**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-K**

 
| **ý**                                  | **ANNUAL REPORT PURSUANT SECTION 13 OF THE SECURITIES  EXCHANGE ACT OF 1934,**                                                                                                                                                                                                                                                                                                                                                       |
|---------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                        | **for the fiscal year-ended December 31,  2003, or**                                                                                                                                                                                                                                                                                                                                                                                 |
|                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **o**                                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF  1934,**                                                                                                                                                                                                                                                                                                                                      |
|                                        | **for the transition period from                                    to                                 ** |
|                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Commission File Number:  333-30640** |

 

**PEOPLES FIRST, INC.**

(Exact name of registrant as specified in itscharter)

 
| **PENNSYLVANIA**                                                |   | **23-3028825**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (IRS Employer  Identification No.) |
|                                                            |   |                               |
| **24 SOUTH THIRD STREET, OXFORD, PA**                           |   | **19363**                          |
| (Address of principal executive office)                         |   | (Zip Code)                         |
|                                                            |   |                               |
| **610-932-9294**                                                |
| (Registrant’s Telephone Number, including  area code)      |
|                                                            |
| Securities registered under  section 12(b) of the Act:     |
| **Not Applicable**                                              |

 

Securities registered undersection 12(g) of the Act:

 

| **Title of  each class**                 |   | **Name of  each exchange** |
|------------------------------------------|--------|----------------------------|
| COMMON STOCK, Par Value  $1.00 per share |   | None                       |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

ý  Yes                                   o  No

 

Indicate by check mark if disclosure of delinquent filers pursuant toitem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

As of June 30, 2003 the aggregate market value of the 2,965,284shares of Common stock of the Registrant outstanding on such date, held bynon-affiliates of the Registrant, was approximately $52,068,557.  This figure is based on the last known salesprice, prior to June 30, 2003, reported to the Registrant of $23.85 pershare for Common Stock.  Althoughdirectors, officers and five percent beneficial owners of the Registrant wereassumed to be “affiliates” of the Registrant for purposes of this calculation,the classification is not to be interpreted as an admission of such status.

 

Indicate by check mark whether the registrant is an accelerated fileras defined in Rule 12b-2 of the Act)   o Yes    ý No

 

As of January 31, 2004, the Registrant had 2,956,288 shares ofCommon Stock outstanding.

 

**DocumentsIncorporated by Reference**

None

 

 

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**Forward LookingStatements**

Except for historical information, this report may be deemed to contain“forward-looking” statements regarding Peoples.  Examples of forward-looking statements include, but are notlimited to, (a) projections or statements regarding future earnings, expenses,net interest income, other income, earnings or loss per share, asset mix andquality, growth prospects, capital structure and other financial terms, (b)statements of plans and objectives of management or the board of directors, and(c) statements of assumptions, such as economic conditions in Peoples’ marketareas.  Such forward-looking statementscan be identified 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 that the future results covered byforward-looking statements will be achieved. Such statements are subject to risks, uncertainties, and other factorsthat could cause actual results to differ materially from future resultsexpressed or implied by such forward-looking statements.  Important factors that could impact Peoples’operating results include, but are not limited to, (i) the effects of changingeconomic conditions in Peoples’ market areas and nationally, (ii) credit risksof commercial, real estate, consumer and other lending activities, (iii)significant changes in interest rates, (iv) changes in federal and statebanking laws and regulations which could impact Peoples’ operations, (v)funding costs, (vi) the effects of armed conflicts involving the United Statesor its interests, and (vii) other external developments which could materiallyaffect Peoples’ business and operations.

 

**Item 1 – Business**

 

**Peoples First, Inc.**

Peoples First, Inc. is a bank holding company which was incorporatedunder the laws of the Commonwealth of Pennsylvania on July 27, 2000, toown all the outstanding stock of The Peoples Bank of Oxford.  Peoples provides commercial banking andtrust services through its wholly owned subsidiary, The Peoples Bank ofOxford.  As of December 31, 2003,Peoples had total assets of $459,223,000 and total stockholders’ equity of$49,386,000.

 

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**Merger Agreement withNational Penn Bancshares, Inc.**

On December 17, 2003, Peoples and National Penn Bancshares, Inc.(“NPB”) entered into a merger agreement (the “National Penn Merger Agreement”),which sets forth the terms and conditions pursuant to which Peoples will bemerged (the “NPB Merger”) with and into NPB. Under the terms of the National Penn Merger Agreement, shareholders ofPeoples will be entitled to receive either $49.54 in cash or 1.505 shares ofNPB common stock for each share of Peoples common stock that they hold.  Peoples shareholders may elect to receiveall cash, all stock, or a combination of cash and stock, subject to electionand allocation procedures designed so that, in the aggregate, 70% of Peoples’outstanding common stock will be exchanged for NPB common stock and 30% ofPeoples’ outstanding common stock will be exchanged for cash.  The total value of the transaction isapproximately $148,000,000.

 

The NPB Merger is subject to a number of customary conditions,including, but not limited to, (i) approval of the NPB Merger Agreement by theshareholders of Peoples and (ii) receipt of required regulatory approvals.  A copy of the NPB Merger Agreement was filedas Exhibit 2.1 to a Current Report on Form 8-K filed by Peoples onDecember 22, 2003 and is incorporated by reference at Exhibit 2.1 to thisForm 10-K.

 

**The Peoples Bank ofOxford**

The Peoples Bank of Oxford is a state-chartered commercial bankinginstitution, which was incorporated under the laws of the Commonwealth ofPennsylvania, on December 19, 1913. The Bank’s deposits are insured by the Federal Deposit InsuranceCorporation.

 

As of December 31, 2003, the Bank had total assets of $451,387,000,total deposits of $368,254,000 and total stockholders’ equity of$42,299,000.  At year-end,December 31, 2003, the Bank had 152 full-time employees and 40 part-timeemployees.

 

The Bank’s Corporate Headquarters, Trust Department and full service MainOffice are located at 24 South Third Street, Oxford, Pennsylvania.  The Bank has nine branches and nineautomated teller machines.  Theseoffices serve a predominately rural agricultural area, which includes southernChester County, Pennsylvania and to a lesser extent southern Lancaster County,Pennsylvania and northern

 

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Cecil County, Maryland.  InDecember 2001, the Bank opened its first branch in Maryland to betterserve the northern Cecil County area and in November 2002, the Bank openedits first branch in Lancaster County, Pennsylvania. The Bank’s OperationsCenter is located at 125 Peoples Drive, Oxford, Pennsylvania.

 

The Bank primarily serves individuals and small to medium sized farmsand businesses, providing a broad range of services, including retail andcommercial banking services, investment services and trust services. Theseservices include providing various types of demand, savings and time depositaccounts, making secured and unsecured consumer, real estate and commercialloans, sale of investment products and safe deposit box rentals.  Additionally retail customers can accesstheir account information, pay bills, transfer funds, and access informationregarding bank services via their personal computer using online banking.  The Bank provides its customers with accessto invest in mutual funds, annuities, insurance and various other financialinstruments via the INVEST Financial Corporation, a third party serviceprovider.  In addition, the Bank alsoprovides trust and investment services to individuals, small businesses andcharitable organizations through its Trust Department.  These services include investmentmanagement, estate settlement and maintenance of securities and accounting recordsfor various types of trust relationships.

 

The Bank completed the stock sale of its investment advisor subsidiary,Wilmerding & Associates, Inc., to an unaffiliated third party inAugust 2003.  Wilmerding was not asignificant contributor to Peoples’ total revenues and Peoples incurred nomaterial gain or loss on the sale transaction. The Bank’s remaining wholly-owned subsidiary, Peoples First BusinessInvestment, LLC, is a non-operating company, which holds certain equityinvestments 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 derives its income from the origination and sale of mortgages. Thesesubsidiaries are not significant contributors to Peoples’ total revenues.

 

The Bank’s business is not seasonal in nature nor is the Bank involvedin operations in foreign countries. Management does not separately allocate expenses, including the cost offunding loan

 

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demand, between the commercial, retail, mortgage banking and trustoperations.  As a result, discreteinformation is not available and segment reporting would not bemeaningful.  The operations of theBank’s subsidiaries are not material to the consolidated financial statements.

 

Upon completion of the NPB Merger, it is expected that The Peoples Bankof Oxford will be merged with and into National Penn Bank, the wholly ownedbanking subsidiary of NPB.  Under theterms of the NPB Merger Agreement, National Penn Bank will establish andoperate a separate banking division under the name “The Peoples Bank of Oxford,a Division of National Penn Bank” (the “Peoples Bank Division”).  The Peoples Bank Division will consist ofall of Peoples’ banking offices at the time of the merger and up to twoadditional banking offices to be opened by the Peoples Bank Division followingthe transaction.  NPB has agreed tooperate the Peoples Bank Division for a period of at least two years followingcompletion of the transaction, except in the case of a sale of NPB or by mutualagreement.

 

**Competition**

There is strong competition in Peoples’ service area for bankingbusiness among commercial banks, thrift institutions, other financialinstitutions and financial intermediaries. In addition to commercial banks, federal and state savings and loanassociations, savings banks and credit unions actively compete in Peoples’market area providing a wide variety of banking services.  Mortgage banking firms, finance companies,insurance companies, leasing companies, brokerage companies and financialaffiliates of industrial companies provide additional competition for loans andvarious financial services.  Peoplesalso currently competes for interest-bearing funds with a number of otherfinancial intermediaries which offer a diverse range of investment alternativesincluding brokerage firms and mutual funds. Many competitors have substantially greater financial resources andlarger branch systems than those of Peoples.

 

There are thirteen full service commercial banks, five savings banksand two credit unions with branches in Peoples’ designated market area.  Peoples maintains a majority of the marketshare in the Oxford and Avondale area and market share continues to grow in theremainder of its market area.  Peoplesis also subject to

 

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competition from banks outside of its service area for variousfinancial services.

 

In consumer transactions, Peoples believes that it is able to competeeffectively by offering low cost checking accounts, comparable banking hoursand competitive rates on its interest bearing accounts.  In competing with other banks and financialinstitutions, Peoples seeks to provide personalized services throughmanagement’s knowledge and awareness of Peoples’ service area, customers andborrowers.

 

With respect to commercial transactions, Peoples’ legal lending limitto a single borrower is generally lower than the other larger commerciallenders.  Management believes thatPeoples’ legal lending limit is sufficient to handle the credit requirements ofits target market.  In addition, Peopleswill participate commercial loans with other financial institutions, ifnecessary, in order to accommodate a customer’s needs.

 

Peoples has not engaged in any material research activities relating tothe development of new services or the improvement of existing bankservices.  However, marketing activitieshave occurred that enable Peoples to remain competitive, which include theaddition of new services, additional branches and improvements to servicescurrently offered.

 

Peoples believes it is and will continue to be competitive in regard tointerest rates and product offerings, while maintaining its profit margins andstable capital structure.

 

**Loan and DepositStructure**

At December 31, 2003, total loans, net of unearned income, equaled$358,665,000 with an additional $91,917,000 in standby letters of credit,unused lines of credit and commitments to extend credit.

 

Peoples’ loan portfolio is well diversified, with the largestconcentration of loans in three categories: agricultural loans for mushroomproduction, real estate secured loans to lessors of nonresidential buildingsand construction loans to residential builders.  Agricultural loans for mushroom production totaled $28,177,000,comprised 7.9% of total loans outstanding, with unused commitments outstandingtotaling $10,407,000.  Real estatesecured loans to lessors of commercial properties (stores, offices and

 

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convenience centers, etc.) totaled $27,408,000, comprised 7.6% of totalloans outstanding, with an additional $2,711,000 in unused commitmentsoutstanding. In addition, construction loans to residential builders totaled$23,900,000, represented 6.7% of total loans outstanding and had unusedcommitments outstanding of $14,604,000.

 

At December 31, 2003, Peoples’ total deposits equaled$368,205,000, of which 25.7% were non-interest bearing deposits and 74.3% wereinterest bearing deposits.  AlthoughPeoples’ deposits are primarily generated from southern Chester County, thereis no concentration of deposits in one person or group of persons that ifwithdrawn would have a material adverse effect on Peoples.  Peoples has no brokered deposits.  However, it should be noted that theliquidity position of any bank could be negatively impacted in the event that asubstantial portion of the bank’s depositors withdraw their funds within ashort period of time.

 

**Regulation**

Peoples is subject to extensive regulation and examination by theFederal Reserve, the Pennsylvania Department of Banking, and the Federal DepositInsurance Corporation (FDIC).  Peoples’deposit accounts are insured up to the maximum legal limits by the FDIC.  Peoples is not a member of the FederalReserve System.

 

Federal and state banking laws regulate many aspects of Peoples’business including, but not limited to, capital requirements, amount ofreserves for deposits, loans and investments Peoples may make, acceptablecollateral that may be taken and consumer protection laws.

 

Peoples is subject in the course of its activities to a growing numberof federal, state and local environmental laws and regulations.  Peoples does not anticipate that compliancewith environmental laws and regulations will have any material effect oncapital expenditures, earnings or on the competitive position of Peoples.

 

The Sarbanes-Oxley Act of 2002 was passed to enhance penalties foraccounting and auditing improprieties at publicly traded companies and toprotect investors by improving the accuracy and reliability of corporatedisclosures under the federal securities laws. The Sarbanes-Oxley Act generally applies to all companies,

 

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including Peoples, that file or are required to file periodic reportswith the Securities and Exchange Commission under the Securities Exchange Actof 1934, or the Exchange Act.  Thelegislation includes provisions, among other things, governing the servicesthat can be provided by a public company’s independent auditors and theprocedures for approving such services, requiring the chief executive officerand chief financial officer to certify certain matters relating to thecompany’s periodic filings under the Exchange Act, requiring expedited filingsof reports by insiders of their securities transactions and containing otherprovisions relating to insider conflicts of interest, increasing disclosurerequirements relating to critical financial accounting policies and theirapplication, increasing penalties for securities law violations, and creating anew public accounting oversight board, a regulatory body subject to SECjurisdiction with broad powers to set auditing, quality control and ethicsstandards for accounting firms.  Thelegislation also requires the national securities exchanges and Nasdaq to adoptrules relating to certain matters, including the independence of members of acompany’s audit committee as a condition to listing or continued listing.  Peoples does not believe that theapplication of these new rules to Peoples as they become effective will have amaterial effect on its results of operations.

 

**Available Information**

The public may read and copy any materials Peoples files with the SECat the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington,D.C.  20549.  The public may obtain information on the operation of the PublicReference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an internet site (http://www.sec.gov) thatcontains reports, proxy and information statements, and other informationregarding issuers that file electronically with the SEC.  Some of Peoples’ information is alsoavailable on our website at http://www.peoplesoxford.com.

 

**Item 2 – Properties**

 

The principal banking office and executive offices of Peoples arelocated at 24 South Third Street, Oxford, Pennsylvania, 19363.  Peoples owns the office building, whichconsists of approximately 21,000 square feet. In addition, Peoples owns an adjacent parking lot, which consists ofapproximately 33,000 square feet, providing parking for customers andemployees.

 

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The Oxford South office, a full service branch, is located at 2196Baltimore Pike, Oxford, in East Nottingham Township, Pennsylvania. Peoples ownsthe office building, which consists of approximately 3,200 square feet.

 

The Avon Grove Office, a full service branch, is located at 565 EastBaltimore Pike in Avondale, Pennsylvania. The office consists of approximately 3,800 square feet.  Peoples has a long-term lease on the landwith rental payments in 2003 totaling $16,900.  The lease term expires in March 2008 and provides for eightrenewal options of five years each.

 

The Longwood Office, a full service branch, is located at 900 EastBaltimore Pike in Kennett Square, Pennsylvania.  The office consists of approximately 3,800 square feet.  The rental payments on the long-term landlease totaled $55,500 in 2003.  Thelease term expires in 2015 and provides for one five-year renewal option and anadditional renewal option of four years and three hundred and sixty-four days.

 

The Jennersville Office, a full service branch, is located at 103Jennersville Road in Penn Township, Chester County, Pennsylvania. The officeconsists of approximately 2,500 square feet. Peoples has a long-term land leasewhich expires in 2017 and provides for one five year renewal option and anadditional renewal option of four years and eleven months.  Rental payments in 2003 totaled $36,200.

 

The Jenners Pond Office is a full service branch operating with limitedhours.  This office is located in andserves Jenners Pond, a retirement community at 2000 Greenbriar Lane, WestGrove, Pennsylvania.  The office spaceis leased though 2004 and consists of 250 square feet.  Rental payments in 2003 totaled $6,200.

 

The New Garden Office, a full service branch, is located at 920 WestCypress Street, Kennett Square, Pennsylvania. The office consists of approximately 3,800 square feet.  The rental payment on the long-term landlease totaled $47,500 in 2003.  Peopleshas a long-term land lease which expires in 2020 and provides for one five yearrenewal options and an additional renewal option of four years and elevenmonths.

 

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The Rising Sun Office, a full service branch opened inDecember 2001, is located at 5 Maple Heights Lane, Rising Sun,Maryland.  The office consists ofapproximately 3,800 square feet.  Therental payment on the long-term land lease totaled $18,600 in 2003.  Peoples has a long-term land lease whichexpires in 2021 and provides for two five year renewal options.

 

The Georgetown Office, a full service branch opened inNovember 2002, is located at 1138 Georgetown Road, Christiana,Pennsylvania. Peoples owns the office building, which consists of approximately1,300 square feet.

 

Peoples’ Operations Center is located along Route 10 at 125 Peoples Wayin Lower Oxford Township, Chester County, Pennsylvania.  Peoples owns the office building, whichconsists of approximately 23,000 square feet.

 

**Item 3 – LegalProceedings**

 

There are no pending legal proceedings to which Peoples is party or towhich its property is subject, which would in the opinion of management, bematerial in relation to Peoples’ results of operations or financial condition.

 

**Item 4 – Submissionof Matters to a Vote of Security Holders**

 

None

 

 

**PART II**

 

**Item 5 – Market forPeoples Common Stock and Related Stockholder Matters**

 

The authorized capital stock of Peoples consists of 10,000,000 sharesof common stock, par value $1.00 per share, of which 2,956,288 shares wereoutstanding as of January 31, 2004. There were approximately 722 stockholders of record as ofJanuary 31, 2004.  Peoples’ commonstock is not listed or traded on a recognized securities exchange.  Peoples’ common stock is traded in theover-the-counter market under the symbol PPFR and trading in Peoples commonstock is limited in volume.

 

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The following table sets forth the high and low prices for Peoplescommon stock for each quarterly period for the last two years. Stock quotationsreflect inter-dealer prices, without retail mark-up, markdown or commission,and may not represent actual transactions.

 
|           |   | **2003** |   | **2002** |   |
|----------------|--------|----------|--------|----------|--------|
|           |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
| First Quarter  |   | $        | 27.00  |     | $      | 21.15 |   | $ | 22.35 |   | $ | 20.53 |   |
| Second Quarter |   | $        | 25.00  |     | $      | 22.60 |   | $ | 22.25 |   | $ | 21.00 |   |
| Third Quarter  |   | $        | 28.98  |     | $      | 23.85 |   | $ | 23.50 |   | $ | 21.45 |   |
| Fourth Quarter |   | $        | 48.25  |     | $      | 27.00 |   | $ | 22.75 |   | $ | 21.50 |   |

 

Holders of shares of common stock are entitled to receive suchdividends when, as, and if declared by Peoples’ Board of Directors, out offunds legally available for that purpose. Declaration of and payment of cash dividends by Peoples depends upondividend payments by the Bank, which is Peoples primary source of revenue andcash flow.  Peoples is a legal entityseparate and distinct from its subsidiaries. Accordingly, the right of Peoples, and consequently the right ofcreditors and shareholders of Peoples, to participate in any distribution ofthe assets or earnings of any subsidiary is necessarily subject to the priorclaims of creditors of the subsidiary, except to the extent that the claims ofPeoples in its capacity as a creditor may be recognized.  Under Pennsylvania banking law, the paymentof dividends by the Bank is generally restricted to its accumulated net earnings.

 

Peoples and the Bank have paid quarterly cash dividends on its commonstock since 1988.  The following setsforth the cash dividends declared per share on Peoples common stock during eachof the two years ended December 31, 2003.

 
|           |   | **Per-Share  Dividend** |   |
|----------------|--------|-------------------------|--------|
|           |   | **2003**                |   | **2002** |   |
| First Quarter  |   | $                       | 0.15   |   | $ | 0.13 |   |
| Second Quarter |   | $                       | 0.15   |   | $ | 0.13 |   |
| Third Quarter  |   | $                       | 0.17   |   | $ | 0.13 |   |
| Fourth Quarter |   | $                       | 0.27   |   | $ | 0.20 |   |

 

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The dividend for the fourth quarter 2003 included a regular dividend of$.17 and a special dividend of $.10. The dividend for the fourth quarter 2002included a regular dividend of $.15 and a special dividend of $.05.

 

Peoples retains American Stock Transfer & Trust Company, 59 MaidenLane, New York, New York, as its transfer and dividend paying agent.

 

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**Item 6 – SelectedFinancial Data**

 

**SUMMARY OFSELECTED FINANCIAL DATA**

 
|                                                       |   | **Years  Ended December 31,**                 |        |
|------------------------------------------------------------|--------|----------------------------------------------------|-------------|
|                                                       |   | **2003**                                           |        | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                       |   | **(Dollars in  Thousands, Except per Share Data)** |        |
|                                                       |   |                                               |        |
| **INCOME STATEMENT  DATA:**                                |   |                                               | ** **  |   |   |   |   |   |   |   |   |
| Net interest income                                        |   | **$**                                              | **16,951**  | ** ** | $ | 16,026 |   | $ | 14,363 |   | $ | 13,951 |   | $ | 12,819 |   |
| Provision for loan losses                                  |   | **600**                                            | ** **  | 480 |   | 330 |   | 465 |   | 451 |   |
| Non-interest income                                        |   | **5,323**                                          | ** **  | 4,591 |   | 4,107 |   | 3,242 |   | 2,249 |   |
| Realized gain on disposal of securities                    |   | **24**                                             | ** **  | 387 |   | — |   | — |   | — |   |
| Non-interest expense                                       |   | **14,542**                                         | ** **  | 13,962 |   | 12,434 |   | 11,101 |   | 8,746 |   |
| **Income before  Income Taxes**                            |   | **7,156**                                          | ** **  | 6,562 |   | 5,706 |   | 5,627 |   | 5,871 |   |
| Income tax expense                                         |   | **1,961**                                          | ** **  | 1,708 |   | 1,470 |   | 1,565 |   | 1,704 |   |
| **Net Income**                                             |   | **$**                                              | **5,195**   | ** ** | $ | 4,854 |   | $ | 4,236 |   | $ | 4,062 |   | $ | 4,167 |   |
|                                                       |   |                                               | ** **  |   |   |   |   |   |   |   |   |
| **BALANCE SHEET DATA  (PERIOD END):**                      |   |                                               | ** **  |   |   |   |   |   |   |   |   |
| Total assets                                               |   | **$**                                              | **459,223** | ** ** | $ | 409,017 |   | $ | 361,349 |   | $ | 337,643 |   | $ | 292,508 |   |
| Loans (net)                                                |   | **353,693**                                        | ** **  | 297,658 |   | 247,990 |   | 221,862 |   | 204,244 |   |
| Securities - held-to-maturity                              |   | **—**                                         | ** **  | — |   | 2,845 |   | 2,929 |   | 3,330 |   |
| Securities - available-for-sale                            |   | **66,274**                                         | ** **  | 63,518 |   | 66,699 |   | 48,746 |   | 43,861 |   |
| Federal funds sold                                         |   | **1,712**                                          | ** **  | 8,919 |   | 9,429 |   | 18,015 |   | 1,095 |   |
| Deposits                                                   |   | **368,205**                                        | ** **  | 322,136 |   | 282,462 |   | 267,088 |   | 231,229 |   |
| Long term debt                                             |   | **30,906**                                         | ** **  | 29,706 |   | 24,349 |   | 19,756 |   | 16,110 |   |
| Stockholders’ equity                                  |   | **49,386**                                         | ** **  | 46,864 |   | 43,642 |   | 41,204 |   | 38,179 |   |
|                                                       |   |                                               | ** **  |   |   |   |   |   |   |   |   |
| **PER SHARE DATA:**                                        |   |                                               | ** **  |   |   |   |   |   |   |   |   |
| Basic earnings                                             |   | **$**                                              | **1.75**    | ** ** | $ | 1.63 |   | $ | 1.40 |   | $ | 1.33 |   | $ | 1.39 |   |
| Diluted earnings                                           |   | **1.75**                                           | ** **  | 1.63 |   | 1.40 |   | 1.33 |   | 1.39 |   |
| Cash dividends declared                                    |   | **0.74**                                           | ** **  | 0.59 |   | 0.49 |   | 0.46 |   | 0.42 |   |
| Book value                                                 |   | **16.71**                                          | ** **  | 15.81 |   | 14.56 |   | 13.55 |   | 12.74 |   |
| Weighted average number common shares:                     |   |                                               | ** **  |   |   |   |   |   |   |   |   |
| Basic                                                      |   | **2,961**                                          | ** **  | 2,978 |   | 3,022 |   | 3,052 |   | 2,996 |   |
| Diluted                                                    |   | **2,968**                                          | ** **  | 2,978 |   | 3,022 |   | 3,052 |   | 2,996 |   |
|                                                       |   |                                               | ** **  |   |   |   |   |   |   |   |   |
| **SELECTED RATIOS:**                                       |   |                                               | ** **  |   |   |   |   |   |   |   |   |
| Return on average assets                                   |   | **1.19**                                           | **%**       | 1.27 | % | 1.23 | % | 1.30 | % | 1.50 | % |
| Return on average stockholders’ equity                |   | **10.68**                                          | **%**       | 10.70 | % | 9.78 | % | 10.19 | % | 11.17 | % |
| Average equity to average assets                           |   | **11.10**                                          | **%**       | 11.88 | % | 12.61 | % | 12.79 | % | 13.42 | % |
| Allowance for loan losses to total loans at  end of period |   | **1.39**                                           | **%**       | 1.49 | % | 1.66 | % | 1.74 | % | 1.61 | % |

 

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**Item 7 – Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

 

**Management’s Discussion and Analysis ofFinancial Condition****and Results of Operations**

 

The following discussion represents management’s analysis of thefinancial condition and results of operations of Peoples First, Inc.(“Peoples”) and should be read in conjunction with the accompanying financialstatements and other financial data included elsewhere in this report.

 

**Forward-Looking Statements**

Except for historical information, this report may be deemed to contain“forward-looking” statements regarding Peoples.  Examples of forward-looking statements include, but are notlimited to, (a) projections or statements regarding future earnings, expenses, netinterest income, other income, earnings or loss per share, asset mix andquality, growth prospects, capital structure and other financial terms, (b)statements of plans and objectives of management or the board of directors, and(c) statements of assumptions, such as economic conditions in Peoples’ marketareas.  Such forward-looking statementscan be identified 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 that the future results covered byforward-looking statements will be achieved. Such statements are subject to risks, uncertainties, and other factorsthat could cause actual results to differ materially from future resultsexpressed or implied by such forward-looking statements.  Important factors that could impact Peoples’operating results include, but are not limited to, (i) the effects of changingeconomic conditions in Peoples’ market areas and nationally, (ii) credit risksof commercial, real estate, consumer and other lending activities,

 

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(iii) significant changes in interest rates, (iv) changes in federaland state banking laws and regulations which could impact Peoples’ operations,(v) funding costs, (vi) the effects of armed conflicts involving the UnitedStates or its interests, and (vii) other external developments which couldmaterially affect Peoples’ business and operations.

 

**Critical AccountingPolicies**

Note 2 to Peoples consolidated financial statements (included in Item 8of this Form 10-K) lists significant accounting policies used in thedevelopment and presentation of its financial statements.  This discussion and analysis, thesignificant accounting policies, and other financial statement disclosuresidentify and address key variables and other qualitative and quantitativefactors that are necessary for an understanding and evaluation of Peoples andits results of operations.

 

The most significant estimates in the preparation of Peoples’ financialstatements are for the allowance for loan losses and the stock optionplan.  Please refer to the discussion ofthe allowance for loan losses under “ Allowance for Loan Losses” in the “Financial Condition” section below and refer to Notes 2 and 12 to Peoplesconsolidated financial statements (included in Item 8 of this Form 10-K) forthe discussion on the stock option plan.

 

# **Overview**

In 2003, Peoples recorded net income of $5,195,000, an increase of$341,000 or 7.0% from net income of $4,854,000 in 2002.  Net income was $4,236,000 in 2001.  Improvement in net interest income andincreased non-interest income led to overall improved earnings for 2003. Actualnet interest income increased $925,000 in 2003 compared to 2002 and increased$1,663,000 in 2002 compared to 2001. The interest income from increased volume in loans offset the totaldecline in net interest income from the drop in interest rates and increasedvolume in liabilities.  Non-interestincome increased $369,000 in 2003 compared to 2002 and increased $871,000 in2002 compared to 2001.  The increase innon-interest income in 2003 compared to 2002 was primarily attributable toincreased income from service charges on deposit accounts and mortgage bankingactivities, along with increased income from fiduciary activities.  Basic and diluted earnings per share were$1.75 in 2003, $1.63 in 2002, and $1.40 in 2001.

 

Return on average assets was 1.19% for 2003, compared with 1.27% in2002 and 1.23% in 2001.  Return onaverage equity for 2003 was 10.68% compared to 10.70% in 2002 and 9.78% in2001.

 

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During 2003, average interest-earning assets increased by 15.4% or$54,780,000 to $410,115,000 Average interest-bearing liabilities increased$39,635,000 or 15.1%, to $302,048,000 for the year.  For the year 2003, net interest income, on a fully tax-equivalentbasis, increased by $870,000 or 5.2%. The increased volume contributed $2,653,000 to net interest income for2003, while reduced rates negatively impacted net interest income by$1,783,000.  This is reflected in thenet interest margin compressing to 4.29% in 2003 compared to 4.71% in 2002 and4.71% in 2001.

 

Non-interest income increased $369,000 or 7.4% in 2003, compared to anincrease of $871,000 or 21.2% in 2002. The increase in 2003 resulted from increased income from service chargescollected on deposit accounts by $389,000, other income by $244,000, mortgagebanking activities by $186,000, and increased income from fiduciary activitiesby $123,000.  The year 2003 did notinclude the write-down of $84,000 on an impaired security which occurred in2002. These increases were partially offset by lower realized gains on disposalof securities by $363,000 and a decrease of $303,000 in investment managementfees received from Wilmerding. The Bank sold its Wilmerding subsidiary to anunaffiliated third party in August 2003 and incurred no material gain orloss on the sale transaction.

 

Non-interest expenses increased $580,000 or 4.2% for 2003, compared toan increase of $1,528,000 or 12.3% for 2002. The 2003 increase was largely a result of increased salaries and employeebenefits of $388,000 and other operating expenses up $85,000.  The increased salaries and employee benefitsconsisted of normal merit increases and to a greater extent additions to staffof the Bank.  Other operating expenseincreases were primarily in director’s fees and on-line banking charges.

 

The following table sets forth selected quarterly financial data andper share data.

 

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**QuarterlyFinancial Data**

 
|                        |   | **2003**                                   |       | **2002**            |       |
|-----------------------------|--------|--------------------------------------------|------------|---------------------|------------|
|                        |   | **First  Quarter**                         |       | **Second  Quarter** |       | **Third  Quarter** |   | **Fourth  Quarter** |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
|                        |   | **(In  Thousands, Except per Share Data)** | ** ** |
|                        |   |                                       | ** ** |                | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |
| Interest income             |   | **$**                                      | **5,614**  | ** **          | **$**      | **5,660** | ** ** | **$** | **5,801** | ** ** | **$** | **5,824** |   | $ | 5,537 |   | $ | 5,708 |   | $ | 5,822 |   | $ | 5,846 |   |
| Interest expense            |   | **(1,577**                                 | **)**      | **(1,546**          | **)**      | **(1,449** | **)** | **(1,376** | ) | (1,694 | ) | (1,661 | ) | (1,766 | ) | (1,766 | ) |
| Net interest income         |   | **4,037**                                  | ** ** | **4,114**           | ** ** | **4,352** | ** ** | **4,448** |   | 3,843 |   | 4,047 |   | 4,056 |   | 4,080 |   |
| Provision for loan losses   |   | **(150**                                   | **)**      | **(150**            | **)**      | **(150** | **)** | **(150** | ) | (90 | ) | (90 | ) | (150 | ) | (150 | ) |
| Non-interest income         |   | **1,322**                                  | ** ** | **1,389**           | ** ** | **1,462** | ** ** | **1,150** |   | 1,080 |   | 1,023 |   | 1,073 |   | 1,415 |   |
| Realized gain on securities |   | **—**                                 | ** ** | **9**               | ** ** | **12** | ** ** | **3** |   | — |   | — |   | 387 |   | — |   |
| Non-interest expense        |   | **(3,513**                                 | **)**      | **(3,638**          | **)**      | **(3,594** | **)** | **(3,797** | ) | (3,350 | ) | (3,376 | ) | (3,532 | ) | (3,704 | ) |
| Income before income taxes  |   | **1,696**                                  | ** ** | **1,724**           | ** ** | **2,082** | ** ** | **1,654** |   | 1,483 |   | 1,604 |   | 1,834 |   | 1,641 |   |
| Income tax expense          |   | **(463**                                   | **)**      | **(471**            | **)**      | **(584** | **)** | **(443** | ) | (369 | ) | (410 | ) | (492 | ) | (437 | ) |
| **Net Income**              |   | **$**                                      | **1,233**  | ** **          | **$**      | **1,253** | ** ** | **$** | **1,498** | ** ** | **$** | **1,211** |   | $ | 1,114 |   | $ | 1,194 |   | $ | 1,342 |   | $ | 1,204 |   |
| **PER SHARE DATA:**         |   |                                       | ** ** |                | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |
| Basic earnings              |   | **$**                                      | **0.42**   | ** **          | **$**      | **0.42** | ** ** | **$** | **0.51** | ** ** | **$** | **0.41** |   | $ | 0.37 |   | $ | 0.40 |   | $ | 0.45 |   | $ | 0.41 |   |
| Diluted earnings            |   | **$**                                      | **0.42**   | ** **          | **$**      | **0.42** | ** ** | **$** | **0.51** | ** ** | **$** | **0.41** |   | $ | 0.37 |   | $ | 0.40 |   | $ | 0.45 |   | $ | 0.41 |   |
| Dividends declared          |   | **$**                                      | **0.15**   | ** **          | **$**      | **0.15** | ** ** | **$** | **0.17** | ** ** | **$** | **0.27** |   | $ | 0.13 |   | $ | 0.13 |   | $ | 0.13 |   | $ | 0.20 |   |
|                             |        |                                            |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Results of Operations**

 

**Net Interest Income and Net Interest Margin**

Net interest income is the difference between interest income earned oninvestments and loans, and interest expense incurred on deposits and otherliabilities.  For analysis purposes, netinterest income is evaluated on a fully tax equivalent (FTE) basis tofacilitate comparison with interest earned which is subject to federal taxationat the statutory tax rate of 34%.  Thefactors that affect net interest income include changes in interest rates andchanges in interest-earning assets and interest-bearing liabilities.  Net interest income on an FTE basisincreased by $870,000 or 5.2% to $17,598,000 in 2003 from $16,728,000 in2002.  Comparatively, net interestincome (FTE basis) increased by $1,717,000 or 11.4% to $16,728,000 in 2002 from$15,011,000 in 2001.

 

The following table includes average balances, rates and interestincome and expense adjusted to an FTE basis, the interest rate spread and thenet interest margin.  Following that isthe rate and volume

 

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analysis table that shows changes in net interest income attributed tochanges in rates and changes in average balances of interest-earning assets andinterest-bearing liabilities.

 

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**AVERAGE BALANCES, RATES AND INTEREST INCOMEAND EXPENSE**

 
|                                                 |   | **2003**                    |        | **2002**     |       | **2001**         |       |
|------------------------------------------------------|--------|-----------------------------|-------------|--------------|------------|------------------|------------|
|                                                 |   | **Average  Balance**        |        | **Interest** |       | **Yield/  Rate** |       | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   |
|                                                 |   | **(Dollars  in Thousands)** |        |
|                                                 |   |                        | ** **  |         | ** ** |             | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| **ASSETS**                                           |   |                        | ** **  |         | ** ** |             | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest-Earning Assets:**                         |   |                        | ** **  |         | ** ** |             | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities:                                          |   |                        | ** **  |         | ** ** |             | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                              |   | **$**                       | **51,540**  | ** **   | **$**      | **2,105**        | ** ** | **4.08** | **%** | $ | 53,053 |   | $ | 2,595 |   | 4.89 | % | $ | 42,164 |   | $ | 2,428 |   | 5.76 | % |
| Tax-exempt                                           |   | **13,852**                  | ** **  | **945**      | ** ** | **6.82**         | **%**      | 15,312 |   | 1,061 |   | 6.93 | % | 13,589 |   | 1,081 |   | 7.95 | % |
| Total securities                                     |   | **65,392**                  | ** **  | **3,050**    | ** ** | **4.66**         | **%**      | 68,365 |   | 3,656 |   | 5.35 | % | 55,753 |   | 3,509 |   | 6.29 | % |
| Interest-bearing due from banks                      |   | **1,333**                   | ** **  | **16**       | ** ** | **1.20**         | **%**      | 1,237 |   | 28 |   | 2.26 | % | 7,991 |   | 358 |   | 4.48 | % |
| Federal funds sold                                   |   | **14,362**                  | ** **  | **154**      | ** ** | **1.07**         | **%**      | 10,340 |   | 163 |   | 1.58 | % | 18,201 |   | 688 |   | 3.78 | % |
| Loans:                                               |   |                        | ** **  |         | ** ** |             | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                              |   | **314,647**                 | ** **  | **19,323**   | ** ** | **6.14**         | **%**      | 262,621 |   | 18,712 |   | 7.13 | % | 226,834 |   | 18,608 |   | 8.20 | % |
| Tax-exempt                                           |   | **12,214**                  | ** **  | **956**      | ** ** | **7.83**         | **%**      | 11,326 |   | 1,005 |   | 8.87 | % | 8,552 |   | 826 |   | 9.66 | % |
| Total loans                                          |   | **326,861**                 | ** **  | **20,279**   | ** ** | **6.20**         | **%**      | 273,947 |   | 19,717 |   | 7.20 | % | 235,386 |   | 19,434 |   | 8.26 | % |
| Investment in FHLB stock                             |   | **2,167**                   | ** **  | **47**       | ** ** | **2.17**         | **%**      | 1,446 |   | 51 |   | 3.53 | % | 1,367 |   | 89 |   | 6.51 | % |
| Total interest-earning assets                        |   | **410,115**                 | ** **  | **23,546**   | ** ** | **5.74**         | **%**      | 355,335 |   | 23,615 |   | 6.65 | % | 318,698 |   | 24,078 |   | 7.56 | % |
| Non-interest-earning assets                          |   | **28,114**                  | ** **  |         | ** ** |             | ** ** | 26,484 |   |   |   |   |   | 24,833 |   |   |   |   |   |
| **Total Assets**                                     |   | **$**                       | **438,229** | ** **   |       | ** **       |       | ** ** | $ | 381,819 |   |   |   |   |   | $ | 343,531 |   |   |   |   |   |
|                                                 |   |                        | ** **  |         | ** ** |             | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**       |   |                        | ** **  |         | ** ** |             | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest-Bearing Liabilities:**                    |   |                        | ** **  |         | ** ** |             | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings and transaction accounts                     |   | **$**                       | **168,560** | ** **   | **$**      | **1,300**        | ** ** | **0.77** | **%** | $ | 137,502 |   | $ | 1,760 |   | 1.28 | % | $ | 117,493 |   | $ | 2,660 |   | 2.26 | % |
| Time deposits                                        |   | **94,142**                  | ** **  | **2,887**    | ** ** | **3.07**         | **%**      | 90,572 |   | 3,411 |   | 3.77 | % | 91,441 |   | 4,981 |   | 5.45 | % |
| Total interest-bearing deposits                      |   | **262,702**                 | ** **  | **4,187**    | ** ** | **1.59**         | **%**      | 228,074 |   | 5,171 |   | 2.27 | % | 208,934 |   | 7,641 |   | 3.66 | % |
| Federal funds purchased                              |   | **67**                      | ** **  | **1**        | ** ** | **1.49**         | **%**      | — |   | — |   |   |   | — |   | — |   |   |   |
| Securities sold under agreements to repurchase       |   | **8,312**                   | ** **  | **44**       | ** ** | **0.53**         | **%**      | 6,436 |   | 60 |   | 0.93 | % | 7,803 |   | 189 |   | 2.42 | % |
| Long-term debt                                       |   | **30,967**                  | ** **  | **1,716**    | ** ** | **5.54**         | **%**      | 27,903 |   | 1,656 |   | 5.93 | % | 20,339 |   | 1,237 |   | 6.08 | % |
| Total interest-bearing liabilities                   |   | **302,048**                 | ** **  | **5,948**    | ** ** | **1.97**         | **%**      | 262,413 |   | 6,887 |   | 2.62 | % | 237,076 |   | 9,067 |   | 3.82 | % |
| Demand deposits, non-interest bearing                |   | **85,475**                  | ** **  |         | ** ** |             | ** ** | 71,901 |   |   |   |   |   | 61,073 |   |   |   |   |   |
| Other liabilities                                    |   | **2,071**                   | ** **  |         | ** ** |             | ** ** | 2,140 |   |   |   |   |   | 2,047 |   |   |   |   |   |
| Stockholders’ equity                            |   | **48,635**                  | ** **  |         | ** ** |             | ** ** | 45,365 |   |   |   |   |   | 43,335 |   |   |   |   |   |
| **Total Liabilities and  Stockholders’ Equity** |   | **$**                       | **438,229** | ** **   |       | ** **       |       | ** ** | $ | 381,819 |   |   |   |   |   | $ | 343,531 |   |   |   |   |   |
| Net interest income                                  |   |                        | ** **  | **$**        | **17,598** | ** **       |       | ** ** |   |   | $ | 16,728 |   |   |   |   |   | $ | 15,011 |   |   |   |
| Interest rate spread                                 |   |                        |        |         |       | **3.77**         | **%**      |   |   |   |   | 4.03 | % |   |   |   |   | 3.74 | % |
| Net interest margin                                  |   |                        |        |         |       | **4.29**         | **%**      |   |   |   |   | 4.71 | % |   |   |   |   | 4.71 | % |

 

*Yields ontax-exempt assets have been computed on a fully tax equivalent basis assuming atax rate of 34%.*

*For yieldcalculation purposes, non-accruing loans are included in the average loanbalances.*

*Interestincome on loans includes amortized fees and costs on loans totaling $357,000for 2003, $216,000 for 2002, and $134,000 for 2001.*

 

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**Rate/VolumeAnalysis**

 
|                                            |   | **2003 versus 2002** |       | **2002 versus 2001** |       |
|-------------------------------------------------|--------|----------------------|------------|----------------------|------------|
|                                            |   | **Change Due To**    |       | **Change Due To**    |       |
|                                            |   | **Rate**             |       | **Volume**           |       | **Total** |   | **Rate** |   | **Volume** |   | **Total** |   |
|                                            |   | **(In Thousands)**   |       |
|                                            |   |                 |       |                 |       |   | ** ** |   |   |   |   |   |   |
| **Interest-Earning Assets:**                    |   |                 | ** ** |                 | ** ** |   | ** ** |   |   |   |   |   |   |
| Securities:                                     |   |                 | ** ** |                 | ** ** |   | ** ** |   |   |   |   |   |   |
| Taxable                                         |   | **$**                | **(428**   | **)**                | **$**      | **(62** | **)** | **$** | **(490** | **)** | $ | (366 | ) | $ | 533 |   | $ | 167 |   |
| Tax-exempt                                      |   | **(17**              | **)**      | **(99**              | **)**      | **(116** | **)** | (139 | ) | 119 |   | (20 | ) |
| Interest-bearing  due from banks                |   | **(13**              | **)**      | **1**                | ** ** | **(12** | **)** | (177 | ) | (153 | ) | (330 | ) |
| Federal  funds sold                             |   | **(52**              | **)**      | **43**               | ** ** | **(9** | **)** | (401 | ) | (124 | ) | (525 | ) |
| Loans                                           |   | **(2,721**           | **)**      | **3,283**            | ** ** | **562** | ** ** | (2,492 | ) | 2,775 |   | 283 |   |
| Investment  in FHLB stock                       |   | **(20**              | **)**      | **16**               | ** ** | **(4** | **)** | (41 | ) | 3 |   | (38 | ) |
| **Total**                                       |   | **(3,251**           | **)**      | **3,182**            | ** ** | **(69** | **)** | (3,616 | ) | 3,153 |   | (463 | ) |
| **Interest-Bearing Liabilities:**               |   |                 | ** ** |                 | ** ** |   | ** ** |   |   |   |   |   |   |
| Savings  and transaction accounts               |   | **(700**             | **)**      | **240**              | ** ** | **(460** | **)** | (1,156 | ) | 256 |   | (900 | ) |
| Time  deposits                                  |   | **(633**             | **)**      | **109**              | ** ** | **(524** | **)** | (1,537 | ) | (33 | ) | (1,570 | ) |
| Federal  funds purchased                        |   | **—**           | ** ** | **1**                | ** ** | **1** | ** ** | — |   | — |   | — |   |
| Securities  sold under agreements to repurchase |   | **(26**              | **)**      | **10**               | ** ** | **(16** | **)** | (116 | ) | (13 | ) | (129 | ) |
| Long-term  debt                                 |   | **(109**             | **)**      | **169**              | ** ** | **60** | ** ** | (30 | ) | 449 |   | 419 |   |
| **Total**                                       |   | **(1,468**           | **)**      | **529**              | ** ** | **(939** | **)** | (2,839 | ) | 659 |   | (2,180 | ) |
| **Net Interest Income**                         |   | **$**                | **(1,783** | **)**                | **$**      | **2,653** | ** ** | **$** | **870** | ** ** | $ | (777 | ) | $ | 2,494 |   | $ | 1,717 |   |

 

*Interestincome is presented on a fully tax equivalent basis, assuming a tax rate of34%.*

*The netchange attributable to the combination of rate and volume has been allocated tochange due to volume.*

 

The 525 basis point reduction in the Federal Reserve Bank’s federalfunds rate and the discount rate that occurred during 2001 and 2002 along withanother 25 basis point decrease in 2003 resulted in overall lower rates during2003 compared to 2002.  Interest earningassets had an average yield of 5.74% during 2003 compared to a yield of 6.65%for 2002, a decrease of 91 basis points. Likewise, interest bearing liabilities had an average rate of 1.97%during 2003 compared to 2.62% for 2002 however, this only reflects a decreaseof 65 basis points in comparison to the 91 basis point decrease on interestearning assets.

 

Tax equivalent interest income decreased by $69,000 between 2003 and2002.  Lower rates decreased interestincome by $3,251,000.  Most of thisdecrease was offset by the growth in asset volume contributing an additional$3,182,000 to interest income.  Thegrowth in average loans of $52,914,000 positively impacted interest income by$3,283,000; however, a decline of 100 basis points in the yield on loanslowered interest income by $2,721,000. The growth in loans is the result

 

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of a continued emphasis on developing new lending business. Totalaverage securities decreased by $2,973,000 along with a corresponding yielddecrease of 69 basis points. The reduced volume of securities decreasedinterest income by $161,000 and the decline in rates reduced the income by$445,000.   Average Federal funds soldincreased by $4,022,000, increasing income by $43,000, in contrast with adecrease in yield of 51 basis points, which resulted in a reduction in interestincome of $52,000.  Interest-bearing duefrom bank balances and investment in FHLB stock both reflected some decreasesto interest income as a result of lower rates.

 

Total interest-bearing liabilities grew by $39,635,000 between 2003 and2002, increasing interest expense by $529,000 for 2003, more than offset by alower annualized rate on total interest-bearing liabilities by 65 basis pointswhich decreased interest expense by $1,468,000.  Deposit balances grew, as Peoples continues to expand within itsmarket area, with deposit growth contributing $349,000 in interest expense.Overall, the lower rates paid on deposits in 2003 reduced interest expense by$1,333,000.   Peoples took advantage ofthe lower rates this year and locked into some additional long-term borrowingsfrom the Federal Home Loan Bank. Long-term debt averaged $30,967,000 for the year, up $3,064,000 over theaverage for 2002.  As a result,long-term borrowings added a net increase of $60,000 to interest expense.

 

The 475 basis point reduction in the Federal Reserve Bank’s federalfunds rate and the discount rate during 2001 and the 50 basis point reductionin 2002 resulted in overall lower rates during 2002 compared to 2001.  The reduction in rates resulted in anoverall decline in net interest income due to rate changes totaling$777,000.  The reduction in rates oninterest-earning assets resulted in a decline of interest income of$3,616,000.  The decreased income waspartially offset with a reduction in interest expense on interest-bearingliabilities totaling $2,839,000.

 

Tax equivalent interest income decreased by $463,000 between 2002 and2001.  Lower rates decreased interestincome by $3,616,000.  Most of thisdecrease was offset by the growth in asset volume contributing an additional$3,153,000 to interest income.  Thegrowth in average loans of $38,561,000 positively impacted interest income by$2,775,000; however, a decline of 106 basis points in the yield on loanslowered interest income by $2,492,000. The growth in loans is the result of acontinued emphasis on developing new lending business. Total average securitiesgrew by $12,612,000 but the corresponding yield decreased 94 basis points. Thegrowth in securities increased interest income by $652,000, but the decline inrates reduced the return by $505,000.  Average Federal funds sold decreased by $7,861,000, decreasing income by$124,000, in conjunction with a decrease in yield of 220 basis points, whichresulted in a reduction in interest income of $401,000.  Interest-bearing due from bank balancesdecreased by $6,754,000, decreasing income by $153,000, accompanied by a 222basis point decline in rate, amounting to a decrease in income of $177,000.

 

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Total interest-bearing liabilities grew by $25,337,000 between 2002 and2001, increasing interest expense by $659,000 for 2002, more than offset by alower annualized rate on total interest-bearing liabilities by 120 basis pointswhich decreased interest expense by $2,839,000.  Deposit balances grew, as Peoples continues to expand within itsmarket area, with growth contributing $223,000 in interest expense. Overall,the lower rates paid on deposits in 2002 reduced interest expense by$2,693,000.   Peoples took advantage of thelower rates during 2003 and locked into some additional long-term borrowingsfrom the Federal Home Loan Bank. Long-term debt averaged $27,903,000 for the year, up $7,564,000 over theaverage for 2001.  In addition, Peoplesprepaid $1,000,000 in long-term debt absorbing a penalty of $65,000 in 2002 inorder to reduce future years’ interest expense. As a result, the growth inlong-term borrowings at an overall lower rate added $449,000 to interestexpense.

 

The net interest margin is the ratio of net interest income tointerest-earning assets, reflecting a net yield on earning assets.   Peoples’ net interest margin, on a taxequivalent basis, for the years 2003, 2002 and 2001 was 4.29%, 4.71% and 4.71%,respectively. The continued low rate environment along with the continuedcompetition in product pricing has resulted in the compression of the netinterest margin. During 2003, Peoples had 39.3% of its deposits in NOW andsavings accounts, which it considers core deposits and which normally, carrylower rates relative to other types of deposits.  Because of this, these accounts have historically contributedsignificantly to the net interest margin. However, there is an ultimate floorto which the rates on these accounts can fall. The inability to decrease the deposit rates consistent with anotherFederal Reserve rate reduction while rates on loans continue to decline,results in a compression in the net interest margin. The monetary impact canalso be seen in the rate change analysis: the interest income decreaseattributed to rate was $3,251,000 compared to a decrease in interest expense of$1,468,000, along with the yield earned on interest bearing assets decreasing91 basis points during the year and the rate paid on interest bearingliabilities only decreasing 65 basis points. The compression in the netinterest margin in 2002, compared to 2001, resulted from the overall decline inrates during the year and the continued competition in product pricing.

 

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**Provision for Loan Losses**

The provision for loan losses and allowance for loan losses are basedon management’s ongoing assessment of Peoples’ credit exposure andconsideration of other relevant factors. The allowance for loan losses is a valuation reserve, which is availableto absorb future loan charge-offs.  Theprovision for loan losses is the amount charged to earnings on an annual basis.

 

Peoples recorded a $600,000 provision for loan losses in 2003, ascompared to a provision of $480,000 and $330,000 in 2002 and 2001,respectively. Provisions for loan losses are charged to income to bring theallowance for loan losses to a level deemed appropriate by management based onthe factors discussed under “Allowance for Loan Losses.”

 

**Non-Interest Income**

With the continued compression of the net interest margin, Peoples hasbeen focusing on methods to increase non-interest income.  Non-interest income of $5,347,000 for 2003increased $369,000 or 7.4% for the year 2003 compared to 2002.  Non-interest income was $4,978,000 in 2002compared to $4,107,000 in 2001.

 

Service charges on deposit accounts continued to grow with income of$1,839,000, $1,500,000 and $1,338,000 for the years 2003, 2002 and 2001,respectively.  The increase in servicecharges on deposit accounts reflects primarily increased fees collected onchecks presented against non-sufficient funds and increased income from servicecharges on business and personal accounts. The overall trend is consistent with the growth noted in deposit accountbalances and especially growth in demand deposits, NOW and Super NOW accounts,which has the greatest effect on Peoples’ service charge income.

 

People’s Trust Department continues to grow in size, with 2003 year-endfair value of assets under management totaling $147,107,000, compared to$114,427,000 in 2002 and $99,238,000 in 2001. Likewise, revenue generated by the Trust Department also continues togrow with income for the years 2003, 2002 and 2001 of $705,000, $582,000 and$539,000, respectively.

 

The Bank completed the stock sale of its investment advisor subsidiary,Wilmerding & Associates, Inc., to an unaffiliated third party inAugust 2003.  Wilmerding was notachieving the level of

 

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profitability desired by the Bank nor was it a significant contributorto Peoples’ total revenues.  Peoplesincurred no material gain or loss on the sale transaction. Investmentmanagement fees attributed to Wilmerding totaled $379,000 for 2003, $682,000for 2002 and $749,000 for the year 2001.

 

Income from mortgage banking activities totaled $1,058,000 in 2003,which was an increase of 21.3% or $186,000 compared to 2002.  In addition to originating and retainingmortgages in its portfolio, Peoples derives income from the sale of individualloans in the secondary market.   Thefavorable rate environment for mortgage banking activities during the firsthalf of 2003, and all of 2002 and 2001 led to increased demand for bothpurchase-money and refinancing mortgage loans. Starting late in the third quarter of 2003, mortgage rates increasedover where they had been, resulting in a slowdown in Peoples’ refinancingactivity and a reduction in the volume of mortgages that were sold.  The growth in the first three quarters,combined with Peoples’ efforts to expand the mortgage business by working moreclosely with the realtors in its market area, led to the increased income frommortgage banking activities. Overall, Peoples reflected an approximate 40.4%increase in the number of mortgages sold. In comparison, income from mortgage banking activities for the year 2002totaled $872,000 and $476,000 for 2001.

 

Peoples generally holds the securities in its securities portfoliountil maturity, which normally results in nominal securities gains and losses.In 2002, Peoples recorded an $84,000 reserve against an impaired security.  This bond is a municipal bond under aHousing and Urban Development Program. During 2003, a portion of the impaired securities were called resultingin a realized gain on securities totaling $24,000. The balance of the bond, netof the reserve, is $340,000.  Managementcontinues to closely monitor this security. During 2002, Peoples realized a gain on the redemption of a security inthe amount of $387,000 that had been written down in 2000.

 

Check-card commission, which is the interchange commissions on debitcards, totaled $315,000 for 2003, compared to $256,000 and $217,000 in 2002 and2001, respectively.  The interchangereimbursement fee that Peoples receives for debit based transactions waslowered in August 2003 however, the increased debit card usage by ourcustomers to pay for goods and services

 

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still resulted in increased income for 2003 compared to 2002 and 2001.

 

Other income increased by $244,000 to $1,027,000 for 2003, compared to$783,000 and $788,000 in 2002 and 2001, respectively.  This increase was a result of increased income from investmentsales through INVEST, a third party which Peoples uses to sell investmentproducts; not incurring a loss in 2003 on the sale of a fixed asset; earningsfrom bank owned life insurance; and earnings and management fees from PeoplesFirst Land Transfer, LLC and Peoples First Mortgage Company, LLC.  Peoples First Land Transfer, a 79.0% ownedsubsidiary of the Bank, started operation in January 2002 and derives itsincome from the sale of title insurance. This subsidiary is not a significant contributor to Peoples’ totalrevenues, adding a total of $38,000 to non-interest income in 2003. PeoplesFirst Mortgage, a 50.0% owned subsidiary of the Bank, started operation in May2003 and derives its income from the sale of mortgages.  This subsidiary is not a significantcontributor to Peoples’ total revenues, adding a total of $44,000 in earningsand management fees to non-interest income in 2003.

 

**Non-Interest Expense**

Non-interest expense increased $580,000 or 4.2% in 2003 to $14,542,000,up from $13,962,000 in 2002 and $12,434,000 in 2001.  The increase for 2003 was primarily from increased salaries andemployee benefits, along with smaller increases in occupancy, furniture andequipment, professional fees, computer and software, debit card, marketing,other operating expenses and taxes other than income, partially offset by adecreases in communication and supplies.

 

Salaries and employee benefits increased $388,000 or 4.5% in 2003totaling $9,039,000, up from $8,651,000 in 2002.  Salaries and employee benefits increased $1,126,000 or 15.0% in2002 compared to 2001.  The increaseswere primarily Bank related payroll expense incurred through normal meritincreases, increased incentive compensation and to a greater extent, additionsto staff, along with increased expenses associated with deferred compensationagreements.  The increases werepartially offset, due to the sale of Wilmerding and the resultingdiscontinuation of their expenses as of August 2003.  The number of full time equivalent employeesrose from 151 in 2001 to 169 in 2002 and to 172 in 2003.

 

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Occupancy expense increased by $15,000 or 1.5% to $1,015,000 in 2003,up from $1,000,000 in 2002 and $878,000 in 2001.  These expenses were attributed to incurring a full year ofoperating expenses for the Georgetown office and maintenance of the properties,including snow removal last winter. While new facilities may contribute to higher occupancy expenses, it isanticipated these facilities will generate additional income through theexpansion of services to our customers, community and new business development.

 

Furniture and equipment expense reflected an increase of $27,000 or3.7% in 2003, to $752,000 compared to $725,000 in 2002 and $615,000 in2001.  Increased depreciation expensewas the primary contributor to the increase, which included additional depreciationfor the new mainframe computer put into operation in September 2003.  Furniture and equipment expense isanticipated to increase in 2004, as a result of Peoples’ desire to keep currentwith technological advances.

 

Communication and supplies reflects a decrease of $33,000 or 4.9% to$646,000 in 2003 from $679,000 in 2002 and $689,000 in 2001.  This decrease in expense results fromdecreased postage expense partially offset with higher communications expensefrom business growth.

 

Taxes, other than income, totaled $405,000 in 2003, $393,000 in 2002and $371,000 in 2001.  These taxes areprimarily the Pennsylvania Bank Shares Tax, which represents .80%, .86% and..84% of average stockholders’ equity, respectively.

 

Professional fees increased by $31,000 to $270,000 in 2003 compared to$239,000 in 2002 and $343,000 in 2001. The professional fees for 2003, 2002 and2001 are attributed to business growth with varying complexities requiringoutside accounting, consulting and legal expertise.   Also, contributing to increased accounting fees in 2003 were theadditional requirements related to the Sarbanes-Oxley Act.

 

Computer software expenses increased by $21,000 to $413,000 in 2003compared to $392,000 in 2002 and $386,000 in 2001. The increased computer andsoftware expenses are attributed to software maintenance contracts.  Computer software expenses are expected toincrease in 2004 as a result of increased software amortization

 

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primarily from the mainframe operating system which became operationalin the second half of 2003 and check imaging which will be fully implementedfirst quarter of 2004.

 

Debit card expenses increased by 7.5 % to $344,000 in 2003, afterincreasing to $320,000 in 2003 from $296,000 in 2001.  The increase in expense is the result of increased customer usageof their debit cards for the purchase of goods and services.

 

Marketing expenses increased by $10,000 to $369,000 in 2003, comparedto $359,000 in 2002 and $292,000 in 2001. The increases are a result of Peoplesexpanded marketing efforts to place more emphasis on promoting our services andtargeting our customer base.

 

Other operating expense increased by 7.1% to $1,289,000 in 2003, afterincreasing to $1,204,000 in 2002 from $1,039,000 in 2001. The increase in 2003was the result of various category increases and decreases, the largestincreases of which were $48,000 in on-line banking costs and $34,000 indirectors’ fees.  Likewise, the increasein 2002, was the result of various category increases and decreases, thelargest of which were a $75,000 increase in loan origination related expensesconsistent with increased loan volume, a $35,000 increase in education(including tuition reimbursement) and training of staff and a $35,000 increasein fees paid by Peoples on deposit accounts with other banks. The increases inoperating expenses are a result of business growth.

 

# **Income Taxes**

Total income tax expense was $1,961,000 for 2003 compared to $1,708,000for 2002 and $1,470,000 in 2001.  Incometaxes for 2003 include $29,000 in Maryland State income taxes compared to$18,000 in 2002 and $4,000 in 2001, when Peoples’ first branch office opened inMaryland.

 

Federal income taxes as a percentage of income before income taxes was27.0%, 25.8% and 25.8% for the years ended 2003, 2002 and 2001,respectively.   Peoples’ lower effectivefederal tax rate, compared to the statutory rate of 34%, is a result of severaltax-free investments.  Tax credits arerealized on an investment in a community development project, along with anadditional percentage of income derived from tax-exempt investments and loans,and tax-exempt 

 

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income earned on life insurance contracts.  Decreased tax-equivalent net interest income as a per cent oftotal income for 2003 resulted in the increase in the effective tax rate for2003 compared to previous years.

 

Refer to Note 9 to the financial statements for further analysis ofincome taxes.

 

# **Return on AverageEquity and Average Assets**

Return on average equity (ROE) and return on average assets (ROA) arecommonly used measures of bank profitability. ROE is a measure of return on the capital invested by stockholders,while ROA measures the overall return that a bank achieves on its asset base.

 

Return on average equity is calculated by dividing net income byaverage stockholders’ equity. Peoples’ ROE was 10.68% for 2003, 10.70% in 2002,and 9.78% in 2001.  Return on averageassets is derived by dividing net income by average assets. Peoples’ ROA forthe years ended 2003, 2002 and 2001 was 1.19%, 1.27% and 1.23%, respectively.

 

# **FinancialCondition**

 

# **Securities**

The securities portfolio is a component of interest-earning assets andis second in size only to the loan portfolio. Investment securities not only provide interest income, they provide asource of liquidity, diversify the earning asset portfolio and providecollateral for public funds and securities sold under agreements to repurchase.

 

Peoples’ securities are classified as either held-to-maturity oravailable-for-sale.  Securities in theheld-to-maturity category are accounted for at amortized cost.  Available-for-sale securities are accountedfor at fair value with unrealized gains and losses, net of taxes, reported as aseparate component of comprehensive income. In addition, there have been no transfers of securities fromavailable-for-sale to held-to-maturity, nor were there any securities sold.

 

While Peoples generally intends to hold its investment portfolio untilmaturity, Peoples classifies new purchases as available-for-sale.  The held-to-maturity securities on the booksat the end of 2001 were redeemed during 2002, leaving the entire investmentportfolio classified as available-for-sale. The fair value of these securitiesdecreased due primarily to the turnover of securities in 2003.  This

 

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resulted in net unrealized gains at year-end 2003 of $1,860,000, adecrease of $398,000 since year-end 2002, which is reflected as accumulatedother comprehensive income of $1,227,000 in stockholders’ equity, net ofdeferred income taxes. The accumulated other comprehensive income atDecember 31, 2002 totaled $1,490,000, net of deferred taxes.

 

During 2002, Peoples recorded a write-down of $84,000 on an impairedsecurity.  This bond is a municipal bondunder a Housing and Urban Development Program. During 2003, a portion of this bond was called leaving a balance, net ofthe $60,000 reserve, of $340,000. Management continues to closely monitor this security.

 

The following tables set forth the composition of the securitiesportfolio and the securities maturity schedule, including weighted averageyield, as of the dates indicated.

 

**Securities**

 
|                                               |   | **December 31,** |       |
|----------------------------------------------------|--------|-----------------------|------------|
|                                               |   | **2003**              |       | **2002** |   | **2001** |   |
|                                               |   | **(In Thousands)**    | ** ** |
|                                               |   |                  |       |   |   |   |   |
| **Held-to-Maturity  Securities at Amortized Cost** |   |                  | ** ** |   |   |   |   |
| State and political  subdivisions                  |   | **$**                 | **—** | ** ** | $ | — |   | $ | 2,845 |   |
| **Total  Held-to-Maturity**                        |   | **—**            | ** ** | — |   | 2,845 |   |
|                                               |   |                  | ** ** |   |   |   |   |
| **Available-for-Sale  Securities at Fair Value**   |   |                  | ** ** |   |   |   |   |
| U.S. Treasury securities                           |   | **22,928**            | ** ** | 16,922 |   | 21,482 |   |
| U.S. Government agencies                           |   | **21,460**            | ** ** | 26,283 |   | 28,221 |   |
| State and political  subdivisions                  |   | **13,165**            | ** ** | 15,713 |   | 12,668 |   |
| Corporate securities                               |   | **8,721**             | ** ** | 4,600 |   | 4,328 |   |
| **Total  Available-for-Sale**                      |   | **66,274**            | ** ** | 63,518 |   | 66,699 |   |
| **Total  Securities**                              |   | **$**                 | **66,274** | ** ** | $ | 63,518 |   | $ | 69,544 |   |

 

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**Securities Maturity Schedule**

 
|                             |   | **December 31, 2003**  |       |
|----------------------------------|--------|-----------------------------|------------|
|                             |   | **Less Than 1 Year**        | ** ** | **1-5 Years** | ** ** | **5-10 Years** | ** ** | **Over 10 years  or no Maturity** | ** ** | **Total** | ** ** |
|                             |   | **Amount**                  |       | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
|                             |   | **(Dollars  in Thousands)** |       |
|                             |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasury securities         |   | $                           | 5,553      |   | 3.68 | % | $ | 17,375 |   | 2.11 | % | $ | — |   | — | % | $ | — |   | — | % | $ | 22,928 |   | 2.49 | % |
| U.S. Government agencies         |   | 1,025                       |       | 4.05 | % | 17,375 |   | 3.65 | % | 3,060 |   | 4.42 | % | — |   | — | % | 21,460 |   | 3.78 | % |
| State and political subdivisions |   | 680                         |       | 4.87 | % | 7,154 |   | 5.47 | % | 2,017 |   | 6.02 | % | 3,314 |   | 9.17 | % | 13,165 |   | 6.45 | % |
| Corporate securities             |   | 4,020                       |       | 4.14 | % | 2,600 |   | 5.12 | % | 2,101 |   | 6.85 | % | — |   | — | % | 8,721 |   | 5.08 | % |
| **Total**                        |   | **$**                       | **11,278** | ** ** | **3.95** | **%** | **$** | **44,504** | ** ** | **3.43** | **%** | **$** | **7,178** | ** ** | **5.58** | **%** | **$** | **3,314** | ** ** | **9.17** | **%** | **$** | **66,274** | ** ** | **4.03** | **%** |

 

*Available-For-Salesecurities are accounted for at fair value.*

*Weightedaverage yields are calculated on a fully tax equivalent basis assuming a taxrate of 34%.*

 

At year-end 2003, securities totaled $66,274,000, including $1,860,000in net unrealized gains.  Comparatively,securities totaled $63,518,000 at year-end 2002, including $2,258,000 in netunrealized gains, and $69,544,000, including $997,000 in net unrealized gains,at year-end 2001.  At year-end 2003,34.6% of the portfolio is held in direct obligations of the U.S. Treasury, mostof which have relatively short maturities of less than five years. Of the totalsecurities portfolio, 84.2% matures in less than five years, with 17.0%maturing in less than one year and 67.2% maturing in the one to five yearcategory.  The securities portfolio isstructured to provide a dependable flow of earnings, while providing aconsistent source of liquidity.  Thesecurities portfolio does not include the securities of any single issuer,other than securities of the U.S. Treasury and Agencies, the value of which,based on aggregate book value or fair value, exceeds 10% of stockholders’equity.

 

# **Loans**

The loan portfolio comprises the major portion of Peoples’ earningassets as of December 31, 2003. Loans, net of unearned income, at year-end 2003 were $358,665,000, anincrease of $56,504,000 or 18.7% from year-end 2002.  The increase in loans outstanding was

 

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centered in real estate mortgages, which grew by $22,751,000 or 10.4%and includes residential, commercial and agricultural mortgage loans; realestate construction which grew $29,079,000 or 128.2%; along with an increase of$6,936,000 or 14.9% in commercial, financial and agricultural loans. Non-realestate secured installment loans decreased by $2,247,000 or 15.0%.

 

The following tables set forth information on the composition ofPeoples’ total loans, and contractual maturities for commercial andconstruction loans as of the dates indicated.

 

**Loans Outstanding**

 
|                                   |   | **December 31,** |        |
|----------------------------------------|--------|-----------------------|-------------|
|                                   |   | **2003**              |        | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                   |   | **(In  Thousands)**   | ** **  |
|                                   |   |                  | ** **  |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Commercial, financial and agricultural |   | **$**                 | **53,413**  | ** ** | $ | 46,477 |   | $ | 43,149 |   | $ | 32,239 |   | $ | 26,847 |   |
| Real estate - construction             |   | **51,763**            | ** **  | 22,684 |   | 8,513 |   | 10,667 |   | 10,675 |   |
| Real estate - mortgage                 |   | **241,401**           | ** **  | 218,650 |   | 191,544 |   | 173,124 |   | 159,721 |   |
| Installment loans to individuals       |   | **12,722**            | ** **  | 14,969 |   | 9,645 |   | 10,378 |   | 11,000 |   |
| **Total**                              |   | **359,299**           | ** **  | 302,780 |   | 252,851 |   | 226,408 |   | 208,243 |   |
| Less: unearned income                  |   | **(634**              | **)**       | (619 | ) | (679 | ) | (624 | ) | (656 | ) |
| Less: allowance for loan losses        |   | **(4,972**            | **)**       | (4,503 | ) | (4,182 | ) | (3,922 | ) | (3,343 | ) |
| **Net Loans**                          |   | **$**                 | **353,693** | ** ** | $ | 297,658 |   | $ | 247,990 |   | $ | 221,862 |   | $ | 204,244 |   |

 

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**Loan Maturities**

**Commercialand Construction Loans**

 
|                                   |   | **December 31, 2003** |       |
|----------------------------------------|--------|----------------------------|------------|
|                                   |   | **1 Year  or Less**        |       | **1-5 Years** | ** ** | **Over  5 Years** | ** ** | **Total** | ** ** |
|                                   |   | **(In  Thousands)**        | ** ** |
|                                   |   |                       | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Commercial, financial and agricultural |   | $                          | 19,107     |   | $ | 20,760 |   | $ | 13,546 |   | $ | 53,413 |   |
| Real estate - construction             |   | 19,185                     |       | 27,796 |   | 4,782 |   | 51,763 |   |
| **Total**                              |   | **$**                      | **38,292** | ** ** | **$** | **48,556** | ** ** | **$** | **18,328** | ** ** | **$** | **105,176** | ** ** |
| Loans with a fixed interest rate       |   |                       |       | $ | 19,168 |   | $ | 9,553 |   |   |   |
| Loans with variable interest rate      |   |                       |       | 29,388 |   | 8,775 |   |   |   |
| **Total**                              |   |                       | ** ** | **$** | **48,556** |   | **$** | **18,328** | ** ** |   |   |

 

*Scheduledprincipal repayments prior to the loan’s maturity date are not reflectedbecause such information is not readily available*.

 

The composition of the loan portfolio, at year-end 2003, wasapproximately 14.9% commercial, financial, agricultural and industrial loans,14.4% real estate construction loans, 67.2% real estate mortgage loans, whichinclude commercial, agricultural and residential loans secured by real estateand 3.5% installment loans.

 

Peoples loan portfolio is well diversified, with the largestconcentration of loans in three categories: agricultural loans for mushroomproduction, real estate secured loans to lessors of nonresidential propertiesand construction loans to residential builders.  Agricultural loans for mushroom production totaled $28,177,000and comprise 7.9% of total loans outstanding. Real estate secured loans to lessors of commercial properties (stores,offices and convenience centers, etc.) totaled $27,408,000 or 7.6% of totalloans outstanding.  In addition,construction loans to residential builders totaled $23,900,000 which represents6.7% of total loans outstanding.

 

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# **Non-PerformingAssets**

Non-performing assets include loans on a non-accrual basis, loans pastdue more than ninety days and still accruing, troubled debt restructurings andforeclosed real estate.  These groups ofassets represent the asset categories posing the greatest risk of loss toPeoples.  Non-accrual loans are loans nolonger accruing interest, due to apparent financial difficulties of theborrower.  Peoples normally places loanswhich are contractually past due 90 days or more on nonaccrual status, unlessthe loan is considered by management to be both well secured and in the processof collection or secured by a one to four family residential property. Troubleddebt restructurings result when an economic concession has been made to aborrower taking the form of a reduction or deferral of interest and/orprincipal.  Peoples has no troubled debtrestructurings. Foreclosed real estate includes real estate obtained inforeclosure or in lieu of foreclosure and is recorded at the lower of theoutstanding balance at the time of foreclosure or fair value minus estimatedcosts to sell.  Gains and losses on thesale of other real estate owned and write-downs resulting from periodicre-evaluations of the property are charged to other operating expenses.

 

The following table sets forth Peoples’ non-performing assets as of thedates indicated.

 

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**Non-Performing Assets**

 
|                                                                |   | **December 31,**       |       |
|---------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                |   | **2003**                    |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                                |   | **(Dollars  in Thousands)** | ** ** |
|                                                                |   |                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Non-accrual loans                                                   |   | **$**                       | **2,664**  | ** ** | $ | 3,463 |   | $ | 3,658 |   | $ | 453 |   | $ | 1,047 |   |
| Accruing loans 90 days past due                                     |   | **156**                     | ** ** | 47 |   | 190 |   | 187 |   | 497 |   |
| **Total Non-Performing Loans**                                      |   | **2,820**                   | ** ** | 3,510 |   | 3,848 |   | 640 |   | 1,544 |   |
| Foreclosed real estate                                              |   | **97**                      | ** ** | — |   | 40 |   | — |   | 296 |   |
| **Total Non-Performing Assets**                                     |   | **$**                       | **2,917**  | ** ** | $ | 3,510 |   | $ | 3,888 |   | $ | 640 |   | $ | 1,840 |   |
|                                                                |   |                        | ** ** |   |   |   |   |   |   |   |   |
| **Ratios:**                                                         |   |                        | ** ** |   |   |   |   |   |   |   |   |
| Non-performing loans to total loans                                 |   | **0.79**                    | **%**      | 1.16 | % | 1.53 | % | 0.28 | % | 0.74 | % |
| Non-performing assets to total loans and foreclosed real  estate    |   | **0.81**                    | **%**      | 1.16 | % | 1.54 | % | 0.28 | % | 0.89 | % |
| Allowance for loan losses to non-performing loans                   |   | **176.31**                  | **%**      | 128.29 | % | 108.68 | % | 612.81 | % | 216.52 | % |
| **Non-accrual Loans:**                                              |   |                        | ** ** |   |   |   |   |   |   |   |   |
| Interest income that would have been recorded under  original terms |   | **$**                       | **173**    | ** ** | $ | 271 |   | $ | 304 |   | $ | 52 |   | $ | 134 |   |
| Interest income recorded during the year                            |   | **$**                       | **18**     | ** ** | $ | 58 |   | $ | 110 |   | $ | 25 |   | $ | 13 |   |

 

*There were no troubled debt restructuringsfor any of the periods presented  above.*

 

Total non-performing assets at year-end 2003 were $2,917,000, adecrease of $593,000 or 16.9% since the beginning of the year.  Non-performing assets decreased $378,000 or9.7% from year-end 2001 to 2002.  Totalnon-performing loans to total loans at year-ends 2003, 2002 and 2001 were .79%,1.16% and 1.53%, respectively.  Theincrease in non-performing loans during 2001 was primarily concentrated in onecommercial mortgage, which remained in non-performing loans during 2002 and2003.

 

Total loans past due 90 days or more at year-end 2003 were $156,000, aincrease of $109,000 since the beginning of the year.  Comparatively, accruing loans 90 days past due decreased $143,000from year-end 2001 to 2002.

 

The foreclosed real estate of $97,000 that Peoples held at year-end2003 consists of one commercial property. Peoples had no foreclosed real estate at year-end 2002.

 

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# **Allowance for LoanLosses**

The allowance for loan losses is a reserve established through chargesto earnings in the form of a provision for loan losses.  The allowance is maintained to absorblosses, which are inherent in a loan portfolio.  Management determines the adequacy of the allowance based onon-going quarterly assessments of the loan portfolio, including such factorsas: changes in the nature and volume of the portfolio, effects ofconcentrations of credit, current and projected economic and businessconditions, regulatory and consultant recommendations, repayment patterns onloans, borrowers’ financial condition, current charge-offs, trends in volumeand severity of past due loans and classified loans, potential problem loansand supporting collateral.  In addition,various regulatory agencies, as part of their examination, review the adequacyof the allowance and from time to time Peoples may employ a third party toreview the adequacy of the reserve. Such agencies may recommend that Peopleschange the level of the reserve based on their judgments of informationavailable to them at the time of examination.

 

The following tables set forth information on the analysis for loanlosses and the allocation of the allowance for loan losses as of the datesindicated.

 

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**Analysisof Allowance for Loan Losses**

 
|                                                           |   | **Year Ended December 31,** |       |
|----------------------------------------------------------------|--------|----------------------------------|------------|
|                                                           |   | **2003**                         |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                           |   | **(Dollars in Thousands)**       |       |
|                                                           |   |                             | ** ** |   |   |   |   |   |   |   |   |
| Beginning  Balance                                             |   | **$**                            | **4,503**  | ** ** | $ | 4,182 |   | $ | 3,922 |   | $ | 3,343 |   | $ | 2,965 |   |
| Provision  for Loan Losses                                     |   | **600**                          | ** ** | 480 |   | 330 |   | 465 |   | 451 |   |
| **Loans charged-off:**                                         |   |                             | ** ** |   |   |   |   |   |   |   |   |
| Commercial,  financial and agricultural                        |   | **(49**                          | **)**      | (29 | ) | (26 | ) | (7 | ) | (17 | ) |
| Real  estate - construction                                    |   | **—**                       | ** ** | — |   | — |   | — |   | — |   |
| Real  estate - mortgage                                        |   | **(81**                          | **)**      | (95 | ) | (15 | ) | (35 | ) | (35 | ) |
| Installment                                                    |   | **(50**                          | **)**      | (59 | ) | (70 | ) | (21 | ) | (83 | ) |
| **Total Charged-off**                                          |   | **(180**                         | **)**      | (183 | ) | (111 | ) | (63 | ) | (135 | ) |
| **Recoveries:**                                                |   |                             | ** ** |   |   |   |   |   |   |   |   |
| Commercial,  financial and agricultural                        |   | **6**                            | ** ** | 13 |   | 21 |   | — |   | 48 |   |
| Real  estate - construction                                    |   | **—**                       | ** ** | — |   | — |   | — |   | — |   |
| Real  estate - mortgage                                        |   | **25**                           | ** ** | — |   | 11 |   | 169 |   | — |   |
| Installment                                                    |   | **18**                           | ** ** | 11 |   | 9 |   | 8 |   | 14 |   |
| **Total Recoveries**                                           |   | **49**                           | ** ** | 24 |   | 41 |   | 177 |   | 62 |   |
| **Net (Charge-offs) Recoveries**                               |   | **(131**                         | **)**      | (159 | ) | (70 | ) | 114 |   | (73 | ) |
| **Ending Balance**                                             |   | **$**                            | **4,972**  | ** ** | $ | 4,503 |   | $ | 4,182 |   | $ | 3,922 |   | $ | 3,343 |   |
|                                                           |   |                             | ** ** |   |   |   |   |   |   |   |   |
| **Ratios:**                                                    |   |                             | ** ** |   |   |   |   |   |   |   |   |
| Net  (charge-offs) recoveries to average loans                 |   | **(0.04**                        | **)%**     | (0.06 | )% | (0.03 | )% | 0.05 | % | (0.04 | )% |
| Net  (charge-offs) recoveries to the provision for loan losses |   | **(21.83**                       | **)%**     | (33.13 | )% | (21.21 | )% | 24.52 | % | (16.19 | )% |
| Allowance  for loan losses to total loans                      |   | **1.39**                         | **%**      | 1.49 | % | 1.66 | % | 1.74 | % | 1.61 | % |

 

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** **

**Allocation of the Allowance for Loan Losses**

 
|                                    |   | **December 31,** |       |
|-----------------------------------------|--------|-----------------------|------------|
|                                    |   | **2003**              |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                    |   | **Amount**            |       | **Percent of  Loan Type to  Total Loans** | ** ** | **Amount** | ** ** | **Percent of  Loan Type to  Total Loans** | ** ** | **Amount** | ** ** | **Percent of  Loan Type to  Total Loans** | ** ** | **Amount** | ** ** | **Percent of  Loan Type to  Total Loans** | ** ** | **Amount** | ** ** | **Percent of  Loan Type to  Total Loans** | ** ** |
|                                    |   | **(In Thousands)**    |       |
|                                    |   |                  | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial,  financial and agricultural |   | **$**                 | **557**    | ** ** | **14.87** | **%** | $ | 870 |   | 15.35 | % | $ | 793 |   | 17.06 | % | $ | 807 |   | 14.24 | % | $ | 695 |   | 12.89 | % |
| Real  estate - construction             |   | **474**               | ** ** | **14.41** | **%** | 179 |   | 7.49 | % | 40 |   | 3.37 | % | 55 |   | 4.71 | % | 198 |   | 5.13 | % |
| Real  estate - mortgage                 |   | **3,122**             | ** ** | **67.19** | **%** | 2,787 |   | 72.22 | % | 2,470 |   | 75.76 | % | 1,893 |   | 76.47 | % | 1,378 |   | 76.70 | % |
| Installment                             |   | **136**               | ** ** | **3.53** | **%** | 465 |   | 4.94 | % | 366 |   | 3.81 | % | 352 |   | 4.58 | % | 304 |   | 5.28 | % |
| Unallocated                             |   | **683**               | ** ** | **N/A** | ** ** | 202 |   | N/A |   | 513 |   | N/A |   | 815 |   | N/A |   | 768 |   | N/A |   |
| **Total**                               |   | **$**                 | **4,972**  | ** ** | **100.00** | **%** | $ | 4,503 |   | 100.00 | % | $ | 4,182 |   | 100.00 | % | $ | 3,922 |   | 100.00 | % | $ | 3,343 |   | 100.00 | % |

 

At December 31, 2003, the allowance for loan losses to total loanswas 1.39% and was 1.49% and 1.66% at year-ends 2002 and 2001, respectively. Seethe “Provision for Loan Losses” for information on the additions to theallowance. Net charge-offs, which also affect the allowance, totaled $131,000$159,000 and $70,000 for 2003, 2002 and 2001, respectively.  The percent of net charge-offs to averageloans was .04%, .06% and .03% in 2003, 2002 and 2001, respectively.

 

The unallocated portion of the allowance is intended to provide forpossible losses that are not otherwise accounted for and to compensate for theimprecise nature of estimating future loan losses.  The unallocated portion of the allowance increased $481,000 fromyear-end 2002 to year-end 2003.   Management believes the allowance is adequate to cover the inherentrisks associated with Peoples loan portfolio. While allocations have been established for particular loan categories,management considers the entire allowance to be available to absorb losses inany category.

 

# **Deposits**

Management believes that the development and retention of deposits isthe basis of sound growth and profitability. These deposits 

 

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provide the primary source of funding for loans and securities. As ofDecember 31, 2003, deposits totaled $368,205,000 up $46,069,000 or 14.3%from year-end 2002.  Comparatively,total deposits grew $39,674,000 or 14.1% between year-end 2002 and 2001.

 

Contributing to the growth in deposits was Peoples’ continued expansionand business development within its market area, along with the consumer’slingering uncertainties in the stock market making short-term deposit accountsan attractive, safe alternative for investors. The 2003 growth was reflected in all categories except time deposits,with increases of $14,883,000 in demand deposits, $16,471,000 in NOW and SuperNOW accounts, $2,428,000 in money market deposits, $18,113,000 in savings, anda decrease of $5,826,000 in time deposits. In comparison, during 2002 growthwas reflected in all categories, with increases of $11,290,000 in demanddeposits, $10,482,000 in money market deposits, $9,090,000 in savings,$3,609,000 in NOW and Super NOW accounts and $5,203,000 in time deposits.

 

The following tables set forth information on the composition ofPeoples’ deposits and time deposits of $100,000 or more as of the datesindicated.

 

**AverageDeposits by Major Classification**

 
|                                  |   | **Year Ended December 31,** |        |
|---------------------------------------|--------|----------------------------------|-------------|
|                                  |   | **2003**                         |        | **2002** |   | **2001** |   |
|                                  |   | **Average  Balance**             |        | **Rate** | ** ** | **Average  Balance** | ** ** | **Rate** | ** ** | **Average  Balance** | ** ** | **Rate** | ** ** |
|                                  |   | **(Dollars in Thousands)**       | ** **  |
|                                  |   |                             | ** **  |   | ** ** |   |   |   |   |   |   |   |   |
| Non-interest-bearing  demand deposits |   | **$**                            | **85,475**  | ** ** | **N/A** | ** ** | $ | 71,901 |   | N/A |   | $ | 61,073 |   | N/A |   |
|                                  |   |                             | ** **  |   | ** ** |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits:           |   |                             | ** **  |   | ** ** |   |   |   |   |   |   |   |   |
| NOW  and Super NOW                    |   | **64,883**                       | ** **  | **0.69** | **%** | 58,561 |   | 1.15 | % | 53,427 |   | 2.37 | % |
| Money  market                         |   | **39,279**                       | ** **  | **1.03** | **%** | 31,939 |   | 1.78 | % | 24,311 |   | 3.08 | % |
| Savings                               |   | **64,398**                       | ** **  | **0.70** | **%** | 47,002 |   | 1.10 | % | 39,755 |   | 1.63 | % |
| Time                                  |   | **94,142**                       | ** **  | **3.07** | **%** | 90,572 |   | 3.77 | % | 91,441 |   | 5.45 | % |
| **Total**                             |   | **$**                            | **348,177** | ** ** |   | ** ** | $ | 299,975 |   |   |   | $ | 270,007 |   |   |   |

 

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**TimeDeposits of $100,000 or More**

**MaturitySchedule**

 
|                            |   | **December 31,**  |       |
|---------------------------------|--------|------------------------|------------|
|                            |   | **2003**               |       | **2002** |   |
|                            |   | **Time  Certificates** |       | **Other  Time** | ** ** | **Total** | ** ** | **Time  Certificates** | ** ** | **Other  Time** | ** ** | **Total** | ** ** |
|                            |   | **(In Thousands)**     | ** ** |
|                            |   |                   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Three  months or less           |   | **$**                  | **3,692**  | ** ** | **$** | **—** | ** ** | **$** | **3,692** | ** ** | $ | 4,525 |   | $ | 110 |   | $ | 4,635 |   |
| Over  three through six months  |   | **3,986**              | ** ** | **—** | ** ** | **3,986** | ** ** | 4,521 |   | — |   | 4,521 |   |
| Over  six through twelve months |   | **4,471**              | ** ** | **326** | ** ** | **4,797** | ** ** | 7,068 |   | 111 |   | 7,179 |   |
| Over  twelve months             |   | **6,620**              | ** ** | **2,107** | ** ** | **8,727** | ** ** | 6,280 |   | 1,830 |   | 8,110 |   |
| **Total**                       |   | **$**                  | **18,769** | ** ** | **$** | **2,433** | ** ** | **$** | **21,202** | ** ** | $ | 22,394 |   | $ | 2,051 |   | $ | 24,445 |   |

 

Large dollar certificates of $100,000 or more are generally consideredmore volatile than other deposits. Peoples’ large dollar certificates and individual retirement accounts(IRAs) totaled $21,202,000 at year-end 2003, reflecting a decrease of$3,243,000, after increasing $2,024,000 in 2002 to $24,445,000 from $22,421,000at year-end 2001.  The low rateenvironment and continued competition for accounts contributed to the decreasein certificates.

 

# **Borrowings**

Long-term borrowings from the Federal Home Loan Bank totaled$30,906,000, at year-end 2003. Peoples borrowed $7,000,000 in 2002 and borrowedan additional $2,000,000 in 2003.  Theincreases in 2002 and 2003 resulted from favorable long-term rates and matchingsome long-term debt to similar maturity mortgages to be held in Peoples’ loanportfolio. Peoples will continue to target deposits as its primary fundingsource, since deposits are generally less costly and provide an opportunity toexpand our customer relationships.

 

# **Interest RateSensitivity**

The operations of Peoples do not subject it to foreign currency risk orcommodity price risk.  Peoples does notutilize interest rate swaps, caps or hedging transactions.  In addition, Peoples has no market risksensitive instruments entered into for trading purposes.  However, Peoples is subject to interest raterisk and employs several different methods to manage and monitor the risk.

 

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Rate sensitive assets and rate sensitive liabilities are those whoserates or yields are subject to change within a defined time period, due tomaturity or a floating market rate.  Therisk to Peoples results from interest rate fluctuations to the extent thatthere is a difference between the amount of Peoples’ rate sensitive assets andthe amount of rate sensitive liabilities within specified periods.  Peoples monitors its rate sensitivity inorder to reduce its vulnerability to interest rate fluctuations whilemaintaining adequate capital and acceptable levels of liquidity.  Peoples’ asset and liability policy, alongwith monthly financial reports and quarterly financial simulations, suppliesmanagement with guidelines to evaluate and manage Peoples’ rate sensitivity.

 

Gap analysis is one method used to monitor the imbalance betweenrepricing or maturing assets and liabilities within a defined time frame inrelation to total assets.  When the gapis positive, with interest rate sensitive assets repricing faster than ratesensitive liabilities, net interest income usually improves if interest ratesincrease.  The opposite occurs in thecase of a negative gap. Intentional mismatching can improve the net interestmargin if interest rates move as predicted.  However, the net interest margin may suffer if rates move contraryto predictions.

 

The following table sets forth Peoples’ interest sensitivity analysisas of the date indicated.

 

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**InterestSensitivity Analysis**

 
|                                           |   | **December 31, 2003** |        |
|------------------------------------------------|--------|----------------------------|-------------|
|                                           |   | **Under  Three  Months**   |        | **3 Months  through  6 Months** | ** ** | **6 Months  through  1 Year** | ** ** | **1 Year  through  5 Years** | ** ** | **Over  5 Years** | ** ** |
|                                           |   | **(In Thousands)**         | ** **  |
|                                           |   |                       | ** **  |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **ASSETS:**                                    |   |                       |        |   |   |   |   |   |   |   |   |
| Loans  receivable                              |   | $                          | 155,671     |   | $ | 20,082 |   | $ | 19,376 |   | $ | 113,589 |   | $ | 44,975 |   |
| Securities                                     |   | 8,325                      |        | 6,823 |   | 9,439 |   | 35,174 |   | 6,513 |   |
| Federal  funds sold                            |   | 1,712                      |        | — |   | — |   | — |   | — |   |
| Interest-earning  deposits with banks          |   | 325                        |        | — |   | — |   | — |   | — |   |
| FHLB  stock                                    |   | —                     |        | — |   | — |   | — |   | 2,291 |   |
| **Total Interest-Earning Assets**              |   | $                          | 166,033     |   | $ | 26,905 |   | $ | 28,815 |   | $ | 148,763 |   | $ | 53,779 |   |
|                                           |   |                       |        |   |   |   |   |   |   |   |   |
| **LIABILITIES:**                               |   |                       |        |   |   |   |   |   |   |   |   |
| NOW  and Super NOW                             |   | $                          | 26,505      |   | $ | — |   | $ | — |   | $ | — |   | $ | 49,225 |   |
| Money  market                                  |   | 35,157                     |        | — |   | — |   | — |   | 3,906 |   |
| Savings                                        |   | 12,444                     |        | — |   | — |   | 15,210 |   | 41,481 |   |
| Time  deposits                                 |   | 18,950                     |        | 17,755 |   | 20,450 |   | 32,325 |   | — |   |
| Securities  sold under agreement to repurchase |   | 8,470                      |        | — |   | — |   | — |   | — |   |
| Long-term  debt                                |   | 212                        |        | 216 |   | 440 |   | 22,309 |   | 7,729 |   |
| **Total Interest-Bearing Liabilities**         |   | **$**                      | **101,738** | ** ** | **$** | **17,971** | ** ** | **$** | **20,890** | ** ** | **$** | **69,844** | ** ** | **$** | **102,341** | ** ** |
| Interest  sensitivity gap                      |   | **$**                      | **64,295**  | ** ** | **$** | **8,934** | ** ** | **$** | **7,925** | ** ** | **$** | **78,919** | ** ** | **$** | **(48,562** | **)** |
| Cumulative  sensitivity gap                    |   | **$**                      | **64,295**  | ** ** | **$** | **73,229** | ** ** | **$** | **81,154** | ** ** | **$** | **160,073** | ** ** | **$** | **111,511** | ** ** |
|                                           |   |                       |        |   |   |   |   |   |   |   |   |
| As  of December 31,2002                   |   |                       |        |   |   |   |   |   |   |   |   |
| Interest  sensitivity gap                      |   | $                          | 16,586      |   | $ | (4,062 | ) | $ | 19,554 |   | $ | 86,859 |   | $ | (25,523 | ) |
| Cumulative  sensitivity gap                    |   | $                          | 16,586      |   | $ | 12,524 |   | $ | 32,078 |   | $ | 118,937 |   | $ | 93,414 |   |

 

The Interest Sensitivity Analysis includes certain assumptions on there-pricing of NOW and savings accounts. Generally, these accounts are less sensitive to interest rate changesand are part of Peoples’ core deposits. As a result, management has estimated that 90% of money market accounts,35% of NOW accounts and 18% of savings accounts are the most interest ratesensitive, thereby placing them in the “Under 3 Month” category, placing anadditional 22% of savings in the “1 Year through 5 Years” category and placingthe remainder in the “Over 5 Years” category.

 

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As indicated in the Interest Sensitivity Analysis for December 31,2002, Peoples’ cumulative one year gap was a positive $81,154,000 up from$32,078,000 at December 31, 2002. A positive gap means Peoples’ assets will reprice faster than liabilitiesand Peoples has gotten more asset sensitive in the last year. Because of theextent to which rates have declined in 2001 and 2002, Peoples has become moresensitive to future rate declines and would expect added compression of the netinterest margin.  Currently, Peoples has39.3% of its deposits in NOW and savings accounts, which it considers coredeposits, and which normally carry lower rates relative to other types ofdeposits.  Because of this, theseaccounts have historically contributed significantly to the net interestmargin. However, there is an ultimate floor to which the rates on theseaccounts can fall.  Under currentconditions, the inability to further decrease these deposit rates while loan andother earning asset rates continue to drop and re-price at lower rates couldresult in further compression of the net interest margin.

 

Financial simulation is another tool to monitor interest raterisk.  Simulation presents a picture ofthe effect interest rate changes have on net interest income.  Assumptions and estimates are used in thepreparation of the simulation and actual values may differ from thosepresented. The simulations include the assumption that the rates on NOW andsavings accounts would change only 25 basis points and rates on money marketaccounts would only change 50 basis points in a +/-200 basis point rateshock.  In addition, these simulationsdo not portray other actions management might take in response to changes inmarket rates.  The following is ananalysis of possible changes in Peoples’ net interest income, for a +/- 200basis point rate shock over a one year period compared to a flat or unchangedrate scenario.

 
|                         |   | **2003**                                    |       | **2002**                                    |       |
|------------------------------|--------|---------------------------------------------|------------|---------------------------------------------|------------|
| **Change in interest rates** |   | **Percent  Change in  Net Interest Income** | ** ** | **Percent  Change in  Net Interest Income** | ** ** |
| + 200 basis points           |   | 8.4                                         | %          | 3.0                                         | %          |
| Flat rate                    |   | 0.0                                         | %          | 0.0                                         | %          |
| - 200 basis points           |   | -10.7                                       | %          | -3.6                                        | %          |

 

The percent change is obtained by dividing the increase or decrease innet interest income for the applicable year following application of the rateshock analysis by the total net interest income for such year. The net interestincome at risk position reflected in the chart is outside the guidelines set byPeoples’ asset/liability policy for a -200 basis point shock. While a 200 basispoint decrease could result in a 10.7% decrease in net interest income the bankis positioned for a rising rate environment which would mean that an increaseof 200 basis points could result in an 8.4% increase in net interest income.

 

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The drop in the Federal Reserve Bank’s discount and federal funds ratesby 575 basis points in the last three years has put to the test Peoples’ability to effectively manage its interest rate sensitivity. During the pasttwo years, Peoples maintained its net interest margin at 4.71%.  However, with the continued low rateenvironment and the additional federal funds rate decrease in 2003, Peoples hasbeen experiencing compression in the net interest margin averaging 4.30% forthe year 2003.

 

# **Liquidity andOff-Balance Sheet Arrangements**

Liquidity represents Peoples’ ability to efficiently manage cash flowsto support customers’ loan demand, withdrawals by depositors, the payment ofoperating expenses, as well as the ability to take advantage of business andinvestment opportunities as they arise. Liquidity is essential to compensate for fluctuations in the balancesheet and provide funds for growth.

 

The primary source of liquidity is Peoples’ growing core depositbase.  A loyal customer base and astrong capital position provide a stable foundation from which to work.  The stability of the core deposits isreflected in a comparison of year-end balances to yearly averages.  Core deposits at year-end 2003 totaled$347,003,000 and averaged $324,602,000 for the year; this is consistent withthe increase in deposits for the year. Likewise, year-end 2002 core deposits totaled $297,691,000 and averaged$277,560,000 for the year.

 

Other sources of liquidity are available from investments in federalfunds sold and interest bearing deposits with banks, which combined totaled$2,037,000 at year-end 2003 and securities maturing in one year or less, whichtotaled $11,201,000 at year-end 2003. These sources provide Peoples with adequate resources to meet itsshort-term liquidity requirements. In comparison, interest bearing due frombanks and federal funds sold totaled $9,980,000 and securities maturing in oneyear or less totaled $11,167,000 at year-end 2002. Longer term liquidity needsmight be met by selling available-for-sale securities, which includes 100.0% ofthe securities portfolio, selling loans or raising additional capital.  In addition, Peoples has established federalfunds lines of credit with other commercial banks and with the Federal HomeLoan Bank of Pittsburgh, which is a reliable source for short and long-termfunds.

 

Peoples’ loan to deposit ratio for 2003 was maintained at an average of93.9% and ended the year at 97.4%, compared to an

 

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average of 91.3% in 2002, ending the year at 93.8%.  The average loan to deposit ratio was 87.2%in 2001.

 

Peoples’ financial statements do not reflect various commitments thatare made in the normal course of business, which may involve some liquidityrisk.  These commitments consist mainlyof unfunded loans and letters of credit made under the same standards ason-balance sheet instruments.  Unusedcommitments, at December 31, 2003 totaled $91,917,000. This consisted of$32,655,000 in commercial real estate, construction, and land developmentloans, $14,806,000 in home equity lines of credit, $8,702,000 in standbyletters of credit and the remainder in other unused commitments.  Because these instruments have fixedmaturity dates, and because many of them will expire without being drawn upon,they do not generally present any significant liquidity risk to Peoples.

 

Management believes that any amounts actually drawn upon can be fundedin the normal course of operations. Peoples has no investment in or financial relationship with anyunconsolidated entities that are reasonably likely to have a material effect onliquidity or the availability of capital resources.

 

The following table represents Peoples’ aggregate on and off balancesheet contractual obligations to make future payments.

 

**ContractualObligations**

 
|                  |   | **December 31, 2003** | ** ** |
|-----------------------|--------|----------------------------|------------|
|                  |   | **Less Than 1  Year**      |       | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **Over 5 years** | ** ** | **Total** | ** ** |
|                  |   | **(In Thousands)**         | ** ** |
|                  |   |                       |       |   |   |   |   |   |   |   |   |
| Time  deposits        |   | $                          | 57,155     |   | $ | 16,681 |   | $ | 15,644 |   | $ | — |   | $ | 89,480 |   |
| Long-term  debt       |   | 868                        |       | 3,940 |   | 2,869 |   | 23,229 |   | 30,906 |   |
| Operating  leases     |   | 186                        |       | 374 |   | 383 |   | 1,990 |   | 2,933 |   |
| Purcahse  Obligations |   | 51                         |       | 90 |   | 41 |   | — |   | 182 |   |
| **Total**             |   | $                          | 58,260     |   | $ | 21,085 |   | $ | 18,937 |   | $ | 25,219 |   | $ | 123,501 |   |

 

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Peoples is not aware of any known trends or any known demands,commitments, events or uncertainties, which would result in any materialincrease or decrease in liquidity.

 

**Capital Resources**

The greater the capital resources, the more likely Peoples will be ableto meet its cash obligations and unforeseen expenses. Peoples’ strong capitalposition is the result of retained earnings. The dividend payout ratio was 42.2% in 2003 compared to 36.1% and 34.9%in years 2002 and 2001, respectively. Stockholders’ equity at the end of 2003 totaled $49,386,000, an increaseof $2,522,000 or 5.4% over year-end 2002. The increase was a result of net income reduced by a $263,000 unrealizedloss on securities available-for-sale, net of taxes, the dividend payout of$2,190,000 and $220,000 in treasury stock purchases.   Likewise, stockholders’ equity at the end of 2002 totaled$46,864,000, an increase of $3,222,000 or 7.4% over year-end 2001. The increasewas a result of net income supplemented with an $831,000 unrealized gain onsecurities available-for-sale, net of taxes, and reduced by the dividend payoutof $1,753,000 and $710,000 in treasury stock purchases.

 

During 2001, Peoples repurchased shares of its stock under two separateplans approved by its Board of Directors. The Board of Directors approved thefirst plan on October 13, 2000, for the repurchase of up to $1,000,000 inPeoples stock.  This plan was originallyto terminate April 2001, but was granted an extension by the Board toOctober 2002.  As ofDecember 31, 2001, this plan had reached its limit of 51,081 sharesrepurchased at a cost of $999,991.

 

The second plan, the Board approved in November 2001 for therepurchase of $1,000,000 in Peoples stock with an original termination date ofOctober 2002.  The Board grantedthis plan an extension to October 2003. During the third quarter 2003, this plan was completed with repurchasedshares totaling 45,194 at a cost of $1,000,000. In addition, on June 18,2002 the Board approved a third repurchase plan for repurchasing another$1,000,000 in Peoples stock with a termination date that has been extended toOctober 2003.  As ofDecember 31, 2003, 645 shares have been repurchased at a cost of $16,000.

 

The following table sets forth Peoples’ and the Bank’s capital amountsand  ratios as of the dates indicated.

 

45

----

 

**CapitalRatios**

 
|                                                                   |   | **December 31,** |        |
|------------------------------------------------------------------------|--------|-----------------------|-------------|
|                                                                   |   | **2003**              |        | **2002** |   | **2001** |   |
|                                                                   |   | **(In Thousands)**    | ** **  |
|                                                                   |   | **Bank**              |        | **Peoples** | ** ** | **Bank** | ** ** | **Peoples** | ** ** | **Bank** | ** ** | **Peoples** | ** ** |
| Tier  I capital                                                        |   |                  | ** **  |   | ** ** |   |   |   |   |   |   |   |   |
| Total  stockholders’ equity, excluding other comprehensive income |   | **$**                 | **41,340**  | ** ** | **$** | **48,140** | ** ** | $ | 38,011 |   | $ | 45,374 |   | $ | 34,737 |   | $ | 42,983 |   |
| Tier  II capital                                                       |   |                  | ** **  |   | ** ** |   |   |   |   |   |   |   |   |
| Allowance  for loan losses (1)                                         |   | **4,839**             | ** **  | **4,875** | ** ** | 3,986 |   | 4,024 |   | 3,320 |   | 3,353 |   |
| Total  risk-based capital                                              |   | **$**                 | **46,179**  | ** ** | **$** | **53,015** | ** ** | $ | 41,997 |   | $ | 49,398 |   | $ | 38,057 |   | $ | 46,336 |   |
| Risk  adjusted assets (including off-balance sheet exposure)           |   | **$**                 | **386,959** | ** ** | **$** | **389,942** | ** ** | $ | 318,350 |   | $ | 321,471 |   | $ | 264,765 |   | $ | 267,422 |   |
|                                                                   |   |                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Capital  Ratios:**                                                   |   | **Bank**              | ** **  | **Peoples** | ** ** | **Bank** | ** ** | **Peoples** | ** ** | **Bank** | ** ** | **Peoples** | ** ** |
| Leverage                                                               |   | **9.25**              | **%**       | **10.59** | **%** | 9.59 | % | 11.21 | % | 9.96 | % | 12.05 | % |
| Tier  I Risk-Based Capital                                             |   | **10.68**             | **%**       | **12.35** | **%** | 11.94 | % | 14.11 | % | 13.12 | % | 16.07 | % |
| Total  Risk-Based Capital                                              |   | **11.93**             | **%**       | **13.60** | **%** | 13.19 | % | 15.37 | % | 14.37 | % | 17.33 | % |

 

----

*(1)  Allowance for loan losses is limited to thelesser of the balance of the allowance for loan losses or 1.25% ofrisk-adjusted assets for Tier II Capital calculations.*

 

Peoples had a leverage ratio of 10.6%, a Tier I capital to risk-basedassets ratio of 12.4%, and a total capital to risk-based assets ratio of 13.6%at year-end 2003.  At December 31,2003, the Bank had a leverage ratio of 9.3%, a Tier I capital to risk-basedassets ratio of 10.7%, and a total capital to risk-based assets ratio of 11.9%.These ratios exceed the federal regulatory minimum requirements for a “wellcapitalized” bank. The ratios indicate that Peoples and the Bank both exceedthe federal regulatory minimum requirements to be considered “well capitalized.”

 

Peoples is not under any agreement with the regulatory authorities noris it aware of any current recommendations by the regulatory authorities, thatif implemented would have a material effect on Peoples’ capital, liquidity orits operations.

 

46

----

 

# **Inflation**

The impact of inflation upon banks differs from the impact uponnon-banks. The majority of assets and liabilities of a bank are monetary innature and therefore change with movements in interest rates.  The exact impact of inflation on Peoples isdifficult to measure.  Inflation maycause operating expenses to increase at a rate not matched by increasedearnings. Inflation may also affect the borrowing needs of consumers, therebyaffecting growth of Peoples’ assets. Inflation may also affect the general level of interest rates, whichcould have an effect on Peoples’ profitability.  However, as discussed previously, Peoples strives to manage itsinterest sensitive assets and liabilities offsetting the effects of inflation.

 

**Item 7A –Quantitative and Qualitative Disclosures about Market Risk**

 

Incorporated by reference from Part II, Item 7 “Management’s Discussionand Analysis of Financial Conditions and Results of Operations–Interest RateSensitivity” of this Form 10-K.

 

**Item 8 – FinancialStatements and Supplementary Data**

 

INDEPENDENT AUDITOR’S REPORT

 

To the Board of Directors and StockholdersPeoples First, Inc.Oxford, Pennsylvania

 

We have audited the accompanying consolidatedbalance sheets of Peoples First, Inc. and its subsidiary as ofDecember 31, 2003 and 2002, and the related consolidated statements ofincome, stockholders’ equity and cash flows for each of the three years in theperiod ended December 31, 2003. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Peoples First, Inc. and its subsidiary as ofDecember 31, 2003 and 2002, and the results of their operations and theircash flows for each of the three years in the period ended

 

47

----

 

December 31, 2003 in conformity with accounting principlesgenerally accepted in the United States of America.

 

 
|                  | /s/ BEARD MILLER COMPANY LLP |   |
|-----------------------|------------------------------|--------|
|                  |                         |
|                  |                         |
| Reading, Pennsylvania |                         |
| January 16, 2004 |                         |

 

48

----

 

***PEOPLES FIRST, INC.***

**CONSOLIDATEDBALANCE SHEETS**

 
|                                                                                            |   | **December 31,** |        |
|-------------------------------------------------------------------------------------------------|--------|-----------------------|-------------|
|                                                                                            |   | **2003**              |        | **2002** |   |
|                                                                                            |   | **(In  Thousands)**   | ** **  |
| **ASSETS**                                                                                      |   |                  |        |   |   |
|                                                                                            |   |                  |        |   |   |
| Cash and due  from banks                                                                        |   | **$**                 | **12,167**  | ** ** | $ | 14,357 |   |
| Interest-bearing  deposits with banks                                                           |   | **325**               | ** **  | 1,061 |   |
| Federal funds  sold                                                                             |   | **1,712**             | ** **  | 8,919 |   |
| Securities  available for sale, at fair value                                                   |   | **66,274**            | ** **  | 63,518 |   |
| Loans, net of  allowance for loan losses 2003 $4,972; 2002 $4,503                               |   | **353,693**           | ** **  | 297,658 |   |
| Investment in  FHLB stock, at cost                                                              |   | **2,291**             | ** **  | 2,041 |   |
| Premises and  equipment, net                                                                    |   | **11,185**            | ** **  | 11,408 |   |
| Accrued  interest receivable and other assets                                                   |   | **11,576**            | ** **  | 10,055 |   |
|                                                                                            |   |                  |        |   |   |
| **Total Assets**                                                                                |   | **$**                 | **459,223** | ** ** | $ | 409,017 |   |
|                                                                                            |   |                  |        |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                   |   |                  | ** **  |   |   |
|                                                                                            |   |                  |        |   |   |
| **LIABILITIES**                                                                                 |   |                  | ** **  |   |   |
|                                                                                            |   |                  |        |   |   |
| Deposits:                                                                                       |   |                  | ** **  |   |   |
| Demand,  non-interest bearing                                                                   |   | **$**                 | **94,797**  | ** ** | $ | 79,914 |   |
| NOW and Super  NOW                                                                              |   | **75,730**            | ** **  | 59,259 |   |
| Money market  funds                                                                             |   | **39,063**            | ** **  | 36,635 |   |
| Savings                                                                                         |   | **69,135**            | ** **  | 51,022 |   |
| Time                                                                                            |   | **89,480**            | ** **  | 95,306 |   |
|                                                                                            |   |                  |        |   |   |
| Total Deposits                                                                                  |   | **368,205**           | ** **  | 322,136 |   |
|                                                                                            |   |                  | ** **  |   |   |
| Securities  sold under agreements to repurchase                                                 |   | **8,470**             | ** **  | 7,855 |   |
| Long-term debt                                                                                  |   | **30,906**            | ** **  | 29,706 |   |
| Accrued  interest payable and other liabilities                                                 |   | **2,256**             | ** **  | 2,456 |   |
|                                                                                            |   |                  |        |   |   |
| **Total Liabilities**                                                                           |   | **409,837**           | ** **  | 362,153 |   |
|                                                                                            |   |                  |        |   |   |
| **STOCKHOLDERS’  EQUITY**                                                                  |   |                  | ** **  |   |   |
|                                                                                            |   |                  |        |   |   |
| Common stock, par value $1.00 per share;  authorized 10,000,000 shares; issued 3,053,208 shares |   | **3,053**             | ** **  | 3,053 |   |
| Surplus                                                                                         |   | **16,172**            | ** **  | 16,172 |   |
| Retained earnings                                                                               |   | **30,949**            | ** **  | 27,944 |   |
| Accumulated other comprehensive income                                                          |   | **1,227**             | ** **  | 1,490 |   |
| Treasury stock, at cost 2003 96,920 shares;  2002 87,924 shares                                 |   | **(2,015**            | **)**       | (1,795 | ) |
|                                                                                            |   |                  |        |   |   |
| **Total Stockholders’  Equity**                                                            |   | **49,386**            | ** **  | 46,864 |   |
|                                                                                            |   |                  |        |   |   |
| **Total Liabilities  and Stockholders’ Equity**                                            |   | **$**                 | **459,223** | ** ** | $ | 409,017 |   |

 

*See notes to consolidated financialstatements.*

 

49

----

 

***PEOPLES FIRST, INC.***

**CONSOLIDATEDSTATEMENTS OF INCOME**

 
|                                                     |   | **Years  Ended December 31,**         |       |
|----------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                     |   | **2003**                                   |       | **2002** |   | **2001** |   |
|                                                     |   | **(In  Thousands, Except per Share Data)** | ** ** |
|                                                     |   |                                       |       |
| **INTEREST INCOME**                                      |   |                                       | ** ** |   |   |   |   |
| Loans  receivable, including fees                        |   | **$**                                      | **19,954** | ** ** | $ | 19,375 |   | $ | 19,153 |   |
| Securities:                                              |   |                                       | ** ** |   |   |   |   |
| Taxable                                                  |   | **2,105**                                  | ** ** | 2,595 |   | 2,428 |   |
| Tax-exempt                                               |   | **624**                                    | ** ** | 701 |   | 714 |   |
| Other                                                    |   | **216**                                    | ** ** | 242 |   | 1,135 |   |
|                                                     |   |                                       |       |   |   |   |   |
| **Total Interest  Income**                               |   | **22,899**                                 | ** ** | 22,913 |   | 23,430 |   |
|                                                     |   |                                       |       |   |   |   |   |
| **INTEREST EXPENSE**                                     |   |                                       | ** ** |   |   |   |   |
| Deposits                                                 |   | **4,187**                                  | ** ** | 5,171 |   | 7,641 |   |
| Short-term  borrowings                                   |   | **45**                                     | ** ** | 60 |   | 189 |   |
| Long-term debt                                           |   | **1,716**                                  | ** ** | 1,656 |   | 1,237 |   |
|                                                     |   |                                       |       |   |   |   |   |
| **Total Interest  Expense**                              |   | **5,948**                                  | ** ** | 6,887 |   | 9,067 |   |
|                                                     |   |                                       |       |   |   |   |   |
| **Net Interest Income**                                  |   | **16,951**                                 | ** ** | 16,026 |   | 14,363 |   |
|                                                     |   |                                       |       |   |   |   |   |
| **PROVISION FOR LOAN  LOSSES**                           |   | **600**                                    | ** ** | 480 |   | 330 |   |
|                                                     |   |                                       |       |   |   |   |   |
| **Net Interest Income  after Provision for Loan Losses** |   | **16,351**                                 | ** ** | 15,546 |   | 14,033 |   |
|                                                     |   |                                       |       |   |   |   |   |
| **NON-INTEREST INCOME**                                  |   |                                       | ** ** |   |   |   |   |
| Service  charges on deposit accounts                     |   | **1,839**                                  | ** ** | 1,500 |   | 1,338 |   |
| Income from  fiduciary activities                        |   | **705**                                    | ** ** | 582 |   | 539 |   |
| Mortgage  banking activities                             |   | **1,058**                                  | ** ** | 872 |   | 476 |   |
| Impairment of  securities                                |   | **—**                                 | ** ** | (84 | ) | — |   |
| Realized gain  on disposal of securities                 |   | **24**                                     | ** ** | 387 |   | — |   |
| Investment management  fees                              |   | **379**                                    | ** ** | 682 |   | 749 |   |
| Check card  commissions                                  |   | **315**                                    | ** ** | 256 |   | 217 |   |
| Other income                                             |   | **1,027**                                  | ** ** | 783 |   | 788 |   |
|                                                     |   |                                       |       |   |   |   |   |
| **Total  Non-Interest Income**                           |   | **5,347**                                  | ** ** | 4,978 |   | 4,107 |   |
|                                                     |   |                                       |       |   |   |   |   |
| **NON-INTEREST  EXPENSES**                               |   |                                       | ** ** |   |   |   |   |
| Salaries and  wages                                      |   | **9,039**                                  | ** ** | 8,651 |   | 7,525 |   |
| Occupancy                                                |   | **1,015**                                  | ** ** | 1,000 |   | 878 |   |
| Furniture and  equipment                                 |   | **752**                                    | ** ** | 725 |   | 615 |   |
| Communications  and supplies                             |   | **646**                                    | ** ** | 679 |   | 689 |   |
| Professional  fees                                       |   | **270**                                    | ** ** | 239 |   | 343 |   |
| Computer and  software                                   |   | **413**                                    | ** ** | 392 |   | 386 |   |
| Debit card                                               |   | **344**                                    | ** ** | 320 |   | 296 |   |
| Marketing                                                |   | **369**                                    | ** ** | 359 |   | 292 |   |
| Taxes, other  than income                                |   | **405**                                    | ** ** | 393 |   | 371 |   |
| Other                                                    |   | **1,289**                                  | ** ** | 1,204 |   | 1,039 |   |
|                                                     |   |                                       |       |   |   |   |   |
| **Total  Non-Interest Expenses**                         |   | **14,542**                                 | ** ** | 13,962 |   | 12,434 |   |
|                                                     |   |                                       |       |   |   |   |   |
| **Income before  Income Taxes**                          |   | **7,156**                                  | ** ** | 6,562 |   | 5,706 |   |
|                                                     |   |                                       |       |   |   |   |   |
| **INCOME TAX EXPENSE**                                   |   | **1,961**                                  | ** ** | 1,708 |   | 1,470 |   |
|                                                     |   |                                       |       |   |   |   |   |
| **Net Income**                                           |   | **$**                                      | **5,195**  | ** ** | $ | 4,854 |   | $ | 4,236 |   |
|                                                     |   |                                       |       |   |   |   |   |
| **BASIC AND DILUTED  EARNINGS PER SHARE**                |   | **$**                                      | **1.75**   | ** ** | $ | 1.63 |   | $ | 1.40 |   |

 

*See notes to consolidated financialstatements.*

 

50

----

 

***PEOPLES FIRST, INC.***

**CONSOLIDATEDSTATEMENTS OF STOCKH****OLDERS’ EQUITY**

**Years Ended December 31, 2003, 2002 and2001**

 
|                                                                                           |   | **Number of  Shares  Issued** |       | **Common  Stock** |       | **Surplus** |       | **Retained  Earnings** |       | **Accumulated  Other  Comprehensive  Income (Loss)** |       | **Treasury  Stock** |       | **Total**  |       |
|------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|-------------------|------------|-------------|------------|------------------------|------------|------------------------------------------------------|------------|---------------------|------------|------------|------------|
|                                                                                           |   | **(Dollars in  Thousands)**   |       |
|                                                                                           |   |                          |       |
| **BALANCE - DECEMBER 31, 2000**                                                           |   | 3,053,208                     |       | $                 | 3,053      |        | $          | 16,172                 |       | $                                                    | 22,085     |                | $          | 122        |       | $ | (228 | ) | $ | 41,204 |   |
| Comprehensive income:                                                                          |   |                          |       |              |       |        |       |                   |       |                                                 |       |                |       |       |       |
| Net income                                                                                     |   | —                        |       | —            |       | —      |       | 4,236                  |       | —                                               |       | —              |       | 4,236      |       |
| Net change in unrealized gains (losses) on  securities available  for sale, net of  taxes |   | —                        |       | —            |       | —      |       | —                 |       | 537                                                  |       | —              |       | 537        |       |
|                                                                                           |   |                          |       |              |       |        |       |                   |       |                                                 |       |                |       |       |       |
| **Total Comprehensive Income**                                                                 |   |                          |       |              |       |        |       |                   |       |                                                 |       |                |       | 4,773      |       |
|                                                                                           |   |                          |       |              |       |        |       |                   |       |                                                 |       |                |       |       |       |
| Cash dividends declared, $.49 per share                                                        |   | —                        |       | —            |       | —      |       | (1,478                 | )          | —                                               |       | —              |       | (1,478     | )          |
| Purchase of treasury stock                                                                     |   | —                        |       | —            |       | —      |       | —                 |       | —                                               |       | (857                | )          | (857       | )          |
|                                                                                           |   |                          |       |              |       |        |       |                   |       |                                                 |       |                |       |       |       |
| **BALANCE - DECEMBER 31, 2001**                                                           |   | 3,053,208                     |       | 3,053             |       | 16,172      |       | 24,843                 |       | 659                                                  |       | (1,085              | )          | 43,642     |       |
| Comprehensive income:                                                                          |   |                          |       |              |       |        |       |                   |       |                                                 |       |                |       |       |       |
| Net income                                                                                     |   | —                        |       | —            |       | —      |       | 4,854                  |       | —                                               |       | —              |       | 4,854      |       |
| Net change in unrealized gains (losses) on  securities available  for sale, net of  taxes |   | —                        |       | —            |       | —      |       | —                 |       | 831                                                  |       | —              |       | 831        |       |
|                                                                                           |   |                          |       |              |       |        |       |                   |       |                                                 |       |                |       |       |       |
| **Total Comprehensive Income**                                                                 |   |                          |       |              |       |        |       |                   |       |                                                 |       |                |       | 5,685      |       |
|                                                                                           |   |                          |       |              |       |        |       |                   |       |                                                 |       |                |       |       |       |
| Cash dividends declared, $.59 per share                                                        |   | —                        |       | —            |       | —      |       | (1,753                 | )          | —                                               |       | —              |       | (1,753     | )          |
| Purchase of treasury stock                                                                     |   | —                        |       | —            |       | —      |       | —                 |       | —                                               |       | (710                | )          | (710       | )          |
|                                                                                           |   |                          |       |              |       |        |       |                   |       |                                                 |       |                |       |       |       |
| **BALANCE - DECEMBER 31, 2002**                                                           |   | 3,053,208                     |       | 3,053             |       | 16,172      |       | 27,944                 |       | 1,490                                                |       | (1,795              | )          | 46,864     |       |
| Comprehensive income:                                                                          |   |                          |       |              |       |        |       |                   |       |                                                 |       |                |       |       |       |
| Net income                                                                                     |   | **—**                    | ** ** | **—**        | ** ** | **—**  | ** ** | **5,195**              | ** ** | **—**                                           | ** ** | **—**          | ** ** | **5,195**  |       |
| Net change in unrealized gains (losses) on  securities available  for sale, net of  taxes |   | **—**                    | ** ** | **—**        | ** ** | **—**  | ** ** | **—**             | ** ** | **(263**                                             | **)**      | **—**          | ** ** | **(263**   | **)**      |
|                                                                                           |   |                          | ** ** |              | ** ** |        | ** ** |                   | ** ** |                                                 | ** ** |                | ** ** |       | ** ** |
| **Total Comprehensive Income**                                                                 |   |                          | ** ** |              | ** ** |        | ** ** |                   | ** ** |                                                 | ** ** |                | ** ** | **4,932**  | ** ** |
|                                                                                           |   |                          | ** ** |              | ** ** |        | ** ** |                   | ** ** |                                                 | ** ** |                | ** ** |       | ** ** |
| Cash dividends declared, $.74 per share                                                        |   | **—**                    | ** ** | **—**        | ** ** | **—**  | ** ** | **(2,190**             | **)**      | **—**                                           | ** ** | **—**          | ** ** | **(2,190** | **)**      |
| Purchase of treasury stock                                                                     |   | **—**                    | ** ** | **—**        | ** ** | **—**  | ** ** | **—**             | ** ** | **—**                                           | ** ** | **(220**            | **)**      | **(220**   | **)**      |
|                                                                                           |   |                          | ** ** |              | ** ** |        | ** ** |                   | ** ** |                                                 | ** ** |                | ** ** |       | ** ** |
| **BALANCE - DECEMBER 31, 2003**                                                           |   | **3,053,208**                 | ** ** | **$**             | **3,053**  | ** **  | **$**      | **16,172**             | ** ** | **$**                                                | **30,949** | ** **          | **$**      | **1,227**  | ** ** | **$** | **(2,015** | **)** | **$** | **49,386** | ** ** |

 

*See notes to consolidated financialstatements.*

 

51

----

 

***PEOPLES FIRST, INC.***

**CONSOLIDATEDSTATEMENTS OF CASH FL****OWS**

 
|                                                                                                   |   | **Years Ended December 31,** |       |
|--------------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                                   |   | **2003**                          |       | **2002** |   | **2001** |   |
|                                                                                                   |   | **(In Thousands)**                | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                               |   |                              |       |   |   |   |   |
| Net income                                                                                             |   | **$**                             | **5,195**  | ** ** | $ | 4,854 |   | $ | 4,236 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:                     |   |                              | ** ** |   |   |   |   |
| Depreciation                                                                                           |   | **758**                           | ** ** | 729 |   | 631 |   |
| Amortization                                                                                           |   | **184**                           | ** ** | 184 |   | 185 |   |
| Net  accretion on securities                                                                           |   | **(38**                           | **)**      | (29 | ) | (54 | ) |
| Realized  gain on disposal of securities                                                               |   | **(24**                           | **)**      | (387 | ) | — |   |
| Impairment  of securities                                                                              |   | **—**                        | ** ** | 84 |   | — |   |
| Provision  for loan losses                                                                             |   | **600**                           | ** ** | 480 |   | 330 |   |
| Earnings  on life insurance                                                                            |   | **(225**                          | **)**      | (191 | ) | (196 | ) |
| Deferred  income taxes                                                                                 |   | **(46**                           | **)**      | (17 | ) | (74 | ) |
| (Gain)  loss on sale of premises and equipment and foreclosed real estate                              |   | **(27**                           | **)**      | 46 |   | — |   |
| Other                                                                                                  |   | **10**                            | ** ** | — |   | — |   |
| (Increase)  decrease in other assets                                                                   |   | **1,095**                         | ** ** | (693 | ) | (1,601 | ) |
| Increase  (decrease) in other liabilities                                                              |   | **(409**                          | **)**      | 66 |   | (734 | ) |
|                                                                                                   |   |                              |       |   |   |   |   |
| **Net Cash Provided by Operating Activities**                                                          |   | **7,073**                         | ** ** | 5,126 |   | 2,723 |   |
|                                                                                                   |   |                              |       |   |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                                               |   |                              | ** ** |   |   |   |   |
| Net  (increase) decrease in interest-bearing deposits with banks                                       |   | **736**                           | ** ** | (247 | ) | 13,182 |   |
| Net  decrease in federal funds sold                                                                    |   | **7,207**                         | ** ** | 510 |   | 8,586 |   |
| Securities  available for sale:                                                                        |   |                              | ** ** |   |   |   |   |
| Proceeds  from maturities                                                                              |   | **28,662**                        | ** ** | 24,380 |   | 27,935 |   |
| Purchases                                                                                              |   | **(31,754**                       | **)**      | (19,993 | ) | (45,021 | ) |
| Securities  held to maturity, proceeds from maturities                                                 |   | **—**                        | ** ** | 3,231 |   | 85 |   |
| Net  increase in loans receivable                                                                      |   | **(56,635**                       | **)**      | (50,148 | ) | (26,458 | ) |
| Purchase  of premises and equipment                                                                    |   | **(664**                          | **)**      | (1,305 | ) | (2,081 | ) |
| Proceeds  from sales of premises and equipment and foreclosed assets                                   |   | **156**                           | ** ** | 169 |   | — |   |
| Other                                                                                                  |   | **100**                           | ** ** | — |   | — |   |
| Purchase  of FHLB stock                                                                                |   | **(250**                          | **)**      | (673 | ) | — |   |
| Purchase  of life insurance                                                                            |   | **(2,500**                        | **)**      | — |   | — |   |
|                                                                                                   |   |                              |       |   |   |   |   |
| **Net Cash Used in Investing Activities**                                                              |   | **(54,942**                       | **)**      | (44,076 | ) | (23,772 | ) |
|                                                                                                   |   |                              |       |   |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                                               |   |                              | ** ** |   |   |   |   |
| Net  increase in non-interest bearing demand, NOW, Super NOW, money market funds  and savings deposits |   | **51,895**                        | ** ** | 34,471 |   | 14,330 |   |
| Net  increase (decrease) in time deposits                                                              |   | **(5,826**                        | **)**      | 5,203 |   | 1,044 |   |
| Proceeds  from long-term debt                                                                          |   | **2,000**                         | ** ** | 7,000 |   | 5,000 |   |
| Repayments  on long-term debt                                                                          |   | **(800**                          | **)**      | (1,643 | ) | (407 | ) |
| Net  increase (decrease) in securities sold under agreements to repurchase                             |   | **615**                           | ** ** | (855 | ) | 2,010 |   |
| Dividends  paid                                                                                        |   | **(1,985**                        | **)**      | (1,550 | ) | (1,453 | ) |
| Purchase  of treasury stock                                                                            |   | **(220**                          | **)**      | (710 | ) | (857 | ) |
|                                                                                                   |   |                              |       |   |   |   |   |
| **Net Cash Provided by Financing Activities**                                                          |   | **45,679**                        | ** ** | 41,916 |   | 19,667 |   |
|                                                                                                   |   |                              |       |   |   |   |   |
| **Net Increase (Decrease) in Cash and Due  from Banks**                                                |   | **(2,190**                        | **)**      | 2,966 |   | (1,382 | ) |
|                                                                                                   |   |                              |       |   |   |   |   |
| **CASH AND DUE FROM BANKS - BEGINNING**                                                                |   | **14,357**                        | ** ** | 11,391 |   | 12,773 |   |
|                                                                                                   |   |                              |       |   |   |   |   |
| **CASH AND DUE FROM BANKS - ENDING**                                                                   |   | **$**                             | **12,167** | ** ** | $ | 14,357 |   | $ | 11,391 |   |
|                                                                                                   |   |                              | ** ** |   |   |   |   |
| **SUPPLEMENTARY CASH FLOWS INFORMATION**                                                               |   |                              | ** ** |   |   |   |   |
|                                                                                                   |   |                              | ** ** |   |   |   |   |
| Interest  paid                                                                                         |   | **$**                             | **6,165**  | ** ** | $ | 7,113 |   | $ | 9,340 |   |
|                                                                                                   |   |                              |       |   |   |   |   |
| Income  taxes paid                                                                                     |   | **$**                             | **2,000**  | ** ** | $ | 1,560 |   | $ | 1,545 |   |
|                                                                                                   |   |                              |       |   |   |   |   |
| **SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING  AND  FINANCING ACTIVITIES**                   |   |                              | ** ** |   |   |   |   |
|                                                                                                   |   |                              |       |   |   |   |   |
| Other real  estate acquired in settlement of loans                                                     |   | **$**                             | **97**     | ** ** | $ | — |   | $ | — |   |

 

*See notes to consolidated financialstatements.*

 

52

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***PEOPLES FIRST, INC.***

**NOTESTO CONSOLIDATED FINANCIAL STA****TEMENTS**

 

**NOTE 1 - NATURE OF OPERATIONS AND BASIS OFPRESENTATION**

 

The consolidated financial statements include the accounts of PeoplesFirst, Inc. and its wholly-owned subsidiary, The Peoples Bank of Oxford (Bank)and its subsidiaries (collectively “Peoples”). The Bank sold the subsidiary, Wilmerding & Associates, Inc.(“Wilmerding”), an investment advisor, to an unaffiliated third party, onAugust 15, 2003, and incurred no material gain or loss on thetransaction.  The subsidiary, PeoplesFirst Business Investment Company, LLC (“PFBI”), is a non-operating companyformed in January 2002 for the purpose of holding certain equityinvestments in operating entities.  Oneof such operating entities is Peoples First Land Transfer, LLC, which commencedoperations in January 2002 and derives its income from the sale of titleinsurance.  The other operating entityis Peoples First Mortgage Company, LLC which commenced operations in May 2003and derives its income from the sale of mortgages.  All material intercompany transactions have been eliminated.  Peoples First, Inc. was formed onJuly 27, 2000 and is subject to regulation by the Board of Governors of theFederal Reserve System.

 

Peoples First, Inc. is a one-bank holding company headquartered inOxford, Pennsylvania and provides full banking services, including trustservices through its subsidiary.  TheBank operates under a state bank charter and is subject to regulation of thePennsylvania Department of Banking and the Federal Deposit InsuranceCorporation.  The areas served by theBank are principally Chester County and southern Lancaster County inPennsylvania and northern Cecil County, Maryland.

 

**NOTE 2 - SUMMARY OF ACCOUNTING POLICIES**

 

**Estimates**

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.  Material estimates that are particularlysusceptible to significant change in the near term relate to the determinationof the allowance for loan losses.

 

**Presentation of Cash Flows**

 

For purposes of reporting cash flows, cash and cash equivalents aredefined as those accounts included in the balance sheet caption “Cash and duefrom banks.”

 

**Significant Group Concentrations of CreditRisk**

 

Most of Peoples’ activities are with customers located withinsoutheastern Pennsylvania and northern Maryland.  Note 3 discusses the types of securities that Peoples investsin.  Note 4 discusses the types oflending that Peoples engages in.  Note15 discusses concentrations of lending in certain industries.

 

53

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**Securities**

 

Securities classified as available for sale are those securities thatPeoples intends to hold for an indefinite period of time but not necessarily tomaturity.  Any decision to sell asecurity classified as available for sale would be based on various factors,including significant movement in interest rates, changes in maturity mix ofPeoples’ assets and liabilities, liquidity needs, regulatory capitalconsiderations and other similar factors. Securities available for sale are carried at fair value.  Unrealized gains and losses are reported inother comprehensive income, net of the related deferred tax effect.  Realized gains or losses, determined on thebasis of the cost of the specific securities sold, are included in earnings.Premiums and discounts are recognized in interest income using a method whichapproximates the interest method over the period to maturity.

 

Bonds, notes and debentures for which Peoples has the positive intentand ability to hold to maturity are reported at cost, adjusted for premiums anddiscounts that are recognized in interest income using the interest method overthe period to maturity.

 

Management determines the appropriate classification of debt securitiesat the time of purchase and re-evaluates such designation as of each balancesheet date.

 

Federal law requires a member institution of the Federal Home Loan Banksystem to hold stock of its district Federal Home Loan Bank according to apredetermined formula.  The stock iscarried at cost.

 

**Loans Receivable**

 

Loans generally are stated at their outstanding unpaid principalbalances, net of an allowance for loan losses and any deferred fees orcosts.  Interest income is accrued onthe unpaid principal balance.  Loanorigination fees, net of certain direct origination costs, are deferred andrecognized as an adjustment of the yield (interest income) of the relatedloans.  Peoples is generally amortizingthose amounts over the contractual life of the loan.

 

The accrual of interest is discontinued when the contractual payment ofprincipal or interest has become 90 days past due or management has seriousdoubts about further collectibility of principal or interest, even though theloan is currently performing.  A loanmay remain on accrual status if it is in the process of collection and iseither guaranteed or well secured.  Whena loan is placed on nonaccrual status, unpaid interest credited to income inthe current year is reversed and unpaid interest accrued in prior years ischarged against the allowance for loan losses. Interest received on nonaccrual loans generally is either appliedagainst principal or reported as interest income, according to management’sjudgment as to the collectibility of principal. Generally, loans are restoredto accrual status when the obligation is brought current, has performed inaccordance with the contractual terms for a reasonable period of time and theultimate collectibility of the total contractual principal and interest is nolonger in doubt.

 

**Allowance for Loan Losses**

 

The allowance for loan losses is established through provisions forloan losses charged against income. Loans deemed to be uncollectible are charged against the allowance forloan losses, and subsequent recoveries, if any, are credited to the allowance.

 

54

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The allowance for loan losses is maintained at a level consideredadequate to provide for losses that can be reasonably anticipated.  Management’s periodic evaluation of theadequacy of the allowance is based on Peoples’ past loan loss experience, knownand inherent risks in the portfolio, adverse situations that may affect theborrower’s ability to repay, the estimated value of any underlying collateral,composition of the loan portfolio, current economic conditions, and otherrelevant factors.  This evaluation isinherently subjective as it requires material estimates that may be susceptibleto significant change, including the amounts and timing of future cash flowsexpected to be received on impaired loans.

 

The allowance consists of specific, general and unallocatedcomponents.  The specific componentrelates to loans that are classified as either doubtful, substandard or specialmention.  For such loans that are alsoclassified as impaired, an allowance is established when the discounted cashflows (or collateral value or observable market price) of the impaired loan islower than the carrying value for that loan. The general component covers non-classified loans and is based onhistorical loss experience adjusted for qualitative factors.  An unallocated component is maintained tocover uncertainties that could affect management’s estimate of probablelosses.  The unallocated component ofthe allowance reflects the margin of imprecision inherent in the underlyingassumptions used in the methodologies for estimating specific and generallosses in the portfolio.

 

A loan is considered impaired when, based on current information andevents, it is probable that Peoples will be unable to collect the scheduledpayments of principal or interest when due according to the contractual termsof the loan agreement.  Factorsconsidered by management in determining impairment include payment status,collateral value and the probability of collecting scheduled principal andinterest payments when due.  Loans thatexperience insignificant payment delays and payment shortfalls generally arenot classified as impaired.  Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and the borrower, including the length of the delay, thereasons for the delay, the borrower’s prior payment record, and the amount ofthe shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loanbasis for commercial and construction loans by either the present value ofexpected 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 theloan is collateral dependent.

 

Large groups of smaller balance homogeneous loans are collectivelyevaluated for impairment.  Accordingly,Peoples does not separately identify individual consumer and residentialmortgage loans for impairment disclosures.

 

**Premises and Equipment**

 

Premises and equipment are stated at cost less accumulateddepreciation.  Depreciation expense iscalculated principally on the straight-line method over the respective assetsestimated useful lives as follows:

 

|                       |   | **Years** |   |
|----------------------------|--------|-----------|--------|
|                       |   |      |   |
| Buildings and improvements |   | 10 - 40   |   |
| Furniture and equipment    |   | 5 - 10    |   |

 

55

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**Transfer of Financial Assets**

 

Transfers of financial assets are accounted for as sales, when controlover the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) theassets have been isolated from Peoples, (2) the transferee obtains the right(free of conditions that constrain it from taking advantage of that right) topledge or exchange the transferred assets and (3) Peoples does not maintaineffective control over the transferred assets through an agreement torepurchase them before their maturity.

 

**Foreclosed Real Estate**

 

Real estate properties acquired through, or in lieu of, loanforeclosure are to be sold and are initially recorded at fair value less cost tosell at the date of foreclosure establishing a new cost basis.  After foreclosure, valuations areperiodically performed by management and the real estate is carried at thelower of its carrying amount or fair value less cost to sell.  Revenue and expenses from operations andchanges in the valuation allowance are included in other expenses.  Foreclosed real estate is included in otherassets.

 

**Bank-Owned Life Insurance**

 

Peoples invests in bank owned life insurance (“BOLI”) as a source offunding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a chosengroup of employees.  Peoples is theowner and beneficiary of the policies. This life insurance investment is carried at the cash surrender value ofthe underlying policies and is included in other assets in the amount of$6,842,000 and $4,117,000 at December 31, 2003 and 2002,respectively.  Income from the increasein cash surrender value of the policies is included in other income on theincome statement.

 

**Advertising Costs**

 

Peoples follows the policy of charging the costs of advertising toexpense as incurred.  Advertisingexpense was $369,000, $359,000 and $292,000 in 2003, 2002 and 2001,respectively.

 

**Income Taxes**

 

Deferred income tax assets and liabilities are determined based on thedifferences between financial statement carrying amounts and the tax basis ofexisting assets and liabilities.  Thesedifferences are measured at the enacted tax rates that will be in effect whenthese differences reverse.  As changesin tax laws or rates are enacted, deferred tax assets and liabilities areadjusted through the provision for income taxes.

 

**Stock-Based Compensation**

 

At December 31, 2003, Peoples had one stock-based employeecompensation plan, which is described more fully in Note 12.  Peoples accounts for this plan under therecognition and measurement principles of APB Opinion No. 25, “Accounting forStock Issued to Employees,” and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under the plan had an exerciseprice equal to the market value of the underlying common stock on the date ofgrant.  The following table illustratesthe effect on net income and earnings per share for 2003 if Peoples had appliedthe fair value recognition provisions of FASB Statement No. 123, “Accountingfor Stock-Based Compensation,” to stock-based employee compensation.

 

56

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|                                                                                                                              |   | **Year Ended  December 31,  2003**      |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                                              |   | **(In  Thousands,  Except per  Share Data)** |   |
| Net income, as reported                                                                                                           |   | $                                            | 5,195  |   |
| Deduct total stock based compensation  expense determined under fair value based method for the award, net of  related tax effect |   | (201                                         | )      |
|                                                                                                                              |   |                                         |   |
| Pro forma net income                                                                                                              |   | $                                            | 4,994  |   |
|                                                                                                                              |   |                                         |   |
| Basic earnings per share:                                                                                                         |   |                                         |   |
| As reported                                                                                                                       |   | $                                            | 1.75   |   |
|                                                                                                                              |   |                                         |   |
| Pro forma                                                                                                                         |   | $                                            | 1.69   |   |
|                                                                                                                              |   |                                         |   |
| Diluted earnings per share:                                                                                                       |   |                                         |   |
| As reported                                                                                                                       |   | $                                            | 1.75   |   |
|                                                                                                                              |   |                                         |   |
| Pro forma                                                                                                                         |   | $                                            | 1.68   |   |

 

The fair value of each option grant is estimated using theBlack-Scholes option-pricing model with the following weighted-averageassumptions:  dividend yield of 2.5%,expected volatility of 30.67%, risk-free interest rate of 2.81% and expectedlife of 7 years.  The fair value ofoptions granted in 2003 was $6.53.

 

**Earnings per Common Share**

 

Basic earnings per share represents income available to commonstockholders 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 had been issued, as well as anyadjustment to income that would result from the assumed issuance.  Potential common shares that may be issuedby Peoples relate solely to outstanding stock options, and are determined usingthe treasury stock method.

 

**Off-Balance Sheet Financial Instruments**

 

In the ordinary course of business, Peoples has entered intooff-balance sheet financial instruments consisting of commitments to extendcredit, letters of credit and commitments to sell loans.  Such financial instruments are recorded inthe balance sheets when they become receivable or payable.

 

**Trust Assets**

 

Assets held by Peoples in a fiduciary capacity for customers are notincluded in the financial statements since such items are not assets ofPeoples.  Trust income is reported onthe accrual method.

 

57

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**Comprehensive Income**

 

Accounting principles generally require that recognized revenue,expenses, gains and losses be included in net income.  Although certain changes in assets and liabilities, such asunrealized gains and losses on available for sale securities, are reported as aseparate component of the equity section of the balance sheet, such items,along with net income, are components of comprehensive income.

 

Total comprehensive income, which is the sum of net income and othercomprehensive income, for the years ended December 31, 2003, 2002 and 2001was $4,932,000, $5,685,000 and $4,773,000, respectively.  Components of other comprehensive income andrelated income tax effects are as follows:

 
|                                                                                       |   | **Years  Ended December 31,** |       |
|--------------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                                       |   | **2003**                           |       | **2002** |   | **2001** |   |
|                                                                                       |   | **(In  Thousands)**                | ** ** |
|                                                                                       |   |                               |       |
| Unrealized holding gains (losses) on  available for sale securities                        |   | **$**                              | **(374**   | **)** | $ | 1,261 |   | $ | 813 |   |
| Reclassification adjustment for gains  realized in income on available for sale securities |   | **24**                             | ** ** | — |   | — |   |
|                                                                                       |   |                               |       |   |   |   |   |
| **Net Unrealized  Gains (Losses)**                                                         |   | **(398**                           | **)**      | 1,261 |   | 813 |   |
|                                                                                       |   |                               | ** ** |   |   |   |   |
| Income tax effect                                                                          |   | **135**                            | ** ** | (430 | ) | (276 | ) |
|                                                                                       |   |                               |       |   |   |   |   |
| **Net of Tax Amount**                                                                      |   | **$**                              | **(263**   | **)** | $ | 831 |   | $ | 537 |   |

 

**Segment Reporting**

 

Peoples acts as an independent community financial service provider andoffers traditional banking and related financial services to individual,business and government customers. Through its branch and automated teller machine network, the Bank offersa full array of commercial and retail financial services, including the takingof time, savings and demand deposits; the making of commercial, consumer andmortgage loans; and the providing of safe deposit services.  Peoples also performs personal, corporate,pension and fiduciary services through its Trust Department.

 

Management does not separately allocate expenses, including the cost offunding loan demand, between the commercial, retail, mortgage banking and trustoperations of Peoples.  As such,discrete information is not available and segment reporting would not bemeaningful.

 

The operations of Wilmerding, the Bank’s investment managementsubsidiary, are not material to the consolidated financial statements.

 

58

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**New Accounting Standards**

 

In November 2002, the Financial Accounting Standards Board (FASB)issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”  ThisInterpretation expands the disclosures to be made by a guarantor in itsfinancial statements about its obligations under certain guarantees andrequires the guarantor to recognize a liability for the fair value of an obligationassumed under certain specified guarantees. Under FIN 45, the Company does not issue any guarantees that wouldrequire liability recognition or disclosure, other than its standby letters ofcredit, as discussed in Note 14. Adoption of FIN 45 did not have a significant impact on Peoples’financial condition or results of operations.

 

In January 2003, the Financial Accounting Standards Board issuedFASB Interpretation No. 46, “Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51.”  FIN 46was revised in December 2003.  ThisInterpretation provides new guidance for the consolidation of variable interestentities (VIEs) and requires such entities to be consolidated by their primarybeneficiaries if the entities do not effectively disperse risk among partiesinvolved.  The Interpretation also addsdisclosure requirements for investors that are involved with unconsolidatedVIEs.  The disclosure requirements applyto all financial statements issued after December 31, 2003.  The consolidation requirements apply tocompanies that have interests in special purpose entities for periods endingafter December 15, 2003. Consolidation of other types of VIEs is required in financial statementsfor periods ending after March 15, 2004. Adoption of this Interpretation did not have and is not expected to havean impact on Peoples’ financial condition or results of operations.

 

In April 2003, the Financial Accounting Standards Board issuedStatement No. 149, “Amendment of Statement No. 133, Accounting for DerivativeInstruments and Hedging Activities.” This Statement clarifies the definition of a derivative and incorporatescertain decisions made by the Board as part of the Derivatives ImplementationGroup process.  This Statement iseffective for contracts entered into or modified and for hedging relationshipsdesignated after June 30, 2003 and should be applied prospectively.  The provisions of the Statement that relateto implementation issues addressed by the Derivatives Implementation Group thathave been effective should continue to be applied in accordance with theirrespective dates.  Adoption of thisstandard did not have an impact on Peoples’ financial condition or results ofoperations.

 

In May 2003, the Financial Accounting Standards Board issued StatementNo. 150, “Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity.”  ThisStatement requires that an issuer classify a financial instrument that is withinits scope as a liability.  Many of theseinstruments were previously classified as equity.  This Statement was effective for financial instruments enteredinto or modified after May 31, 2003 and otherwise was effective beginningJuly 1, 2003.  Adoption of thisstandard did not have an impact on Peoples’ financial condition or results ofoperations.

 

59

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**NOTE 3 - SECURITIES**

 

The amortized cost and fair value of securities were as follows:

 
|                              |   | **Amortized  Cost** |       | **Gross  Unrealized  Gains** |       | **Gross  Unrealized  Losses** |       | **Fair  Value** |       |
|-----------------------------------|--------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
|                              |   | **(In  Thousands)** |       |
|                              |   |                |       |
| **DECEMBER 31,  2003:**      |   |                |       |                         |       |                          |       |            |       |
| **AVAILABLE FOR SALE:**           |   |                |       |                         |       |                          |       |            |       |
| U.S. Treasury securities          |   | **$**               | **22,715** | ** **                   | **$**      | **218**                       | ** ** | **$**           | **5**      | ** ** | **$** | **22,928** | ** ** |
| U.S. Government agencies          |   | **20,979**          | ** ** | **511**                      | ** ** | **30**                        | ** ** | **21,460**      | ** ** |
| States and political subdivisions |   | **12,295**          | ** ** | **870**                      | ** ** | **—**                    | ** ** | **13,165**      | ** ** |
| Corporate securities              |   | **8,425**           | ** ** | **336**                      | ** ** | **40**                        | ** ** | **8,721**       | ** ** |
|                              |   |                |       |                         |       |                          |       |            |       |
| **Total**                         |   | **$**               | **64,414** | ** **                   | **$**      | **1,935**                     | ** ** | **$**           | **75**     | ** ** | **$** | **66,274** | ** ** |
|                              |   |                |       |                         |       |                          |       |            |       |
| **DECEMBER 31,  2002:**      |   |                |       |                         |       |                          |       |            |       |
| **AVAILABLE FOR SALE:**           |   |                |       |                         |       |                          |       |            |       |
| U.S. Treasury securities          |   | $                   | 16,490     |                         | $          | 432                           |       | $               | —     |   | $ | 16,922 |   |
| U.S. Government agencies          |   | 25,465              |       | 818                          |       | —                        |       | 26,283          |       |
| States and political subdivisions |   | 14,880              |       | 834                          |       | 1                             |       | 15,713          |       |
| Corporate securities              |   | 4,425               |       | 184                          |       | 9                             |       | 4,600           |       |
|                              |   |                |       |                         |       |                          |       |            |       |
| **Total**                         |   | $                   | 61,260     |                         | $          | 2,268                         |       | $               | 10         |   | $ | 63,518 |   |

 

There were no sales of securities during the years endedDecember 31, 2003, 2002 and 2001. During the year ended December 31, 2002, Peoples wrote downsecurities to their fair value which it deemed to be other than temporarilyimpaired by $84,000.  The tax benefitapplicable to the writedowns was $29,000 in 2002.  During 2002, a held to maturity security that Peoples wrote downin 2000 was called and a $387,000 gain was realized.  During 2003, the available for sale security that Peoples wrotedown in 2002 was partially called and a $24,000 gain was realized.

 

The following table shows gross unrealized losses and fair value ofsecurities, aggregated by security category and length of time that individualsecurities have been in a continuous unrealized loss position, atDecember 31, 2003:

 
|                                |   | **Less than  12 Months** |       | **12 Months  or More** |   | **Total**       |   |
|-------------------------------------|--------|--------------------------|------------|------------------------|--------|-----------------|--------|
|                                |   | **Fair  Value**          |       | **Unrealized  Losses** |   | **Fair  Value** |   | **Unrealized  Losses** |   | **Fair  Value** |   | **Unrealized  Losses** |   |
|                                |   | **(In  Thousands)**      | ** ** |
|                                |   |                     |       |
| **SECURITIES  AVAILABLE FOR SALE:** |   |                     |       |                   |   |            |   |   |   |   |   |   |   |
| U.S. Treasury securities            |   | $                        | 4,493      |                   | $      | 5               |   | $ | — |   | $ | — |   | $ | 4,493 |   | $ | 5 |   |
| U.S. Government agencies            |   | 2,970                    |       | 30                     |   | —          |   | — |   | 2,970 |   | 30 |   |
| Corporate securities                |   | 3,765                    |       | 40                     |   | —          |   | — |   | 3,765 |   | 40 |   |
| **Total**                           |   | $                        | 11,228     |                   | $      | 75              |   | $ | — |   | $ | — |   | $ | 11,228 |   | $ | 75 |   |

 

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In management’s opinion, the unrealized losses reflect changes ininterest rates subsequent to the acquisition of specific securities.  There were eight securities in the less thantwelve months category.  Peoples has theability to hold these securities until maturity or market price recovery.  Management believes that the unrealizedlosses represent temporary impairments of the securities.

 

Securities with an amortized cost of $48,173,000 and $38,167,000 at December 31,2003 and 2002, respectively, were pledged to secure public deposits, securitiessold under agreements to repurchase and for other purposes as required orpermitted by law.

 

The amortized cost and fair value of securities as of December 31,2003, by contractual maturity, are shown below.  Expected maturities may differ from contractual maturities orcall dates because borrowers may have the right to prepay obligations with orwithout call or prepayment penalties. 

 
|                                   |   | **Amortized  Cost** |       | **Fair  Value** |       |
|----------------------------------------|--------|---------------------|------------|-----------------|------------|
|                                   |   | **(In  Thousands)** | ** ** |
|                                   |   |                |       |
| Due in one year or less                |   | **$**               | **11,201** | ** **      | **$**      | **11,278** | ** ** |
| Due after one year through five years  |   | **43,421**          | ** ** | **44,504**      | ** ** |
| Due after five years through ten years |   | **6,810**           | ** ** | **7,178**       | ** ** |
| Due after ten years                    |   | **2,982**           | ** ** | **3,314**       | ** ** |
|                                   |   |                |       |            |       |
|                                   |   | **$**               | **64,414** |            | **$**      | **66,274** | ** ** |

 

**NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FORLOAN LOSSES**

 

The components of loans receivable at December 31 were as follows:

 
|                                   |   | **2003**            |        | **2002**   |   |
|----------------------------------------|--------|---------------------|-------------|------------|--------|
|                                   |   | **(In  Thousands)** |        |
|                                   |   |                |        |
| Commercial, financial and agricultural |   | **$**               | **53,413**  | ** ** | $      | 46,477 |   |
| Real estate, construction              |   | **51,763**          | ** **  | 22,684     |   |
| Real estate, mortgage                  |   | **241,401**         | ** **  | 218,650    |   |
| Installment loans to individuals       |   | **12,722**          | ** **  | 14,969     |   |
|                                   |   |                |        |       |   |
|                                   |   | **359,299**         |        | 302,780    |   |
| Deferred fees, net                     |   | **(634**            | **)**       | (619       | )      |
| Allowance for loan losses              |   | **(4,972**          | **)**       | (4,503     | )      |
|                                   |   |                |        |       |   |
|                                   |   | **$**               | **353,693** |       | $      | 297,658 |   |

 

61

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The following table presents changes in the allowance for loan losses:

 
|                      |   | **Years  Ended December 31,** |       |
|---------------------------|--------|------------------------------------|------------|
|                      |   | **2003**                           |       | **2002** |   | **2001** |   |
|                      |   | **(In  Thousands)**                | ** ** |
|                      |   |                               |       |
| Balance, beginning        |   | **$**                              | **4,503**  | ** ** | $ | 4,182 |   | $ | 3,922 |   |
| Provision for loan losses |   | **600**                            | ** ** | 480 |   | 330 |   |
| Recoveries                |   | **49**                             | ** ** | 24 |   | 41 |   |
| Loans charged off         |   | **(180**                           | **)**      | (183 | ) | (111 | ) |
|                      |   |                               |       |   |   |   |   |
| Balance, ending           |   | **$**                              | **4,972**  | ** ** | $ | 4,503 |   | $ | 4,182 |   |

 

The recorded investment in impaired loans, not requiring an allowancefor loan losses was $2,561,000 and $-0- at December 31, 2003 and 2002,respectively.  The recorded investmentin impaired loans requiring an allowance for loan losses was $2,535,000 and$2,614,000 at December 31, 2003 and 2002, respectively.  The related allowance for loan lossesassociated with these loans was $662,000 and $392,000 at December 31, 2003and 2002, respectively.  For the yearsended December 31, 2003, 2002 and 2001, the average recorded investment inthese impaired loans was $5,218,000, $2,673,000 and $3,158,000,respectively.  The interest incomerecognized, representing cash collected, on these impaired loans was $173,000,$-0- and $67,000 in 2003, 2002 and 2001, respectively.

 

Loans on which the accrual of interest has been discontinued amountedto $2,664,000 and $3,463,000 at December 31, 2003 and 2002,respectively.  Loan balances past due 90days or more and still accruing interest, but which management expects willeventually be paid in full, amounted to $156,000 and $47,000 atDecember 31, 2003 and 2002, respectively.

 

**NOTE 5 - PREMISES AND EQUIPMENT**

 

Components of premises and equipment at December 31 are asfollows: 

 
|                       |   | **2003**            |       | **2002**   |   |
|----------------------------|--------|---------------------|------------|------------|--------|
|                       |   | **(In  Thousands)** |       |
|                       |   |                |       |
| Land                       |   | **$**               | **982**    | ** ** | $      | 1,112 |   |
| Buildings and improvements |   | **9,935**           | ** ** | 9,865      |   |
| Furniture and equipment    |   | **4,555**           | ** ** | 4,201      |   |
| Construction in progress   |   | **528**             | ** ** | 355        |   |
|                       |   |                |       |       |   |
|                       |   | **16,000**          |       | 15,533     |   |
| Accumulated depreciation   |   | **(4,815**          | **)**      | (4,125     | )      |
|                       |   |                |       |       |   |
|                       |   | **$**               | **11,185** |       | $      | 11,408 |   |

 

62

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Peoples leases land and office space under various operatingleases.  The leases expire in 2004through 2021.  All leases provide forvarious renewal options.  The minimumrental commitments under the leases are as follows (in thousands):

 
| Year ending December 31: |   |      |       |
|-------------------------------|--------|-----------|------------|
| 2004                          |   | **$**     | **186**    |   |
| 2005                          |   | **184**   | ** ** |
| 2006                          |   | **190**   | ** ** |
| 2007                          |   | **195**   | ** ** |
| 2008                          |   | **188**   | ** ** |
| 2009 and thereafter           |   | **1,990** | ** ** |
|                          |   |      |       |
|                          |   | **$**     | **2,933**  |   |

 

Rental expense was $238,000, $250,000 and $214,000 for the years endedDecember 31, 2003, 2002 and 2001, respectively.

 

**NOTE 6 - DEPOSITS**

 

Aggregate time deposits in denominations of $100,000 or more were$21,202,000 and $24,445,000 at December 31, 2003 and 2002, respectively.

 

At December 31, 2003, the scheduled maturities of time depositsare as follows (in thousands): 

 
| 2004   |   | **$**      | **57,155** |   |
|--------|--------|------------|------------|--------|
| 2005   |   | **13,778** |       |
| 2006   |   | **2,903**  | ** ** |
| 2007   |   | **11,918** | ** ** |
| 2008   |   | **3,726**  | ** ** |
|   |   |       |       |
|   |   | **$**      | **89,480** |   |

 

**NOTE 7 - BORROWINGS**

 

Information concerning securities sold under agreements to repurchaseis summarized as follows:

 
|                                                   |   | **Years  Ended December 31,** |       |
|--------------------------------------------------------|--------|------------------------------------|------------|
|                                                   |   | **2003**                           |       | **2002** |   |
|                                                   |   | **(Dollars  in Thousands)**        | ** ** |
|                                                   |   |                               |       |
| Average balance during the year                        |   | **$**                              | **8,312**  | ** ** | $ | 6,436 |   |
| Average interest rate during the year                  |   | **0.53**                           | **%**      | 0.93 | % |
| Maximum month-end balance during the year              |   | **$**                              | **15,120** | ** ** | $ | 9,800 |   |
| Weighted average interest rate at the end  of the year |   | **0.45**                           | **%**      | 0.63 | % |

 

63

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Securities sold under agreements to repurchase which are classified assecured borrowings, generally mature within one day from the transactiondate.  Securities sold under agreementsto repurchase are reflected at the amount of cash received in connection withthe transaction.  The securitiesunderlying the agreements were under Peoples’ control.  Peoples monitors the fair value of theunderlying securities on a daily basis.

 

Long-term debt consisted of the following:

 
|                                                                                                                   |   | **December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|------------|
|                                                                                                                   |   | **2003**              |       | **2002** |   |
|                                                                                                                   |   | **(In  Thousands)**   | ** ** |
| Notes with the Federal Home Loan Bank  (FHLB):                                                                         |   |                  |       |   |   |
| 30 year/20 year note due March 19,  2018, fixed at 6.23% (1)                                                      |   | **$**                 | **923**    |   | $ | 938 |   |
| 10 year note due April 22, 2008, fixed  at 6.14%                                                                  |   | **517**               |       | 616 |   |
| 10 year term note due May 29, 2008,  long-term fixed at 6.33%                                                          |   | **1,000**             |       | 1,000 |   |
| 30 year/20 year note due June 15,  2018, fixed at 6.38% (1)                                                       |   | **928**               |       | 944 |   |
| 15 year/7 year note due July 6, 2005,  fixed at 6.15% (1)                                                         |   | **744**               |       | 798 |   |
| 30 year/20 year note due July 13,  2018, fixed at 6.17% (1)                                                       |   | **2,782**             |       | 2,828 |   |
| 10 year note due February 12, 2009,  fixed at 5.46%                                                               |   | **1,168**             |       | 1,359 |   |
| 15 year/5 year term note due May 21, 2014,  convertible select - fixed 5.60% to float at (2)                           |   | **2,500**             |       | 2,500 |   |
| 10 year/1 year term note due  January 21, 2010, convertible select - fixed 5.99% with strike rate at  7.50% (2)   |   | **4,000**             |       | 4,000 |   |
| 10 year/2 year term note due  February 18, 2010, convertible select - fixed 6.485% with strike rate at  8.00% (2) |   | **4,000**             |       | 4,000 |   |
| 10 year note due October 25, 2011,  fixed at 4.97%                                                                |   | **2,058**             |       | 2,268 |   |
| 5 year term note due November 16,  2006, fixed at 4.67%                                                           |   | **1,500**             |       | 1,500 |   |
| 10 year/1 year term note due June 13,  2012, convertible select - fixed 4.40% with strike rate at 7.50% (2)       |   | **5,000**             |       | 5,000 |   |
| 15 year/7 year note due June 15, 2009,  fixed at 4.97% (1)                                                        |   | **1,860**             |       | 1,955 |   |
| 15 year note due March 5, 2018, fixed  at 4.06%                                                                   |   | **1,926**             |       | — |   |
|                                                                                                                   |   |                  |       |   |   |
|                                                                                                                   |   | **$**                 | **30,906** |   | $ | 29,706 |   |

 

----

(1) The year/year refers to the amortization term and the initial termuntil the balloon payment.

 

(2) These notes contain a convertible option that allows the FHLB, atquarterly intervals, to change the note to an adjustable-rate advance atthree-month LIBOR plus 8 to 22 basis points. If the note is converted, the option allows the Bank to put the fundsback to the FHLB at par.  The year/yearrefers to the maturity of the note (in years) and the term until the firstconvertible date.

 

64

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These loans are primarily fixed rate loans.  Approximately $12.9 million of the loans have scheduled monthlyprincipal and interest payments.  $18.0million are payable in full at maturity. The weighted-average interest rate on these borrowings is 5.48% andscheduled maturities are as follows (in thousands):

 
| 2004       |   | **$**      | **868**    |   |
|------------|--------|------------|------------|--------|
| 2005       |   | **1,540**  |       |
| 2006       |   | **2,400**  |       |
| 2007       |   | **949**    |       |
| 2008       |   | **1,920**  |       |
| Thereafter |   | **23,229** |       |
|       |   |       |       |
|       |   | **$**      | **30,906** |   |

 

The Bank has a maximum borrowing capacity with the FHLB ofapproximately $134,663,000, of which $30,906,000 was outstanding atDecember 31, 2003.  Advances fromthe Federal Home Loan Bank are secured by qualifying assets of the Bank.

 

**NOTE 8 - PENSION PLAN**

 

Peoples has a 401(k) plan covering substantially all employees.  Peoples matches the amount an employee hasdeducted from the employee’s pay up to a maximum of 6% of the employee’s grosspay.  Additional discretionarycontributions are determined annually by the Board of Directors.  Peoples’ contributions are expensed as thecost is incurred, funded currently, and amounted to $497,000 in 2003, $487,000in 2002 and $372,000 in 2001, including additional discretionary contributionsof $110,000, $101,000 and $80,000, respectively.

 

**NOTE 9 - INCOME TAXES**

 

The components of the provision for income taxes are as follows:

 
|     |   | **Years  Ended December 31,** |       |
|----------|--------|------------------------------------|------------|
|     |   | **2003**                           |       | **2002** |   | **2001** |   |
|     |   | **(In  Thousands)**                |       |
|     |   |                               |       |   |   |   |   |
| Current  |   | **$**                              | **2,007**  | ** ** | $ | 1,725 |   | $ | 1,544 |   |
| Deferred |   | **(46**                            | **)**      | (17 | ) | (74 | ) |
|     |   |                               | ** ** |   |   |   |   |
|     |   | **$**                              | **1,961**  |   | $ | 1,708 |   | $ | 1,470 |   |

 

65

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Income tax expense of Peoples is less than the amounts computed byapplying statutory federal income tax rates to income before income taxesbecause of the following:

 
|                                                              |   | **Percentage  of Income  Before Income Taxes** |       |
|-------------------------------------------------------------------|--------|------------------------------------------------|------------|
|                                                              |   | **Years  Ended December 31,**             |       |
|                                                              |   | **2003**                                       |       | **2002** |   | **2001** |   |
|                                                              |   |                                           | ** ** |   |   |   |   |
| Tax at statutory rates                                            |   | **34.0**                                       | **%**      | 34.0 | % | 34.0 | % |
| Tax exempt interest income, net of interest  expense disallowance |   | **(5.7**                                       | **)**      | (7.1 | ) | (6.7 | ) |
| Earnings on life insurance                                        |   | **(1.1**                                       | **)**      | (1.1 | ) | (1.2 | ) |
| Other                                                             |   | **0.2**                                        | ** ** | 0.2 |   | (0.3 | ) |
|                                                              |   |                                           | ** ** |   |   |   |   |
| **Effective Tax Rates**                                           |   | **27.4**                                       | **%**      | 26.0 | % | 25.8 | % |

 

The federal income tax provision includes $8,000, $132,000 and $-0- in2003, 2002 and 2001, respectively, of federal income taxes related to gains onthe disposal of securities.

 

The components of the deferred tax assets and liabilities are asfollows at December 31:

 
|                                               |   | **2003**            |       | **2002**   |   |
|----------------------------------------------------|--------|---------------------|------------|------------|--------|
|                                               |   | **(In  Thousands)** |       |
|                                               |   |                |       |       |   |
| Deferred tax assets:                               |   |                | ** ** |       |   |
| Allowance for loan losses                          |   | **$**               | **1,563**  | ** ** | $      | 1,404 |   |
| Impairment of securities                           |   | **20**              | ** ** | 29         |   |
| Other                                              |   | **232**             | ** ** | 165        |   |
|                                               |   |                | ** ** |       |   |
| **Total Deferred Tax  Assets**                     |   | **1,815**           | ** ** | 1,598      |   |
|                                               |   |                | ** ** |       |   |
| Deferred tax liabilities:                          |   |                | ** ** |       |   |
| Accumulated depreciation                           |   | **472**             | ** ** | 299        |   |
| Accretion on securities                            |   | **19**              | ** ** | 21         |   |
| Unrealized gains on securities available  for sale |   | **632**             | ** ** | 769        |   |
|                                               |   |                | ** ** |       |   |
| **Total Deferred Tax  Liabilities**                |   | **1,123**           | ** ** | 1,089      |   |
|                                               |   |                | ** ** |       |   |
| **Net Deferred Tax  Asset**                        |   | **$**               | **692**    | ** ** | $      | 509 |   |

 

**NOTE 10 - TRANSACTIONS WITH EXECUTIVEOFFICERS AND DIRECTORS**

 

Certain directors and executive officers of Peoples, their families andtheir affiliates are customers of the Bank. Any transactions with such parties,including loans and commitments, were in the ordinary course of business atnormal terms, including interest rates and collateralization, prevailing at thetime and did not represent more than normal risks.  At December 31, 2003 and 2002, balances outstanding on suchloans amounted to $1,532,000 and $3,870,000, respectively.  During 2003, new loans and advances to suchrelated parties totaled $3,304,000 and repayments totaled $5,642,000.

 

66

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**NOTE 11 - REGULATORY MATTERS ANDSTOCKHOLDERS’ EQUITY**

 

Peoples and the Bank are subject to various regulatory capitalrequirements administered by the federal banking agencies. Failure to meetminimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could havea direct material effect on Peoples’ financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, Peoples must meet specificcapital guidelines that involve quantitative measures of Peoples’ assets,liabilities and certain off-balance sheet items as calculated under regulatoryaccounting practices.  Peoples’ capitalamounts and classification are also subject to qualitative judgments by theregulators about components, risk weightings and other factors.

 

Quantitative measures established by regulation to ensure capitaladequacy require Peoples to maintain minimum amounts and ratios (set forth inthe table below) of total and Tier 1 capital (as defined in theregulations) to risk-weighted assets, and of Tier 1 capital to averageassets.  Management believes, as ofDecember 31, 2003, that Peoples meets all capital adequacy requirements towhich it is subject.

 

As of December 31, 2003, the most recent notification from theFederal Deposit Insurance Corporation has categorized the Bank as wellcapitalized under the regulatory framework for prompt corrective action.  There are no conditions or events since thatnotification that management believes have changed the Bank’s category.

 

Peoples and the Bank’s actual capital amounts and ratios are alsopresented in the table:

 
|                                      |   | **Actual**                  |       | **For  Capital Adequacy  Purposes** |       | **To be Well  Capitalized  under Prompt  Corrective Action  Provisions** |       |
|-------------------------------------------|--------|-----------------------------|------------|-------------------------------------|------------|--------------------------------------------------------------------------|------------|
|                                      |   | **Amount**                  |       | **Ratio**                           |       | **Amount**                                                               |       | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                      |   | **(Dollars  in Thousands)** |       |
|                                      |   |                        |       |                                |       |                                                                     |       |   |   |   |   |   |   |
| **As of December 31, 2003:**         |   |                        | ** ** |                                | ** ** |                                                                     | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Total capital (to risk-weighted assets):  |   |                        | ** ** |                                | ** ** |                                                                     | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Bank                                      |   | **$**                       | **46,179** | ** **                          | **11.93**  | **%**                                                                    | **$**      | **330,957** | ** ** | **38.00** | **%** | **$** | **338,696** | ** ** | **310.00** | **%** |
| Peoples                                   |   | **53,015**                  | ** ** | **13.60**                           | ** ** | **331,195**                                                         | ** ** | **38.00** | ** ** | **N/A** | ** ** |   | ** ** |
| Tier 1 capital (to risk-weighted assets): |   |                        | ** ** |                                | ** ** |                                                                     | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Bank                                      |   | **41,340**                  | ** ** | **10.68**                           | ** ** | **315,478**                                                         | ** ** | **34.00** | ** ** | **323,218** | ** ** | **3  6.00** | ** ** |
| Peoples                                   |   | **48,140**                  | ** ** | **12.35**                           | ** ** | **315,598**                                                         | ** ** | **34.00** | ** ** | **N/A** | ** ** |   | ** ** |
| Tier 1 capital (to average assets):       |   |                        | ** ** |                                | ** ** |                                                                     | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Bank                                      |   | **41,340**                  | ** ** | **9.25**                            | ** ** | **317,885**                                                         | ** ** | **34.00** | ** ** | **322,356** | ** ** | **3  5.00** | ** ** |
| Peoples                                   |   | **48,140**                  | ** ** | **10.59**                           | ** ** | **318,186**                                                         | ** ** | **34.00** | ** ** | **N/A** | ** ** |   | ** ** |
|                                      |   |                        |       |                                |       |                                                                     |       |   |   |   |   |   |   |
| **As of December 31, 2002:**         |   |                        |       |                                |       |                                                                     |       |   |   |   |   |   |   |
| Total capital (to risk-weighted assets):  |   |                        | ** ** |                                | ** ** |                                                                     | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Bank                                      |   | $                           | 41,997     |                                | 13.19      | %                                                                        | $          | 325,468 |   | 38.00 | % | $ | 331,835 |   | 310.00 | % |
| Peoples                                   |   | 49,398                      |       | 15.37                               |       | 325,718                                                             |       | 38.00 |   | N/A |   |   |   |
| Tier 1 capital (to risk-weighted assets): |   |                        |       |                                |       |                                                                     |       |   |   |   |   |   |   |
| Bank                                      |   | 38,011                      |       | 11.94                               |       | 312,734                                                             |       | 34.00 |   | 319,101 |   | 3  6.00 |   |
| Peoples                                   |   | 45,374                      |       | 14.11                               |       | 312,859                                                             |       | 34.00 |   | N/A |   |   |   |
| Tier 1 capital (to average assets):       |   |                        |       |                                |       |                                                                     |       |   |   |   |   |   |   |
| Bank                                      |   | 38,011                      |       | 9.59                                |       | 315,859                                                             |       | 34.00 |   | 319,824 |   | 3  5.00 |   |
| Peoples                                   |   | 45,374                      |       | 11.21                               |       | 316,193                                                             |       | 34.00 |   | N/A |   |   |   |

 

67

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The Bank is required to maintain average cash reserve balances in vaultcash or with the Federal Reserve Bank. The amount of these restricted cash reserve balances with the FederalReserve Bank at December 31, 2003 and 2002 was approximately $1,879,000and $1,573,000, respectively.

 

Under Pennsylvania banking law, the Bank is subject to certainrestrictions on the amount of dividends that it may declare without priorregulatory approval.  AtDecember 31, 2003, $22,134,000 of the Bank’s retained earnings wereavailable for dividend declaration to Peoples without prior regulatoryapproval, subject to regulatory requirements discussed above.  Under Federal Reserve regulations, the Bankis limited as to the amount it may lend affiliates, including Peoples First,Inc., unless such loans are collateralized by specified obligations.

 

During 2003, Peoples’ dividend reinvestment plan, which had 100,000shares of common stock reserved for issuance under the plan, was eliminated.

 

**NOTE 12 - STOCK OPTION PLAN**

 

During 2001, Peoples’ stockholders approved a stock option plan for keyemployees and directors of Peoples and its subsidiaries that is administered bya committee of the Board of Directors. Under the Plan, the Board is authorized to grant “incentive stockoptions” and “non-qualified stock options.” A total of 200,000 shares of Peoples’ common stock has been reserved forissuance under the Plan.  The optionprice for options issued under the Plan must be at least equal to 100% of thefair market value of the common stock on the grant date.  No incentive stock options have beengranted.

 

On June 17, 2003, Peoples granted 85,950 nonqualified stockoptions to purchase common stock at $24.13 per share to employees ofPeoples.  Options granted under the Planare exercisable over a period not less than one year after the grant date, butno later than ten years and one month after the date of grant in accordancewith the vesting period as determined by the Plan Committee.  Options expire on the earlier of ten yearsafter the date of grant, up to twenty-four months from the date of retirement,as of the date of termination for cause, or one year from the date of death, permanentdisability or a change in control.

 

Transactions under the Plan are summarized as follows:

 
|                               |   | **Number  of  Options** |   | **Exercise  Price per  Share** |   |
|------------------------------------|--------|-------------------------|--------|--------------------------------|--------|
|                               |   |                    |   |                           |   |
| Outstanding December 31, 2002 |   | —                  |   | $                              | — |   |
| Options granted                    |   | 85,950                  |   | 24.13                          |   |
| Options forfeited                  |   | 500                     |   | 24.13                          |   |
|                               |   |                    |   |                           |   |
| Outstanding December 31, 2003 |   | 85,450                  |   | $                              | 24.13  |   |

 

No options are exercisable at December 31, 2003.  To date, no options have been exercised orexpired; 500 options were forfeited. The weighted average remaining contractual life of the optionsoutstanding is 9.5 years.  Optionsavailable for grant at December 31, 2003 and 2002 were 114,550 and200,000, respectively.

 

68

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**NOTE 13 - EARNINGS PER SHARE**

 

Basic earnings per share represents income available to commonstockholders 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.

 

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

 
|                                    |   | **Years  Ended December 31,** |          |
|-----------------------------------------|--------|------------------------------------|---------------|
|                                    |   | **2003**                           |          | **2002** |   | **2001** |   |
|                                    |   |                               |          |   |   |   |   |
| Numerator - net income                  |   | **$**                              | **5,195,000** | ** ** | $ | 4,854,000 |   | $ | 4,236,000 |   |
|                                    |   |                               | ** **    |   |   |   |   |
| Denominator:                            |   |                               | ** **    |   |   |   |   |
| Average basic shares outstanding        |   | **2,961,291**                      | ** **    | 2,977,635 |   | 3,021,507 |   |
| Effect of dilutive stock options        |   | **6,564**                          | ** **    |   |   |   |   |
|                                    |   |                               | ** **    |   |   |   |   |
| **Average Diluted  Shares Outstanding** |   | **2,967,855**                      | ** **    |   |   |   |   |
|                                         |        |                                    |               |  |  |  |  |  |  |  |

 

**NOTE 14 - OFF-BALANCE SHEET FINANCIALINSTRUMENTS**

 

The Bank is a party to financial instruments with off-balance sheetrisk in the normal course of business to meet the financing needs of itscustomers.  These financial instrumentsinclude commitments to extend credit and letters of credit.  Those instruments involve, to varyingdegrees, elements of credit and interest rate risk in excess of the amountrecognized in the balance sheets.

 

The Bank’s exposure to credit loss in the event of nonperformance bythe other party to the financial instrument for commitments to extend creditand letters of credit is represented by the contractual amount of thoseinstruments.  The Bank uses the samecredit policies in making commitments and conditional obligations as it doesfor on-balance sheet instruments.

 

A summary of the Bank’s financial instrument commitments is as follows:

 
|                               |   | **December 31,** |       |
|------------------------------------|--------|-----------------------|------------|
|                               |   | **2003**              |       | **2002** |   |
|                               |   | **(In  Thousands)**   |       |
|                               |   |                  |       |   |   |
| Commitments to extend credit:      |   |                  | ** ** |   |   |
| Loan origination commitments       |   | **$**                 | **32,655** | ** ** | $ | 20,983 |   |
| Unused home equity lines of credit |   | **14,806**            | ** ** | 11,422 |   |
| Unused business lines of credit    |   | **35,754**            | ** ** | 29,909 |   |
|                               |   |                  | ** ** |   |   |
|                               |   | **$**                 | **83,215** |   | $ | 62,314 |   |
|                               |   |                  | ** ** |   |   |
| Standby letters of credit          |   | **$**                 | **8,702**  | ** ** | $ | 5,638 |   |

 

69

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Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Since some of the commitmentsare expected to expire without being drawn upon, the total commitment amountdoes not necessarily represent future cash requirements.  The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, ifdeemed necessary by the Bank upon extension of credit, is based on management’scredit evaluation of the customer and generally consists of real estate.

 

Standby letters of credit written are conditional commitments issued bythe Bank to guarantee the performance of a customer to a third party.  The majority of these standby letters ofcredit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially thesame as that involved in extending other loan commitments.  The Bank requires collateral supportingthese letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation ofsuch collateral would be sufficient to cover the maximum potential amount offuture payments required under the corresponding guarantees.  The current amount of the liability as ofDecember 31, 2003 for guarantees under standby letters of credit issued isnot material.

 

**NOTE 15 - CONCENTRATIONS OF CREDIT RISK**

 

The Bank operates primarily in Chester County and southern LancasterCounty, Pennsylvania and northern Cecil County, Maryland.  The Bank has extended credit primarily tocommercial entities and individuals in this area whose ability to honor theircontracts is influenced by the region’s economy.  These customers are also the primary depositors of the Bank.  The loan portfolio is well diversified,however, extensions of credit for agricultural loans for mushroom production,real estate loans to lessors of commercial properties and construction loans toresidential buildings, comprise 7.9%, 7.6% and 6.7%, respectively, of the loanportfolio at December 31, 2003. The Bank is limited in extending credit by legal lending limits to anysingle borrower or group of borrowers.

 

**NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OFFINANCIAL INSTRUMENTS**

 

Management uses its best judgment in estimating the fair value ofPeoples’ financial instruments; however, there are inherent weaknesses in anyestimation technique.  Therefore, forsubstantially all financial instruments, the fair value estimates herein arenot necessarily indicative of the amounts Peoples could have realized in asales transaction on the dates indicated. The estimated fair value amounts have been measured as of theirrespective year ends and have not been re-evaluated or updated for purposes ofthese financial statements subsequent to those respective dates.  As such, the estimated fair values of thesefinancial instruments subsequent to the respective reporting dates may bedifferent than the amounts reported at each year end.

 

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The following information should not be interpreted as an estimate ofthe fair value of Peoples since a fair value calculation is only provided for alimited portion of Peoples’ assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivityused in making the estimates, comparisons between Peoples’ disclosures andthose of other companies may not be meaningful.  The following methods and assumptions were used to estimate thefair values of Peoples’ financial instruments at December 31, 2003 and2002:

 

•                  For cash and duefrom banks, interest-bearing deposits with banks and federal funds sold, thecarrying amount is a reasonable estimate of fair value.

 

•                  For securities,fair value equals quoted market price, if available.  If a quoted market price is not available, fair value isestimated using quoted market prices for similar securities.

 

•                  The fair valueof loans is estimated by discounting the future cash flows using the currentrates at which similar loans would be made to borrowers with similar creditratings and for the same remaining maturities.

 

•                  The fair valueof the investment in FHLB stock is the carrying amount.

 

•                  The fair valueof accrued interest receivable and accrued interest payable is the carryingamount.

 

•                  The fair valueof demand deposits, savings accounts and certain money market deposits is theamount payable on demand at the reporting date.  The fair value of fixed-maturity certificates of deposit isestimated using the rates currently offered for deposits for similar remainingmaturities.

 

•                  The fair valueof securities sold under agreements to repurchase approximate their carryingamount.

 

•                  The fair valueof long-term debt is estimated by discounting future cash flows using currentrates at which similar debt with similar maturities could be obtained from theFHLB.

 

•                  The fair valueof commitments to extend credit and for outstanding letters of credit isestimated using the fees currently charged to enter into similar agreements.

 

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The estimated fair values of Peoples’ financial instruments were asfollows:

 
|                                                                                  |   | **December 31,  2003** |       | **December 31,  2002** |       |
|---------------------------------------------------------------------------------------|--------|-----------------------------|------------|-----------------------------|------------|
|                                                                                  |   | **Carrying  Amount**        |       | **Fair  Value**             |       | **Carrying  Amount** |   | **Fair  Value** |   |
|                                                                                  |   | **(In  Thousands)**         |       |
|                                                                                  |   |                        | ** ** |                        | ** ** |   | ** ** |   | ** ** |
| Financial assets:                                                                     |   |                        |       |                        |       |   |   |   |   |
| Cash and due from banks, interest-bearing  deposits with banks and federal funds sold |   | **$**                       | **14,204** | ** **                  | **$**      | **14,204** |   | $ | 24,337 |   | $ | 24,337 |   |
| Securities                                                                            |   | **66,274**                  | ** ** | **66,274**                  |       | 63,518 |   | 63,518 |   |
| Loans receivable, net                                                                 |   | **353,693**                 | ** ** | **363,898**                 |       | 297,658 |   | 312,090 |   |
| Investment in FHLB stock                                                              |   | **2,291**                   | ** ** | **2,291**                   |       | 2,041 |   | 2,041 |   |
| Accrued interest receivable                                                           |   | **1,772**                   | ** ** | **1,772**                   |       | 1,743 |   | 1,743 |   |
|                                                                                  |   |                        | ** ** |                        |       |   |   |   |   |
| Financial liabilities:                                                                |   |                        | ** ** |                        |       |   |   |   |   |
| Deposits                                                                              |   | **368,205**                 | ** ** | **369,354**                 |       | 322,136 |   | 324,341 |   |
| Securities sold under agreements to  repurchase                                       |   | **8,470**                   | ** ** | **8,470**                   |       | 7,855 |   | 7,855 |   |
| Long-term debt                                                                        |   | **30,906**                  | ** ** | **32,214**                  |       | 29,706 |   | 31,377 |   |
| Accrued interest payable                                                              |   | **583**                     | ** ** | **583**                     |       | 800 |   | 800 |   |
|                                                                                  |   |                        | ** ** |                        |       |   |   |   |   |
| Off-balance sheet financial instruments:                                              |   |                        | ** ** |                        |       |   |   |   |   |
| Commitments to extend credit and  outstanding letters of credit                       |   | **—**                  | ** ** | **—**                  |       | — |   | — |   |
|                                                                                       |        |                             |            |                             |            |  |  |  |  |  |  |  |  |

 

**NOTE 17 - PENDING MERGER**

 

On December 18, 2003, the Board of Directors of Peoples signed adefinitive agreement to merge with and into National Penn Bancshares, Inc. ofBoyertown, Pennsylvania.  The transaction,which is subject to regulatory approval as well as Peoples’ stockholders, isanticipated to close in the second quarter of 2004.  Completion of the merger in 2004 will trigger change in controlpayments to certain officers, as dictated by their respective contracts andacceleration of the vesting of outstanding stock options.

 

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**NOTE 18 - PEOPLES FIRST, INC. (PARENT COMPANYONLY) FINANCIAL INFORMATION**

 

**BALANCE SHEETS**

 
|                                                 |   | **December 31,** |       |
|------------------------------------------------------|--------|-----------------------|------------|
|                                                 |   | **2003**              |       | **2002** |   |
|                                                 |   | **(In  Thousands)**   |       |
| **ASSETS**                                           |   |                  |       |   |   |
|                                                 |   |                  |       |   |   |
| Cash                                                 |   | **$**                 | **49**     |   | $ | 47 |   |
| Securities available for sale, at fair  value        |   | **7,874**             |       | 8,205 |   |
| Investment in bank subsidiary                        |   | **42,299**            |       | 39,227 |   |
| Other assets                                         |   | **105**               |       | 109 |   |
|                                                 |   |                  |       |   |   |
| **Total Assets**                                     |   | **$**                 | **50,327** |   | $ | 47,588 |   |
|                                                 |   |                  |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**        |   |                  |       |   |   |
|                                                 |   |                  |       |   |   |
| Other liabilities                                    |   | **$**                 | **941**    |   | $ | 724 |   |
|                                                 |   |                  |       |   |   |
| Stockholders’ equity                            |   | **49,386**            |       | 46,864 |   |
|                                                 |   |                  |       |   |   |
| **Total Liabilities  and Stockholders’ Equity** |   | **$**                 | **50,327** |   | $ | 47,588 |   |

 

**STATEMENTS OF INCOME**

 
|                                                             |   | **Years  Ended December 31,** |       |
|------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                             |   | **2003**                           |       | **2002** |   | **2001** |   |
|                                                             |   | **(In  Thousands)**                |       |
|                                                             |   |                               | ** ** |   | ** ** |   | ** ** |
| Dividends from bank subsidiary                                   |   | **$**                              | **1,559**  | ** ** | $ | 1,274 |   | $ | 10,355 |   |
| Interest income on tax exempt securities                         |   | **325**                            | ** ** | 343 |   | 203 |   |
| Equity in (excess of) undistributed  earnings of bank subsidiary |   | **3,348**                          | ** ** | 3,274 |   | (6,296 | ) |
| Other expenses                                                   |   | **(53**                            | **)**      | (53 | ) | (39 | ) |
|                                                             |   |                               | ** ** |   |   |   |   |
| **Income before  Income Taxes**                                  |   | **5,179**                          | ** ** | 4,838 |   | 4,223 |   |
|                                                             |   |                               | ** ** |   |   |   |   |
| Income tax benefit                                               |   | **16**                             | ** ** | 16 |   | 13 |   |
|                                                             |   |                               | ** ** |   |   |   |   |
| **Net Income**                                                   |   | **$**                              | **5,195**  | ** ** | $ | 4,854 |   | $ | 4,236 |   |

 

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**STATEMENTS OF CASH FLOWS**

 
|                                                                               |   | **Years  Ended December 31,** |       |
|------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                               |   | **2003**                           |       | **2002** |   | **2001** |   |
|                                                                               |   | **(In  Thousands)**                |       |
|                                                                               |   |                               | ** ** |   | ** ** |   | ** ** |
| **CASH FLOWS FROM  OPERATING ACTIVITIES**                                          |   |                               | ** ** |   |   |   |   |
|                                                                               |   |                               |       |   |   |   |   |
| Net income                                                                         |   | **$**                              | **5,195**  | ** ** | $ | 4,854 |   | $ | 4,236 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                               | ** ** |   |   |   |   |
| Amortization of securities premium, net                                            |   | **2**                              | ** ** | 4 |   | 4 |   |
| Deferred income taxes                                                              |   | **5**                              | ** ** | 5 |   | 5 |   |
| Excess of (equity in) undistributed  earnings of bank subsidiary                   |   | **(3,348**                         | **)**      | (3,274 | ) | 6,296 |   |
| (Increase) decrease in other assets                                                |   | **4**                              | ** ** | 400 |   | (119 | ) |
| Increase (decrease) in other liabilities                                           |   | **(1**                             | **)**      | (1 | ) | 1 |   |
|                                                                               |   |                               | ** ** |   |   |   |   |
| **Net Cash Provided  by Operating Activities**                                     |   | **1,857**                          | ** ** | 1,988 |   | 10,423 |   |
|                                                                               |   |                               | ** ** |   |   |   |   |
| **CASH FLOWS FROM  INVESTING ACTIVITIES**                                          |   |                               | ** ** |   |   |   |   |
|                                                                               |   |                               |       |   |   |   |   |
| Securities available for sale:                                                     |   |                               | ** ** |   |   |   |   |
| Proceeds from maturities                                                           |   | **580**                            | ** ** | 250 |   | — |   |
| Purchases                                                                          |   | **(230**                           | **)**      | — |   | (8,049 | ) |
|                                                                               |   |                               | ** ** |   |   |   |   |
| **Net Cash Provided  by (Used in) Investing Activities**                           |   | **350**                            | ** ** | 250 |   | (8,049 | ) |
|                                                                               |   |                               | ** ** |   |   |   |   |
| **CASH FLOWS FROM  FINANCING ACTIVITIES**                                          |   |                               | ** ** |   |   |   |   |
|                                                                               |   |                               |       |   |   |   |   |
| Purchase of treasury stock                                                         |   | **(220**                           | **)**      | (710 | ) | (857 | ) |
| Cash dividends paid                                                                |   | **(1,985**                         | **)**      | (1,550 | ) | (1,453 | ) |
|                                                                               |   |                               | ** ** |   |   |   |   |
| **Net Cash Used in  Financing Activities**                                         |   | **(2,205**                         | **)**      | (2,260 | ) | (2,310 | ) |
|                                                                               |   |                               | ** ** |   |   |   |   |
| **Net Increase  (Decrease) in Cash**                                               |   | **2**                              | ** ** | (22 | ) | 64 |   |
|                                                                               |   |                               | ** ** |   |   |   |   |
| **CASH  - BEGINNING**                                                         |   | **47**                             | ** ** | 69 |   | 5 |   |
|                                                                               |   |                               | ** ** |   |   |   |   |
| **CASH - ENDING**                                                                  |   | **$**                              | **49**     | ** ** | $ | 47 |   | $ | 69 |   |

 

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**Item 9 – Changes inand Disagreements with Accountants on Accounting and Financial Disclosure**

 

None

 

 

**Item 9A – Controlsand Procedures**

 

Peoples, under the supervision and with the participation of Peoples’management, including the Chief Executive Officer and the Chief FinancialOfficer, evaluated the effectiveness of the design and operation of Peoples’disclosure controls and procedures as of December 31, 2003.  Based on that evaluation, Peoples’ ChiefExecutive Officer and Chief Financial Officer concluded that Peoples’disclosure controls and procedures are effective.  There were no significant changes to Peoples’ internal controlsor in other factors that could significantly affect these controls subsequentto the date of their evaluation.

 

Securities and Exchange Commission Rule 13a-14 defines “disclosurecontrols and procedures” as controls and other procedures of an issuer that aredesigned to ensure that information required to be disclosed by the issuer inthe reports that it files or submits under the Securities Exchange Act of 1934is recorded, processed, summarized and reported within the time periodsspecified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that such information is accumulated andcommunicated to the issuer’s management, including its principal executiveofficer and principal financial officer, as appropriate to allow timelydecisions regarding required disclosure.

 

 

**PART III**

 

**Item 10 – Directorsand Executive Officers of Peoples and the Bank**

Peoples’ bylaws specify that the board of directors will consist of notless than five nor more than twenty-five members as fixed from time to time byresolution of a majority of the full board of directors.  The board of directors, as provided in thebylaws, is divided into three classes: Class I, Class II andClass III.  One class is electedeach year and the term of office for each class is three years.  Each class must be as nearly equal in numberas possible.

 

As of January 31, 2004, the board of directors consisted of tenmembers with four members in Class I, three members in Class II andthree members in Class III.

 

**Directors**

The names of the persons presently serving as directors of Peoples arelisted in Item 12 “Security Ownership of Management” of this Form 10-K togetherwith their ages, business experience for at least five

 

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years and certain other information supplied by such person to Peoples,all as of January 31, 2004.  Suchinformation is incorporated by reference in this Item 10.

 

**Executive Officers**

The following sets forth information with respect to executive officersof Peoples and the Bank.  Each officerwas elected at the first meeting of the Board of Directors following the 2003Annual Meeting of Shareholders and will serve until the first meeting of theBoard of Directors following the 2004 Annual Meeting of Shareholders, at whichtime the Board of Directors will elect officers for the following year.  There are no arrangements or understandingsbetween Peoples or the Bank and any person pursuant to which any such officerswere selected.

 

George C. Mason (age 68) is Chairman and served as Chief ExecutiveOfficer of Peoples through December 2001. He has been a Director of the Bank since 1972, has served as Chairman ofthe Board of the Bank since July 1973, and served as Chief ExecutiveOfficer of the Bank from March 1992 through December 2001.  Mr. Mason also serves as a Director ofHERCO, Inc., Hershey, Pennsylvania. Since October 1988, Mr. Mason has been employed full time at theBank.

 

Hugh J. Garchinsky (age 53) is a Director and the President ofPeoples.  He has served as ChiefExecutive Officer of Peoples and the Bank since January 2002.  He has been a Director of the Bank since1997, and became President of the Bank in 2000.  Mr. Garchinsky joined the Bank in October 1992 as Manager ofLoan Operations, became a Vice President in 1994, Senior Vice President in1996, and Executive Vice President in 1997.

 

David H. Acox, Jr. (age 55) joined the Bank as Trust Officer inOctober 1989, became Vice President and Trust Officer in March 1994and Senior Vice President and Trust Officer in April 1997.  Mr. Acox is directly responsible for theTrust Department.

 

Jay L. Andress (age 52) joined the Bank in August 1973, becameVice President in charge of operations in March 1988, and has been SeniorVice President of Operations since April 1997.  Mr. Andress is directly responsible for data processing,facilities and technology development. Mr. Andress is the son-in-law of Carl R. Fretz, Vice Chairman of theBoard and Corporate Secretary of Peoples and the Bank.

 

Gary R. Davis (age 49) joined the Bank in July 1994, becameAssistant Vice President in 1995, Vice President in 1997, Senior Vice Presidentin 1999 and currently directs the Bank’s lending and credit analysis functions.

 

Scott W. Gundaker (age 53) joined the Bank in October 2001 asSenior Vice President of Retail Services. Mr. Gundaker is directly responsible for marketing and community bankingfunctions.  Prior to joining Peoples, Mr.Gundaker was employed by Orbiscom, Inc. as Senior

 

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Vice President from 2000 to 2001. From 1998 to 2000, Mr. Gundaker was employed by Mastercard Internationalas a Senior Vice President.

 

Howard M. Mannheim (age 65) joined the Bank in June 1996, andcurrently serves as Executive Vice President, Chief Operating Officer andSupport Group Manager.  Mr. Mannheim isdirectly responsible for back office operations and administrative functions.

 

Susan H. Reeves (age 50) Chief Financial Officer of Peoples, joined theBank in January 1984, became Vice President and Auditor in 1991, VicePresident and Chief Financial Officer in 1996, and currently serves as SeniorVice President, Cashier and Chief Financial Officer of the Bank.  Mrs. Reeves is directly responsible for thefinancial division of the Bank.

 

**Family Relationships**

There are no family relationships between any director, executiveofficer or person nominated or chosen by the board to become a director or executiveofficer other than Carl R. Fretz, Vice Chairman of the Board and CorporateSecretary of Peoples and the Bank, is the father-in-law of Jay L. Andress,Senior Vice President of Operations.

 

**Audit CommitteeFinancial Expert**

In light of the pending merger of Peoples with and into NPB under theNPB Merger Agreement, which is expected to close in the second quarter of 2004,Peoples has not identified or designated a member of its audit committee as anaudit committee financial expert or made any efforts to recruit a new directorpossessing the attributes required of an audit committee financial expert.

 

**Section 16Reporting**

Section 16(a) of the Securities Exchange Act of 1934, as amended,requires Peoples’ officers and directors, and persons who own more than tenpercent of Peoples common stock to file reports of the ownership and changes inthe ownership with the Securities and Exchange Commission.  Officers, directors, and beneficial ownersof more than ten percent of Peoples common stock are required to furnishPeoples with copies of all such forms that they file.

 

Based solely upon Peoples’ review of such forms received by it, orwritten representations from certain reporting persons that no such forms wererequired for those persons, Peoples believes that during the fiscal year endedDecember 31, 2003, its officers, directors and persons who own more thanten percent of the common stock complied with all filing requirementsapplicable to them, except that director Molly Morrison inadvertently filed herinitial report of beneficial ownership on Form 3 late and R. Marshall Phillipsinadvertently filed one Form 4 late.

 

**Code of Ethics**

Peoples has adopted a code of ethics that applies to the chiefexecutive officer and the chief financial officer.  A copy of the code

 

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of ethics is filed as Exhibit 14.1 to this Form 10-K.  Peoples will provide upon written request,without charge, a copy of its code of ethics. Requests should be addressed to Susan H. Reeves, Senior Vice Presidentand Chief Financial Officer, Peoples First, Inc., P.O. Box 500, Oxford,Pennsylvania  19363.

 

**Item 11 – ExecutiveCompensation**

 

**ExecutiveCompensation**

The following table sets forth for the fiscal years endedDecember 31, 2003, 2002 and 2001, certain information as to the totalremuneration paid to or accrued for the benefit of Peoples’ Chief ExecutiveOfficer and Peoples’ other executive officers receiving total compensation inexcess of $100,000.

 

**SummaryCompensation Table**

 
|                                  |   |     |   | **Annual  Compensation** |    | **Long-Term  Compensation** |   |
|---------------------------------------|--------|----------|--------|--------------------------|---------|-----------------------------|--------|
| **Name and  Principal Position**      |   | **Year** |   | **Salary  ($)(1)**       |    | **Bonus  ($)**              |   | **Other  Annual  Compensation  ($)(2)** |   | **Options  (# Shares)** |   | **All Other  Compensation  ($) -** |   |
|                                  |   |     |   |                     |    |                        |   |   |   |   |   |   |   |
| George C. Mason                       |   | 2003     |   | $                        | 150,000 |                        | $      | 27,500 |   | — |   | — |   | $ | 167,674 | (3) |
| Chairman                              |   | 2002     |   | $                        | 165,000 |                        | $      | 27,500 |   | — |   | — |   | $ | 56,542 | (3) |
|                                  |   | 2001     |   | $                        | 175,500 |                        | $      | 25,000 |   | — |   | — |   | $ | 48,505 | (3) |
|                                  |   |     |   |                     |    |                        |   |   |   |   |   |   |   |
| Hugh J. Garchinsky                    |   | 2003     |   | $                        | 153,000 |                        | $      | 65,000 |   | — |   | 15,000 |   | $ | 19,667 | (4) |
| Director, Chief                       |   | 2002     |   | $                        | 150,000 |                        | $      | 50,000 |   | — |   | — |   | $ | 14,753 | (4) |
| Executive Officer And President       |   | 2001     |   | $                        | 140,600 |                        | $      | 40,000 |   | — |   | — |   | $ | 12,535 | (4) |
|                                  |   |     |   |                     |    |                        |   |   |   |   |   |   |   |
| Howard M. Mannheim                    |   | 2003     |   | $                        | 115,000 |                        | $      | 35,000 |   | — |   | 10,000 |   | $ | 15,138 | (5) |
| Executive Vice                        |   | 2002     |   | $                        | 115,000 |                        | $      | 30,000 |   | — |   | — |   | $ | 11,257 | (5) |
| President and Chief Operating Officer |   | 2001     |   | $                        | 93,500  |                        | $      | 20,000 |   | — |   | — |   | $ | 8,672 | (5) |
|                                  |   |     |   |                     |    |                        |   |   |   |   |   |   |   |
| Gary R. Davis                         |   | 2003     |   | $                        | 98,500  |                        | $      | 33,000 |   | — |   | 8,000 |   | $ | 12,219 | (6) |
| Senior Vice                           |   | 2002     |   | $                        | 94,600  |                        | $      | 28,000 |   | — |   | — |   | $ | 9,516 | (6) |
| President and Senior Lending Officer  |   | 2001     |   | $                        | 92,600  |                        | $      | 18,000 |   | — |   | — |   | $ | 7,469 | (6) |
|                                  |   |     |   |                     |    |                        |   |   |   |   |   |   |   |
| Susan H. Reeves                       |   | 2003     |   | $                        | 97,000  |                        | $      | 30,000 |   | — |   | 8,000 |   | $ | 11,717 | (7) |
| Senior Vice                           |   | 2002     |   | $                        | 93,000  |                        | $      | 24,000 |   | — |   | — |   | $ | 9,388 | (7) |
| President and Chief Financial Officer |   | 2001     |   | $                        | 90,200  |                        | $      | 20,000 |   | — |   | — |   | $ | 8,278 | (7) |

 

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(1)                                  Amounts shown includecash compensation earned and received as well as amounts earned but deferred atthe election of those officers pursuant to the terms of Peoples’ profit sharingand 401(k) Plan.  Amounts also includeannual director’s fees in the case of Messrs. Mason and Garchinsky.

 

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(2)                                  The value forperquisites and other personal benefits does not exceed the lesser of $50,000or ten percent of the total annual salary and bonus of each named executiveofficer.

 

(3)                                  Consists of Peoples’contributions to Peoples’ profit sharing and 401(k) plan for 2003, 2002 and2001 totaling $11,905, $13,544 and $12,911, respectively.  Amounts for 2003, 2002 and 2001 also includean economic benefit of $2,147, $1,524 and $1,774, respectively toMr. Mason for life insurance coverage under an endorsement split-dollararrangement and the value of Peoples’ contributions made during 2003, 2002 and2001 of $153,622, $41,474 and $38,820, respectively, to a revenue neutral planwhich will provide a supplemental benefit to Mr. Mason at his retirement.

 

(4)                                  Consists of Peoples’contributions to Peoples’ profit sharing and 401(k) plan for 2003, 2002 and2001 totaling $19,667, $14,753 and $12,535, respectively.

 

(5)                                  Consists of Peoples’contributions to Peoples’ profit sharing and 401(k) plan for 2003, 2002 and2001 totaling $15,138, $11,257 and $8,672, respectively.

 

(6)                                  Consists of Peoples’contributions to Peoples’ profit sharing and 401(k) plan for 2003, 2002 and2001 totaling $12,219, $9,516 and $7,469, respectively.

 

(7)                                  Consists of Peoples’contributions to Peoples’ profit sharing and 401(k) plan for 2003, 2002 and 2001totaling $11,717, $9,388 and $8,278, respectively.

 

The following table sets forth information concerning grants of stockoptions during the fiscal year ended December 31, 2003.

 

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**OptionGrants in Last Fiscal Year**

 
|               |   | **Number of  Securities  Underlying  Options** |   | **% of Total  Options  Granted to  Employees  in** |   | **Exercise  or  Base Price  Per Share** |   | **Expiration** |    | **Potential  Realizable Value at  Assumed Annual  Rates of Stock Price  Appreciation  for Option Term** |   |
|--------------------|--------|------------------------------------------------|--------|----------------------------------------------------|--------|-----------------------------------------|--------|----------------|---------|---------------------------------------------------------------------------------------------------------|--------|
| **Name**           |   | **Granted  (1)**                               |   | **Fiscal  Year**                                   |   | **(2)**                                 |   | **Date**       |    | **5%**                                                                                                  |   | **10%** |   |
| George C. Mason    |   | —                                         |   | —                                             |   | —                                  |   | —         |    | —                                                                                                  |   | — |   |
| Hugh J. Garchinsky |   | 15,000                                         |   | 17.45                                              | %      | $                                       | 24.13  |           | 7/14/13 |                                                                                                    | $      | 227,700 |   | $ | 576,900 |   |
| Howard M. Mannheim |   | 10,000                                         |   | 11.63                                              | %      | $                                       | 24.13  |           | 7/14/13 |                                                                                                    | $      | 151,800 |   | $ | 384,600 |   |
| Gary R. Davis      |   | 8,000                                          |   | 9.31                                               | %      | $                                       | 24.13  |           | 7/14/13 |                                                                                                    | $      | 121,440 |   | $ | 307,680 |   |
| Susan H. Reeves    |   | 8,000                                          |   | 9.31                                               | %      | $                                       | 24.13  |           | 7/14/13 |                                                                                                    | $      | 121,440 |   | $ | 307,680 |   |

 

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(1)                                  All amounts representnon-qualified stock options.  Terms ofoutstanding non-qualified options are for a period of ten years and one monthfrom the date the option is granted. The options vest and cannot be exercised until the earlier of (i) oneyear after the date of grant or (ii) a “change in control” as defined in theplan (which will occur as a result of the NPB Merger).  At the election of the CompensationCommittee administering the Employee Stock Incentive Plan or the Board ofDirectors, options may be exercised during a period not to exceed three monthsfollowing an optionee’s voluntary termination of employment other than byreason of retirement or disability.

(2)                                  Under the terms ofthe Plan, the exercise price per share for an incentive stock option must be atleast equal to the fair market value of the common stock at the date ofgrant.  The exercise price may be paidin cash, in shares of common stock valued at fair market value on the date ofexercise, or, under certain circumstances, pursuant to a cashless exerciseprocedure established under the plan.

 

There were no options exercised by executive officers during the yearended December 31, 2003.

 

The following table sets forth information concerning unexercisedoptions to purchase Peoples’ common stock granted to the Named ExecutiveOfficers:

 

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**AggregateOptions Exercised in Last YearAnd December 31, 2003 Option Value**

 
|               |   | **Shares**                      |   | **Number of  Securities  Underlying  Unexcerised  Options at  December 31, 2003** |   | **Value of  Unexercised In-  the-Money  Options at  December 31,  2003 ($)** |   |
|--------------------|--------|---------------------------------|--------|----------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|--------|
| **Name**           |   | **Acquired  on  Exercise  (#)** |   | **Value  Realized  ($)**                                                               |   | **Exercisable**                                                                   |   | **Unexcercisable** |   | **Exercisable  (1)** |   | **Unexercisable  (1)** |   |
| George C  Mason    |   | 0                               |   | $                                                                                      | 0      |                                                                              | 0      |   | 0 |   | 0 |   | 0 |   |
| Hugh J  Garchinsky |   | 0                               |   | $                                                                                      | 0      |                                                                              | 0      |   | 15,000 |   | 0 |   | 358,050 |   |
| Howard M  Mannheim |   | 0                               |   | $                                                                                      | 0      |                                                                              | 0      |   | 10,000 |   | 0 |   | 238,700 |   |
| Gary R Davis       |   | 0                               |   | $                                                                                      | 0      |                                                                              | 0      |   | 8,000 |   | 0 |   | 190,960 |   |
| Susan H  Reeves    |   | 0                               |   | $                                                                                      | 0      |                                                                              | 0      |   | 8,000 |   | 0 |   | 190,960 |   |

----

(1) Based on a market value of $48.00 per share for Peoples’ common stock atDecember 31, 2003.

 

**Director Compensation**

In 2003, directors received an annual fee of $10,000. All directors,except for Mr. Garchinsky, also received a $2,500 bonus.  Directors who are not employees also receive$250 for each committee meeting attended.

 

**Employment Agreements**

**George C.Mason**. On January 1, 2002, the Bank entered intoa new employment agreement with Mr. Mason, the Chairman of the Board of Peoplesand the Bank.

 

The purpose of the employment agreement is to establish the duties,compensation and continued employment relationship of Mr. Mason with the Bankand Peoples.  The employment agreementprovides for an initial term of three years, after which such agreement willautomatically renew for successive three-year terms on January 1 of eachyear unless notice of termination is given. Mr. Mason’s current annual base salary under the employment agreement is$140,000, and he is entitled to an annual bonus of at least $10,000 peryear.  In addition, Mr. Mason isentitled to participate in all of the employee benefit plans which areapplicable to executive salaried employees; disability insurance with a monthlybenefit of at least $2,500; and fringe benefits normally associated with suchofficer’s position.  The employmentagreement terminates upon the death or disability of Mr. Mason, or forcause, as defined in the employment agreement.

 

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The employment agreement provides that, if the Bank terminates theemployment of Mr. Mason without cause, or Mr. Mason terminates hisemployment for specified events of “good reason,” Mr. Mason would receive300% of the sum of his annual base salary in effect at the time of terminationplus the average of his annual bonuses for the preceding three years.  Following such termination, for theremainder of the term of the employment agreement, Mr. Mason and hisdependents would be entitled to all employee benefits, other than bonuses, asif he were still employed.  If thepayments and benefits under the agreement, when aggregated with other amounts receivedfrom Peoples or the Bank, are such that Mr. Mason becomes subject to excise taxon excess parachute payments under Sections 4999 and 280G of the InternalRevenue Code, he would be entitled to receive additional payments equal to suchexcise tax and any incremental income taxes he may be required to pay by reasonof the receipt of additional amounts under the agreement.  Mr. Mason’s employment under the employmentagreement will terminate as a result of the NPB Merger, and he will be entitledto receive a lump-sum payment upon completion of the transaction (expected tooccur in the second quarter of 2004) of approximately $563,000.  Mr. Mason has also entered into a consultingagreement with NPB, effective upon closing the NPB Merger, for a period of two years.

 

In the event of termination of Mr. Mason’s employment under hisemployment agreement as a result of death, Mr. Mason’s estate would beentitled to a lump-sum payment representing Mr. Mason’s salary for theremainder of the agreement.  In theevent of termination of Mr. Mason’s employment as a result of disability,Mr. Mason would be entitled to continuation of base salary for a period ofthree years.

 

**Hugh J.Garchinsky**. On January 1, 2002, The Bank enteredinto an employment agreement with Mr. Hugh J. Garchinsky, the ChiefExecutive Office and President of Peoples and the Bank.

 

The purpose of the employment agreement is to establish the duties,compensation and continued employment relationship of Mr. Garchinsky with theBank and Peoples.  The employmentagreement provides for an initial term of three years, after which suchagreement will automatically renew for successive three-year terms onJanuary 1 of each year unless notice of termination is given.  Mr. Garchinsky’s current annual basesalary under the employment agreement is $146,000.  In addition, Mr. Garchinsky is entitled to participate inall of the employee benefit plans which are applicable to executive salariedemployees; disability insurance with a monthly benefit of at least $2,500; andfringe benefits normally associated with such officer’s position.  The employment agreement terminates upon thedeath or disability of Mr. Garchinsky, or for cause, as defined in theemployment agreement.

 

The employment agreement provides that, if the Bank terminates theemployment of Mr. Garchinsky without cause, or Mr. Garchinsky terminates hisemployment for specified events of good reason, Mr. Garchinsky would receive300% of the sum of his annual base salary in effect at the time

 

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of termination plus the average of his annual bonuses for the precedingthree years.  Following suchtermination, for the remainder of the term of the employment agreement, Mr.Garchinsky and his dependents would be entitled to all employee benefits, otherthan bonuses, as if he were still employed. If the payments and benefits under the agreement, when aggregated withother amounts received from Peoples or the Bank, are such that Mr. Garchinskybecomes subject to excise tax on excess parachute payments under Sections 4999and 280G of the Internal Revenue Code, he will receive additional paymentsequal to such excise tax and any incremental income taxes he may be required topay by reason of the receipt of additional amounts under the agreement.  Mr Garchinsky’s employment under theemployment agreement will terminate as a result of the NPB Merger, and he willbe entitled to receive a lump-sum payment of upon completion of the transaction(expected to occur in the second quarter of 2004) of approximately $485,000.  Mr. Garchinsky will continue his employmentwith NPB and has entered into a new employment agreement with NPB, which willbe effective upon completion of the NPB Merger.

 

In the event of termination of Mr. Garchinsky’s employment under hisemployment agreement as a result of death, Mr. Garchinsky’s estate wouldbe entitled to a lump-sum payment representing Mr. Garchinsky’s salary for theremainder of the agreement.  In theevent of termination of Mr. Garchinsky’s employment as a result of disability,Mr. Garchinsky would be entitled to continuation of base salary for a period ofthree years less any amounts payable under a disability plan then in effect.

 

**Change in ControlAgreements**

Gary R. Davis, Senior Vice President and Senior Lending Officer of the Bank,Susan H. Reeves, Senior Vice President and Chief Financial Officer of the Bank,and Scott W. Gundaker, Senior Vice President of Retail Services of the Bank,have entered into change in control agreements with Peoples and the Bank, whichprovide benefits in the event that their employment terminates for specifiedevents of “good reason” following a “change in control” involving Peoples.  Under these agreements Mr. Davis, Ms. Reevesand Mr. Gundaker would be entitled to receive aggregate payments of approximately$201,000, $195,000, and $187,500, respectively, upon completion of the NPBMerger, plus the continuation of health and medical benefits for a period oftwo years, which is expected to occur in the second quarter of 2004.

 

**CompensationCommittee Interlocks and Insider Participation**

For 2003, the compensation committee of the board of directorsconsisted of three directors, Messrs. Beiler, Bernardon, and Cameron; theChairman, Mr. Mason; and the Chief Executive Officer and President,Mr. Garchinsky.  Mr. Mason andMr. Garchinsky do not participate in discussions regarding, or vote onmatters affecting, their own compensation.

 

Mr. Beiler is the President of Beiler Campbell, Inc. from whomPeoples leases the ground for the Longwood Branch.  On December 7, 1994, Peoples signed a 20-year land leasewith two five-year renewals with

 

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Beiler Campbell, Inc. for this branch. The term of the lease commenced in August 1995.  Rental payments made in 2003 totaled$55,592.  In addition to the leasepayments in 2003, Peoples paid $10,475 to Beiler Campbell, Inc. for common areaexpense related to the Longwood Branch. In addition, Mr. Beiler’s company has performed real estateappraisals for customer loans extended by Peoples. Substantially all of the$114,445 paid for appraisals was passed through to the borrowers.  Management believes that payments made byPeoples for these services were comparable to market rates that would have beencharged by unaffiliated third parties for similar services.  During 2003, Peoples paid Mr. Beiler’scompany $49,500 for office space rental, which allowed Peoples to locate theirmortgage originators within the realtor’s offices.

 

 

84

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**Item 12 – SecurityOwnership of Certain Beneficial Owners and Management and Releated StockholderMatters**

 

**Securities authorizedfor issuance under equity compensation plans**

Shareholders of Peoples approved the 2001 Stock Option Plan at the 2001annual meeting of shareholders.  Peoplesmay grant options to purchase up to 200,000 shares of common stock to directorsand eligible employees.  During 2003,85,950 options were granted under the Plan of which 500 were forfeited.  The following table provides certaininformation regarding securities issuable under Peoples’ equity compensationplans as of December 31, 2003.

 

85

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**Equity Compensation Plan Information**

 
| **Plan Category**                                           |   | **Number of  securities  to be issued  upon  exercise of  outstanding  options,  warrants and  rights** |   | **Weighted-  average  exercise  price of  outstanding  options,  warrants and  rights** |   | **Number of  securities  remaining  available for  future  issuance  under equity  compensation  plans  (excluding  securities  reflected in  column 1)** |    |
|-------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| Equity  compensation plans approved by security holders     |   | 85,450                                                                                                  |   | $                                                                                       | 24.125 |                                                                                                                                                      | 114,550 |   |
| Equity  compensation plans not approved by security holders |   | 0                                                                                                       |   | —                                                                                  |   | 0                                                                                                                                                         |    |
| Total                                                       |   | 85,450                                                                                                  |   | $                                                                                       | 24.125 |                                                                                                                                                      | 114,550 |   |

 

**Principal BeneficialOwners of Common Stock**

The following table sets forth, as January 31, 2004, the name andaddress of each person who owns of record or who is known by the board to bethe beneficial owner of more than five percent of the common stock, the numberof shares beneficially owned by such person and the percentage of the commonstock so owned.

 
|                                                                     |   | **Common  Stock  Beneficially Owned(1)** |   |
|--------------------------------------------------------------------------|--------|------------------------------------------|--------|
| **Name and address  of beneficial owner**                                |   | **Amount  and nature  of ownership**     |   | **Percentage  of shares  outstanding** |   |
|                                                                     |   |                                     |   |   |   |
| George C. Mason  24 South Third Street  Oxford, PA  19363 |   | 293,312                                  | (2)    | 9.92 | % |
|                                                                     |   |                                     |   |   |   |
| Elizabeth Mason Thun  24 South Third Street  Oxford, PA  19363 |   | 273,122                                  |   | 9.24 | % |

 

----

(1)                                  Based uponinformation furnished by the respective individual and/or filings made pursuantto regulations of the Securities and Exchange Commission.  Under

 

86

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applicable regulations, shares are deemed tobe beneficially owned by a person if he or she directly or indirectly has orshares the power to vote or dispose of the shares, whether or not he or she hasany economic interest in the shares. Unless otherwise indicated, the named beneficial owner has sole votingand investment power with respect to the shares.

 

(2)                                  Includes 45,152shares owned by Mr. Mason’s spouse, of which he disclaims beneficial ownership.

 

**Security Ownership ofManagement**

The names of the persons presently serving as directors and the mosthighly paid executive officers of Peoples are listed below, together with theirages, business experience for at least five years and certain other informationsupplied by such person to Peoples, all as of January 31, 2004 (unlessotherwise indicated, the persons named below have sole voting and investmentpower with respect to all shares of common stock shown as beneficially owned bythem);

 
|                                                     |   |    |   |                                                                                                                                                                                                 |   | **BENEFICIAL  OWNERSHIP(1)** |   |
|----------------------------------------------------------|--------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
| **NOMINEE**                                              |   | **AGE** |   | **OCCUPATION  AND  EMPLOYMENT**                                                                                                                                                                      |   | **NUMBER  OF SHARES**        |   | **PERCENTAGE  OF SHARES  OUTSTANDING** |   |
|                                                     |   |    |   |                                                                                                                                                                                                 |   |                         |   |   |   |
| NOMINEES FOR CLASS I DIRECTORS TO  SERVE UNTIL 2004 |   |    |   |                                                                                                                                                                                                 |   |                         |   |   |   |
|                                                     |   |    |   |                                                                                                                                                                                                 |   |                         |   |   |   |
| Ben S. Beiler                                            |   | 61      |   | Director since 1989  President of Beiler-Campbell Realtors, and other related entities (all of  which are engaged in real estate sales, investment, or development companies)                        |   | 25,013                       | (4)    | 0.85 | % |
|                                                     |   |    |   |                                                                                                                                                                                                 |   |                         |   |   |   |
| Arthur A. Bernardon                                      |   | 57      |   | Director since 1998  President of Bernardon Haber Holloway Architects PC and partner in real  estate investment and development companies                                                            |   | 5,654                        | (5)    | 0.19 | % |
|                                                     |   |    |   |                                                                                                                                                                                                 |   |                         |   |   |   |
| Molly K. Morrison                                        |   | 50      |   | Director since 2003  Chief Operating Officer of Natural Lands Trust, Inc. (a non-profit land trust)  since August 2001 Director of Policy and Planning, County of Chester  until June 2000 |   | —                       |   | — |   |
|                                                     |   |    |   |                                                                                                                                                                                                 |   |                         |   |   |   |
| David R. Wilmerding                                      |   | 68      |   | Director since 2001  Chairman of Wilmerding & Associates, Inc. (registered investment advisory  firm)                                                                                            |   | 51,978                       |   | 1.76 | % |
|                                                     |   |    |   |                                                                                                                                                                                                 |   |                         |   |   |   |
| CLASS II DIRECTORS SERVING UNTIL 2005               |   |    |   |                                                                                                                                                                                                 |   |                         |   |   |   |
|                                                     |   |    |   |                                                                                                                                                                                                 |   |                         |   |   |   |
| Hugh J. Garchinsky                                       |   | 53      |   | Director since 1997  Chief Executive Officer since 2002  President since 2000   Executive VicePresident 1997-1999                                                                                    |   | 7,874                        |   | 0.27 | % |
|                                                     |   |    |   |                                                                                                                                                                                                 |   |                         |   |   |   |
| Carl R. Fretz(9)                                         |   | 73      |   | Director since 1965  Vice Chairman and Corporate Secretary President of the Bank 1973-1999                                                                                                           |   | 48,370                       | (6)    | 1.64 | % |

 

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| R. Marshall Phillips                                      |   | 65     |   | Director since 2003  General Partner of Phillips Mushroom Farms, LP (a mushroom growing and  shipping company)                                                                                     |   | 1,950   |   | 0.07   | %      |
|-----------------------------------------------------------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|--------|
|                                                      |   |   |   |                                                                                                                                                                                               |   |    |   |   |   |
| CLASS III DIRECTORS SERVING UNTIL 2006               |   |   |   |                                                                                                                                                                                               |   |    |   |   |   |
|                                                      |   |   |   |                                                                                                                                                                                               |   |    |   |   |   |
| George C. Mason                                           |   | 68     |   | Chairman of the Board since 1973  Chief Executive Officer 1992-2001  Director since 1972   Director of HERCO, Inc.                                                                                 |   | 293,312 | (2)    | 9.92   | %      |
|                                                      |   |   |   |                                                                                                                                                                                               |   |    |   |   |   |
| Ross B. Cameron, Jr.                                      |   | 62     |   | Director since 1999  Principal owner of Sea Y LLC (a marine manufacturing business); Former  Partner/Owner in investment firm RCH Investments, (a commercial real estate  development partnership) |   | 27,500  |   | 0.93   | %      |
|                                                      |   |   |   |                                                                                                                                                                                               |   |    |   |   |   |
| Lawrie R. Drennen, Jr.                                    |   | 48     |   | Director since 2003  Secretary/Treasurer of Oxford Grain & Hay Company, Inc. (retail sales of  pet, horse and animal feed and products,                                                        |   | 12,504  | (3)    | 0.42   | %      |
|                                                      |   |   |   |                                                                                                                                                                                               |   |    |   |   |   |
| EXECUTIVE OFFICERS NOT SERVING AS DIRECTORS               |   |   |   |                                                                                                                                                                                               |   |    |   |   |   |
|                                                      |   |   |   |                                                                                                                                                                                               |   |    |   |   |   |
| Howard M. Mannheim                                        |   | 65     |   | Executive Vice President  Chief Operating Officer since 2002                                                                                                                                       |   | 6,835   |   | 0.23   | %      |
|                                                      |   |   |   |                                                                                                                                                                                               |   |    |   |   |   |
|                                                      |   |   |   |                                                                                                                                                                                               |   |    |   |   |   |
| Gary R. Davis                                             |   | 49     |   | Senior Vice President  Senior Lending Officer                                                                                                                                                      |   | 3,628   | (7)    | 0.12   | %      |
|                                                      |   |   |   |                                                                                                                                                                                               |   |    |   |   |   |
|                                                      |   |   |   |                                                                                                                                                                                               |   |    |   |   |   |
| Susan H. Reeves                                           |   | 50     |   | Senior Vice President  Chief Financial Officer                                                                                                                                                     |   | 4,188   | (8)    | 0.14   | %      |
|                                                      |   |   |   |                                                                                                                                                                                               |   |    |   |   |   |
| Directors and Executive Officers as a group  (16 persons) |   |   |   |                                                                                                                                                                                               |   | 513,160 | (10)   | 17.36  | %      |

 

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| (1)    |   | Based upon information furnished by the respective individual and/or  filings made pursuant to Securities and Exchange Commission regulations.  Under these regulations, shares are deemed  to be beneficially owned by a person if he or she directly or indirectly has  or shares the power to vote or dispose of the shares, whether or not he or  she has any economic interest in the shares.   Unless otherwise indicated, the named beneficial owner has sole voting  and investment power with respect to the shares. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (2)    |   | Includes 45,152 shares owned by Mr. Mason’s spouse, of which he  disclaims beneficial ownership.                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (3)    |   | Includes 165 shares owned jointly with spouse and 6,855 shares owned  jointly with children; 200 shares are owned by Mr. Drennen’s spouse of  which he disclaims beneficial ownership.                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (4)    |   | Includes 2,270 shares owned jointly with spouse; 1,050 shares are  owned by Mr. Beiler’s spouse of which                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

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|   |   | he disclaims beneficial ownership.                                                                                                                      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                    |
| (5)    |   | All 5,654 shares are owned jointly with spouse.                                                                                                         |
|   |   |                                                                                                                                                    |
| (6)    |   | Includes 4,158 shares owned jointly with spouse; 32,411 shares are  owned by Mr. Fretz’s spouse of which he disclaims beneficial ownership.   |
|   |   |                                                                                                                                                    |
| (7)    |   | Includes 2,460 shares owned jointly with spouse.                                                                                                        |
|   |   |                                                                                                                                                    |
| (8)    |   | Includes 3,463 shares owned jointly with spouse.                                                                                                        |
|   |   |                                                                                                                                                    |
| (9)    |   | Carl R. Fretz is the father-in-law of Jay L. Andress, Senior  Vice President of Operations.                                                        |
|   |   |                                                                                                                                                    |
| (10)   |   | Includes 86,086 shares beneficially owned indirectly by the directors  and executive officers of Peoples for which beneficial ownership is  disclaimed. |

 

**Item 13 - CertainRelationships and Related Transactions**

 

**Certain Transactions**

Peoples has had and intends to have business transactions in theordinary course of business with directors, officers, principal shareholdersand their associates on comparable terms as those prevailing from time to timefor other nonaffiliated vendors of Peoples. For a description of certain of these transactions, see the informationset forth under the caption “Compensation Committee Interlocks and InsiderParticipation” in Item 11 of this Form 10-K.

 

**Certain Indebtedness**

Peoples has had and intends to continue tohave banking and financial transactions in the ordinary course of business,including loans, with its directors, officers, principal shareholders and theirassociates.  The loans are made onsubstantially the same terms, including interest rates and collateral, as thoseprevailing at the same time for comparable transactions with unrelated partiesand do not involve more than the normal risk of collectibility or present otherunfavorable features.  The aggregateamount of extensions of credit outstanding since January 1, 2003, todirectors, officers, principal shareholders and any associate of such persons,did not exceed the lesser of $5.0 million or 10% of Peoples’ equity capital andthe aggregate extensions of credit to all such persons, as a group, did notexceed 20% of Peoples’ equity during such period.

 

**Item 14 - PrincipalAccounting Fees and Services**

 

**Audit Fees**

Audit fees billed or expected to be billed to Peoples by Beard MillerCompany LLP for the audit of Peoples’ 2003 annual financial

 

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statements and for the review of those financial statements included inPeoples’ quarterly reports on Form 10-Q for 2003 totaled $70,519.

 

Audit fees billed to Peoples by Beard Miller Company LLP for the auditof Peoples’ 2002 annual financial statements and for the review of thosefinancial statements included in Peoples’ quarterly reports on Form 10-Qfor 2002 totaled $57,893.

 

**Audit-Related Fees**

Fees billed to Peoples by Beard Miller Company LLP during Peoples’ 2003and 2002 fiscal years for audit related services rendered to Peoples, totaled$24,565 and $17,308, respectively. Audit related services consisted of accounting and regulatoryconsultation, assisting with a reverse due diligence review and the audit ofthe 401(k) plan.

 

**TaxFees**

Fees billed to Peoples by Beard Miller Company LLP during Peoples’ 2003and 2002 fiscal years for tax-related services rendered to Peoples, totaled $11,779and $12,102, respectively.  Tax relatedservices consisted of tax return preparation and tax advice.

 

**All Other Fees**

No fees other than the audit fees, audit-related fees and tax feesdescribed in this Item 14 were billed to Peoples by Beard Miller Company LLP in2003 or 2002.

 

**Audit CommitteePre-Approval Procedures**

The audit committee reviews and approves in advance any services to beprovided to Peoples by its independent accountants, Beard Miller CompanyLLP.  In the event, items need to beaddressed between meetings, the Chairman of the Audit Committee has theauthority to review and approve.  TheChairman reports any such approvals to the Audit Committee at its next meeting.  All of the fees for services described inthis Item 14 were approved in advance by the audit committee.

 

In 2003, the audit committee began operating under a written charter.

 

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**PART IV**

 

**Item 15 - Exhibits,Financial Statements and Reports on Form 8-K**

 

(a)  The following documents arefiled as part of this report:

 

1.               Financial Statements

 
| Independent Auditor’s Report                                                                                |
|------------------------------------------------------------------------------------------------------------------|
|                                                                                                             |
| Consolidated Balance Sheets as of December 31, 2003 and  December 31, 2002.                            |
|                                                                                                             |
| Consolidated Statements of Income for the years  ended December 31, 2003, 2002 and 2001.                    |
|                                                                                                             |
| Consolidated Statements of Stockholders’  Equity for the years ended December 31, 2003, 2002 and 2001. |
|                                                                                                             |
| Consolidated Statements of Cash Flows for  the years ended December 31, 2003, 2002 and 2001.                |
|                                                                                                             |
| Notes to Consolidated Financial Statements.                                                                      |

 

2.               Financial Statement Schedules

 

All other schedules for which provision is made in the applicableaccounting regulation of the Securities and Exchange Commission are notrequired under the related instruction, or are inapplicable or pertain to itemsas to which the required disclosures have been made elsewhere in the FinancialStatements and Notes thereto, and therefore have been

omitted.

 

3.               Exhibits

 
| 2.1    | Agreement and Plan of Merger, dated December 17, 2003, by and  between National Penn Bancshares 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 the Registrant’s Registration Statement on Form  S-4, No. 333-30640.)                                                                                                   |
|   |                                                                                                                                                                                                                                                                        |
| 3.2    | Bylaws of Peoples First, Inc. (Incorporated by reference to Exhibit  3.2 to the Registrant’s Registration Statement on Form S-4, No. 333-30640.)                                                                                                                       |
|   |                                                                                                                                                                                                                                                                        |
| 10.1   | Lease Agreement, dated December 7, 1994, between Beiler  Campbell, Inc. and The Peoples Bank of Oxford. (Incorporated by reference to  Exhibit 10.1 to the                                                                                                             |

 

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|    | Registrant’s Quarterly Report on Form 10-Q for the period ended  September 30, 2000.)                                                                                                                                                                                                                                                      |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                                                                                                                                                                                                 |
| 10.2    | Employment Agreement, dated January 1, 2002, between The Peoples  Bank of Oxford and George C. Mason. (Incorporated by reference to Exhibit  10.2 to the Registrant’s Annual Report on Form 10-K for the period ended  December 31, 2001.)                                                                                            |
|    |                                                                                                                                                                                                                                                                                                                                                 |
| 10.3    | Employment Agreement, dated January 1, 2002, between The Peoples  Bank of Oxford and Hugh J. Garchinsky. (Incorporated by reference to Exhibit  10.3 to the Registrant’s Annual Report on Form 10-K for the period ended  December 31, 2001.)                                                                                         |
|    |                                                                                                                                                                                                                                                                                                                                                 |
| 10.4    | Form of Change in Control Agreements, dated September 15, 2003,  between Peoples First, Inc., The Peoples Bank of Oxford and each of Gary R.  Davis, Scott W. Gundaker, and Susan H. Reeves. (Incorporated by reference to  Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period  ended September 30, 2003.) |
|    |                                                                                                                                                                                                                                                                                                                                                 |
| 14.1    | Code of Ethics                                                                                                                                                                                                                                                                                                                                       |
|    |                                                                                                                                                                                                                                                                                                                                                 |
| 21      | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                 |
|    |                                                                                                                                                                                                                                                                                                                                                 |
| 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                                                                                                                                                                                                                               |
|    |                                                                                                                                                                                                                                                                                                                                                 |
| 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 filed during the lastquarter of the period covered by this report.

 
|   | Peoples furnished a Form 8-K (Items 7 and 12) on October 23,  2003 disclosing a press release issued by Peoples discussing third quarter  earnings.                                                                                                 |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                     |
|   | Peoples filed a Form 8-K (Items 5 and 7) on December 22, 2003,  announcing the execution by Peoples and National Penn Bancshares, Inc. of a  definitive agreement, dated December 17, 2003, providing for the merger  of Peoples with and into |

 

92

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|   | National Penn Bancshares, Inc. and announcing the regular quarterly  dividend and a special cash dividend. |
|--------|------------------------------------------------------------------------------------------------------------|

 

93

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**SIGNATURE**

 

Pursuant to the requirements of Section 13 of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                      | **PEOPLES FIRST, INC.** |
|---------------------------|-------------------------|
|                      |                    |   |
|                      |                    |   |
| Date: March 16, 2004 | By:                     | /s/ Hugh J. Garchinsky |   |
|                      |                    | Hugh J. Garchinsky |
|                      |                    | President and Chief Executive Officer |

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.

 
|                                                        |   | Date:  March 16, 2004 |
|-------------------------------------------------------------|--------|---------------------------------|
| George C. Mason                                             |   |                            |
| Chairman of the Board and Director                          |   |
|                                                        |   |                            |
| /s/ Hugh J. Garchinsky                                      |   | Date:  March 16, 2004 |
| Hugh J. Garchinsky                                          |   |                            |
| President and Chief Executive Officer                       |   |
|                                                        |   |                            |
|                                                        |   |                            |
| /s/ Carl R. Fretz                                           |   | Date:  March 16, 2004 |
| Carl R. Fretz                                               |   |                            |
| Vice Chairman, Corporate Secretary and Director             |   |
|                                                        |   |                            |
|                                                        |   |                            |
| /s/ Susan H. Reeves                                         |   | Date:  March 16, 2004 |
| Susan H. Reeves                                             |   |                            |
| Senior Vice President,  Chief Financial Officer and Cashier |   |
|                                                        |   |                            |
| /s/ Ben S. Beiler                                           |   | Date:  March 16, 2004 |
| Ben S. Beiler                                               |   |                            |
| Director                                                    |   |                            |
|                                                        |   |                            |
|                                                        |   |                            |
| /s/ Arthur A. Bernardon                                     |   | Date:  March 16, 2004 |
| Arthur A. Bernardon                                         |   |                            |
| Director                                                    |   |                            |

 

94

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| /s/ Ross B. Cameron, Jr.     |   | Date: March 16, 2004 |
|------------------------------|--------|---------------------------|
| Ross B. Cameron, Jr.         |   |                      |
| Director                     |   |                      |
|                         |   |                      |
| /s/ Lawrie R. Drennen, Jr.   |   | Date: March 16, 2004 |
| Lawrie R. Drennen, Jr.       |   |                      |
| Director                     |   |                      |
|                         |   |                      |
|                         |   | Date: March 16, 2004 |
| Molly K. Morrison            |   |                      |
| Director                     |   |                      |
|                         |   |                      |
|                         |   | Date: March 16, 2004 |
| R. Marshall Phillips         |   |                      |
| Director                     |   |                      |
|                         |   |                      |
| /s/ David R. Wilmerding, Jr. |   | Date: March 16, 2004 |
| David R. Wilmerding, Jr.     |   |                      |
| Director                     |   |                      |

 

95

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