$	9,804,945
Fees and commissions received		1,929,708			1,942,499
Cash paid to suppliers and employees		(5,896,751	)		(5,667,166	)
Interest paid		(2,593,057	)		(2,886,279	)
Taxes paid		681,303			(306,536	)
		3,325,086			2,887,463
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for premises, equipment, and software		(106,224	)		(214,982	)
Loans made, net of principal collected		5,373,352			(6,526,416	)
Proceeds from sale of foreclosed real estate		1,211,179			200,394
Proceeds from maturities and calls of securities
Available for sale		4,000,000			1,000,000
Held to maturity		3,000,688			6,550,709
Purchase of securities Available for Sale		(4,049,654	)		(6,022,091	)
Purchase of securities held to maturity		-			-
Redemption of FHLB Stock		387,000			167,800
Acquisition of Insurance Agency		-			-
		9,816,341			4,844,586
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in
Time deposits		1,458,595			4,695,081
Other deposits		6,048,892			(7,955,893	)
Securities sold under repurchase agreements		(81,427	)		(724,471	)
Advances under (repayments of) notes payable		(3,000,000	)		(4,000,000	)
Repayments of other borrowings		-			-
Repurchase of Stock		-			-
Dividends paid		(257,240	)		(1,052,341	)
		4,168,820			(9,037,624	)
NET INCREASE (DECREASE) IN CASH		17,310,247			(10,994,747	)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD		11,394,485			23,004,550
CASH AND EQUIVALENTS AT END OF PERIOD	$	28,704,732		$	12,009,803

NON CASH TRANSACTIONS
Transfer of foreclosed real estate	$	4,667,588		$	4,203,586

PEOPLES BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited) (continued)

	For the nine months ended
	September 30,
	2011			2010
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED FROM OPERATING ACTIVITIES
Net income	$	(768,124	)	$	621,425
ADJUSTMENTS
Depreciation and amortization		213,239			263,657
Provision for loan losses		3,875,000			1,985,000
Amortization of intangible assets		42,306			50,754
Write-down of foreclosed real estate		274,500			50,000
Security discount accretion, net of premium amortization		35,302			20,763
Deferred income taxes		-			411
Loss (gain) on sale of foreclosed real estate		61,107			104,606
Decrease (increase) in
Accrued interest receivable		318,314			209,200
Income tax refund receivable		-			-
Other assets		(506,756	)		(334,210	)
Increase (decrease) in
Deferred origination fees and costs, net		6,309			39,434
Accrued Interest payable and other liabilities		(226,111	)		(123,577	)
	$	3,325,086		$	2,887,463

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

Peoples Bancorp, Inc. and Subsidiaries

Notes to Financial Statements (unaudited)

1.	Basis of Presentation

The accompanying unaudited consolidated financial statements of Peoples Bancorp, Inc. and its subsidiaries, The Peoples Bank, a Maryland-chartered bank (the “Bank”), and Fleetwood, Athey, Macbeth & McCown, Inc., a Maryland insurance agency (the “Insurance Agency”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or any other future interim period. The consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and related notes contained in the Annual Report of Peoples Bancorp, Inc. on Form 10-K for the year ended December 31, 2010. When used in these notes, the term “Company” refers to Peoples Bancorp, Inc, and, unless the context requires otherwise, its consolidated subsidiaries.

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

The Company has evaluated events and transactions occurring subsequent to the balance sheet issuance date of September 30, 2011 through November 2, 2011 for items that should potentially be recognized or disclosed in these financial statements. No significant subsequent events were identified that would affect the presentation of the financial statements.

2.	Cash Flows

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

3.	Comprehensive (loss) income

For the nine months ended September 30, 2011 and 2010, total comprehensive (loss) income, net of taxes, was ($768,239) and $633,182, respectively. Comprehensive (loss) income is the sum of net (loss) income and the change in the unrealized gain or loss on securities available for sale, net of income (benefit) taxes.

4.	Loans and Allowance for Loan Losses

Major classifications of loans as of September 30, 2011 and December 31, 2010 are as follows:

	September 30, 2011			December 31,2010

Real estate
Residential	$	73,440,818		$	75,206,074
Commercial		84,662,392			89,617,135
Construction		8,722,679			13,403,765
Commercial		25,717,036			29,052,413
Consumer		4,963,200			5,588,830
		197,506,125			212,868,217
Deferred costs, net of deferred fees		78,139			84,448
Allowance for loan losses		(4,220,634	)		(5,656,788	)
	$	193,363,630		$	207,295,877

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 broken into the following categories: Residential; Commercial; Construction and Land Development; and Other Loans.

Residential real estate loans are underwritten subject to 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 viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally 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 Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success.

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

The Company 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 Company’s policies and procedures. Most of the Company’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:

	September 30, 2011		December 31,2010
Within ninety days		71,042,975.89	$	41,653,284
Over ninety days to one year		57,848,319.00		96,362,940
Over one year to five years		68,031,170.00		74,464,702
Over five years		583,660		387,291
	$	197,506,125	$	212,868,217

Variable rate loans included in above	$	11,148,375	$	51,208,677

A table of the recorded investment in loans that were impaired and risk rated at September 30, 2011 follows:

Impaired and Risk Rated Loans at September 30, 2011

	Recorded		Unpaid		Investment for		Investment for
	Investment in		Principal		which there		which there
Description of Loans	Impaired Loans		Balance		is related ALLL		is no Related ALLL

Residential real estate	$	1,743,441	$	1,743,441	$	1,743,441	$	-
Commercial real estate		5,685,299		5,685,299		5,685,299		-
Other real estate		-		-		-		-
Construction and land development		528,006		528,006		528,006		-
Commercial loans		146,944		146,944		146,944		-
Consumer loans		-		-		-		-
Total impaired loans	$	8,103,690	$	8,103,690	$	8,103,690	$	-

The following table illustrates total impaired loans segmented by those with and without a related allowance as of September 30, 2011, December 31, 2010 and September 30, 2010.

Total Impaired Loans Segmented by Portfolio Segment With and Without a Related Allowance Recorded
September 30, 2011
	Recorded		Current				Interest
	Investment in		Loan		Related		Income		Average
Description of Loans	Impaired Loans		Balance		Allowance		Recognized		Balance
With Related Allowance recorded
Residential real estate	$	1,743,441	$	1,743,441	$	466,337	$	84,244	$	2,115,431
Commercial real estate		5,685,299		5,685,299		1,147,748		227,609		5,490,140
Other real estate		-		-		-		-		-
Construction and land development		528,006		528,006		191,023		-		522,205
Commercial loans		146,944		146,944		102,782		8,186		151,953
Consumer loans		-		-		-		-		-
Total impaired loans	$	8,103,690	$	8,103,690	$	1,907,890	$	320,039	$	8,279,729

With No Related Allowance recorded
Residential real estate	$	-	$	-	$	-	$	-	$	-
Commercial real estate		-		-		-		-		-
Other real estate		-		-		-		-		-
Construction and land development		-		-		-		-		-
Commercial loans		-		-		-		-		-
Consumer loans		-		-		-		-		-
Total impaired loans	$	-	$	-	$	-	$	-	$	-

TOTAL
Residential real estate	$	1,743,441	$	1,999,135	$	466,337	$	84,244	$	2,115,431
Commercial real estate		5,685,299		5,429,605		1,147,748		227,609		5,490,140
Other real estate		-		-		-		-		-
Construction and land development		528,006		528,006		191,023		-		522,205
Commercial loans		146,944		146,944		102,782		8,186		151,953
Consumer loans		-		-		-		-		-
Total impaired loans	$	8,103,690	$	8,103,690	$	1,907,890	$	320,039	$	8,279,729

Total Impaired Loans Segmented by Portfolio Segment With and Without a Related Allowance Recorded
December 31, 2010
	Recorded		Current				Interest
	Investment in		Loan		Related		Income		Average
Description of Loans	Impaired Loans		Balance		Allowance		Recognized		Balance
With Related Allowance recorded
Residential real estate	$	1,092,458	$	1,092,458	$	217,644	$	16,091	$	1,109,176
Commercial real estate		1,670,505		1,670,505		535,044		72,645		1,589,338
Other real estate		-		-		-		-		-
Construction and land development		5,169,481		5,169,481		2,494,682		239,506		4,726,734
Commercial loans		160,283		160,283		46,126		1,511		138,065
Consumer loans		-		-		-		-		-
Total impaired loans	$	8,092,727	$	8,092,727	$	3,293,496	$	329,753	$	7,563,313

With No Related Allowance recorded
Residential real estate	$	1,080,353	$	1,080,353	$	-	$	33,360	$	1,105,548
Commercial real estate		1,441,244		1,441,244		-		24,395		2,032,234
Other real estate		-		-		-		-		-
Construction and land development		625,967		625,967		-		3,552		617,399
Commercial loans		385,221		385,221		-		-		385,221
Consumer loans		-		-		-		-		-
Total impaired loans	$	3,532,785	$	3,532,785	$	-	$	61,307	$	4,140,402

TOTAL
Residential real estate	$	2,172,811	$	2,172,811	$	217,644	$	49,451	$	2,214,724
Commercial real estate		3,111,749		3,111,749		535,044		97,040		3,621,572
Other real estate		-		-		-		-		-
Construction and land development		5,795,448		5,795,448		2,494,682		243,058		5,344,133
Commercial loans		545,504		545,504		46,126		1,511		523,286
Consumer loans		-		-		-		-		-
Total impaired loans	$	11,625,512	$	11,625,512	$	3,293,496	$	391,060	$	11,703,715

Total Impaired Loans Segmented by Portfolio Segment With and Without a Related Allowance Recorded
September 30, 2010
	Recorded		Current				Interest
	Investment in		Loan		Related		Income		Average
Description of Loans	Impaired Loans		Balance		Allowance		Recognized		Balance
With Related Allowance recorded
Residential real estate	$	730,223	$	730,223	$	167,185	$	140,968	$	897,955
Commercial real estate		403,768		403,768		381,983		69,553		389,960
Other real estate		-		-		-		-		-
Construction and land development		6,690,865		6,690,865		395,825		1,770,172		6,512,730
Commercial loans		75,000		75,000		3,484		8,441		82,509
Consumer loans		-		-		-		-		-
Total impaired loans	$	7,899,856	$	7,899,856	$	948,478	$	1,989,134	$	7,883,154

With No Related Allowance recorded
Residential real estate	$	726,740	$	726,740	$	-	$	94,569	$	622,509
Commercial real estate		2,673,055		2,673,055		-		1,046,739		3,462,866
Other real estate		-		-		-		-		-
Construction and land development		628,006		628,006		-		176,824		640,867
Commercial loans		385,221		385,221		-		63,319		482,449
Consumer loans		-		-		-		-		-
Total impaired loans	$	4,413,022	$	4,413,022	$	-	$	1,381,451	$	5,208,691

TOTAL
Residential real estate	$	1,456,963	$	1,456,963	$	167,185	$	235,537	$	1,520,464
Commercial real estate		3,076,823		3,076,823		381,983		1,116,292		3,852,826
Other real estate		-		-		-		-		-
Construction and land development		7,318,871		7,318,871		395,825		1,946,996		7,153,597
Commercial loans		460,221		460,221		3,484		71,760		564,958
Consumer loans		-		-		-		-		-
Total impaired loans	$	12,312,878	$	12,312,878	$	948,478	$	3,370,585	$	13,091,845

Total interest income reported in the chart “Total Impaired Loans Segmented by With and Without a Related Allowance Recorded” for June 30, 2011 that was included in Note 4 to the consolidated financial statements contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 was overstated by $3,765,491 due to a clerical error. The amount reported was $3,925.866, but it should have been $160,375. A revised table for June 30, 2011 is set forth below.

Total Impaired Loans Segmented by Portfolio Segment With and Without a Related Allowance Recorded
June 30, 2011
	Recorded		Current				Interest
	Investment in		Loan		Related		Income		Average
Description of Loans	Impaired Loans		Balance		Allowance		Recognized		Balance

With Related Allowance recorded
Residential real estate	$	968,513	$	968,513	$	250,226	$	1,772	$	964,448
Commercial real estate		5,029,924		5,029,924		656,846		120,777		5,030,067
Other real estate		-		-		-		-		-
Construction and land development		576,006		576,006		142,763		-		572,824
Commercial loans		39,631		39,631		13,227		714		39,676
Consumer loans		-		-		-		-		-
Total impaired loans	$	6,614,074	$	6,614,074	$	1,063,062	$	123,263	$	6,607,015

With No Related Allowance recorded
Residential real estate	$	205,754	$	205,754	$	-	$	27,287	$	222,067
Commercial real estate		605,468		605,468		-		9,825		602,177
Other real estate		-		-		-		-		-
Construction and land development		-		-		-		-		-
Commercial loans		-		-		-		-		-
Consumer loans		-		-		-		-		-
Total impaired loans	$	811,222	$	811,222	$	-	$	37,112	$	824,244

TOTAL
Residential real estate	$	1,174,267	$	1,174,267	$	250,226	$	29,059	$	1,186,515
Commercial real estate		5,635,392		5,635,392		656,846		130,602		5,632,244
Other real estate		-		-		-		-		-
Construction and land development		576,006		576,006		142,763		-		572,824
Commercial loans		39,631		39,631		13,227		714		39,676
Consumer loans		-		-		-		-		-
Total impaired loans	$	7,425,296	$	7,425,296	$	1,063,062	$	160,375	$	7,431,259

Transactions in the allowance for loan losses were as follows:

	September 30, 2011		December 31, 2010		September 30, 2010

Beginning balance	$	5,656,788	$	2,845,364	$	2,845,364
Provision charged to operations		3,875,000		4,910,000		1,985,000
Recoveries		75,554		19,677		18,552
		9,607,342		7,775,041		4,848,916
Loans charged off		5,386,708		2,118,253		1,979,819
Ending balance	$	4,220,634	$	5,656,788	$	2,869,097

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

Allowance for Credit Losses and Loan Balances that are Individually and Collectively Evaluated for Possible Impairment
September 30, 2011
													Construction
							Residential			Commercial			and land			Other
	Unallocated			Commercial			Real Estate			Real Estate			Development			Real Estate			Consumer			Overdraft			Total
Allowance for Credit Losses
Beginning Balance	$	137,047		$	676,113		$	806,728		$	1,124,851		$	2,780,148		$	2,122		$	126,751		$	3,028		$	5,656,788
Charge-Offs		-			(517,852	)		(1,287,678	)		(1,033,650	)		(2,530,352	)		-			(15,579	)		(1,597	)		(5,386,708	)
Recoveries		-			3,998			30,889			1,851			10,100			-			27,538			1,178			75,554
Provision		(123,105	)		285,997			1,734,475			1,687,639			341,606			(167	)		(67,009	)		15,564			3,875,000
Ending Balance	$	13,942		$	448,256		$	1,284,414		$	1,780,691		$	601,502		$	1,955		$	71,701		$	18,173		$	4,220,634

Ending Balance allocated to:
Loans individually evaluated for impairment	$	-		$	102,782		$	523,029		$	1,091,056		$	191,023		$	-		$	-		$	-		$	1,907,890
Loans collectively evaluated for impairment		13,942			345,474			761,385			689,635			410,479			1,955			71,701			18,173			2,312,744
	$	13,942		$	448,256		$	1,284,414		$	1,780,691		$	601,502		$	1,955		$	71,701		$	18,173		$	4,220,634

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

Ending Balance allocated to:
Loans individually evaluated for impairment	$	-		$	46,126		$	217,644		$	535,044		$	2,494,664		$	-		$	-		$	-		$	3,293,478
Loans collectively evaluated for impairment		137,047			629,987			589,084			589,807			285,484			2,122			126,751			3,028			2,363,310
	$	137,047		$	676,113		$	806,728		$	1,124,851		$	2,780,148		$	2,122		$	126,751		$	3,028		$	5,656,788

Allowance for Credit Losses and Loan Balances that are Individually and Collectively Evaluated for Possible Impairment
September 30, 2010
													Construction
							Residential			Commercial			and land			Other
	Unallocated			Commercial			Real Estate			Real Estate			Development			Real Estate			Consumer			Overdraft			Total
Allowance for Credit Losses
Beginning Balance	$	140,751		$	728,049		$	920,132		$	643,430		$	164,539		$	2,782		$	245,137		$	544		$	2,845,364
Charge-Offs		-			(166,779	)		(784,972	)		(951,603	)		(7,040	)		-			(66,112	)		(3,313	)		(1,979,819	)
Recoveries		-			2,460			148			-			-			-			14,413			1,531			18,552
Provision		(43,112	)		111,050			499,551			761,253			610,548			(775	)		43,627			2,858			1,985,000
Ending Balance	$	97,639		$	674,780		$	634,859		$	453,080		$	768,047		$	2,007		$	237,065		$	1,620		$	2,869,097

Ending Balance allocated to:
Loans individually evaluated for impairment	$	-		$	3,484		$	167,186		$	381,983		$	395,825		$	-		$	-		$	-		$	948,478
Loans collectively evaluated for impairment		97,639			671,296			467,673			71,097			372,222			2,007			237,065			1,620			1,920,619
	$	97,639		$	674,780		$	634,859		$	453,080		$	768,047		$	2,007		$	237,065		$	1,620		$	2,869,097

Credit Quality Indicators .

As part of the on-going monitoring of the quality of the Bank’s loan portfolio, management tracks certain credit quality indicators. The Bank utilizes credit-score for 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.

Grade 7 through 9 – This grade includes “Substandard” loans, in accordance with regulatory guidelines, for which the accrual of interest may have stopped. This grade includes loans that are past due or not fully secured where a specific valuation allowance may be necessary.

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

September 30, 2011	Pass Watch		Special Mention		Substandard		Total

Commercial	$	1,467,694	$	-	$	1,338,486	$	2,806,180
Residential real estate		4,565,243		621,565		4,022,535		9,209,343
Commercial real estate		2,607,968		-		6,416,545		9,024,513
Construction and land development		312,251		-		661,416		973,667
Other real estate		-		-		43,655		43,655
Consumer		36,046		-		10,599		46,645
	$	8,989,202	$	621,565	$	12,493,236	$	22,104,003

December 30, 2010	Pass Watch		Special Mention		Substandard		Total

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

The following table analyzes the age of past due and nonaccruing loans for the nine months ended September 30, 2011, the year ended December 31, 2010 and the nine months ended September 30, 2010.

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

Residential real estate	$	1,951,431	$	940,063	$	4,112,780	$	7,004,274	$	66,474,321	$	73,478,595	$	122,997
Commercial real estate		1,027,295		524,525		3,716,754		5,268,574		60,005,430		65,274,004		-
Other real estate		123,922		-		-		123,922		19,255,634		19,379,556		-
Construction and land development		-		-		661,416		661,416		8,060,758		8,722,174		-
Commercial loans		467,208		70,941		122,646		660,795		25,085,987		25,746,782		-
Consumer loans		53,702		22,201		25,466		101,369		4,881,784		4,983,153		-
Total	$	3,623,558	$	1,557,730	$	8,639,062	$	13,820,350	$	183,763,914	$	197,584,264	$	122,997

					Greater than
	30-59 Days		60-89 Days		90 Days or		Total				Total		Loans 90 Days
December 31, 2010	Past Due		Past Due		Nonaccruing		Past Due		Current		Loans		and Accruing

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

					Greater than
	30-59 Days		60-89 Days		90 Days or		Total				Total		Loans 90 Days
September 30, 2010	Past Due		Past Due		Nonaccruing		Past Due		Current		Loans		and Accruing

Residential real estate	$	2,288,674	$	1,868,383	$	3,394,136	$	7,551,193	$	66,955,635	$	74,506,828	$	1,148,574
Commercial real estate		741,632		-		2,638,173		3,379,805		61,807,439		65,187,244		1,533,694
Other real estate		546,592		546,592		44,295		1,137,479		22,075,852		23,213,331		44,295
Construction and land development		765,609		399,725		1,256,045		2,421,379		10,258,119		12,679,498		134,017
Commercial loans		306,006		143,681		575,928		1,025,615		28,578,525		29,604,140		1,913
Consumer loans		116,084		46,200		10,852		173,136		5,666,426		5,839,562		10,852
Total	$	4,764,597	$	3,004,581	$	7,919,429	$	15,688,607	$	195,341,996	$	211,030,603	$	2,873,345

Loans on which the accrual of interest has been discontinued or reduced, and the interest that would have been accrued at September 30, 2011 and December 31, 2010, are as follows:

	September 30,		December 31,
	2011		2010

Residential real estate	$	3,989,783	$	2,497,896
Commercial real estate		3,716,753		1,095,951
Other real estate		-		-
Construction and land development		661,416		1,157,464
Commercial loans		122,646		574,184
Consumer loans		25,466		-
Total	$	8,516,064	$	5,325,495

Interest not accrued on nonaccrual loans	$	592,889	$	644,566

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 Company’s troubled debt restructurings at September 30, 2011 are set forth in the following table:

	Troubled Debt Restructurings

				Paying as agreed		Past due
	Number of	Contract		under		30 days or more
	Contracts	balance		modified terms		Or non-accruing
September 30, 2011
Troubled Debt restructurings
Residential real estate	33	$	5,504,329	$	3,944,212	$	1,560,117
Commercial real estate	26		7,834,330		4,362,773		3,471,557
Other real estate	4		1,028,422		1,028,422		-
Construction and land development	2		379,664		379,664		-
Commercial loans	0		-		-		-
Consumer loans	0		-		-		-
	65	$	14,746,745	$	9,715,071	$	5,031,674

				Paying as agreed		Past due
	Number of	Contract		under		30 days or more
	Contracts	balance		modified terms		Or non-accruing
September 30, 2010
Troubled Debt restructurings
Residential real estate	21	$	3,926,347	$	3,255,857	$	670,490
Commercial real estate	9		1,030,174		994,313		35,862
Other real estate	0		-		-		-
Construction and land development	3		1,067,251		542,251		525,000
Commercial loans	0		-		-		-
Consumer loans	0		-		-		-
	33	$	6,023,772	$	4,792,421	$	1,231,352

5. Commitments

Loan commitments are made to accommodate the financial needs of the Company’s customers. Letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. These obligations are not recorded in the Company’s financial statements. The credit risks inherent in loan commitments and letters of credit are essentially the same as those involved in extending loans to customers, and these arrangements are subject to the Company’s normal credit policies. The Company’s exposure to credit loss in the event the customer does not satisfy the terms of these arrangements equals the notional amount of the obligation less the value of any collateral. The table below represents unfunded obligations at September 30, 2011 and December 31, 2010.

	September 30, 2011		December 31, 2010

Check loan lines of credit	$	504,629	$	468,621
Mortgage lines of credit		6,053,782		6,727,480
Other lines of credit		10,688,994		10,964,947
Undisbursed construction loan commitments		1,632,995		2,240,747
	$	18,880,400	$	20,401,795

Standby letters of credit	$	1,946,388	$	3,016,824

6. Earnings Per Share

Earnings (loss) per common share is derived by dividing net income (loss) available to holders of shares of common stock by the weighted average number of shares of common stock outstanding of 779,512 for the three- and nine-month periods ended September 30, 2011 and 2010.

7. Pension

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

During the nine months ended September 30, 2011 and 2010, the Bank recognized net periodic costs for this plan of $230,637 and $230,861, respectively. The Bank contributed $55,059 to the plan during the nine months ended September 30, 2011, compared to $136,351 for the first nine months of 2010.

8. 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.

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

Selected financial information by line of business, is included in the following table:

For the nine months ended September 30, 2011	Community banking			Insurance products and services		Intersegment Transactions			Consolidated Total

Net interest income	$	6,396,772		$	-	$	-		$	6,396,772
Provision for loan losses		3,875,000			-		-			3,875,000
Net interest income after provision		2,521,772			-		-			2,521,772

Noninterest revenue		872,681			995,920		-			1,868,601
Noninterest expense		5,109,079			730,721		-			5,839,800
Income before income taxes		(1,714,626	)		265,199		-			(1,449,427	)
Income taxes		(785,911	)		104,608		-			(681,303	)
Net income (loss)	$	(928,715	)	$	160,591	$	-		$	(768,124	)

Average assets	$	248,155,189		$	1,721,248	$	(747,738	)	$	249,128,699

For the nine months ended September 30, 2010	Community banking		Insurance products and services		Intersegment Transactions			Consolidated Total

Net interest income	$	6,670,049	$	-	$	-		$	6,670,049
Provision for loan losses		1,985,000		-		-			1,985,000
Net interest income after provision		4,685,049		-		-			4,685,049

Noninterest revenue		879,287		958,606		-			1,837,893
Noninterest expense		4,890,796		703,774		-			5,594,570
Income before income taxes		673,540		254,832		-			928,372
Income taxes		206,245		100,702		-			306,947
Net income	$	467,295	$	154,130	$	-		$	621,425

Average assets	$	247,585,518	$	1,603,469	$	(480,405	)	$	248,708,582

9. Fair Value

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

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

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

Level 3 inputs — Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

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

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 September 30, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

Available for Sale		Total				Level 1 Inputs				Level 2 Inputs				Level 3 Inputs
U. S. Government Securities		$	8,054,300			$	8,054,300			$	-			$	-

The Company’s foreclosed real estate is measured at fair value on a nonrecurring basis, which means that the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of reduced property value). Foreclosed real estate measured at fair value on a non-recurring basis during the nine months ended September 30, 2011 is reported at the fair value of the underlying collateral, assuming that the sale prices of the properties will be their current appraised values. Appraised values are estimated using Level 2 inputs based on observable market data and current property tax assessments. Foreclosed real estate measured at fair value on a nonrecurring basis during the nine months ended September 30, 2011 is as follows.

		Total				(Level 1)				(Level 2)				(Level 3)
Foreclosed real estate		$	4,332,400			$	-			$	4,332,400			$	-

FASB ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis.

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

	September 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value

Financial assets
Cash and due from banks	$	21,687,732	$	21,687,732	$	10,378,485	$	10,378,485
Federal funds sold		7,017,000		7,017,000		1,016,000		1,016,000
Investment securities (total)		8,559,786		8,563,667		11,546,313		11,590,095
Federal Home Loan Bank and CBB Financial Corp. stock		1,764,600		1,764,600		2,151,600		2,151,600
Loans, net		193,363,630		193,111,586		207,295,877		208,116,545
Accrued interest receivable		1,042,394		1,042,394		1,360,708		1,360,708

Financial liabilities
Noninterest-bearing deposits	$	38,815,215	$	38,815,215	$	36,219,753	$	36,219,753
Interest-bearing deposits		158,333,002		161,263,342		153,420,977		157,626,964
Short-term borrowings		2,672,894		2,672,894		2,754,321		2,754,321
Federal Home Loan Bank advances		21,000,000		22,927,752		24,000,000		25,230,768
Accrued interest payable		268,887		268,887		414,758		414,758

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.

10.	Investment Securities

Investment securities are summarized as follows:

	Amortized		Unrealized		Unrealized		Fair
September 30, 2011	cost		gains		losses		Value
Available for Sale
U. S. government agency	$	8,035,541	$	24,209	$	5,450	$	8,054,300

Held to maturity
U. S. government agency	$	500,924	$	3,871	$	-	$	504,795
Mortgage-backed securities		4,562		10		-		4,572
	$	505,486	$	3,881	$	-	$	509,367

December 31, 2010
Available for Sale
U. S. government agency	$	8,016,831	$	18,949	$	-	$	8,035,780

Held to maturity
U. S. government agency	$	3,505,278	$	43,757	$	-	$	3,549,035
Mortgage-backed securities		5,255		25		-		5,280
	$	3,510,533	$	43,782	$	-	$	3,554,315

The table below shows the gross unrealized loss and fair value of securities that are in an unrealized loss position as of September 30, 2011, 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		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		loss		value		loss		value		loss

U. S. Government Agency	$	1,003,460	$	5,450	$	-	$	-	$	1,003,460	$	5,450

Total	$	1,003,460	$	5,450	$	-	$	-	$	1,003,460	$	5,450

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.

	Available for Sale				Held to maturity
	Amortized		Fair		Amortized		Fair
September 30, 2011	cost		Value		cost		Value
Maturing
Within one year	$	6,019,055	$	6,031,890	$	500,924	$	504,795
Over one to five years		2,016,486		2,022,410		-		-
Mortgage-backed securities		-		-		4,562		4,572
	$	8,035,541	$	8,054,300	$	505,486	$	509,367

Pledged securities	$	2,676,401	$	2,678,289	$	-	$	-

December 31, 2010
Maturing
Within one year	$	3,002,803	$	3,017,460	$	1,503,934	$	1,533,625
Over one to five years		2,013,865		2,017,020		-		-
Mortgage-backed securities		-		-		5,255		5,280
	$	5,016,668	$	5,034,480	$	1,509,189	$	1,538,905

Pledged securities	$	633,593	$	637,127	$	2,530,378	$	2,562,778

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

11.	Recent Accounting Standards

Recent accounting pronouncements approved by FASB that apply to the Company are discussed below. These pronouncements are not expected to have, or, if already effective, did not have, a material impact on the financial statements of the Company.

ASU No. 2010-20, “Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a roll-forward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period became effective for the Company’s financial statements beginning on January 1, 2011. ASU 2011-01, “ Receivables (Topic 310) - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 ,” temporarily deferred the effective date for disclosures related to troubled debt restructurings to coincide with the effective date of the then proposed ASU 2011-02, “ Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring ,” which is further discussed below.

ASU No. 2010-28, “Intangibles - Goodwill and Other (Topic 350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASU 2010-28 became effective for the Company on January 1, 2011.

ASU No. 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (i) the restructuring constitutes a concession; and (ii) the debtor is experiencing financial difficulties. ASU 2011-02 will be effective for the Company on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011.

ASU No. 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion. ASU 2011-03 will be effective for the Company on January 1, 2012.

ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in GAAP and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011.

ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all nonowner changes in stockholders’ equity be presented in either 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 or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 is effective for annual periods beginning after December 15, 2011.

ASU No. 2010-20, “Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period became effective for the Company’s financial statements beginning on January 1, 2011. ASU 2011-01, “Receivables (Topic 310) - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20,” temporarily deferred the effective date for disclosures related to troubled debt restructurings to coincide with the effective date of the then proposed ASU 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” which is further discussed below.

Item 2.

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

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

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

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

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

Application of Critical Accounting Policies

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

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

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 interim Consolidated Financial Statements and Notes thereto included elsewhere in this report, and in conjunction with the audited Consolidated Financial Statements and Notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Annual Report of Peoples Bancorp, Inc. on Form 10-K for the year ended December 31, 2010.

Forward-Looking Information

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

RESULTS OF OPERATIONS

Overview

For the three- and nine-month periods ended September 30, 2011, the Company reported a net loss of $430,366, or ($0.55) per share, and $768,124, or ($0.99) per share, respectively, compared to net income of $288,235, or $0.37 per share, and $621,425, or $0.80 per share, respectively, for the same periods in 2010. The decreases for the three months (249.31%) and nine months (223.61%) ended September 30, 2011 over the same periods last year resulted primarily from decreased net interest income and increases in the loan loss provision and other operating expenses. The Insurance Agency’s net income for the first nine months of 2011 increased by $6,461 to $160,591 when compared to the $154,130 realized for the same time period in 2010.

Net Interest Income

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

The key performance measure for net interest income is the “net margin on interest-earning assets,” or net interest income divided by average interest-earning assets. The Company’s net interest margin for the nine-month period ended September 30, 2011 was 4.01%, compared to 4.04% for the same period in 2010. The net margin may decline if competition increases, loan demand decreases, or the cost of funds rises faster than the return on loans and securities. The net margin may also be adversely impacted by a number of factors which cannot be predicted and are beyond our control.

Net interest income for the three-month period ended September 30, 2011 was $2,155,269, which represents an increase of $42,921 or 2.03% from net interest income for the same period in 2010. Net interest income for the nine-month period ended September 30, 2011 was $6,396,772, which represents a decrease of $273,277 or 4.10% from the net interest income for the first nine months of 2010. The primary contributor to the decrease was the reduction in interest earning assets.

Interest revenue for the three and nine months ended September 30, 2011 totaled $2,931,636 and $8,834,958, respectively, compared to $3,048,455 and $9,535,548, respectively, for the same periods last year, representing decreases of $116,819 or 3.83% and $691,590 or 7.25%, respectively. We recorded a $533,939 decrease in interest earned on loans as a direct result of nonaccrual loan balances increasing when compared to the first nine months of 2010. Additionally, there was a $166,810 decrease in income on U. S. Government Agency securities for the first nine months of 2011 when compared to the same time period in 2010. This decrease was the direct result of a $656,697 decline in the average balance of U.S. Government Agency securities and lower interest rates on securities as they re-priced when compared to the same period in 2010.

Interest expense for the three- and nine-month periods ended September 30, 2011 totaled $776,367 and $2,447,186, respectively, compared to $936,107 and $2,865,499, respectively, for the same periods last year, representing decreases of $159,740 or 17.06% and $418,313 or 14.60%, respectively. The Company decreased its FHLB borrowings during the first nine months of 2011 from $24,000,000 at December 31, 2009 to $21,000,000 at September 30, 2010. FHLB borrowings at September 30, 2010 were $24,000,000. As a result, interest expense on borrowed funds for the first nine months of 2011 decreased $127,968 when compared to the nine months ended September 30, 2010.

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

	For the nine months Ended							For the nine months Ended
	September 30, 2011							September 30, 2010
	Average							Average
	Balance		Interest		Yield			Balance		Interest		Yield
Assets
Federal funds sold	$	3,483,663	$	4,397		0.17	%	$	1,446,565	$	1,862		0.17	%
Interest-bearing deposits		207,443		235		0.15	%		43,625		63		0.19	%
Investment securities:
U. S. government agency		9,872,859		92,077		1.25	%		13,531,296		268,468		2.65	%
FHLB of Atlanta &
CBB Financial Corp.. Stock		2,003,331		12,809		0.85	%		2,363,351		5,988		0.34	%
		11,876,190		104,886					15,894,647		274,456
Loans:
Demand and time		27,236,219		1,209,297		5.94	%		27,544,150		1,183,039		5.74	%
Mortgage		172,658,302		7,373,089		5.71	%		176,033,250		7,868,542		5.98	%
Installment		5,136,723		255,056		6.64	%		6,308,184		309,920		6.57	%
Total loans		205,031,244		8,837,442		5.76	%		209,885,584		9,361,501		5.96	%
Allowance for loan losses		4,051,718							3,099,666
Total loans, net of allowance		200,979,526		8,837,442		5.88	%		206,785,918		9,361,501		6.05	%
Total interest-earning assets		216,546,822		8,946,960		5.52	%		224,170,755		9,637,882		5.75	%
Non-interest-bearing cash		17,239,579							11,689,401
Premises and equipment		6,331,182							6,510,957
Other assets		9,011,116							6,337,469
Total assets	$	249,128,699						$	248,708,582

Liabilities and Stockholders’ Equity
Interest-bearing Deposits
Savings and NOW deposits	$	47,261,619	$	41,353		0.12	%	$	46,149,438	$	63,431		0.18	%
Money market and supernow		11,361,880		18,937		0.22	%		11,007,339		34,027		0.41	%
Other time deposits		98,726,276		1,853,105		2.51	%		96,530,726		2,106,282		2.92	%
Total interest-bearing deposits		157,349,775		1,913,395		1.63	%		153,687,503		2,203,740		1.92	%
Borrowed funds		24,734,736		533,791		2.89	%		28,401,635		661,759		3.12	%
Total interest-bearing liabilities		182,084,511		2,447,186		1.80	%		182,089,138		2,865,499		2.10	%
Noninterest-bearing deposits		38,179,958							35,426,592
		220,264,469							217,515,730
Other liabilities		1,852,762							2,526,906
Stockholders’ equity		27,011,468							28,665,946
Total liabilities and stockholders equity	$	249,128,699						$	248,708,582
Net interest spread						3.73	%						3.64	%
Net interest income			$	6,499,774						$	6,772,383
Net margin on interest-earning assets						4.01	%						4.04	%

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

Analysis of Changes in Net Interest Income

	Nine months ended September 30,									Nine months ended September 30,
	2011 compared with 2010									2010 compared with 2011
	variance due to									variance due to
	Total			Rate			Volume			Total			Rate			Volume
Earning assets
Federal funds sold	$	2,572		$	(37	)	$	2,535		$	(5,342	)	$	(576	)	$	(5,918	)
Interest-bearing deposits		188			(16	)		172			(29	)		35			6
Investment securities:
U. S. government agency		(59,590	)		(116,801	)		(176,391	)		3,372			(167,174	)		(163,802	)
FHLB stock		(1,039	)		7,860			6,821			(16	)		863			847
Other		-			-			-			-			-			-
Loans:
Demand and time		(13,337	)		39,595			26,258			(446,974	)		(122,819	)		(569,793	)
Mortgage		(148,834	)		(346,619	)		(495,453	)		265,375			(622,250	)		(356,875	)
Installment		(58,134	)		3,270			(54,864	)		129,449			(47,880	)		81,569
Total interest revenue		(278,174	)		(412,748	)		(690,922	)		(54,165	)		(959,801	)		(1,013,966	)

Interest-bearing liabilities
Savings and NOW deposits		1,494			(23,572	)		(22,078	)		17,736			(13,347	)		4,389
Money market and supernow		1,063			(16,153	)		(15,090	)		(19,979	)		(7,252	)		(27,231	)
Other time deposits		46,969			(300,145	)		(253,176	)		234,207			(319,261	)		(85,054	)
Other borrowed funds		(81,427	)		(46,541	)		(127,968	)		(484,545	)		(67,615	)		(552,160	)
Total interest expense		(31,901	)		(386,411	)		(418,312	)		(252,581	)		(407,475	)		(660,056	)

Net interest income	$	(246,273	)	$	(26,337	)	$	(272,610	)	$	198,416		$	(552,326	)	$	(353,910	)

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

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 $3,875,000 for the first nine months of 2011, compared to $1,985,000 for the same period of 2010. The increase in the provision was in response to the increase in net charge-offs, and specific allocations for impaired loans. Additional information regarding risk elements in the loan portfolio, the provision for loan losses and management’s assessment of the adequacy of the allowance for loan losses are discussed below in the section entitled “Loan Quality.”

Noninterest Revenue

Noninterest revenue for the three-month period ended September 30, 2011 totaled $607,809, which represents a decrease of 5.81% from the $645,287 recorded for the same period in 2010. The decrease resulted primarily from a loss of $42,459 on the sale of foreclosed real estate, compared to a gain on foreclosed real estate of $51,091 for the same period in 2010. For the first nine months of 2011, noninterest revenue was $1,868,801, compared to $1,784,378 for the same period last year, representing an increase of 4.72%. The increase was mainly attributable to the $148,044, or 23.06%, increase to service charges on deposit accounts. Insurance Agency contingency income increased $41,497, or 4.37%, over the first nine months 2010. 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 other noninterest revenue of $97,726, or 39.65%, when compared to the same period of 2010.

Noninterest Expense

The Company recorded noninterest expense of $2,097,740 and $5,839,800 for the three- and nine-month periods ended September 30, 2011, respectively, compared to $1,827,290 and $5,541,055, respectively, for the same periods in 2010, representing respective increases of $270,450, or 14.80%, and $298,745, or 5.39%. The increases were mainly attributable to increased other operating expenses of $368,983 for the first nine months of 2011. The items in other operating expenses contributing to the increases are other real estate expense increase of $339,657 and increased other expenses of $79,348. These increases were offset by a $25,687 decrease in salaries and employee benefits and a $39,476 decrease in FDIC insurance assessments.

Income Tax Expense

The Company’s effective tax rate for the three- and nine-month periods ended September 30, 2011 was 45.2% and 47.0%, respectively, compared to 35.3% and 33.1%, respectively, for the same periods in 2010. The Company recorded an income tax benefit of $354,296 and $681,303 for the three- and nine-months ended September 30, 2011, respectively, compared to the income tax expense of $157,110 and $306,947, respectively, for the same periods in 2010. Losses before income tax during the three- and nine-month periods ended September 30, 2011 contributed to the decreases in income tax expense when compared to the same periods of last year.

FINANCIAL CONDITION

Overview

Total assets of the Company at September 30, 2011 were $248,966,885, compared to $245,792,415 at December 31, 2010, representing an increase of $3,174,470 or 1.29%.

Total liabilities at September 30, 2011 were $222,600,200, compared to $218,400,251 at December 31, 2010, representing an increase of $4,199,949 or 1.92%.

Stockholders’ equity was $26,366,685 at September 30, 2011, compared to $27,392,164 at December 31, 2010, representing a decrease of $1,025,479. The decrease was due to a net loss for the first nine months of 2011 totaling $768,124, plus a $115 decrease in the unrealized gains on securities available for sale net of income taxes and dividends paid to stockholders of $257,240.

Return on average equity for the nine months ended September 30, 2011 was (3.80)%, compared to 2.90% for the same period in 2010. Return on average assets was (0.41)% for the nine months ended September 30, 2011, compared to 0.33% for the same period in 2010.

Composition of Loan Portfolio

At September 30, 2011, loans, net of the allowance for loan losses, were $193,363,630, a decrease of $13,932,247 since December 31, 2010. Because loans are expected to produce higher yields than investment securities and other interest-earning assets, the absolute volume of loans and the volume as a percentage of total earning assets is an important determinant of net interest margin. Average loans, net of the allowance for loan losses, were $200,979,526 and $206,785,918 during the first nine months of 2011 and 2010, respectively, which constituted 92.81% and 92.24% of average interest-earning assets for the respective periods. For the nine months ended September 30, 2011, our average loan to deposit ratio was 102.79%, compared to 109.34% for the nine months ended September 30, 2010. The securities sold under repurchase agreements function like deposits, with the securities providing collateral in place of the FDIC insurance. Our ratio of average loans to deposits plus borrowed funds was 91.24% for the nine months ended September 30, 2011, compared to 95.07% for the nine months ended September 30, 2010. The Company extends credit primarily to customers located in and near the Maryland counties of Kent County, Queen Anne’s County, and Cecil County. There are no industry concentrations in our loan portfolio. A substantial portion of our loans are, however, secured by real estate, and the real estate market in the region, which is directly impacted by the local economy, will influence the performance of the Company’s portfolio and the value of the collateral securing the portfolio.

Loan Quality

The allowance for loan losses represents a reserve for potential losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with a particular emphasis on non-accruing, past due, and other loans that management believes require attention. The determination of the reserve level rests upon management's judgment about factors affecting loan quality and assumptions about the economy. Management believes that the allowance as of September 30, 2011 is adequate to cover possible losses in the loan portfolio identified as of that date; however, management's judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may not prove valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.

For significant problem loans, management's review consists of evaluation of the financial strengths of the borrowers and guarantors, the related collateral, and the effects of economic conditions. The overall evaluation of the adequacy of the total allowance for loan losses is based on an three year 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 decreased to $4,220,634 at September 30, 2011, from $5,656,788 at December 31, 2010. The provision for loan losses was $3,875,000 for the first nine months of 2011, compared to $1,985,000 for the same period of 2010. The increase in the provision for loan losses in the first nine months of 2011 when compared to the same period of 2010 was in response to the increase in net charge-offs, the results of our quarterly review of the adequacy of the factors discussed previously, and specific allocations for impaired loans. As of September 30, 2011 and December 31, 2010, the ratio of allowance for loan losses to gross loans was 2.14% and 2.66%, respectively. As part of our loan review process, management has noted an increase in foreclosures and bankruptcies in the geographic areas where we operate. Additionally, the current nationwide recession has had a significant and adverse impact on real estate values and sales over the past 12 months. Consequently, we have closely reviewed our loan portfolio and applied sensitivity analysis to collateral values to ensure that we are adequately measuring potential future losses.

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

	Nine months ended			Nine months ended			Year ended
	September 30,			September 30,			December 31,
	2011			2010			2010

Balance at beginning of year	$	5,656,788		$	2,845,364		$	2,845,364
Loan losses:
Commercial		517,852			166,779			166,779
Mortgages		4,851,680			1,743,615			1,846,683
Consumer		17,176			69,425			104,791
Total loan losses		5,386,708			1,979,819			2,118,253
Recoveries on loans previously charged off
Commercial		3,998			2,460			2,660
Mortgages		42,840			148			374
Consumer		28,716			15,944			16,643
Total loan recoveries		75,554			18,552			19,677
Net loan losses		5,311,154			1,961,267			2,098,576
Provision for loan losses charged to expense		3,875,000			1,985,000			4,910,000
Balance at end of year	$	4,220,634		$	2,869,097		$	5,656,788

Allowance for loan losses to loans outstanding		2.14	%		1.36	%		2.66	%

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.

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 Company had loans past due 90 days or more including nonaccrual loans of $8,639,061, $7,923,834 and $11,694,138 at September 30, 2011, September 30, 2010 and December 31, 2010, respectively. These loans are detailed below:

Risk Elements of Loan Portfolio

	Nine months		Nine months		For the Years
	Ended		Ended		Ended
	September 30,		September 30,		December 31,
	2011		2010		2010
Nonaccrual Loans
Commercial	$	122,646	$	574,014	$	574,184
Mortgage		8,367,953		4,472,070		4,751,311
Consumer		25,466		0		-
		8,516,064		5,046,084		5,325,495
Accruing Loans Past Due 90 Days or More
Commercial		-		1,913		19,838
Mortgage		122,997		2,864,985		6,282,242
Consumer		-		10,852		66,563
		122,997		2,877,750		6,368,643
	$	8,639,061	$	7,923,834	$	11,694,138

Loans are classified as impaired when the collection of contractual obligations, including principal and interest, is doubtful. Management believes that it has identified all significant impaired loans as of September 30, 2011 and has made the appropriate charge to the Bank’s loan loss reserve.

Deposits and Other Interest-Bearing Liabilities

Average interest-bearing deposits increased $3,662,272 or 2.38% to $157,349,775 for the nine months ended September 30, 2011, from $153,687,503 for the same period in 2010. Average noninterest-bearing deposits increased $2,753,366 or 7.77% to $38,179,958 for the nine months ended September 30, 2011, from $35,426,592 for the same period in 2010. Average total deposits increased 3.39% or $6,415,638 to $195,529,733 for the nine months ended September 30, 2011 from $189,114,095 for the same period in 2010. Average borrowed funds, primarily from the FHLB of Atlanta to fund loan demand, decreased 12.91% to $24,734,736 from $28,401,635 at September 30, 2010.

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

Short-term Borrowings

The following table sets forth our position with respect to short-term borrowings at September 30, 2011 and December 31, 2010:

	September 30, 2011					December 31, 2010
	Amount		Rate			Amount		Rate

Retail Repurchase Agreements	$	2,672,894		1.28	%	$	2,754,321		1.76	%

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

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

As of September 30, 2011, the Bank had lines of credit of $6,650,000 in unsecured overnight federal funds and $5,000,000 in secured overnight federal funds with correspondent banks.

Liquidity and Capital Resources

Liquidity describes our ability to meet financial obligations that arise out of the ordinary course of business. Liquidity is needed primarily to fund loans, meet depositor withdrawal requirements, and fund current and planned expenditures. The Company derives liquidity through increased customer deposits, maturities in the investment portfolio, loan repayments and income from earning assets. To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds markets through lines of credit totaling $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 $28,478,065 of which $21,000,000 was advanced as of September 30, 2011. We also have the ability to borrow secured funds through the Federal Reserve’s Discount window as necessary.

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

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

	Actual			Minimum Requirements			To Be Well Capitalized
Total risk-based capital		14.18	%		8.00	%		10.00	%
Tier 1 risk-based capital		12.92	%		4.00	%		6.00	%
Tier 1 leverage ratio		10.04	%		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 September 30, 2011 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 third quarter of 2011, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

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

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

None.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. (Removed and Reserved).

Item 5. Other Information.

None.

Item 6. Exhibits.

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

SIGNATURES

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

	PEOPLES BANCORP, INC.

Date: November 10, 2011	By:	/s/ Thomas G. Stevenson
		Thomas G. Stevenson
		President/Chief Executive Officer
		& Chief Financial Officer
		(Principal Executive Officer &
		Principal Accounting Officer)

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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PEBC Peoples Bancorp Inc (PK)