UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC   20549

FORM 10-Q

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

For the quarterly period ended          June 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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  R No £

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

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

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

Yes £ No R

APPLICABLE ONLY TO CORPORATE ISSUERS

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

PEOPLES BANCORP, INC.

FORM 10-Q

INDEX

		Page
Part I – Financial Information
Item 1.	Financial Statements	3
	Consolidated Balance Sheets at June 30, 2011 (unaudited) and December 31, 2010	3
	Consolidated Statements of Income (unaudited) for three and six months ended June 30, 2011 and 2010	4
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the six months ended June 30, 2011 and 2010	5
	Consolidated Statements of Cash Flows (unaudited) for six months ended June 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	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
Part II – Other Information
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	(Removed and Reserved)	34
Item 5.	Other Information	34
Item 6.	Exhibits	34
Signatures		35
Exhibit Index		36

2

PART I - FINANCIAL INFORMATION

Item 1.       Financial Statements.

PEOPLES BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30,			December, 31
	2011			2010
	(unaudited)
ASSETS
Cash and due from banks	$	20,063,114		$	10,378,485
Federal funds sold		3,317,884			1,016,000
Cash and cash equivalents		23,380,998			11,394,485
Securities available for sale		8,078,680			8,035,780
Securities held to maturity (approximate fair value of $515,050 and $3,554,315)		506,847			3,510,533
Federal Home Loan Bank & CBB Financial Corp. stock, at cost		1,899,900			2,151,600
Loans, less allowance for loan losses of $3,490,415 and $5,656,788		198,309,155			207,295,877
Premises and equipment		6,315,747			6,389,781
Goodwill and intangible assets		573,320			603,988
Accrued interest receivable		1,030,932			1,360,708
Deferred income taxes		2,362,487			2,367,847
Foreclosed real estate		5,083,586			1,201,600
Other assets		1,619,941			1,480,216
Total Assets	$	249,161,593		$	245,792,415
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing	$	39,133,565		$	36,219,753
Interest-bearing		156,972,565			153,420,977
		196,106,130			189,640,730
Securities sold under repurchase agreements		2,456,175			2,754,321
Federal Home Loan Bank advances		22,000,000			24,000,000
Accrued interest payable		381,405			414,758
Other liabilities		1,412,487			1,590,442
		222,356,197			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		16,493,744			17,088,742
		27,209,730			27,804,728
Accumulated other comprehensive income (loss)
Unrealized gain on available for sale securities		19,704			11,474
Unfunded liability of defined benefit plan		(424,038	)		(424,038	)
		26,805,396			27,392,164
Total Liabilities and Stockholders' Equity	$	249,161,593		$	245,792,415

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

3

PEOPLES BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)

	For the three months ended						For the six months ended
	June 30						June 30
	2011			2010			2011			2010
Interest and dividend revenue
Loans, including fees	$	2,945,057		$	3,068,089		$	5,833,550		$	6,287,440
U. S. government agency securities		26,515			86,796			68,228			195,266
Deposits in other banks		3			13			11			18
Federal funds sold		1,418			579			2,111			1,275
Equity securities		4,177			1,501			8,422			3,094
Total interest and dividend revenue		2,977,170			3,156,978			5,912,322			6,487,093
Interest expense
Deposits		640,457			732,967			1,312,907			1,472,780
Borrowed funds		176,781			211,463			357,912			456,612
Total interest expense		817,238			944,430			1,670,819			1,929,392
Net interest income		2,159,932			2,212,548			4,241,503			4,557,701
Provision for loan losses		925,000			1,025,000			2,425,000			1,500,000
Net interest income after provision for loan losses		1,234,932			1,187,548			1,816,503			3,057,701
Noninterest revenue
Service charges on deposit accounts		272,893			226,369			518,078			441,171
Insurance commissions		272,071			289,787			647,385			623,395
Loss on sale of foreclosed real estate		(1,296	)		(104,606	)		(18,648	)		(104,606	)
Other noninterest revenue		96,450			114,941			157,635			179,131
Total noninterest revenue		640,118			526,491			1,304,450			1,139,091
Noninterest expenses
Salaries and employee benefits		1,024,294			1,042,848			2,048,653			2,107,857
Occupancy		110,686			113,854			231,484			241,569
Furniture and equipment		79,306			82,324			164,008			171,479
Other operating		765,542			620,187			1,341,573			1,192,860
Total noninterest expenses		1,979,828			1,859,213			3,785,718			3,713,765
Income (loss) before income taxes		(104,778	)		(145,174	)		(664,765	)		483,027
Income taxes (benefit)		(64,640	)		(77,108	)		(327,007	)		149,837
Net income (loss)	$	(40,138	)	$	(68,066	)	$	(337,758	)	$	333,190
Earnings (loss) per common share	$	(0.05	)	$	(0.08	)	$	(0.43	)	$	0.43

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

4

PEOPLES BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

SIX MONTHS ENDED JUNE 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		-		-		333,190			-		$	333,190
Unrealized gain on investment securities available for sale net of income taxes of $(20,218)		-		-		-			7,511			7,511
Comprehensive income											$	340,701
Cash dividend, $0.90 per share		-		-		(701,561	)		-
Balance, June 30, 2010	$	7,795,120	$	2,920,866	$	18,497,028		$	(684,126	)
Balance, December 31, 2010	$	7,795,120	$	2,920,866	$	17,088,742		$	(412,564	)
Net loss		-		-		(337,758	)		-		$	(337,758	)
Unrealized gain on investment securities available for sale net of income taxes of $(5,361)		-		-		-			8,230			8,230
Comprehensive income (loss)											$	(329,528	)
Cash dividend, $.33 per share		-		-		(257,240	)		-
Balance, June 30, 2011	$	7,795,120	$	2,920,866	$	16,493,744		$	(404,334	)

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

5

PEOPLES BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)	For the six months ended
	June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received	$	6,263,011		$	6,671,080
Fees and commissions received		1,323,098			1,348,303
Cash paid to suppliers and employees		(3,907,479	)		(3,925,287	)
Interest paid		(1,704,172	)		(1,953,254	)
Income tax (paid) refund received		327,007			(149,429	)
		2,301,465			1,991,416
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for premises, equipment, and software		(91,217	)		(124,054	)
Loans made, net of principal collected		2,360,693			(6,251,256	)
Proceeds from sale of foreclosed real estate		302,952			200,394
Proceeds from maturities and calls of securities
Available for sale		4,000,000			1,000,000
Held to maturity		3,000,560			4,550,397
Purchase of securities Available for Sale		(4,049,654	)		(4,003,871	)
Purchase of securities held to maturity		-			-
Redemption of FHLB stock, net of purchases		251,700			-
		5,775,034			(4,628,390	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in
Time deposits		412,330			2,097,171
Other deposits		6,053,070			(7,639,223	)
Securities sold under repurchase agreements		(298,146	)		(173,071	)
Repayments of Federal Home Loan Bank advances		(2,000,000	)		(2,000,000	)
Repayment of other borrowings		-			-
Dividends paid		(257,240	)		(701,561	)
		3,910,014			(8,416,684	)
NET INCREASE (DECREASE) IN CASH		11,986,513			(11,053,658	)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD		11,394,485			23,004,550
CASH AND EQUIVALENTS AT END OF PERIOD	$	23,380,998		$	11,950,892
NON CASH TRANSACTIONS
Transfer of foreclosed real estate	$	4,203,586		$	-

6

PEOPLES BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited) (cont’d)	For the six months ended
	June 30,
	2011			2010
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED FROM OPERATING ACTIVITIES
Net income	$	(337,758	)	$	333,190
ADJUSTMENTS
Depreciation and amortization		160,541			171,931
Provision for loan losses		2,425,000			1,500,000
Deferred Income Taxes		-			411
Amortization of intangible assets		30,668			33,836
Security discount accretion, net of premium amortization		23,470			16,444
Loss (gain) on sale of foreclosed real estate		18,648			104,606
Decrease (increase) in
Accrued interest receivable		329,776			141,485
Income tax refund receivable		-			-
Other assets		(135,015	)		(249,971	)
Increase (decrease) in
Deferred origination fees and costs, net		(2,557	)		26,058
Accrued interest payable		(33,353	)		(23,862	)
Other liabilities		(177,955	)		(62,712	)
	$	2,301,465		$	1,991,416

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

7

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 six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011 or any other future interim period.  The consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and related notes contained in the Annual Report of Peoples Bancorp, Inc. on Form 10-K for the year ended December 31, 2010.  When used in these notes, the term “Company” refers to Peoples Bancorp, Inc. and, unless the context requires otherwise, its consolidated subsidiaries.

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

The Company evaluated subsequent events after the balance sheet date through August 11, 2011.  No significant subsequent events were identified which would affect the presentation of the financial information.

2. Cash Flows

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

3. Comprehensive income (loss)

For the six months ended June 30, 2011, total comprehensive loss, net of taxes, was $329,528, compared to total comprehensive income, net of taxes, of $340,701 for the same period of 2010.  Comprehensive income (loss) is the sum of net income (loss) and the change in the unrealized gain or loss on securities available for sale, net of income taxes.

8

4. Loans and Allowance for Loan Losses

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

	June 30, 2011			December 31,2010
Real estate
Residential	$	73,947,595		$	75,206,074
Commercial		86,220,838			89,617,135
Construction		8,983,014			13,403,765
Commercial		27,693,843			29,052,413
Consumer		4,867,275			5,588,830
		201,712,565			212,868,217
Deferred costs, net of deferred fees		87,005			84,448
Allowance for loan losses		(3,490,415	)		(5,656,788	)
	$	198,309,155		$	207,295,877

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

Within ninety days	$	30,874,448	$	41,653,284
Over ninety days to one year		87,880,674		96,362,940
Over one year to five years		81,703,147		74,464,702
Over five years		1,254,296		387,291
	$	201,712,565	$	212,868,217
Variable rate loans included in above	$	49,591,623	$	51,208,677

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

Impaired and Risk Rated Loans at June 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	$	1,174,267	$	1,174,267	$	968,513	$	205,754
Commercial real estate		5,635,392		5,635,392		5,029,924		605,468
Other real estate		-		-		-		-
Construction and land development		576,006		576,006		576,006		-
Commercial loans		39,631		39,631		39,631		-
Consumer loans		-		-		-		-
Total impaired loans	$	7,425,296	$	7,425,296	$	6,614,074	$	811,222

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

9

4. Loans and Allowance for Loan Losses (Continued)

Total Impaired Loans Segmented by 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	$	198,512	$	964,448
Commercial real estate		5,029,924		5,029,924		656,846		3,192,407		5,030,067
Other real estate		-		-		-		-		-
Construction and land development		576,006		576,006		142,763		180,731		572,824
Commercial loans		39,631		39,631		13,227		11,755		39,676
Consumer loans		-		-		-		-		-
Total impaired loans	$	6,614,074	$	6,614,074	$	1,063,062	$	3,583,405	$	6,607,015
With No Related Allowance recorded
Residential real estate	$	205,754	$	205,754	$	-	$	42,549	$	222,067
Commercial real estate		605,468		605,468		-		299,912		602,177
Other real estate		-		-		-		-		-
Construction and land development		-		-		-		-		-
Commercial loans		-		-		-		-		-
Consumer loans		-		-		-		-		-
Total impaired loans	$	811,222	$	811,222	$	-	$	342,461	$	824,244
TOTAL
Residential real estate	$	1,174,267	$	1,174,267	$	250,226	$	241,061	$	1,186,515
Commercial real estate		5,635,392		5,635,392		656,846		3,492,319		5,632,244
Other real estate		-		-		-		-		-
Construction and land development		576,006		576,006		142,763		180,731		572,824
Commercial loans		39,631		39,631		13,227		11,755		39,676
Consumer loans		-		-		-		-		-
Total impaired loans	$	7,425,296	$	7,425,296	$	1,063,062	$	3,925,866	$	7,431,259

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

10

4.  Loans and Allowance for Loan Losses (Continued)

Total Impaired Loans Segmented by With and Without a Related Allowance Recorded June 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	$	1,465,887	$	1,465,887	$	317,470	$	223,727	$	1,496,368
Commercial real estate		3,014,961		3,014,961		924,476		787,994		2,980,983
Other real estate		-		-		-		-		-
Construction and land development		6,917,304		6,917,304		347,076		41,679		6,915,575
Commercial loans		236,537		236,537		142,842		70,116		236,648
Consumer loans		23,893		23,893		2,180		8,183		23,770
Total impaired loans	$	11,658,582	$	11,658,582	$	1,734,045	$	1,131,699	$	11,653,344
With No Related Allowance recorded
Residential real estate	$	1,484,248	$	1,484,248	$	-	$	297,289	$	1,581,777
Commercial real estate		1,159,091		1,159,091		-		413,394		1,214,599
Other real estate		-		-		-		-		-
Construction and land development		681,679		681,679		-		176,824		650,748
Commercial loans		460,221		460,221		-		55,297		468,956
Consumer loans		5,903		5,903		-		-		5,903
Total impaired loans	$	3,791,142	$	3,791,142	$	-	$	942,803	$	3,921,983
TOTAL
Residential real estate	$	2,950,135	$	2,950,135	$	317,470	$	521,016	$	3,078,145
Commercial real estate		4,174,052		4,174,052		924,476		1,201,388		4,195,582
Other real estate		-		-		-		-		-
Construction and land development		7,598,983		7,598,983		347,076		218,503		7,566,323
Commercial loans		696,758		696,758		142,842		125,413		705,604
Consumer loans		29,796		29,796		2,180		8,183		29,673
Total impaired loans	$	15,449,724	$	15,449,724	$	1,734,045	$	2,074,502	$	15,575,328

Transactions in the allowance for loan losses were as follows:

	June 30, 2011		December 31, 2010		June 30, 2010
Beginning balance	$	5,656,788	$	2,845,364	$	2,845,364
Provision charged to operations		2,425,000		4,910,000		1,500,000
Recoveries		63,593		19,677		16,278
		8,145,381		7,775,041		4,361,642
Loans charged off		4,654,966		2,118,253		810,692
Ending balance	$	3,490,415	$	5,656,788	$	3,550,950

11

4. Loans and Allowance for Loan Losses (Continued)

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

June 30, 2011

							Residential			Commercial			Construction 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	)		(801,798	)		(812,673	)		(2,482,352	)		-			(38,897	)		(1,394	)		(4,654,966	)
Recoveries		-			510			2,560			-			4,000			-			55,395			1,128			63,593
Provision		(53,809	)		532,403			1,076,591			837,375			100,617			(102	)		(67,807	)		(268	)		2,425,000
Ending Balance	$	83,238		$	691,174		$	1,084,081		$	1,149,553		$	402,413		$	2,020		$	75,442		$	2,494		$	3,490,415
Ending Balance allocated to:
Loans individually evaluated for impairment	$	-		$	13,227		$	250,226		$	656,846		$	142,763		$	-		$	-		$	-		$	1,063,062
Loans collectively evaluated for impairment		83,238			677,947			833,855			492,707			259,650			2,020			75,442			2,494			2,427,353
	$	83,238		$	691,174		$	1,084,081		$	1,149,553		$	402,413		$	2,020		$	75,442		$	2,494		$	3,490,415

Allowance for Credit Losses and Loan Balances that are Individually and Collectively Evaluated for Possible Impairment

December 31, 2010

							Residential			Commercial			Construction 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

June 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		-			(71,965	)		(611,230	)		(92,457	)		(7,040	)		-			(25,079	)		(2,921	)		(810,692	)
Recoveries		-			2,050			73			-			-			-			12,906			1,249			16,278
Provision		(138,630	)		127,343			479,676			445,451			566,286			(809	)		16,968			3,715			1,500,000
Ending Balance	$	2,121		$	785,477		$	788,651		$	996,424		$	723,785		$	1,973		$	249,932		$	2,587		$	3,550,950
Ending Balance allocated to:
Loans individually evaluated for impairment	$	-		$	142,842		$	317,470		$	924,476		$	347,077		$	-		$	2,180		$	-		$	1,734,045
Loans collectively evaluated for impairment		2,121			642,635			471,181			71,948			376,708			1,973			247,752			2,587			1,816,905
	$	2,121		$	785,477		$	788,651		$	996,424		$	723,785		$	1,973		$	249,932		$	2,587		$	3,550,950

12

4.  Loans and Allowance for Loan Losses (Continued)

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.

June 30, 2011	Pass Watch		Special Mention		Substandard		Total
Commercial	$	575,095	$	39,631	$	1,822,607	$	2,437,333
Residential real estate		3,566,950		28,435		4,640,404		8,235,789
Commercial real estate		1,047,818		1,256,498		7,190,194		9,494,510
Construction and land development		312,251		-		710,016		1,022,267
Other real estate		-		-		46,025		46,025
Consumer		24,673		-		11,290		35,963
	$	5,526,787	$	1,324,564	$	14,420,536	$	21,271,887

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

13

4.         Loans and Allowance for Loan Losses (Continued)

The following table analyzes the age of past due and nonaccruing loans for the years ended June 30, 2011, December 31, 2010 and June 30, 2010.

					Greater than
	30-59 Days		60-89 Days		90 Days or		Total				Total		Loans 90 Days
June 30, 2011	Past Due		Past Due		Nonaccruing		Past Due		Current		Loans		and Accruing
Residential real estate	$	1,658,557	$	1,223,750	$	3,773,477	$	6,655,784	$	67,291,811	$	73,947,595	$	671,160
Commercial real estate		431,961		308,447		3,939,882		4,680,290		61,519,732		66,200,022		591,911
Other real estate		-		-		-		-		20,020,816		20,020,816		-
Construction and land development		-		-		710,016		710,016		8,272,998		8,983,014		97,961
Commercial loans		5,549		243,849		200,681		450,079		27,243,764		27,693,843		-
Consumer loans		59,448		23,764		29,532		112,744		4,754,531		4,867,275		-
Total	$	2,155,515	$	1,799,810	$	8,653,588	$	12,608,913	$	189,103,652	$	201,712,565	$	1,361,032

					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
June 30, 2010	Past Due		Past Due		Nonaccruing		Past Due		Current		Loans		and Accruing
Residential real estate	$	1,011,454	$	475,300	$	3,502,308	$	4,989,062	$	70,035,935	$	75,024,997	$	2,515,734
Commercial real estate		510,754		186,805		3,505,692		4,203,251		63,696,481		67,899,732		2,987,494
Other real estate		-		-		45,595		45,595		22,990,308		23,035,903		45,595
Construction and land development		-		97,969		1,119,189		1,217,158		11,208,981		12,426,139		542,223
Commercial loans		543,173		-		574,880		1,118,053		26,402,033		27,520,086		114,113
Consumer loans		51,381		65,627		56,371		173,379		6,019,056		6,192,435		56,371
Total	$	2,116,762	$	825,701	$	8,804,035	$	11,746,498	$	200,352,794	$	212,099,292	$	6,261,530

14

4. Loans and Allowance for Loan Losses (Continued)

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

	June 30,		December 31,
	2011		2010
Residential real estate	$	3,102,316	$	2,497,896
Commercial real estate		3,347,971		1,095,951
Other real estate		-		-
Construction and land development		612,055		1,157,464
Commercial loans		200,681		574,184
Consumer loans		29,533		-
Total	$	7,292,556	$	5,325,495
Interest not accrued on nonaccrual loans	$	544,252	$	644,566

As of June 30, 2011, the Bank had classified $4,919,345 of loans as troubled debt restructurings. (“TDRs”)  Under a TDR, interest rates may be reduced to current market rates or principal reductions may be deferred for a set period of time.  For each of the current TDRs, the customer is expected to pay the full principal balance owed.

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 June 30, 2011 and December 31, 2010.

	June 30, 2011		December 31, 2010
Check loan lines of credit	$	508,270	$	468,621
Mortgage lines of credit		7,499,302		6,727,480
Other lines of credit		11,310,888		10,964,947
Undisbursed construction loan commitments		1,515,428		2,240,747
	$	20,833,888	$	20,401,795
Standby letters of credit	$	2,017,602	$	3,016,824

15

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 six-month periods ended June 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 10 full years before retirement.  The Bank’s general funding policy is to contribute annually the maximum amount that can be deducted for income tax purposes, determined using the projected unit credit cost method.  The assets of the plan are invested in various time deposits and held in trust as required by law.

During the six-month periods  ended June 30, 2011 and 2010, the Bank recognized net periodic costs for this plan of $154,693 and $155,301, respectively.  The Bank contributed $34,088 to the plan during the six months ended June 30, 2011, compared to $121,260 for the first six months of 2010.

8. Segment Reporting

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

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

16

8. Segment Reporting (Continued)

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

For the six months ended June 30 2011	Community  Banking			Insurance  products and services		Intersegment Transactions			Consolidated  Total
Net interest income	$	4,241,503		$	-	$	-		$	4,241,503
Provision for loan losses		2,425,000			-		-			2,425,000
Net interest income after provision		1,816,503			-		-			1,816,503
Noninterest revenue		654,342			650,108		-			1,304,450
Noninterest expense		3,310,256			475,462		-			3,785,718
Income before income taxes		(839,411	)		174,646		-			(664,765	)
Income taxes		(395,896	)		68,889		-			(327,007	)
Net income	$	(443,515	)	$	105,757	$	-		$	(337,758	)
Average assets	$	248,033,700		$	1,712,278	$	(760,710	)	$	248,985,268

For the six months ended June 30 2010	Community  Banking		Insurance  products and services		Intersegment Transactions			Consolidated  Total
Net interest income (loss)	$	4,557,701	$	-	$	-		$	4,557,701
Provision for loan losses		1,500,000		-		-			1,500,000
Net interest income (loss) after provision		3,057,701		-		-			3,057,701
Noninterest revenue		614,618		629,079		-			1,243,697
Noninterest expense		3,362,596		455,775		-			3,818,371
Income before income taxes		309,723		173,304		-			483,027
Income taxes		81,293		68,544		-			149,837
Net income	$	228,430	$	104,760	$	-		$	333,190
Average assets	$	248,325,510	$	1,643,059	$	(532,662	)	$	249,435,907

17

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.

18

9. Fair Value (Continued)

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 June 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	$	8,078,680	$	8,078,680	$	-	$	-

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 six months ended June 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 six months ended June 30, 2011 is as follows.

	Total		(Level 1)		(Level 2)		(Level 3)
Foreclosed real estate	$	5,083,586	$	-	$	5,083,586	$	-

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.

19

9. Fair Value (Continued)

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value
Financial assets
Cash and due from banks	$	20,063,114	$	20,063,114	$	10,378,485	$	10,378,485
Federal funds sold		3,317,884		3,317,884		1,016,000		1,016,000
Investment securities (total)		8,585,527		8,593,730		11,546,313		11,590,095
Federal Home Loan Bank  and CBB Financial Corp. stock		1,899,900		1,899,900		2,151,600		2,151,600
Loans, net		198,309,155		197,787,639		207,295,877		208,116,545
Accrued interest receivable		1,030,932		1,030,932		1,360,708		1,360,708
Financial liabilities
Noninterest-bearing deposits	$	39,133,565	$	39,133,565	$	36,219,753	$	36,219,753
Interest-bearing deposits		156,972,565		160,137,566		153,420,977		157,626,964
Short-term borrowings		2,456,175		2,456,175		2,754,321		2,754,321
Federal Home Loan Bank advances		22,000,000		23,578,072		24,000,000		25,230,768
Accrued interest payable		381,405		381,405		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.

20

10. Investment Securities

Investment securities are summarized as follows:

	Amortized		Unrealized		Unrealized		Fair
June 30, 2011	cost		gains		losses		value
Available for sale
U. S. government agency	$	8,046,140	$	32,540	$	-	$	8,078,680
Held to maturity
U. S. government agency	$	502,155	$	8,160	$	-	$	510,315
Mortgage-backed securities		4,692		43		-		4,735
	$	506,847	$	8,203	$	-	$	515,050
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

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

	Available for sale				Held to maturity
	Amortized		Fair		Amortized		Fair
June 30, 2011	cost		value		cost		value
Maturing
Within one year	$	5,022,026	$	5,037,110	$	502,155	$	510,315
Over one to five years		3,024,114		3,041,570		-		-
Mortgage-backed securities		-		-		4,692		4,735
	$	8,046,140	$	8,078,680	$	506,847	$	515,050
Pledged securities	$	2,681,071	$	2,695,098	$	-	$	-
December 31, 2010
Maturing
Within one year	$	6,002,966	$	6,018,760	$	3,505,278	$	3,549,035
Over one to five years		2,013,865		2,017,020		-		-
Mortgage-backed securities		-		-		5,255		5,280
	$	8,016,831	$	8,035,780	$	3,510,533	$	3,554,315
Pledged securities	$	633,593	$	637,127	$	2,530,378	$	2,562,778

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

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11.  Recent Accounting Pronouncements

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.

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11.           Recent Accounting Pronouncements (Continued)

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.

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

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

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

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

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

Application of Critical Accounting Policies

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

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

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

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

Forward-Looking Information

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

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RESULTS OF OPERATIONS

General

           For the three-month period ended June 30, 2011, we reported a net loss of $40,138, or $(0.05) per share, compared to net loss of $68,066, or $(0.08) per share, for the same period in 2010.  Net loss for the six months ended June 30, 2011 was $337,758, or $(0.43) per share, compared to net income of $333,190, or $0.43 per share, for the first six months of 2010.  The decrease in losses for the second quarter of 2011 when compared to the second quarter of 2010 resulted primarily from a $100,000 decrease in our provision for loan losses, from $1,024,000 for the second quarter of 2010 to $925,000 for the second quarter of 2011.  The change in earnings, from net income for the first six months of 2010 to a net loss for the same period of 2011, resulted primarily from a $925,000 increase in our provision for loan losses, from $1,500,000 for the six months ended June 30, 2010 to $2,425,000 for the same period of 2011.  The increased provision for the first six months of 2011 was due primarily to the determination during the first quarter of 2011 that the Company would realize additional losses related to a significant borrower.  The Insurance Agency’s net income for the first six months of 2011 increased by $997 to $105,757 when compared to the $104,760 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 six-month period ended June 30, 2011 was 3.99%, compared to 4.14% 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 June 30, 2011 was $2,159,932, which represents a decrease of $52,626 or 2.38% from net interest income for the same period in 2010.  Net interest income for the six-month period ended June 30, 2011 was $4,241,503, which represents a decrease of $316,198 or 6.94% from net interest income for the first six months of 2010.  The primary contributor to the decreases was the reduction in interest earning assets.

Interest revenue for the three and six months ended June 30, 2011 totaled $2,977,170 and $5,912,322, respectively, compared to $3,156,978 and $6,487,093, respectively, for the same periods last year, representing decreases of $179,808 or 5.70% and $574,771 or 8.86%, respectively.  We have experienced a $453,890 decrease in interest earned on loans as a direct result of nonaccrual loan balances increasing when compared to the first six months of 2010.  Additionally, there was a $127,038 decrease in income on U. S. Government Agency securities for the first six months of 2011 when compared to the same time period in 2010.  This decrease was the direct result of the average balance of U.S. Government Agency securities decreasing by $3,886,759 when compared to the same period in 2010.

Interest expense for the three- and six-month periods ended June 30, 2011 totaled $817,238 and $1,670,819, respectively, compared to $944,430 and $1,929,392, respectively, for the same periods last year, representing decreases of $127,192 or 13.47% and $258,573 or 13.40%, respectively.  The Company decreased its Federal Home Loan Bank (“FHLB”) borrowings during the first six months of 2011 from $24,000,000 at December 31, 2010 to $22,000,000 at June 30, 2011.  FHLB borrowings at June 30, 2010 were $26,000,000.  As a result, interest expense on borrowed funds for the first six months of 2011 decreased $98,700 when compared to the six months ended June 30, 2010.

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

Average Balances, Interest, and Yields

	For the Quarter Ended							For the Quarter Ended
	June 30, 2011							June 30, 2010
	Average							Average
	Balance		Interest		Yield			Balance		Interest		Yield
Assets
Federal funds sold	$	2,320,131	$	2,111		0.19	%	$	1,665,824	$	1,275		0.15	%
Interest-bearing deposits		138,814		12		0.02	%		24,917		19		0.15	%
Investment securities:
U.  S.  government agency		10,529,556		72,154		1.38	%		14,416,315		204,721		2.86	%
FHLB of Atlanta &
CBB Financial Corp..  Stock		2,079,076		8,907		0.86	%		2,401,200		3,244		0.27	%
		12,608,632		81,061					16,817,515		207,965		2.49	%
Loans:
Demand and time		27,171,608		794,637		5.90	%		27,183,191		785,366		5.83	%
Mortgage		174,473,033		4,931,391		5.70	%		175,682,859		5,343,959		6.13	%
Installment		5,230,783		171,138		6.60	%		6,455,235		214,171		6.69	%
Total loans		206,875,424		5,897,166		5.75	%		209,321,285		6,343,496		6.11	%
Allowance for loan losses		4,221,899							2,835,037
Total loans, net of allowance		202,653,525		5,897,166		5.87	%		206,486,248		6,343,496		6.20	%
Total interest-earning assets		217,721,102		5,980,350		5.54	%		224,994,504		6,552,755		5.87	%
Non-interest-bearing cash		16,598,158							11,556,068
Premises and equipment		6,351,809							6,518,370
Other assets		8,314,199							6,366,965
Total assets	$	248,985,268						$	249,435,907
Liabilities and Stockholders’ Equity
Interest-bearing Deposits
Savings and NOW deposits	$	47,231,814	$	29,397		0.13	%	$	47,153,799	$	43,892		0.19	%
Money market and supernow		11,008,730		13,488		0.25	%		11,070,864		25,006		0.46	%
Other time deposits		98,531,099		1,270,022		2.60	%		95,656,406		1,403,882		2.96	%
Total interest-bearing deposits		156,771,643		1,312,907		1.69	%		153,881,069		1,472,780		1.93	%
Borrowed funds		25,148,643		357,912		2.87	%		28,522,566		456,612		3.23	%
Total interest-bearing liabilities		181,920,286		1,670,819		1.85	%		182,403,635		1,929,392		2.13	%
Noninterest-bearing deposits		37,993,539							35,672,397
		219,913,825							218,076,032
Other liabilities		1,924,083							2,539,643
Stockholders’ equity		27,147,360							28,820,232
Total liabilities and stockholders equity	$	248,985,268						$	249,435,907
Net interest spread						3.69	%						3.74	%
Net interest income			$	4,309,531						$	4,623,363
Net margin on interest-earning assets						3.99	%						4.14	%

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

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Provision for Loan Losses

The provision for loan losses was $925,000 and $2,425,000 for the three- and six-month periods ended June 30, 2011, compared to $1,025,000 and $1,500,000 for the same periods of 2010.  The decrease in the provision for the second quarter of 2011 resulted from larger provisions in the first quarter of 2011.  The increase for the first six months of 2011 was in response to the increase in net charge-offs and specific allocations for impaired loans.  Additional information regarding risk elements in the loan portfolio, the provision for loan losses and management’s assessment of the adequacy of the allowance for loan losses are discussed below in the section entitled “Loan Quality”.

Noninterest Revenue

Noninterest revenue for the three- and six-month periods ended June 30, 2011 totaled $640,118 and $1,304,450, respectively, which represent increases of 21.58% and 14.52% over the $526,491 and $1,139,091, respectively, for the same periods in 2010.  The increase for the six-month period resulted primarily from the $76,907 or 17.43% increase in service charge on deposit account income earned during the first six months of 2011, from $441,171 for the first six months of 2010 to $518,078 for the same period of 2011.  Insurance Agency contingency income increased 3.85% or $23,990 to $647,385 when comparing the same time periods.  Insurance Agency contingency income is based on sales of new policies to customers and claims against existing policies for the prior year. Net losses on the sale of foreclosed real estate for the first six months of 2011 decreased by $85,958 or 82.17% when compared to the same period of 2010.  In addition, we experienced a decrease in other noninterest revenue during the first six months of 2011 of $21,496 or 12.00% when compared to the same period of 2010.

Noninterest Expense

The Company recorded noninterest expense of $1,979,828 and $3,785,718 for the three- and six-month periods ended June 30, 2011, respectively, compared to $1,859,213 and $3,713,765, respectively, for the same periods in 2010, representing increases of $120,615 or 6.49% and $71,953 or 1.94%, respectively.  The increases were mainly attributable to increased other operating expenses of $148,713 for the first six months of 2011.  The items in other operating expenses contributing to this increase are the $150,516 increase in the Bank’s foreclosed real estate expenses and the $17,235 increase in directors’ fees when compared to the first six months of 2010.  These increases were offset by a $59,204 decrease in salaries and employee benefits when compared to the six months ended June 30, 2010.

Income Tax Expense

The Company’s effective tax rate for the three- and six-month periods ended June 30, 2011 was (61.7)% and (49.2)%, respectively, compared to (53.1)% and 31.0%, respectively, for the same periods in 2010.  The Company recorded an income tax benefit of $64,640 and $77,108 for the three-month periods ended June 30, 2011 and 2010, respectively.  For the six months ended June 30, 2011, the Company recorded an income tax benefit of $327,007, compared to an income tax expense of $149,837 for the same period last year.  Negative income before income tax during the three- and six-month periods ended June 30, 2011 contributed to the decreases in income tax expense when compared to the same periods of last year.

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FINANCIAL CONDITION

Overview

Total assets of the Company at June 30, 2011 were $249,161,593, compared to $245,792,415 at December 31, 2010, representing an increase of $3,369,178 or 1.37%.

Total liabilities at June 30, 2011 were $222,356,197, compared to $218,400,251 at December 31, 2010, representing an increase of  $3,955,946 or 1.81%.

Stockholders’ equity was $26,805,396 at June 30, 2011, compared to $27,392,164 at December 31, 2010, a decrease of $586,768.  The decrease was due to a net loss for the period totaling $337,758 plus a $8,230 increase in the unrealized gains on securities available for sale net of income taxes, offset by dividends paid to stockholders of $257,240.

Return on average equity for the six months ended June 30, 2011 was (2.51)%, compared to 2.33% for the same period in 2010.  Return on average assets was (0.27)% for the six months ended June 30, 2011, compared to 0.27% for the same period in 2010.

Composition of Loan Portfolio

At June 30, 2011, loans, net of allowance for loan losses, were $198,309,155, a decrease of $8,986,722 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 $202,653,525 and $206,486,248 for the first six months of 2011 and 2010, respectively, which constituted 93.08% and 91.77% of average interest-earning assets for the respective periods.  For the six months ended June 30, 2011, our average loan to deposit ratio was 104.05%, compared to 108.93% for the six months ended June 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 92.15% for the six months ended June 30, 2011, compared to 94.69% for the six months ended June 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 June 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.

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

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

The allowance for loan losses decreased to $3,490,415 at June 30, 2011, compared to $5,656,788 at December 31, 2010.  The provision for loan losses was $2,425,000 for the first six months of 2011, compared to $1,500,000 for the same period of 2010.  The increase in the provision for loan losses in the first six 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 reviews of the adequacy of the factors discussed previously, and specific allocations for impaired loans.  As of June 30, 2011 and December 31, 2010, the ratio of the allowance for loan losses to gross loans was 1.73% 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.  Where necessary, we have obtained new appraisals on collateral.  Specific allocations of the allowance have been provided in these instances where losses may occur.

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

Allowance for Loan Losses
	June 30,			June 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			71,965			166,779
Mortgages		4,096,822			710,728			1,846,683
Consumer		40,292			27,999			104,791
Total loan losses		4,654,966			810,692			2,118,253
Recoveries on loans previously charged off
Commercial		510			2,050			2,660
Mortgages		6,560			73			374
Consumer		56,523			14,155			16,643
Total loan recoveries		63,593			16,278			19,677
Net loan losses		4,591,373			794,414			2,098,576
Provision for loan losses charged to operations		2,425,000			1,500,000			4,910,000
Balance at end of period	$	3,490,415		$	3,550,950		$	5,656,788
Allowance for loan losses to loans outstanding at end of period		1.73	%		1.67	%		2.66	%

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

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

The Company had loans past due 90 days or more, including nonaccrual loans, of $8,653,588 and $8,804,035 at June 30, 2011 and 2010, respectively.  At December 31, 2010, loans past due 90 days or more, including nonaccrual loans, totaled $11,694,139.  During the first six months of 2011, the Company’s nonaccrual loans increased $1,967,061 or 36.94% from December 31, 2010.  This increase was due to the lack of economic recovery in the real estate market in our lending area.    These loans are detailed below:

Risk Elements of Loan Portfolio
					For the Year
	Six months		Six months		Ended
	Ended June 30,		Ended June 30,		December 31,
	2011		2010		2010
Nonaccrual Loans
Commercial	$	200,681	$	460,767	$	574,184
Mortgage		7,062,342		2,081,738		4,751,311
Consumer		29,533		-		-
		7,292,556		2,542,505		5,325,495
Accruing Loans Past Due 90 Days or More
Commercial		-		114,113		19,838
Mortgage		1,361,032		6,091,046		6,282,242
Consumer		-		56,371		66,563
		1,361,032		6,261,530		6,368,643
	$	8,653,588	$	8,804,035	$	11,694,138

Gross interest income of $183,130 for the first half of 2011, $347,046 for fiscal year 2010 and $80,941 for the first half of 2010 would have been recorded if nonaccrual loans had been current and performing in accordance with their original terms.  Interest actually recorded on such loans was $10,860 for the first half of 2011, $31,683 for fiscal year 2010 and $253 for the first half of 2010.

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

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Deposits and Other Interest-Bearing Liabilities

Average interest-bearing deposits increased $2,890,574 or 1.88% to $156,771,643 for the six months ended June 30, 2011, from $153,881,069 for the same period in 2010.  Average noninterest-bearing deposits increased $2,321,142 or 6.51% to $37,993,539 for the six months ended June 30, 2011, from $35,672,397 for the same period in 2010.  Average total deposits have increased 2.75% or $5,211,716 to $194,765,182 for the six months ended June 30, 2011 from $189,553,466 for the same period in 2010.  Borrowings, primarily from the FHLB of Atlanta to fund loan demand, decreased to $22,000,000 from $24,000,000 at December 31, 2010, a decrease of 8.33%.

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

Short-Term Borrowings

The following table sets forth our position with respect to short-term borrowings for June 30, 2011 and December 31, 2010. 

	June 30, 2011					December 31, 2010
	Amount		Rate			Amount		Rate
Retail Repurchase Agreements		2,456,175		.90	%		2,754,321		1.76	%

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

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

As of June 30, 2011, the Bank had lines of credit of $13,650,000 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 $18,650,000 from correspondent banks.  The Bank is also a member of the FHLB of Atlanta, which provides another source of liquidity through a secured line of credit in the amount of $33,715,324 of which $22,000,000 has been advanced as of June 30, 2011.  We also have the ability to borrow secured funds through the Federal Reserve’s Discount window as necessary.

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

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

				Minimum			To be well
	Actual			Requirements			Capitalized
Tier 1 risk-based capital		12.91	%		4.00	%		6.00	%
Total risk-based capital		14.17	%		8.00	%		10.00	%
Leverage ratio		10.24	%		4.00	%		5.00	%

As of June 30, 2011, both Peoples Bancorp, Inc. and the Bank were considered “well capitalized” under applicable regulatory capital guidelines.

Item 3.               Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4.               Controls and Procedures.

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

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An evaluation of the effectiveness of these disclosure controls was carried out as of June 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 second quarter of 2011, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our control over financial reporting.

PART II - OTHER INFORMATION

Item 1.               Legal Proceedings.

None.

Item 1A.            Risk Factors.

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

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SIGNATURES

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

	PEOPLES BANCORP, INC.
Date:  August 11, 2011	By:	/s/ Thomas G. Stevenson
		Thomas G. Stevenson
		President/Chief Executive Officer
		& Chief Financial Officer

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EXHIBIT INDEX

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