SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

 

Commission file number:  333-30640

 

PEOPLES FIRST, INC.

(Exact name of registrant as specified in its charter)

 

 

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

 

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

 

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

 

COMMON STOCK, Par Value $1.00 per share

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

 

 

Item  1. Financial Statements

PEOPLES FIRST, INC.

CONSOLIDATED BALANCE SHEETS

 

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

 

Note: The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date.

 

See Notes to Consolidated Financial Statements

 

1

 

PEOPLES FIRST, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

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

 

See Notes to Consolidated Financial Statements

 

2

 

PEOPLES FIRST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

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

 

See Notes to Consolidated Financial Statements

 

3

 

PEOPLES FIRST, INC.

PEOPLES FIRST, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2003

(Unaudited)

 

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

 

PEOPLES FIRST, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2004

(Unaudited)

 

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

 

4

 

PEOPLES FIRST, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

March 31, 2004

 

Note A – Basis of Presentation

 

The consolidated financial statements include the accounts of Peoples First, Inc. and its wholly owned subsidiary, The Peoples Bank of Oxford (the “Bank”) and its subsidiaries (collectively “Peoples”).   The Bank sold the subsidiary, Wilmerding & Associates, Inc. (“Wilmerding”), an investment advisor, to an unaffiliated third party, on August 15, 2003, and incurred no material gain or loss on the transaction.  The subsidiary, Peoples First Business Investment Company, LLC (“PFBI”), is a non-operating company formed in January 2002 for the purpose of holding 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 other operating entity is Peoples First Mortgage Company, LLC, which commenced operation in May 2003 and derives its income from the sale of mortgages.  All material inter-company transactions have been eliminated. Peoples First, Inc. was formed on July 27, 2000 and is subject to regulation by the Board of Governors of the Federal Reserve System.

 

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

 

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

 

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Note B – Accounting Policies

 

The accounting policies of Peoples as applied in the interim financial statements presented, are substantially the same as those followed on an annual basis as presented in the Annual Report on Form 10-K of Peoples First, Inc. filed for the year ended December 31, 2003.

 

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

 

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

 

Note C – Earnings per Share

 

Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares (stock options) had been issued.

 

6

 

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

 

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

 

Note D – Comprehensive Income

 

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

 

7

 

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

 

Note E – Stock Option Plan

 

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

 

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

 

Transactions under the plan are summarized as follows:

 

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

 

8

 

No options are exercisable at March 31, 2004.  To date, no options have been exercised, 500 options were forfeited in 2003 and none have expired.  The weighted average remaining contractual life of the options outstanding is 9.25 years.

 

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

 

Note F – Standby Letters of Credit

 

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

 

The majority of these standby letters of credit expire within the next twelve months.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments.  Peoples requires collateral and personal guarantees supporting these letters of credit as deemed necessary.  Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees.  The current amount of the liability as of March 31, 2004, for guarantees under standby letters of credit issued after December 31, 2003 is not material.

 

Note G – Pending Merger

 

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

 

9

 

Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

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

 

No assurance can be given that the future results covered by forward-looking statements will be achieved.  Such statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.  Important factors that could impact Peoples’ operating results include, but are not limited to, (i) the effects of changing economic conditions in Peoples’ market areas and nationally, (ii) credit risks of commercial, real estate, consumer and other lending activities, (iii) significant changes in interest rates, (iv) changes in federal and state banking laws and regulations which could impact Peoples’ operations, (v) funding costs, (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 the consolidated financial statements of Peoples First, Inc. (included in Item 8 of the Annual Report on Form 10-K of Peoples First, Inc. for the year ended December 31, 2003) 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.

 

10

 

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

 

Financial Condition

 

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

 

Net loans grew $2,287,000 or ..7% during the first quarter of 2004.  The majority of this loan growth was in real estate secured loans, which increased $4,594,000 or 1.6%, agricultural loans, which were up $220,000 or 3.2% and tax-free loans which were up $261,000 or 1.9%.  Decreases were noted in commercial loans, which were down $2,016,000 or 5.8% and total consumer loans, which were down $102,000 or .8%.  The growth in real estate loans was distributed through various categories in which construction and development loans were up $803,000, commercial real estate loans grew $1,262,000, loans secured by agricultural properties increased $1,746,000, home equity loans and lines of credit increased $732,000 and residential first lien loans increased $571,000.

 

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

 

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

 

Results of Operations

 

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

 

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

 

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

 

12

 

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

 

In addition, increases were noted in service charges on deposit accounts, income from fiduciary activities, realized gains on securities, check card commissions, other income and realized gains on securities.  Service charges on deposit accounts increased by $26,000 or 6.2% for the first quarter of 2004, compared to the same period in 2003. While demand, NOW and Super-NOW balances decreased for the quarter, fees collected on checks drawn against non-sufficient funds increased.  Income from fiduciary activities was up by $58,000 or 37.2%, compared to the first quarter of 2003.  The income increase is consistent with the increase in Peoples’ Trust Department total assets under management, which equaled $153,067,000 on March 31, 2004, up from $114,165,000 at March 31 2003.   Other income reflected an increase of $31,000 or 13.8% for the first quarter of 2004, compared to 2003.  Increased other income was a result of increased income from earnings on investment sales through INVEST, a third party which Peoples uses to sell investment products; management fees from the bank’s subsidiary; and earnings from bank owned life insurance.

 

Total non-interest expense increased by $114,000 or 3.3% for the first quarter of 2004, compared to the same time period in 2003.  The largest increase in non-interest expense was in salaries and employee benefits, which increased by $107,000 or 4.9% for the first quarter of 2004, compared to the first quarter of 2003. The increases in payroll and payroll related expenses resulted from normal merit increases, increased incentive compensation accruals and increased cost of health benefits. Other increases in non-interest expense included computer and software costs up by $45,000 as a result of increased software amortization associated with the main-frame operating system and imaging software; debit card expense

 

13

 

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

 

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

 

Liquidity and Off-Balance Sheet Arrangements

 

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

 

Peoples’ financial 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 March 31, 2004 totaled $92,280,000.  This consisted of $32,422,000 in commercial real estate, construction, and land development loans, $15,970,000 in home equity lines of credit,

 

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$8,387,000 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

 

Capital Resources

 

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

 

At March 31, 2004, Peoples had a leverage ratio of 10.70 %, a Tier I capital to risk-based assets ratio of 12.51%, and a total capital to risk-based assets ratio of 13. 76%. At March 31, 2004, the Bank had a leverage ratio of 9.30 %, a Tier I capital to risk-based assets ratio of 10.78 %, and a total capital to risk-based assets ratio of 12.03 %. These ratios indicate Peoples First, Inc. and the Bank both exceed the federal regulatory minimum requirements to be considered “well capitalized.”

 

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

 

Item 3.  Quantitative and Qualitative Disclosure about Market

 

There are no material changes in Peoples’ interest rate risk exposure since December 31, 2003. Please refer to the Annual Report on Form 10-K of Peoples First, Inc. for the year ended December 31, 2003, filed with the Securities and Exchange Commission.

 

Item 4.  Controls and Procedures

 

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 as of March 31, 2004.  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

 

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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 II – OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

Not Applicable

 

Item 2.  Changes in Securities and Use of Proceeds

 

Not Applicable

 

Item 3.  Defaults Upon Senior Securities

 

Not Applicable

 

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

 

Not Applicable

 

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Item 5.  Other Information

 

Not Applicable

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)          Exhibits

 

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

 

(b) Reports on Form 8-K

 

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

 

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SIGNATURES

 

 

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

 

 

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

 

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