Back to GetFilings.com

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, 2004

Commission File Number No. 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 (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 if disclosure of delinquent filers pursuant to tem 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 described in Rule 12b-2 of the Act). Yes o    No ý

        As of June 30, 2004, 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 common stock was last sold was approximately $70.9 million.

        Number of Shares of Common Stock Outstanding at March 17, 2005: 5,002,873

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 26, 2005 are incorporated in Part III hereof.

INDEX

PART I

FORWARD LOOKING STATEMENTS

        Leesport Financial Corp. (the "Company") may from time to time make written or oral "forward-looking statements," including statements contained in the Company's filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

        These forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Company's control). The words "may," "could," "should," would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the willingness of users to substitute competitors' products and services for the Company's products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

        The Company cautions that the foregoing list of important factors is not exclusive. Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this report. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

Item 1.    Business

        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, 2004, the Company had total assets of $877.4 million, total shareholders' equity of $90.9 million, and total deposits of $612.3 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

1

America as a national bank in 1909. Leesport Bank operates in Berks, Schuylkill, Philadelphia, Delaware and Montgomery counties in Pennsylvania.

        On October 1, 2004, the Company acquired 100% of the outstanding voting shares of Madison Bancshares group, Ltd., the holding company for Madison Bank ("Madison"), a Pennsylvania state-chartered commercial bank and its wholly owned subsidiary, Philadelphia Financial Mortgage Company ("PFM" or "Philadelphia Financial"). Madison and PFM are both now Divisions of Leesport Bank. The transaction enhances the Bank's strong presence in Pennsylvania, particularly in the high growth counties of Berks, Philadelphia, Montgomery and Delaware.

        At December 31, 2004, the Bank had the equivalent of 227 full-time employees.

        Leesport Bank provides services to its customers through nineteen full service financial centers, which operate under Leesport Bank's name in Leesport, Blandon, Bern Township, Wyomissing, Breezy Corner 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 Haven, which is located in Schuylkill County. Through its 2004 acquisition of Madison, Leesport Bank operates Madison division financial centers in Blue Bell, Conshohocken, Lansdale, Horsham, Oaks and Center Square all of which are in Montgomery County, Pennsylvania. The Bank also operates Madison division branches in Fox Chase (northeast Philadelphia) in Philadelphia County, Pennsylvania and Strafford in Delaware County, Pennsylvania. 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.

        Leesport Bank provides mortgage banking services to its customers through Philadelphia Financial through offices in Reading, Blue Bell and Lancaster, which are located in Berks County Pennsylvania, Montgomery County, Pennsylvania and Lancaster County, Pennsylvania, respectively.

        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.

        Through a relationship with a company called First HSA, Inc. headed by Dr. William West, the Company began developing business in rapidly developing Health Savings Accounts ("HSA"). At December 31, 2004, the Company has grown its HSA business to more than five thousand accounts with approximately $6 million in deposits. The Company anticipates this business to grow rapidly as HSA accounts become a popular low cost vehicle for medical insurance. The Company believes its head start in this business will give it an advantage in raising deposits in 2005.

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

2

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 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 the 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 7 full-time employees at December 31, 2004.

        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, Langhorne, Pennsylvania. Essick & Barr had 70 full-time employees at December 31, 2004.

        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 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 on or after March 9, 2010 or 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 on or

3

after September 26, 2007 or 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.

        On June 26, 2003, Madison established Madison Statutory Trust I, a Connecticut statutory business trust. Pursuant to the purchase of Madison on October 1, 2004, the Company assumed Madison Statutory Trust I in which the Company owns all of the common equity. Madison Statutory Trust I issued $5 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.10%. These securities must be redeemed in June 2033, but may be redeemed on or after September 26, 2008 or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if the treatment of these securities is no longer qualified 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.

        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

4

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 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

5

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 $4.1 million available for payment of dividends to the Company at December 31, 2004, 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, 2004, 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 2004 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 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 2005 is an annual rate of $.0144 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

6

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 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.

        The USA PATRIOT Act, enacted in direct response to the terrorist attacks on September 11, 2001, strengthens the anti-money laundering provisions of the Bank Secrecy Act. Many of the new provisions added by the Act apply to accounts at or held by foreign banks, or accounts of or transactions with foreign entities. While the Bank does not have a significant foreign business, the new requirements of the Bank Secrecy Act still require the Bank to use proper procedures to identify its customers. The Act also requires the banking regulators to consider a bank's record of compliance under the Bank Secrecy Act in acting on any application filed by a bank. As the Bank is subject to the provisions of the Bank Secrecy Act (i.e., reporting of cash transactions in excess of $10,000), the Bank's record of compliance in this area will be an additional factor in any applications filed by it in the future. To the Bank's knowledge, its record of compliance in this area is satisfactory.

7

        The Fair and Accurate Credit Transaction Act was adopted in 2003. It extends and expands upon provisions in the Fair Credit Reporting Act, affecting the reporting of delinquent payments by customers and denials of credit applications. The revised act imposes additional record keeping, reporting, and customer disclosure requirements on all financial institutions, including the Bank. Also in late 2003, the Check 21 Act was adopted. This Act affects the way checks can be processed in the banking system, allowing payments to be converted to electronic transfers rather than processed as traditional paper checks.

        Congress is often considering some financial industry legislation, and the federal banking agencies routinely propose new regulations. New legislation and regulation may include dramatic changes to the federal deposit insurance system. The Corporation cannot predict how any new legislation, or new rules adopted by the federal banking agencies, may affect its business in the future.

        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.

8

9

        In the fourth quarter of 2004, the Company sold the North Point, Northeast Reading, Hamburg, Bern Township, Exeter and Sinking Spring financial centers and leased them back from the purchaser with a lease term of 20 years.

        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, 2004.

10

Item 4B.    Executive Officers of the Registrant

        Certain information, as of January 31, 2005, including principal occupation during the past five years, relating to each executive officer of the Company is as follows:

*

Raymond H. Melcher, Jr. resigned as a director and executive officer of the Company and all of its affiliates effective March 17, 2005. Vito A. DeLisi was appointed acting President and Chief Executive Officer of the Company and Leesport Bank effective March 17, 2005.

11

PART II

Item 5.    Market For Common Equity and Related Shareholder Matters

        As of December 31, 2004, there were 924 record holders of the Company's common stock. The market price of the Company's common stock for each quarter in 2004 and 2003 and the dividends declared on the Company's common stock for each quarter in 2004 and 2003 are set forth below.

        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 December 15, 2004 with a record date of January 3, 2005 and distributed to shareholders on January 14, 2005:

        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."

        On May 20, 2004, the Company announced the extension of its stock repurchase plan, originally effective January 1, 2003, for the repurchase of up to 162,000 shares of the Company's common stock. During the fourth quarter of 2004, the Company did not repurchase any of its outstanding common stock. At December 31, 2004, the maximum number of shares that may yet be purchased under the stock repurchase plan was 100,513 shares.

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,

12

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 December 15, 2004 with a record date of January 3, 2005 and distributed to shareholders on January 14, 2005.

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, 2004, 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, 2004, Leesport Realty Solutions, LLC was a wholly-

13

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. In July 2004, Leesport Bank dissolved its investment with the real estate company.

        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.

        On October 1, 2004, the Company acquired 100% of the outstanding voting shares of Madison Bancshares Group, Ltd., the holding company for Madison Bank ("Madison"), a Pennsylvania state-chartered commercial bank and its wholly owned subsidiary, Philadelphia Financial. Madison has become a division of Leesport Bank. For each share of Madison common stock, the Company exchanged 0.6028 shares of Leesport common stock resulting in the issuance of 1,311,010 of Leesport common stock and a cash payment of $11,790. The total purchase price was $34.6 million. The value of the common shares issued was determined based on the average market price of Leesport common shares five days before and five days after the date of the announcement. In connection with the transaction, Madison paid cash of $7.1 million and recognized the expense for 699,122 Madison options and warrants outstanding at September 30, 2004. In addition, Madison paid cash of $2.3 million and recognized the expense for the termination of existing contractual arrangements.

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 judgments,

14

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.

Allowance for Loan Losses

        The provision for loan losses charged to operating expense reflects the amount deemed appropriate by management to provide for known and inherent losses in the existing loan portfolio. Management's judgment is based on the evaluation of individual loans past experience, the assessment of current economic conditions, and other relevant factors. Loan losses are charged directly against the allowance for loan losses and recoveries on previously charged-off loans are added to the allowance.

        Management uses significant estimates to determine the allowance for loan losses. Consideration is given to a variety of factors in establishing these estimates including current economic conditions, diversification of the loan portfolio, delinquency statistics, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant factors. Since the sufficiency of the allowance for loan losses is dependent, to a great extent on conditions that may be beyond our control, it is possible that management's estimates of the allowance for loan losses and actual results could differ in the near term. Although we believe that we use the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the evaluation. For example, a downturn in the local economy could cause increases in non-performing loans. Additionally, a decline in real estate values could cause some of our loans to become inadequately collateralized. In either case, this may require us to increase our provisions for loan losses, which would negatively impact earnings. Additionally, a large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively impact earnings. In addition, regulatory authorities, as an integral part of their examination, periodically review the allowance for loan losses. They may require additions to the allowance for loan losses based upon their judgments about information available to them at the time of examination. Future increases to our allowance for loan losses, whether due to unexpected changes in economic conditions or otherwise, could adversely affect our future results of operations.

Stock-Based Compensation

        As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123, the Company accounts for stock-based compensation in accordance with Accounting Principals Board Opinion ("APB") No. 25. Under APB No. 25, no compensation expense is recognized in the income statement related to any option granted under the Company's stock option plans. The pro forma impact to net income and earnings per share that would occur if compensation expense was recognized, based on the estimated fair value of the options on the date of the grant, is disclosed in the notes to the consolidated financial statements.

        In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (R), "Share-Based Payment." Statement No. 123 (R) addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. Statement 123 (R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to the employees in the income statement. The revised Statement generally requires that an entity account for those transactions using the fair-value-based method, and eliminates the intrinsic value method of

15

accounting in APB Opinion No. 25. "Accounting for Stock Issued to Employees," which was permitted under Statement No. 123, as originally issued.

        The revised Statement requires entities to disclose information about the nature of the share-based payment transaction and the effects of those transactions on the financial statements. Statement No. 123 (R) is effective for periods beginning after June 15, 2005. All public companies must use either the modified prospective or the modified retrospective transition method. The Company will adopt the modified prospective method. Using the modified prospective method, the Company estimates that total stock-based compensation expense, net of related tax effects, will be approximately $24,000 for the year ending December 31, 2005.

Goodwill

        The Company has recorded goodwill of $9.2 million at December 31, 2004 related to Essick & Barr, LIG and LWM. The Company performs its annual goodwill impairment test in the fourth quarter of each calendar year. A fair value is determined for the insurance services and investment services reporting segments. If the fair value of the reporting unit exceeds the book value, no write downs of goodwill is necessary. If the fair value is less than the book value, an additional test is necessary to assess the proper carrying value of goodwill. The Company determined that no impairment write-offs were necessary during 2004 and 2003.

        Business unit valuation is inherently subjective, with a number of factors based on assumption and management judgments. Among these are future growth rates, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors and reporting unit performance could result in different assessments of the fair value and could result in impairment charges in the future.

Investment Securities Impairment Evaluation

        Management evaluates securities for the other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Results of Operations

        Net income for 2004 was $5.42 million or $1.36 per share diluted compared to $4.95 million or $1.38 per share diluted for 2003 and $4.92 million or $1.41 per share for 2002. 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. Details regarding changes in each of these areas follow.

        Included in net income for 2004 are merger related costs of $899,000 associated with the Madison acquisition. Included in net income for 2003 is a gain of $3.1 million on the sale of three financial centers

16

partially offset by prepayment fees of $2.5 million on the refinance of borrowings from the Federal Home Loan Bank. Excluding these items, net income and earnings per share for 2004 and 2003 were as follows:

        Return on average assets was 0.78% for 2004, 0.84% for 2003 and 0.95% for 2002. Return on average shareholders' equity was 8.69% for 2004, 9.39% for 2003 and 10.33% for 2002.

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 increased to $20.8 million or 26.0% for the year ended December 31, 2004, compared to $16.5 million for 2003. The increase in net interest income during 2004 was primarily the result of an increase in average earning assets, due mainly to strong organic loan growth, loans acquired from Madison, and the targeted short-term interest rate, as established by the Federal Reserve Bank ("FRB"), increasing five times, which resulted in an increase in the prime rate from 4.00% at December 31, 2003, to 5.25% at December 31, 2004. Average loans increased by $81.5 million or 23.1% from 2003 to 2004. Management attributes the increase in organic loan growth to successful marketing initiatives and the favorable interest rate environment. Average investment securities increased by $8.8 million or 5.0% from 2003 to 2004.

        Another major contributing factor to the increase in net interest income was a decrease in the cost of interest-bearing deposits and the cost of long term borrowings. The decrease in interest-bearing deposit rates was the result of both management pricing strategy as well as the effect of longer-term certificates of deposit that matured during the year and repriced at lower rates. The average rate paid on interest-bearing deposits has dropped steadily over the last three years, from 3.03% for the year ended 2002, to 2.45% for 2003, to 2.31% for 2004. Average interest bearing deposits increased $59.5 million or 17.7% from 2003 to 2004 due primarily to strong organic growth in deposits and deposits acquired from Madison.

17

The average rate paid on long-term borrowings has dropped steadily over the last three years, from 4.97% for the year ended 2002, to 4.51% for 2003, to 3.34% for 2004. The decrease in the cost of long-term borrowings from 2003 to 2004 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 deposit. Average long-term borrowings decreased $26.5 million or 40.3% from 2003 to 2004. At year-end 2004, actual balances for federal funds purchased and long term debt were $36.1 million and $54.5 million, respectively compared to $62.1 million and $34.5 million at year-end 2003, respectively.

        As a result of an increase in the commercial loan portfolio for loans acquired from Madison, an increase in the investment portfolio yield, increased non-interest bearing deposits, maturities of higher priced certificates of deposit and lower long-term borrowing costs and the increase in prime rate, the net interest margin increased to 3.46% in 2004 from 3.22% in 2003.

Other Income

        Details of non-interest income follow:

        The Company's primary source of other income for 2004 was commissions and other revenue generated through sales of insurance products through its insurance subsidiary, Essick & Barr. Revenues from insurance operations totaled $10.8 million in 2004 compared to $9.2 million in 2003 and $5.7 million in 2002. Revenues from broker and investment advisory commissions generated through the Company's investment subsidiaries, LIG and LWM, decreased to $528,000 in 2004 from $696,000 in 2003 due to market weakness and a change in the management team which created a temporary downturn in business as accountholder coverage was restructured. Also, annuity and other insurance commissions generated by LIG and LWM of $309,000, $112,000 and $48,000 are included in commissions and fees from insurance sales for the years 2004, 2003 and 2002, respectively.

        In September 2003, the Company recognized a $3.1 million gain on 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 $2.1 million in 2004, $2.4 million in 2003 and $1.5 million in 2002. The decrease in mortgage banking revenue from 2003 to 2004 is mainly attributable to decreased mortgage loan refinancing due to higher interest rates offset by the acquisition of Philadelphia Financial. Also included in other income are net gains on loan sales of $432,000 in 2004, $269,000 in 2003 and $621,000 in 2002 from the sale of $8.5 million, $8.7 million and $5.6 million, respectively, of fixed and adjustable 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 and the acquisition of Madison.

18

Other Expenses

        Details of non-interest expense follow:

        Non-interest expense consists primarily of costs associated with personnel, occupancy and equipment, data processing, marketing and professional fees. The Company's non-interest expense for the year ended December 31, 2004 totaled $30.5 million, representing an increase of $3.0 million or 10.8% as compared to 2003. Salaries and employee benefits, the largest component of non-interest expense, increased $3.6 million or 26.5% from 2003 to 2004. The increase in salaries and employee benefits from 2003 to 2004 was primarily the result of the acquisition of Madison, merit increases, continued growth of the Company, commissions paid on revenue generated from sales of insurance products through Essick & Barr and higher benefits costs consistent with industry trends. Full-time equivalent (FTE) employees for the Company are 332, 230 and 227 for the years ended December 31, 2004, 2003 and 2002, respectively. The growth in FTE's from 2003 to 2004 was primarily the result of the acquisition of Madison and continued growth of the Company.

        Total occupancy expense increased $573,000 or 28.3% in 2004 primarily due to the acquisition of Madison. The occupancy expense increase in 2003 was primarily the result 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, net of the facility costs associated with the sale of three financial centers in September 2003. Total equipment expense increased $451,000 or 29.7% in 2004 primarily due to the additional depreciation and software maintenance expense related to acquisition of Madison. Equipment expense for 2003 included insurance subsidiary acquisitions, two new financial centers and a new operations center.

        Other non-interest expense for 2004 includes merger related costs of $899,000 related to the acquisition of Madison. Other non-interest expense for 2003 includes $2.5 million in prepayment expenses on the refinance of $40.9 million of fixed rate, high cost FHLB advances. Total amortization of identifiable intangible assets increased $123,000 or 39.8% in 2004 as compared to 2003 primarily due to core deposit intangibles acquired in the Madison acquisition. Total outside processing services decreased $25,000 in 2004 as compared to 2003 primarily because of conversion costs incurred in the second quarter of 2003 associated with the change to Metavante Corporation, our core banking system provider. Insurance expense increased $160,000 in 2004 primarily due to the acquisition of Madison.

Income Taxes

        The effective income tax rate for the Company for the years ended December 31, 2004, 2003 and 2002 was 17.6%, 27.5% and 28.8% respectively. The effective tax rate for 2004 decreased from 2003 primarily

19

because of a $587,000 federal tax benefit for the twelve months ended December 31, 2004 received from the Bank's investment in an affordable housing corporate tax credit limited partnership.

Financial Condition

        The Company's total assets increased to $877.4 million at December 31, 2004, representing a growth rate of 41.0% from $622.3 million at December 31, 2003.

Cash and Securities Portfolio

        Cash and balances due from banks increased to $24.1 million at December 31, 2004 from $15.2 million at December 31, 2003.

        The securities portfolio decreased 14.2% to $172.2 million at December 31, 2004, from $200.7 million at December 31, 2003 primarily due to investment maturities and principal repayments reinvested into higher yielding loans. 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 2004 and 2003 were of mortgage backed securities issued by US Government agencies. State and political subdivision securities were also purchased in 2004 to increase the yield of the portfolio.

        At December 31, 2004, the securities balance included a net unrealized loss on available for sale securities of $393,000 versus a net unrealized gain of $429,000 at December 31, 2003. The increase in longer term interest rates over the last six months of 2004 was primarily responsible for the reduction in the fair market value of the securities.

Loans

        Loans increased to $596.3 million at December 31, 2004 from $357.4 million at December 31, 2003, an increase of $238.9 million or 66.8%. Management has targeted the loan portfolio as a key to the Company's continuing growth. Specifically, the Company has a lending focus within its market area of higher yielding commercial loans made to small and medium sized businesses. The acquisition of Madison in 2004, whose loan portfolio consisted of mainly commercial loans, underscores that focus as the commercial portfolio increased to $309.8 million at December 31, 2004, from $202.6 million at December 31, 2003, an increase of $107.2 million or 52.9%.

        Loans secured by 1 to 4 family residential real estate increased to $190.6 million at December 31, 2004, from $88.9 million as of December 31, 2003, an increase of $101.7 million or 114.4%. Loans secured by multi-family residential real estate increased to $12.4 million at December 31, 2004, from $8.9 million as of December 31, 2003, an increase of $3.5 million or 39.3%. The increase in residential real estate is due primarily to a reduction in mortgage loan refinancing due to increases in mortgage rates and the acquisition of Madison.

        Home equity lending products increased to $71.4 million at December 31, 2004, from $45.8 million as of December 31, 2003, an increase of $25.6 million or 55.9%. This increase is primarily due to continued favorable market interest rates, successful marketing initiatives and the acquisition of Madison.

        The loans held for sale category is composed of $9.8 million of mortgage loans committed for sale to other institutions and the secondary market as of December 31, 2004 versus $1.3 million as of December 31, 2003. The increase in loans held for sale is primarily due to the acquisition of Philadelphia Financial.

        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 utilizing these loans sales to generating fees, improve interest-rate risk and fund growth in higher yielding assets.

20

Premises and Equipment

        Premises and equipment, net of accumulated depreciation and amortization, decreased during 2004 to $8.6 million from $12.9 million at the end of 2003. During 2004, the Company sold six branch locations with a net book value of $7.0 million and leased them back from the purchaser with a lease term of 20 years resulting in a gain of $712,000, which is being amortized into income over the term of the lease. Depreciation expense and amortization of leasehold improvements for the years ended December 31, 2004 and 2003 was $1.4 million and $1.1 million, respectively.

Goodwill and Identifiable Intangible Assets

        Goodwill increased to $38.2 million from $9.2 million for the years ended December 31, 2004 and 2003, respectively. Identifiable intangible assets increased to $5.8 million from $4.4 million for the years ended December 31, 2004 and 2003, respectively. These increases in goodwill and identifiable intangible assets are due primarily to the acquisition of Madison.

Bank Owned Life Insurance

        Bank owned life insurance increased $566,000 to $11.4 million at December 31, 2004 from $10.8 million at December 31, 2003. The increase in bank owned life insurance is due to tax exempt earnings credited in 2004.

Other Assets

        Other assets, which include accrued interest receivable, increased to $18.3 million at December 31, 2004 from $13.6 million at December 31, 2003. Other assets increased primarily due to the acquisition of Madison.

Deposits and Borrowings

        Total deposits increased by $203.7 million or 49.9% to $612.3 million at December 31, 2004 from $408.6 million at December 31, 2003.

        Non-interest bearing deposits increased to $107.4 million at December 31, 2004, from $67.7 million at December 31, 2003, an increase of $39.7 million or 58.7%. The increase in non-interest bearing deposits is primarily due to organic growth and the acquisition of Madison. Management continues to promote growth in these types of deposits, which include a free checking account product, as a method to help reduce the overall cost of the Company's funds. Interest bearing deposits increased by $164.0 million or 48.1%, from $340.9 million at December 31, 2003 to $504.8 million at December 31, 2004. The increase is primarily the result of the acquisition of Madison, organic growth due to corporate pricing strategies and successful marketing initiatives.

        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 ("FHLB")and other correspondent banks and securities sold under agreements to repurchase, were $88.9 million at December 31, 2004, and $103.7 million at December 31, 2003. This decrease is primarily the result the Company purchasing long-term FHLB advances taking advantage of the favorable interest rate environment and limiting future interest rate risk. Long-term borrowings, which consisted of advances from the FHLB totaled $54.5 million and $34.5 million at December 31, 2004 and 2003, respectively.

        Junior subordinated debt was $20.2 million as of December 31, 2004 and $15.0 million at December 31, 2003. The increase of $5.2 million is due to the acquisition of Madison.

Shareholders' Equity

        The Company's common stock, surplus, retained earnings and accumulated other comprehensive income/(loss) for the years ended December 31, 2004 and 2003 increased by $37.5 million and $0.5 million, respectively, to $90.9 million and $53.4 million. The increase for 2004 is primarily the result of the

21

acquisition of Madison of $34.1 million and net income of $5.4 million offset by cash dividends of $2.8 million, which included the effect of the 5% stock dividend declared by the Board of Directors on December 15, 2004 with a record date of January 3, 2005 and distributed to shareholders on January 14, 2005.

        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 2004, combined with current interest rates, resulted in a decrease in equity, net of taxes, of $392,000. This compares with a decrease to equity, net of taxes, of $1.9 million at the end of 2003.

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.

        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 junior subordinated debt 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.

22

        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 of 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. At December 31, 2004 and 2003, the carrying and market values were approximately $102,000 and $94,000, respectively.

        Also, the Company sells fixed and adjustable rate residential mortgage loans to limit the interest rate risk of holding longer-term assets on the balance sheet. In 2004, 2003 and 2002, the Company sold $8.5 million, $8.7 million and $5.6 million, respectively, of fixed and adjustable rate loans.

        At December 31, 2004, the Company was in a positive one-year cumulative gap position. Commercial adjustable rate loans increased $87.5 million or 57.6% from $151.7 million at December 31, 2003 to $239.2 million at December 31, 2004. Installment adjustable rate loans increased $17.2 million or 39.8% from $43.2 million at December 31, 2003 to $60.4 million at December 31, 2004. These increases are primarily the result of the acquisition of Madison, organic growth and successful marketing initiatives. During the second half of 2004, the targeted short-term interest rate, as established by the FRB, increased five times, which resulted in an increase in the prime rate from 4.00% at December 31, 2003, to 5.25% at December 31, 2004. This increase in rates caused the Company to experience a decrease in principal payments in loans and mortgage backed securities extending maturities for fixed rate loans and investments. These factors contributed to the Company's positive one-year cumulative gap position. In 2005, the Company will continue its strategy to originate adjustable rate commercial and installment loans and use investment security cash flows and fixed rate deposits to reduce the overnight borrowings to maintain a positive gap position.

Interest Sensitivity Gap at December 31, 2004

(1)

Includes 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.

23

        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 100, 200 and 300 basis points, adjusted because of the current low rate environment, were applied to the Company's interest earning assets and interest bearing liabilities as of December 31, 2004. The results of these simulations on net interest income for 2004 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, 2004 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 2004 as discussed above. The acquisition of Madison and the Company's plan to reduce its negative one-year cumulative gap position is expected to keep 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.

        Other than Tier 1 capital restrictions on the Company's junior subordinated debt discussed later, the Company is not aware of any pending recommendations by regulatory authorities that would have a

24

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, 2004 was 7.98% compared to 9.32% at December 31, 2003. This decrease is primarily the result of an increase in disallowed goodwill and other intangible assets and the increase in average total assets primarily due to the acquisition of Madison. For 2004 and 2003, 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 junior subordinated debt, 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 issued a final rule restricting the Company's junior subordinated debt to 25% of Tier I capital. Amounts of junior subordinated debt in excess of the 25% limit generally may be included in tier 2 capital. The final rule provides a five-year transition period, ending March 31, 2009.

        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

25

and investment securities, deposit flows, and loan prepayments are significantly influenced by general economic conditions and level of interest rates.

        At December 31, 2004, the Company maintained $24.1 million in cash and cash equivalents primarily consisting of cash and due from banks. In addition, the Company had $172.2 million in securities available for sale. The combined total of $196.3 million represented 22.4% of total assets at December 31, 2004 compared to 34.7% at December 31, 2003.

        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 through organic growth and acquisitions 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, 2004, approximately 62.8% of the Company's assets were funded by core deposits acquired within its market area. An additional 10.4% 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, 2004 totaled $218.9 million. This consisted of $52.2 million in commercial real estate and construction loans, $43.9 million in home equity lines of credit, $112.7 million in unused business lines of credit and $10.1 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.

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).

26

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.

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.