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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2003

Commission File Number 0-14555

LEESPORT FINANCIAL CORP.
(Exact name of registrant as specified in its charter)

1240 Broadcasting Road
Wyomissing, Pennsylvania 19610
(Address of Principal Executive Offices)

(610) 208-0966
Registrant's Telephone Number:

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $5.00 Par Value
(Title of Class)

        The Registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 checkmark 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. ý

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

        As of June 30, 2003, the aggregate market value of the voting and non-voting common stock of the registrant held by non-affiliates computed by reference to the price at which the common stock was last sold was approximately $57.7 million.

        Number of Shares of Common Stock Outstanding at March 8, 2004: 3,406,223.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the registrant's definitive Proxy Statement prepared in connection with its Annual Meeting of Stockholders to be held on April 27, 2004 are incorporated in Part III hereof.

INDEX

PART I

FORWARD LOOKING STATEMENTS

        Except for historical information, this report may be deemed to contain "forward looking" statements. Leesport Financial Corp. (the "Company") desires to avail itself of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform Act") and is including this cautionary statement for the express purpose of availing itself of the protection afforded by the Reform Act.

        Examples of forward looking statements include, but are not limited to (a) projections of or statements regarding future earnings, 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 the Company or its management or Board of Directors, (c) statements of future economic performance, and (d) statements of assumptions, such as economic conditions in the Company's market areas, underlying other statements and statements about the Company or its businesses. 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 the forward-looking statements will be achieved. Such statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could impact the Company's operating results include, but are not limited to, (i) the effects of changing economic conditions in the Company's 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, insurance, and investment laws and regulations which could impact the Company's operations, (v) funding costs, and (vi) other external developments which could materially affect the Company's business and operations.

Item 1.    Business

The Company

        Leesport Financial Corp. (the "Company") is a Pennsylvania business corporation headquartered at 1240 Broadcasting Road, Wyomissing, Pennsylvania 19610. The Company was organized as a bank holding company on January 1, 1986. The Company's election with the Board of Governors of the Federal Reserve System to become a financial holding company became effective on February 7, 2002. The Company offers a wide array of financial services through its various subsidiaries. The Company's executive offices are located at 1240 Broadcasting Road, Wyomissing, Pennsylvania 19610.

        At December 31, 2003, the Company had total assets of $622.3 million, total shareholders' equity of $53.4 million, and total deposits of $408.6 million.

The Bank

        The Company's wholly-owned banking subsidiary is Leesport Bank ("Leesport Bank" or the "Bank"), a Pennsylvania chartered commercial bank. During the year ended December 31, 2000, the charters of The First National Bank of Leesport and Merchants Bank of Pennsylvania, both wholly-owned banking subsidiaries of the Company at that time, were merged into a single charter under the name Leesport Bank. The First National Bank of Leesport was incorporated under the laws of the United States of America as a national bank in 1909. Leesport Bank operates in Berks and Schuylkill counties in Pennsylvania.

        At December 31, 2003, the Bank had the equivalent of 159 full-time employees.

        Leesport Bank provides services to its customers through eleven full service financial centers, which operate under Leesport Bank's name in Leesport, Blandon, Bern Township, Wyomissing, Breezy Corner,

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Hamburg, Birdsboro, Northeast Reading, Exeter Township and Sinking Spring all of which are in Berks County, Pennsylvania. Leesport Bank also operates a financial center in Schuylkill County, which is located in Schuylkill Haven. The Bank also operates a limited service facility in Wernersville, Berks County, Pennsylvania. All full service facilities provide automated teller machine services. Each financial center, except the Wernersville and Breezy Corner locations, provide drive-in facilities.

        The Bank engages in full service commercial and consumer banking business, including such services as accepting deposits in the form of time, demand and savings accounts. Such time deposits include certificates of deposit, individual retirement accounts and Roth IRA accounts. The Bank's savings accounts include money market accounts, club accounts, NOW accounts and traditional regular savings accounts. In addition to accepting deposits, the Bank makes both secured and unsecured commercial and consumer loans, finances commercial transactions, provides equipment lease and accounts receivable financing, makes construction and mortgage loans, including home equity loans, and rents safe deposit facilities. The Bank also provides small business loans and student loans.

        In early 2001, the Bank formed a strategic alliance with INA Trust Company in order to offer personal trust services to its customers. The alliance enabled the Bank to enter the trust business quickly and without incurring significant start-up expenses. Personal trust services through this alliance are offered by the wealth management division.

Subsidiary Activities

        Effective October 1, 2002, Essick & Barr, Inc., a Berks County based general insurance agency ("Essick & Barr") was converted to a limited liability company, and became a subsidiary of the Company and no longer a subsidiary of the Bank. Effective February 13, 2003, both Leesport Wealth Management, Inc. ("LWM"), an SEC-registered investment advisory business which was acquired in 1999 and Leesport Investment Group, Inc. ("LIG"), which was formed in 1999 to purchase a securities brokerage business, were converted to limited liability companies, and became subsidiaries of the Company and no longer subsidiaries of the Bank. The Bank had two wholly-owned subsidiaries as of December 31, 2003: Leesport Realty Solutions, LLC, which was formed originally during 2000 to provide title insurance and other real estate related services to its customers through limited partnership arrangements with third parties involved in the real estate services industry; and Leesport Mortgage, LLC, a 60% owned subsidiary, which was jointly formed with a real estate company in May of 2002, to provide mortgage brokerage services, including, without limitation, any activity in which a mortgage broker may engage. It is operated as a permissible "affiliated business arrangement" within the meaning of Real Estate Settlement Procedures Act of 1974.

        Both LIG and LWM, which include the acquisition of certain assets of First Affiliated Investment Group, an investment management and brokerage firm, as of September 1, 2002, are headquartered at 1240 Broadcasting Road, Wyomissing, Pennsylvania and collectively had 10 full-time employees at December 31, 2003.

        Essick & Barr, which includes The Boothby Group, a property and casualty and employee benefits insurance agency acquired as of October 1, 2002, offers a full line of personal and commercial property and casualty insurance as well as group insurance for businesses, employee benefit plans, and life insurance. Effective September 30, 2003, Essick & Barr acquired certain assets of CrosStates Insurance Consultants, Inc., a full service insurance agency that specializes in personal property and casualty insurance located in Langhorne, Pennsylvania. Essick & Barr is headquartered in Reading, Pennsylvania with sales offices at 108 South Fifth Street, Reading, Pennsylvania; 460 Norristown Road, Blue Bell, Pennsylvania, 1240 Broadcasting Road, Wyomissing, Pennsylvania; and 2300 E. Lincoln Highway, Lahghorne, Pennsylvania. Essick & Barr had 64 full-time employees at December 31, 2003.

        Leesport Realty Solutions, LLC provides title insurance and other real estate related services to the Company's customers through limited partnership arrangements with unaffiliated third parties involved in

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the real estate services industry. At December 31, 2003, Leesport Realty Solutions, LLC had entered into four such arrangements as follows: Leesport Search and Settlement Solutions (70% equity interest); New Millennium Abstract (5% equity interest); Spectrum Settlement Agency (4% equity interest); and Benson Settlement Company (35% equity interest). The capital contributions of Leesport Realty Solutions, LLC in connection with the formation of each of the limited partnerships were not material. None of the limited partnership arrangements involves the use of a special purposes entity for financial accounting purposes or any off-balance sheet financing technique, and neither Leesport Realty Solutions, LLC, the Company, nor any other affiliate of the Company has any continuing contractual financial commitment to the limited partnerships beyond the amount of the initial capital contribution.

        The Company also owns First Leesport Capital Trust I (the "Trust"), a Delaware statutory business trust formed on March 9, 2000, in which the Company owns all of the common equity. The Trust has outstanding $5 million of 10⁷/8% fixed rate mandatory redeemable capital securities. These securities must be redeemed in March 2030 but may be redeemed earlier in the event that the interest expense becomes non-deductible for federal income tax purpose or if these securities no longer qualify as Tier I capital for the Company. In October, 2002 the Company entered into an interest rate swap agreement that effectively converts the securities to a floating interest rate of six month LIBOR plus 5.25%. In June, 2003 the Company purchased a six month LIBOR cap to create protection against rising interest rates for the interest rate swap.

        On September 26, 2002, the Company established Leesport Capital Trust II, a Delaware statutory business trust, in which the Company owns all of the common equity. Leesport Capital Trust II issued $10 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.45%. These securities must be redeemed in September 2032 but may be redeemed earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if these securities no longer qualify as Tier I capital for the Company.

Competition

        The Company faces substantial competition in originating loans, in attracting deposits, and generating fee-based income. This competition comes principally from other banks, savings institutions, credit unions, mortgage banking companies and, with respect to deposits, institutions offering investment alternatives, including money market funds. Competition also comes from other insurance agencies and direct writing insurance companies. Due to the passage of landmark banking legislation in November 1999, competition may increasingly come from insurance companies, large securities firms and other financial services institutions. As a result of consolidation in the banking industry, some of the Company's competitors and their respective affiliates may enjoy advantages such as greater financial resources, a wider geographic presence, a wider array of services, or more favorable pricing alternatives and lower origination and operating costs.

Supervision and Regulation

General

        The Company is registered as a bank holding company, which has elected to be treated as a financial holding company, and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System under the Bank Holding Act of 1956, as amended. As a bank holding company, the Company's activities and those of its bank subsidiary are limited to the business of banking and activities closely related or incidental to banking. Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve Board. The Federal Reserve Board has issued regulations under the Bank Holding Company Act that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve Board, pursuant to such regulations, may require the Company to stand ready to use its resources to provide adequate capital funds to its bank subsidiary during periods of financial stress or adversity.

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        The Bank Holding Company Act prohibits the Company from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock, or substantially all of the assets of any bank, or from merging or consolidating with another bank holding company, without prior approval of the Federal Reserve Board. Additionally, the Bank Holding Company Act prohibits the Company from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a non-banking business, unless such business is determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. The types of businesses that are permissible for bank holding companies to own were expanded by the Gramm-Leach-Bliley Act in 1999.

        As a Pennsylvania bank holding company for purposes of the Pennsylvania Banking Code, the Company is also subject to regulation and examination by the Pennsylvania Department of Banking.

        The Company is under the jurisdiction of the Securities and Exchange Commission and of state securities commissions for matters relating to the offering and sale of its securities. In addition, the Company is subject to the Securities and Exchange Commission's rules and regulations relating to periodic reporting, proxy solicitation, and insider trading.

Regulation of Leesport Bank

        Leesport Bank is a Pennsylvania chartered commercial bank, and its deposits are insured (up to applicable limits) by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is subject to regulation and examination by the Pennsylvania Department of Banking and by the FDIC. The Community Reinvestment Act requires Leesport Bank to help meet the credit needs of the entire community where Leesport Bank operates, including low and moderate income neighborhoods. Leesport Bank's rating under the Community Reinvestment Act, assigned by the FDIC pursuant to an examination of Leesport Bank, is important in determining whether the Bank may receive approval for, or utilize certain streamlined procedures in, applications to engage in new activities.

        Leesport Bank is also subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of Leesport Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.

Capital Adequacy Guidelines

        Bank holding companies are required to comply with the Federal Reserve Board's risk-based capital guidelines. The required minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be "Tier 1 capital," consisting principally of common shareholders' equity, less certain intangible assets. The remainder ("Tier 2 capital") may consist of certain preferred stock, a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, and a limited amount of the general loan loss allowance. The risk-based capital guidelines are required to take adequate account of interest rate risk, concentration of credit risk, and risks of nontraditional activities.

        In addition to the risk-based capital guidelines, the Federal Reserve Board requires a bank holding company to maintain a leverage ratio of a minimum level of Tier 1 capital (as determined under the risk-based capital guidelines) equal to 3% of average total consolidated assets for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a ratio of at least 1% to 2% above the stated minimum. The Pennsylvania Department of Banking requires

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state chartered banks to maintain a 6% leverage capital level and 10% risk based capital, defined substantially the same as the federal regulations. The Bank is subject to almost identical capital requirements adopted by the FDIC.

Prompt Corrective Action Rules

        The federal banking agencies have regulations defining the levels at which an insured institution would be considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." The applicable federal bank regulator for a depository institution could, under certain circumstances, reclassify a "well-capitalized" institution as "adequately capitalized" or require an "adequately capitalized" or "undercapitalized" institution to comply with supervisory actions as if it were in the next lower category. Such a reclassification could be made if the regulatory agency determines that the institution is in an unsafe or unsound condition (which could include unsatisfactory examination ratings). The Company and the Bank each satisfy the criteria to be classified as "well capitalized" within the meaning of applicable regulations.

Regulatory Restrictions on Dividends

        Dividend payments made by Leesport Bank to the Company are subject to the Pennsylvania Banking Code, the Federal Deposit Insurance Act, and the regulations of the FDIC. Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally, retained earnings). The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. The Prompt Corrective Action Rules, described above, further limit the ability of banks to pay dividends if they are not classified as well capitalized or adequately capitalized.

        Under these policies and subject to the restrictions applicable to the Bank, the Bank had approximately $3.2 million available for payment of dividends to the Company at December 31, 2003, without prior regulatory approval.

FDIC Insurance Assessments

        The FDIC has implemented a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital and supervisory measures. Under the risk-related premium schedule, the FDIC assigns, on a semiannual basis, each depository institution to one of three capital groups (well-capitalized, adequately capitalized or undercapitalized) and further assigns such institution to one of three subgroups within a capital group. The institution's subgroup assignment is based upon the FDIC's judgment of the institution's strength in light of supervisory evaluations, including examination reports, statistical analyses and other information relevant to measuring the risk posed by the institution. Only institutions with a total capital to risk-adjusted assets ratio of 10% or greater, a Tier 1 capital to risk-based assets ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater, are assigned to the well-capitalized group. As of December 31, 2003, the Bank was well capitalized for purposes of calculating insurance assessments.

        The Bank Insurance Fund is presently fully funded at more than the minimum amount required by law. Accordingly, the 2003 Bank Insurance Fund assessment rates ranged from zero for those institutions with the least risk, to $0.27 for every $100 of insured deposits for institutions deemed to have the highest risk. The Bank is in the category of institutions that presently pay nothing for deposit insurance. The FDIC adjusts the rates every six months. The FDIC has indicated from time to time that all banks may again be required to pay deposit insurance premiums in the future if the current trend of the size of the deposit insurance funds relative to all insured deposits continues.

        While the Bank presently pays no premiums for deposit insurance, it is subject to assessments to pay the interest on Financing Corporation bonds. The Financing Corporation was created by Congress to issue

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bonds to finance the resolution of failed thrift institutions. Prior to 1997, only thrift institutions were subject to assessments to raise funds to pay the Financing Corporation bonds. Beginning in 2000, commercial banks and thrifts are subject to the same assessment for Financing Corporation bonds. The FDIC sets the Financing Corporation assessment rate every quarter. The Financing Corporation assessment for the Bank (and all other banks) for the first quarter of 2004 is an annual rate of $.0154 for each $100 of deposits.

Other Legislation

        The Gramm-Leach-Bliley Act, passed in 1999, dramatically changed certain banking laws. One of the most significant changes was that the separation between banking and the securities businesses mandated by the Glass-Steagall Act has now been removed, and the provisions of any state law that prohibits affiliation between banking and insurance entities have been preempted. Accordingly, the legislation now permits firms engaged in underwriting and dealing in securities, and insurance companies, to own banking entities, and permits bank holding companies (and in some cases, banks) to own securities firms and insurance companies. The provisions of federal law that preclude banking entities from engaging in non-financially related activities, such as manufacturing, have not been changed. For example, a manufacturing company cannot own a bank and become a bank holding company, and a bank holding company cannot own a subsidiary that is not engaged in financial activities, as defined by the regulators.

        The legislation creates a new category of bank holding company called a "financial holding company." In order to avail itself of the expanded financial activities permitted under the law, a bank holding company must notify the Federal Reserve Board ("Federal Reserve") that it elects to be a financial holding company. A bank holding company can make this election if it, and all its bank subsidiaries, are well capitalized, well managed, and have at least a satisfactory Community Reinvestment Act rating, each in accordance with the definitions prescribed by the Federal Reserve and the regulators of the subsidiary banks. Once a bank holding company makes such an election, and provided that the Federal Reserve does not object to such election by such bank holding company, the financial holding company may engage in financial activities (i.e., securities underwriting, insurance underwriting, and certain other activities that are financial in nature as to be determined by the Federal Reserve) by simply giving a notice to the Federal Reserve within thirty days after beginning such business or acquiring a company engaged in such business. This makes the regulatory approval process to engage in financial activities much more streamlined than under prior law.

        On February 7, 2002, the Company's election with the Board of Governors of the Federal Reserve System to become a financial holding company became effective.

        The Sarbanes-Oxley Act of 2002 was enacted 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 the Company, 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. In connection with this legislation, the national securities exchanges and Nasdaq have adopted rules relating to certain matters, including the independence of members of a company's audit committee, as a

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condition to listing or continued listing. The Company does not believe that the application of these rules to the Company will have a material effect on its business, financial condition or results of operations.

        Essick & Barr, LIG, and LWM are subject to additional regulatory requirements. Essick & Barr is subject to Pennsylvania insurance laws and the regulations of the Pennsylvania Department of Insurance. The securities brokerage activities of LIG are subject to regulation by the SEC and the NASD, and LWM is a registered investment advisor subject to regulation by the SEC.

Item 2.    Properties

        The Company's principal office is located in the administration building at 1240 Broadcasting Road, Wyomissing, Pennsylvania.

        Listed below are the locations of properties owned or leased by the Bank and its subsidiaries. Owned properties are not subject to any mortgage, lien or encumbrance.

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        Essick & Barr shares offices in the Company's administration building located at 1240 Broadcasting Road, Wyomissing, Pennsylvania. Essick & Barr is charged a pro rata amount of the total lease expense.

        LIG and LWM also share office space in the Company's administration building in Wyomissing and are accordingly charged a pro rata amount of the total lease expense.

Item 3.    Legal Proceedings

        A certain amount of litigation arises in the ordinary course of the business of the Company, and the Company's subsidiaries. In the opinion of the management of the Company, there are no proceedings pending to which the Company, or the Company's subsidiaries are a party or to which their property is subject, that, if determined adversely to the Company or its subsidiaries, would be material in relation to the Company's shareholders' equity or financial condition, nor are there any proceedings pending other than ordinary routine litigation incident to the business of the Company and its subsidiaries. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company or its subsidiaries by governmental authorities.

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

        No matters were submitted to a vote of security holders during the fourth quarter of the Company's fiscal year ended December 31, 2003.

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Item 4A.    Executive Officers of the Registrant

        Certain information, as of January 31, 2004, including principal occupation during the past five years, relating to each executive officer of the Company is as follows:

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PART II

Item 5.    Market For Common Equity and Related Shareholder Matters.

        As of December 31, 2003, there were 821 record holders of the Company's common stock. The market price of the Company's common stock for each quarter in 2003 and 2002 and the dividends declared on the Company's common stock for each quarter in 2003 and 2002 are set forth below.

Market Price of Common Stock

        The Company's common stock is traded on the Nasdaq National Market under the symbol "FLPB." The following table sets forth, for the fiscal quarters indicated, the high and low bid and asked price per share of the Company's common stock, as reported on the Nasdaq National Market, and has been adjusted for the effect of the 5% stock dividend declared by the Board of Directors on March 19, 2003 with a record date of April 1, 2003 and distributed to shareholders on April 15, 2003:

Dividend Information

        Cash dividends on the Company's common stock have historically been payable on the 15^th of January, April, July, and October.

        The Company derives a significant portion of its income from dividends paid to it by the Bank. For a description of certain regulatory restrictions on the payment of dividends by the Bank to the Company, see "Business—Regulatory Restrictions on Dividends."

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Item 6.    Selected Financial Data

        The selected consolidated financial and other data and management's discussion and analysis of financial condition and results of operation set forth below and in Item 7 hereof is derived in part from, and should be read in conjunction with, the consolidated financial statements and notes thereto contained elsewhere herein.

        Earnings and cash dividends per share amounts reflect the 5% stock dividend declared by the Board of Directors on March 19, 2003 with a record date of April 1, 2003 and distributed to shareholders on April 15, 2003.

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

        The Company is a financial services company. As of December 31, 2003, Leesport Bank, Essick & Barr, LLC, Leesport Investment Group, LLC and Leesport Wealth Management, LLC were wholly-owned subsidiaries of the Company. As of December 31, 2003, Leesport Realty Solutions, LLC was a wholly-owned, non-bank subsidiary of Leesport Bank and Leesport Mortgage, LLC was a 60% owned non-bank subsidiary of Leesport Bank.

        During 2000, Leesport Realty Solutions, LLC was formed as a subsidiary of Leesport Bank for the purpose of providing title insurance and other real estate related services to its customers through limited partnership arrangements with third parties involved in the real estate services industry.

        In May 2002, the Company's subsidiary, Leesport Bank, jointly formed Leesport Mortgage, LLC with a real estate company. Leesport Mortgage, LLC was formed to provide mortgage brokerage services, including, without limitation, any activity in which a mortgage broker may engage. It is operated as a permissible "affiliated business arrangement" within the meaning of the Real Estate Settlement Procedures Act of 1974. Leesport Bank's initial investment was $15,000.

        On August 30, 2002, the Company completed its purchase of certain assets of First Affiliated Investment Group, an investment management and brokerage firm located in State College, Pennsylvania. In addition to cash payments payable to the shareholder of $175,000, the Company issued 9,460 shares of its common stock at a price of $18.50, resulting in an aggregate purchase price of $350,000 as of the closing date. Contingent payments to the shareholder totaling up to $300,000, payable in stock at the then current market values and/or cash, are based upon achieving certain annual revenue levels over the next three years.

        On October 1, 2002, the Company completed its acquisition of 100% of the outstanding common stock of The Boothby Group, Inc., a full service insurance agency headquartered in Blue Bell, Pennsylvania. In addition to cash payments of $3.6 million, the Company issued 132,448 shares of its common stock at a price of $18.12 resulting in an aggregate purchase price of $6.2 million as of the closing date. Contingent payments payable to the five former shareholders totaling up to $1.6 million, payable in shares of the Company's common stock at the then current market values, are based on The Boothby Group division of Essick & Barr achieving certain annual revenue levels over the next five years.

        On September 30, 2003, the Company completed its purchase of certain assets of CrosStates Insurance Consultants, Inc., a full service insurance agency that specializes in personal property and casualty insurance located in Langhorne, Pennsylvania. The Company made a cash payment of $1.0 million as of the closing date. Contingent payments payable to the former shareholder totaling up to $1.2 million, payable 50% in cash and 50% in shares of the Company's common stock at the then current market values, are based on the CrosStates Insurance division of Essick & Barr achieving certain levels of earnings over the next two years.

Critical Accounting Policies

        Disclosure of the Company's significant accounting policies is included in Note 1 to the consolidated financial statements. Certain of these policies are particularly sensitive requiring significant judgement, estimates and assumptions to be made by management. Additional information is contained in Management's Discussion and Analysis and the Notes to the consolidated financial statements for the most sensitive of these issues. These include, the provision and allowance for loan losses, and revenue recognition for insurance activities, stock based compensation, and derivative financial instruments (see Notes 10 and 16), and purchase accounting, goodwill and intangible assets (Note 2). These discussions, analysis and disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

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Results of Operations

        Net income for 2003 was $4.95 million or $1.44 per share diluted compared to $4.92 million or $1.49 per share diluted for 2002 and $2.78 million or $1.38 per share for 2001. These changes are a result of increasing net interest income after provision for loan losses and other income each year, net of increases in other expenses. Detail regarding changes in each of these areas follows.

        Return on average assets was 0.84% for 2003, 0.95% for 2002 and 0.64% for 2001. Return on average shareholders' equity was 9.39% for 2003, 10.33% for 2002 and 8.67% for 2001.

Net Interest Income

        Net interest income is a primary source of revenue for the Company. This income results from the difference between the interest and fees earned on loans and investments and the interest paid on deposits to customers and other non-deposit sources of funds, such as repurchase agreements and borrowings from the Federal Home Loan Bank. Net interest margin is the difference between the gross (tax-effected) yield on earning assets and the cost of interest bearing funds as a percentage of earning assets. All discussion of net interest margin is on a fully taxable equivalent basis.

        Net interest income for 2003 was $16.5 million, equal to the $16.5 million in 2002, which was a 30.8% increase over the $12.6 million in 2001. Average earning assets increased by $48 million or 10.1% from 2002 to 2003, and are net of approximately $54 million of earning assets included in the sale of three financial centers in Schuylkill and Luzerne counties in September 2003. The net interest margin was 3.22% in 2003 and 3.53% in 2002. Net interest margin decreased during 2003 primarily because of the decline in loan and investment portfolio yields. Prepayments of higher yielding assets in both categories and the accelerated premium amortization of $1.5 million for the year 2003 as compared to $0.8 million for the year 2002 from our mortgage backed securities portfolio accounted for the decrease in the yield on earning assets from 6.47% in 2002 to 5.61% in 2003. This decline in yield on earning assets was only partially offset by the decline in the yield on interest bearings liabilities which were 3.40% in 2002 compared to 2.75% in 2003. The approximate yield on time deposits was 3.90% and 4.68% for 2003 and 2002, respectively. Yields on interest bearing demand deposits decreased from 1.63% in 2002 to 1.20% in 2003. The decrease in yield on time deposits and interest bearing demand deposits from 2002 to 2003 was attributable to the maturity of higher yielding instruments being replaced by lower yielding current rate instruments and the lower rate environment which existed through most of 2003 as compared to 2002. Also effecting the yield on time deposits are $22.1 million and $20.4 million as of December 31, 2003 and 2002, respectively, of an IRA CD product initiated in the mid 1980's that have an 8.0% interest rate floor. In this low rate environment, the Company is actively pursuing derivative product(s) and asset investments to reduce or offset the high cost of these funds. Yields on long-term debt decreased from 4.97% in 2002 to 4.51% in 2003. This was primarily the result of refinancing $40.9 million of Federal Home Loan Bank advances in September 2003 that were replaced with lower cost borrowings and certificates of deposits. The primary growth in earning assets for 2003 was in average securities and average loans. Average securities increased by 16.4% in 2003 and 59.6% in 2002. Average loans outstanding increased by 7.8% in 2003 and 11.1% in 2002. The loan increases are primarily due to market share expansion. The investment securities increases are the result of utilizing deposit and borrowings funds that exceeded the increase in loan balances.

        Average interest-bearing deposits increased by 7.4% in 2003 and 9.1% in 2002 while average borrowings increased by 22.2% in 2003 and by 48.6% in 2002. The deposit increases are primarily due to market share expansion and are net of the $59.5 million of deposits included in the sale of three financial centers in September 2003.

        The 48.6% increase in average borrowings for 2002, from $68.7 million for 2001 to $102.1 million, is primarily a result of the Company changing to an overnight fed funds purchase position to take advantage of the low overnight rate environment and to help reduce the overall cost of funds.

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        At year-end 2003, actual balances for federal funds purchased and long term debt were $62.1 million and $34.5 million, respectively compared to $9.2 million and $72.2 million at year-end 2002, respectively.

Other Income

        Details of non-interest income follow:

        The Company's primary source of other income for 2003 was commissions and other revenue generated through sales of insurance products through its insurance subsidiary, Essick & Barr, which included fourth quarter revenues from the CrosStates acquisition of $0.3 million, a full year of revenues from The Boothby Group and increased revenues from the existing Essick & Barr Division. Revenues from insurance operations totaled $9.2 million in 2003 compared to $5.7 million in 2002 and $1.8 million in 2001. Revenues generated from the Company's investment subsidiaries, LIG and LWM, decreased to $696,000 in 2003 from $744,000 in 2002 due to market weakness and a change in the management team which created a temporary downturn in business as accountholder coverage was restructured.

        In September 2003, the Company concluded the sale of three financial centers located in northern Schuylkill and Luzerne Counties. This sale reflects the strategic plan to build on the existing Berks County and growing southeastern Pennsylvania market areas and expand the business relationships developed with the acquisitions of The Boothby Group and CrosStates Insurance.

        The Company also relies on several other sources for its other income, including sales of newly originated mortgage loans and service charges on deposit accounts. The income recognized from mortgage banking activities was $2.4 million in 2003, $1.5 million in 2002 and $1.2 million in 2001. The addition of new, variable compensation mortgage originators and increased refinancing activities due to falling interest rates contributed to these increases. Also included in income from loan sales was a net gain of $47,000 for 2003 and a net gain of $461,000 in 2002 from the sale of $4.9 and $28.0 million, respectively of fixed rate portfolio residential mortgage loans. The increases in income from customer service fees reflect an expanded customer base, new services, and the annual review of the fee pricing structure and levels.

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Other Expenses

        Details of non-interest expense follow:

        The largest component of non-interest expenses is salaries and employee benefits. Full-time equivalent (FTE) employees for the Company are 230, 227 and 193 for the years ended December 31, 2003, 2002 and 2001, respectively. From December 31, 2003 to 2002, this represents a 1.3% increase in full-time equivalent employees, a result of acquisitions, the continued growth of the Company and is net of 12 FTE's included in the sale of three financial centers in September 2003. Salaries and benefits expense totaled $13.6 million in 2003, $10.2 million in 2002 and $8.0 million in 2001 and are a result of acquisitions, new financial centers, continued growth of the company, higher benefits costs consistant with industry trends.

        Salary and benefit costs associated with the insurance and investment subsidiaries totaled approximately $5.4 million in 2003, $3.7 million in 2002 and $2.9 million in 2001. These increases in salary and benefits expenses resulted from annual merit increases and promotions, additional personnel costs associated with the acquisition of CrosStates Insurance, full years of The Boothby Group and First Affiliated Investment Group and continuing growth of the Company, and increases in employee health insurance costs consistent with national trends.

        Total occupancy expense increased in 2003 primarily because of the addition of the CrosStates Insurance facility, two new financial centers, a new operations center and a full year of the The Boothby Group facility, these are net of the facility costs associated with the sale of three financial centers in September 2003. The occupancy increase in 2002 was primarily the result of acquisitions and the addition of a new financial center, while 2001 included the addition of the Company's executive and administrative office building, the relocation of two existing financial centers and the addition and renovation of two financial centers. The equipment expense increase in 2003 was primarily due to the additional depreciation and software maintenance expense related to CrosStates Insurance, two new financial centers and the operations center and a full year of expenses from The Boothby Group. Equipment expense for 2002 included improvements to our processing and data line technology, while 2001 included new check imaging software and equipment.

        The increase in marketing and advertising expenses reflects the Company's continuing efforts to increase awareness of its various product offerings and the costs associated with its new financial center openings.

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        Total amortization of identifiable intangible assets increased in 2003 as compared to 2002 primarily because 2003 included a full year of amortization compared to a partial year of amortization for The Boothby Group and First Affiliated Investments. Also included in the total amortization for 2003 is the estimated amortization from the September 30, 2003 acquisition of CrosStates Insurance. Detail is provided in Note 2 of the consolidated financial statements.

        Professional service expenses incurred primarily represent consulting services from financial, legal and employee benefits companies, director fees and corporate sponsorships/donations. These increases in 2003 and 2002 reflect the Company's continuing commitment to improving the efficiency of the Company's operations and enhancing our contribution as a good corporate citizen.

        Total outside processing services increased in 2003 primarily because of conversion costs related to the Company's change to Metavante as its core banking processor, the full year of outside processing services for The Boothby Group and First Affiliated Investments and the partial year of services for CrosStates Insurance.

        Insurance expense increased in 2003 primarily due to the new financial centers, new operations center, additional full time employees and higher 2003 coverage costs consistent with national trends.

        The FHLB advance prepayment fee was a result of prepaying $40.9 million of high rate FHLB advances as of September 30, 2003. These high cost advances were replaced with lower cost borrowings and certificates of deposits to reduce long-term borrowing costs and increase future net interest income levels.

Income Taxes

        The effective income tax rate for the Company for the years ended December 31, 2003, 2002 and 2001 was 27.5%, 28.8% and 28.7% respectively. The effective tax rate for 2003 was lower than 2002 primarily because of an increase in non-taxable interest income and the opposite was true for 2002 and 2001.

Financial Condition

        The Company's total assets increased to $622.3 million at December 31, 2003, representing a growth rate of 10.7% from $562.4 million at December 31, 2002.

Cash and Securities Portfolio

        Cash and balances due from banks decreased to $15.2 million at December 31, 2003 from $16.5 million at December 31, 2002.

        The securities portfolio increased 27.4% to $200.7 million at December 31, 2003, from $157.6 million at December 31, 2002 primarily due to deposit balances increasing more than loan balances, as well as increased short-term borrowings to take advantage of the low rate environment. Securities are used to supplement loan growth as necessary, to generate interest and dividend income, to manage interest rate risk, and to provide liquidity. To accomplish these ends, most of the purchases in the portfolio during 2003 and 2002 were of mortgage backed securities issued by US Government agencies. State and political subdivision securities were also purchased in 2003 to increase the yield of the portfolio. Currently, all of the Company's securities are carried as available for sale.

        At December 31, 2003, the securities balance included a net unrealized gain on available for sale securities of $429,000 versus a net unrealized gain of $3.2 million at December 31, 2002. The paydown of higher yielding securities during 2003 and the increase in interest rates in the fourth quarter of 2003 was primarily responsible for the reduction in the fair market value of the securities.

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Loans

        Loans increased to $357.4 million at December 31, 2003 from $335.2 million at December 31, 2002, an increase of $22.2 million or 6.6% and is net of loans totaling $24 million included in the sale of three financial centers in September 2003. Management has targeted the loan portfolio as a key to the Company's continuing growth. Specifically, the Company has shifted its lending focus to higher yielding commercial loans made to small and medium sized businesses in its market area. A significant increase in the volume of commercial loans during 2003 and 2002 underscores that focus as the commercial portfolio increased to $202.6 million at December 31, 2003, from $189.4 million at December 31, 2002, an increase of $13.2 million or 7.0%.

        Loans secured by residential real estate decreased to $97.8 million at December 31, 2003, from $106.2 million as of December 31, 2002, a decrease of $8.4 million or 7.9%, due to the declining interest rate environment which caused an increase in loan principal prepayments for these loans and from the sale of $4.9 million of low yielding portfolio mortgage loans.

        Home equity lending products increased to $45.8 million at December 31, 2003, from $26.6 million as of December 31, 2002, an increase of $19.2 million or 72.6%. This increase is primarily due to the decline in interest rates and the shift of consumer borrowing from mortgage loans to home equity lending products.

        The loans held for sale category is composed of $1.3 million of mortgage loans committed for sale on the secondary market as of December 31, 2003 versus $21.0 million as of December 31, 2002.

        The sales of residential real estate loans in the secondary market reflect the Company's strategy of de-emphasizing the retention of long-term, fixed rate loans in the portfolio, generating fees, improving interest-rate risk and funding growth in higher yielding assets.

Premises and Equipment

        Premises and equipment, net of accumulated depreciation and amortization, increased during 2003 to $12.9 million from $11.3 million at the end of 2002. Depreciation expense and amortization of leasehold improvements for the years ended December 31, 2003 and 2002 was $1.1 million and $905,000, respectively.

        Major changes to this category in 2003 included the costs related to the construction of new financial centers in Exeter Township and Sinking Spring, Berks County, Pennsylvania totaling $2.7 million; expenditures for furniture and equipment which includes the new financial centers, the new operations center and updated data processing equipment totaling $1.4 million; and leasehold improvements associated with the new operations center totaling $656,000. These increases were offset by reductions from the October 2003 sale of the old operations center that had a carrying value of $495,000 and the sale of three financial centers in September 2003 that had a carrying value totaling $1.2 million.

Goodwill and Intangible Assets

        Goodwill increased to $9.2 million from $8.3 million for the years ended December 31, 2003 and 2002, respectively. The Company had identifiable net increase of $1.2 million in identifiable intangible assets during the year 2003. These increases in goodwill and intangible assets are the result of the Company's September 30, 2003 purchase of certain assets of CrosStates Insurance Consultants, Inc.

Bank Owned Life Insurance

        Bank owned life insurance increased $4.2 million to $10.8 million at September 30, 2003 from $6.6 million at December 31, 2002. During the third quarter 2003, the Company purchased additional bank owned life insurance on certain key employees to fund a Supplemental Executive Retirement Plan (SERP) program.

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Other Assets

        Other assets, which include accrued interest receivable, increased to $13.6 million at December 31, 2003 from $7.0 million at December 31, 2002. A significant component of the increase in other assets is a $5.0 million investment in an affordable housing, corporate tax credit limited partnership.

Deposits and Borrowings

        Total deposits increased by $28.8 million or 7.6%, growing to $408.6 million at December 31, 2003 from $379.8 million at December 31, 2002 and are net of $59.5 million included in the sale of three financial centers in September 2003.

        Non-interest bearing deposits increased to $67.7 million at December 31, 2003, from $60.0 million at December 31, 2002, an increase of $7.7 million or 12.8%. Management continues to promote growth in these types of deposits, which include a free checking product, as a method to help reduce the overall cost of the Company's funds. Interest bearing deposits increased by $21.1 million or 6.6%, growing from $319.8 million at December 31, 2002 to $340.9 million at December 31, 2003. The increase is primarily the result of deposits from two new financial centers and a certificate of deposit promotion to fund some of the Federal Home Loan Bank advance prepayment in September 2003.

        Borrowed funds from various sources are generally used to supplement deposit growth. Short-term borrowings, which were composed of federal funds purchased from the Federal Home Loan Bank and other correspondent banks and securities sold under agreements to repurchase, were $103.7 million at December 31, 2003, and $34.1 million at December 31, 2002. This increase is a result of borrowings to partially replace $40.9 million of high cost Federal Home Loan Bank advances prepaid in September 2003 and to take advantage of the low rate overnight borrowings market to increase net interest income. Long-term debt, which consisted of advances from the Federal Home Loan Bank totaled $34.5 million and $72.2 million at December 31, 2003 and 2002, respectively.

        Mandatory redeemable capital debentures were $15 million as of December 31, 2003 and 2002.

Shareholders' Equity

        The Company's common stock, surplus, retained earnings and accumulated other comprehensive income for the years ended December 31, 2003 and 2002 increased by $0.5 million and $7.7 million, respectively, to $53.4 million and $52.9 million. The increase for 2003 is primarily the result of net income of $4.9 million and offset by cash dividends of $2.2 million, which included the effect of the 5% stock dividend declared by the Bord of Directors on March 19, 2003 with a record date of April 1, 2003 and distributed to shareholders on April 15, 2003, and the purchase of treasury stock of $1.1 million. The increase for 2002 is primarily the result of net income of $4.9 million and from common stock issued for the acquisitions of the Boothby Group and First Affiliated Investment Group.

        Total shareholders' equity includes accumulated other comprehensive income, which includes an adjustment for the fair value of the Company's securities portfolio. This amount attempts to identify the impact to equity in the unlikely event that the Company's entire securities portfolio would be liquidated under current economic conditions. The amounts and types of securities held by the Company at the end of 2003, combined with current interest rates, resulted in a decrease in equity, net of taxes, of $1.9 million. This compares with an increase to equity, net of taxes, of $1.9 million at the end of 2002.

Interest Rate Sensitivity

        Through the years, the banking industry has adapted to an environment in which interest rates have fluctuated dramatically and in which depositors have been provided with liquid, rate sensitive investment options. The industry utilizes a process known as asset/liability management as a means of managing this adaptation.

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        Asset/liability management is intended to provide for adequate liquidity and interest rate sensitivity by matching interest rate sensitive assets and liabilities and coordinating maturities and repricing characteristics on assets and liabilities.

        Interest rate risk management involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched. Interest rate sensitivity is the relationship between market interest rates and earnings volatility due to the repricing characteristics of assets and liabilities. The Company's net interest income is affected by changes in the level of market interest rates. In order to maintain consistent earnings performance, the Company seeks to manage, to the extent possible, the repricing characteristics of its assets and liabilities.

        One major objective of the Company when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income. The management of and authority to assume interest rate risk is the responsibility of the Company's Asset/Liability Committee ("ALCO"), which is comprised of senior management and Board members. The ALCO meets quarterly to monitor the ratio of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk management is a regular part of management of the Company. In addition, there is an annual process to review the interest rate risk policy with the Board of Directors which includes limits on the impact to earnings from shifts in interest rates.

        To manage the interest rate sensitivity position, an asset/liability model called "gap analysis" is used to monitor the difference in the volume of the Company's interest sensitive assets and liabilities that mature or reprice within given periods. A positive gap (asset sensitive) indicates that more assets reprice during a given period compared to liabilities, while a negative gap (liability sensitive) has the opposite effect.

        During October 2002, the Company entered into its first interest rate swap agreement with a notional amount of $5 million. This derivative financial instrument effectively converted fixed interest rate obligations of outstanding mandatory redeemable capital debentures to variable interest rate obligations, decreasing the asset sensitivity of its balance sheet by more closely matching the Company's variable rate assets with variable rate liabilities. The Company considers the credit risk inherent in the contracts to be negligible.

        Interest rate caps are generally used to limit the exposure from the repricing and maturity of liabilities and to limit the exposure created by other interest rate swaps. In June, 2003 the Company purchased a six month LIBOR cap to create protection against rising interest rates for the above mentioned $5 million interest rate swap. The initial premium related to this interest rate cap was $102,000, which is amortized over the life of the interest rate cap. At December 31, 2003, the carrying and market values were approximately $94,000.

        At December 31, 2003, the Company was in a negative one-year cumulative gap position compared to the positive one-year cumulative gap position at December 31, 2002. During the second half of 2003, the Company experienced a decrease in principal payments in loans and mortgage backed securities because of the shift to a flat or slightly rising interest rate environment. In September 2003, the Company prepaid $40.9 million of high rate FHLB advances and partially funded this with considerably less expensive overnight borrowings. These two factors moved the Company from a positive to a negative one-year

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cumulative gap position. The Company will be using investment security cashflows and fixed rate deposits during 2004 to reduce the overnight borrowings and move towards a neutral gap position.

Interest Sensitivity Gap at December 31, 2003

(1)

Gross of unrealized gains/losses on available for sale securities.

(2)

Securities and loans are included in the earlier of the period in which interest rates were next scheduled to adjust or the period in which they are due.

(3)

Demand and savings accounts are generally subject to immediate withdrawal. However, management considers a certain amount of such accounts to be core accounts having significantly longer effective maturities based on the retention experiences of such deposits in changing interest rate environments.

        Certain shortcomings are inherent in the method of analysis presented in the above table. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table. The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

        The Company also measures its sensitivity to interest rate movements through simulations of the effects of rate changes upon its net interest income. Interest rate movements of up 100, 200 and 300 basis points and down 25, 50 and 75 basis points, adjusted because of the current low rate environment, were

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applied to the Company's interest earning assets and interest bearing liabilities as of December 31, 2003. The results of these simulations on net interest income for 2003 are as follows:

        Economic value of shareholders' equity as a result of interest rate changes is presented in the following hypothetical table. This analysis estimates the projected change in the value of equity as of December 31, 2003 as a result of hypothetical interest rate movements. The results of the simulations in the up 100, 200 and 300 basis points categories reflect the balance sheet and interest rate environment changes during the last half of 2003 as discussed above. The Company's plan to reduce its negative one-year cumulative gap position is expected to bring the economic value of shareholders' equity inside policy limits.

Capital

        Federal bank regulatory agencies have established certain capital-related criteria that must be met by banks and bank holding companies. The measurements which incorporate the varying degrees of risk contained within the balance sheet and exposure to off-balance sheet commitments were established to provide a framework for comparing different institutions.

        The Company is not aware of any pending recommendations by regulatory authorities that would have a material impact on the Company's capital, resources, or liquidity if they were implemented, nor is the Company under any agreements with any regulatory authorities.

        The adequacy of the Company's capital is reviewed on an ongoing basis with regard to size, composition and quality of the Company's resources. An adequate capital base is important for continued growth and expansion in addition to providing an added protection against unexpected losses.

        An important indicator in the banking industry is the leverage ratio, defined as the ratio of common shareholders' equity less intangible assets, to average quarterly assets less intangible assets. The leverage ratio at December 31, 2003 was 9.32% compared to 9.94% at December 31, 2002. This decrease is

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primarily the result of an increase in disallowed goodwill and other intangible assets and the increase in average total assets. For 2003 and 2002, the ratios were above minimum regulatory guidelines.

        As required by the federal banking regulatory authorities, guidelines have been adopted to measure capital adequacy. Under the guidelines, certain minimum ratios are required for core capital and total capital as a percentage of risk-weighted assets and other off-balance sheet instruments. For the Company, Tier I capital consists of common shareholders' equity less intangible assets plus the mandatory redeemable capital debentures, and Tier II capital includes the allowable portion of the allowance for loan losses, currently limited to 1.25% of risk-weighted assets. By regulatory guidelines, the separate component of equity for unrealized appreciation or depreciation on available for sale securities is excluded from Tier I capital. In addition, federal banking regulating authorities have considered excluding trust preferred securities, such as the Company's mandatory redeemable capital debentures from Tier I capital, whether or not any such proposed will be adopted, and, if so, the terms of an such proposed cannot be determined at this time.

        The following table sets forth the Company's capital ratios.

        Regulatory guidelines require that Tier I capital and total risk-based capital to risk-adjusted assets must be at least 4.0% and 8.0%, respectively.

Liquidity and Funds Management

        Liquidity management ensures that adequate funds will be available to meet anticipated and unanticipated deposit withdrawals, debt servicing payments, investment commitments, commercial and consumer loan demand and ongoing operating expenses. Funding sources include principal repayments on loans and investment securities, sales of loans, growth in core deposits, short and long-term borrowings and repurchase agreements. Regular loan payments are a dependable source of funds, while the sale of loans and investment securities, deposit flows, and loan prepayments are significantly influenced by general economic conditions and level of interest rates.

        At December 31, 2003, the Company maintained $15.2 million in cash and cash equivalents primarily consisting of cash and due from banks. In addition, the Company had $200.7 million in securities available for sale. The combined total of $215.9 million represented 34.7% of total assets at December 31, 2003 compared to 31.0% at December 31, 2002.

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        The Company considers its primary source of liquidity to be its core deposit base, which includes non-interest-bearing and interest-bearing demand deposits, savings, and time deposits under $100,000. This funding source has grown steadily over the years and consists of deposits from customers throughout the financial center network. The Company will continue to promote the growth of deposits through its financial center offices. At December 31, 2003, approximately 60.6% of the Company's assets were funded by core deposits acquired within its market area. An additional 8.6% of the assets were funded by the Company's equity. These two components provide a substantial and stable source of funds.

Off-Balance Sheet Arrangements

        The Company's financial statements do not reflect various off-balance sheet arrangements 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, 2003 totaled $131.3 million. This consisted of $18.2 million in commercial real estate and construction loans, $49.3 million in home equity lines of credit, $54.7 million in unused business lines of credit and $9.2 million 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 the Company. Any amounts actually drawn upon, management believes, can be funded in the normal course of operations. The Company 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.

Contractual Obligations

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

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Changes in Interest Income and Interest Expense

        The following table sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate), and (2) changes in rate (changes in rate multiplied by average volume).

Analysis of Changes in Interest Income(1)(2)(3)

(1)

Loan fees have been included in the change in interest income totals presented. Non-accrual loans have been included in average loan balances.

(2)

Changes due to both volume and rates have been allocated in proportion to the relationship of the dollar amount change in each.

(3)

Interest income on loans and securities is presented on a taxable equivalent basis.

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Average Balances, Rates and Net Yield

        The following table sets forth the average daily balances of major categories of interest earning assets and interest bearing liabilities, the average rate paid thereon, and the net interest margin for each of the periods indicated.

(1)

Rates on loans and investment securities are reported on a tax-equivalent basis of 34%.

(2)

Non-accrual loans have been included in average loan balances.

Risk Elements

        Non-performing loans, consisting of loans on non-accrual status, loans past due 90 days or more and still accruing interest, and renegotiated troubled debt increased to $1.5 million at December 31, 2003, up from $1.4 million at December 31, 2002. Generally, loans that are more than 90 days past due are placed on non-accrual status. As a percentage of total loans, non-performing loans represented .42% at December 31, 2003 and 2002. The allowance for loan losses represents 287.7% of non-performing loans at December 31, 2003, compared to 297.4% at December 31, 2002.

        The Company continues to emphasize credit quality and believes that pre-funding analysis and diligent intervention at the first signs of delinquency will help to maintain these levels.

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        The following table is a summary of non-performing loans and renegotiated loans for the years presented.