PEOPLES FIRST INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 2002 or

[ ] 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.
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(Exact name of registrant as specified in its charter)

PENNSYLVANIA 23-3028825
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(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)

24 SOUTH THIRD STREET, OXFORD, PENNSYLVANIA 19363
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)

(610) 932-9294
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(Registrant's telephone number, including area code)

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

Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical
date.

COMMON STOCK, Par Value $1.00 per share
2,968,284 shares outstanding as of June 30, 2002

Item 1. Financial Statements

PEOPLES FIRST, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)

Note: The balance sheet at December 31, 2001, has been derived
from the audited financial statements at that date.

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

PEOPLES FIRST, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Share Data)

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

PEOPLES FIRST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)

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

PEOPLES FIRST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2001
(Unaudited)
(In Thousands)

PEOPLES FIRST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2002
(Unaudited)
(In Thousands)

PEOPLES FIRST, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

June 30, 2002

Note A - Basis of Presentation

The consolidated financial statements include the accounts of
Peoples First, Inc. and its wholly owned subsidiary, The Peoples
Bank of Oxford (the "Bank") and its subsidiaries (collectively
"Peoples"). Peoples subsidiaries include Wilmerding &
Associates, Inc. ("Wilmerding"), an investment advisor
registered with the SEC and based in Rosemont, Pennsylvania and
Peoples First Business Investment Company, LLC ("PFBI"), a non-
operating company formed in January 2002 for the purpose of
holding certain equity investments in operating entities. All
material inter-company transactions have been eliminated.
Peoples First, Inc. was formed on July 27, 2000 and is subject
to regulation by the Board of Governors of the Federal Reserve
System.

The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and are
presented in accordance with the instructions to Form 10-Q and
Rule 10-01 of the Securities and Exchange Commission Regulation
S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the six months ended June 30,
2002, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2002.

The consolidated financial statements presented in this report
should be read in conjunction with the audited financial
statements and the accompanying notes included in the Annual
Report on Form 10-K of Peoples First, Inc. filed with the
Securities and Exchange Commission for the year ended
December 31, 2001.

Note B - Accounting Policies

The accounting policies of Peoples as applied in the interim
financial statements presented, are substantially the same as
those followed on an annual basis as presented in the Annual
Report on Form 10-K of Peoples First, Inc. filed for the year
ended December 31, 2001.

Note C - Comprehensive Income

The only comprehensive income item that Peoples presently has is
unrealized gains (losses) on securities available for sale. The
federal income taxes allocated to the unrealized gains are as
follows:

Note D - New Accounting Standards

Financial Accounting Standard Board ("FASB") Statement No. 142
"Goodwill and Other Intangible Assets," prescribes that goodwill
associated with a business combination and intangible assets
with an indefinite useful life should not be amortized but
should be tested for impairment at least annually. The
Statement requires intangibles that are separable from goodwill
and that have a determinable useful life to be amortized over
the determinable useful life. The provisions of this Statement
became effective for Peoples in January 2002. Upon adoption of
this statement, goodwill and other intangible assets arising
from acquisitions completed before July 1, 2001 would be
accounted for in accordance with the provisions of this
statement. This transition provision could require a
reclassification of a previously separately recognized
intangible to goodwill and vice versa if the intangibles in
question do not meet the new criteria for classification as a
separately recognizable intangible. Adoption of this statement
did not have an impact on Peoples' financial condition or
results of operations as Peoples had no goodwill or other
intangibles on its balance sheet.

In July 2001, the FASB issued Statement 143, "Accounting for
Asset Retirement Obligations," which addresses the financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement requires that the fair
value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount
of the long-lived asset. This Statement will become effective
for Peoples on January 1, 2003 and will not have an impact on
Peoples' financial condition or results of operations.

In August 2001, the FASB issued Statement 144, "Accounting for
the Impairment of or Disposal of Long-Lived Assets." This
Statement supersedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions for the disposal of a segment of a business." This
Statement also amends ARB No. 51, "Consolidated Financial
Statements." The provisions of this Statement became effective
for Peoples on January 1, 2002 and did not have a significant
impact on Peoples' financial condition or results of operations.

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

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 not
limited to, (a) projections or statements regarding future
earnings, expenses, net interest income, other income, earnings
or loss per share, asset mix and quality, 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' market areas. Such forward-looking statements can
be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "intends," "will," "should,"
"anticipates," or the negative of 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 by
forward-looking statements will be achieved. Such statements
are subject to risks, uncertainties, and other factors that
could cause actual results to differ materially from future
results expressed 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 changing
economic conditions in Peoples' market areas and nationally,
(ii) credit risks of commercial, real estate, consumer and other
lending activities, (iii) significant changes in interest rates,
(iv) changes in federal and state banking laws and regulations
which could impact Peoples' operations, (v) funding costs, and
(vi) other external developments which could materially affect
Peoples' business and operations.

Critical Accounting Policies

Note 2 to the consolidated financial statements of Peoples
First, Inc. (included in Item 8 of the Annual Report on Form 10-
K of Peoples First, Inc. for the year ended December 31, 2001)
lists significant accounting policies used in the development
and presentation of its financial statements. This discussion
and analysis, the significant accounting policies, and other
financial statement disclosures identify and address key
variables and other qualitative and quantitative factors that
are necessary for an understanding and evaluation of Peoples and
its results of operations.

The most significant estimate in the preparation of Peoples'
financial statements is for the allowance for loan losses.
Please refer to the discussion of this calculation under
"Results of Operations" below.

Financial Condition

Total assets of Peoples increased $28,432,000 or 7.9% during the
first half of 2002. Increases in deposits of $19,594,000, long-
term debt of $6,705,000, other liabilities of $2,047,000 and the
increase in retained earnings of $1,534,000 were the primary
resources for the growth in assets. This growth funded an
increase in net loans of $22,198,000 or 9.0% for the first half
of 2002. The majority of the loan growth was in mortgage loans
increasing $19,850,000 or 10.1%. In addition, federal funds
sold increased $2,795,000, securities increased $2,622,000 along
with an increase in interest-bearing deposits with banks of
$882,000. Peoples' investment in FHLB stock increased by
$201,000 resulting from the FHLB's stock ownership requirements
as it relates to the long-term debt increase.

Total deposits increased by $19,594,000 since year-end 2001.
The increases were in demand deposit accounts, which were up by
$6,597,000 or 9.6%, savings accounts increased by $6,984,000 or
16.7%, NOW and SuperNOW accounts were up by $4,710,000 or 8.5%
and money market accounts which were up by $2,864,000 or 11.0%.
These increases were partially offset by a decrease in time
deposits of $1,561,000 or 1.7% for the six months ended June 30,
2002. The current rate environment contributed to the growth in
deposits, along with Peoples' expansion and business
development.

Results of Operations

Net income for the first half 2002 was $2,308,000 or $.77 per
share and totaled $1,194,000 or $.40 per share for the three
months ended June 30, 2002. In comparison, net income for the
first half of 2001 was $2,044,000 or $.67 per share and
$1,061,000 or $.35 per share for the quarter ended June 30,
2001. This reflects a $264,000 or 12.9% increase in net income
for the first half of 2002 compared to 2001 and an increase of
$133,000 or 12.5% for the second quarter 2002 compared to the
second quarter 2001.

Net interest income for the first half 2002 increased by
$868,000 or 12.4% compared to the first half 2001. Likewise,
for the second quarter 2002, net interest income increased by
$487,000 or 13.7% compared to the same time period in 2001.
This increase is a result of increased volume and an improved
net interest margin. The net interest margin held steady at
4.71% for the year 2001. For the first half of 2002, the net
interest margin has averaged 4.90%, adding to the net interest
income. While the margin has improved for the first half,
Peoples anticipates it will again start to compress, negatively
impacting net interest income.

Peoples recorded a $180,000 provision for loan losses for the
first six months of 2002, as compared to a provision of $210,000
for the first half 2001. The provision for the second quarter
of 2002, totaled $90,000 which was comparable to the second
quarter 2001. As a percentage of loans, the allowance for loan
losses was 1.56% at June 30, 2002, compared to 1.66% at year-end
2001 and 1.75% at June 30, 2001. Although the amount of the
allowance for loan losses at June 30, 2002 increased $105,000,
or 2.5%, over the amount at December 31, 2001, the allowance for
loan losses as a percentage of total loans has declined 10 basis
points since year-end 2001, principally as a result of loan
growth. Because the loan growth over the first six months of
2002 primarily involved real estate loans, management did not
feel it necessary to maintain the level of the allowance for
loan losses, as a percentage of total loans, at the same level
that existed at December 31, 2001. Provisions for loan losses
are charged to income to bring the allowance for loan losses to
a level deemed appropriate by management. Management determines
the adequacy of the allowance based on on-going quarterly
assessments of the loan portfolio, including such factors as:
changes in the nature and volume of the portfolio, effects of
concentrations of credit, current and projected economic and
business conditions, regulatory and consultant recommendations,
repayment patterns on loans, borrower's financial condition,
current charge-offs, trends in volume and severity of past due
loans and classified loans, potential problem loans and
supporting collateral. Management believes the allowance is
presently adequate to cover the inherent risks associated with
Peoples' loan portfolio.

Non-interest income increased by $138,000 or 7.0% and $6,000 or
..6% for the six and three month time periods ending June 30,
2002, respectively compared to the same periods in 2001. The
largest increase in non-interest income for the first half of
2002 compared to 2001 was in fees from mortgage banking
activities, which increased, by $128,000 or 65.6%. Peoples acts
as a broker on the secondary market, originating individual
loans for correspondent banks and mortgage companies and
receiving a fee for these services. The favorable rate
environment for mortgage banking activities during 2001 and 2002
has led to an increase in mortgage loan and refinancing demand.
This increased demand and Peoples' efforts to expand the
business by working more closely with local realtors has led to
the increased fee income from mortgage banking activities. In
addition, service charges on deposit accounts increased by
$35,000 or 5.5%, compared to the first half of 2001. The
increased service charges on deposit accounts are consistent
with the continued growth in the Bank's core deposit accounts,
which generate these fees. Income from fiduciary activities was
up by $17,000 or 6.4% and investment management fees from
Wilmerding were up $16,000 or 4.3% compared to the first six
months of 2001. Peoples' Trust Department and Wilmerding's
total assets under management equaled $344,862,000 on June 30,
2002, up from $340,855,000 at June 30, 2001. The increases in
non-interest income were partly offset by a decrease of $58,000
or 11.8% in other income for the first half 2002 compared to
2001, which was the result of a reduction in other fee income
collected and a loss on the sale of an asset.

Total non-interest expense increased by $746,000 or 12.5% for
the first half 2002 compared to the same time period in 2001 and
$332,000 or 10.9% for the second quarter of 2002 compared to the
second quarter 2001. The largest increase in non-interest
expense was in salaries and employee benefits, which increased
by $530,000 or 14.7% for the first half of 2002 compared to the
first half 2001. The increases in payroll and payroll related
expenses resulted from normal merit increases, additions to
staff and increased incentive compensation accruals, along with
the rising costs of medical insurance. Increases in salary and
benefits are anticipated as Peoples continues to grow in size
and number of locations.

Comparing the first half of 2002 to first half 2001, other
expenses were up by $163,000 or 17.2%, primarily as a result of
increased loan origination related expenses and fees paid by
Peoples on deposit accounts with other banks. Increases were
noted in furniture and fixture expense, which increased $57,000
or $19.1%, along with occupancy expense, which reflected an
increase of $50,000 or 11.7%. The Rising Sun Branch that opened
in December 2001 contributed to the increase in occupancy and
furniture and fixture expenses. As Peoples continues to add new
offices and services, additional operating costs will be
generated. Over time it is anticipated these costs will be
offset by the additional income generated through the expansion
of services to our customers and community and new business
development. Pennsylvania shares tax expense was up $10,000 or
5.4%, which correlates with growth in the Bank's shareholder's
equity. Reductions were achieved in communications and supplies
expense, which were down by $28,000 or 8.3%, along with
professional fees which decreased by $36,000 or 21.3%. These
reductions were a result of improved management of the supply
inventory and reduced legal and consulting costs.

Income tax expense was $779,000 for the first half of 2002
compared to $753,000 for first half of 2001 and $410,000 for the
second quarter 2002 compared to $382,000 for the second quarter
2001. Income tax expense as a percentage of income before
income taxes was 25.2% for the first half 2002 compared to 26.9%
for the first half 2001. The decrease in Peoples' effective tax
rate away from the statutory rate of 34.0% is a result of tax-
exempt income on loans, securities and bank owned life
insurance, along with tax credits on an investment in a low
income housing partnership.

Liquidity

Liquidity represents Peoples' ability to efficiently manage cash
flows to support customers' loan demand, withdrawals by
depositors, the payment of operating expenses, as well as the
ability to take advantage of business and investment
opportunities as they arise. One of Peoples' sources of
liquidity is $280,577,000 in core deposits at June 30, 2002,
which increased $20,536,000 over total core deposits of
$260,041,000 at year-end. Other sources of liquidity are
available from investments in interest-bearing deposits with
banks and federal funds sold which totaled $13,920,000, and
securities maturing in one year or less, which totaled
$12,961,000, at June 30, 2002. In comparison, interest-bearing
due from banks and federal funds sold totaled $10,243,000 and
securities maturing in one year or less totaled $10,250,000 at
year-end 2001. In addition, Peoples has established federal
funds lines of credit with other commercial banks and with the
Federal Home Loan Bank of Pittsburgh, which can be drawn upon if
needed as a source of liquidity. Management is of the opinion
that Peoples' liquidity is sufficient to meet its anticipated
needs.

Capital Resources

Total stockholders' equity was $44,863,000 as of June 30, 2002,
representing a $1,221,000 increase from the beginning of the
year. The growth in capital was primarily a result of net
earnings retention of $1,534,000, along with increased
accumulated other comprehensive income up $331,000, and
partially offset with treasury stock purchases of $644,000. In
November 2001, the Board approved a second stock repurchase plan
authorizing the repurchase of $1,000,000 in Peoples' stock with
a termination date of October 2002. Under this plan 33,843
shares have been repurchased at a cost of $728,000 through
June 30, 2002. 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 of June
2003.

At June 30, 2002, Peoples had a leverage ratio of 11.84%, a
Tier I capital to risk-based assets ratio of 14.96% and a total
capital to risk-based assets ratio of 16.21%. At June 30, 2002,
the Bank had a leverage ratio of 9.95%, a Tier I capital to
risk-based assets ratio of 12.42% and a total capital to risk-
based assets ratio of 13.68%. These ratios indicate Peoples and
the Bank both exceed the federal regulatory minimum requirements
for a "well capitalized bank."

In 2001, shareholders approved the 2001 Stock Option Plan. No
options have been granted under this plan.

Item 3. Quantitative and Qualitative Disclosure about Market

There are no material changes in Peoples' interest rate risk
exposure since December 31, 2001. Please refer to the Annual
Report on Form 10-K of Peoples First, Inc. for the year ended
December 31, 2001, filed with the Securities and Exchange
Commission.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Not Applicable

Item 2. Changes in Securities and Use of Proceeds

Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

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

The 2001 Annual Meeting of Shareholders of Peoples First, Inc.
was held on May 14, 2002. The only matter presented for
shareholder action at the meeting was the election of two (2)
class II directors to hold office for three years from the
election date.

There was no solicitation in opposition to the nominees of the
Board of Directors for election as directors. All nominees of
the Board of Directors were elected. The number of votes cast
for or withheld for each nominee was as follows:

Nominee Name Votes for Votes withheld
------------ --------- --------------

Hugh J. Garchinsky 2,279,685.845 2,746.58

Carl R. Fretz 2,279,685.845 2,746.58

Item 5. Other Information

Not Applicable

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit Title
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3.1 Articles of Incorporation of Peoples. (Incorporated by
reference to Exhibit 3.1 to Peoples' Registration
Statement on Form S-4, No. 333-30640.)

3.2 Bylaws of Peoples. (Incorporated by reference to
Exhibit 3.2 to Peoples' Registration Statement on
Form S-4, No. 333-30640.)

99.1 Certification of Chief Executive Officer under
Section 906 of the Sarbanes-Oxley Act of 2002.

99.2 Certification of Chief Financial Officer under
Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

There were no reports filed on Form 8-K during the second
quarter of 2002.

SIGNATURES

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

PEOPLES FIRST, INC.
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(Registrant)

Date: August 12, 2002 BY: /s/ Hugh J. Garchinsky
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Hugh J. Garchinsky
President and
Chief Executive Officer

Date: August 12, 2002 BY: /s/ Susan H. Reeves
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Susan H. Reeves
Senior Vice President and
Chief Financial Officer