PEOPLES BANCORP INC/MD - FORM 10-K

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EX-21 - PEOPLES BANCORP INC/MD	v216433_ex21.htm
EX-32.1 - PEOPLES BANCORP INC/MD	v216433_ex32-1.htm
EX-31.1 - PEOPLES BANCORP INC/MD	v216433_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2010

0-24169

Commission File No.

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

Securities Registered pursuant to Section 12(g) of the Act: Common Stock, par value $10.00 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. £

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 16(d) of the Act. £

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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes 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 £ No £ (Not Applicable)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (check one): Large accelerated filer £ Accelerated filer £ Non-accelerated filer £ Smaller reporting company R

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

Yes £ No R

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $32,549,526.

The number of shares outstanding of the registrant’s common stock as of March 1, 2011 was 779,512.

Documents Incorporated by Reference

Portions of the definitive proxy statement to be filed with the SEC in connection with the registrant’s 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

PEOPLES BANCORP, INC.

FORM 10-K

INDEX

PART I

Item 1.	Business	3
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	16
Item 2.	Properties	17
Item 3.	Legal Proceedings	17
Item 4.	[Removed and Reserved]	17

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17
Item 6.	Selected Financial Data	18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 8.	Financial Statements and Supplementary Data	34
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	64
Item 9A.	Controls and Procedures	64
Item 9B.	Other Information	66

PART III

Item 10.	Directors, Executive Officers and Corporation Governance	66
Item 11.	Executive Compensation	66
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	66
Item 13.	Certain Relationships and Related Transactions, and Director Independence	66
Item 14.	Principal Accountant Fees and Services	66

PART IV

Item 15.	Exhibits and Financial Statement Schedules	67

Signatures		67
Exhibit Index		69

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This Annual Report of Peoples Bancorp, Inc. on Form 10-K may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this annual 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 Form 10-K, 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 Item 1A of Part I of this annual report. 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.

Except as expressly provided otherwise, the term “Company” as used in this annual report refers to Peoples Bancorp, Inc. and the terms “we”, “us” and “our” refer collectively to Peoples Bancorp, Inc. and its subsidiaries.

PART I

Item 1.

Business.

General

The Company was incorporated under the laws of Maryland on December 10, 1996 and is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Company’s sole business is acting as the parent company to The Peoples Bank, a Maryland-chartered bank (the “Bank”), and Fleetwood, Athey, Macbeth & McCown, Inc., a Maryland insurance agency (the “Insurance Subsidiary”).

On January 2, 2007, the Company acquired the Insurance Subsidiary and began operating in the insurance products and services business segment. Prior to that date, we operated in only one business segment: community banking.

Location and Service Area

We offer a variety of services to consumer and commercial customers in our primary service area, which encompasses all of Kent County, northern Queen Anne’s County, and southern Cecil County, Maryland.

The principal components making up the economy for our service area are agriculture and light industry. Kent County is also growing as a tourist and retirement area. The tourist business is centered primarily in Chestertown and Rock Hall. There is a large retirement community, Heron Point, located in Chestertown. The seafood business, once prominent, is in decline. There are three health-care facilities located in Chestertown. Agriculture and agricultural-related businesses are the largest overall employers in the service area. There are several light industry companies in Kent County.

Banking Products and Services

Through the Bank’s five branches located throughout Kent County, Maryland and two branches in Queen Anne’s County, Maryland, we offer a full range of deposit services that are typically offered by most depository institutions in our service area, including checking accounts, NOW accounts, savings accounts and other time deposits of various types, ranging from daily money market accounts to longer-term certificates of deposit. The transaction accounts and time

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certificates are tailored to our principal service area and have rates that are competitive with those offered by other institutions in the area. In addition, we offer certain retirement account services, such as Individual Retirements Accounts. All deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to the maximum amount allowed by law. We solicit these accounts from individuals, businesses, associations and organizations, and governmental authorities.

We also offer a full range of short- to medium-term commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements), and purchase of equipment and machinery. Consumer loans include secured and unsecured loans for financing automobiles, home improvements, education, and personal investments. We also originate mortgage loans and real estate construction and acquisition loans.

Other services include cash management services, safe deposit boxes, travelers checks, internet banking, direct deposit of payroll and social security checks, and automatic drafts for various accounts. The Bank is associated with a regional network of automated teller machines that may be used by our customers throughout Maryland and other regions. We also offer credit card services through a correspondent bank and non-deposit investment products, such as insurance and securities products, through broker-dealer relationships.

Information about our revenues, net income and assets derived from our operations in the community banking segment for each of the years ended December 31, 2010 and 2009 may be found in our Consolidated Financial Statements and Notes thereto, which are included in Item 8 of Part II of this annual report.

Investment Activities

We maintain a portfolio of investment securities to provide liquidity and income. The current portfolio amounts to approximately 4.70% of our total assets and is invested primarily in U.S. government agency and mortgage-backed securities.

A key objective of the investment portfolio is to provide a balance in our asset mix of loans and investments consistent with our liability structure, and to assist in management of interest rate risk. The investments augment our capital positions, providing the necessary liquidity to meet fluctuations in credit demand of the community and fluctuations in deposit levels. In addition, the portfolio provides collateral for pledging against public funds and repurchase agreements and a reasonable allowance for control of tax liabilities. Finally, the investment portfolio is designed as a source of income. In view of the above objectives, management treats the portfolio conservatively and generally only purchases securities that meet conservative investment criteria.

Insurance Activities

The Insurance Subsidiary is located in Chestertown, Kent County, Maryland. The Insurance Subsidiary offers a full range of property and casualty insurance products and services to customers in our market area.

Seasonality

Management does not believe that our business activities are seasonal in nature. Demand for our products and services may vary depending on local and national economic conditions, but management believes that any variation will not have a material impact on our planning or policy-making strategies.

Employees

At March 1, 2011, we employed 73 persons, of which 65 were employed on a full-time basis.

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COMPETITION

The banking business, in all of its phases, is highly competitive. Within our service area and the surrounding area, we compete with commercial banks (including local banks and branches or affiliates of other larger banks), savings and loan associations and credit unions for loans and deposits, with consumer finance companies for loans, with money market mutual funds and other investment vehicles for deposits, with insurance companies, agents and brokers for insurance products, and with other financial institutions for various types of financial products and services. There is also competition for commercial and retail banking business from banks and financial institutions located outside of our market area. Many of these financial institutions offer services, such as trust services, that we do not offer and have greater financial resources or have substantially higher lending limits than us.

The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations and office hours. The primary factors in competing for loans are interest rates, loan origination fees, the quality and range of lending services and personalized services.

To compete with other financial services providers, we rely principally upon local promotional activities, personal relationships established by officers, directors and employees with our customers and specialized services tailored to meet our customers’ needs. In those instances in which we are unable to accommodate a customer’s needs, we will arrange for those services to be provided by other financial services providers with which we have a relationship. We offer many personalized services and attract customers by being responsive and sensitive to the needs of the community. We rely not only on the goodwill and referrals of satisfied customers, as well as traditional media advertising to attract new customers, but also on individuals who develop new relationships to build our customer base. To enhance our image in the community, we support and participate in many local events. Our employees, officers and directors represent us on many boards and local civic and charitable organizations.

The following table sets forth deposit data for Kent County, Maryland as of June 30, 2010, the most recent date for which comparative information is available:

Institution	Offices In Market Area	Deposits (in thousands)		Market Share
The Peoples Bank (f/k/a Peoples Bank of Kent County, Maryland)	5	$	175,211		34.35	%
PNC Bank National Assn	5		145,993		28.62	%
Chesapeake Bank & Trust Co	2		66,443		13.03	%
Branch Banking & Trust Co	2		47,960		9.40	%
CNB (f/k/a The Centreville National Bank of Maryland)	2		43,545		8.54	%
SunTrust Bank	1		30,886		6.06	%

Source: FDIC Deposit Market Share Report

SUPERVISION AND REGULATION

The following is a summary of the material regulations and policies applicable to us and is not intended to be a comprehensive discussion. Changes in applicable laws and regulations may have a material effect on our business, financial condition and results of operation.

General

The Company is a financial holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the BHC Act and, as such, is subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the FRB.

The Bank is a Maryland commercial bank subject to the banking laws of Maryland and to regulation by the Commissioner of Financial Regulation of Maryland (the “Maryland Commissioner”), who is required by statute to make

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at least one examination in each calendar year (or at 18-month intervals if the Maryland Commissioner determines that an examination is unnecessary in a particular calendar year).

The Insurance Subsidiary is subject to examination by the FRB, and, as an affiliate of the Bank, may be subject to examination by the Bank’s regulators from time to time. In addition, the Insurance Subsidiary is subject to licensing and regulation by the insurance authorities of the states in which it does business. Retail sales of insurance products that have investment components by the Insurance Subsidiary to customers of the Bank are also subject to the requirements of the Interagency Statement on Retail Sales of Nondeposit Investment Products promulgated in 1994, as amended, by the federal banking regulators, including the FDIC and the FRB.

Regulation of Financial Holding Companies

In November 1999, the federal Gramm-Leach-Bliley Act (the “GLB Act”) was signed into law. Effective in pertinent part on March 11, 2000, the GLB Act revised the BHC Act and repealed the affiliation provisions of the Glass-Steagall Act of 1933, which, taken together, limited the securities, insurance and other non-banking activities of any company that controls an FDIC insured financial institution. Under the GLB Act, a bank holding company can elect, subject to certain qualifications, to become a “financial holding company.” The GLB Act provides that a financial holding company may engage in a full range of financial activities, including insurance and securities sales and underwriting activities, and real estate development, with new expedited notice procedures.

Under FRB policy, the Company is expected to act as a source of strength to its subsidiary bank, and the FRB may charge the Company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank when required. In addition, under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), depository institutions insured by the FDIC can be held liable for any losses incurred by, or reasonably anticipated to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. Accordingly, in the event that any insured subsidiary of the Company causes a loss to the FDIC, other insured subsidiaries of the Company could be required to compensate the FDIC by reimbursing it for the estimated amount of such loss. Such cross guaranty liabilities generally are superior in priority to obligations of a financial institution to its stockholders and obligations to other affiliates.

Regulation of the Bank

Federal and state banking regulators may prohibit the institutions over which they have supervisory authority from engaging in activities or investments that the agencies believe are unsafe or unsound banking practices. These banking regulators have extensive enforcement authority over the institutions they regulate to prohibit or correct activities that violate law, regulation or a regulatory agreement or which are deemed to be unsafe or unsound practices. Enforcement actions may include the appointment of a conservator or receiver, the issuance of a cease and desist order, the termination of deposit insurance, the imposition of civil money penalties on the institution, its directors, officers, employees and institution-affiliated parties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the removal of or restrictions on directors, officers, employees and institution-affiliated parties, and the enforcement of any such mechanisms through restraining orders or other court actions.

The Bank is subject to the provisions of Section 23A and Section 23B of the Federal Reserve Act. Section 23A limits the amount of loans or extensions of credit to, and investments in, the Company and its nonbank affiliates by the Bank. Section 23B requires that transactions between any of the Bank and the Company and its nonbank affiliates be on terms and under circumstances that are substantially the same as with non-affiliates.

The Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, and principal stockholders or any related interest of such persons, which generally require that such credit extensions be made on substantially the same terms as are available to third parties dealing with the Bank and not involve more than the normal risk of repayment. Other laws tie the maximum amount that may be loaned to any one customer and its related interests to capital levels.

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As part of the Federal Deposit Insurance Company Improvement Act of 1991 (“FDICIA”), each federal banking regulator adopted non-capital safety and soundness standards for institutions under its authority. These standards include internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. An institution that fails to meet those standards may be required by the agency to develop a plan acceptable to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. We believe that the Bank meets substantially all standards that have been adopted. FDICIA also imposes new capital standards on insured depository institutions.

The Community Reinvestment Act (“CRA”) requires that, in connection with the examination of financial institutions within their jurisdictions, the federal banking regulators evaluate the record of the financial institution in meeting the credit needs of their communities including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered by all regulatory agencies in evaluating mergers, acquisitions and applications to open a branch or facility. As of the date of its most recent examination report, the Bank had a CRA rating of “Outstanding.”

On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (the “TLGP”) to decrease the cost of bank funding and, hopefully, normalize lending. This program is comprised of two components. The first component guarantees senior unsecured debt issued between October 14, 2008 and June 30, 2009. The guarantee will remain in effect until June 30, 2012 for such debts that mature beyond June 30, 2009. The second component, called the Transaction Accounts Guarantee Program (“TAG”), provided full coverage for non-interest bearing transaction deposit accounts, IOLTAs, and NOW accounts with interest rates of 0.25% or less, regardless of account balance, initially until December 31, 2009. The TAG program expired on December 31, 2010. We elected to participate in both programs and paid additional FDIC premiums in 2010 and 2009 as a result.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which made sweeping changes to the financial regulatory landscape and will impact all financial institutions, including the Company.

On November 9, 2010, the FDIC issued a final rule to implement Section 343 of the Dodd-Frank Act that provides temporary unlimited deposit insurance coverage for non-interest bearing transaction accounts at all FDIC-insured depository institutions. The coverage is automatic for all FDIC-insured institutions and does not include an opt out option. The separate coverage for noninterest-bearing transaction accounts became effective on December 31, 2010 and terminates on December 31, 2012.

These new laws, regulations and regulatory actions will cause our regulatory expenses to increase. Additionally, due in part to numerous bank failures throughout the country since 2008, the FDIC imposed an emergency insurance assessment to help restore the Deposit Insurance Fund and further required insured depository institutions to prepay their estimated quarterly risk-based deposit assessments through 2012 on December 30, 2009. Given the current state of the national economy, there can be no assurance that the FDIC will not impose future emergency assessments or further revise its rate structure.

The Dodd-Frank Act’s significant regulatory changes include the creation of a new financial consumer protection agency, known as the Bureau of Consumer Financial Protection (the “Bureau”), that is empowered to promulgate new consumer protection regulations and revise existing regulations in many areas of consumer compliance. Moreover, the Dodd-Frank Act permits states to adopt stricter consumer protection laws and states’ attorneys general may enforce consumer protection rules issued by the Bureau. The Dodd-Frank Act also imposes more stringent capital requirements on bank holding companies by, among other things, imposing leverage ratios on bank holding companies and prohibiting new trust preferred securities issuances from counting as Tier 1 capital. These developments may limit our future capital strategies.

Certain provisions of the Dodd-Frank Act, including those relating to direct supervision by the Bureau, will not apply to banking organizations with assets of less than $10 billion, such as the Company and the Bank. Nevertheless, the other provisions of the Dodd-Frank Act will increase our regulatory compliance burden and costs and may restrict the financial products and services we offer to our customers. In particular, the Dodd-Frank Act will require us to invest significant management attention and resources so that we can evaluate the impact of this law and make any necessary changes to our product offerings and operations.

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Deposit Insurance

Deposits at the Bank are insured through the Deposit Insurance Fund, which is administered by the FDIC, and the Bank is required to pay quarterly deposit insurance premium assessments to the FDIC. The Deposit Insurance Fund was created pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), which was signed into law on February 8, 2006. This law (i) required the then-existing $100,000 deposit insurance coverage to be indexed for inflation (with adjustments every five years, commencing January 1, 2011), and (ii) increased the deposit insurance coverage for retirement accounts to $250,000 per participant, subject to adjustment for inflation. Effective October 3, 2008, however, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was enacted and, among other things, temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. EESA initially contemplated that the coverage limit would return to $100,000 after December 31, 2009, but the expiration date has since been extended to December 31, 2013. The coverage for retirement accounts did not change and remains at $250,000. On July 21, 2010, as part of the Dodd-Frank Act, the current standard maximum deposit insurance amount was permanently raised to $250,000.

The Reform Act also gave the FDIC greater latitude in setting the assessment rates for insured depository institutions which could be used to impose minimum assessments. On November 12, 2009, the FDIC adopted a final rule requiring insured depository institutions to prepay their estimated quarterly risk-based deposit assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009, along with each institution’s risk based deposit insurance assessment for the third quarter of 2009. This prepayment did not include the assessments for TLGP participation or the FICO assessment that will be billed quarterly. It was also announced that the assessment rate will increase by 3 basis points effective January 1, 2011. The prepayment will be accounted for as a prepaid expense to be amortized quarterly. The prepaid assessment will qualify for a zero risk weight under the risk-based capital requirements. The Bank’s three-year prepaid assessment was $1,022,585. The Bank expensed a total of $299,870 in FDIC premiums during 2010.

Capital Requirements

Under Maryland law, the Bank must meet certain minimum capital stock and surplus requirements before it may establish a new branch office. With each new branch located outside the municipal area of the Bank’s principal banking office, these minimal levels are subject to upward adjustment based on the population size of the municipal area in which the branch will be located. Prior to establishment of the branch, the Bank must obtain Maryland Commissioner and FDIC approval. If establishment of the branch involves the purchase of a bank building or furnishings, the total investment in bank buildings and furnishings cannot exceed, with certain exceptions, 50% of the Bank’s unimpaired capital and surplus.

FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, federal banking regulators are required to rate supervised institutions on the basis of five capital categories: “well -capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized;” and to take certain mandatory actions, and are authorized to take other discretionary actions, with respect to institutions in the three undercapitalized categories. The severity of the actions will depend upon the category in which the institution is placed. A depository institution is “well capitalized” if it has a total risk based capital ratio of 10% or greater, a Tier 1 risk based capital ratio of 6% or greater, and a leverage ratio of 5% or greater and is not subject to any order, regulatory agreement, or written directive to meet and maintain a specific capital level for any capital measure. An “adequately capitalized” institution is defined as one that has a total risk based capital ratio of 8% or greater, a Tier 1 risk based capital ratio of 4% or greater and a leverage ratio of 4% or greater (or 3% or greater in the case of an institution with a composite CAMELS rating of 1). Tier 1 capital consists of common stockholders’ equity, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, less certain intangibles.

FDICIA generally prohibits a depository institution from making any capital distribution, including the payment of cash dividends, or paying a management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit

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capital restoration plans. For a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee (subject to certain limitations) that the institution will comply with such capital restoration plan.

Significantly undercapitalized depository institutions may be subject to a number of other requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized and requirements to reduce total assets and stop accepting deposits from correspondent banks. Critically undercapitalized depository institutions are subject to the appointment of a receiver or conservator, generally within 90 days of the date such institution is determined to be critically undercapitalized.

As of December 31, 2010, the Company and the Bank were deemed to be “well capitalized.” For more information regarding the capital condition of the Company and the Bank, see Item 7 of Part II of this annual report under the caption “Capital.”

Limitations on Dividends

Holders of shares of the Company’s common stock are entitled to dividends if, when, and as declared by the Company’s Board of Directors out of funds legally available for that purpose, and the Board’s ability to declare dividends is subject to certain restrictions imposed under federal banking law and state banking and corporate law. These restrictions are discussed in more detail below in Item 1A of Part I of this report under the caption “Our ability to pay dividends is limited.”

USA PATRIOT Act

Congress adopted the USA PATRIOT Act (the “Patriot Act”) on October 26, 2001 in response to the terrorist attacks that occurred on September 11, 2001. Under the Patriot Act, certain financial institutions, including banks, are required to maintain and prepare additional records and reports that are designed to assist the government’s efforts to combat terrorism. The Patriot Act includes sweeping anti-money laundering and financial transparency laws and required additional regulations, including, among other things, standards for verifying client identification when opening an account and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

Federal Securities Laws

The shares of the Company’s common stock are registered with the Securities and Exchange Commission (the “SEC”) under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company is subject to information reporting requirements, proxy solicitation requirements, insider trading restrictions and other requirements of the Exchange Act, including the requirements imposed under the federal Sarbanes-Oxley Act of 2002. Among other things, loans to and other transactions with insiders are subject to restrictions and heightened disclosure, the Company must disclose whether directors meet an “independent director” standard, and the Company is required to comply with certain corporate governance obligations.

Governmental Monetary and Credit Policies and Economic Controls

The earnings and growth of the banking industry and ultimately of the Bank are affected by the monetary and credit policies of governmental authorities, including the FRB. An important function of the FRB is to regulate the national supply of bank credit in order to control recessionary and inflationary pressures. Among the instruments of monetary policy used by the FRB to implement these objectives are open market operations in U.S. Government securities, changes in the federal funds rate, changes in the discount rate of member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans or paid for deposits. The monetary policies of the FRB authorities have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future. In view of changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including

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the FRB, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or their effect on the business and earnings of the Company and its subsidiaries.

Item 1A.

Risk Factors.

Our financial condition and results of operations are subject to numerous risks and uncertainties and could be materially and adversely affected by any of these risks and uncertainties. The risks and uncertainties that we believe are the most significant are discussed below. You should carefully consider these risks before making an investment decision with respect to any of the Company’s securities. This annual report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this report.

Risks Relating to the Business of the Company and its Affiliates

The Company’s future depends on the successful growth of its Affiliates.

The Company’s primary business activity for the foreseeable future will be to act as the holding company of the Bank and the Insurance Subsidiary. Therefore, the Company’s future profitability will depend on the success and growth of these subsidiaries. In the future, part of the Company’s growth may come from buying other banks and buying or establishing other companies. Such entities may not be profitable after they are purchased or established, and they may lose money, particularly at first. A new bank or company may bring with it unexpected liabilities, bad loans, or bad employee relations, or the new bank or company may lose customers.

The majority of our business is concentrated in Maryland, a significant amount of which is concentrated in real estate lending, so a decline in the local economy and real estate markets could adversely impact our financial condition and results of operations.

Because most of our loans are made to customers who reside on Maryland’s upper Eastern Shore, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose loan portfolios are geographically diverse. Further, we make many real estate secured loans, including construction and land development loans, all of which are in greater demand when interest rates are low and economic conditions are good. The national and local economies have significantly weakened during the past two years in part due to the widely-reported problems in the sub-prime mortgage loan market. As a result, real estate values across the country, including in our market areas, have decreased and the general availability of credit, especially credit to be secured by real estate, has also decreased. These conditions have made it more difficult for real estate owners and owners of loans secured by real estate to sell their assets at the times and at the prices they desire. In addition, these conditions have increased the risk that the market values of the real estate securing our loans may deteriorate, which could cause us to lose money in the event a borrower fails to repay a loan and we are forced to foreclose on the property. We cannot guarantee that any risk management practices we implement to address our geographic and loan concentrations will be effective to prevent losses relating to our loan portfolio. Furthermore, we can provide no assurance as to when, or if, economic conditions will improve.

Our concentrations of commercial real estate loans could subject us to increased regulatory scrutiny and directives, which could force us to preserve or raise capital and/or limit our future commercial lending activities.

The FRB and the FDIC, along with the other federal banking regulators, issued guidance in December 2006 entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” directed at institutions who have particularly high concentrations of commercial real estate loans within their lending portfolios. This guidance suggests that these institutions face a heightened risk of financial difficulties in the event of adverse changes in the economy and commercial real estate markets. Accordingly, the guidance suggests that institutions whose concentrations exceed certain percentages of capital should implement heightened risk management practices appropriate to their concentration risk. The guidance provides that banking regulators may require such institutions to reduce their concentrations and/or maintain higher capital ratios than institutions with lower concentrations in commercial real estate.

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Based on our concentration of commercial acquisition and development and construction lending as of December 31, 2010, we may be subject to heightened supervisory scrutiny during future examinations and/or be required to take steps to address our concentration and capital levels. Management cannot predict the extent to which this guidance will impact our operations or capital requirements.

The Bank may experience loan losses in excess of its allowance, which could materially and adversely impact our financial condition and results of operations.

The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. Management maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectability of the loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding balances and for specific loans when their ultimate collectability is considered questionable. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, or if the bank regulatory authorities require us to increase the allowance for loan losses as a part of its examination process, our earnings and capital could be significantly and adversely affected. Future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to our non-performing or performing loans. Material additions to the allowance for loan losses would result in a decrease in our net income and capital, and could have a material adverse effect on our financial condition.

Interest rates and other economic conditions will impact our results of operations.

Our results of operations may be materially and adversely affected by changes in prevailing economic conditions, including declines in real estate values, rapid changes in interest rates and the monetary and fiscal policies of the federal government. Our profitability is in part a function of the spread between the interest rates earned on assets and the interest rates paid on deposits and other interest-bearing liabilities (i.e., net interest income), including advances from the Federal Home Loan Bank (the “FHLB”). Interest rate risk arises from mismatches (i.e., the interest sensitivity gap) between the dollar amount of repricing or maturing assets and liabilities and is measured in terms of the ratio of the interest rate sensitivity gap to total assets. More assets repricing or maturing than liabilities over a given time period is considered asset-sensitive and is reflected as a positive gap, and more liabilities repricing or maturing than assets over a given time period is considered liability-sensitive and is reflected as negative gap. An asset-sensitive position (i.e., a positive gap) could enhance earnings in a rising interest rate environment and could negatively impact earnings in a falling interest rate environment, while a liability-sensitive position (i.e., a negative gap) could enhance earnings in a falling interest rate environment and negatively impact earnings in a rising interest rate environment. Fluctuations in interest rates are not predictable or controllable. We have attempted to structure our asset and liability management strategies to mitigate the impact on net interest income of changes in market interest rates, but there can be no assurance that these attempts will be successful in the event of such changes.

The market value of our investments could decline.

As of December 31, 2010, we had classified 69.60% of our investment securities as available-for-sale pursuant to Investments – Debt and Equity Securities No. 320 (“ASC 320”) relating to accounting for investments. ASC 320 requires that the available-for-sale portfolio be “marked to market” and that unrealized gains and losses be reflected as a separate item in stockholders’ equity (net of tax) as accumulated other comprehensive income. The remaining investment securities are classified as held-to-maturity in accordance with ASC 320, and are stated at amortized cost.

In the past, gains on sales of investment securities have not been a significant source of income for us. There can be no assurance that future market performance of our investment portfolio will enable us to realize income from sales of securities. Stockholders’ equity will continue to reflect the unrealized gains and losses (net of tax) of these investments. There can be no assurance that the market value of our investment portfolio will not decline, causing a corresponding decline in stockholders’ equity.

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The Bank is a member of the FHLB of Atlanta. A member of the FHLB system is required to purchase stock issued by the relevant FHLB bank based on how much it borrows from the FHLB and the quality of the collateral pledged to secure that borrowing. Accordingly, we maintain investments in stock issued by the FHLB of Atlanta. The stock is carried at cost and is considered a long-term investment because of the restrictions on our ability to transfer the stock. The Company recognizes dividends on this stock on a cash basis. Accounting guidance indicates that an investor in FHLB stock should recognize impairment if it concludes that it is not probable that it will ultimately recover the par value of its shares. The decision of whether impairment exists is a matter of judgment that should reflect the investor’s view of an FHLB’s long-term performance, which includes factors such as its operating performance, the severity and duration of declines in the market value of its net assets related to its capital stock amount, its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance, the impact of legislation and regulatory changes on the FHLB, and accordingly, on the members of the FHLB and its liquidity and funding position. In the past, the FHLB of Atlanta has terminated and/or deferred the payment of dividends on its stock, and it may do so in the future. A future termination or deferral, together with other factors that may exist at the time, may require us to take an impairment charge on our FHLB stock.

Management believes that several factors will affect the market values of our investment portfolio. These include, but are not limited to, changes in interest rates or expectations of changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation and the slope of the interest rate yield curve (the yield curve refers to the differences between shorter-term and longer-term interest rates; a positively sloped yield curve means shorter-term rates are lower than longer-term rates). Also, the passage of time will affect the market values of our investment securities, in that the closer they are to maturing, the closer the market price should be to par value. These and other factors may impact specific categories of the portfolio differently, and management cannot predict the effect these factors may have on any specific category.

We operate in a competitive environment, and our inability to effectively compete in our markets could have an adverse impact on our financial condition and results of operations.

We operate in a competitive environment, competing for loans, deposits, and customers with commercial banks, savings associations and other financial entities. Competition for deposits comes primarily from other commercial banks, savings associations, credit unions, money market and mutual funds and other investment alternatives. Competition for loans comes primarily from other commercial banks, savings associations, mortgage banking firms, credit unions and other financial intermediaries. Competition for other products, such as insurance and securities products, comes from other banks, securities and brokerage companies, insurance companies, insurance agents and brokers, and other non-bank financial service providers in our market area. Many of these competitors are much larger in terms of total assets and capitalization, have greater access to capital markets, and/or offer a broader range of financial services than those that we offer. In addition, banks with a larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the needs of larger customers.

In addition, changes to the banking laws over the last several years have facilitated interstate branching, merger and expanded activities by banks and holding companies. For example, the GLB Act made it easier for financial institutions to branch across state lines and to engage in previously-prohibited activities that are now accepted elements of competition in the banking industry. These changes may bring us into competition with more and a wider array of institutions, which may reduce our ability to attract or retain customers. Management cannot predict the extent to which we will face such additional competition or the degree to which such competition will impact our financial conditions or results of operations.

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The banking industry is heavily regulated; significant regulatory changes could adversely affect our operations.

Our operations will be impacted by current and future legislation and by the policies established from time to time by various federal and state regulatory authorities. The Company is subject to supervision by the FRB and the Bank is subject to supervision and periodic examination by the Maryland Commissioner and the FDIC. Banking regulations, designed primarily for the safety of depositors, may limit a financial institution’s growth and the return to its investors by restricting such activities as the payment of dividends, mergers with or acquisitions by other institutions, investments, loans and interest rates, interest rates paid on deposits, expansion of branch offices, and the offering of securities or trust services. The Company and the Bank are also subject to capitalization guidelines established by federal law and could be subject to enforcement actions to the extent that either is found by regulatory examiners to be undercapitalized. It is not possible to predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our future business and earnings prospects. Management also cannot predict the nature or the extent of the effect on our business and earnings of future fiscal or monetary policies, economic controls, or new federal or state legislation. Further, the cost of compliance with regulatory requirements may adversely affect our ability to operate profitably.

Our regulatory expenses will likely increase due to federal laws, rules and programs that have been enacted or adopted in response to the recent banking crisis and the current national recession.

In response to the banking crisis that began in 2008 and the resulting national recession, the federal government took drastic steps to help stabilize the credit market and the financial industry. These steps included the enactment of EESA, which, among other things, raised the basic limit on federal deposit insurance coverage to $250,000, and the FDIC’s adoption of the TLGP, which, under the TAG portion, provides full deposit insurance coverage through June 30, 2010 for non-interest bearing transaction deposit accounts, IOLTAs, and NOW accounts with interest rates of 0.50% or less, regardless of account balance. The TLGP was extended to December 31, 2010 and includes non-interest bearing transaction deposit accounts, IOLTAs, and NOW accounts with interest rates of 0.25% or less, regardless of account balance. The TLGP requires participating institutions, like us, to pay 10 basis points per annum for the additional insured deposits. These actions will cause our regulatory expenses to increase. Additionally, due in part to the failure of several depository institutions around the country since the banking crisis began, the FDIC imposed an emergency insurance assessment to help restore the Deposit Insurance Fund and further required insured depository institutions to prepay their estimated quarterly risk-based deposit assessments through 2012 on December 30, 2009. Given the current state of the national economy, there can be no assurance that the FDIC will not impose future emergency assessments or further revise its rate structure.

In addition, and as noted above, the Dodd-Frank Act recently became law and implements significant changes in the financial regulatory landscape that will impact all financial institutions, including our Company. The Dodd-Frank Act is likely to increase our regulatory compliance burden. It is too early, however, for us to assess the full impact that the Dodd-Frank Act may have on our business, financial condition or results of operations. Many of the Dodd-Frank Act’s provisions require subsequent regulatory rulemaking. The Dodd-Frank Act’s significant regulatory changes include the creation of a new financial consumer protection agency, known as the Bureau of Consumer Financial Protection (the “Bureau”), that is empowered to promulgate new consumer protection regulations and revise existing regulations in many areas of consumer compliance, which will increase our regulatory compliance burden and costs and may restrict the financial products and services we offer to our customers. Moreover, the Dodd-Frank Act permits states to adopt stricter consumer protection laws and states’ attorneys general may enforce consumer protection rules issued by the Bureau. The Dodd-Frank Act also imposes more stringent capital requirements on bank holding companies by, among other things, imposing leverage ratios on bank holding companies and prohibiting new trust preferred issuances from counting as Tier 1 capital. These restrictions will limit our future capital strategies. Although certain provisions of the Dodd-Frank Act, such as direct supervision by the Bureau, will not apply to banking organizations with less than $10 billion of assets, such our Company, the changes resulting from the legislation will impact our business. These changes will require us to invest significant managements attention and resources to evaluate and make necessary changes.

Recent amendments to the FRB’s Regulation E may negatively impact our non-interest income.

On November 12, 2009, the FRB announced the final rules amending Regulation E (“Reg E”) that prohibit financial institutions from charging fees to consumers for paying overdrafts on automated teller machine and one-time debit card

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transactions, unless a consumer consents, or opts-in, to the overdraft service for those types of transactions. Compliance with this regulation is effective July 1, 2010 for new consumer accounts and August 15, 2010 for existing consumer accounts. The impact that these new rules will have on us is unknown at this time, but they do have the potential to reduce our non-interest income and this reduction could be material.

Customer concern about deposit insurance may cause a decrease in deposits held at the Bank.

With recent increased concerns about bank failures, customers increasingly are concerned about the extent to which their deposits are insured by the FDIC. Customers may withdraw deposits from the Bank in an effort to ensure that the amount they have on deposit with us is fully insured. Decreases in deposits may adversely affect our funding costs and net income.

Our funding sources may prove insufficient to replace deposits and support our future growth.

We rely on customer deposits, advances from the FHLB, and lines of credit at other financial institutions to fund our operations. Although we have historically been able to replace maturing deposits and advances if desired, no assurance can be given that we would be able to replace such funds in the future if our financial condition or the financial condition of the FHLB or market conditions were to change. Our financial flexibility will be severely constrained and/or our cost of funds will increase if we are unable to maintain our access to funding or if financing necessary to accommodate future growth is not available at favorable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our profitability would be adversely affected.

The loss of key personnel could disrupt our operations and result in reduced earnings.

Our growth and profitability will depend upon our ability to attract and retain skilled managerial, marketing and technical personnel. Competition for qualified personnel in the financial services industry is intense, and there can be no assurance that we will be successful in attracting and retaining such personnel. Our current executive officers provide valuable services based on their many years of experience and in-depth knowledge of the banking industry and our market area. Due to the intense competition for financial professionals, these key personnel would be difficult to replace and an unexpected loss of their services could result in a disruption to the continuity of operations and a possible reduction in earnings.

Our lending activities subject us to the risk of environmental liabilities.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.

We may be subject to other claims and the costs of defensive actions.

Our customers may sue us for losses due to alleged breaches of fiduciary duties, errors and omissions of employees, officers and agents, incomplete documentation, our failure to comply with applicable laws and regulations, or many other reasons. Also, our employees may knowingly or unknowingly violate laws and regulations. Management may not be aware of any violations until after their occurrence. This lack of knowledge may not insulate us from liability. Claims and legal actions may result in legal expenses and liabilities that may reduce our profitability and hurt our financial condition.

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We may be adversely affected by other recent legislation.

As discussed above, the GLB Act repealed restrictions on banks affiliating with securities firms and permits bank holding companies that become financial holding companies to engage in additional financial activities, including insurance and securities underwriting and agency activities, merchant banking, and insurance company portfolio investment activities that are currently not permitted for bank holding companies. Although the Company is a financial holding company, this law may increase the competition we face from larger banks and other companies. It is not possible to predict the full effect that this law will have on us.

The Sarbanes-Oxley Act of 2002 requires management of publicly-traded companies to perform an annual assessment of their internal control over financial reporting and to report on whether the system is effective as of the end of the Company’s fiscal year. Disclosure of significant deficiencies or material weaknesses in internal controls could cause an unfavorable impact to stockholder value by affecting the market value of our stock.

The Patriot Act reinforced the importance of implementing and following procedures required by the Bank Secrecy Act and money laundering issues. Non-compliance with this act or failure to file timely and accurate documentation could expose the Company to adverse publicity as well as fines and penalties assessed by regulatory agencies.

Periodically, the federal and state legislatures consider bills with respect to the regulation of financial institutions. Some of these proposals could significantly change the regulation of banks and the financial services industry. We cannot predict whether such proposals will be adopted or the impact on our business, earnings or operations of such future legislation.

We may not be able to keep pace with developments in technology, in which case we may become less competitive and lose customers.

We use various technologies in conducting our businesses, including telecommunication, data processing, computers, automation, internet-based banking, and debit cards. Technology changes rapidly. Our ability to compete successfully with other financial institutions may depend on whether we can exploit technological changes. We may not be able to exploit technological changes, and any investment we do make may not make us more profitable.

Risks Related to the Company’s Common Stock

Our ability to pay dividends is limited.

The Company’s stockholders are entitled to dividends on their shares of common stock if, when, and as declared by the Company’s Board of Directors out of funds legally available for that purpose. The Company’s ability to pay dividends to stockholders is largely dependent upon the receipt of dividends from the Bank. Both federal and state laws impose restrictions on the ability of the Bank to pay dividends. Federal law prohibits the payment of a dividend by an insured depository institution if the depository institution is considered “undercapitalized” or if the payment of the dividend would make the institution “undercapitalized.” For a Maryland state-chartered bank, dividends may be paid out of undivided profits or, with the prior approval of the Maryland Commissioner, from surplus in excess of 100% of required capital stock. If, however, the surplus of a Maryland bank is less than 100% of its required capital stock, then cash dividends may not be paid in excess of 90% of net earnings. In addition to these specific restrictions, bank regulatory agencies have the ability to prohibit proposed dividends by a financial institution that would otherwise be permitted under applicable regulations if the regulatory body determines that such distribution would constitute an unsafe or unsound practice. Because of these limitations, there can be no guarantee that the Company’s Board will declare dividends in any fiscal quarter.

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Shares of the Company’s common stock are not insured.

Investments in shares of the Company’s common stock are not deposits and are not insured against loss by the government.

Shares of the Company’s common stock are not heavily traded.

There is no established trading market for the shares of common stock of the Company, and transactions are infrequent and privately negotiated by the buyer and seller in each case. See Item 5 of Part II of this annual report for further market information. Management cannot predict the extent to which an active public market for these securities will develop or be sustained in the future. Securities that are not heavily traded can be more volatile than stock trading in an active public market. Factors such as our financial results, the introduction of new products and services by us or our competitors, and various factors affecting the banking industry generally may have a significant impact on the market price of our common stock. In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the securities of many companies have experienced wide price fluctuations that have not necessarily been related to their operating performance. Accordingly, the Company’s stockholders may not be able to sell their shares at the volumes, prices, or times that they desire.

The Company’s Articles of Incorporation and Maryland law may discourage a corporate takeover.

The Company’s Articles of Incorporation, as amended, requires that any proposed merger, share exchange, consolidation, reverse stock split, sale, exchange, lease of all or substantially all of the assets of the Company or any similar transaction be approved by the affirmative vote of 75% of the outstanding shares of the Company’s common stock.

The Maryland Business Combination Act generally prohibits, subject to certain limited exceptions, corporations from being involved in any “business combination” (defined as a variety of transactions, including a merger, consolidation, share exchange, asset transfer or issuance or reclassification of equity securities) with any “interested shareholder” for a period of five years following the most recent date on which the interested shareholder became an interested shareholder. An interested shareholder is defined generally as a person who is the beneficial owner of 10% or more of the voting power of the outstanding voting stock of the corporation after the date on which the corporation had 100 or more beneficial owners of its stock or who is an affiliate or associate of the corporation and was the beneficial owner, directly or indirectly, of 10% percent or more of the voting power of the then outstanding stock of the corporation at any time within the two-year period immediately prior to the date in question and after the date on which the corporation had 100 or more beneficial owners of its stock. The Maryland Control Share Acquisition Act applies to acquisitions of “control shares,” which, subject to certain exceptions, are shares the acquisition of which entitle the holder, directly or indirectly, to exercise or direct the exercise of the voting power of shares of stock of the corporation in the election of directors within any of the following ranges of voting power: one-tenth or more, but less than one-third of all voting power; one-third or more, but less than a majority of all voting power or a majority or more of all voting power. Control shares have limited voting rights.

Although these provisions do not preclude a takeover, they may have the effect of discouraging, delaying or deferring a tender offer or takeover attempt that a stockholder might consider in his or her best interest, including those attempts that might result in a premium over the market price for the common stock. These provisions could potentially adversely affect the market price of the Company’s common stock.

Item 1B.

Unresolved Staff Comments.

None.

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Item 2.

Properties.

Other than for our operating purposes, we do not invest in real estate. We own and operate branches at the following locations:

Location	Type of Office	Square Footage
100 Spring Avenue in Chestertown, Maryland 21620	Main Office	16,000
600 Washington Avenue, Chestertown, Maryland 21620	Branch	3,500
166 North Main Street, Galena, Maryland 21635	Branch	2,000
21337 Rock Hall Avenue, Rock Hall, Maryland 21661	Branch	2,000
31905 River Road, Millington, Maryland 21651	Branch	2,584
1005 Sudlersville Road, Church Hill, Maryland 21623	Branch	2,584
223 East Main Street, Sudlersville, Maryland 21668	Branch	2,584
100 Talbot Boulevard, Chestertown, Maryland 21620	Insurance Subsidiary	3,000

We also own property located off of Route 544 in Chestertown, Maryland which is being held for possible future expansion purposes.

Item 3.

Legal Proceedings

We are not a party to, nor is any of our properties the subject of, any material legal proceedings other than routine litigation arising in the ordinary course of business. In the opinion of management, no such proceeding will have a material adverse effect on our financial condition or results of operations.

Item 4.

[Removed and Reserved]

PART II

Item 5.

Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

As of March 1, 2011, the Company had 629 stockholders of record. Although certain brokers make a market in the shares of the Company’s common stock through the OTCQB Market operated by the OTC Markets Group, Inc., we believe there is no established trading market for the shares of common stock, that transactions are infrequent, and that most transactions are privately negotiated. Management cannot predict whether any market will develop in the near future. Market information for the Company’s common stock may be found at the OTC Markets Group, Inc.’s Internet website, www.otcmarkets.com, under the symbol “PEBC”. The information contained in or accessed through that website is not part of this annual report or incorporated herein by reference. The following table sets forth, to the best knowledge of the Company, the high and low sales prices for the shares of the Company’s common stock, along with the cash dividends paid, for each quarterly period of 2009 and 2010. There may have been sales during these periods of which the Company is not aware. These prices do not include retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions.

	2009						2010
	Price Range				Dividends		Price Range				Dividends
	High		Low				High		Low
First Quarter	$	70.00	$	54.00	$	0.44	$	92.00	$	60.00	$	0.45
Second Quarter		70.00		58.00		0.45		65.00		40.00		0.45
Third Quarter		72.00		59.00		0.45		65.00		50.00		0.45
Fourth Quarter		69.00		65.00		0.45		65.00		65.00		0.45

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The last sale known to the Company occurred on March 17, 2011 and the price was reported on the Pink Sheets as $53.00 per share.

In 2009 and 2010, the Company paid cash dividends to stockholders totaling $1,395,326 and $1,403,122, respectively. On January 14, 2011, the Board of Directors of Peoples Bancorp, Inc. reduced the quarterly cash dividend on the common stock for the fourth quarter of 2010 to $.22 per share from $.45 per share for the third quarter of 2010. Cash dividends are typically declared on a quarterly basis and are at the discretion of the Board of Directors, based upon such factors as operating results, financial condition, capital adequacy, regulatory requirements, and stockholder return. The Company’s ability to pay dividends is limited by federal and Maryland law and is generally dependent on the ability of the Bank to declare and pay dividends to the Company, which is also limited by law. For more information regarding these limitations, see Item 1A of Part I of this annual report under the caption, “Our ability to pay dividends is limited.” There can be no assurance that dividends will be declared in any fiscal quarter.

The transfer agent for the shares of common stock of the Company is:

The Peoples Bank

100 Spring Ave

Chestertown, Maryland 21620

410-778-3500

The Company and its affiliates (as defined by Exchange Act Rule 10b-18) did not purchase any shares of the Company’s common stock during the three-month period ended December 31, 2010.

Item 6.

Selected Financial Data.

The Company is a smaller reporting company and, as such, is not required to include the information required by this item.

Item 7.

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

The following discussion of consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes and other statistical information included in Item 8 of Part II of this annual report.

Overview

For the year ended December 31, 2010, we recorded a net loss of $373,535, compared to net income of $1,889,928 for the year ended December 31, 2009. Basic and diluted net income(loss) per share was $(.48) for 2010, compared to $2.42 for 2009.

Return on average assets decreased to (.15)% for 2010 from .75% for 2009. Return on average stockholders’ equity for 2010 was (1.31)%, compared to 6.61% for 2009. Average assets decreased to $248,896,143 in 2010, representing a 1.27% decrease when compared to 2009. Average loans net of allowance for loan losses decreased .30% in 2010 to $207,649,864. During 2010, average deposits increased 8.06% to $189,891,335 when compared to 2009. Average stockholders’ equity for the year ended December 31, 2010 decreased .04% over 2009, totaling $28,596,699.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and follow general practices within the industries in which we operate. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the

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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 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 the 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 most significant accounting policies that we follow are presented in Note 1 to the Consolidated Financial Statements. These 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 to be the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

The allowance for loan losses represents management’s estimate of probable loan losses inherent in the loan portfolio as of the balance sheet date. 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. The loan portfolio also represents the largest asset type on the consolidated balance sheets. Note 1 to Consolidated Financial Statements describes the methodology used to determine the allowance for loan losses, and a discussion of the factors driving changes in the amount of the allowance for loan losses is included below under the caption “FINANCIAL CONDITION—Market Risk Management.”

RESULTS OF OPERATIONS

We reported a net loss of $373,535 for the year ended December 31, 2010, compared to net income of $1,889,928. Basic and diluted net income(loss) per share was $(0.48) for the year ended December 31, 2010, compared $2.42 for the year ended December 31, 2009. This represents a decrease in net income for 2010 of $2,263,463 or 119.76% when compared to 2009. This loss is the direct result of increasing our provision for loan losses $3,184,000 from $1,726,000 in 2009 to $4,910,000 in 2010. The increased provision was due primarily to the determination during the fourth quarter of 2010 that the Bank may realize a large loan loss.

Net Interest Income

The primary source of our income 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 level of net interest income is determined primarily by the average balance of interest-earning assets and funding sources and the various rate spreads between our interest-earning assets and our interest-bearing funding sources. The table “Average Balances, Interest, and Yields” that appears below shows our average volume of interest-earning assets and interest-bearing liabilities for 2010 and 2009, and related income/expense and yields. Changes in net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, and increases or decreases in the average rates earned and paid on such assets and liabilities. The volume of interest-earning assets and interest-bearing liabilities is affected by the ability to manage the earning-asset portfolio (which includes loans), and the availability of particular sources of funds, such as noninterest bearing deposits. The table “Analysis of Changes in Net Interest Income” shows the amount of net interest income change from rate changes and from volume changes.

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For the year ended December 31, 2010, net interest income decreased $262,021, or 2.82%, to $9,036,863 from $9,298,884 for the year ended December 31, 2009. The decrease in net interest income in 2010 was the result of a $1,092,442 decrease in interest income offset by an $830,421 decrease in interest expense. In 2010, deposits increased but our borrowed funds decreased with loan demand. Net income decreased because the yield earned on loans declined faster than yields on deposits and borrowed funds. The yield on interest-earning assets on a fully taxable equivalent basis was 6.10% in 2009 and 5.77% in 2010, with the combined effective rate on deposits and borrowed funds following the same fluctuation by decreasing from 2.46% in 2009 to 2.08% in 2010.

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. Our net interest margin for 2010 and 2009 on a fully taxable equivalent basis was 4.09%. Management attempts to maintain a net margin on interest-earning assets of 4.50% or higher. The net margin may decline, however, if competition increases, loan demand decreases, or the cost of funds rises faster or declines slower than the return on loans and securities. Although such expectations are based on management’s judgment, actual results will depend on a number of factors that cannot be predicted with certainty, and fulfillment of management’s expectations cannot be assured.

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Average Balances, Interest, and Yields

	For the Year Ended							For the Year Ended
	December 31, 2010							December 31, 2009
	Average							Average
	Balance		Interest		Yield			Balance		Interest		Yield
Assets
Federal funds sold	$	1,338,039	$	2,433		0.18	%	$	5,766,770	$	9,700		0.17	%
Interest-bearing deposits		42,530		88		0.21	%		160,478		96		0.06	%
Investment securities:
U. S. government agency		13,033,449		315,862		2.42	%		13,461,801		553,987		4.12	%
FHLB of Atlanta and CBB Financial Corp. stock		2,320,287		8,305		0.36	%		2,378,191		7,678		0.32	%
Loans:
Commercial		28,168,323		1,612,031		5.72	%		33,032,256		2,017,459		6.11	%
Real estate		176,460,817		10,611,050		6.01	%		170,371,008		10,845,710		6.37	%
Consumer		6,168,924		401,426		6.51	%		7,151,500		592,708		8.29	%
Total loans		210,798,064		12,624,507		5.99	%		210,554,764		13,455,877		6.39	%
Allowance for loan losses		3,148,200							2,287,849
Total loans, net of allowance		207,649,864		12,624,507		6.08	%		208,266,915		13,455,877		6.46	%
Total interest-earning assets		224,384,169		12,951,195		5.77	%		230,034,155		14,027,338		6.10	%
Noninterest-bearing cash		11,721,212							9,760,027
Premises and equipment		6,493,792							6,537,536
Other assets		6,296,970							5,770,923
Total assets	$	248,896,143						$	252,102,641
Liabilities and Stockholders’ Equity
Interest-bearing deposits
Savings and NOW deposits	$	45,714,413		82,960		0.18	%	$	42,866,972		86,501		0.20	%
Money market		11,127,627		42,807		0.38	%		10,727,609		62,839		0.59	%
Other time deposits		97,006,196		2,795,184		2.88	%		88,579,998		2,925,853		3.30	%
Total interest-bearing deposits		153,848,236		2,920,951		1.90	%		142,174,579		3,075,193		2.16	%
Borrowed funds		27,902,456		855,923		3.07	%		45,084,559		1,532,291		3.40	%
Total interest-bearing liabilities		181,750,692		3,776,874		2.08	%		187,259,138		4,607,484		2.46	%
Noninterest-bearing deposits		36,043,099							33,555,278
		217,793,791							220,814,416
Other liabilities		2,505,653							2,679,597
Stockholders’ equity		28,596,699							28,608,628
Total liabilities and Stockholders’ equity	$	248,896,143						$	252,102,641
Net interest spread						3.69	%						3.64	%
Net interest income			$	9,174,321						$	9,419,854
Net margin on interest-earning assets						4.09	%						4.09	%

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

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Analysis of Changes in Net Interest Income

	Year ended December 31,									Year ended December 31,
	2010 compared with 2009									2009 compared with 2008
	variance due to									variance due to
	Total			Rate			Volume			Total			Rate			Volume
Earning assets
Federal funds sold	$	(7,267	)	$	728		$	(7,995	)	$	(82,797	)	$	(110,524	)	$	27,727
Interest-bearing deposits		(8	)		102			(110	)		(15,223	)		(8,682	)		(6,541	)
Investment securities:
U. S. government agency		(238,125	)		(221,018	)		(17,107	)		(240,108	)		(102,891	)		(137,217	)
FHLB & CBB Financial Corp. stock		627			818			(191	)		(141,882	)		(128,319	)		(13,563	)
Loans:
Commercial		(405,428	)		(121,467	)		(283,961	)		(715,409	)		(232,006	)		(483,403	)
Mortgage		(234,660	)		(613,911	)		379,251			(676,335	)		(527,240	)		(149,095	)
Consumer		(191,282	)		(116,672	)		(74,610	)		224,106			482			223,624
Total interest revenue		(1,076,143	)		(1,071,418	)		(4,725	)		(1,647,648	)		(1,109,180	)		(538,468	)

Interest-bearing liabilities
Savings and NOW deposits		(3,541	)		(9,057	)		5,516			(12,190	)		(30,788	)		18,598
Money market and supernow		(20,032	)		(22,296	)		2,264			(99,918	)		(49,255	)		(50,663	)
Other time deposits		(130,669	)		(393,822	)		263,153			(300,634	)		(604,728	)		304,094
Other borrowed funds		(676,368	)		(137,713	)		(538,655	)		(871,804	)		(413,517	)		(458,287	)
Total interest expense		(830,610	)		(562,888	)		(267,722	)		(1,284,546	)		(1,098,288	)		(186,258	)

Net interest income	$	(245,533	)	$	(508,531	)	$	262,998		$	(363,102	)	$	(10,892	)	$	(352,210	)

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.

Noninterest Revenue

Noninterest revenue for the 12 months ended December 31, 2010 was $2,305,062, compared to $2,628,640 for same period in 2009. This decrease resulted from a $163,104 decrease in the Insurance Subsidiary’s insurance commissions and a $94,251 decrease in service charges on deposit accounts when compared to 2009. Additionally, there was a net loss of $53,315 on the sale of foreclosed real estate, compared to a net gain of $29,365 in 2009.

The following table presents the principal components of noninterest revenue for the years ended December 31, 2010 and 2009:

Noninterest Revenue

	2010			2009
Service charges on deposit accounts	$	856,871		$	951,122
Insurance commissions		1,182,957			1,346,061
Gain (Loss) on sale of foreclosed real estate		(53,515	)		29,365
Other noninterest revenue		318,749			302,092
Total noninterest revenue	$	2,305,062		$	2,628,640

Noninterest revenue as a percentage of total revenue		22.58	%		17.75	%

- 22 -

Noninterest Expense

Noninterest expense for the 12-month period ended December 31, 2010 decreased by $60,119, or 0.83%, to $7,173,650, from $7,233,769 in 2009. This decrease was attributed to the increases in the Bank’s foreclosed real estate expense of $46,643, or 52.68%, data processing and correspondent bank costs of $133,585, or 24.37%, and Occupancy expense of $66,246, or $14.76%, offset by decreases of $302,647, or 7.11%, to compensation and related expenses and $84,605, or $20.29%, in regulatory assessments.

The following table presents the principal components of noninterest expense for the years ended December 31, 2010 and 2009:

Noninterest Expense

	2010			2009
Compensation and related expenses	$	3,952,737		$	4,255,384
Occupancy expense		515,091			448,845
Furniture and equipment expense		345,097			345,992
Data processing and correspondent bank costs		681,718			548,133
Director fees		146,348			149,181
Postage		110,799			92,573
Office supplies		96,054			122,920
Professional fees		130,933			122,684
Printing and stationery		14,905			17,044
Public relations and contributions		68,188			48,398
Telephone		43,747			41,889
Regulatory assessments		332,308			416,913
Loan products		13,825			14,637
Foreclosed real estate expense		135,192			88,549
Advertising		59,532			60,464
Insurance		37,687			27,001
Other		489,489			433,162

Total noninterest expense	$	7,173,650		$	7,233,769
Noninterest expense as a percentage of total expense		21.56	%		18.44	%

Income Taxes

The Company’s effective income tax rate was 49.6% in 2010 and 36.30% in 2009.

Results for the Fourth Quarter of 2010

During the fourth quarter of 2010, we recorded a net loss of $994,960, compared to net income of $395,063 for the corresponding period in 2009. Correspondingly, we recorded a net loss per share of $1.28 for the fourth quarter of 2010, compared to net income per share of $0.50 for the corresponding period in 2009. This loss is the direct result of a $2,370,000 increase in the Bank’s reserve for loan losses. The increase to the reserve relates to a large commercial loan and was taken when the borrower notified management that, due to the impact of the on-going recession, he will not be able to meet his future obligations to the Bank as they come due. Currently, this borrower’s obligations are current but he cannot assure management that he will continue to make payments.

Excluding the provisions for loan losses, the Company would have recorded net interest income of $2,366,814 for the fourth quarter of 2010, which represents a $106,519 increase over the $2,260,295 recorded for the three months ended December 31, 2009. The increase was due primarily to loan revenues and borrowed funds interest expense

- 23 -

reducing in direct correlation to the reduction in loan and borrowed funds account balances. Deposit balances decreased during this period and interest expense decreased as the direct result of lower interest rates for the period and the repricing of matured time deposits at lower rates. Comparing the fourth quarter of 2010 to the fourth quarter of 2009, interest revenue decreased $63,846 and interest expense decreased $170,365, with $124,019 of this decrease resulting from borrowed funds interest expense decreasing. The provision for loan losses for the fourth quarter of 2010 increased by $2,370,000 to $2,925,000 when compared to the fourth quarter of 2009.

Noninterest income for the fourth quarter of 2010 decreased $71,073 when compared to the same period of 2009 to $467,169. This decrease was due primarily to a decrease in other income of $41,756, in insurance commissions of $13,047 and service charges of $16,270 for the fourth quarter of 2010 when compared to the fourth quarter of 2009.

Total noninterest expense decreased $76,431 to $1,579,080 for the quarter ended December 31, 2010, from $1,655,511 for the corresponding quarter of 2009. This decrease primarily resulted from a $64,485 decrease in our FDIC assessment, and a $25,016 decrease in office supplies. The Company has reduced expenses under its control and constantly attempts to increase overall income.

FINANCIAL CONDITION

Assets

Total assets decreased 3.79% to $245,792,415 at December 31, 2010 when compared to assets at December 31, 2009. Average total assets for 2010 were $248,896,143, a decrease of 1.27% from 2009. The loan portfolio represented 92.54% of average earning assets in 2010, compared to 90.54% in 2009, and was the primary source of income for the Company.

Funding for loans is provided primarily by core deposits, fed funds, and FHLB borrowings. Total deposits decreased 1.87% to $189,640,730 at December 31, 2010 when compared to 2009.

Composition of Loan Portfolio

Because loans are expected to produce higher yields than investment securities and other interest-earning assets (assuming that loan losses are not excessive), 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 $207,649,864 and $208,266,915 for 2010 and 2009, respectively, which constituted 92.54% and 90.54% of average interest-earning assets for the respective years. At December 31, 2010, our loan to deposit ratio was 109.31%, compared to 105.51% at December 31, 2009, while the ratio of average loans to average deposits was 109.35% and 118.52% for 2010 and 2009, respectively. The securities sold under agreements to repurchase function like deposits with the securities providing collateral in place of the FDIC insurance. The Bank also borrows from correspondent banks and the FHLB to fund loans. Our ratio of average loans to average deposits plus borrowed funds was 95.34% for the year ended December 31, 2010, compared to 94.32% for the year ended December 31, 2009. We extend loans primarily to customers located in and near Kent County, Queen Anne’s County and Cecil County in Maryland. There are no industry concentrations in our loan portfolio. A substantial portion of our loans are, however, secured by real estate and, accordingly, the real estate market in the region will influence the performance of our loan portfolio.

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The following table sets forth the composition of our loan portfolio at December 31, 2010 and 2009:

Composition of Loan Portfolio
	2010						2009
				Percent						Percent
	Amount			of total			Amount			of total
Commercial	$	29,052,413			13.65	%	$	26,942,744			13.04	%
Real estate – residential		75,206,074			35.33	%		74,431,249			36.02	%
Real estate - commercial		89,617,135			42.10	%		86,004,530			41.62	%
Construction		13,403,765			6.30	%		12,670,414			6.13	%
Consumer		5,588,830			2.62	%		6,593,515			3.19	%
Total loans		212,868,217			100.00	%		206,642,452			100.00	%
Deferred costs, net of deferred fees		84,448						102,590
Allowance for loan losses		(5,656,788	)					(2,845,364	)
Net loans	$	207,295,877					$	203,899,678

The following table sets forth the maturity distribution, classified according to sensitivity to changes in interest rates, for selected components of our loan portfolio at December 31, 2010:

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
	December 31, 2010
	One year		Over one		Over five
	or less		through five years		years		Total

Commercial	$	25,993,455	$	2,223,768	$	835,190	$	29,052,413
Real estate – residential		42,233,470		32,972,604		-		75,206,074
Real estate - commercial		55,598,207		34,018,928		-		89,617,135
Construction		10,493,297		2,910,468		-		13,403,765
Consumer		3,669,743		1,818,489		100,598		5,588,830
Total	$	137,988,172	$	73,944,257	$	935,788	$	212,868,217

Fixed interest rate	$	92,716,451	$	68,618,436	$	324,653	$	161,659,540
Variable interest rate		45,271,721		5,325,821		611,135		51,208,677
Total	$	137,988,172	$	73,944,257	$	935,788	$	212,868,217

At December 31, 2010, $51,208,677, or 24.06%, of the total loans were either variable-rate loans or loans written on demand.

Off-Balance Sheet Arrangements

In the normal course of business, to meet the financing needs of our customers, we are a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. Our exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of the instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. We generally require collateral or other security to

- 25 -

support the financial instruments with credit risk. The amount of collateral or other security is determined based on management’s credit evaluation of the counterparty. We evaluate each customer’s creditworthiness on a case-by-case basis.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Letters of credit are conditional commitments that we issue to guarantee the performance of a customer to a third party. Letters of credit and other commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the letters of credit and commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. See Note 4 to the Consolidated Financial Statements, which is included in Item 8 of Part II of this annual report, for further information about these commitments.

Loan Quality

The allowance for loan losses represents a reserve for probable losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated monthly 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 considers the year-end allowance appropriate and adequate to cover probable losses in the loan portfolio; however, management’s judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.

For significant problem loans, management’s review consists of evaluation of the financial strengths of the borrowers and guarantors, the related collateral, and the effects of economic conditions. The overall evaluation of the adequacy of the total allowance for loan losses is based on an analysis of historical loan loss ratios, loan charge-offs, delinquency trends, and previous collection experience, along with an assessment of the effects of external economic conditions.

Risk Elements of Loan Portfolio

	For the Years Ended December 31,
	2010		2009

Non-Accrual Loans	$	5,325,495	$	2,384,186
Accruing Loans Past Due 90 Days or More		6,368,643		6,247,775

The following table, “Allocation of Allowance for Loan Losses”, shows the specific allowance applied by loan type and also the general allowance included in the allowance for loan losses at December 31, 2010 and 2009:

Allocation of Allowance for Loan Losses
	2010		2009

Commercial	$	676,113	$	728,049
Real estate		4,713,849		1,730,883
Consumer		129,779		244,069
Unallocated		137,047		140,751
Total	$	5,656,788	$	2,845,364

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The provision for loan losses is a charge to earnings in the current period to replenish the allowance for loan losses and maintain it at a level management has determined to be adequate. The provision for loan losses was $4,910,000 in 2010, which represents an increase of $3,184,000 over the $1,726,000 that was funded in 2009. We added to our reserves in anticipation of potential losses in connection with the higher than normal balances of nonaccrual loans and loans accruing 90 days or more past due. The following table shows information about the allowance for loan losses for each of the last two years:

Allowance for Loan Losses

	2010			2009
Balance at beginning of year	$	2,845,364		$	2,001,739
Loan losses:
Commercial		166,779			290,126
Mortgages		1,846,683			490,049
Consumer		104,791			157,367
Total loan losses		2,118,253			937,542
Recoveries on loans previously charged off
Commercial		2,660			47,501
Mortgages		374			3,207
Consumer		16,643			4,459
Total loan recoveries		19,677			55,167
Net loan losses		2,098,576			882,375
Provision for loan losses charged to expense		4,910,000			1,726,000
Balance at end of year	$	5,656,788		$	2,845,364

Allowance for loan losses to loans outstanding at end of year		2.66	%		1.38	%

Net charge-offs to average loans		1.00	%		0.42	%

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 delinquent loan is generally placed in nonaccrual status when it becomes 90 days or more past due. When a loan is placed in nonaccrual status, all interest that had been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

We had nonperforming loans of $11,694,138 and $8,631,961 at December 31, 2010 and 2009, respectively. Management considers the nonaccrual loans as of December 31, 2010 to be nonperforming loans. We had $1,201,600 and $1,335,000 in foreclosed other real estate at December 31, 2010 and 2009, respectively. Foreclosed other real estate is considered part of non-performing assets.

Investment Securities

Our security portfolio is categorized as available-for-sale and held to maturity. Investment securities classified as available-for-sale are held for an indefinite period of time and may be sold in response to changing market and interest rate conditions or for liquidity purposes as part of our overall asset/liability management strategy. Available-for-sale securities are carried at market value, with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive income included in stockholders’ equity, net of applicable income taxes. We do not currently follow a strategy of making security purchases with a view of near-term resales and, therefore, do not own any securities classified as trading securities. Investment securities classified as held-to-maturity are held until they mature. Held-to maturity securities are held at amortized cost value. For additional information about the investment portfolio, see Note 3 to Consolidated Financial Statements, which is included in Item 8 of Part II of this annual report.

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The following table sets forth the maturities and weighted average yields of the investment portfolio as of December 31, 2010.

	3 Months or Less					Over 3 Months to 1 Year					1 – 5 Years					5-10 Years					Over 10 Years
	Carrying Amount		Average Yield			Carrying Amount		Average Yield			Carrying Amount		Average Yield			Carrying Amount		Average Yield			Carrying Amount		Average Yield
Held to Maturity:
U.S. government agencies	$	2,001,344		3.40	%	$	1,503,934		3.42	%		-		-			-		-			-		-
Mortgage backed securities		-		-			-		-			-		-			5,255		1.94	%		-		-

Total Held to Maturity	$	2,001,344		3.40	%	$	1,503,934		3.42	%	$	-		-			5,255		1.94	%		-		-
Available for Sale:
U.S. government agencies	$	3,001,300		0.54	%	$	3,017,460		0.97	%	$	2,017,020		0.54	%		-		-			-		-

Total Available for Sale	$	3,001,300		0.54	%	$	3,017,460		0.97	%	$	2,017,020		0.54	%		-		-			-		-

Liquidity Management

Liquidity describes our ability to meet financial obligations that arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of customers and to fund current and planned expenditures. Liquidity is derived 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. The funds invested in federal funds sold also provide liquidity, as do lines of credit, overnight federal funds, and reverse repurchase agreements available from correspondent banks. The aggregate amount available from correspondent banks under all lines of credit at December 31, 2010 was $19,150,000. Additionally, the Bank has a partially funded line of credit from the FHLB of Atlanta. This line is secured by the Bank’s residential mortgage loan portfolio.

Average liquid assets (cash and amounts due from banks, interest bearing deposits in other banks, federal funds sold, and investment securities available for sale) are 10.38% of average deposits for 2010, compared to 10.91% for 2009.

We have various financial obligations, including contractual obligations and commitments, that may require future cash payments. Management does not believe that any of the foregoing arrangements have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Market Risk Management

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates or equity pricing. Our principal market risk is interest rate risk that arises from our lending, investing and deposit taking activities. Our profitability is primarily dependent on the Bank’s net interest income. Interest rate risk can significantly affect net interest income to the degree that interest-bearing liabilities mature or reprice at different intervals than interest-earning assets. The degree to which these different assets mature or reprice is known as interest rate sensitivity.

The primary objective of asset/liability management is to ensure the steady growth of net interest income. To lessen the impact of these margin swings, the balance sheet should be structured so that repricing opportunities exist for both assets and liabilities in roughly equivalent amounts at approximately the same time intervals. Interest rate sensitivity may be controlled on either side of the balance sheet. On the asset side, management can exercise some control on maturities. Also, loans may be structured with rate floors and ceilings on variable rate notes and by providing for repricing opportunities on fixed rate notes. Our available for sale investment portfolio, including federal funds sold, provides the most flexible and fastest control over rate sensitivity since it can generally be restructured more quickly than

- 28 -

the loan portfolio. On the liability side, deposit products can be restructured so as to offer incentives to attain the maturity distribution desired. Competitive factors sometimes make control over deposits more difficult and less effective.

The rate-sensitive position, or gap, is the difference in the volume of rate-sensitive assets and liabilities at a given time interval. The general objective of gap management is to actively manage rate-sensitive assets and liabilities to reduce the impact of interest rate fluctuations on the net interest margin. Management generally attempts to maintain a balance between rate-sensitive assets and liabilities as the exposure period is lengthened to minimize our overall interest rate risk.

Several aspects of the asset mix of the balance sheet are continually evaluated: yield; credit quality; appropriate funding sources; and liquidity. Management of the liability mix of the balance sheet focuses on expanding the various funding sources.

The interest rate sensitivity position at December 31, 2010 is presented in the table “Interest Sensitivity Analysis”. The difference between rate-sensitive assets and rate-sensitive liabilities, or the interest rate sensitivity gap, is shown at the bottom of the table. We were asset-sensitive for the under one-year time horizons and liability-sensitive for time frames after one year. For asset-sensitive institutions, if interest rates should decrease, the net interest margins should decline. Because all interest rates and yields do not adjust at the same velocity, the gap is only a general indicator of rate sensitivity.

Interest Sensitivity Analysis

	December 31, 2010
	Within			After three			After one
	three			but within			but within			After
	months			12 months			five years			five years			Total
Assets
Earning assets
Interest-bearing deposits	$	42,530		$	-		$	-		$	-		$	42,530
Federal funds sold		1,016,000			-			-			-			1,016,000
Investment securities
Available for sale		3,001,300			3,017,460			2,017,020			-			8,035,780
Held to maturity		2,001,344			1,503,934			-			5,255			3,510,533
Restricted stock		-			-			-			2,151,600			2,151,600
Loans		41,653,284			96,362,940			74,464,702			387,291			212,868,217
Total earning assets	$	47,714,458		$	100,884,334		$	76,481,722		$	2,544,146		$	227,624,660
Liabilities
Interest-bearing liabilities
Money market and Supernow	$	10,778,134		$	-		$	-		$	-		$	10,778,134
Savings and NOW deposits		45,538,267			-			-			-			45,538,267
Certificates $100,000 and over		2,304,919			5,310,472			26,903,472			398,354			34,917,217
Certificates under $100,000		5,838,675			11,272,749			45,884,914			191,021			63,187,359
Securities sold under repurchase agreements & federal funds purchased		1,751,428			602,893			400,000			-			2,754,321
Notes payable		14,000,000			2,000,000			8,000,000			-			24,000,000
Total interest-bearing liabilities	$	80,211,423		$	19,186,114		$	81,188,386		$	589,375		$	181,175,298

Period gap	$	(32,496,965	)	$	81,698,220		$	(4,706,664	)	$	1,954,771		$	46,449,362
Cumulative gap		(32,496,965	)		49,201,255			44,494,591			46,449,362			46,449,362
Ratio of cumulative gap to total earning assets		(14.28	)%		21.62	%		19.55	%		20.41	%		20.41	%

From time to time, we may also employ other methods to assess our interest rate sensitivity, such as simulation models to quantify the effect a hypothetical immediate upward or downward change in rates would have on net interest income and the fair value of capital.

- 29 -

Deposits and Other Interest-Bearing Liabilities

Average interest-bearing liabilities decreased $5,508,446, or 2.94%, to $181,750,692 in 2010, from $187,259,138 in 2009. Average interest-bearing deposits increased $11,673,657, or 8.21%, to $153,848,236 in 2010 from $142,174,579 in 2009. Correspondingly, average demand deposits increased $2,487,821, or 7.41%, to $36,043,099 in 2010 from $33,555,278 in 2009.

Total deposits at December 31, 2010 were $189,640,730, a decrease of 1.87% when compared to deposits of $193,250,908 at December 31, 2009.

The following table sets forth the Company’s deposits by category at December 31, 2010 and 2009:

	2010					2009
			Percent of					Percent of
	Amount		Deposits			Amount		Deposits
Demand deposit accounts	$	35,219,753		18.57	%	$	36,951,197		19.12	%
Savings and NOW accounts		45,538,267		24.02	%		51,133,862		26.46	%
Money market accounts		10,778,134		5.68	%		10,596,599		5.48	%
Time deposits less than $100,000		63,187,359		33.32	%		60,812,304		31.47	%
Time deposits of $100,000 or more		34,917,217		18.41	%		33,756,946		17.47	%
Total deposits	$	189,640,730		100.00	%	$	193,250,908		100.00	%

Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits decreased $4,770,449 during 2010, primarily due to the effects of the on-going recession. In the past, deposits, particularly core deposits, have been our primary source of funding and have enabled us to meet our short-term liquidity needs. In recent years, we have borrowed from correspondent banks and the FHLB of Atlanta to meet liquidity needs. The maturity distribution of our time deposits over $100,000 at December 31, 2010 is shown in the following table.

Maturities of Certificates of Deposit and Other Time Deposits of $100,000 or More
	December 31, 2010
	Within three months		After three through six months		After six through 12 months		After 12 months		Total
Certificates of Deposit - $100,000 or more	$	2,304,919	$	1,792,246	$	3,518,226	$	27,301,826	$	34,917,217

Large certificate of deposit customers tend to be extremely sensitive to interest rates, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. Some financial institutions partially fund their balance sheets using large certificates of deposit obtained through brokers. These brokered deposits are generally expensive and are unreliable as long-term funding sources. Accordingly, we do not typically purchase brokered deposits.

The average balance of borrowings decreased $17,182,103, or 38.11%, in 2010, compared to a decrease of $12,124,414, or 21.19%, in 2009. The decrease in 2010 when compared to 2009 was due primarily to the fact that loan demand has reduced and we were able to reduce our lines of credit particularly at the FHLB of Atlanta during 2010.

- 30 -

Short-term Borrowings

The following table sets forth our position with respect to short-term borrowings for each of the last two years ended December 31:

	2010					2009
	Amount		Rate			Amount		Rate

At year end:
Repurchase Agreements	$	2,754,321		0.38	%	$	2,917,339		0.36	%

Average for the year:
Retail Repurchase Agreements	$	2,324,268		1.76	%	$	8,918,437		0.78	%
Federal Funds purchased		107		0.63	%		20,918		0.80	%

Maximum Month End Balance:
Retail Repurchase Agreements	$	7,956,138				$	12,929,966
Federal Funds purchased		27,000					-

The Bank 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 the Bank’s real estate mortgage loans. The Bank was required to purchase shares of capital stock in the FHLB of Atlanta as a condition to obtaining the line of credit.

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

The Bank has lines of credit of $13,650,000 in unsecured overnight federal funds and $5,500,000 in secured overnight federal funds with correspondent banks at December 31, 2010.

Capital

Under the capital adequacy guidelines of the FRB and the FDIC, the Company and the Bank are required to maintain minimum capital ratios. These requirements are described above in Item 1 or Part I under “SUPERVISION AND REGULATION—Capital Requirements.” At December 31, 2010 and 2009, the Company and the Bank were considered “well-capitalized.” The table below compares the capital ratios of the Bank with the regulatory minimums. The Company’s only assets in 2010 other than its equity interest in the Bank were its equity interest in the Insurance Subsidiary and a small amount of cash. The value of the equity interest in the Insurance Subsidiary at December 31, 2010 did not cause the Company’s capital ratios as of December 31, 2010 to materially differ from the Bank’s ratios.

Analysis of Capital

				Actual Ratios			Actual Ratios
	Required			2010			2009
	Minimums			Bank			Bank
Total risk-based capital ratio		8.0	%		14.3	%		15.1	%
Tier I risk-based capital ratio		4.0	%		13.0	%		13.9	%
Tier I leverage ratio		4.0	%		10.5	%		11.0	%

- 31 -

RECENT ACCOUNTING PRONOUNCEMENTS

Management has the responsibility for the selection and use of appropriate accounting policies. The significant accounting policies used by the Company and the Bank are described in the notes to the consolidated financial statements.

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) adopted Accounting Standards Codification (“ASC”) as the officially recognized source of authoritative U.S. generally accepted accounting principles (“GAAP”) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), the Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the Securities and Exchange Commission (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 U.S. GAAP in financial statements and accounting policies.

The following accounting guidance has been approved by the Financial Accounting Standards Board and would apply to the Company if the Company or Bank entered into an applicable activity. Some of these new pronouncements become effective in 2010.

Accounting Standards Update (ASU) No. 2009-16, “Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets.” ASU 2009-16 amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. ASU 2009-16 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The provisions of ASU 2009-16 became effective on January 1, 2010 and did not have a significant impact on the Company’s financial statements.

ASU No. 2009-17, “Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” ASU 2009-17 amends prior guidance to change how an entity determines when another entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. ASU 2009-17 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. As further discussed below, ASU No. 2010-10, “Consolidations (Topic 810) - Amendments for Certain Investment Funds,” deferred the effective date of ASU 2009-17 for a reporting entity’s interests in investment companies. The provisions of ASU 2009-17 became effective on January 1, 2010 and did not have a significant impact on the Company’s financial statements.

ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures About Fair Value Measurements.” ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (a) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (b) entities should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for the Company

- 32 -

beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Company on January 1, 2010. See Note 15 – Fair Value of Financial Instruments.

ASU No. 2010-10, “Consolidations (Topic 810) - Amendments for Certain Investment Funds.” ASU 2010-10 defers the effective date of the amendments to the consolidation requirements made by ASU 2009-17 to a reporting entity’s interest in another entity (i) that has all of the attributes of an investment company, as specified under ASC Topic 946, “Financial Services - Investment Companies,” or (ii) for which it is industry practice to apply measurement principles of financial reporting that are consistent with those in ASC Topic 946. As a result of the deferral, a reporting entity will not be required to apply the ASU 2009-17 amendments to the Subtopic 810-10 consolidation requirements to its interest in another entity that meets the criteria to qualify for the deferral. ASU 2010-10 also clarifies that any interest held by a related party should be treated as though it is a reporting entity’s own interest when evaluating the criteria for determining whether such interest represents a variable interest. In addition, ASU 2010-10 also clarifies that a quantitative calculation should not be the sole basis for evaluating whether a decision maker’s or service provider’s fee is a variable interest. The provisions of ASU 2010-10 became effective for the Company as of January 1, 2010 and did not have a significant impact on the Company’s financial statements.

ASU No. 2010-11, “Derivatives and Hedging (Topic 815) - Scope Exception Related to Embedded Credit Derivatives.” ASU 2010-11 clarifies that the only form of an embedded credit derivative that is exempt from embedded derivative bifurcation requirements are those that relate to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The provisions of ASU 2010-11 became effective for the Company on July 1, 2010 and did not have a significant impact on the Company’s financial statements.

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 will be 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 will be required for the Company’s financial statements that include periods beginning on or after January 1, 2011.

The accounting policies adopted by management are consistent with authoritative U.S. generally accepted accounting principles and are consistent with those followed by peer bank holding companies and banks.

Item 7A.

Quantitative and Qualitative Disclosure About Market Risk.

The information required by this item may be found in Item 7 of this Part II under the caption “FINANCIAL CONDITION—Market Risk Management”, which is incorporated herein by reference.

- 33 -

Item 8.

Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm			35
Consolidated Balance Sheets			36
Consolidated Statements of Income			37
Consolidated Statements of Changes in Stockholders’ Equity			38
Consolidated Statements of Cash Flows			39
Notes to Consolidated Financial Statements			41

- 34 -

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Peoples Bancorp, Inc.

Chestertown, Maryland

We have audited the accompanying consolidated balance sheets of Peoples Bancorp, Inc. and Subsidiaries as of December 31, 2010 and 2009 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Peoples Bancorp, Inc. and Subsidiaries as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

	/s/ Rowles & Company, LLP

Baltimore, Maryland
March 24, 2011

- 35 -

PEOPLES BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

	DECEMBER 31,
	2010			2009

ASSETS

Cash and due from banks	$	10,378,485		$	15,988,739
Federal funds sold		1,016,000			7,015,811
Cash and cash equivalents		11,394,485			23,004,550
Securities available for sale		8,035,780			3,027,700
Securities held to maturity (fair value of $3,554,315 and $10,312,156)		3,510,533			10,063,376
Federal Home Loan Bank and CBB Financial Corp. stock, at cost		2,151,600			2,401,200
Loans, less allowance for loan losses of $5,656,788 and $2,845,364		207,295,877			203,899,678
Premises and equipment		6,389,781			6,521,504
Goodwill and intangible assets		603,988			671,660
Accrued interest receivable		1,360,708			1,450,155
Deferred income taxes		2,367,847			1,277,611
Foreclosed real estate		1,201,600			1,335,000
Other assets		1,480,216			1,814,991
	$	245,792,415		$	255,467,425

	2010			2009

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits
Noninterest bearing checking	$	35,219,753		$	36,951,197
Savings and NOW		45,538,267			51,133,862
Money market		10,778,134			10,596,599
Other time		98,104,576			94,569,250
		189,640,730			193,250,908

Securities sold under repurchase agreements		2,754,321			2,917,339
Federal Home Loan Bank advances		24,000,000			28,000,000
Accrued interest payable		414,758			439,410
Other liabilities		1,590,442			1,970,020
		218,400,251			226,577,677
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		17,088,742			18,865,399
Accumulated other comprehensive income
Unrealized gain on securities available for sale		11,474			3,587
Unfunded liability for defined benefit plan		(424,038	)		(695,224	)
		27,392,164			28,889,748
	$	245,792,415		$	255,467,425

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

- 36 -

PEOPLES BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

	YEARS ENDED DECEMBER 31,
	2010			2009

Interest and dividend revenue
Loans, including fees	$	12,505,705		$	13,360,850
U.S. government agency securities		297,851			528,403
Federal funds sold		2,433			9,700
Other		7,937			7,415
Total interest and dividend revenue		12,813,926			13,906,368

Interest expense
Deposits		2,920,951			3,075,193
Borrowed funds		856,112			1,532,291
Total interest expense		3,777,063			4,607,484

Net interest income		9,036,863			9,298,884

Provision for loan losses		4,910,000			1,726,000
Net interest income after provision for loan losses		4,126,863			7,572,884
Noninterest revenue
Service charges on deposit accounts		856,871			951,122
Insurance commissions		1,182,957			1,346,061
Gain (loss) on sale of foreclosed real estate		(53,515	)		29,365
Other noninterest revenue		318,749			302,092
Total noninterest revenue		2,305,062			2,628,640
Noninterest expense
Salaries		3,004,709			3,211,979
Employee benefits		948,028			1,043,405
Occupancy		515,091			448,845
Furniture and equipment		345,097			345,992
Other operating		2,360,725			2,183,548
Total noninterest expense		7,173,650			7,233,769

Income before income taxes		(741,725	)		2,967,755

Income tax expense (benefit)		(368,190	)		1,077,827

Net income (loss)	$	(373,535	)	$	1,889,928

Earnings (loss) per common share - basic and diluted	$	(0.48	)	$	2.42

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

-37-

PEOPLES BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2010 AND 2009

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

Balance, December 31, 2008		779,512	$	7,795,120	$	2,920,866	$	18,370,797		$	(643,859	)

Net income		-		-		-		1,889,928			-		$	1,889,928
Change in underfunded status
of defined benefit plan net of
income taxes of $391		-		-		-		-			600			600
Unrealized loss on investment
securities available for sale net
of income taxes of $31,513		-		-		-		-			(48,378	)		(48,378	)
Comprehensive income													$	1,842,150
Cash dividend, $1.79 per share		-		-		-		(1,395,326	)		-

Balance, December 31, 2009		779,512		7,795,120		2,920,866		18,865,399			(691,637	)

Net (loss)		-		-		-		(373,535	)		-		$	(373,535	)
Change in underfunded status
of defined benefit plan net of
income taxes of $176,261		-		-		-		-			271,185			271,185
Unrealized gain on investment
securities available for sale net
of income taxes of $4,102		-		-		-		-			7,888			7,888
Comprehensive income													$	(94,462	)
Cash dividend, $1.80 per share		-		-		-		(1,403,122	)		-

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

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

-38-

PEOPLES BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	YEARS ENDED DECEMBER 31,
	2010			2009

Cash flows from operating activities
Interest received	$	12,949,311		$	14,097,355
Fees and commissions received		2,358,577			2,599,275
Interest paid		(3,801,715	)		(4,609,906	)
Cash paid to suppliers and employees		(6,210,301	)		(7,328,259	)
Income taxes paid		(978,679	)		(896,099	)
		4,317,193			3,862,366
Cash flows from investing activities
Proceeds from maturities and calls of investment securities
Held to maturity		6,551,030			1,000,840
Available for sale		1,000,000			4,000,000
Purchase of investment securities
Held to maturity		-			(1,000,000	)
Available for sale		(6,022,073	)		(3,049,383	)
Purchase of Federal Home Loan Bank stock		249,600			32,800
Purchase of CBB Financial Corp. stock		-			60,000
Loans made, net of principal collected		(8,722,941	)		8,693,040
Purchase of premises, equipment, and software		(235,041	)		(359,541	)
Acquisition of Insurance Agency		-			(25,344	)
Proceeds from sale of foreclosed real estate		428,485			371,364
		(6,750,940	)		9,723,776
Cash flows from financing activities
Net increase (decrease) in
Time deposits		3,535,326			13,269,581
Other deposits		(7,145,504	)		14,242,754
Securities sold under repurchase agreements and
federal funds purchased		(163,018	)		(9,212,200	)
Federal Home Loan Bank advances, net of repayments		(4,000,000	)		(15,000,000	)
Repayments of other borrowings		-			(173,216	)
Dividends paid		(1,403,122	)		(1,395,326	)
		(9,176,318	)		1,731,593

Net increase (decrease) in cash and cash equivalents		(11,610,065	)		15,317,735

Cash and cash equivalents at beginning of year		23,004,550			7,686,815

Cash and cash equivalents at end of year	$	11,394,485		$	23,004,550

Non cash transactions
Transfer of foreclosed real estate	$	398,600		$	315,000

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

-39-

PEOPLES BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

	YEARS ENDED DECEMBER 31,
	2010			2009

Reconciliation of net income to net cash provided by operating activities
Net income (loss)	$	(373,535	)	$	1,889,928

Adjustments to reconcile net income to net cash provided by
operating activities
Amortization of premiums and accretion of discounts		27,796			12,224
Provision for loan losses		4,910,000			1,726,000
Depreciation and software amortization		354,426			351,914
Amortization of intangible assets		67,672			66,616
Write-down of foreclosed real estate		50,000			45,000
Gain on sale of foreclosed real estate		53,515			(29,365	)
Deferred income taxes		(1,185,153	)		(388,710	)
Decrease (increase) in
Accrued interest receivable		89,447			132,533
Prepaid income taxes		(161,716	)		569,837
Other assets		508,829			(559,890	)
Increase (decrease) in
Deferred origination fees and costs, net		18,142			46,231
Accrued interest payable		(24,652	)		(2,422	)
Other liabilities		(17,578	)		2,470
	$	4,317,193		$	3,862,366

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

-40-

PEOPLES BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

The accounting and reporting policies reflected in the accompanying financial statements of Peoples Bancorp, Inc. and its subsidiaries, The Peoples Bank, a Maryland commercial bank (the “Bank”), and Fleetwood, Athey, MacBeth & McCown, Inc., an insurance agency (the “Insurance Subsidiary”), conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. As used in these notes, unless the context requires otherwise, the term “the Company” refers collectively to Peoples Bancorp, Inc., the Bank and the Insurance Subsidiary.

Principles of consolidation

The consolidated financial statements include the accounts of the Peoples Bancorp, Inc., the Bank, and the Insurance Subsidiary. Intercompany balances and transactions have been eliminated.

Nature of business

Peoples Bancorp, Inc. and its subsidiaries operate primarily in Kent and Queen Anne’s Counties, Maryland. The Bank, which operates out of a main office and six branches, offers deposit services and loans to individuals, small businesses, associations, and government entities. Other services include direct deposit of payroll and social security checks, automatic drafts from accounts, automated teller machine services, cash management services, safe deposit boxes, money orders, travelers cheques, and on-line banking with bill payment service. The Bank also offers credit card services and discount brokerage services through a correspondent.

The Insurance Subsidiary 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.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions may affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

Cash and cash equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.

Investment securities

As securities are purchased, management determines if the securities should be classified as held to maturity or available for sale. Securities which management has the intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost which is cost adjusted for amortization of premiums and accretion of discounts to maturity, or over the expected life in the case of mortgage-backed securities. Amortization and accretion are recorded using the interest method. Securities which may be sold before maturity are classified as available for sale and carried at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

Gains and losses on the sale of securities are determined using the specific identification method.

-41-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies (Continued)

Loans and allowance for loan losses

Loans are stated at their outstanding unpaid principal balance adjusted for deferred origination costs, deferred origination fees, and the allowance for loan losses.

Interest on loans is accrued based on the principal amounts outstanding. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest is discontinued when any portion of the principal or interest is ninety days past due and collateral is insufficient to discharge the debt in full. When the accrual of interest is discontinued, loans are reviewed for impairment. Past due status is based on contractual terms of the loan. All interest accrued but not collected for loans that are placed on nonaccrual status is reversed against interest revenue.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes a loan is uncollectible. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard, or special mention. The general component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Premises and equipment

Premises and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives of three to ten years for furniture and equipment, ten to forty years for premises, and three years for software.

-42-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies (Continued)

Foreclosed real estate

Real estate acquired through foreclosure is recorded at the lower of cost or fair value on the date acquired. In general, cost equals the Company’s investment in the property at the time of foreclosure. Losses incurred at the time of acquisition of the property are charged to the allowance for loan losses. Subsequent reductions in the estimated value of the property are included in other operating expense.

Goodwill and intangible assets

The Company recorded goodwill of $273,000 and other intangible assets of approximately $550,000 as the result of the acquisition of the Insurance Subsidiary in 2007.

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. Goodwill is not ratably amortized into the income statement over an estimated life, but rather is tested at least annually for impairment. Intangible assets that have finite lives are amortized over their estimated useful lives and are also subject to impairment testing. The Company’s intangible assets have finite lives and are amortized on a straight-line basis over periods not exceeding 10 years.

Advertising

Advertising costs are expensed over the life of ad campaigns. General purpose advertising is charged to expense as incurred.

Income taxes

The provision for income taxes includes taxes payable for the current year and deferred income taxes. Deferred income taxes are provided for the temporary differences between financial and taxable income.

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Per share data

Basic earnings(loss) per share is calculated by dividing net income(loss) available to common stockholders by the weighted-average number of common shares outstanding and does not include the effect of any potentially dilutive common stock equivalents. Diluted earnings(loss) per share is calculated by dividing net income(loss) by the weighted-average number of shares outstanding, adjusted for the dilutive effect of stock-based awards. There is no dilutive effect on the loss per share during loss periods. The weighted average number of shares outstanding were 779,512 for 2010 and 2009. There were no dilutive common stock equivalents outstanding in 2010 or 2009.

Subsequent Events

The Company has evaluated events and transactions occurring subsequent to the balance sheet issuance date of December 31, 2010 through March 24, 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 and Due From Banks

The Bank normally carries balances with other banks that exceed the federally insured limit. The average balances carried in excess of the limit, including unsecured federal funds sold to the same banks, were $1,338,038 for 2010 and $5,766,770 for 2009.

Banks are required to carry noninterest-bearing cash reserves at specified percentages of deposit balances. The Bank’s normal amount of cash on hand and on deposit with other banks is sufficient to satisfy the reserve requirements.

-43-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Investment Securities

Investment securities are summarized as follows:

	Amortized		Unrealized		Unrealized		Fair
December 31, 2010	cost		gains		losses		value
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

December 31, 2009
Available for sale
U. S. government agency	$	3,020,741	$	6,959	$	-	$	3,027,700

Held to maturity
U. S. government agency	$	10,057,082	$	248,790	$	-	$	10,305,872
Mortgage-backed securities		6,294		3		13		6,284
	$	10,063,376	$	248,793	$	13	$	10,312,156

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
December 31, 2010	cost		value		cost		value
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

December 31, 2009
Maturing
Within one year	$	1,015,880	$	1,017,300	$	6,541,691	$	6,663,095
Over one to five years		2,004,861		2,010,400		3,515,391		3,642,777
Mortgage-backed securities		-		-		6,294		6,284
	$	3,020,741	$	3,027,700	$	10,063,376	$	10,312,156

Pledged securities	$	-	$	-	$	2,971,405	$	3,068,439

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

As of December 31, 2010, there were no securities in an unrealized loss position.

-44-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Loans and Allowance for Loan Losses

Major classifications of loans as of December 31, are as follows:

	2010			2009

Real estate
Residential	$	75,206,074		$	74,431,249
Commercial		89,617,135			86,004,530
Construction		13,403,765			12,670,414
Commercial		29,052,413			26,942,744
Consumer		5,588,830			6,593,515
		212,868,217			206,642,452
Deferred costs, net of deferred fees		84,448			102,590
Allowance for loan losses		(5,656,788	)		(2,845,364	)
	$	207,295,877		$	203,899,678

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

Within ninety days	$	41,653,284	$	74,605,756
Over ninety days to one year		96,362,940		56,604,647
Over one year to five years		74,464,702		74,652,660
Over five years		387,291		779,389
	$	212,868,217	$	206,642,452

Variable rate loans included in above	$	51,208,677	$	61,280,747

A table of the recorded investment in loans that were impaired and risk rated at December 31, 2010 follows:

Impaired and Risk Rated Loans at December 31, 2010

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

Residential real estate	$	2,172,811	$	2,172,811	$	1,092,458	$	1,080,353
Commercial real estate		3,111,749		3,111,749		1,670,505		1,441,244
Other real estate		-		-		-		-
Construction and land development		5,795,448		5,795,448		5,169,481		625,967
Commercial loans		545,504		545,504		160,283		385,221
Consumer loans		-		-		-		-
Total impaired loans	$	11,625,512	$	11,625,512	$	8,092,727	$	3,532,785

-45-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Loans and Allowance for Loan Losses (Continued)

The following table illustrates total impaired loans segmented by those with and without a related allowance as of December 31, 2010. Comparable information is not available for 2009.

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

-46-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Loans and Allowance for Loan Losses (Continued)

Transactions in the allowance for loan losses were as follows:

	2010		2009

Beginning balance	$	2,845,364	$	2,001,739
Provision charged to operations		4,910,000		1,726,000
Recoveries		19,677		55,167
		7,775,041		3,782,906
Loans charged off		2,118,253		937,542
Ending balance	$	5,656,788	$	2,845,364

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

Allowance for Loan Losses and Loan Balances that are Individually and Collectively Evaluated for Possible Impairment
December 31, 2009
													Construction
							Residential			Commercial			and land			Other
	Unallocated			Commercial			Real Estate			Real Estate			Development			Real Estate		Consumer			Overdraft			Total
Allowance for loan losses
Beginning balance	$	436,251		$	319,710		$	236,820		$	473,639		$	461,259		$	-	$	74,060		$	-		$	2,001,739
Charge-offs		-			(290,127	)		(118,040	)		(222,008	)		(150,000	)		-		(150,698	)		(6,669	)		(937,542	)
Recoveries		-			47,501			3,207			-			-			-		2,498			1,961			55,167
Provision		(295,500	)		650,965			798,145			391,799			(146,720	)		2,782		319,277			5,252			1,726,000
Ending balance	$	140,751		$	728,049		$	920,132		$	643,430		$	164,539		$	2,782	$	245,137		$	544		$	2,845,364

Ending balance allocated to:
Loans individually
evaluated for impairment	$	-		$	154,200		$	478,826		$	587,189		$	55,246		$	-	$	1,612		$	-		$	1,277,073
Loans collectively
evaluated for impairment		140,751			573,849			441,306			56,241			109,293			2,782		243,525			544			1,568,291
	$	140,751		$	728,049		$	920,132		$	643,430		$	164,539		$	2,782	$	245,137		$	544		$	2,845,364

Allowance for Loan 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 loan 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

-47-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 does credit-score all loans. Loans are risk rated 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

accrual of interest may have stopped. This grade includes loans where loans are past due or not fully secured where a

specific valuation allowance may be necessary.

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

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

December 31, 2009	Pass Watch		Special Mention		Substandard		Total

Commercial	$	358	$	146,734	$	633,409	$	780,501
Residential real estate		456,663		-		1,666,490		2,123,153
Commercial real estate		221,841		1,135,962		4,656,472		6,014,275
Construction and land development		-		97,969		248,007		345,976
Other real estate		-		-		-		-
Consumer		16,654		-		15,091		31,745
	$	695,516	$	1,380,665	$	7,219,469	$	9,295,650

-48-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Loans and Allowance for Loan Losses (Continued)

The following table analyzes the age of past due loans for the years ended December 31, 2010 and 2009.

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

Residential real estate	$	1,452,435	$	1,258,246	$	4,506,064	$	7,216,745	$	66,889,312	$	75,206,074	$	2,008,168
Commercial real estate		980,023		467,285		3,216,515	$	4,663,823		61,220,621		65,357,188		2,120,564
Other real estate		-		-		1,130,824	$	1,130,824		20,591,492		24,259,947		1,130,824
Construction and land development		-		-		2,180,150	$	2,180,150		11,257,156		13,403,765		1,022,686
Commercial loans		54,262		28,545		594,022	$	676,829		25,798,539		29,052,413		19,838
Consumer loans		122,969		25,878		66,563	$	215,410		6,337,300		5,588,830		66,563
Total	$	2,609,689	$	1,779,954	$	11,694,138	$	16,083,781	$	192,094,420	$	212,868,217	$	6,368,643

	30-59 Days		60-89 Days		Greater than		Total				Total		Loans 90 Days
December 31, 2009	Past Due		Past Due		90 Days		Past Due		Current		Loans		and Accruing

Residential real estate	$	1,527,173	$	2,220,446	$	3,794,318	$	7,541,937	$	66,889,312	$	74,431,249	$	2,962,686
Commercial real estate		236,678		371,972		3,583,767		4,192,417		67,902,342		72,094,759		3,092,799
Other real estate		-		-		-		-		20,591,492		20,591,492		-
Construction and land development		312,251		525,000		576,007		1,413,258		4,575,434		5,988,692		-
Commercial loans		342,909		147,698		653,599		1,144,206		25,798,539		26,942,745		168,020
Consumer loans		209,214		22,730		24,271		256,215		6,337,300		6,593,515		24,271
Total	$	2,628,225	$	3,287,846	$	8,631,962	$	14,548,033	$	192,094,419	$	206,642,452	$	6,247,776

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

	2010		2009

Residential real estate	$	2,497,896	$	831,632
Commercial real estate		1,095,951		490,968
Other real estate		-		-
Construction and land development		1,157,464		576,007
Commercial loans		574,184		485,579
Consumer loans		-		-
Total	$	5,325,495	$	2,384,186

Interest not accrued on nonaccrual loans	$	644,566	$	289,779

As of December 31, 2010, the Bank had classified $5,076,619 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.

-49-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Loans and Allowance for Loan Losses (Continued)

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

	2010		2009

Check loan lines of credit	$	468,621	$	502,887
Mortgage lines of credit		6,727,480		11,202,534
Other lines of credit		10,964,947		16,776,329
Undisbursed construction loan commitments		2,240,747		933,503
	$	20,401,795	$	29,415,253

Standby letters of credit	$	3,016,824	$	3,761,110

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

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

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

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

-50-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Premises and Equipment

A summary of premises and equipment and related depreciation expense as of December 31, is as follows:

	2010		2009

Land	$	2,432,279	$	2,432,279
Premises		5,054,037		5,015,237
Furniture and equipment		3,067,445		2,901,349
		10,553,761		10,348,865
Accumulated depreciation		4,163,980		3,827,361
Net premises and equipment	$	6,389,781	$	6,521,504

Depreciation expense	$	344,882	$	339,779

Computer software included in other assets and the related amortization are as follows:

	2010		2009

Cost	$	110,296	$	88,412
Accumulated amortization		83,545		74,000
Net computer software	$	26,751	$	14,412

Amortization expense	$	9,545	$	3,715

6. Other Time Deposits

Maturities of other time deposits as of December 31, are as follows:

	2010		2009

Within one year	$	23,900,138	$	19,339,251
Over one to two years		7,896,616		19,153,090
Over two to three years		23,404,265		7,506,085
Over three to four years		22,925,801		22,161,944
Over four to five years		19,388,381		26,161,222
Over five years		589,375		247,658
	$	98,104,576	$	94,569,250

Included in other time deposits are certificates of deposit in amounts of $100,000 or more of $34,917,217 and $33,756,946 as of December 31, 2010 and 2009, respectively.

-51-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Securities Sold Under Repurchase Agreements

Securities sold under repurchase agreements represent borrowings from customers. The government agency securities that are the collateral for these agreements are owned by the Bank and maintained in the custody of an unaffiliated bank. Additional information is as follows:

	2010			2009

Maximum month-end amount outstanding	$	7,956,138		$	12,929,966
Average amount outstanding		2,324,268			8,918,437
Average rate paid during the year		1.76	%		0.78	%
Investment securities underlying agreements at year-end
Book value		2,354,950			2,461,938
Fair value		2,339,598			2,533,874

8.	Intangibles and Goodwill

The Company recorded a $550,000 intangible asset and $272,932 in goodwill in connection with the Insurance Subsidiary acquisition in 2007. The intangible asset is fully amortizable straight-line over 10 years for financial statement purposes and 15 years for income tax purposes. Goodwill is not amortized, but is annually evaluated for impairment.

In addition, the Insurance Subsidiary acquired a local insurance agency recording a $25,344 intangible asset fully amortizable over 2 years. No goodwill was recorded in connection with this transaction that occurred in 2009.

Information relating to goodwill and intangible assets at December 31, 2010 is as follows:

	Balance
Goodwill	$	272,932
Intangible assets		575,344
Accumulated amortization		(244,288	)
Goodwill and intangible assets, net	$	603,988

Amortization expense recognized in 2010	$	67,672

Estimated amortization expense:
2011	$	56,056
2012		55,000
2013		55,000
2014		55,000
2015		55,000

-52-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. Notes Payable and Lines of Credit

The Bank may borrow up to approximately 30% of total assets from the Federal Home Loan Bank (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 the Bank’s real estate mortgage loans. As of December 31, 2010, the Bank had $15,729,310 of mortgage loans available to pledge as collateral to the FHLB. The Bank was required to purchase shares of capital stock in the FHLB as a condition to obtaining the line of credit.

The Bank’s borrowings from the Federal Home Loan Bank as of December 31, 2010 and 2009, are summarized as follows:

Maturity	Interest			2010		2009
date	rate			Balance		Balance

January 25, 2010		5.29	%	$	-	$	2,000,000
March 22, 2010		4.04	%		-		2,000,000
April 2, 2010		5.02	%		-		2,000,000
June 22, 2010		5.59	%		-		1,000,000
June 27, 2010		1.56	%		-		1,000,000
September 17, 2010		1.72	%		-		1,000,000
March 17, 2011		2.12	%		1,000,000		1,000,000
March 28, 2011		2.00	%		1,000,000		1,000,000
July 22, 2011		1.48	%		1,000,000		1,000,000
October 11, 2011		1.32	%		1,000,000		1,000,000
March 9, 2012		4.29	%		-		2,000,000
March 27, 2012		2.43	%		1,000,000		1,000,000
April 2, 2012		1.26	%		1,000,000		-
June 9, 2012		2.19	%		1,000,000		1,000,000
October 9, 2012		1.94	%		1,000,000		1,000,000
October 22, 2012		1.53	%		1,000,000		-
April 2, 2013		1.93	%		1,000,000		-
April 22, 2013		1.85	%		1,000,000		-
June 24, 2013		1.60	%		1,000,000		-
October 27, 2014		2.55	%		2,000,000
January 26, 2017		4.36	%		5,000,000		5,000,000
August 2, 2017		4.34	%		5,000,000		5,000,000
				$	24,000,000	$	28,000,000

The outstanding advances require interest payments monthly or quarterly with principal due at maturity.

In addition to the line from the FHLB, the Bank has lines of credit of $13,650,000 in unsecured overnight federal funds and $5,500,000 in secured overnight federal funds at December 31, 2010. As of December 31, 2010, the Bank had not borrowed under these federal funds lines of credit.

-53-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Income Taxes

The components of income tax expense (benefit) are as follows:

	2010			2009
Current
Federal	$	671,320		$	1,200,370
State		145,643			266,167
		816,963			1,466,537
Deferred		(1,185,153	)		(388,710	)
	$	(368,190	)	$	1,077,827

The components of the deferred income tax expense (benefit) are as follows:

Provision for loan losses and bad debts	$	(983,487	)	$	(292,569	)
Prepaid pension costs		(24,954	)		(8,257	)
Depreciation and amortization		(4,417	)		(6,349	)
Discount accretion		(21,835	)		(17,552	)
Nonaccrual interest		(142,741	)		(23,757	)
Deferred compensation		(7,072	)		(6,990	)
Write-down of foreclosed real estate		(647	)		(33,236	)
	$	(1,185,153	)	$	(388,710	)

The components of the net deferred income tax asset are as follows:

Deferred income tax assets
Allowance for loan losses and bad debt reserve	$	1,937,899	$	914,469
Deferred compensation		193,907		186,835
Pension liability		142,891		252,798
Nonaccrual interest		254,249		111,507
Foreclosed real estate valuation allowance		43,744		43,097
		2,572,690		1,508,706
Deferred income tax liabilities
Depreciation and amortization		193,925		198,397
Discount accretion		3,443		29,326
Unrealized gain on investment securities available for sale		7,475		3,372
		204,843		231,095
Net deferred income tax asset	$	2,367,847	$	1,277,611

A reconciliation of the provisions for income taxes from statutory federal rates to effective rates follows:

Tax at statutory federal income tax rate	34.0	%	34.0	%
Tax effect of
Tax-exempt income	9.0		(1.6	)
State income taxes, net of federal benefit	4.1		4.1
Other, net	2.5		(0.2	)
	49.6	%	36.3	%

-54-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Profit Sharing Plan

The Company has a profit sharing plan qualifying under section 401(k) of the Internal Revenue Code that covers all of the Company’s employees with one year of service who have attained age 21. The Company matches 15% of employee contributions to the Plan, up to a maximum of 2% of pay. The Company may make discretionary contributions to the Plan in amounts approved by its Board of Directors. Plan expenses, included in employee benefits expense for 2010 and 2009, were $9,422 and $8,337, respectively.

12. Pension

The Bank has a defined benefit pension plan covering substantially all of the 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 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 following table sets forth the financial status of the plan at December 31:

	2010			2009
Change in plan assets
Fair value of plan assets at beginning of year	$	2,618,274		$	2,567,432
Actual return on plan assets		86,123			85,787
Employer contribution		136,351			136,351
Benefits paid		(213,220	)		(171,296	)
Fair value of plan assets at end of year		2,627,528			2,618,274

Change in benefit obligation
Projected benefit obligation at beginning of year		3,364,118			3,187,386
Service cost		100,334			171,013
Interest cost		205,566			193,859
Benefits paid		(213,220	)		(171,296	)
Actuarial loss (gain)		(467,609	)		(16,844	)
Projected benefit obligation at end of year		2,989,189			3,364,118

Funded status		(361,661	)		(745,844	)
Unamortized prior service cost		(1,382	)		(2,759	)
Unrecognized net loss		702,180			1,150,845
Prepaid pension expense included in other assets	$	339,137		$	402,242

Accumulated benefit obligation	$	2,036,621		$	2,571,973

-55-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. Pension (Continued)

Net pension expense includes the following components:

	2010			2009

Service cost	$	100,334		$	171,013
Interest cost		205,566			193,859
Expected return on assets		(150,155	)		(146,622	)
Amortization of prior service cost		(1,377	)		(1,377	)
Amortization of loss		45,246			46,360
Net pension expense	$	199,614		$	263,233

Assumptions used in the accounting for net pension expense were:

Discount rates	6.25	%	6.25	%
Rate of increase in compensation level	5.00	%	5.00	%
Long-term rate of return on assets	5.75	%	5.75	%

The Bank intends to contribute approximately $125,000 to the Plan in 2011.

Projected benefits expected to be paid from the Plan are as follows:

Year	Amount

2011	$	42,000
2012	$	46,000
2013	$	103,000
1014	$	103,000
2015	$	110,000
2016-2020	$	786,000

The long-term rate of return on assets assumption considers the current earnings on assets of the Plan as well as the effects of asset diversification. The Plan’s investment strategy is to earn a reasonable return while safeguarding the benefits promised to employees. All assets of the Plan are invested in deposit accounts at the Bank.

-56-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Other Operating Expenses

Other operating expenses consist of the following:

	2010		2009

Data processing and correspondent fees	$	681,718	$	548,133
Directors' fees		146,348		149,181
Professional fees		130,933		122,684
Advertising		59,532		60,464
Postage		110,799		92,573
Public relations and contributions		68,188		48,398
Office supplies		96,054		122,920
Printing and stationery		14,905		17,044
Telephone		43,747		41,889
Regulatory assessments		332,308		416,913
Loan product costs		13,825		14,637
Forclosed real estate expense		135,192		88,549
Insurance		37,687		27,001
Other		489,489		433,162
	$	2,360,725	$	2,183,548

14. Related Party Transactions

In the normal course of banking business, loans are made to senior officers and directors of the Company as well as to companies and individuals affiliated with those officers and directors. The terms of these transactions are substantially the same as the terms provided to other borrowers entering into similar loan transactions. In the opinion of management, these loans are consistent with sound banking practices, are within regulatory lending limitations, and do not involve more than normal credit risk.

A summary of these loans is as follows:

	2010			2009

Beginning loan balances	$	5,251,105		$	6,665,231
Advances		4,115,395			3,527,233
Repayments		(4,275,123	)		(4,868,368	)
Change in related parties		(2,649	)		(72,991	)
Ending loan balances	$	5,088,728		$	5,251,105

In addition to the outstanding balances listed above, the officers and directors and their related interests have $3,168,081 in unused loans committed but not funded as of December 31, 2010.

A director is a partner in a law firm that provides services to the Company. Payments of $ 20,047 and $11,000 were made to that firm during 2010 and 2009.

Deposits from senior officers and directors and their related interests were $2,752,485 as of December 31, 2010 and $2,434,699 as of December 31, 2009.

-57-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. Capital Standards

The Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation have adopted risk-based capital standards for banking organizations. These standards require ratios of capital to assets for minimum capital adequacy and to be classified as well capitalized under prompt corrective action provisions. The table below sets forth the capital ratios of the Bank as of December 31, 2010 and 2009. Because Peoples Bancorp, Inc.’s only asset other than its equity interest in the Bank and the Insurance Subsidiary is a small amount of cash, its capital ratios do not differ materially from those of the Bank.

						Minimum					To be well
	Actual					capital adequacy					capitalized
(in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio

December 31, 2010
Total capital (to risk-weighted assets)	$	28,651		14.3	%	$	16,050		8.0	%	$	20,062		10.0	%
Tier 1 capital (to risk-weighted assets)	$	26,104		13.0	%	$	8,025		4.0	%	$	12,037		6.0	%
Tier 1 capital (to average fourth quarter assets)	$	26,104		10.5	%	$	9,934		4.0	%	$	12,418		5.0	%

December 31, 2009
Total capital (to risk-weighted assets)	$	30,361		15.1	%	$	16,051		8.0	%	$	20,063		10.0	%
Tier 1 capital (to risk-weighted assets)	$	27,849		13.9	%	$	8,025		4.0	%	$	12,038		6.0	%
Tier 1 capital (to average fourth quarter assets)	$	27,849		11.0	%	$	10,135		4.0	%	$	12,669		5.0	%

Tier 1 capital consists of common stock, additional paid on capital, and undivided profits. Total capital includes a limited amount of the allowance for loan losses. In calculating risk-weighted assets, specified risk percentages are applied to each category of asset and off-balance sheet items.

Failure to meet the capital requirements could affect the Bank’s ability to pay dividends and accept deposits and may significantly affect the operations of the Bank.

In the most recent regulatory report, the Bank was categorized as well capitalized under the prompt corrective action regulations. Management knows of no events or conditions that should change this classification.

16.	Foreclosed Real Estate

Activity in foreclosed real estate is as follows:

	2010			2009

Beginning of year balance	$	1,335,000		$	1,407,000
Additions		398,600			110,000
Write downs		(50,000	)		(45,000	)
Proceeds from sales		(428,485	)		(166,365	)
Gain (loss) on sales		(53,515	)		29,365
End of year balance	$	1,201,600		$	1,335,000

-58-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. Fair Value Measures

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 December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

Available for Sale		Total				Level 1 Inputs				Level 2 Inputs				Level 3 Inputs
U. S. Government Agency Securities		$	8,035,780			$	8,035,780			$	-			$	-

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 twelve months ended December 31, 2010 and 2009 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 twelve months ended December 31, 2010 is as follows.

-59-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. Fair Value Measures (Continued)

	Total		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs

Foreclosed real estate	$	1,201,600	$	-	$	1,201,600	$	-

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.

	December 31,
	2010				2009
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value

Financial assets
Cash and due from banks	$	10,378,485	$	10,378,485	$	15,988,739	$	15,988,739
Federal funds sold		1,016,000		1,016,000		7,015,811		7,015,811
Investment securities (total)		11,546,313		11,590,095		13,091,076		13,339,856
Federal Home Loan Bank and CBB
Financial Corp. stock		2,151,600		2,151,600		2,401,200		2,401,200
Loans, net		207,295,877		208,116,545		203,899,678		204,083,903
Accrued interest receivable		1,306,708		1,360,708		1,450,155		1,450,155

Financial liabilities
Noninterest-bearing deposits	$	35,219,753	$	35,219,753	$	36,951,197	$	36,951,197
Interest-bearing deposits		154,420,977		157,626,964		156,299,711		160,895,134
Short-term borrowings		2,754,321		2,754,321		2,917,339		2,917,339
Federal Home Loan
Bank advances		24,000,000		25,230,768		28,000,000		28,457,862
Accrued interest payable		414,758		414,758		439,410		439,410

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

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

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

-60-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18. Parent Company Financial Information

The balance sheets, statements of income, and statements of cash flows for Peoples Bancorp, Inc. (Parent Only) follow:

	December 31,
Balance Sheets	2010			2009
Assets
Cash	$	306,690		$	307,239
Investment in bank subsidiary		25,690,671			27,157,172
Investment in insurance agency subsidiary		1,399,805			1,434,757
Income tax refund receivable		4,839			7,395
Total assets	$	27,402,005		$	28,906,563

Liabilities and Stockholders' Equity

Other liabilities	$	9,841		$	16,815
Stockholders' equity
Common stock		7,795,120			7,795,120
Additional paid-in capital		2,920,866			2,920,866
Retained earnings		17,088,741			18,865,399
Accumulated other comprehensive income (loss)		(412,563	)		(691,637	)
Total stockholders' equity		27,392,164			28,889,748
Total liabilities and stockholders' equity	$	27,402,005		$	28,906,563

	Years Ended December 31,
Statements of Income	2010			2009

Interest revenue	$	3,626		$	5,482
Dividends from bank subsidiary		1,413,122			1,405,326
Equity in undistributed income of insurance agency subsidiary		165,047			233,490
Equity in undistributed income of bank subsidiary		(1,945,573	)		265,468
		(363,778	)		1,909,766
Expenses
Professional fees		8,000			21,750
Other		4,915			5,483
		12,915			27,233

Income before income taxes		(376,693	)		1,882,533
Income tax expense (benefit)		(3,158	)		(7,395	)
Net income (loss)	$	(373,535	)	$	1,889,928

-61-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18. Parent Company Financial Information (Continued)

	Years Ended December 31,
Statements of Cash Flows	2010			2009

Cash flows from operating activities
Interest and dividends received	$	1,416,748		$	1,410,808
Income taxes refunded		5,714			5,979
Cash paid for operating expenses		(19,889	)		(22,531	)
		1,402,573			1,394,256

Cash flows from financing activities
Dividends paid		(1,403,122	)		(1,395,326	)

Net increase (decrease) in cash		1,402,573			1,394,256
Cash at beginning of year		307,239			308,309
Cash at end of year	$	1,709,812		$	1,702,565

Reconciliation of net income to net cash
provided by operating activities
Net income	$	(373,535	)	$	1,889,928
Adjustments to reconcile net income to net cash
provided by operating activities
Undistributed net income of subsidiaries		1,780,526			(498,958	)
Increase (decrease) in other liabilities		(6,974	)		4,702
(Increase) decrease in income tax refund receivable		2,556			(1,416	)
	$	1,402,573		$	1,394,256

-62-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19. Quarterly Results of Operations (Unaudited)

	Three Months Ended
(in thousands)	December 31,			September 30,		June 30,			March 31,
except per share information
2010
Interest revenue	$	3,279		$	3,048	$	3,157		$	3,330
Interest expense		912			936		944			985
Net interest income		2,367			2,112		2,213			2,345
Provision for loan losses		2,925			485		1,025			475
Net income (loss)		(995	)		288		(68	)		401
Comprehensive income (loss)		(727	)		292		(59	)		400

Earnings (loss) per share	$	(1.28	)	$	0.38	$	(0.09	)	$	0.51

2009
Interest revenue	$	3,342		$	3,440	$	3,527		$	3,597
Interest expense		1,082			1,156		1,177			1,192
Net interest income		2,260			2,284		2,350			2,405
Provision for loan losses		555			316		425			430
Net income		395			470		382			643
Comprehensive income		393			462		368			619

Earnings per share	$	0.50		$	0.60	$	0.49		$	0.83

-63-

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act with the Securities and Exchange Commission, such as this annual 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 the Company’s management, including the Chief Executive Officer (“CEO”), who also serves as the Company’s Chief Financial Officer (“CFO”), as appropriate, 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 as of December 31, 2010 was carried out under the supervision and with the participation of the Company’s management, including the CEO. Based on that evaluation, the Company’s management, including the CEO, has concluded that the Company’s disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the fourth quarter of 2010, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has performed an evaluation and testing of the Company’s internal control over financial reporting as of December 31, 2010. Management’s report on the Company’s internal control over financial reporting is included on the following page.

-64-

Management’s Report on Internal Control Over Financial Reporting

Management of Peoples Bancorp, Inc. (the “Company”) is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include some amounts that are based on the best estimates and judgments of management.

This annual report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting because management’s report was not subject to attestation pursuant to temporary rules of the SEC that permit the Company to provide only this management’s report.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system is designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of the Company’s financial reporting and the preparation and presentation of financial statements for external reporting purposes in conformity with accounting principles generally accepted in the United States of America, as well as to safeguard assets from unauthorized use or disposition. The system of internal control over financial reporting is evaluated for effectiveness by management and tested for reliability through a program of internal audit with actions taken to correct potential deficiencies as they are identified. Because of inherent limitations in any internal control system, no matter how well designed, misstatement due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control effectiveness may vary over time.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 based upon criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on this assessment and on the foregoing criteria, management has concluded that, as of December 31, 2010, the Company’s internal control over financial reporting is effective. The Company is a “smaller reporting company” as defined by Exchange Act Rule 12b-2 and, accordingly, its independent registered public accounting firm is not required to attest to the foregoing management report.

March 30, 2011

/s/ Thomas G. Stevenson
Thomas G. Stevenson,
President, Chief Executive Officer, and
Chief Financial Officer

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Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The Company has adopted a Code of Ethics that applies to all of its directors, officers, and employees, including its principal executive officer, principal financial officer, principal accounting officer, or controller, or persons performing similar functions. A written copy of the Company’s Code of Ethics will be provided to stockholders, free of charge, upon request to: Stephanie Usilton, Peoples Bancorp, Inc., 100 Spring Avenue, Chestertown, Maryland 21620 or (410) 778-3500.

All other information required by this item is incorporated herein by reference to the Company’s definitive proxy statement to be filed in connection with the 2011 Annual Meeting of Stockholders.

Item 11. Executive Compensation.

The information required by this item is incorporated herein by reference to the Company’s definitive proxy statement to be filed in connection with the 2011 Annual Meeting of Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The Company has not adopted any compensation plan or arrangement pursuant to which our executive officers may receive shares of the Company’s common stock. All other information required by this item is incorporated herein by reference to the Company’s definitive proxy statement to be filed in connection with the 2011 Annual Meeting of Stockholders.

Item 13. Certain Relationships and Related Transactions and Director Independence.

The information required by this item is incorporated herein by reference to the Company’s definitive proxy statement to be filed in connection with the 2011 Annual Meeting of Stockholders.

Item 14. Principal Accountant Fees and Services.

The information required by this item is incorporated herein by reference to the Company’s definitive proxy statement to be filed in connection with the 2011 Annual Meeting of Stockholders.

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a)(1), (2) and (c). Financial statements and schedules:

Report of Independent Registered Public Accounting Firm	35
Consolidated Balance Sheets at December 31, 2010 and 2009	36
Consolidated Statements of Income for the years Ended December 31, 2010 and 2009	37
Consolidated Statements of Changes in Stockholders’ Equity for the years Ended December 31,
2010 and 2009	38
Consolidated Statements of Cash Flows for the years Ended December 31, 2010 and 2009	39
Notes to Consolidated Financial Statements for the years ended December 31, 2010 and 2009	41

(a)(3) and (b). Exhibits required to be filed by Item 601 of Regulation S-K:

The exhibits filed or furnished with this annual report are shown on the Exhibit List that follows the signatures to this annual report, which list is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PEOPLES BANCORP, INC.

Date: March 30, 2011	By:	/s/ Thomas G. Stevenson
		Thomas G. Stevenson
		President, CEO and CFO

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date:	March 30, 2011	By:	/s/ E. Jean Anthony
			E. Jean Anthony, Director

Date:	March 30, 2011	By:
			Robert W. Clark, Jr., Director

Date:	March 30, 2011	By:	/s/Lamont e. Cooke
			LaMonte E. Cooke, Director

Date:	March 30, 2011	By:	/s/ Gary B. Fellows
			Gary B. Fellows, Director

Date:	March 30, 2011	By:	/s/ Herman E. Hill, Jr.
			Herman E. Hill, Jr., Director

Date:	March 30, 2011	By:	/s/ Patricia Joan Ozman Horsey
			Patricia Joan Ozman Horsey, Director

Date:	March 30, 2011	By:	/s/ P. Patrick McCleary
			P. Patrick McCleary, Director

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Date:	March 30, 2011	By:	/s/ Alexander P. Rasin, III
			Alexander P. Rasin, III, Director

Date:	March 30, 2011	By:	/s/ Stefan R. Skipp
			Stefan R. Skipp, Director

Date:	March 30, 2011	By:	/s/ Thomas G. Stevenson
			Thomas G. Stevenson, President, CEO,
			CFO and Director

Date:	March 30, 2011	By:	/s/ Elizabeth A. Strong
			Elizabeth A. Strong, Director

Date:	March 30, 2011	By:	/s/ William G. Wheatley
			William G. Wheatley, Director

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EXHIBIT INDEX

Exhibit No.		Description

3.1		Articles of Incorporation of the Company, as corrected and amended (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on January 24, 2005)
3.2		Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004)
21		Subsidiaries of the Company (filed herewith)
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)

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Attached files

PEOPLES BANCORP INC/MD Reports

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