PEOPLES FIRST INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[ X ] Annual report pursuant Section 13 of the Securities
Exchange Act of 1934, for the fiscal year-ended
December 31, 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.
(Exact name of registrant as specified in its charter)

PENNSYLVANIA 23-3028825
(State or other jurisdiction of (IRS Employer
incorporation or organization) 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 under section 12(g) of the Act:

Name of each exchange
Title of each class on which registered

COMMON STOCK, Par Value None
$1.00 per share

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 bank was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[ X ] Yes [ ]No

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

As of January 31, 2003, the aggregate market value of the 2,965,284
shares of Common Stock of the Registrant outstanding on such date, held by
non-affiliates of the Registrant, was approximately $47,984,596. This
figure is based on the last known sales price, prior to January 31, 2003,
reported to the Registrant of $22.00 per share for Common Stock. Although
directors, officers and five percent beneficial owners of the Registrant
were assumed 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 filer
as defined in Rule 12b-2 of the Act) [ ] Yes [X] No

As of June 30, 2002 the aggregate market value of the 2,968,284
shares of Common stock of the Registrant outstanding on such date, held by
non-affiliates of the Registrant, was approximately $48,268,665. This
figure is based on the last known sales price, prior to June 30, 2002,
reported to the Registrant of $21.95 per share for Common Stock. Although
directors, officers and five percent beneficial owners of the Registrant
were assumed to be "affiliates" of the Registrant for purposes of this
calculation, the classification is not to be interpreted as an admission
of such status.

Documents Incorporated by Reference

Portions of the Registrant's definitive proxy statement, dated
April 9, 2003, are incorporated by reference in Part III of this Form 10-
K.

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, (vi) the effects of armed conflicts
involving the United States or its interests, and (vii) other external
developments which could materially affect Peoples' business and
operations.

Item 1 - Business

Peoples First, Inc.

Peoples First, Inc. is a bank holding company which was incorporated
under the laws of the Commonwealth of Pennsylvania on July 27, 2000, to
own all the outstanding stock of The Peoples Bank of Oxford.

Peoples provides commercial banking and trust services through its
wholly owned subsidiary The Peoples Bank of Oxford. The consolidated
financial statements include Peoples and the Bank. All significant inter-
company accounts and transactions have been eliminated. Peoples' primary
source of operating funds is dividends received from the Bank. Peoples'
expenses consist of minimal operating expenses. To obtain maximum tax
advantage, during 2001, Peoples purchased over $8,000,000 in municipal
securities. The funds to purchase the securities were obtained through
dividends received from the Bank. Dividends paid to stockholders consist
of dividends declared and paid to Peoples by the Bank.

As of December 31, 2002, Peoples had total assets of $409,017,000 and
total stockholders' equity of $46,864,000.

The Peoples Bank of Oxford

The Peoples Bank of Oxford is a state-chartered commercial banking
institution, which was incorporated under the laws of the Commonwealth of
Pennsylvania, on December 19, 1913. The bank's deposits are insured by
the Federal Deposit Insurance Corporation.

As of December 31, 2002, the Bank had total assets of $400,834,000,
total deposits of $322,183,000 and total stockholders' equity of
$39,228,000. At year-end, December 31, 2002, the Bank had 144 full-time
employees and 38 part-time employees.

The Bank's Corporate Headquarters, Trust Department and full service
Main Office are located at 24 South Third Street, Oxford, Pennsylvania.
The Bank has nine branches and nine automated teller machines. These
offices serve a predominately rural agricultural area, which includes
southern Chester County, Pennsylvania and to a lesser extent southern
Lancaster County, Pennsylvania and northern Cecil County, Maryland. In
December 2001, the Bank opened its first branch in Maryland to better
serve the northern Cecil County area and in November 2002, the Bank opened
its first branch in Lancaster County, Pennsylvania. The Bank's Operations
Center is located at 125 Peoples Drive, Oxford, Pennsylvania.

The Bank primarily serves individuals and small to medium sized farms
and businesses, providing a broad range of services, including retail and
commercial banking services, investment services and trust services. These
services include providing various types of demand, savings and time
deposit accounts, making secured and unsecured consumer, real estate and
commercial loans, sale of investment products and safe deposit box
rentals. Additionally retail customers can access their account
information, pay bills, transfer funds, and access information regarding
bank services via their personal computer using online banking. The Bank
provides its customers with access to invest in mutual funds, annuities,
insurance and various other financial instruments via the INVEST Financial
Corporation. In addition, the Bank also provides trust and investment
services to individuals, small businesses and charitable organizations
through its Trust Department. These services include investment
management, estate settlement and maintenance of securities and accounting
records for various types of trust relationships.

The Bank has two wholly owned subsidiaries. On April 10, 2000, the
Bank purchased Wilmerding & Associates, located in Rosemont, Pennsylvania.
Wilmerding is a registered investment advisor providing counsel to
individual, fiduciary and corporate clients. At year-end, December 31,
2002, Wilmerding had five full-time employees. In addition, the Bank's
other subsidiary, Peoples First Business Investment, LLC, is a non-
operating company, which holds certain equity investments in operating
entities. One of such operating entities is Peoples First Land Transfer,
LLC, which commenced operations in January 2002 and derives its income
from the sale of title insurance.

The Bank's business is not seasonal in nature nor is the Bank
involved in operations in foreign countries. Management does not
separately allocate expenses, including the cost of funding loan demand,
between the commercial, retail, mortgage banking and trust operations. As
a result, discrete information is not available and segment reporting
would not be meaningful. The operations of the Bank's two subsidiaries
are not material to the consolidated financial statements.

Competition

There is strong competition in Peoples' service area for banking
business among commercial banks, thrift institutions, other financial
institutions and financial intermediaries. In addition to commercial
banks, federal and state savings and loan associations, 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 financial
affiliates of industrial companies provide additional competition for
loans and various financial services. Peoples also currently competes for
interest-bearing funds with a number of other financial intermediaries
which offer a diverse range of investment alternatives including brokerage
firms and mutual funds. Many competitors have substantially greater
financial resources and larger branch systems than those of Peoples.

There are ten full service commercial banks and three savings banks
with branches in the southern Chester County portion of Peoples'
designated market area. Peoples maintains a majority of the market share
in the southern Chester County area. Peoples is also subject to
competition from banks outside of its service area for various financial
services.

In consumer transactions, Peoples believes that it is able to compete
effectively by offering low cost checking accounts, comparable banking
hours and competitive rates on its interest bearing accounts. In
competing with other banks and financial institutions, Peoples seeks to
provide personalized services through management's knowledge and awareness
of Peoples' service area, customers and borrowers.

With respect to commercial transactions, Peoples' legal lending limit
to a single borrower is generally lower than the other larger commercial
lenders. Management believes that Peoples' legal lending limit is
sufficient to handle the credit requirements of its target market. In
addition, Peoples will participate commercial loans with other financial
institutions if necessary, in order to accommodate a customer's needs.

Peoples has not engaged in any material research activities relating
to the development of new services or the improvement of existing bank
services. However, marketing activities have occurred that enable Peoples
to remain competitive, which include the addition of new services,
additional branches and improvements to services currently offered.

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

Loan and Deposit Structure

At December 31, 2002, total loans, net of unearned income, equaled
$302,161,000 with an additional $67,952,000 in standby letters of credit,
unused lines of credit and commitments to extend credit. Peoples has a
significant concentration of residential and commercial mortgage loans
collateralized by properties located in Peoples market area.
Approximately, $80,791,000 in loans was outstanding to real estate
investors. Included in this category are a diverse group of properties
and borrowers, the larger of which are: $31,311,000 are mortgages on
commercial rental properties (stores, offices and convenience centers,
etc.), $14,645,000 are mortgage loans on residential rental properties,
$14,519,000 are construction loans to residential builders, $8,914,000 are
mortgages on mobile homes and land and $5,134,000 are land sub-division
projects. These figures do not include mortgages on one to four family
owner-occupied properties. Similarly, approximately, $21,674,000 in
unused commitments were outstanding to real estate investors. Of those
commitments, $2,294,000 are mortgages on commercial rental properties,
$1,569,000 are mortgage loans on residential rental properties,
$12,353,000 are construction loans to residential builders, $494,000 are
secured by mobile home and land and $2,763,000 are land sub-division
projects. These figures do not include conventional mortgages on one to
four family owner-occupied properties.

Peoples also has a significant portion of loans outstanding to the
agricultural sector totaling $50,697,000. Approximately, $29,043,000 of
these loans is outstanding to the mushroom industry, which represents 9.6%
of total loans, and about $21,654,000 are outstanding to other segments of
the farm community. Likewise, unused commitments to the mushroom industry
totaled $10,296,000 and other agricultural loans totaled $2,477,000.

At December 31, 2002, Peoples' total deposits equaled $322,136,000,
of which 24.8% were non-interest bearing deposits and 75.2% were interest
bearing deposits. Although Peoples' deposits are primarily generated from
southern Chester County, there is no concentration of deposits in one
person or group of persons that if withdrawn would have a material adverse
effect on Peoples. Peoples has no brokered deposits. However, it should
be noted that the liquidity position of any bank could be tightened in the
event a substantial portion of the bank's depositors decided to withdraw
their funds from the bank within a short period of time.

Regulation

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

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

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

On July 30, 2002, the President signed into law the Sarbanes-Oxley
Act of 2002. The stated goals of this sweeping legislation are to enhance
penalties for accounting and auditing improprieties at publicly traded
companies and to protect investors by improving the accuracy and
reliability of corporate disclosures under the federal securities laws.
The Sarbanes-Oxley Act generally applies to all companies, including
Peoples, that file or are required to file periodic reports with the
Securities and Exchange Commission under the Securities Exchange Act of
1934, or the Exchange Act. The legislation includes provisions, among
other things, governing the services that can be provided by a public
company's independent auditors and the procedures for approving such
services, requiring the chief executive officer and chief financial
officer to certify certain matters relating to the company's periodic
filings under the Exchange Act, requiring expedited filings of reports by
insiders of their securities transactions and containing other provisions
relating to insider conflicts of interest, increasing disclosure
requirements relating to critical financial accounting policies and their
application, increasing penalties for securities law violations, and
creating a new public accounting oversight board, a regulatory body
subject to SEC jurisdiction with broad powers to set auditing, quality
control and ethics standards for accounting firms. The legislation also
requires the national securities exchanges and Nasdaq to adopt rules
relating to certain matters, including the independence of members a
company's audit committee as a condition to listing or continued listing.
Given the extensive SEC role in implementing rules relating to many of the
new requirements, the final scope of these requirements remains to be
determined at this time, although Peoples does not believe that the
application of these new rules to Peoples as they become effective will
have a material effect on its results of operations.

Item 2 - Properties

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

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

The Avon Grove Office, a full service branch, is located at 565 East
Baltimore Pike in Avondale, Pennsylvania. The office consists of
approximately 3,800 square feet. Peoples has a long-term lease on the
land with rental payments in 2002 totaling $16,900. The lease term
expires in March 2008 and provides for eight renewal options of five years
each.

The Longwood Office, a full service branch, is located at 900 East
Baltimore Pike in Kennett Square, Pennsylvania. The office consists of
approximately 3,800 square feet. The rental payments on the long-term
land lease totaled $53,800 in 2002. The lease term expires in 2015 and
provides for one five-year renewal option and an additional renewal option
of four years and three hundred and sixty-four days.

The Jennersville Office, a full service branch, is located at 103
Jennersville Road in Penn Township, Chester County, Pennsylvania. The
office consists of approximately 2,500 square feet. Peoples has a long-
term land lease which expires in 2017 and provides for one five year
renewal option and an additional renewal option of four years and eleven
months. Rental payments in 2002 totaled $35,200.

The Jenners Pond Office is a full service branch operating with
limited hours. This office is located in and serves Jenners Pond, a
retirement community at 2000 Greenbriar Lane, West Grove, Pennsylvania.
The office space is leased though 2004 and consists of 250 square feet.
Rental payments in 2002 totaled $6,200.

The West Kennett Office, a full service branch, is located at 920
West Cypress Street, Kennett Square, Pennsylvania. The office consists of
approximately 3,800 square feet. The rental payment on the long-term land
lease totaled $46,200 in 2002. Peoples has a long-term land lease which
expires in 2020 and provides for one five year renewal options and an
additional renewal option of four years and eleven months.

The Rising Sun Office, a full service branch opened in December 2001,
is located at 5 Maple Heights Lane, Rising Sun, Maryland. The office
consists of approximately 3,800 square feet. The rental payment on the
long-term land lease totaled $18,100 in 2002. Peoples has a long-term
land lease which expires in 2021 and provides for two five year renewal
options.

The Georgetown Office, a full service branch opened in November 2002,
is located at 1138 Georgetown Road, Christiana, Pennsylvania. Peoples owns
the office building, which consists of approximately 1,300 square feet.

Peoples' Operations Center is located along Route 10 at 125 Peoples
Way in Lower Oxford Township, Chester County, Pennsylvania. Peoples owns
the office building, which consists of approximately 23,000 square feet.

Item 3 - Legal Proceedings

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

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

None

Item 4A - Executive Officers of the Registrant

The following sets forth information with respect to executive
officers of Peoples and the Bank. Each officer was elected at the first
meeting of the Board of Directors following the 2002 Annual Meeting of
Shareholders and will serve until the first meeting of the Board of
Directors following the 2003 Annual Meeting of Shareholders, at which time
the Board of Directors will elect officers for the following year. There
are no arrangements or understandings between Peoples or the Bank and any
person pursuant to which any such officers were selected.

George C. Mason (age 67) is Chairman and served as Chief Executive
Officer of Peoples through December 2001. He has been a Director of the
Bank since 1972, has served as Chairman of the Board of the Bank since
July 1973, and served as Chief Executive Officer of the Bank from March
1992 through December 2001. Mr. Mason also serves as a Director of HERCO,
Inc., Hershey, Pennsylvania. Since October 1988, Mr. Mason has been
employed full time at the Bank.

Carl R. Fretz (age 72) is Vice Chairman of the Board and Corporate
Secretary of Peoples and has been a Director of the Bank since 1965, Vice
Chairman of the Board and Corporate Secretary of the Bank since 1999 and
previously served as President of the Bank from 1973 to 1999. Mr. Fretz
also serves as director of Oxford Mainstreet, Inc. Mr. Fretz is the
father-in-law of Jay L. Andress, Senior Vice President of the Bank.

Hugh J. Garchinsky (age 52) is a Director and the President of
Peoples. He has served as Chief Executive Officer of Peoples and the Bank
since in January 2002. He has been a Director of the Bank since 1997, and
became President of the Bank in 2000. Mr. Garchinsky joined the Bank in
October 1992 as Manager of Loan Operations, became a Vice President in
1994, Senior Vice President in 1996, and Executive Vice President in 1997.

David H. Acox, Jr. (age 54) joined the Bank as Trust Officer in
October 1989, became Vice President and Trust Officer in March 1994 and
Senior Vice President and Trust Officer in April 1997. Mr. Acox is
directly responsible for the Trust Department.

Jay L. Andress (age 51) joined the Bank in August 1973, became Vice
President in charge of operations in March 1988, and has been Senior Vice
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 the Board
and Corporate Secretary of Peoples and the Bank.

Gary R. Davis (age 48) joined the Bank in July 1994, became Assistant
Vice President in 1995, Vice President in 1997, Senior Vice President in
1999 and currently directs the Bank's lending and credit analysis
functions.

Scott W. Gundaker (age 52) joined the Bank in October 2001 as Senior
Vice President of Retail Services. Mr. Gundaker is directly responsible
for marketing and community banking functions. Prior to joining Peoples,
Mr. Gundaker was employed by Orbiscom, Inc. as Senior Vice President from
2000 to 2001. From 1998 to 2000, Mr. Gundaker was employed by Mastercard
International as a Senior Vice President.

Howard M. Mannheim (age 64) joined the Bank in June 1996, and
currently serves as Executive Vice President, Chief Operating Officer and
Support Group Manager. Mr. Mannheim is directly responsible for back
office operations and administrative functions.

Susan H. Reeves (age 49) Chief Financial Officer of Peoples, joined
the Bank in January 1984, became Vice President and Auditor in 1991, Vice
President and Chief Financial Officer in 1996, and currently serves as
Senior Vice President, Cashier and Chief Financial Officer of the Bank.
Mrs. Reeves is directly responsible for the financial division of the
Bank.

PART II

Item 5 - Market for Peoples Common Stock and Related Stockholder Matters

The authorized capital stock of Peoples consists of 10,000,000 shares
of common stock, par value $1.00 per share, of which 2,965,284 shares were
outstanding as of January 31, 2003. There were approximately 728
stockholders of record as of January 31, 2003. Peoples' common stock is
not listed or traded on a recognized securities exchange. Peoples' common
stock is traded in the over-the-counter market under the symbol PPFR and
trading in Peoples common stock is limited in volume.

The following table sets forth the high and low prices for Peoples
common stock for each quarterly period for the last two years.

2002 2001
----------------- --------------
High Low High Low
------ ------ ------ ------
First Quarter $22.35 $20.53 $20.25 $17.25
Second Quarter $22.25 $21.00 $21.00 $19.25
Third Quarter $23.50 $21.45 $22.00 $20.25
Fourth Quarter $22.75 $21.50 $22.75 $20.50

Holders of shares of common stock are entitled to receive such
dividends when, as, and if declared by Peoples' Board of Directors, out of
funds legally available for dividends. Declaration of and payment of cash
dividends by Peoples depends upon dividend payments by the Bank, which is
Peoples primary source of revenue and cash flow. Peoples is a legal
entity separate and distinct from its subsidiaries. Accordingly, the
right of Peoples, and consequently the right of creditors and shareholders
of Peoples, to participate in any distribution of the assets or earnings
of any subsidiary is necessarily subject to the prior claims of creditors
of the subsidiary, except to the extent that the claims of Peoples in its
capacity as a creditor may be recognized. Under Pennsylvania banking law,
the payment of dividends by the Bank is generally restricted to its
accumulated net earnings.

Peoples and the Bank have paid quarterly cash dividends on its common
stock since 1988. The following sets forth the cash dividends declared
per share on Peoples common stock during each of the two years ended
December 31, 2002.

Per-Share Dividends
2002 2001
----- -----
First Quarter $0.13 $0.12
Second Quarter $0.13 $0.12
Third Quarter $0.13 $0.12
Fourth Quarter $0.20 $0.13

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

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

Item 6 - Selected Financial Data

SUMMARY OF FINANCIAL DATA

Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion represents management's analysis of the
financial condition and results of operations of Peoples First, Inc.
("Peoples") and should be read in conjunction with the accompanying
financial statements 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 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, (vi) the effects of armed conflicts
involving the United States or its interests, and (vii) other external
developments which could materially affect Peoples' business and
operations.

Critical Accounting Policies

Note 2 to Peoples consolidated financial statements (included in Item
8 of Peoples' Form 10-K for the year-ended December 31, 2002) 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 " Allowance for Loan Losses"
in the " Financial Condition" section below.

Overview

In 2002, Peoples recorded net income of $4,854,000, an increase of
$618,000 or 14.6% from net income of $4,236,000 in 2001. Net income was
$4,062,000 in 2000. Improvement in net interest income and increased non-
interest income led to overall improved earnings for 2002. Actual net
interest income increased $1,663,000 in 2002 compared to 2001 and
increased $412,000 in 2001 compared to 2000. The interest income from
increased volume in loans and securities offset the total decline in net
interest income from the drop in interest rates. Non-interest income
increased $871,000 in 2002 compared to 2001 and increased $865,000 in 2001
compared to 2000. The increase in non-interest income in 2002 compared to
2001 was primarily attributable to increased mortgage banking activities,
realized gain on disposal of securities, along with increased income from
service charges on deposit accounts. Basic earnings per share were $1.63
in 2002, $1.40 in 2001 and $1.33 in 2000.

Return on average assets was 1.27% for 2002, compared with 1.23% in
2001 and 1.30% in 2000. Return on average equity for 2002 was 10.70%
compared to 9.78% in 2001 and 10.19% in 2000.

During 2002, average interest-earning assets increased by 11.5% or
$36,637,000 to $355,335,000. Average interest-bearing liabilities
increased $25,337,000 or 10.7%, to $262,413,000 for the year. The
increased interest income from the growth in earning assets was able to
offset only 87.2% of the decrease in interest income resulting from the
decline in rates on earning assets. The higher interest expense from
increased volume in interest-bearing liabilities was offset with decreased
interest expense resulting from the reduction in rates on interest-
bearing liabilities. Together, these netted an increase of $1,717,000 or
11.4% in fully tax-equivalent net interest income. The net interest
margin remained at 4.71% in 2002 compared to 4.71% in 2001 and 4.97% in
2000.

Non-interest income increased $871,000 or 21.2% in 2002, compared to
an increase of $865,000 or 26.7% in 2001. The increase in 2002 resulted
from increased mortgage banking activities by $396,000, a realized gain of
$387,000 on the redemption of a security and increased income from service
charges collected on business deposit accounts and checks presented
against non-sufficient funds by $162,000. This was supplemented with
increased income from fiduciary activities by $43,000 and other income by
$34,000. These increases were partially offset by a write-down on an
impaired security of $84,000 and a decrease of $67,000 in investment
management fees received by Wilmerding. Because Wilmerding's fee income
is based on the market value of assets under management, the overall
decline in the stock market directly impacted its revenues.

Non-interest expenses increased $1,528,000 or 12.3% for 2002,
compared to an increase of $1,333,000 or 12.0% for 2001. The 2002
increase was largely a result of increased salaries and employee benefits
of $1,126,000, occupancy expense of $122,000, furniture and equipment
expense of $110,000 and other operating expenses up $262,000. The
increased salaries and employee benefits consisted of normal merit
increases and to a greater extent additions to staff of the Bank. A full
year of operating expenses for the Rising Sun Branch, which opened in
December 2001, contributed to higher occupancy and furniture and fixture
expense. Other operating expenses included increased loan origination
expenses, increased marketing expenses, higher education and training
costs and additional fees paid by Peoples on deposit accounts with other
banks.

The following table sets forth selected quarterly financial data and
per share data.

Quarterly Financial Data

(1) Peoples has a simple capital structure. Basic earnings
per share represents net income divided by the weighted
average number of common shares outstanding during the
period.

Results of Operations

Net Interest Income and Net Interest Margin

Net interest income is the difference between interest income earned
on investments and loans, and interest expense incurred on deposits and
other liabilities. For analysis purposes, net interest income is
evaluated on a fully tax equivalent (FTE) basis to facilitate comparison
with interest earned which is subject to federal taxation at the statutory
tax rate of 34%. The factors that affect net interest income include
changes in interest rates and changes in interest-earning assets and
interest-bearing liabilities. Net interest income on an FTE basis
increased by $1,717,000 or 11.4% to $16,728,000 in 2002 from $15,011,000
in 2001. Comparatively, net interest income (FTE basis) increased by
$543,000 or 3.8% to $15,011,000 in 2001 from $14,468,000 in 2000.

The following table includes average balances, rates and interest
income and expense adjusted to an FTE basis, the interest rate spread and
the net interest margin. Following that is the rate and volume analysis
table that shows changes in net interest income attributed to changes in
rates and changes in average balances of interest-earning assets and
interest-bearing liabilities.

Average Balances, Rates and Interest Income and Expense

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

For yield calculation purposes, non-accruing loans are included in
the average loan balances.

Interest income on loans includes amortized fees and costs on loans
totaling $216,000 for 2002, $134,000 for 2001 and $139,000 for 2000.

Rate/Volume Analysis

The 475 basis point reduction in the Federal Reserve Bank's federal
funds rate and the discount rate during 2001 and the 50 basis point
reduction in 2002 resulted in overall lower rates during 2002 compared to
2001. Interest earning assets had an average yield of 6.65% during 2002
compared to a yield of 7.56% for 2001, a decrease of 91 basis points.
Likewise, interest bearing liabilities had an average rate of 2.62% during
2002 compared to 3.82% for 2001, a decrease of 120 basis points.

Tax equivalent interest income decreased by $463,000 between 2002 and
2001, due to lower rates decreasing interest income by $3,616,000. Most
of this decrease was offset by the growth in asset volume contributing an
additional $3,153,000 to interest income. The growth 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 loans lowered interest income
by $2,492,000. The growth in loans is the result of a continued emphasis
on developing new lending business. Total average securities grew by
$12,612,000 but the corresponding yield decreased 94 basis points. The
growth in securities increased interest income by $652,000, but the
decline in rates 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, which resulted
in a reduction in interest income of $401,000. Interest-bearing due from
bank balances decreased by $6,754,000, decreasing income by $153,000,
accompanied by a 222 basis point decline in rate, amounting to a decrease
in income of $177,000.

Total interest-bearing liabilities grew by $25,337,000 between 2002
and 2001, increasing interest expense by $659,000 for 2002, more than
offset by a lower annualized rate on total interest-bearing liabilities by
120 basis points which decreased interest expense by $2,839,000. Deposit
balances grew, as Peoples continues to expand within its market 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 the lower rates this year and locked into some
additional long-term borrowings from the Federal Home Loan Bank. Long-
term debt averaged $27,903,000 for the year, up $7,564,000 over the
average for 2001. In addition, Peoples prepaid $1,000,000 in long-term
debt absorbing a penalty of $65,000 in 2002 in order to reduce future
years' interest expense. As a result, the growth in long-term borrowings
at an overall lower rate added $449,000 to interest expense.

During 2001, the 475 basis point reduction in the Federal Reserve
Bank's federal funds rate and the discount rate resulted in an overall
decline in net interest income due to rate changes totaling $688,000. The
reduction in rates on interest-earning assets resulted in a decline of
interest income of $1,897,000. The decreased income was partially offset
with a reduction in interest expense on interest-bearing liabilities
totaling $1,209,000.

Tax equivalent interest income increased by $92,000 between 2001 and
2000, due to growth in asset volume contributing $1,989,000 in interest
income, largely offset with a reduction of $1,897,000 resulting from the
decline in rates. The primary components of this increase were the growth
in average loans of $17,036,000 positively impacting interest income by
$1,407,000; however, a decline of 57 basis points in the yield on loans
lowered interest income by $1,253,000. The growth in loans was directly
related to new lending business development and retaining more mortgage
loans in-house, instead of selling them on the secondary market. Total
average securities grew by $6,259,000 but the corresponding yield
decreased 22 basis points. The growth in securities increased interest
income by $433,000, but the decline in rates reduced the return by
$148,000. Average Federal funds sold increased by $5,870,000, increasing
income by $222,000, more than offset by a decrease in yield of 253 basis
points, which resulted in a reduction in interest income of $312,000.
Interest-bearing due from bank balances decreased by $1,647,000,
decreasing income by $74,000, accompanied by a 184 basis point decline in
rate, amounting to a decrease to income of $177,000.

Total interest-bearing liabilities grew by $22,586,000 between 2001
and 2000, increasing interest expense by $758,000 for 2001, more than
offset by a lower annualized rate on total interest-bearing liabilities by
62 basis points which decreased interest expense by $1,209,000. Deposit
balances grew, as Peoples continued to expand within its market area, with
growth contributing $659,000 in interest expense. Overall, the lower rates
paid on deposits in 2001, reduced interest expense by $1,071,000.
Peoples borrowed some additional long-term borrowings from the Federal
Home Loan Bank. Long-term debt averaged $20,339,000 for the year,
additional increases were matched against a similar maturity and volume of
customer mortgages retained in Peoples' portfolio. Matching these
maturities enabled Peoples to lock in a spread, along with a long-term
interest income cash flow, while managing the interest rate risk. As a
result, the growth in long-term borrowings at an overall lower rate added
$45,000 to interest expense.

The net interest margin is the ratio of net interest income to
interest-earning assets, reflecting a net yield on earning assets.
Peoples' net interest margin, on a tax equivalent basis, for the years
2002, 2001 and 2000 was 4.71%, 4.71% and 4.97%, respectively. During the
first three quarters of 2002, the net interest margin averaged 4.79%, but
during the third quarter it again started to compress as the federal funds
rate dropped another 50 basis points, along with the continued competition
in product pricing. During 2002, Peoples had 34.2% of its deposits in NOW
and savings accounts, which it considers core deposits and which normally
carry lower rates relative to other types of deposits. Because of this,
these accounts have historically contributed significantly to the net
interest margin. However, there is an ultimate floor to which the rates on
these accounts can fall. The inability to decrease the deposit rates
consistent with another Federal Reserve rate reduction while rates on
loans continue to decline, results in a compression in the net interest
margin. The monetary impact can also be seen in the rate change analysis:
the interest income decrease attributed to rate was $3,616,000 compared to
a decrease in interest expense of $2,839,000. The compression in the net
interest margin in 2001, compared to 2000, resulted from the overall
decline in rates during the year and the continued competition in product
pricing.

Provision for Loan Losses

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

Peoples recorded a $480,000 provision for loan losses in 2002, as
compared to a provision of $330,000 and $465,000 in 2001 and 2000,
respectively. Provisions for loan losses are charged to income to bring
the allowance for loan losses to a level deemed appropriate by management
based on the factors discussed under "Allowance for Loan Losses."

Non-Interest Income

With the continued compression of the net interest margin, Peoples
has been focusing on methods to increase non-interest income. Non-
interest income of $4,978,000 for 2002 increased $871,000 or 21.2% for the
year 2002 compared to 2001. Non-interest income was $4,107,000 in 2001
compared to $3,242,000 in 2000.

Service charges on deposit accounts continued to grow with income of
$1,500,000, $1,338,000 and $1,175,000 for the years 2002, 2001 and 2000,
respectively. The increase in service charges on deposit accounts
reflects primarily increased fees collected on checks presented against
non-sufficient funds and increased income from service charges on business
accounts. The overall trend is consistent with the growth noted in
deposit account balances 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 current
year-end fair value of assets under management totaling $114,427,000,
compared to $99,238,000 in 2001 and $96,997,000 in 2000. Likewise, income
generated by the Trust Department also continues to grow with income for
the years 2002, 2001 and 2000 of $582,000, $539,000 and $474,000,
respectively.

The Bank acquired Wilmerding & Associates, Inc., an investment
advisor, in April 2000. Wilmerding generated investment management fees
totaling $682,000 for 2002, $749,000 for 2001 and $808,000 for the year
2000. Wilmerding's management fees are based on the market value of assets
under management, which were $211,667,000 for 2002, $254,156,000 for 2001
and $245,513,000 for 2000. The decline in management fees reflects the
impact of the overall downturn in the financial market, along with a
change in status of certain accounts. While Wilmerding is not achieving
the level of profitability desired, various cost saving measures were put
in place during 2002, along with personnel changes designed to achieve
profitability. Peoples is currently considering several other options
relating to its investment management business. At the present time,
Wilmerding is not a significant contributor to Peoples' total revenues.

Income from mortgage banking activities totaled $872,000 in 2002,
which was an increase of 83.2% or $396,000 compared to 2001. In addition
to originating and retaining mortgages in its portfolio, Peoples derives
income from the sale of individual loans in the secondary market. The
favorable rate environment for mortgage banking activities during 2002 and
2001 led to increased demand for both purchase-money and refinancing
mortgage loans. This increased demand, combined with Peoples' efforts to
expand the mortgage business by working more closely with the realtors in
its market area, led to the increased income from mortgage banking
activities. This contributed to an approximate 47.3% increase in the
number of mortgages sold. In comparison, income from mortgage banking
activities for the year 2001 totaled $476,000 and $186,000 for 2000.

Peoples generally holds the securities in its securities portfolio
until 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 a Housing and Urban
Development Program. The balance of the bond, net of the reserve, is
$476,000. Management continues to closely monitor this security.

In 2000, Peoples wrote-down a held-to-maturity security issue by
$326,000, or approximately 10.0% of its carrying amount. During 2002,
this security was redeemed and Peoples realized a gain on the redemption
of this security in the amount of $387,000.

Other income increased by $34,000 to $1,039,000 for 2002, compared to
$1,005,000 and $925,000 in 2001 and 2000, respectively. This increase was
a result of increased income from debit card commissions, income from a
prepayment penalty on a commercial loan payoff and earnings from Peoples
First Land Transfer, LLC. Peoples First Land Transfer, a 79.0% owned
subsidiary of the Bank, started operation in January 2002 and derives its
income from the sale of title insurance. This subsidiary is not a
significant contributor to Peoples' total revenues, adding a total of
$44,000 to non-interest income in 2002.

Non-Interest Expense

Non-interest expense increased $1,528,000 or 12.3% in 2002 to
$13,962,000, up from $12,434,000 in 2001 and $11,101,000 in 2000. The
increase for 2002 was from increased salaries and employee benefits,
occupancy, furniture and equipment, other operating expenses and taxes
other than income, partially offset by decreases in professional fees and
communication and supplies.

Salaries and employee benefits increased $1,126,000 or 15.0% in 2002
totaling $8,651,000, up from $7,525,000 in 2001. Likewise, salaries and
employee benefits increased $989,000 or 15.1% in 2001 compared to 2000.
The increases were primarily Bank related payroll and benefits expense
incurred through normal merit increases, increased incentive compensation
and to a greater extent, additions to staff, along with rising costs of
medical insurance. The number of full time equivalent employees rose from
136 in 2000 to 151 in 2001 and to 169 in 2002. Increases in payroll are
anticipated, as Peoples continues to grow in size, locations and product
offerings with additional staff being added as required.

Occupancy expense increased by $122,000 or 13.9% to $1,000,000 in
2002, up from $878,000 in 2001 and $683,000 in 2000. These expenses were
anticipated as Peoples expanded its facilities. The increased expense in
2002 was attributed to a full year of operating expenses from the Rising
Sun Branch, which opened in December 2001 and additional leased office
space for Peoples' mortgage originators. While these facilities may
contribute to higher occupancy expenses, it is anticipated these
facilities will generate additional income through the expansion of
services to our customers, community and new business development.
Increases in occupancy expense are anticipated as Peoples continues to
grow and expand its facilities.

Furniture and equipment expense reflected an increase of $110,000 or
17.9% in 2002, to $725,000 compared to $615,000 in 2001 and $574,000 in
2000. Increased depreciation expense was the primary contributor to the
increase. Furniture and equipment expense is anticipated to increase in
2003, as a result of Peoples' desire to keep current with technological
advances and absorbing the additional operating costs associated with the
Georgetown branch which opened in November 2002.

Communication and supplies reflects a decrease of $10,000 or 1.5% to
$679,000 in 2002 from $689,000 in 2001 and $646,000 in 2000. This
decrease in expense results from improved management of the supply
inventory partially offset with higher communications expense from
business growth.

Taxes, other than income, totaled $393,000 in 2002, $371,000 in 2001
and $333,000 in 2000. These taxes are primarily the Pennsylvania Bank
Shares Tax which represents .86%, .86% and .84% of average stockholders'
equity, respectively.

Professional fees decreased by $104,000 to $239,000 in 2002 compared
to $343,000 in 2001 and $417,000 in 2000. The professional fees for 2002
and 2001 are attributed to business growth with varying complexities
requiring outside accounting, consulting and legal expertise. The levels
of expenditures in 2000 related to the acquisition of the investment
advisory firm and the formation of the holding company. Professional fees
are anticipated to be higher in 2003 as the requirements of the Sarbanes-
Oxley Act are implemented.

Other operating expense increased by 13.0% to $2,275,000 in 2002,
after increasing to $2,013,000 in 2001 from $1,912,000 in 2000. The
increase in 2002, was the result of various category increases and
decreases, the largest of which were a $75,000 increase in loan
origination related expenses consistent with increased loan volume, a
$67,000 increase in advertising and marketing, a $35,000 increase in
education (including tuition reimbursement) and training of staff and a
$35,000 increase in fees paid by Peoples on deposit accounts with other
banks. Likewise, the increase in 2001, was the result of various category
increases and decreases, the largest of which were a $39,000 increase in
computer and software costs, a $32,000 increase in on-line banking charges
as Peoples utilizes advances in new technology, and $30,000 to comply with
information security regulations. The increases in operating expenses are
a result of expanding Peoples' marketing efforts, business growth and
developing our staff as Peoples places more emphasis on promoting our
services and targeting our customer base.

Income Taxes

Total income tax expense was $1,708,000 for 2002 compared to
$1,470,000 for 2001 and $1,565,000 in 2000. Income taxes for 2002 include
$18,000 in Maryland State income taxes compared to $4,000 in 2001, when
Peoples' first branch office opened in Maryland.

Federal income taxes as a percentage of income before income taxes
was 25.8%, 25.8% and 27.8% for the years ended 2002, 2001 and 2000,
respectively. Peoples' lower effective federal tax rate, compared to the
statutory rate of 34%, is a result of several tax-free investments. Tax
credits are realized on an investment in a community development project,
along with an additional percentage of income derived from tax-exempt
investments and loans, and tax-exempt income earned on a life insurance
contract.

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

Return on Average Equity and Average Assets

Return on average equity (ROE) and return on average assets (ROA) are
commonly 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 by
average stockholders' equity. Peoples' ROE increased to 10.70% for 2002,
from 9.78% in 2001. Peoples' ROE for 2000 was 10.19%. Return on average
assets is derived by dividing net income by average assets. Peoples' ROA
for the years ended 2002, 2001 and 2000 was 1.27%, 1.23% and 1.30%,
respectively.

Financial Condition

Securities

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

Peoples' securities are classified as either held-to-maturity or
available-for-sale. Securities in the held-to-maturity category are
accounted for at amortized cost. Available-for-sale securities are
accounted for at fair value with unrealized gains and losses, net of
taxes, reported as a separate component of comprehensive income. In
addition, there have been no transfers of securities from available-for-
sale to held-to-maturity, nor were there any securities sold.

While Peoples generally intends to hold its investment portfolio
until maturity, Peoples classifies new purchases as available-for-sale.
The only held-to-maturity securities on the books at the end of 2001 were
redeemed during 2002, leaving the entire investment portfolio classified
as available-for-sale. The fair value of these securities improved due to
the lower rate environment in 2002. This resulted in net unrealized gains
at year-end 2002 of $2,258,000, an increase of $1,261,000 since year-end
2001, which is reflected as accumulated other comprehensive income of
$1,490,000 in stockholders' equity, net of deferred income taxes. The
accumulated other comprehensive income at December 31, 2001 totaled
$659,000, net of deferred taxes.

During 2002, Peoples recorded a write-down of $84,000 on an impaired
security. This bond is a municipal bond under a Housing and Urban
Development Program. The balance of the bond, net of the $84,000 reserve,
is $476,000. Management continues to closely monitor this security.

The following tables set forth the composition of the securities
portfolio and the securities maturity schedule, including weighted average
yield, as of the dates indicated.

Securities

Securities Maturity Schedule

Available-For-Sale securities are accounted for at fair value.

Weighted average yields are calculated on a fully tax equivalent basis
assuming a tax rate of 34%.

At year-end 2002, securities totaled $63,518,000, including
$2,258,000 in net unrealized gains. Comparatively, securities totaled
$69,544,000 at year-end 2001, including $997,000 in net unrealized gains,
and $51,675,000, including $184,000 in net unrealized gains, at year-end
2000. At year-end 2002, 26.6% of the portfolio is held in direct
obligations of the U.S. Treasury, most of which have relatively short
maturities of less than five years. Of the total securities portfolio,
75.3% matures in less than five years, with 17.6% maturing in less than
one year and 57.7% maturing in the one to five year category. The
securities portfolio is structured to provide a dependable flow of
earnings, while providing a consistent source of liquidity. The
securities 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' earning
assets as of December 31, 2002. Loans, net of unearned income, at year-
end 2002 were $302,161,000, an increase of $49,989,000 or 19.8% from year-
end 2001. The increase in loans outstanding was centered in real estate
mortgages, which grew by $27,106,000 or 14.2% and includes residential,
commercial and agricultural mortgage loans; and real estate construction
which grew $14,171,000 or 166.5%. Non-real estate secured installment
loans also grew by $5,324,000 along with an increase of $3,328,000 in
commercial, financial and agricultural loans.

The following tables set forth information on the composition of
Peoples' total loans, and contractual maturities for commercial and
construction loans as of the dates indicated.

Loans Outstanding

Loan Maturities
Commercial/Construction Loans

Scheduled principal repayments prior to the loan's maturity date are
not reflected because such information is not readily available.

Loan maturities do not include $8,000 in nonaccrual commercial and
construction loans.

The composition of the loan portfolio, at year-end 2002, was
approximately 15.4% commercial, financial, agricultural and industrial
loans, 7.5% real estate construction loans, 72.2% real estate mortgage
loans, which include commercial, agricultural and residential loans
secured by real estate and 4.9% installment loans.

Peoples has a significant concentration of residential and commercial
mortgage loans collateralized by properties located in southern Chester
County. Approximately, $80,791,000 in loans was outstanding to real
estate investors. Included in this category are a diverse group of
properties and borrowers, the larger of which are: $31,311,000 are
mortgages on commercial rental properties (stores, offices and convenience
centers, etc.), $14,645,000 are mortgage loans on residential rental
properties, $14,519,000 are construction loans to residential builders,
$8,914,000 are mortgages on mobile homes and land and $5,134,000 are land
sub-division projects. These amounts do not include mortgages on one to
four family owner-occupied properties.

Peoples also has a significant portion of loans outstanding to the
agricultural sector totaling $50,697,000. Approximately, $29,043,000 of
these loans are outstanding to the mushroom industry, which represents
9.6% of total loans, and about $21,654,000 are outstanding to other
segments of the farm community.

Non-Performing Assets

Non-performing assets include loans on a non-accrual basis, loans
past due more than ninety days and still accruing, troubled debt
restructurings and foreclosed real estate. These groups of assets
represent the asset categories posing the greatest risk of loss to
Peoples. Non-accrual loans are loans no longer accruing interest, due to
apparent financial difficulties of the borrower. Peoples normally places
loans which are contractually past due 90 days or more on nonaccrual
status, unless the loan is considered by management to be both well
secured and in the process of collection or secured by a one to four
family residential property. Troubled debt restructurings result when an
economic concession has been made to a borrower taking the form of a
reduction or deferral of interest and/or principal. Peoples has no
troubled debt restructurings. Foreclosed real estate includes real estate
obtained in foreclosure or in lieu of foreclosure and is recorded at the
lower of the outstanding balance at the time of foreclosure or fair value
minus estimated costs to sell. Gains and losses on the sale of other real
estate owned and write-downs resulting from periodic re-evaluations of the
property are charged to other operating expenses.

The following table sets forth Peoples' non-performing assets as of
the dates indicated.

Non-Performing Assets

There were no troubled debt restructurings for any of the periods
presented above.

Total non-performing assets at year-end 2002 were $3,510,000, a
decrease of $378,000 or 9.7% since the beginning of the year. In
contrast, non-performing assets increased $3,248,000 or 507.5% from year-
end 2000 to 2001. Total non-performing loans to total loans at year-ends
2002, 2001 and 2000 were 1.16%, 1.53% and .28%, respectively. The
increase in non-performing loans during 2001 was primarily concentrated in
one commercial mortgage, which remained in non-performing loans during
2002.

Total loans past due 90 days or more at year-end 2002 were $47,000, a
decrease of $143,000 since the beginning of the year. Comparatively,
accruing loans 90 days past due increased $3,000 from year-end 2000 to
2001.

The foreclosed real estate of $40,000 that Peoples held at year-end
2001, which consisted of a single-family residence, was sold in 2002.
Peoples had no foreclosed real estate at year-end 2002.

Allowance for Loan Losses

The allowance for loan losses is a reserve established through
charges to earnings in the form of a provision for loan losses. The
allowance is maintained to absorb losses, which are inherent in a loan
portfolio. 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, borrowers' financial condition, current charge-offs, trends in
volume and severity of past due loans and classified loans, potential
problem loans and supporting collateral. In addition, various regulatory
agencies, as part of their examination, review the adequacy of the
allowance and from time to time Peoples may employ a third party to review
the adequacy of the reserve. Such agencies may recommend that Peoples
change the level of the reserve based on their judgments of information
available to them at the time of examination.

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

Analysis of Allowance for Loan Losses

Allocation of the Allowance for Loan Losses

At December 31, 2002, the allowance for loan losses to total loans
was 1.49% and was 1.66% and 1.74% at year-ends 2001 and 2000,
respectively. See the "Provision for Loan Losses" for information on the
additions to the allowance. Net charge-offs, which also affect the
allowance, totaled $159,000 and $70,000 for 2002 and 2001, whereas 2000
reflected net recoveries totaling $114,000. The percent of net charge-
offs to average loans was .06% and .03% in 2002 and 2001, respectively,
compared to net recoveries to average loans of .05% in 2000.

The unallocated portion of the allowance is intended to provide for
possible losses that are not otherwise accounted for and to compensate for
the imprecise nature of estimating future loan losses. The unallocated
portion of the allowance has decreased $613,000 from year-end 2000 to
year-end 2002, as unallocated portions have been allocated to specific
credits. Management believes the allowance is adequate to cover the
inherent risks 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 in any category.

Deposits

Management believes that the development and retention of deposits is
the basis of sound growth and profitability. These deposits provide the
primary source of funding for loans and securities. As of December 31,
2002, deposits totaled $322,136,000 up $39,674,000 or 14.1% from year-end
2001. Comparatively, total deposits grew $15,374,000 or 5.8% between
year-end 2001 and 2000.

Contributing to the growth in deposits was Peoples' continued
expansion and business development within its market area, along with the
downturn in the stock market making deposit accounts an attractive, safe
alternative for investors. The 2002 growth was reflected in all
categories, with increases of $11,290,000 in demand deposits, $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. In comparison, during
2001 demand deposits grew $7,430,000, money market deposits increased
$5,782,000, NOW and Super NOW accounts grew $3,183,000 along with an
increase of $1,044,000 in time deposits. These increases were partially
offset by a decrease of $2,065,000 in savings accounts. The decrease in
savings was impacted by $5,800,000 in trust department savings funds that
were transferred by the Bank during the first quarter of 2001 to
alternative investment options outside the Bank

The following tables set forth information on the composition of
Peoples' deposits and time deposits of $100,000 or more as of the dates
indicated.

Average Deposits by Major Classification

Time Deposits of $100,000 or More
Maturity Schedule

Large dollar certificates of $100,000 or more are generally
considered more volatile than other deposits. Peoples' large dollar
certificates and individual retirement accounts (IRAs) totaled $24,445,000
at year-end 2002, reflecting an increase of $2,024,000, after increasing
$2,015,000 in 2001 to $22,421,000 from $20,406,000 at year-end 2000. Even
with the declining rate environment, business development resulting in new
account relationships contributed to the 2002 increase.

Borrowings

Long-term borrowings from the Federal Home Loan Bank totaled
$29,706,000, at year-end 2002. Peoples borrowed $5,000,000 in 2001 and
borrowed an additional $7,000,000 in 2002. The increases in 2001 and 2002
resulted from favorable long-term rates and an in-house program that
matched the long-term debt to similar maturity mortgages to be held in
Peoples' loan portfolio. Peoples will continue to target deposits as its
primary funding source, since deposits are generally less costly and
provide an opportunity to expand our customer relationships.

Interest Rate Sensitivity

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

Rate sensitive assets and rate sensitive liabilities are those whose
rates or yields are subject to change within a defined time period, due to
maturity or a floating market rate. The risk to Peoples results from
interest rate fluctuations to the extent that there is a difference
between the amount of Peoples' rate sensitive assets and the amount of
rate sensitive liabilities within specified periods. Peoples monitors its
rate sensitivity in order to reduce its vulnerability to interest rate
fluctuations while maintaining adequate capital and acceptable levels of
liquidity. Peoples' asset and liability policy, along with monthly
financial reports and quarterly financial simulations, supplies management
with guidelines to evaluate and manage Peoples' rate sensitivity.

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

The following table sets forth Peoples' interest sensitivity analysis
as of the date indicated.

Interest Sensitivity Analysis

The Interest Sensitivity Analysis includes certain assumptions on the
re-pricing of NOW and savings accounts. Generally, these accounts are
less sensitive to interest rate changes and 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 rate sensitive, thereby placing them in the "Under 3 Month"
category, placing an additional 22% of savings in the "1 Year through 5
Years" category and placing the remainder in the "Over 5 Years" category.

As indicated in the Interest Sensitivity Analysis for December 31,
2002, Peoples' cumulative one year gap was a positive $32,078,000, which
means assets will reprice faster than liabilities. Because of the extent
to which rates have declined in 2001 and 2002, Peoples has become more
sensitive to future rate declines and would expect added compression of
the net interest margin. Currently, Peoples has 34.2% of its deposits in
NOW and savings accounts, which it considers core deposits, and which
normally carry lower rates relative to other types of deposits. Because
of this, these accounts have historically contributed significantly to the
net interest margin. However, there is an ultimate floor to which the
rates on these accounts can fall. Under current conditions, the inability
to further decrease these deposit rates while loan and other earning asset
rates continue to drop and re-price at lower rates could result in further
compression of the net interest margin.

Financial simulation is another tool to monitor interest rate risk.
Simulation presents a picture of the effect interest rate changes have on
net interest income. Assumptions and estimates are used in the
preparation of the simulation and actual values may differ from those
presented. The simulations include the assumption that the rates on NOW
and savings accounts would change only 25 basis points and rates on money
market accounts would only change 50 basis points in a +/-200 basis point
rate shock. In addition, these simulations do not portray other actions
management might take in response to changes in market rates. The
following is an analysis of possible changes in Peoples' net interest
income, for a +/- 200 basis point rate shock over a one year period
compared to a flat or unchanged rate scenario.

2001 2002
Change in Percent Change in Percent Change in
interest rates Net Interest Income Net Interest Income
============== =================== ====================
+ 200 basis points 1.1% 3.0%
Flat rate 0.0% 0.0%
- - 200 basis points -1.4% -3.6%

The percent change is obtained by dividing the increase or decrease
in net interest income for the applicable year following application of
the rate shock analysis by the total net interest income for such year.
The net interest income at risk position reflected in the chart is within
the guidelines set by Peoples' asset/liability policy. For 2002, an
increase of 200 basis points could result in a 3.0% increase in net
interest income, whereas, a 200 basis point decrease could result in a
3.6% decrease in net interest income.

The drop in the Federal Reserve Bank's discount and federal funds
rates by 475 basis points during 2001 and an additional decrease of 50
basis points in 2002 actually put to the test Peoples' ability to
effectively manage its interest rate sensitivity. During the past two
years, Peoples has maintained its net interest margin at 4.71%. However,
with the continued low rate environment and the additional federal funds
rate decrease in November 2002, Peoples has been experiencing compression
in the net interest margin ending at 4.53% for the month of December 2002.

Liquidity and Capital Resources

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. Liquidity is
essential to compensate for fluctuations in the balance sheet and provide
funds for growth.

The primary source of liquidity is Peoples' growing core deposit
base. A loyal customer base and a strong capital position provide a
stable foundation from which to work. The stability of the core deposits
is reflected in a comparison of year-end balances to yearly averages.
Core deposits at year-end 2002 totaled $297,691,000 and averaged
$277,560,000 for the year, this is consistent with the increase in
deposits for the year. Likewise, year-end 2001 core deposits totaled
$260,041,000 and averaged $248,487,000 for the year.

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

Peoples' loan to deposit ratio for 2002 was maintained at an average
of 91.3% and ended the year at 93.8%, compared to an average of 87.2% in
2001, ending the year at 89.3%. The average loan to deposit ratio was
89.2% in 2000.

Peoples' financial statements do not reflect various commitments that
are made in the normal course of business, which may involve some
liquidity risk. These commitments consist mainly of unfunded loans and
letters of credit made under the same standards as on-balance sheet
instruments. Unused commitments, at December 31, 2002 totaled
$67,952,000. This consisted of $20,983,000 in commercial real estate,
construction, and land development loans, $11,422,000 in home equity lines
of credit, $5,638,000 in standby letters of credit and the remainder in
other unused commitments. Because these instruments have fixed maturity
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
funded in the normal course of operations. Peoples has no investment in
or financial relationship with any unconsolidated entities that are
reasonably likely to have a material effect on liquidity or the
availability of capital resources.

The following table represents Peoples' aggregate on and off balance
sheet contractual obligations to make future payments.

Contractual Obligations

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

The greater the capital resources, the more likely Peoples will be
able to meet its cash obligations and unforeseen expenses. Peoples' strong
capital position is the result of retained earnings. The dividend payout
ratio was 36.1% in 2002 compared to 34.9% and 34.4% in years 2001 and
2000, respectively. 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
increase was a result of net income supplemented with a $831,000
unrealized gain on securities available-for-sale, net of taxes, and
reduced by the dividend payout of $1,753,000 and $710,000 in treasury
stock purchases. Likewise, stockholders' equity at the end of 2001
totaled $43,642,000, an increase of $2,438,000 or 5.9% over year-end 2000.
The increase was a result of net income supplemented with a $537,000
unrealized gain on securities available-for-sale, net of taxes, and
reduced by the dividend payout of $1,478,000 and $857,000 in treasury
stock.

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

The second plan, the Board approved in November 2001 for the
repurchase of $1,000,000 in Peoples stock with an original termination
date of October 2002. The Board granted this plan an extension to June
2003. Under this plan 36,843 shares have been repurchased at a cost of
$795,384 through December 31, 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. As of December 31,
2002, no shares have been purchased under the third plan.

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

Capital Ratios

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

(2) At December 31, 2000, Peoples' ratios did not differ
significantly from the Bank's ratios.

Peoples had a leverage ratio of 11.2%, a Tier I capital to risk-based
assets ratio of 14.1%, and a total capital to risk-based assets ratio of
15.4% at year-end 2002. At December 31, 2002, the Bank had a leverage
ratio of 9.6%, a Tier I capital to risk-based assets ratio of 11.9%, and a
total capital to risk-based assets ratio of 13.2%. These ratios exceed the
federal regulatory minimum requirements for a "well capitalized" bank. The
ratios indicate that Peoples and the Bank both exceed the federal
regulatory minimum requirements to be considered "well capitalized."

Peoples is not under any agreement with the regulatory authorities
nor is it aware of any current recommendations by the regulatory
authorities, that if implemented would have a material effect on Peoples'
capital, liquidity or its operations.

Inflation

The impact of inflation upon banks differs from the impact upon non-
banks. The majority of assets and liabilities of a bank are monetary in
nature and therefore change with movements in interest rates. The exact
impact of inflation on Peoples is difficult to measure. Inflation may
cause operating expenses to increase at a rate not matched by increased
earnings. Inflation may also affect the borrowing needs of consumers,
thereby affecting growth of Peoples' assets. Inflation may also affect
the general level of interest rates, which could have an effect on
Peoples' profitability. However, as discussed previously, Peoples strives
to manage its interest sensitive assets and liabilities offsetting the
effects of inflation.

Market for Peoples' Common Stock

The authorized capital stock of Peoples consists of 10,000,000 shares
of common stock, par value $1.00 per share, of which 2,965,284 shares were
outstanding as of January 31, 2003. There were approximately 728
stockholders of record as of January 31, 2003. Peoples' common stock is
not listed or traded on a recognized securities exchange. Peoples' common
stock is traded in the over-the-counter market under the symbol PPFR and
trading in Peoples' common stock is limited in volume.

The following table sets forth the high and low prices for Peoples'
common stock for each quarterly period for the last two years.

2002 2001
High Low High Low
============== ==============
First Quarter $22.35 $20.53 $20.25 $17.25
Second Quarter $22.25 $21.00 $21.00 $19.25
Third Quarter $23.50 $21.45 $22.00 $20.25
Fourth Quarter $22.75 $21.50 $22.75 $20.50

Holders of shares of common stock are entitled to receive such
dividends when, as and if declared by Peoples' Board of Directors, out of
funds legally available for that purpose. Dividends payable by the Bank
to Peoples are the primary source of funds for the payment of dividends on
Peoples' stock. Under Pennsylvania banking law, a restriction is placed
on the availability of the Bank's surplus for payment of dividends.

Peoples and the Bank have paid quarterly cash dividends on its common
stock since 1988. The following sets forth the cash dividends declared per
share on Peoples' common stock during the two years ended December 31,
2002.

Per-Share Dividend
2002 2001
==================
First Quarter $0.13 $0.12
Second Quarter $0.13 $0.12
Third Quarter $0.13 $0.12
Fourth Quarter (1)$0.20 $0.13

(1) The dividend for the fourth quarter of 2002, included a
regular dividend of $.15 and a special dividend of $.05.

Item 7A - Quantitative and Qualitative Disclosures about Market Risk

Incorporated by reference from Part II, Item 7 "Management's
Discussion and Analysis of Financial Conditions and Results of Operations-
Interest Rate Sensitivity" of this Form 10-K.

Item 8 - Financial Statements and Supplementary Data

Independent Auditor's Report

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

We have audited the accompanying consolidated balance sheets of
Peoples First, Inc. and its subsidiary as of December 31, 2002 and 2001,
and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended
December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Peoples First, Inc. and its subsidiary as of December 31, 2002 and 2001,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.

/s/Beard Miller Company, LLP

Reading, Pennsylvania
January 10, 2003

Consolidated Balance Sheets

December 31,
==================
2002 2001
======== =======
(In Thousands)

Assets
Cash and due from banks $ 14,357 $ 11,391
Interest-bearing deposits with banks 1,061 814
Federal funds sold 8,919 9,429
Securities available for sale, at fair value 63,518 66,699
Securities held to maturity, fair value
2002 $-0-; 2001 $2,845 - 2,845
Loans, net of allowance for loan losses
2002 $4,503; 2001 $4,182 297,658 247,990
Investment in FHLB stock, at cost 2,041 1,368
Bank premises and equipment, net 11,408 11,007
Accrued interest receivable and other assets 10,055 9,806
-------- --------
Total Assets $409,017 $361,349
======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand, non-interest bearing $ 79,914 $ 68,624
NOW and Super NOW 59,259 55,650
Money market funds 36,635 26,153
Savings 51,022 41,932
Time 95,306 90,103
-------- --------
Total Deposits 322,136 282,462
Securities sold under agreements to repurchase 7,855 8,710
Long-term debt 29,706 24,349
Accrued interest payable and other liabilities 2,456 2,186
-------- --------
Total Liabilities 362,153 317,707
-------- --------
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 27,944 24,843
Accumulated other comprehensive income 1,490 659
Treasury stock, at cost 2002 87,924 shares;
2001 55,073 shares (1,795) (1,085)
-------- --------
Total Stockholders' Equity 46,864 43,642
-------- --------
Total Liabilities and Stockholders' Equity $409,017 $361,349
======== ========

See Notes to Consolidated Financial Statements

Consolidated Statements of Income

Years Ended December 31,
============================
2002 2001 2000
======= ======= ========
(In Thousands
Except per share Data)

Interest Income
Loans receivable, including fees $19,375 $19,153 $19,045
Securities:
Taxable 2,595 2,428 2,395
Tax-exempt 701 714 547
Other 242 1,135 1,482
------- ------- -------
Total Interest Income 22,913 23,430 23,469
------- ------- -------
Interest Expense
Deposits 5,171 7,641 8,053
Short-term borrowings 60 189 267
Long-term debt 1,656 1,237 1,198
------- ------- -------
Total Interest Expense 6,887 9,067 9,518
------- ------- -------
Net Interest Income 16,026 14,363 13,951
Provision for Loan Losses 480 330 465
------- ------- -------
Net Interest Income after Provision for Loan Losses 15,546 14,033 13,486
------- ------- -------
Other Income
Service charges on deposit accounts 1,500 1,338 1,175
Income from fiduciary activities 582 539 474
Mortgage banking activities 872 476 186
Impairment of securities (84) - (326)
Realized gain on disposal of securities 387 - -
Investment management fees 682 749 808
Other income 1,039 1,005 925
------- ------- -------
Total Other Income 4,978 4,107 3,242
------- ------- -------
Other Expenses
Salaries and wages 8,651 7,525 6,536
Occupancy 1,000 878 683
Furniture and equipment 725 615 574
Communications and supplies 679 689 646
Professional fees 239 343 417
Taxes, other than income 393 371 333
Other 2,275 2,013 1,912
------- ------- -------
Total Other Expenses 13,962 12,434 11,101
------- ------- -------
Income before Income Taxes 6,562 5,706 5,627
Income Tax Expense 1,708 1,470 1,565
------- ------- -------
Net Income $ 4,854 $ 4,236 $ 4,062
======= ======= =======
Weighted Average Number of Shares Outstanding 2,978 3,022 3,052
======= ======= =======
Basic Earnings per Share $ 1.63 $ 1.40 $ 1.33
======= ======= =======

See Notes to Consolidated Financial Statements

Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2002, 2001 and 2000

Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income (Loss) Stock Total
====== ======= ============== ============= ======== ========
(In Thousands)

Balance - December 31, 1999 $2,996 $16,197 $19,320 $(334) $ - $38,179
-------
Comprehensive income:
Net income - - 4,062 - - 4,062
Net change in unrealized gains
(losses) on securities
available for sale, net of taxes - - - 456 - 456
-------
Total Comprehensive Income 4,518
-------
Cash dividends declared,
$.46 per share - - (1,397) - - (1,397)
Common stock issued in acquisition 57 (25) 100 - - 132
Purchase of treasury stock - - - - (228) (228)
------ ------- ------- ------ ------- -------
Balance - December 31, 2000 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 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 $16,172 $27,944 $1,490 $(1,795) $46,864
====== ======= ======= ====== ======= =======

See Notes to Consolidated Financial Statements

Consolidated Statements of Cash Flows

Years Ended December 31,
============================
2002 2001 2000
======= ======= ========
(In Thousands
Except per share Data)

Cash Flows from Operating Activities
Net income $ 4,854 $ 4,236 $ 4,062
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 913 816 639
Net accretion on securities (29) (54) (13)
Realized gain on disposal of securities (387) - -
Impairment of securities 84 - 326
Provision for loan losses 480 330 465
Earnings on life insurance (191) (196) (205)
Deferred income taxes (17) (74) (325)
Loss on sale of premises and equipment and
foreclosed real estate 46 - -
Increase in other assets (693) (1,601) (894)
Increase (decrease) in other liabilities 66 (734) 620
-------- -------- ------
Net Cash Provided by Operating Activities 5,126 2,723 4,675
-------- -------- ------

Cash Flows from Investing Activities
Net (increase) decrease in interest
bearing deposits with banks (247) 13,182 (9,780)
Net (increase) decrease in federal funds sold 510 8,586 (16,920)
Securities available for sale:
Proceeds from maturities 24,380 27,935 14,117
Purchases (19,993) (45,021) (18,593)
Securities held to maturity, proceeds from maturities 3,231 85 75
Net increase in loans receivable (50,148) (26,458) (18,083)
Purchase of premises and equipment (1,305) (2,081) (4,101)
Proceeds from sales of premises and equipment and
foreclosed assets 169 - -
Purchase of FHLB stock (673) - -
-------- ------- -------
Net Cash Used in Investing Activities (44,076) (23,772) (53,285)
-------- ------- -------

Cash Flows from Financing Activities
Net increase in non-interest bearing demand, NOW,
Super NOW, money market funds and savings deposits 34,471 14,330 29,986
Net increase in time deposits 5,203 1,044 5,873
Proceeds from long-term debt 7,000 5,000 8,000
Repayments on long-term debt (1,643) (407) (4,354)
Net increase (decrease) in securities sold under
agreements to repurchase (855) 2,010 1,950
Dividends paid (1,550) (1,453) (1,361)
Purchase of treasury stock (710) (857) (228)
-------- ------- -------
Net Cash Provided by Financing Activities 41,916 19,667 39,866
-------- ------- -------
Net Increase (Decrease) in Cash and Due from Banks 2,966 (1,382) (8,744)

Cash and Due from Banks - Beginning 11,391 12,773 21,517
-------- ------- ------
Cash and Due from Banks - Ending $14,357 $11,391 $12,773
======= ======= ======
Supplementary Cash Flows Information
Interest paid $ 7,113 $ 9,340 $ 9,224
======= ======= =======
Income taxes paid $ 1,560 $ 1,545 $ 2,148
======= ======= =======

See Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements

Note 1 - Nature of Operations and Basis of Presentation

The consolidated financial statements include the accounts of Peoples
First, Inc. and its wholly-owned subsidiary, The Peoples Bank of Oxford
(Bank) and its subsidiary (collectively "Peoples"). All material
intercompany transactions have been eliminated. Peoples First, Inc. was
formed July 27, 2000 and is subject to regulation of the Federal Reserve
Bank.

Peoples First, Inc. is a one-bank holding company headquartered in
Oxford, Pennsylvania and provides full banking services, including trust
services through its subsidiary. The Bank operates under a state bank
charter and is subject to regulation of the Pennsylvania Department of
Banking and the Federal Deposit Insurance Corporation. The areas served
by the Bank are principally Chester County and southern Lancaster County
in Pennsylvania and Northern Cecil County, Maryland.

On April 10, 2000, Peoples issued 56,918 shares of common stock, with
a fair value of $1.4 million, to acquire all of the outstanding common
stock of Wilmerding & Associates, Inc. ("Wilmerding"), an investment firm.
Wilmerding is a wholly-owned subsidiary of the Bank and the transaction
has been accounted for as a pooling of interests.

Note 2 - Summary of Accounting Policies

Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Presentation of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents are
defined as those accounts included in the balance sheet caption "Cash and
due from banks."

Securities

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

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

Management determines the appropriate classification of debt
securities at the time of purchase and re-evaluates such designation as of
each balance sheet date.

Federal law requires a member institution of the Federal Home Loan
Bank system to hold stock of its district Federal Home Loan Bank according
to a predetermined formula. The stock is carried at cost.

Loans Receivable

Loans generally are stated at their outstanding unpaid principal
balances, net of an allowance for loan losses and any deferred fees or
costs. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred
and recognized as an adjustment of the yield (interest income) of the
related loans. Peoples is generally amortizing those amounts over the
contractual life of the loan.

The accrual of interest is discontinued when the contractual payment
of principal or interest has become 90 days past due or management has
serious doubts about further collectibility of principal or interest, even
though the loan is currently performing. A loan may remain on accrual
status if it is in the process of collection and is either guaranteed or
well secured. When a loan is placed on nonaccrual status, unpaid interest
credited to income in the current year is reversed and unpaid interest
accrued in prior years is charged against the allowance for loan losses.
Interest received on nonaccrual loans generally is either applied against
principal or reported as interest income, according to management's
judgment as to the collectibility of principal. Generally, loans are
restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period
of time and the ultimate collectibility of the total contractual principal
and interest is no longer in doubt.

Allowance for Loan Losses

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

The allowance for loan losses is maintained at a level considered
adequate to provide for losses that can be reasonably anticipated.
Management's periodic evaluation of the adequacy of the allowance is based
on Peoples' past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, composition of
the loan portfolio, current economic conditions, and other relevant
factors. This evaluation is inherently subjective as it requires material
estimates that may be susceptible to significant change, including the
amounts and timing of future cash flows expected to be received on
impaired loans.

A loan is considered impaired when, based on current information and
events, it is probable that Peoples will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and
construction loans by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, Peoples does not separately
identify individual consumer and residential mortgage loans for impairment
disclosures.

Premises and Equipment

Premises and equipment are stated at cost less accumulated
depreciation. Depreciation expense is calculated principally on the
straight-line method over the respective assets estimated useful lives.

Advertising Costs

Peoples follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense was $359,000, $292,000 and
$286,000 in 2002, 2001 and 2000, respectively.

Income Taxes

Deferred income tax assets and liabilities are determined based on
the differences between financial statement carrying amounts and the tax
basis of existing assets and liabilities. These differences are measured
at the enacted tax rates that will be in effect when these differences
reverse. As changes in tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provision for income taxes.

Earnings per Common Share

Peoples has a simple capital structure. Basic earnings per share
represents income available to common stockholders divided by the weighted
average number of common shares outstanding during the period.

Off-Balance Sheet Financial Instruments

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

Trust Assets

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

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 as unrealized gains and losses on
available for sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income,
are components of comprehensive income.

The components of other comprehensive income and related tax effects
are as follows:

Years Ended December 31,
========================
2002 2001 2000
====== ====== ======
Unrealized holding gains on
available for sale securities $1,261 $813 $690
Reclassification adjustment for gains
realized in income on available
for sale securities - - -
------ ---- ----
Net Unrealized Gains 1,261 813 690
Income tax effect (430) (276) (234)
------ ---- ----
Net of Tax Amount $ 831 $537 $456
====== ==== ====

Segment Reporting

Peoples acts as an independent community financial service provider
and offers traditional banking and related financial services to
individual, business and government customers. Through its branch and
automated teller machine network, the Bank offers a full array of
commercial and retail financial services, including the taking of time,
savings and demand deposits; the making of commercial, consumer and
mortgage 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
of funding loan demand, between the commercial, retail, mortgage banking
and trust operations of Peoples. As such, discrete information is not
available and segment reporting would not be meaningful.

The operations of Wilmerding, the Bank's investment management
subsidiary, are not material to the consolidated financial statements.

Recently Issued Accounting Standards

In July of 2001, the Financial Accounting Standards Board issued
Statement No. 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 became
effective for Peoples on January 1, 2003.

In July of 2002, the Financial Accounting Standards Board issued
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which nullifies EITF Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This Statement
delays recognition of these costs until liabilities are incurred, rather
than at the date of commitment to the plan, and requires fair value
measurement. It does not impact the recognition of liabilities incurred
in connection with a business combination or the disposal of long-lived
assets. The provisions of this Statement are effective for exit or
disposal activities initiated after December 31, 2002.

In October of 2002, the Financial Accounting Standards Board issued
Statement No. 147, "Acquisitions of Certain Financial Institutions." This
Statement provides guidance on accounting for the acquisition of a
financial institution, including the acquisition of part of a financial
institution. The Statement defines criteria for determining whether the
acquired financial institution meets the conditions for a "business
combination." If the acquisition meets the conditions of a "business
combination," the specialized accounting guidance under Statement No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions"
will not apply after September 30, 2002, and the amount of any
unidentifiable intangible asset will be reclassified to goodwill upon
adoption of Statement No. 147. Additionally, Statement No. 147 will
require restatement of the financial statements to present the balance
sheet and income statement as if the amount accounted for under Statement
72 as an unidentifiable intangible asset had been reclassified to goodwill
as of the date Statement No. 142, "Goodwill and Other Intangible Assets."
The transition provisions were effective on October 1, 2002.

Adoption of these statements is not expected to have a material
impact on Peoples' financial condition or results of operations.

Note 3 - Securities

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

Investment Securities

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
========= ========== ========== =======
(In Thousands)

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
======= ====== === =======
December 31, 2001:
Available for Sale:
U.S. Treasury securities $20,986 $ 532 $36 $21,482
U.S. Government agencies 27,982 263 24 28,221
States and political subdivisions 12,542 148 22 12,668
Corporate securities 4,192 136 - 4,328
------- ------ --- -------
Total $65,702 $1,079 $82 $66,699
======= ====== === =======
Held to Maturity:
States and political subdivisions $ 2,845 $ - $ - $ 2,845
======= ====== === =======

There were no sales of securities during the years ended December 31,
2002, 2001 and 2000. During the years ended December 31, 2002 and 2000,
Peoples wrote down securities to their fair value which it deemed to be
other than temporarily impaired by $84,000 and $326,000, respectively.
The tax benefit applicable to the writedowns was $29,000 in 2002 and
$111,000 in 2000. During 2002, the held to maturity security that Peoples
wrote down in 2000 was called and a $387,000 gain was realized.

Securities with an amortized cost of $38,167,000 and $41,518,000 at
December 31, 2002 and 2001, respectively, were pledged to secure public
deposits, securities sold under agreements to repurchase and for other
purposes as required or permitted by law.

The amortized cost and fair value of securities as of December 31,
2002, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities or call dates because borrowers may
have the right to prepay obligations with or without call or prepayment
penalties.

Investment Securities Maturity Schedule

Amortized Fair
Cost Value
========= =======
(In Thousands)
Due in one year or less $11,032 $11,167
Due after one year
through five years 35,359 36,643
Due after five years
through ten years 11,477 11,979
Due after ten years 3,392 3,729
------- -------
$61,260 $63,518
======= =======

Note 4 - Loans Receivable and Allowance for Loan Losses

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

Loans Outstanding

2002 2001
======== ========
(In Thousands)
Commercial, financial
and agricultural $ 46,477 $ 43,149
Real estate, construction 22,684 8,513
Real estate, mortgage 218,650 191,544
Installment loans to individuals 14,969 9,645
-------- --------
302,780 252,851
Deferred fees, net (619) (679)
Allowance for loan losses (4,503) (4,182)
-------- --------
$297,658 $247,990
======== ========

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

Years Ended December 31,
==========================
2002 2001 2000
====== ====== ======
(In Thousands)
Balance, beginning $4,182 $3,922 $3,343
Provision for loan losses 480 330 465
Recoveries 24 41 177
Loans charged off (183) (111) (63)
------- ------ ------
Balance, ending $4,503 $4,182 $3,922
====== ====== ======

The recorded investment in impaired loans, not requiring an allowance
for loan losses was $-0- at December 31, 2002 and 2001. The recorded
investment in impaired loans requiring an allowance for loan losses was
$2,614,000 and $2,976,000 at December 31, 2002 and 2001, respectively.
The related allowance for loan losses associated with these loans was
$392,000 and $445,000 at December 31, 2002 and 2001, respectively. For
the years ended December 31, 2002, 2001 and 2000, the average recorded
investment in these impaired loans was $2,673,000, $3,158,000 and
$522,000, respectively. The interest income recognized, representing cash
collected, on these impaired loans was $-0-, $67,000 and $25,000 in 2002,
2001 and 2000, respectively.

Loans on which the accrual of interest has been discontinued amounted
to $3,463,000 and $3,658,000 at December 31, 2002 and 2001, respectively.
Loan balances past due 90 days or more and still accruing interest, but
which management expects will eventually be paid in full, amounted to
$47,000 and $190,000 at December 31, 2002 and 2001, respectively.

Note 5 - Premises and Equipment

Components of premises and equipment at December 31 are as follows:

2002 2001
======= =======
(In Thousands)
Land $ 1,112 $ 1,008
Buildings and improvements 9,865 8,863
Furniture and equipment 4,201 3,360
Construction in progress 355 1,218
------- -------
15,533 14,449
Accumulated depreciation (4,125) (3,442)
------- -------
$11,408 $11,007
======= =======

Peoples leases land and office space under various operating leases.
The leases expire in 2003 through 2021. All leases provide for various
renewal options. The minimum rental commitments under the leases are as
follows (in thousands):

Year ended December 31:
2003 $ 225
2004 186
2005 185
2006 190
2007 196
2008 and thereafter 2,158
------
$3,140
======

Rental expense was $250,000, $214,000 and $203,000 for the years
ended December 31, 2002, 2001 and 2000, respectively.

Note 6 - Deposits

Aggregate time deposits in denominations of $100,000 or more were
$24,445,000 at December 31, 2002 and $22,421,000 at December 31, 2001.

At December 31, 2002, the scheduled maturities of time deposits are
as follows (in thousands):

2003 $63,601
2004 10,065
2005 7,874
2006 1,994
2007 11,772
-------
$95,306
=======

Note 7 - Borrowings

Information concerning securities sold under agreements to repurchase
is summarized as follows:

Years Ended December 31,
=======================
2002 2001
======== ========
(Dollars in Thousands)
Average balance during the year $6,436 $ 7,803
Average interest rate during the year 0.93% 2.42%
Maximum month-end balance
during the year $9,800 $12,085

Securities sold under agreements to repurchase which are classified
as secured borrowings, generally mature within one day from the
transaction date. Securities sold under agreements to repurchase are
reflected at the amount of cash received in connection with the
transaction. The securities underlying the agreements were under Peoples'
control. Peoples monitors the fair value of the underlying securities on
a daily basis.

Long-term debt consists of loans from the Federal Home Loan Bank of
Pittsburgh (FHLB). These loans are primarily fixed rate loans.
Approximately $11.7 million of the loans have scheduled monthly principal
and interest payments. $18.0 million are payable in full at maturity.
The weighted-average interest rate on these borrowings is 5.58% and
scheduled maturities are as follows (in thousands):

2003 $ 726
2004 767
2005 1,433
2006 2,289
2007 834
Thereafter 23,657
-------
$29,706
=======

The Bank has a maximum borrowing capacity with the FHLB of
approximately $128,650,000, of which $29,706,000 was outstanding at
December 31, 2002. Advances from the 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 has deducted from the employee's
pay up to a maximum of 6% of the employee's gross pay. Additional
discretionary contributions are determined annually by the Board of
Directors. Peoples' contributions are expensed as the cost is incurred,
funded currently, and amounted to $487,000 in 2002, $372,000 in 2001 and
$358,000 in 2000, including additional discretionary contributions of
$101,000, $80,000 and $90,000, respectively.

Note 9 - Income Taxes

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

Years Ended December 31,
=====================================
2002 2001 2000
====== ====== ======
(In Thousands)
Current $1,725 $1,544 $1,890
Deferred (17) (74) (325)
------ ------ ------
$1,708 $1,470 $1,565
====== ====== ======

Income tax expense of Peoples is less than the amounts computed by
applying statutory federal income tax rates to income before income taxes
because of the following:

Percentage of Income
before Income Taxes
========================
Years Ended December 31,
========================
2002 2001 2000
==== ==== ====
Tax at statutory rates 34.0% 34.0% 34.0%
Tax exempt interest income,
net of interest expense
disallowance (7.1) (6.7) (5.1)
Earnings on life insurance (1.1) (1.2) (1.2)
Other 0.2 (0.3) 0.1
---- ---- ----
Effective Tax Rates 26.0% 25.8% 27.8%
==== ==== ====

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

2002 2001
====== ======
(In Thousands)
Deferred tax assets:
Allowance for loan losses $1,404 $1,295
Impairment of securities 29 111
Other 165 133
------ ------
Total Deferred Tax Assets 1,598 1,539
------ ------
Deferred tax liabilities:
Accumulated depreciation 299 260
Accretion on securities 21 18
Unrealized gains on securities
available for sale 769 339
------ ------
Total Deferred Tax Liabilities 1,089 617
------ ------
Net Deferred Tax Asset $ 509 $ 922
====== ======

Note 10 - Transactions with Executive Officers and Directors

Certain directors and executive officers of Peoples, their families
and their affiliates are customers of the Bank. Any transactions with such
parties, including loans and commitments, were in the ordinary course of
business at normal terms, including interest rates and collateralization,
prevailing at the time and did not represent more than normal risks. At
December 31, 2002 and 2001, balances outstanding on such loans amounted to
$3,870,000 and $3,168,000, respectively. During 2002, new loans and
advances to such related parties totaled $2,626,000 and repayments totaled
$1,924,000.

Note 11 - Stock Option Plan

During 2001, Peoples' stockholders approved a stock option plan for
key employees, officers and non-employee directors of Peoples. Under the
Plan, the Board of Directors, at its discretion, is authorized to grant
options to purchase up to 200,000 shares of Peoples' common stock. As of
December 31, 2002, no options have been granted under the plan.

Note 12 - Regulatory Matters and Stockholders' Equity

Peoples and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on Peoples' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, Peoples must meet specific capital guidelines that
involve quantitative measures of Peoples' assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices. Peoples' capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.

Quantitative measures established by regulation to ensure capital
adequacy require Peoples to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets, and of Tier 1 capital to average
assets. Management believes, as of December 31, 2002, that Peoples meets
all capital adequacy requirements to which it is subject.

As of December 31, 2002, the most recent notification from the
Federal Deposit Insurance Corporation has categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the Bank's category.

Peoples and the Bank's actual capital amounts and ratios are also
presented in the table:

To be Well Capitalized
under Prompt
For Capital Adequacy Corrective Action
Actual Purposes Provisions
====================== ====================== ======================
Amount Ratio Amount Ratio Amount Ratio
========== ========= ========== ========= ========== =========
(Dollars in Thousands)

As of December 31, 2002:
Total capital (to risk-weighted assets):
Bank $41,997 13.19% $>25,468 >8.00% $>31,835 >10.00%
Peoples 49,398 15.37 >25,718 >8.00 N/A
Tier I capital (to risk-weighted assets):
Bank 38,011 11.94 >12,734 >4.00 >19,101 >6.00
Peoples 45,374 14.11 >12,859 >4.00 N/A
Tier I capital (to average assets):
Bank 38,011 9.59 >15,859 >4.00 >19,824 >5.00
Peoples 45,374 11.21 >16,193 >4.00 N/A

As of December 31, 2001:
Total capital (to risk-weighted assets):
Bank $38,057 14.37% $>21,181 >8.00% $>26,477 >10.00%
Peoples 46,336 17.33 >21,394 >8.00 N/A
Tier I capital (to risk-weighted assets):
Bank 34,737 13.12 >10,591 >4.00 >15,886 >6.00
Peoples 42,983 16.07 >10,697 >4.00 N/A
Tier I capital (to average assets):
Bank 34,737 9.96 >13,949 >4.00 >17,436 >5.00
Peoples 42,983 12.05 >14,272 >4.00 N/A

The Bank is required to maintain average cash reserve balances in
vault cash or with the Federal Reserve Bank. The amount of these
restricted cash reserve balances with the Federal Reserve Bank at
December 31, 2002 and 2001 was approximately $1,573,000 and $1,484,000,
respectively.

Under Pennsylvania banking law, the Bank is subject to certain
restrictions on the amount of dividends that it may declare without prior
regulatory approval. At December 31, 2002, $18,786,000 of the Bank's
retained earnings were available for dividend declaration to Peoples without
prior regulatory approval, subject to regulatory requirements discussed
above. Under Federal Reserve regulations, the Bank is limited as to the
amount it may lend affiliates, including Peoples First, Inc., unless such
loans are collateralized by specified obligations.

Common stockholders may participate in a dividend reinvestment plan,
which provides that additional shares of common stock may be purchased with
reinvested dividends at prevailing market prices. To the extent that shares
are not available in the Treasury or open market, Peoples has reserved
100,000 shares of common stock to be issued under the plan.

Note 13 - Off-Balance-Sheet Financial Instruments

The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheets.

The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and letters of credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.

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

December 31,
====================
2002 2001
======= =======
(In Thousands)
Commitments to extend credit:
Loan origination commitments $20,983 $17,613
Unused home equity lines of credit 11,422 5,186
Unused business lines of credit 29,909 23,648
------- -------
$62,314 $46,447
======= =======
Stand-by letters of credit $ 5,638 $ 4,688
======= =======

Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements.
The Bank evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of
the customer and generally consists of real estate.

Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loans to customers. The Bank holds
collateral, when deemed necessary, supporting those commitments.

Note 14 - Concentrations of Credit Risk

The Bank operates primarily in Chester County and southern Lancaster
County, Pennsylvania and Northern Cecil County, Maryland. The Bank has
extended credit primarily to commercial entities and individuals in this
area whose ability to honor their contracts 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 to real
estate investors and developers and the mushroom industry, comprise 27%
and 10%, respectively, of the loan portfolio at December 31, 2002. The
Bank is limited in extending credit by legal lending limits to any single
borrower or group of borrowers.

Note 15 - Disclosures about Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of
Peoples' financial instruments; however, there are inherent weaknesses in
any estimation technique. Therefore, for substantially all financial
instruments, the fair value estimates herein are not necessarily
indicative of the amounts Peoples could have realized in a sales
transaction on the dates indicated. The estimated fair value amounts have
been measured as of their respective year ends and have not been re-
evaluated or updated for purposes of these financial statements subsequent
to those respective dates. As such, the estimated fair values of these
financial instruments subsequent to the respective reporting dates may be
different than the amounts reported at each year end.

The following information should not be interpreted as an estimate of
the fair value of Peoples since a fair value calculation is only provided
for a limited portion of Peoples' assets and liabilities. Due to a wide
range of valuation techniques and the degree of subjectivity used in
making the estimates, comparisons between Peoples' disclosures and those
of other companies may not be meaningful. The following methods and
assumptions were used to estimate the fair values of Peoples' financial
instruments at December 31, 2002 and 2001:

- For cash and due from banks, interest-bearing deposits
with banks and federal funds sold, the carrying 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 is estimated using quoted market
prices for similar securities.

- The fair value of loans is estimated by discounting the
future cash flows using the current rates at which
similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.

- The fair value of the investment in FHLB stock is the
carrying amount.

- The fair value of accrued interest receivable and
accrued interest payable is the carrying amount.

- The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on
demand at the reporting date. The fair value of fixed-
maturity certificates of deposit is estimated using the
rates currently offered for deposits for similar
remaining maturities.

- The fair value of securities sold under agreements to
repurchase approximate their carrying amount.

- The fair value of long-term debt is estimated by
discounting future cash flows using current rates at
which similar debt with similar maturities could be
obtained from the FHLB.

- The fair value of commitments to extend credit and for
outstanding letters of credit is estimated using the
fees currently charged to enter into similar agreements.

The estimated fair values of Peoples' financial instruments were as
follows:

December 31, 2002 December 31, 2001
=================== ===================
Carrying Fair Carrying Fair
Amount Value Amount Value
======== ======== ======== ========
(In Thousands)

Financial assets:
Cash and due from banks,
interest-bearing deposits with
banks and federal funds sold $ 24,337 $ 24,337 $ 21,634 $ 21,634
Securities 63,518 63,518 69,544 69,544
Loans receivable, net 297,658 312,090 247,990 255,614
Investment in FHLB stock 2,041 2,041 1,368 1,368
Accrued interest receivable 1,743 1,743 1,756 1,756

Financial liabilities:
Deposits 322,136 324,341 282,462 284,590
Securities sold under
agreements to repurchase 7,855 7,855 8,710 8,710
Long-term debt 29,706 31,377 24,349 25,112
Accrued interest payable 800 800 1,026 1,026

Off-balance sheet financial instruments:
Commitments to extend credit
and outstanding letters of credit - - - -

Note 16 - Peoples First, Inc. (Parent Company Only) Financial
Information

Balance Sheets

December 31,
======================
2002 2001
======= =======

Assets
Cash $ 47 $ 69
Securities available for sale, at fair value 8,205 8,126
Investment in bank subsidiary 39,227 35,342
Other assets 109 509
------- -------
Total Assets $47,588 $44,046
======= =======

Liabilities and Stockholders' Equity
Other liabilities $ 724 $ 404
Stockholders' equity 46,864 43,642
------- -------
Total Liabilities and Stockholders' Equity $47,588 $44,046
======= =======

Statements of Income

For the Period
July 27, 2000
to
Years Ended December 31, December 31,
======================== ============
2002 2001 2000
----------- ---------- ------------
(In Thousands)

Dividends from bank subsidiary $1,274 $10,355 $1,033
Interest income on tax exempt
securities 343 203 -
Equity in (excess of) undistributed
earnings of bank subsidiary 3,274 (6,296) 475
Other expenses (53) (39) (74)
------ ------- ------
Income before Income Taxes 4,838 4,223 1,434
Income tax benefit 16 13 25
------ ------- ------
Net Income $4,854 $ 4,236 $1,459
====== ======= ======

Statements of Cash Flows

Cash Flows from Operating Activities
Net income $4,854 $ 4,236 $1,459
Adjustments to reconcile net
income to net cash provided
by operating activities:
Amortization of securities premium
(discount), net 4 4 -
Deferred income taxes 5 5 (20)
Excess of (equity in)
undistributed earnings
of bank subsidiary (3,274) 6,296 (475)
(Increase) decrease in
other assets 400 (119) (365)
Increase (decrease) in
other liabilities (1) 1 -
------ ------- ------
Net Cash Provided by Operating
Activities 1,988 10,423 599
------ ------- ------

Cash Flows from Investing Activities
Securities available for sale:
Proceeds from maturities 250 - -
Purchases - (8,049) -
------ ------- ------
Net Cash Provided by (Used in)
Investing Activities 250 (8,049) -
Cash Flows from Financing Activities
Purchase of treasury stock (710) (857) (228)
Cash dividends paid (1,550) (1,453) (366)
------ ------- ------
Net Cash Used in
Financing Activities (2,260) (2,310) (594)
------ ------- ------
Increase (Decrease) in Cash (22) 64 5
Cash - Beginning 69 5 -
------ ------- ------
Cash - Ending $ 47 $ 69 $ 5
====== ======= ======

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

None

PART III

Item 10 - Directors and Executive Officers of Peoples and the Bank

The information relating to executive officers of Peoples is included
under Item 4A in Part I of this Form 10-K. The information required by
this item relating to directors of Peoples is incorporated by reference to
that portion of Proposal I captioned "Election of Directors" located in
the definitive proxy statement to be used in connection with Peoples' 2003
Annual Meeting of Shareholders (the "Proxy Statement"). The information
required by this item relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference to the
section captioned "Section 16 Reporting" in the Proxy Statement.

Item 11 - Executive Compensation

The information required by this item is incorporated by reference to
the sections captioned "General Information About the Board of Directors"
through "Compensation Committee Interlocks and Insider Participation" in
the Proxy Statement.

Item 12 - Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated by reference to
the sections captioned "Principal Beneficial Owners of Common Stock" and
"Nominees for Election as Directors" in the Proxy Statement.

Shareholders of Peoples approved the 2001 Stock Option Plan at the
2001 annual meeting of shareholders. Peoples may grant options to
purchase up to 200,000 shares of common stock to directors and eligible
employees. No options have been granted under the Plan. The following
table provides certain information regarding securities issuable under
Peoples' equity compensation plans as of December 31, 2002.

Equity Compensation Plan Information

Plan Category Number of Weighted Number of
securities average exercise securities remaining
to be issued price of available for future
upon exercise outstanding issuance under equity
of outstanding options, warrants, compensation plans
options, warrants and rights (b (excluding securities
and rights(a) reflected in column (a))

Equity compensation plans
approved by security holders 0 - 200,000

Equity compensation plans
not approved by security
holders 0 - 0

Total 0 - 200,000

Item 13 - Certain Relationships and Related Transactions

The information required by this item is incorporated by reference to
the sections captioned "Certain Indebtedness" and "Certain Transactions"
in the Proxy Statement.

Item 14 - Controls and Procedures

Within ninety days prior to filing this report, Peoples, under the
supervision and with the participation of Peoples' management, including
the Chief Executive Officer and the Chief Financial Officer, evaluated the
effectiveness of the design and operation of Peoples' disclosure controls
and procedures. Based on that evaluation, Peoples' Chief Executive
Officer and Chief Financial Officer concluded that Peoples' disclosure
controls and procedures are effective. There were no significant changes
to Peoples' internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.

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

PART IV

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

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

1. Financial Statements

Independent Auditor's Report

Consolidated Balance Sheets as of December 31, 2002 and
December 31, 2001.

Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000.

Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.

Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2002, 2001 and 2000.

Notes to Consolidated Financial Statements.

2. Financial Statement Schedules

All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instruction, or are inapplicable or pertain to
items as to which the required disclosures have been made elsewhere in the
Financial Statements and Notes thereto, and therefore have been omitted.

3. Exhibits

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
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.)

21 List of Subsidiaries

23 Consent of Auditors

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 filed during the last quarter of the period
covered by this report.

None

SIGNATURE

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

PEOPLES FIRST, INC.

Date: March 18, 2003 By: 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
the Registrant and in the capacities and on the dates indicated.

/s/George C. Mason Date: March 18, 2003
- ---------------------------
George C. Mason
Chairman of the Board and Director

/a/Hugh J. Garchinsky Date: March 18, 2003
- ---------------------------
Hugh J. Garchinsky
President and Chief Executive Officer

/s/Carl R. Fretz Date: March 18, 2003
- ---------------------------
Carl R. Fretz
Vice Chairman, Corporate Secretary
and Director

/s/Susan H. Reeves Date: March 18, 2003
- ---------------------------
Susan H. Reeves
Senior Vice President,
Chief Financial Officer and Cashier

/s/Ben S. Beiler Date: March 18, 2003
- ---------------------------
Ben S. Beiler
Director

/s/Arthur A. Bernardon Date: March 18, 2003
- ---------------------------
Arthur A. Bernardon
Director

/s/Ross B. Cameron, Jr. Date: March 18, 2003
- ---------------------------
Ross B. Cameron, Jr.
Director

/s/Lawrie R. Drennen, Jr. Date: March 18, 2003
- ---------------------------
Lawrie R. Drennen, Jr.
Director

/s/Molly K. Morrison Date: March 18, 2003
- ---------------------------
Molly K. Morrison
Director

/s/R. Marshall Phillips Date: March 18, 2003
- ---------------------------
R. Marshall Phillips
Director

Date:
- ---------------------------
David R. Wilmerding, Jr.
Director

CERTIFICATIONS

I, Hugh J. Garchinsky, Chief Executive Officer of Peoples First,
Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Peoples First,
Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and

(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: March 18, 2003

/s/Hugh J. Garchinsky
------------------------------
Hugh J. Garchinsky
Chief Executive Officer

I, Susan H. Reeves, Chief Financial Officer of Peoples First, Inc.,
certify that:

1. I have reviewed this annual report on Form 10-K of Peoples First,
Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and

(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: March 18, 2003

/s/Susan H. Reeves
------------------------------
Susan H. Reeves
Chief Financial Officer

72