** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

### **FORM 10-Q**

### ** **

| **ý** |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|--------|-----------------------------------------------------------------------------------------------|
|       |   |                                                                                          |
|       |   | **FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004**                                             |
|       |   |                                                                                          |
| **or**     |
|       |   |                                                                                          |   |   |
| **o**      |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|       |   |                                                                                          |
|       |   | **FOR THE TRANSITION PERIOD FROM**                                                            |
| to         |

 

**Commissionfile number:  333-30640**

 

**PEOPLES FIRST, INC.**

(Exact name of registrant as specified in its charter)

 

| **PENNSYLVANIA**                                              |   | **23-3028825**                      |
|---------------------------------------------------------------|--------|-------------------------------------|
| (State or other jurisdiction ofincorporation or organization) |   | (I.R.S. EmployerIdentification No.) |
|                                                          |   |                                |
| **24 SOUTH THIRD STREET, OXFORD, PENNSYLVANIA**               |   | **19363**                           |
| (Address of principal executive offices)                      |   | (Zip Code)                          |
|                                                          |   |                                |
| **(610) 932-9294**                                            |
| (Registrant’s telephone number, including area code)     |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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 ý No o.

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).  o Yes ý No

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpractical date.

 

COMMON STOCK, Par Value $1.00 per share

2,956,288 shares outstanding as of March 31, 2004

 

 

----

 

**Item 1. Financial Statements**

**PEOPLES FIRST, INC.**

**CONSOLIDATED BALANCE SHEETS**

 
|                                                                                            |   | **March 31,  2004** |    | **December  31,  2003** |   |
|-------------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                                                                                            |   | **(unaudited)**     |    | **(note)**              |   |
|                                                                                            |   | **(In  Thousands)** |    |
| **ASSETS**                                                                                      |   |                |    |                    |   |
| Cash and due from banks                                                                         |   | $                   | 12,249  |                    | $      | 12,167 |   |
| Interest-bearing deposits with banks                                                            |   | 233                 |    | 325                     |   |
| Federal funds sold                                                                              |   | 5,721               |    | 1,712                   |   |
|                                                                                            |   |                |    |                    |   |
| Securities - available for sale, at fair  value                                                 |   | 61,951              |    | 66,274                  |   |
|                                                                                            |   |                |    |                    |   |
| Loans - net of unearned income                                                                  |   | 361,014             |    | 358,665                 |   |
| Allowance for loan losses                                                                       |   | (5,034              | )       | (4,972                  | )      |
|                                                                                            |   |                |    |                    |   |
| Net Loans                                                                                       |   | 355,980             |    | 353,693                 |   |
|                                                                                            |   |                |    |                    |   |
| Investment in FHLB stock, at cost                                                               |   | 2,451               |    | 2,291                   |   |
| Premises and equipment, net                                                                     |   | 10,628              |    | 11,185                  |   |
| Accrued interest receivable and other  assets                                                   |   | 11,571              |    | 11,576                  |   |
|                                                                                            |   |                |    |                    |   |
| **Total Assets**                                                                                |   | $                   | 460,784 |                    | $      | 459,223 |   |
|                                                                                            |   |                |    |                    |   |
| **LIABILITIES**                                                                                 |   |                |    |                    |   |
| Deposits:                                                                                       |   |                |    |                    |   |
| Demand, non-interest bearing                                                                    |   | $                   | 91,452  |                    | $      | 94,797 |   |
| NOW and Super NOW                                                                               |   | 74,665              |    | 75,730                  |   |
| Money market funds                                                                              |   | 36,807              |    | 39,063                  |   |
| Savings                                                                                         |   | 79,140              |    | 69,135                  |   |
| Time                                                                                            |   | 88,904              |    | 89,480                  |   |
|                                                                                            |   |                |    |                    |   |
| **Total Deposits**                                                                              |   | 370,968             |    | 368,205                 |   |
| Securities sold under agreements to  repurchase                                                 |   | 6,170               |    | 8,470                   |   |
| Long-term debt                                                                                  |   | 30,693              |    | 30,906                  |   |
| Accrued interest payable and other  liabilities                                                 |   | 2,537               |    | 2,256                   |   |
|                                                                                            |   |                |    |                    |   |
| **Total Liabilities**                                                                           |   | 410,368             |    | 409,837                 |   |
|                                                                                            |   |                |    |                    |   |
| **STOCKHOLDERS’ EQUITY**                                                                   |   |                |    |                    |   |
| Common stock, par value $1.00 per share;  authorized 10,000,000 shares; issued 3,053,208 shares |   | 3,053               |    | 3,053                   |   |
| Surplus                                                                                         |   | 16,172              |    | 16,172                  |   |
| Retained earnings                                                                               |   | 31,802              |    | 30,949                  |   |
| Accumulated other comprehensive income                                                          |   | 1,404               |    | 1,227                   |   |
| Treasury stock, at cost 96,920 shares                                                           |   | (2,015              | )       | (2,015                  | )      |
|                                                                                            |   |                |    |                    |   |
| **Total Stockholders’ Equity**                                                             |   | 50,416              |    | 49,386                  |   |
|                                                                                            |   |                |    |                    |   |
| **Total Liabilities and Stockholders’ Equity**                                             |   | $                   | 460,784 |                    | $      | 459,223 |   |
|                                                                                            |   |                |    |                    |   |
| **Memoranda: Standby Letters of Credit**                                                        |   | $                   | 8,387   |                    | $      | 8,702 |   |

 

Note: The balance sheet atDecember 31, 2003 has been derived from the audited financial statements atthat date.

 

See Notes to ConsolidatedFinancial Statements

 

1

----

 

**PEOPLES FIRST, INC.**

**CONSOLIDATED STATEMENTS OF INCOME**

(Unaudited)

 
|                                                     |   | **Three  Months Ended  March 31,**         |   |
|----------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                     |   | **2004**                                   |   | **2003** |   |
|                                                     |   | **(In  Thousands, Except per Share Data)** |   |
|                                                     |   |                                       |   |   |   |
| **Interest Income:**                                     |   |                                       |   |   |   |
| Loans receivable, including fees                         |   | $                                          | 5,207  |   | $ | 4,827 |   |
| Securities:                                              |   |                                       |   |   |   |
| Taxable                                                  |   | 452                                        |   | 559 |   |
| Tax-exempt                                               |   | 141                                        |   | 168 |   |
| Other interest and dividends                             |   | 12                                         |   | 60 |   |
|                                                     |   |                                       |   |   |   |
| **Total Interest Income**                                |   | 5,812                                      |   | 5,614 |   |
|                                                     |   |                                       |   |   |   |
| **Interest Expense:**                                    |   |                                       |   |   |   |
| Deposits                                                 |   | 898                                        |   | 1,148 |   |
| Short-term borrowings                                    |   | 29                                         |   | 11 |   |
| Long-term borrowings                                     |   | 425                                        |   | 418 |   |
|                                                     |   |                                       |   |   |   |
| **Total Interest Expense**                               |   | 1,352                                      |   | 1,577 |   |
|                                                     |   |                                       |   |   |   |
| **Net Interest Income**                                  |   | 4,460                                      |   | 4,037 |   |
| **Provision for Loan Losses**                            |   | 50                                         |   | 150 |   |
|                                                     |   |                                       |   |   |   |
| **Net Interest Income after Provision for  Loan Losses** |   | 4,410                                      |   | 3,887 |   |
|                                                     |   |                                       |   |   |   |
| **Non-Interest Income:**                                 |   |                                       |   |   |   |
| Service charges on deposit accounts                      |   | 446                                        |   | 420 |   |
| Income from fiduciary activities                         |   | 214                                        |   | 156 |   |
| Investment management fees                               |   | —                                     |   | 154 |   |
| Mortgage banking activities                              |   | 67                                         |   | 292 |   |
| Realized gain on disposal of securities                  |   | 8                                          |   | — |   |
| Check card commission                                    |   | 83                                         |   | 75 |   |
| Other income                                             |   | 256                                        |   | 225 |   |
|                                                     |   |                                       |   |   |   |
| **Total Non-Interest Income**                            |   | 1,074                                      |   | 1,322 |   |
|                                                     |   |                                       |   |   |   |
| **Non-Interest Expense:**                                |   |                                       |   |   |   |
| Salaries and employee benefits                           |   | 2,309                                      |   | 2,202 |   |
| Occupancy                                                |   | 242                                        |   | 268 |   |
| Furniture and equipment                                  |   | 178                                        |   | 187 |   |
| Communications and supplies                              |   | 145                                        |   | 159 |   |
| Taxes, other than income                                 |   | 104                                        |   | 107 |   |
| Professional fees                                        |   | 39                                         |   | 61 |   |
| Computer and software expenses                           |   | 142                                        |   | 97 |   |
| Debit card expense                                       |   | 99                                         |   | 80 |   |
| Marketing expense                                        |   | 59                                         |   | 54 |   |
| Other                                                    |   | 310                                        |   | 298 |   |
|                                                     |   |                                       |   |   |   |
| **Total Non-Interest Expense**                           |   | 3,627                                      |   | 3,513 |   |
|                                                     |   |                                       |   |   |   |
| **Income before Income Taxes**                           |   | 1,857                                      |   | 1,696 |   |
| **Income Tax Expense**                                   |   | 502                                        |   | 463 |   |
|                                                     |   |                                       |   |   |   |
| **Net Income**                                           |   | $                                          | 1,355  |   | $ | 1,233 |   |
|                                                     |   |                                       |   |   |   |
| **Earnings per Share:**                                  |   |                                       |   |   |   |
| **Basic**                                                |   | $                                          | 0.46   |   | $ | 0.42 |   |
| **Diluted**                                              |   | $                                          | 0.45   |   | $ | 0.42 |   |
|                                                     |   |                                       |   |   |   |
| **Dividends Declared per Share**                         |   | $                                          | 0.17   |   | $ | 0.15 |   |

 

See Notes to Consolidated FinancialStatements

 

2

----

 

**PEOPLES FIRST, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

 
|                                                                                                           |   | **Three  Months Ended March 31,** |   |
|----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                           |   | **2004**                          |   | **2003** |   |
|                                                                                                           |   | **(In  Thousands)**               |   |
|                                                                                                           |   |                              |   |   |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                                       |   |                              |   |   |   |
| Net income                                                                                                     |   | $                                 | 1,355  |   | $ | 1,233 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                             |   |                              |   |   |   |
| Depreciation                                                                                                   |   | 185                               |   | 187 |   |
| Amortization                                                                                                   |   | 83                                |   | 41 |   |
| Amortization of securities premium  (discount), net                                                            |   | (9                                | )      | (11 | ) |
| Realized gain on disposal of securities                                                                        |   | (8                                | )      | — |   |
| Provision for loan losses                                                                                      |   | 50                                |   | 150 |   |
| Earnings on life insurance                                                                                     |   | (69                               | )      | (47 | ) |
| Deferred income taxes                                                                                          |   | (40                               | )      | 63 |   |
| Other                                                                                                          |   | —                            |   | (18 | ) |
| Increase in other assets                                                                                       |   | (156                              | )      | 1,092 |   |
| Increase in other liabilities                                                                                  |   | 577                               |   | 2 |   |
|                                                                                                           |   |                              |   |   |   |
| **Net Cash Provided by Operating Activities**                                                                  |   | 1,968                             |   | 2,692 |   |
|                                                                                                           |   |                              |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                                                       |   |                              |   |   |   |
|                                                                                                           |   |                              |   |   |   |
| Net increase in interest-bearing deposits  with banks                                                          |   | 92                                |   | (1,742 | ) |
| Net increase in federal funds sold                                                                             |   | (4,009                            | )      | (22,674 | ) |
| Securities available for sale:                                                                                 |   |                              |   |   |   |
| Proceeds from maturities                                                                                       |   | 4,607                             |   | 5,550 |   |
| Purchases                                                                                                      |   | —                            |   | (3,011 | ) |
| Net increase in loans receivable                                                                               |   | (2,337                            | )      | (6,008 | ) |
| Purchases of FHLB stock                                                                                        |   | (160                              | )      | (232 | ) |
| Purchases of premises and equipment                                                                            |   | 372                               |   | (313 | ) |
| Proceeds from sale of premises &  equipment and foreclosed assets                                          |   | 97                                |   | 156 |   |
|                                                                                                           |   |                              |   |   |   |
| **Net Cash Used in Investing Activities**                                                                      |   | (1,338                            | )      | (28,274 | ) |
|                                                                                                           |   |                              |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                                                       |   |                              |   |   |   |
| Net increase in non-interest bearing demand  deposits, NOW, Super NOW, money market funds and savings deposits |   | 3,339                             |   | 16,423 |   |
| Net increase (decrease) in time deposits                                                                       |   | (576                              | )      | 345 |   |
| Net increase (decrease) in securities sold  under agreements to repurchase                                     |   | (2,300                            | )      | 7,265 |   |
| Proceeds from long-term debt                                                                                   |   | —                            |   | 2,000 |   |
| Repayments of long-term debt                                                                                   |   | (213                              | )      | (178 | ) |
| Dividends paid                                                                                                 |   | (798                              | )      | (593 | ) |
|                                                                                                           |   |                              |   |   |   |
| **Net Cash Provided by (used in) Financing  Activities**                                                       |   | (548                              | )      | 25,262 |   |
|                                                                                                           |   |                              |   |   |   |
| **Net Increase (Decrease) in Cash and Due  from Banks**                                                        |   | 82                                |   | (320 | ) |
|                                                                                                           |   |                              |   |   |   |
| **Cash and Due from Banks - Beginning**                                                                        |   | 12,167                            |   | 14,357 |   |
|                                                                                                           |   |                              |   |   |   |
| **Cash and Due from Banks - Ending**                                                                           |   | $                                 | 12,249 |   | $ | 14,037 |   |

 

See Notes to ConsolidatedFinancial Statements

 

3

----

 

**PEOPLES FIRST, INC.**

**PEOPLES FIRST, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY**

**For the Three Months Ended March 31, 2003**

(Unaudited)

 
|                                                                                    |   | **Number of  Shares  Issued** |   | **Common  Stock** |   | **Surplus** |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Treasury  Stock** |   | **Total** |   |
|-----------------------------------------------------------------------------------------|--------|-------------------------------|--------|-------------------|--------|-------------|--------|------------------------|--------|------------------------------------------------------|--------|---------------------|--------|-----------|--------|
|                                                                                    |   | **(Dollars  in Thousands)**   |   |
|                                                                                    |   |                          |   |              |   |        |   |                   |   |                                                 |   |                |   |      |   |
| **Balance December 31, 2002**                                                           |   | 3,053,208                     |   | $                 | 3,053  |        | $      | 16,172                 |   | $                                                    | 27,944 |                | $      | 1,490     |   | $ | (1,795 | ) | $ | 46,864 |   |
| Comprehensive income                                                                    |   |                          |   |              |   |        |   |                   |   |                                                 |   |                |   |      |   |
| Net Income                                                                              |   |                          |   |              |   |        |   | 1,233                  |   |                                                 |   |                |   | 1,233     |   |
| Net change in unrealized gains/(losses) on securities available for  sale, net of taxes |   |                          |   |              |   |        |   |                   |   | (65                                                  | )      |                |   | (65       | )      |
|                                                                                    |   |                          |   |              |   |        |   |                   |   |                                                 |   |                |   |      |   |
| Total comprehensive income                                                              |   |                          |   |              |   |        |   |                   |   |                                                 |   |                |   | 1,168     |   |
|                                                                                    |   |                          |   |              |   |        |   |                   |   |                                                 |   |                |   |      |   |
| Cash dividends declared, $.15 per share                                                 |   |                          |   |              |   |        |   | (445                   | )      |                                                 |   |                |   | (445      | )      |
| **Balance March 31, 2003**                                                              |   | 3,053,208                     |   | $                 | 3,053  |        | $      | 16,172                 |   | $                                                    | 28,732 |                | $      | 1,425     |   | $ | (1,795 | ) | $ | 47,587 |   |

 

**PEOPLES FIRST, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY**

**For the Three Months Ended March 31, 2004**

(Unaudited)

 
|                                                                                    |   | **Number of  Shares  Issued** |   | **Common  Stock** |   | **Surplus** |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Treasury  Stock** |   | **Total** |   |
|-----------------------------------------------------------------------------------------|--------|-------------------------------|--------|-------------------|--------|-------------|--------|------------------------|--------|------------------------------------------------------|--------|---------------------|--------|-----------|--------|
|                                                                                    |   | **(Dollars  in Thousands)**   |   |
|                                                                                    |   |                          |   |              |   |        |   |                   |   |                                                 |   |                |   |      |   |
| **Balance December 31, 2003**                                                           |   | 3,053,208                     |   | $                 | 3,053  |        | $      | 16,172                 |   | $                                                    | 30,949 |                | $      | 1,227     |   | $ | (2,015 | ) | $ | 49,386 |   |
| Comprehensive income                                                                    |   |                          |   |              |   |        |   |                   |   |                                                 |   |                |   |      |   |
| Net Income                                                                              |   |                          |   |              |   |        |   | 1,355                  |   |                                                 |   |                |   | 1,355     |   |
| Net change in unrealized gains/(losses) on securities available for  sale, net of taxes |   |                          |   |              |   |        |   |                   |   | 177                                                  |   |                |   | 177       |   |
|                                                                                    |   |                          |   |              |   |        |   |                   |   |                                                 |   |                |   |      |   |
| Total comprehensive income                                                              |   |                          |   |              |   |        |   |                   |   |                                                 |   |                |   | 1,532     |   |
|                                                                                    |   |                          |   |              |   |        |   |                   |   |                                                 |   |                |   |      |   |
| Cash dividends declared, $.17 per share                                                 |   |                          |   |              |   |        |   | (502                   | )      |                                                 |   |                |   | (502      | )      |
| **Balance March 31, 2004**                                                              |   | 3,053,208                     |   | $                 | 3,053  |        | $      | 16,172                 |   | $                                                    | 31,802 |                | $      | 1,404     |   | $ | (2,015 | ) | $ | 50,416 |   |

 

4

----

 

### **PEOPLES FIRST, INC.**

### **NOTES TO FINANCIAL STATEMENTS**

(Unaudited)

 

#### **March 31, 2004**

#### ** **

#### **Note A – Basis of Presentation**

#### ** **

The consolidated financial statements include theaccounts of Peoples First, Inc. and its wholly owned subsidiary, The PeoplesBank of Oxford (the “Bank”) and its subsidiaries (collectively “Peoples”).   The Bank sold the subsidiary, Wilmerding& Associates, Inc. (“Wilmerding”), an investment advisor, to anunaffiliated third party, on August 15, 2003, and incurred no material gain orloss on the transaction.  Thesubsidiary, Peoples First Business Investment Company, LLC (“PFBI”), is anon-operating company formed in January 2002 for the purpose of holding certainequity investments in operating entities. One of such operating entities is PeoplesFirst Land Transfer, LLC, which commenced operations in January 2002 andderives its income from the sale of title insurance.  The other operating entity is Peoples First Mortgage Company,LLC, which commenced operation in May 2003 and derives its income from the saleof mortgages.  All materialinter-company transactions have been eliminated. Peoples First, Inc. was formedon July 27, 2000 and is subject to regulation by the Board of Governors of theFederal Reserve System.

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles for interim financial information andare presented in accordance with the instructions to Form 10-Q and Rule 10-01of the Securities and Exchange Commission Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.  Operating results for the three month periodended March 31, 2004, are not necessarily indicative of the results that may beexpected for the year ending December 31, 2004.

 

The consolidated financialstatements presented in this report should be read in conjunction with theaudited financial statements and the accompanying notes included in the AnnualReport on Form 10-K of Peoples First, Inc. filed with the Securities andExchange Commission for the year ended December 31, 2003.

 

5

----

 

#### **Note B – Accounting Policies**

#### ** **

The accounting policies ofPeoples as applied in the interim financial statements presented, aresubstantially the same as those followed on an annual basis as presented in theAnnual Report on Form 10-K of Peoples First, Inc. filed for the year endedDecember 31, 2003.

 

At March 31, 2004, Peoples hadone stock-based employee compensation plan, which is described more fully inNote E.  Peoples accounts for this planunder the recognition and measurement principles of APB Opinion No. 25,“Accounting for Stock Issued to Employees,” and related Interpretations. Nostock-based employee compensation cost is reflected in net income, as alloptions granted under the plan had an exercise price equal to the market valueof the underlying common stock on the date of grant.  The following table illustrates the effect on net income and earningsper share if Peoples had applied the fair value recognition provisions of FASBStatement No. 123, “Accounting for Stock-Based Compensation,” to stock-basedemployee compensation.

 
|                                                                                                                              |   | **3 Months  Ended  March 31, 2004**        |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                                                              |   | **(In  Thousands, Except Per Share Data)** |   |
|                                                                                                                              |   |                                       |   |
| Net income, as reported                                                                                                           |   | $                                          | 1,355  |   |
| Deduct total stock based compensation  expense determined under fair value based method for the award, net of  related tax effect |   | (93                                        | )      |
| Pro forma net income                                                                                                              |   | $                                          | 1,262  |   |
|                                                                                                                              |   |                                       |   |
| Basic earnings per share:                                                                                                         |   |                                       |   |
| As reported                                                                                                                       |   | $                                          | .46    |   |
| Pro forma                                                                                                                         |   | $                                          | .43    |   |
| Diluted earnings per share:                                                                                                       |   |                                       |   |
| As reported                                                                                                                       |   | $                                          | .45    |   |
| Pro forma                                                                                                                         |   | $                                          | .42    |   |

 

##### **Note C – Earnings per Share**

##### ** **

Basic earnings per share represents income availableto common shareholders divided by the weighted-average number of common sharesoutstanding during the period.  Dilutedearnings per share reflects additional common shares that would have beenoutstanding if dilutive potential common shares (stock options) had beenissued.

 

6

----

 

Stock options were first granted in June 2003.  Earnings per common share calculations priorto 2003 consisted of net income available to common shareholders divided by theaverage shares outstanding for the period. Earnings per common share have been computed based upon the following:

 
|                               |   | **3 Months  Ended March 31,** |      |
|------------------------------------|--------|-------------------------------|-----------|
|                               |   | **2004**                      |      | **2003** |   |
|                               |   |                          |      |   |   |
| Numerator -net income              |   | $                             | 1,355,000 |   | $ | 1,233,000 |   |
|                               |   |                          |      |   |   |
| Denominator:                       |   |                          |      |   |   |
| Average basic shares outstanding   |   | 2,956,288                     |      | 2,965,284 |   |
| Effect of dilutive stock options   |   | 42,878                        |      |   |   |
| Average diluted shares outstanding |   | 2,999,166                     |      |   |   |
|                                    |        |                               |           |  |  |  |  |

 

**NoteD – Comprehensive Income**

#### ** **

The only comprehensive incomeitem that Peoples presently has is unrealized gains/(losses) on securitiesavailable for sale.  Total comprehensiveincome, which is the sum of net income and other comprehensive income for thethree month period ended March 31, 2004, was $1,532,000 compared to $1,168,000for the same period last year.  Thefederal income taxes allocated to the unrealized gains/(losses) are as follows:

 

7

----

 
|                                                          |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------------------|--------|------------------------------------|--------|
|                                                          |   | **2004**                           |   | **2003** |   |
|                                                          |   | **(In  Thousands)**                |   |
|                                                          |   |                               |   |   |   |
| Unrealized holding gains/(losses) arising  during the period: |   |                               |   |   |   |
|                                                          |   |                               |   |   |   |
| Before tax amount                                             |   | $                                  | 268    |   | $ | (98 | ) |
|                                                          |   |                               |   |   |   |
| Income tax effect                                             |   | (91                                | )      | 33 |   |
|                                                          |   |                               |   |   |   |
| Net of tax amount                                             |   | $                                  | 177    |   | $ | (65 | ) |

 

##### **Note E – Stock Option Plan**

##### ** **

During 2001, Peoplesstockholders approved a stock option plan for key employees and directors ofPeoples and its subsidiary that is administered by a committee of the Board ofDirectors.  Under the Plan, the Board isauthorized to grant “incentive stock options” and “non-qualified stockoptions.” A total of 200,000 shares of Peoples’ common stock has been reservedfor issuance under the Plan. The option price for options issued under the planmust be at least equal to 100% of the fair market value of the common stock onthe grant date. No incentive stock options have been granted.

 

On June 17, 2003, Peoplesgranted 85,950 nonqualified stock options to purchase common stock at $24.125per share to employees of Peoples. Options granted under the Plan are exercisable over a period not lessthan one year after the grant date, but no later than ten years and one monthafter the date of grant in accordance with the vesting period as determined bythe Plan Committee.  Options expire onthe earlier of ten years after the date of grant, up to twenty-four months fromthe date of retirement, as of the date of termination for cause, or one year fromthe date of death, permanent disability or a change in control.

 

Transactions under the plan aresummarized as follows:

 
|                          |   | **Number of  Options** |   | **Exercise  Price Per  Share** |   |
|-------------------------------|--------|------------------------|--------|--------------------------------|--------|
|                          |   |                   |   |                           |   |
| Outstanding December 31, 2003 |   | 85,450                 |   | $                              | 24.125 |   |
|                          |   |                   |   |                           |   |
| Options granted 2004          |   | —                 |   | —                         |   |
|                          |   |                   |   |                           |   |
| Outstanding March 31, 2004    |   | 85,450                 |   | $                              | 24.125 |   |

 

8

----

 

No options are exercisable atMarch 31, 2004.  To date, no optionshave been exercised, 500 options were forfeited in 2003 and none haveexpired.  The weighted average remainingcontractual life of the options outstanding is 9.25 years.

 

The fair value of each optiongrant is estimated using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions: dividend yield of 2.5 %, expectedvolatility of 30.67%, risk-free interest rate of 2.81%, and expected life of 7years.  The fair value of optionsgranted in 2003 was $6.53.

 

##### **Note F – Standby Letters of Credit**

##### ** **

Outstanding letters of creditwritten are conditional commitments issued by Peoples to guarantee theperformance of a customer to a third party. Peoples’ exposure to credit loss in the event of non-performance by theother party to the financial instrument for standby letters of credit isrepresented by the contractual amount of those instruments.  Peoples had $8,387,000 of standby letters ofcredit as of March 31, 2004 and $8,702,000 at December 31, 2003.  The Bank uses the same credit policies inmaking conditional obligations as it does for on-balance sheet instruments.

 

The majority of these standby letters of credit expirewithin the next twelve months.  Thecredit risk involved in issuing letters of credit is essentially the same asthat involved in extending other loan commitments.  Peoples requires collateral and personal guarantees supportingthese letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation ofsuch collateral and the enforcement of personal guarantees would be sufficientto cover the maximum potential amount of future payments required under thecorresponding guarantees.  The currentamount of the liability as of March 31, 2004, for guarantees under standbyletters of credit issued after December 31, 2003 is not material.

 

**Note G –Pending Merger**

 

On December 18, 2003, the Board of Directors ofPeoples signed a definitive agreement to merge with and into National PennBancshares, Inc. of Boyertown, Pennsylvania. The transaction, which is subject to regulatory approval as well as Peoples’stockholders, is anticipated to close in the second quarter of 2004.  Completion of the merger in 2004 willtrigger change in control payments to certain officers, as dictated by theirrespective contracts and acceleration of the vesting of outstanding stockoptions.

 

9

----

 

**Item2- Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

#### **Forward-Looking Statements**

#### ** **

Except for historicalinformation, this report may be deemed to contain “forward-looking” statementsregarding Peoples.  Examples offorward-looking statements include, but are not limited to, (a) projections orstatements regarding future earnings, expenses, net interest income, otherincome, earnings or loss per share, asset mix and quality, growth prospects,capital structure and other financial terms, (b) statements of plans andobjectives of management or the board of directors, and (c) statements ofassumptions, such as economic conditions in Peoples’ market areas.  Such forward-looking statements can beidentified by the use of forward-looking terminology such as “believes,”“expects,” “may,” “intends,” “will,” “should,” “anticipates,” or the negativeof any of the foregoing or other variations thereon or comparable terminology,or by discussion of strategy.

 

No assurance can be given thatthe future results covered by forward-looking statements will be achieved.  Such statements are subject to risks,uncertainties, and other factors that could cause actual results to differmaterially from future results expressed or implied by such forward-lookingstatements.  Important factors thatcould impact Peoples’ operating results include, but are not limited to, (i)the effects of changing economic conditions in Peoples’ market areas andnationally, (ii) credit risks of commercial, real estate, consumer and otherlending activities, (iii) significant changes in interest rates, (iv) changesin federal and state banking laws and regulations which could impact Peoples’operations, (v) funding costs, (vi) the effects of armed conflicts involvingthe United States or its interests, and (vii) other external developments whichcould materially affect Peoples’ business and operations.

 

##### **Critical Accounting Policies**

##### ** **

Note 2 to the consolidatedfinancial statements of Peoples First, Inc. (included in Item 8 of the AnnualReport on Form 10-K of Peoples First, Inc. for the year ended December 31,2003) lists significant accounting policies used in the development andpresentation of its financial statements. This discussion and analysis, the significant accounting policies, andother financial statement disclosures identify and address key variables andother qualitative and quantitative factors that are necessary for anunderstanding and evaluation of Peoples and its results of operations.

 

10

----

 

The most significant estimatesin the preparation of Peoples’ financial statements are for the allowance forloan losses and the stock option plan. Please refer to the discussion of the allowance for loan losscalculation under “Results of Operations” below and refer to Note E above forthe discussion on the stock option plan.

 

#### **Financial Condition**

#### ** **

Total assets of Peoplesincreased $1,561,000 or .34% during the first three months of 2004.  Increases in deposits of $2,763,000 andretained earnings of $853,000, which were partially offset by a decrease of$2,300,000 in securities sold under agreements to repurchase were the primaryresources for the growth in assets. This growth funded increases in net loansof $2,287,000, along with increases in federal funds sold of $4,009,000, whichwas partially offset by decreases in securities of $4,323,000 and $557,000 inpremises and equipment, for the first three months of 2004.  Peoples’ increased investment in FHLB stockof $160,000 was due to Peoples short-term borrowings during the month of March2004 resulting in higher capital requirements. Cash and due from bank balances increased by $82,000, whereas, interest-bearingdeposits with banks decreased by $92,000.

 

Net loans grew $2,287,000 or..7% during the first quarter of 2004. The majority of this loan growth was in real estate secured loans, whichincreased $4,594,000 or 1.6%, agricultural loans, which were up $220,000 or3.2% and tax-free loans which were up $261,000 or 1.9%.  Decreases were noted in commercial loans,which were down $2,016,000 or 5.8% and total consumer loans, which were down$102,000 or .8%.  The growth in realestate loans was distributed through various categories in which constructionand development loans were up $803,000, commercial real estate loans grew$1,262,000, loans secured by agricultural properties increased $1,746,000, homeequity loans and lines of credit increased $732,000 and residential first lienloans increased $571,000.

 

Total deposits increased by $2,763,000 or .75% sinceyear-end 2003.  The increase wasrealized in savings accounts, which jumped $10,005,000 or 14.5%. Impacting theincrease in savings deposits was the trust department savings account whichincreased from $5,571,000 at December 31, 2003 to $12,023,000 at March 31,2004.  The remainder of the depositaccounts reflected decreases with demand deposit accounts decreasing $3,345,000or 3.5%, NOW and SuperNOW accounts down by $1,065,000 or 1.4%, money marketaccounts decreasing $2,256,000 or 5.8% and time deposits down by $576,000 or..64% during the three months ended March 31, 2004.

 

11

----

 

Securities sold under agreements to repurchase,decreased $2,300,000 or 27.2% and long-term debt decreased by $213,000 or .69%.

 

#### **Results of Operations**

#### ** **

Net income for the first quarter of 2004 was$1,355,000, compared to net income of $1,233,000 for the first quarter of2003.  This reflects a $122,000 or 9.9%increase in net income for the first three months of 2004 compared to 2003.Basic and diluted earnings per share for the first quarter of 2004 were $.46and $.45 per share, respectively, up from $.42 per share for both basic anddiluted earnings per share for the same period in 2003.

 

Net interest income for thefirst quarter 2004 increased by $423,000 or 10.5%, compared to the same timeperiod in 2003.  This increase isprimarily a result of increased volume in earning assets contributing to higherinterest income.  The low rateenvironment along with continued competition in product pricing has resulted inthe compression of the margin, which averaged 4.29% for the first quarter 2004compared to 4.44% for the first quarter of 2003.  However, the margin remained stable for the first quarter 2004compared to 4.29% for the year 2004. With the current rate environment, alreadylow interest rates being paid on deposit accounts and loans continuing to berefinanced at lower rates, continued compression of the margin could occur,which could negatively impact net interest income in future periods.

 

Peoples recorded a $50,000provision for loan losses during the first quarter of 2004, which was down$100,000, as compared to a provision of $150,000 for the first quarter of2003.  As a percentage of loans, theallowance for loan losses was 1.39 % at March 31, 2004, compared to 1.39% atyear-end 2003 and 1.50 % at March 31, 2003. Provisions for loan losses are charged to income to bring the allowancefor loan losses to a level deemed appropriate by management.  Management determines the adequacy of theallowance based on on-going quarterly assessments of the loan portfolio,including such factors as: changes in the nature and volume of the portfolio,effects of concentrations of credit, current and projected economic andbusiness conditions, regulatory and consultant recommendations, repaymentpatterns on loans, borrower’s financial condition, current charge-offs, trendsin volume and severity of past due loans and classified loans, potentialproblem loans and supporting collateral. Management believes the allowance is presently adequate to cover theinherent risks associated with Peoples’ loan portfolio.

 

12

----

 

Non-interest income decreasedby $248,000 or 18.8% for the first quarter ended March 31, 2004, compared tothe same period in 2003.  The largestdecrease in non-interest income for the first quarter of 2004 compared to 2003was $225,000, in mortgage banking activities. Peoples derives this income from the sale of residential mortgage loanson the secondary market. The favorable rate environment for mortgage bankingactivities during the first half of 2003 led to an increased demand for bothpurchase-money and refinancing mortgage loans, which slowed starting in thethird quarter 2003 with an increase in mortgage rates. This resulted in adecline in volume of mortgages sold and reduced fee income. The other largedecrease in non-interest income was in investment management fees fromWilmerding which decreased by $154,000 or 100.00% for the first quarter of 2004compared to 2003.  There will be noadditional investment management fees collected since Peoples completed thestock sale of Wilmerding, on August 15, 2003, to an unaffiliated third party,and incurred no material gain or loss on the transaction.

 

In addition, increases werenoted in service charges on deposit accounts, income from fiduciary activities,realized gains on securities, check card commissions, other income and realizedgains on securities.  Service charges ondeposit accounts increased by $26,000 or 6.2% for the first quarter of 2004,compared to the same period in 2003. While demand, NOW and Super-NOW balancesdecreased for the quarter, fees collected on checks drawn againstnon-sufficient funds increased.  Incomefrom fiduciary activities was up by $58,000 or 37.2%, compared to the firstquarter of 2003.  The income increase isconsistent with the increase in Peoples’ Trust Department total assets under management,which equaled $153,067,000 on March 31, 2004, up from $114,165,000 at March 312003.   Other income reflected anincrease of $31,000 or 13.8% for the first quarter of 2004, compared to 2003.  Increased other income was a result ofincreased income from earnings on investment sales through INVEST, a thirdparty which Peoples uses to sell investment products; management fees from thebank’s subsidiary; and earnings from bank owned life insurance.

 

Total non-interest expenseincreased by $114,000 or 3.3% for the first quarter of 2004, compared to thesame time period in 2003.  The largestincrease in non-interest expense was in salaries and employee benefits, whichincreased by $107,000 or 4.9% for the first quarter of 2004, compared to thefirst quarter of 2003. The increases in payroll and payroll related expensesresulted from normal merit increases, increased incentive compensation accrualsand increased cost of health benefits. Other increases in non-interest expenseincluded computer and software costs up by $45,000 as a result of increasedsoftware amortization associated with the main-frame operating system andimaging software; debit card expense

 

13

----

 

increased by $19,000 fromincreased card usage; marketing expense was up $5,000; and other operatingexpenses were up $12,000.  In contrast,comparing the first quarter of 2004 to first quarter of 2003, occupancyexpenses were down by $26,000, furniture and fixture expense decreased $9,000,communications and supplies expense was down $14,000 and professional fees weredown by $22,000. With the sale of Wilmerding, their associated operatingexpenses stopped as of August 15, 2003.

 

Income tax expense was $502,000for the first quarter of 2004, compared to $463,000 for first quarter of2003.  Income tax expense as apercentage of income before income taxes was 27.0% for the first quarter of2004, compared to 27.3% for the first quarter of 2003.  The difference in Peoples’ effective taxrate from the statutory rate of 34.0% is a result of tax-exempt income onloans, securities, and bank owned life insurance, along with tax credits on aninvestment in a low-income housing partnership.

 

#### **Liquidity and Off-Balance Sheet Arrangements**

#### ** **

Liquidity represents Peoples’ability to efficiently manage cash flows to support customers’ loan demand,withdrawals by depositors, the payment of operating expenses, as well as theability to take advantage of business and investment opportunities as theyarise.  One of Peoples’ sources ofliquidity is $350,101,000 in core deposits at March 31, 2004, which increased$3,098,000 over total core deposits of $347,003,000 at year-end. Core depositsconsist of demand deposits, NOW and Super NOW, money market funds, savings, andtime deposits under $100,000.  Othersources of liquidity are available from investments in interest-bearingdeposits with banks and federal funds sold, which totaled $5,954,000 andsecurities maturing in one year or less, which totaled $4,954,000, at March 31,2004.  In comparison, interest-bearingdue from banks and federal funds sold totaled $2,037,000 and securitiesmaturing in one year or less totaled $11,201,000, at year-end 2003.  In addition, Peoples has established federalfunds lines of credit with other commercial banks, has borrowing capacity withthe Federal Home Loan Bank of Pittsburgh, and has the Federal Reserve DiscountWindow, any of which can be drawn upon if needed as a source of liquidity.  Management is of the opinion that Peoples’liquidity is sufficient to meet its anticipated needs.

 

Peoples’ financial statementsdo not reflect various commitments that are made in the normal course ofbusiness, which may involve some liquidity risk.  These commitments consist mainly of unfunded loans and letters ofcredit made under the same standards as on-balance sheet instruments.  Unused commitments, at March 31, 2004totaled $92,280,000.  This consisted of$32,422,000 in commercial real estate, construction, and land developmentloans, $15,970,000 in home equity lines of credit,

 

14

----

 

$8,387,000 in standby letters of credit and the remainder in otherunused commitments.  Because theseinstruments have fixed maturity dates, and because many of them will expirewithout being drawn upon, they do not generally present any significantliquidity risk to Peoples.

 

Management believes that anyamounts actually drawn upon can be funded in the normal course ofoperations.  Peoples has no investmentin or financial relationship with any unconsolidated entities that arereasonably likely to have a material effect on liquidity or the availability ofcapital resources

 

#### **Capital Resources**

#### ** **

Total stockholders’ equity was$50,416,000 as of March 31, 2004, representing a $1,030,000 increase from thebeginning of the year.  The growth incapital was primarily a result of net earnings retention of $853,000; alongwith an increase of $177,000 in accumulated other comprehensive income.

 

At March 31, 2004, Peoples had a leverage ratio of10.70 %, a Tier I capital to risk-based assets ratio of 12.51%, and a totalcapital to risk-based assets ratio of 13. 76%. At March 31, 2004, the Bank hada leverage ratio of 9.30 %, a Tier I capital to risk-based assets ratio of10.78 %, and a total capital to risk-based assets ratio of 12.03 %. Theseratios indicate Peoples First, Inc. and the Bank both exceed the federalregulatory minimum requirements to be considered “well capitalized.”

 

In 2001, shareholders approvedthe 2001 Stock Option Plan. As of March 31, 2004 there were 85,450 optionsoutstanding under the plan.

 

##### **Item 3. Quantitative and Qualitative Disclosure about Market**

##### ** **

There are no material changes in Peoples’ interestrate risk exposure since December 31, 2003. Please refer to the Annual Reporton Form 10-K of Peoples First, Inc. for the year ended December 31, 2003, filedwith the Securities and Exchange Commission.

 

**Item 4. Controls and Procedures**

 

Peoples, under the supervision and with theparticipation of Peoples’ management, including the Chief Executive Officer andthe Chief Financial Officer, evaluated the effectiveness of the design andoperation of Peoples’ disclosure controls and procedures as of March 31,2004.  Based on that evaluation,Peoples’ Chief Executive Officer and Chief Financial Officer concluded thatPeoples’ disclosure controls and procedures are effective.  There were no significant changes toPeoples’ internal

 

15

----

 

controls or in other factors that could significantlyaffect these controls subsequent to the date of their evaluation.

 

Securities and Exchange Commission Rule 13a-14 defines“disclosure controls and procedures” as controls and other procedures of anissuer that are designed to ensure that information required to be disclosed bythe issuer in the reports that it files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the Commission’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that suchinformation is accumulated and communicated to the issuer’s management,including its principal executive officer and principal financial officer, asappropriate to allow timely decisions regarding required disclosure.

 

#### **PART II – OTHER INFORMATION**

 

#### **Item 1.  LegalProceedings**

 

Not Applicable

 

#### **Item 2. Changes in Securities and Use of Proceeds**

#### ** **

Not Applicable

 

#### **Item 3. Defaults Upon Senior Securities**

#### ** **

Not Applicable

 

#### **Item 4. Submission of Matters to a Vote of Security Holders**

#### ** **

Not Applicable

 

16

----

 

#### **Item 5.  OtherInformation**

 

Not Applicable

 

#### **Item 6. Exhibits and Reports on Form 8-K**

#### ** **

(a)          Exhibits

 
| **Exhibit** |   | **Title**                                                                                                                                                                                                                                               |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1         |   | Agreement  and Plan of Merger, dated December 17, 2003, by and between National Penn and  Peoples First, Inc. (Incorporated by reference to Exhibit 2.1 to the  Registrant’s Current Report on Form 8-K, filed December 22, 2003, No.  333-30640.) |
|        |   |                                                                                                                                                                                                                                                    |
| 3.1         |   | Articles of  Incorporation of Peoples First, Inc. (Incorporated by reference to Exhibit  3.1 to Peoples’ Registration Statement on Form S-4, No. 333-30640.)                                                                                       |
|        |   |                                                                                                                                                                                                                                                    |
| 3.2         |   | Bylaws of  Peoples First Inc. (Incorporated by reference to Exhibit 3.2 to Peoples’  Registration Statement on Form S-4, No. 333-30640.)                                                                                                           |
|        |   |                                                                                                                                                                                                                                                    |
| 31.1        |   | Exchange Act  Rules 13a-14 and 15d-14 Certification of Chief Executive Officer                                                                                                                                                                     |
|        |   |                                                                                                                                                                                                                                                    |
| 31.2        |   | Exchange Act  Rules 13a-14 and 15d-14 Certification of Chief Financial Officer                                                                                                                                                                     |
|        |   |                                                                                                                                                                                                                                                    |
| 32.1        |   | 18 U.S.C.  Section 1350 Certification of Chief Executive Officer under Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                                                                   |
|        |   |                                                                                                                                                                                                                                                    |
| 32.2        |   | 18 U.S.C.  Section 1350 Certification of Chief Financial Officer under Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                                                                   |

 

(b) Reports on Form 8-K

 

Peoples fileda Form 8-K on January 23, 2004 disclosing a press release issued by Peoplesdiscussing 2003 fourth quarter earnings.

 

17

----

 

**SIGNATURES**

 

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, Peoples has duly caused this report to besigned on its behalf by the undersigned thereunto duly authorized.

 

 
|   | **PEOPLES FIRST, INC.** |
|--------|-------------------------|
|   | **(**Registrant)        |
|   |                    |
|   |                    |
| Date:  | May 11, 2004            |   | BY: | /s/ | Hugh J.  Garchinsky |   |
|   |                    |   |   |   | Hugh J.  Garchinsky |   |
|   |                    |   |   |   | President  and |   |
|   |                    |   |   |   | Chief  Executive Officer |
|   |                    |
|   |                    |
| Date:  | May 11, 2004            |   | BY: | /s/ | Susan H.  Reeves |   |
|   |                    |   |   |   | Susan H.  Reeves |
|   |                    |   |   |   | Senior Vice  President and |
|   |                    |   |   |   | Chief  Financial Officer |

 

18

----