LEESPORT FINANCIAL CORP - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý Quarterly Report pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934
for the Quarterly Period Ended June 30, 2004,

o Transition report pursuant to Section 13 or 15(d) Of the Exchange Act
for the Transition Period from to .

No. 0-14555

(Commission File Number)

LEESPORT FINANCIAL CORP.

(Exact name of Registrant as specified in its charter)

PENNSYLVANIA		23-2354007
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

1240 Broadcasting Road, Wyomissing, Pennsylvania		19610
(Address of principal executive offices)		(Zip Code)

(610) 208-0966
(Registrants telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last report)

Check whether 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

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

		Number of Shares Outstanding as of August 12, 2004
COMMON STOCK ($5.00 Par Value)		3,413,094
(Title of Class)		(Outstanding Shares)

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 Quarterly Report on Form 10-Q 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.

Part I – FINANCIAL INFORMATION

Item 1 – Financial Statements

LEESPORT FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share data)

	June 30, 2004			December 31, 2003
	(Unaudited)
ASSETS

Cash and due from banks	$	19,447		$	15,227
Interest-bearing deposits in banks	30			11

Total cash and cash equivalents	19,477			15,238

Federal funds sold	—			1,100
Mortgage loans held for sale	1,921			1,280
Securities available for sale	178,671			200,650
Loans, net of allowance for loan losses 06/04 - $4,801; 12/03 - $4,356	387,831			353,126
Premises and equipment, net	13,253			12,907
Identifiable intangible assets	4,191			4,369
Goodwill	9,580			9,200
Bank owned life insurance	11,103			10,789
Other assets	16,936			13,593

TOTAL ASSETS	$	642,963		$	622,252

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Non-interest bearing	$	69,930		$	67,711
Interest bearing	363,807			340,871
Total deposits	433,737			408,582

Securities sold under agreements to repurchase	46,867			41,588
Federal funds purchased	51,360			62,090
Long-term debt	31,000			34,500
Mandatory redeemable capital debentures	—			15,000
Junior subordinated debt	15,000			—
Other liabilities	12,910			7,115

Total liabilities	590,874			568,875

Shareholders’ Equity
Common Stock, $5.00 par value; authorized 20,000,000 shares; 3,459,137 shares issued at June 30, 2004 and 3,439,310 shares issued at December 31, 2003	17,296			17,197
Surplus	18,844			18,426
Retained earnings	19,854			18,535
Accumulated other comprehensive income (loss)	(3,009		)	273
Treasury stock; 46,043 shares at June 30, 2004 and 55,487 shares at December 31, 2003, at cost	(896		)	(1,054		)

Total shareholders’ equity	52,089			53,377

Total liabilities and shareholders’ equity	$	642,963		$	622,252

See Notes to Consolidated Financial Statements.

LEESPORT FINANCIAL CORP. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except share data)

	Three Months Ended				Six Months Ended
	June 30, 2004		June 30, 2003		June 30, 2004		June 30, 2003

Interest income:
Interest and fees on loans	$	5,604	$	5,791	$	10,956	$	11,415
Interest on securities:
Taxable	1,493		1,463		3,132		2,712
Tax-exempt	220		178		449		356
Dividend income	96		47		198		111
Interest on federal funds sold	—		1		—		9
Other interest income	2		1		5		6
Total interest income	7,415		7,481		14,740		14,609

Interest expense:
Interest on deposits	2,065		2,099		4,114		4,142
Interest on short-term borrowings	139		29		304		39
Interest on securities sold under agreements to repurchase	184		61		363		136
Interest on long-term debt	277		908		578		1,748
Interest on mandatory redeemable capital debentures	—		211		—		430
Interest on junior subordinated debt	202		—		395		—
Total interest expense	2,867		3,308		5,754		6,495
Net interest income	4,548		4,173		8,986		8,114

Provision for loan losses	300		375		660		670
Net interest income after provision for loan losses	4,248		3,798		8,326		7,444
Other income:
Customer service fees	422		376		848		732
Mortgage banking activities	255		840		484		1,460
Commissions and fees from insurance sales	2,530		2,341		5,231		4,489
Brokerage and investment advisory commissions and fees	120		211		249		370
Net gain on sale of loans	85		—		51		21
Other income	322		351		772		639
Net realized gains on sales of securities	46		85		200		195

Total other income	3,780		4,204		7,835		7,906

Other expense:
Salaries and employee benefits	3,686		3,359		7,540		6,669
Occupancy expense	508		493		1,045		976
Equipment expense	439		342		885		643
Marketing and advertising expense	361		358		666		665
Amortization of identifiable intangible assets	94		69		178		137
Professional services	311		306		566		543
Outside processing	500		737		1,021		1,120
Insurance expense	122		97		222		185
Other expense	593		595		1,106		1,198

Total other expense	6,614		6,356		13,229		12,136
Income before income taxes	1,414		1,646		2,932		3,214

Income taxes	162		467		452		902
Net income	$	1,252	$	1,179	$	2,480	$	2,312

See Notes to Consolidated Financial Statements.

	Three Months Ended				Six Months Ended
	June 30, 2004		June 30, 2003		June 30, 2004		June 30, 2003

EARNINGS PER SHARE DATA

Average shares outstanding	3,415,543		3,388,656		3,408,191		3,399,325
Basic earnings per share	$	0.37	$	0.35	$	0.73	$	0.68
Average shares outstanding for diluted earnings per share	3,476,242		3,418,033		3,471,681		3,428,702
Diluted earnings per share	$	0.36	$	0.34	$	0.71	$	0.67
Cash dividends declared per share	$	0.17	$	0.16	$	0.34	$	0.32

See Notes to Consolidated Financial Statements.

LEESPORT FINANCIAL CORP.

UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Six Months ended June 30, 2004 and 2003

(Dollar amounts in thousands, except share data)

				Surplus		Retained Earnings			Accum- ulated Other Compre- hensive Income (Loss)			Treasury Stock			Total

	Common Stock
	Number of Shares Issued	Par Value
Balance, December 31, 2003	3,439,310	$	17,197	$	18,426	$	18,535		$	273		$	(1,054	)	$	53,377

Net Income	—	—		—		2,480			—			—			2,480
Change in net realized gains (losses) on securities available for sale, net of reclassification adjustment and income taxes	—	—		—		—			(3,282		)	—			(3,282		)

Total comprehensive (loss)															(802		)
Purchase of treasury stock (6,000 shares)	—	—		—		—			—			(140		)	(140		)
Reissuance of treasury stock (15,444 shares)	—	—		66		—			—			298			364

Common stock issued in connection with directors’ compensation	6,890	34		128		—			—			—			162

Common stock issued in connection with directors and employee stock purchase plans	12,937	65		224		—			—			—			289

Cash dividends declared ($.34 per share)	—	—		—		(1,161		)	—			—			(1,161		)

Balance, June 30, 2004	3,459,137	$	17,296	$	18,844	$	19,854		$	(3,009	)	$	(896	)	$	52,089

				Surplus		Retained Earnings			Accum- ulated Other Compre- hensive Income (Loss)		Treasury Stock			Total


	Common Stock
	Number of Shares Issued	Par Value
Balance, December 31, 2002	3,241,606	$	16,208	$	15,573	$	18,978		$	2,141	$	—		$	52,900

Net Income	—	—		—		2,312			—		—			2,312
Change in net realized gains (losses) on securities available for sale, net of reclassification adjustment and income taxes	—	—		—		—			373		—			373

Total comprehensive income														2,685
Purchase of treasury stock (50,200 shares)	—	—		—		—			—		(949		)	(949		)

Common stock issued in connection with directors’ compensation	7,953	40		115		—			—		—			155

Common stock issued in connection with directors and employee stock purchase plans	11,521	57		172		—			—		—			229

Common stock dividend (5%)	161,949	810		2,383		(3,200		)	—		—			(7		)

Cash dividends declared ($.32 per share)	—	—		—		(1,076		)	—		—			(1,076		)

Balance, June 30, 2003	3,423,029	$	17,115	$	18,243	$	17,014		$	2,514	$	(949	)	$	53,937

See Notes to Consolidated Financial Statements.

LEESPORT FINANCIAL CORP. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

	Six Months Ended
	June 30, 2004			June 30, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	2,480		$	2,312
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	660			670
Provision for depreciation and amortization of premises and equipment	636			496
Amortization of identifiable intangible assets	178			137
Deferred income taxes	(270		)	(270		)
Director stock compensation	162			155
Net amortization securities premiums and discounts	324			923
Amortization of mortgage servicing rights	85			178
Net realized (gains) losses on sale of foreclosed real estate	18			(37		)
Net realized gains on sales of securities	(200		)	(195		)
Proceeds from sales of loans held for sale	19,778			68,010
Net gains on sale of loans	(507		)	(1,374		)
Loans originated for sale	(19,980		)	(51,907		)
Increase in cash surrender value of life insurance	(315		)	(176		)
(Increase) decrease in accrued interest receivable and other assets	1,247			(1,829		)
Increase in accrued interest payable and other liabilities	3,467			906
NET CASH PROVIDED BY OPERATING ACTIVITIES	7,763			17,999

CASH FLOW FROM INVESTING ACTIVITIES
Available for sale securities:
Purchases	(24,003		)	(101,034		)
Principal repayments, maturities and calls	16,716			51,524
Proceeds from sales	23,528			20,906
Net decrease in federal funds sold	1,100			—
Net increase in loans receivable	(38,966		)	(24,754		)
Proceeds from sale of loans	3,601			—
Net (increase) decrease in Federal Home Loan Bank Stock	625			(562		)
Proceeds from sale of foreclosed real estate	254			204
Purchases of premises and equipment	(982		)	(3,076		)
Purchase of limited partnership investment	(975		)	—
NET CASH USED IN INVESTING ACTIVITIES	(19,102		)	(56,792		)

CASH FLOW FROM FINANCING ACTIVITIES
Net increase in deposits	25,155			41,134
Net increase (decrease) in federal funds purchased	(10,730		)	674
Net increase (decrease) in securities sold under agreements to repurchase	5,279			(677		)
Proceeds from long-term debt	—			14,000
Repayments of long-term debt	(3,500		)	(6,000		)
Purchase of treasury stock	(140		)	(949		)
Proceeds from the exercise of stock options and stock purchase plans	289			229
Reissuance of treasury stock	364			—
Cash dividends paid	(1,139		)	(1,044		)
NET CASH PROVIDED BY FINANCING ACTIVITIES	15,578			47,367
Increase in cash and cash equivalents	4,239			8,574

Cash and cash equivalents:
Beginning	15,238			16,490
Ending	$	19,477		$	25,064

Cash payments for:	$	5,656		$	6,564
Interest
Taxes	$	1,060		$	705

See Notes to Consolidated Financial Statements.

LEESPORT FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The unaudited consolidated financial statements contained herein have been prepared in accordance with the instructions to Form 10-Q of Regulation S-X. All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (including normal recurring adjustments) considered necessary for a fair presentation of the results for the interim periods have been included. For comparative purposes, prior years’ consolidated financial statements have been reclassified to conform to report classifications of the current year. The reclassifications had no effect on net income.

The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The results of operations for the three and six-month periods ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year. For purpose of reporting cash flows, cash and cash equivalents include cash and due from banks, and interest bearing deposits in other banks. For further information, refer to the Consolidated Financial Statements and Footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

2. Earnings Per Common Share

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

Earnings per common share for the respective periods indicated have been computed based upon the following (dollars in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2004		June 30, 2003		June 30, 2004		June 30, 2003
	(Dollar amounts in thousands)

Net income available to shareholders	$	1,252	$	1,179	$	2,480	$	2,312

Average shares outstanding	3,415,543		3,388,656		3,408,191		3,399,325
Effect of dilutive stock options	60,699		29,377		63,490		29,377
Average number of shares used to calculate diluted earnings per share	3,476,242		3,418,033		3,471,681		3,428,702

3. Comprehensive Income

Accounting principles generally require that recognized revenue, expense, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of other comprehensive income (loss) and related tax effects were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(Dollar amounts in thousands)
Unrealized holding gains (losses) on available for sale securities	$	(7,548	)	$	1,185		$	(4,788	)	$	760
Reclassification adjustment for gains realized in income	(46		)	(85		)	(200		)	(195		)
Net unrealized gains (losses)	(7,594		)	1,100			(4,988		)	565
Income tax effect	2,582			(373		)	1,706			(192		)
Other comprehensive income (loss)	$	(5,012	)	$	727		$	(3,282	)	$	373

4. Contingent Liabilities and Guarantees

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

A summary of the contractual amount of the Company’s financial instrument commitments is as follows:

	June 30, 2004		December 31, 2003
	(Dollar amounts in thousands)
Commitments to grant loans	$	23,207	$	18,166
Unfunded commitments under lines of credit	106,657		103,984
Financial and performance standby letters of credit	9,044		9,166

Outstanding letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Company had $9,044,000 of financial and performance standby letters of credit as of June 30, 2004. The Bank uses the same credit policies in making conditional obligations as it does for on-balance sheet instruments.

The majority of these standby letters of credit expire within the next 24 months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Company requires collateral and personal guarantees supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of June 30, 2004 for guarantees under standby letters of credit is not material.

5. Segment Information

The Company’s insurance operations and investment operations are managed separately from the traditional banking and related financial services that the Company also offers. The insurance operation provides commercial, individual, and group benefit plans and personal coverage. The investment operation provides individual financial, retirement and estate planning, investment advice and services, corporate and small business pension and retirement planning services.

	Banking and Financial Services		Insurance Services		Investment Services			Total
	(Dollar amounts in thousands)

Three months ended June 30, 2004
Net interest income and other income from external sources	$	5,678	$	2,530	$	120		$	8,328
Income (loss) before income taxes	1,045		453		(84		)	1,414

Three months ended June 30, 2003
Net interest income and other income from external sources	$	5,825	$	2,341	$	211		$	8,377
Income (loss) before income taxes	1,341		434		(129		)	1,646

Six months ended June 30, 2004
Net interest income and other income from external sources	$	11,341	$	5,231	$	249		$	16,821
Income (loss) before income taxes	2,050		963		(81		)	2,932

Six months ended June 30, 2003
Net interest income and other income from external sources	$	11,161	$	4,489	$	370		$	16,020
Income (loss) before income taxes	2,689		795		(270		)	3,214

6. Stock Option Plans

The Company has an Employee Stock Incentive Plan that covers all officers and key employees of the Company and its subsidiaries and is administered by a committee of the Board of Directors. The total number of shares available for issuance under the Plan is 420,500 shares. The option price for options issued under the Plan must be at least equal to 100% of the fair market value of the common stock on the date of grant and not less than the stock’s par value. Options granted under the Plan are exercisable over a period not less than twelve months after the date of grant, but no later than ten years after the date of grant in accordance with the vesting period as determined by the Plan committee. Options expire on the earlier of ten years after the date of grant, three months from the participant’s termination of employment or one year from the date of the participant’s death or disability.

The Company has an Independent Directors Stock Option Plan. The total number of shares available for issuance under the Plan is 105,125 shares. The Plan covers all directors of the Company who are not employees. The option price for options issued under the Plan will be equal to the fair market value of the Company’s common stock on the date of grant. Options granted under the plan are exercisable six months after the date of grant and expire on the earlier of ten years after the date of grant, three months from the date the participant’s relationship with the Company ceases or twelve months from the date of the participant’s death or disability.

The Company accounts for the above stock option plans under the recognition and measurement principles of APB opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” to stock-based compensation:

	Three Months Ended						Six Months Ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
	(Dollar amounts in thousands except share data)

Net income as reported	$	1,252		$	1,179		$	2,480		$	2,312
Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(45		)	(38		)	(93		)	(77		)

Pro forma net income	$	1,207		$	1,141		$	2,387		$	2,235

Basic earnings per share:
As reported	$	.37		$	.35		$	.73		$	.68
Pro forma	$	.35		$	.34		$	.70		$	.66

Diluted earnings per share:
As reported	$	.36		$	.34		$	.71		$	.67
Pro forma	$	.35		$	.33		$	.69		$	.65

7. Debt and Borrowings

Total debt decreased by $9.0 million or 5.8% to $144.2 million at June 30, 2004 from $153.2 million at December 31, 2003. The decrease in total debt and borrowings was primarily due to the Company repaying overnight federal funds which declined to $51.4 million at June 30, 2004 from $62.1 million at December 31, 2003. The repayment of these funds was primarily accomplished throughout the quarter using proceeds from investment securities pay downs and increases in deposit account balances.

8. Junior Subordinated Debt

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” which was revised in December 2003. This interpretation provides guidance for the consolidation of variable interest entities (VIEs). First Leesport Capital Trust I and Leesport Capital Trust II (the “Trusts”) each qualify as a variable interest entity under FIN 46. The Trusts issued mandatory redeemable preferred securities (Trust Preferred Securities) to third-party investors and loaned the proceeds to the Company. The Trusts hold, as their sole assets, subordinated debentures issued by the company.

FIN 46 required the Company to deconsolidate the Trusts from the consolidated financial statements as of March 31, 2004. There has been no restatement of prior periods. The impact of this deconsolidation was to increase junior subordinated debentures by $15,000,000 and reduce the mandatory redeemable capital debentures line item by $15,000,000 which had represented the trust preferred securities of the trust. The Company’s equity interest in the trust subsidiaries of $538,000, which had previously been eliminated in consolidation, is now reported in “Other assets”. For regulatory purposes, the Federal Reserve Board has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a determination that trust Preferred Securities can no longer be considered in regulatory capital, the securities will become callable and the Company may redeem them. The adoption of FIN 46 did not have an impact on the Company’s results of operations or liquidity.

9. Acquisitions and Divestitures

On April 16, 2004, the Company entered into an agreement and plan of merger with Madison Bancshares Group, Ltd. (“Madison”). The agreement provides, among other things, for the merger of Madison into the Company and the subsequent merger of Madison Bank, the wholly owned banking subsidiary of Madison, into Leesport Bank, with Leesport Bank surviving the merger as a subsidiary of the Company. Madison Bank will maintain its trade name and become a division of Leesport Bank. As of June 30, 2004, Madison had total assets of $215.6 million, loans of $197.2 million and deposits of $177.7 million. The merger agreement provides for each of the approximately 2.16 million shares of Madison’s common stock to be exchanged for 0.6028 shares of the Company’s common stock. In addition, each of the options to acquire Madison’s stock will receive cash for the difference between their option price and $15.65. The acquisition is subject to all required regulatory approvals and by Leesport and Madison shareholders, and is expected to be completed in the fourth quarter of 2004.

On September 30, 2003, the Company acquired certain assets of CrosStates Insurance Consultants, Inc. (CrosStates), a full service insurance agency that specializes in personal and casualty insurance headquartered in Langhorne, Pennsylvania. CrosStates has become a division of the Company’s Essick & Barr, LLC insurance agency. As a result of this acquisition, Essick & Barr, LLC expanded its retail and commercial insurance presence in southeastern Pennsylvania counties.

The Company paid cash of $1.0 million for CrosStates on September 30, 2003 and recorded a liability of $1.4 million, payable to the shareholder of CrosStates in cash and stock at the then current market value. This liability is included in other liabilities. After the first and second years following the acquisition, $1.0 million and $0.4 million, respectively, will be paid to the former shareholder of CrosStates. Also, there are contingent payments totaling up to $1.2 million, payable to the former shareholder in cash and stock at the then current market value based on CrosStates achieving certain annual revenue levels over the next two years. This transaction was accounted for under the purchase method of accounting. Accordingly, the results of operations of the Company include CrosStates’ results since October 1, 2003.

On September 5, 2003, the Company finalized the agreement with The Legacy Bank, Harrisburg, Pennsylvania, to sell its three most northern financial centers: Shenandoah, located in northern Schuylkill County, and Drums and Hazleton, located in Luzerne County. Included in the sale were approximately $59.6 million in deposits and related accrued interest, loans of approximately $24 million and other assets of approximately $1.0 million.

10. Investment in Limited Partnership

On December 29, 2003, the Bank entered into a limited partner subscription agreement with Midland Corporate Tax Credit XVI Limited Partnership, pursuant to which the Bank will receive special tax credits and other tax benefits. The Bank subscribed to a 6.2% interest in the partnership, which is subject to an adjustment depending on the final size of the partnership at a purchase price of $5 million. This investment is included in other assets and is not guaranteed. It is accounted for in accordance with Statement of Position (SOP) 78-9, “Accounting for Investments in Real Estate Ventures,” using the equity method. This agreement was accompanied by a payment of $1,675,000. The associated non-interest bearing promissory note payable included in other liabilities was $2,350,000 at June 30, 2004 and $3,325,000 at December 31, 2003. Installments are payable as requested. The next scheduled payment was July 1, 2004 for $700,000. The Company expects the installments to be fully funded by January 2005.

Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies

Note 1 to the Company’s consolidated financial statements (included in Item 8 of the Form 10-K) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

Results of Operations

OVERVIEW

Net income for the Company for the quarter ended June 30, 2004 was $1.25 million, an increase of 6.2% as compared to $1.18 million for the same period in 2003. For the first six months of 2004, net income was $2.48 million, an increase of 7.3% as compared to $2.31 million for the same period in 2003. Basic and diluted earnings per share were $.37 and $.36, respectively, for the second quarter of 2004 compared to basic and diluted earnings per share of $.35 and $.34, respectively, for the same period of 2003. For the first six months of 2004, basic and diluted earnings per share were $.73 and $.71, respectively, compared to basic and diluted earnings per share of $.68 and $.67, respectively, for the same period of 2003.

The following are the key ratios for the Company as of June 30:

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003

Return on average assets	.81	%	.81	%	.80	%	.81	%
Return on average shareholders’ equity	9.28	%	8.89	%	9.16	%	8.73	%
Dividend payout ratio	46.32	%	47.20	%	46.82	%	46.83	%
Average shareholders’ equity to average assets	8.69	%	9.05	%	8.78	%	9.32	%

Net Interest Income

Net interest income is a primary source of revenue for the Company. Net interest 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 short and long-term borrowed funds. 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, using a 34% tax rate.

Net interest income for the three months ended June 30, 2004 was $4.54 million, an increase of $366,000, or 8.8%, compared to the $4.17 million reported for the second quarter of 2003. Net interest income for the six months ended June 30, 2004 was $8.99 million, an increase of $872,000, or 10.7%, compared to the $8.11 million reported for the same period of 2003. The net interest margin increased to 3.36% for the second quarter of 2004 from 3.21% for the second quarter of 2003. The net interest margin increased to 3.35% for the first six months of 2004 from 3.27% for the same period of 2003. The net interest margin was positively impacted during 2004 by 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.

The following summarizes net interest margin information:

	Three Months Ended June 30,
	2004						2003
	Average Balance		Interest Income/ Expense		% Rate		Average Balance		Interest Income/ Expense		% Rate
	(Dollar amounts in thousands)
Interest-Earning Assets:
Loans (1) (2)
Commercial	$	245,644	$	3,672	5.91		$	225,544	$	3,693	6.57
Mortgage	40,538		767		7.57		58,387		924		6.33
Consumer	89,313		1,198		5.39		77,580		1,195		6.18
Other	1,105		—		—		2,571		—		—
Investments (2)	186,815		1,945		4.16		170,811		1,782		4.18
Federal Funds Sold	—		—		—		148		1		2.71
Other short-term investment	—		—		—		457		1		0.88

Total interest-earning assets	$	563,415	$	7,582	5.32		$	535,498	$	7,596	5.69

Interest-Bearing Liabilities:
Transaction accounts	$	189,010	$	540	$	1.15	$	175,231	$	459	$	1.05
Certificates of deposit	168,185		1,525		3.66		167,560		1,641		3.93
Securities sold under agreement to repurchase	41,735		184		1.74		17,669		61		1.38
Short-term borrowings	44,471		139		1.26		8,410		30		1.43
Long-term borrowings	33,192		277		3.30		76,857		911		4.75
Junior subordinated debt/mandatory redeemable capital securities	15,000		202		5.44		15,000		206		5.51

Total interest-bearing liabilities	491,593		2,867		2.35		460,727		3,308		2.88

Noninterest-bearing deposits	69,827						65,983

Total cost of funds	$	561,420	2,867		2.06		$	526,710	3,308		2.52
Net interest margin (fully taxable equivalent)			$	4,715	3.36				$	4,288	3.21

	Six Months Ended June 30,
	2004						2003
	Average Balance		Interest Income/ Expense		% Rate		Average Balance		Interest Income/ Expense		% Rate
	(Dollar amounts in thousands)
Interest-Earning Assets:
Loans (1) (2)
Commercial	$	241,175	$	7,285	5.97		$	220,940	$	7,297	6.66
Mortgage	39,079		1,352		6.92		53,176		1,769		6.62
Consumer	87,138		2,373		5.48		75,655		2,390		6.37
Other	669		—		—		1,652		—		—
Investments (2)	191,287		4,056		4.24		161,281		3,362		4.20
Federal Funds Sold	16		1		1.26		1,371		9		1.32
Other short-term investment	—		—		—		805		6		1.50

Total interest-earning assets	$	559,364	$	15,067	5.33		$	514,880	$	14,833	5.81

Interest-Bearing Liabilities:
Transaction accounts	$	183,456	$	1,055	$	1.16	$	171,714	$	927	$	1.09
Certificates of deposit	168,125		3,059		3.66		162,465		3,215		3.99
Securities sold under agreement to repurchase	40,483		363		1.77		19,359		135		1.41
Short-term borrowings	48,372		304		1.26		5,473		40		1.47
Long-term borrowings	33,846		578		3.38		74,628		1,748		4.72
Junior subordinated debt/mandatory redeemable capital securities	15,000		395		5.31		15,000		430		5.78

Total interest-bearing liabilities	489,282		5,754		2.37		448,639		6,495		2.92

Noninterest-bearing deposits	67,214						63,094

Total cost of funds	$	556,496	5,754		2.08		$	511,733	6,495		2.56
Net interest margin (fully taxable equivalent)			$	9,313	3.35				$	8,338	3.27

(1) Loan fees have been included in the interest income totals presented. Nonaccrual loans have been included in average loan balances.

(2) Interest income on loans and investments is presented on a taxable equivalent basis using an effective tax rate of 34%.

Average interest-earning assets for the three months ended June 30, 2004 were $563.4 million, a $28.0 million, or 5.2%, increase over average interest-earning assets of $535.4 million for the first quarter of 2003. Average interest-earning assets for the six months ended June 30, 2004 were $559.4 million, a $44.6 million, or 8.6%, increase over average interest-earning assets of $514.8 million for the first six months of 2003. The yield on average interest-earning assets decreased by 0.37%, to 5.32% for the second quarter of 2004 compared to the same period of 2003. The yield on average interest-earning assets decreased by 0.48%, to 5.33% for the first six months of 2004 compared to the same period of 2003.

Average interest-bearing liabilities for the three months ended June 30, 2004 were $491.6 million, a $30.9 million, or 6.7%, increase over average interest-bearing liabilities of $460.7 million for the same period of 2003. Average interest-bearing liabilities for the first six months ended June 30, 2004 were $489.3 million, a $40.7 million, or 9.1%, increase over average interest-bearing liabilities of $448.6 million for the same period of 2003. In addition, the average noninterest-bearing deposits increased to $69.8 million for the three months ended June 30, 2004, from $65.9 million for the same time period of 2003. The interest rate on the total cost of funds decreased by 0.46%, to 2.06% for the three months ended June 30, 2004 compared to the same period of 2003. The average noninterest-bearing deposits increased to $67.2 million for the six months ended June 30, 2004, from $63.1 million for the same time period of 2003. The interest rate on the total cost of funds decreased by 0.48%, to 2.08% for the six months ended June 30, 2004 compared to the same period of 2003.

The lower yield on average earning assets for the first three and six month periods of 2004, as compared to the first three and six month periods of 2003, is primarily the result of increased commercial and consumer loan volume at lower current market rates thereby reducing the yield.

The lower cost of supporting liabilities is the combined result of reducing deposit product interest rates during 2003 and throughout 2004, the increase in non-interest-bearing deposits and lower yields on long-term borrowings. On September 30, 2003, the Company prepaid $40.9 million of fixed rate, high cost Federal Home Loan Bank (FHLB) advances in order to improve future net interest income. The FHLB advances were replaced with lower cost borrowings and certificates of deposit.

Provision for Loan Losses

The provision for loan losses for the quarter ended June 30, 2004 was $300,000 compared to $375,000 for the same period of 2003. The provision for loan losses for the six months ended June 30, 2004 was $660,000 compared to $670,000 for the same period of 2003. The provision reflects the amount deemed appropriate by management to provide an adequate reserve to meet the present risk characteristics of the loan portfolio. The Company continues to maintain strong asset quality ratios in light of the continued growth in the Company’s loan portfolio, to $392.6 million at June 30, 2004 from $359.2 million at June 30, 2003, and management’s assessment of the credit quality factors existing at this time. The ratio of the allowance for loan losses to loans outstanding at June 30, 2004 and June 30, 2003 was 1.22% and 1.17%, respectively. Please see further discussion under the caption “Allowance for Loan Losses.”

Other Income

Total other income for the three months ended June 30, 2004 totaled $3.8 million, a decrease of $424,000, or 10.1%, over other income of $4.2 million for the same period in 2003. Total other income for the six months ended June 30, 2004 totaled $7.8 million, a decrease of $71,000, or 0.9%, over other income of $7.9 million for the same period in 2003.

Customer service fees increased 12.2% for the second quarter of 2004 as compared to the same period in 2003, from $376,000 to $422,000. Customer service fees increased 15.8% for the first six months of 2004 as compared to the same period in 2003, from $732,000 to $848,000. These increases are primarily due to an expanded customer base, new services, and a new fee-pricing schedule.

Income from mortgage banking activities decreased by $585,000 or 69.6% for the second quarter of 2004 as compared to the same period in 2003, from $840,000 to $255,000. Income from mortgage banking activities decreased by $976,000 or 66.8% for the first six months of 2004 as compared to the same period in 2003, from $1,460,000 to $484,000. These decreases are primarily due to the slowdown in the refinance market due to higher interest rates.

One of the Company’s sources of other income is commissions and other revenue generated primarily through sales of insurance products through the Company’s insurance subsidiary, Essick & Barr, LLC. Revenues from insurance operations totaled $2.5 million for the second quarter of 2004 compared to $2.3 million for the same period in 2003, an increase of 8.1%. Revenues from insurance operations totaled $5.2 million for the first six months of 2004 compared to $4.5 million for the same period in 2003, an increase of 16.5%. These increases are primarily the result of the acquisition of certain assets of the CrosStates agency on September 30, 2003. Additionally, insurance and annuity commissions generated through the Company’s wealth management subsidiary, Leesport Wealth Management, LLC, increased to $32,000, for the second quarter of 2004, from $2,000 for the same period in 2003 and increased to $194,000, for the first six months of 2004, from $45,000 for the same period in 2003.

Brokerage and investment advisory commissions and fees decreased to $120,000, or 43.1%, for the second quarter of 2004, from $211,000 for the same period 2003. Brokerage and investment advisory commissions and fees decreased to $249,000, or 32.7%, for the first six months of 2004, from $370,000 for the same period 2003. These decreases are primarily due to decreased volume in brokerage and investment advisory activity.

Included in other income for the first six months of 2004 is a $200,000 gain on the sale of equity securities, and a $51,000 net gain on the sale of portfolio loans. Included in other income for the first six months of 2003 is a $195,000 gain on the sale of equity securities, and a $21,000 net gain on the sale of portfolio loans.

Other income decreased 8.3% for the first quarter of 2004 as compared to the same period in 2003, to $322,000 from $351,000. Other income increased 20.8% for the first six months of 2004 as compared to the same period in 2003, to $772,000 from $639,000. This change is primarily due to the increase in the cash surrender value of bank owned life insurance of $315,000 in 2004, as compared to $176,000 in 2003. The company purchased an additional $3.8 million of insurance in July 2003. Also included, are losses of $83,000 and $166,000, respectively, for the three and six months of 2004, on the Company’s investment in an affordable housing, corporate tax credit limited partnership, which is discussed under “Income Taxes”.

Other Expense

Other expense for the quarter ended June 30, 2004 was $6.6 million compared to $6.4 million for the quarter ended June 30, 2003, a 4.1% increase. Other expense for the first six months of 2004 was $13.2 million compared to $12.1 million for the same period of 2003, a 9.0% increase.

Salary and benefits expense for the second quarter of 2004 increased by 9.7% to $3.7 million from $3.4 million for the same period of 2003. Salary and benefits expense for the first six months of 2004 increased by 13.1% to $7.5 million from $6.7 million for the same period of 2003. This increase is the result of an increase in the number of full time equivalent employees, to 246 at June 30, 2004 from 243 at June 30, 2003, primarily due to the CrosStates acquisition and partially offset by the sale of three financial centers in 2003, overall merit increases applied to base salaries during the past twelve months and increases in employee health insurance costs consistent with national trends. The salaries and benefits expense also includes total commissions paid of $239,000 for the quarter ended June 30, 2004 compared to $321,000 for the same period in 2003 and $500,000 for the six months ended June 30, 2004 compared to $546,000 for the same period in 2003. These decreases are due primarily to reduced volume for brokerage and investment advisory services.

Occupancy expense for the second quarter of 2004 was $508,000, a $15,000 or 3.0% increase over the $493,000 for the same period of 2003. Occupancy and equipment expense for the first six months of 2004 was $1,045,000, a $69,000 or 7.1% increase over the $976,000 for the same period of 2003. These increases are primarily attributable to the addition and related construction costs of two financial service centers, our new operations center, and expenses related to the acquisition of CrosStates Insurance in 2003, partially offset by the sale of three financial centers in 2003.

Equipment expense increased 28.4%, to $439,000 for the second quarter of 2004 from $342,000 for the same period in 2003. Equipment expense increased 37.6%, to $885,000 for the first six months of 2004 from $643,000 for the same period in 2003. These increases are primarily attributable to the addition of two financial service centers, our new operations center, and expenses related to the acquisition of CrosStates Insurance in 2003, partially offset by the sale of three financial centers in 2003.

The amortization of identifiable intangible assets for the second quarter of 2004 was $94,000 compared to $69 for the same period of 2003. The amortization of identifiable intangible assets for the first six months of 2004 was $178,000 compared to $137 for the same period of 2003. These increases are primarily attributable to the acquisition of CrosStates Insurance in 2003.

Outside processing expenses decreased 32.2% to $500,000 for the second quarter of 2004 from $737,000 for the same period of 2003. Outside processing expenses decreased 8.8% to $1,021,000 for the first six months of 2004 from $1,120,000 for the same period of 2003. These decreases are primarily the result of conversion related expenses in the second quarter of 2003 associated with the implementation of a new core banking system.

Income Taxes

The effective income tax rate for the Company for the second quarter of 2004 was 11.46% compared to 28.37% for the same period of 2003. The effective income tax rate for the Company for the first six months of 2004 was 15.42% compared to 28.06% for the same period of 2003. The effective income tax rate for the first six months of 2004 was lower than the rate for the comparable period in 2003 primarily as a result of the increase in tax-advantaged income from additional bank owned life insurance, an increase in tax-advantaged income from tax exempt loans and investment

securities and a federal tax benefit of $297,000 from our $5.0 million investment in an affordable housing, corporate tax credit limited partnership.

Financial Condition

The total assets of the Company at June 30, 2004 were $643.0 million, an increase of approximately $20.7 million, or 3.3%, since December 31, 2003.

Mortgage Loans Held for Sale

Mortgage loans held for sale increased $641,000 or 50.1% to $1.9 million at June 30, 2004 from $1.3 million at December 31, 2003. This increase is related to the timing of when loans are closed and sold in the secondary market.

Securities Available for Sale

Investment securities available for sale decreased 11.0% to $178.7 million at June 30, 2004 from $200.7 million at December 31, 2003. Investment securities are used to supplement loan growth as necessary, to generate interest and dividend income, to manage interest rate risk, and to provide liquidity. The decrease during the first six months of 2004 was a result of our strategy to use principal paydowns to fund loan growth and to reduce overnight borrowings.

Loans

Total loans increased to $392.6 million at June 30, 2004 from $357.5 million at December 31, 2003, an increase of $35.1 million or 9.8%.

The components of loans were as follows:

	June 30, 2004			December 31, 2003
	(Dollar amounts in thousands)
Residential real estate	$	103,530		$	97,796
Commercial	109,538			101,208
Commercial, secured by real estate	118,043			101,360
Consumer, net of unearned income	11,303			11,285
Home equity lines of credit	50,218			45,833

Loans	392,632			357,482

Allowance for loan losses	(4,801		)	(4,356		)

Loans, net of allowance for loan losses	$	387,831		$	353,126

Loans secured by residential real estate (not including home equity lending products) increased $5.7 million, or 5.9%, between December 31, 2003 and June 30, 2004, from $97.8 million to $103.5 million. This increase is primarily due to an increase in market rates reducing the amount of principal repayments from loan refinancing. This increase is also net of approximately $2.9 million of lower yielding fixed rate mortgage portfolio loans and $750,000 of SBA loans sold during the period.

Commercial loans increased to $227.6 million at June 30, 2004 from $202.6 million at December 31, 2003, an increase of $25.0 million or 12.3%. The increase is due primarily to an increase in variable-rate term loans and lines of credit and tax exempt loans.

In addition, home equity lines of credit increased to $50.2 million at June 30, 2004 from $45.8 million at December 31, 2003, an increase of $4.4 million, or 7.7%. This increase is primarily the result of marketing efforts relating to our home equity products.

Allowance for Loan Losses

The allowance for loan losses at June 30, 2004 was $4.8 million compared to $4.4 million at December 31, 2003. Additions to the allowance are made from time to time based upon management’s assessment of credit quality factors existing at that time. The Company performs a review of the credit quality of its loan portfolio on a monthly basis to determine the adequacy of the allowance for loan losses. The allowance at June 30, 2004 was 1.22% of outstanding loans compared to 1.22% of outstanding loans at December 31, 2003.

The allowance for loan losses is an amount that management believes to be adequate to absorb potential losses in the loan portfolio. Additions to the allowance are charged through the provision for loan losses. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. Management regularly assesses the adequacy of the allowance by performing an ongoing evaluation of the loan portfolio, including such factors as charge-off history, the level of delinquent loans, the current financial condition of specific borrowers, the value of any underlying collateral, risk characteristics in the loan portfolio, local and national economic conditions, and other relevant factors. Significant loans are individually analyzed, while other smaller balance loans are evaluated by loan category. This evaluation is inherently subjective as it requires material estimates that may be susceptible to change. Based upon the results of such reviews, management believes that the allowance for loan losses at June 30, 2004 was adequate to absorb credit losses inherent in the portfolio at that date.

The following table shows the activity in the Company’s allowance for loan losses:

	Three Months Ended						Six Months Ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
	(Dollar amounts in thousands)

Balance of allowance for loan losses, beginning of period	$	4,585		$	3,955		$	4,356		$	4,182
Loans charged-off:
Commercial, financial and agricultural	34			178			48			748
Real estate – mortgage	54			—			152			—
Consumer	5			17			31			50
Total loans charged-off	93			195			231			798
Recoveries of loans previously charged-off
Commercial, financial and agricultural	(4		)	(73		)	(5		)	(102		)
Real estate – mortgage	(1		)	—			(3		)	(41		)
Consumer	(4		)	—			(8		)	(11		)
Total recoveries	(9		)	(73		)	(16		)	(154		)
Net loans charged-off	84			122			215			644
Provision for loan losses	300			375			660			670
Balance, end of period	$	4,801		$	4,208		$	4,801		$	4,208

Net charge-offs to average loans	.09		%	.13		%	.12		%	.37		%
Allowance for loan losses to loans outstanding	1.22		%	1.17		%	1.22		%	1.17		%
Loans outstanding at end of period (net of unearned income)	$	392,632		$	359,204		$	392,632		$	359,204
Average balance of loans outstanding during the period	376,600			364,084			368,061			351,423

The following table summarizes the Company’s non-performing assets:

	June 30 2004			December 31, 2003
	(Dollar amounts in thousands)
Non-accrual loans
Real estate – mortgage	$	195		$	129
Consumer	—			18
Commercial, financial and agricultural	610			674
Total	805			821

Loans past due 90 days or more and still accruing
Real estate – mortgage	8			46
Consumer	120			16
Commercial, financial and agricultural	20			—
Total	148			62

Troubled debt restructurings	338			631

Total non-performing loans	1,291			1,514

Other real estate owned (OREO)	37			309

Total non-performing assets	$	1,328		$	1,823

Non-performing loans to total loans	0.33		%	0.42		%
Non-performing assets to total loans plus OREO	0.34		%	0.51		%

Premises and Equipment

Components of premises and equipment were as follows:

	June 30, 2004		December 31, 2003
	(Dollar amounts in thousands)
Land and land improvements	$	2,296	$	2,094
Buildings	5,936		5,982
Leasehold improvements	2,032		2,028
Furniture and equipment	6,197		5,574
	16,461		15,678

Less: accumulated depreciation	3,208		2,771

Premises and equipment, net	$	13,253	$	12,907

Additions in 2004 include costs for the renovations to the Hamburg financial center.

Deposits

Total deposits at June 30, 2004 were $433.7 million compared to $408.6 million at December 31, 2003, an increase of $25.1 million, or 6.2%.

The components of deposits were as follows:

	June 30, 2004		December 31, 2003
	(Dollar amounts in thousands)
Demand, non-interest bearing	$	69,930	$	67,711
Demand, interest bearing	135,468		118,395
Savings	57,491		54,835
Time, $100,000 and over	44,640		43,202
Time, other	126,208		124,439

Total deposits	$	433,737	$	408,582

The increase is due primarily to successful marketing programs and excellent customer service.

Borrowings

Total debt and borrowings decreased by $9.0 million or 5.8% to $144.2 million at June 30, 2004 from $153.2 million at December 31, 2003. Federal funds purchased declined 17.3% to $51.4 million at June 30, 2004 from $62.1 million at December 31, 2003. Long-term debt, composed of borrowings with the Federal Home Loan Bank, decreased by $3.5 million or 10.1% to $31.0 million at June 30, 2004 from $34.5 million at December 31, 2003. The repayment of these funds was primarily accomplished throughout the first half of 2004 using proceeds from investment securities paydowns and increases in deposit account balances. Junior subordinated debt/mandatory redeemable capital debentures remained unchanged from December 31, 2003 to June 30, 2004.

Off Balance Sheet Commitments

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

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

A summary of the contractual amount of the Company’s financial instrument commitments is as follows:

	June 30, 2004		December 31, 2003
	(Dollar amounts in thousands)
Commitments to grant loans	$	23,207	$	18,166
Unfunded commitments under lines of credit	106,657		103,984
Financial and performance standby letters of credit	9,044		9,166

Capital

Total shareholders’ equity decreased $1.3 million, to $52.1 million at June 30, 2004 from $53.4 million at December 31, 2003. The decrease is the net result of net income for the period of $2.5 million less dividends declared of $1.2 million, proceeds of $451,000 from the issuance of shares of common stock under the Company’s employee and director stock purchase plans and directors compensation, net decrease in unrealized gain on securities available for sale, net of tax, of $3.3 million, the purchase of treasury stock of $140,000 and the reissuance of treasury stock of $364,000 in connection with payments of contingent consideration to principals from the acquisition of The Boothby Group insurance agency and First Affiliated Investments.

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

As required by 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 plus mandatory redeemable capital securities less intangible assets, and Tier II capital includes Tier I capital plus 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 and Tier II capital.

The following table sets forth the Company’s capital amounts and ratios.

	June 30 2004			December 31, 2003
	(Dollar amounts in thousands)
Tier I
Common shareholders’ equity (excluding unrealized gains (losses) on securities	$	55,098		$	53,104
Disallowed intangible assets	(13,810		)	(13,597		)
Junior subordinated debt/mandatory redeemable capital debentures	15,000			15,000
Tier II
Allowable portion of allowance for loan losses	4,801			4,356
Unrealized gains on available for sale equity securities	—			223

Risk-based capital	$	61,089		$	59,086

Risk adjusted assets (including off-balance sheet exposures)	$	472,490		$	472,838

Leverage ratio	9.22		%	9.32		%
Tier I risk-based capital ratio	11.91		%	11.53		%
Total risk-based capital ratio	12.93		%	12.50		%

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.

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 Tier I capital less intangible assets, to average quarterly assets less intangible assets. The leverage ratio at June 30, 2004 was 9.22% compared to 9.32% at December 31, 2003. The decrease in this ratio resulted primarily from a larger increase in average assets compared to a smaller increase in risk-based capital. The mandatory redeemable securities are included for regulatory purposes as Tier I capital with certain limiting restrictions. At June 30, 2004, the entire amount of these securities was allowable to be included as Tier I capital for the Company. For both periods, the capital ratios were above minimum regulatory guidelines.

On March 23, 2000 and September 26, 2002, the Company established First Leesport Capital Trust I and Leesport Capital Trust II, respectively, in which the Company owns all of the common equity. First Leesport Capital I issued $5 million of mandatory redeemable capital securities carrying an interest rate of 10.875%, and Leesport Capital Trust II issued $10 million of mandatory redeemable capital securities carrying a floating interest rate of 3 month LIBOR plus 3.45%. These debentures are the sole assets of the Trusts. These securities must be redeemed in March 2030 and September 2032, respectively, but may be redeemed 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. In October 2002, the Company entered into an interest rate swap agreement that effectively converts the $5 million of fixed-rate capital securities to a floating interest rate of six month LIBOR plus 5.25%.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” which was revised in December 2003. This Interpretation provides guidance for the consolidation of variable interest entities (VIEs). First Leesport Capital Trust I and Leesport Capital Trust II (the “Trusts”) each qualify as a variable interest entity under FIN 46. The Trusts issued mandatory redeemable preferred securities (Trust Preferred Securities) to third-party investors and loaned the proceeds to the Company. The Trusts hold, as their sole assets, subordinated debentures issued by the Company.

FIN 46 required the Company to deconsolidate the Trusts from the consolidated financial statements as of March 31, 2004. There has been no restatement of prior periods. The impact of this deconsolidation was to increase junior subordinated debentures by $15,000,000 and reduce the mandatory redeemable capital debentures line item by $15,000,000 which had represented the trust preferred securities of the trust. The Company’s equity interest in the trust subsidiaries of $538,000, which had previously been eliminated in consolidation, is now reported in “Other assets”. For regulatory reporting purposes, the Federal Reserve Board has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a determination that Trust Preferred Securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them. The adoption of FIN 46 did not have an impact on the Company’s results of operations or liquidity.

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.

Liquidity and Interest Rate Sensitivity

The banking industry has been required to adapt to an environment in which interest rates may be volatile and in which deposit deregulation has provided customers with the opportunity to invest in liquid, interest rate-sensitive deposits. The banking industry has adapted to this environment by using a process known as asset/liability management.

Adequate liquidity means the ability to obtain sufficient cash to meet all current and projected needs promptly and at a reasonable cost. These needs include deposit withdrawal, liability runoff, and increased loan demand. The principal sources of liquidity are deposit generation, overnight federal funds transactions with other financial institutions, investment securities portfolio maturities and cash flows, and maturing loans and loan payments. The Bank can also package and sell residential mortgage loans into the secondary market. Other sources of liquidity are term borrowings from the Federal Home Loan Bank, and the discount window of the Federal Reserve Bank. In view of all factors involved, the Bank’s management believes that liquidity is being maintained at an adequate level.

At June 30, 2004, the Company had a total of $144.2 million, or 22.4%, of total assets in borrowed funds. These borrowings included $46.9 million of repurchase agreements with customers, $51.3 million of federal funds purchased, $31.0 million of term borrowings with the Federal Home Loan Bank, and $15.0 million in mandatory redeemable capital securities. The FHLB borrowings have final maturities ranging from July 2004 through February 2009 at interest rates ranging from 1.67% to 4.97%. At June 30, 2004, the Company had a maximum borrowing capacity with the Federal Home Loan Bank of approximately $126.9 million.

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 on assets and liabilities. With the exception of the majority of residential mortgage loans, loans generally are written having terms that provide for a readjustment of the interest rate at specified times during the term of the loan. In addition, interest rates offered for all types of deposit instruments are reviewed weekly and are established on a basis consistent with funding needs and maintaining a desirable spread between cost and return. The Bank does not use reverse repurchase agreements in its asset/liability management practices at this time.

During October 2002, the Company entered into an 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.

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in the Company’s assessment of its sensitivity to market risk since its presentation in the Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC.

Item 4 - Controls and Procedures

The Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief financial Officer conclude that the Company’s disclosure controls and procedures are effective as of June 30, 2004. There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

PART II - OTHER INFORMATION

Item 1 Legal Proceedings - None

Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

The following table sets forth certain information relating to shares of the Company’s common stock repurchased by the Company during the quarter ended June 30, 2004.

Issuer Purchases of Equity Securities

Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Units) Purchased		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

Month #1(April 1 - April 30, 2004)	—	—		—	—

Month #2 (May 1 - May 31, 2004)	5,000	$	23.30	5,000	101,513

Month #3 (June 1, - June 30, 2004)	1,000	$	23.65	1,000	100,513

Total	6,000	$	23.53	6,000	100,513

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.

Item 3 Defaults Upon Senior Securities – None

Item 4 Submission of Matters to Vote of Security Holders

At the annual meeting of shareholders held on April 27, 2004, shareholders of the Company approved the:

1. Election of Karen A. Rightmire, Michael L. Shor and Alfred J. Weber as Class I directors of the Company to serve until 2007.

There was no solicitation in opposition to the nominees of the Board of Directors. The votes cast in the election with respect to each individual nominee were as follows:

Nominee	For	Withheld

Karen A. Rightmire	2,878,215	173,928
Michael L. Shor	2,968,591	83,552
Alfred J. Weber	2,876,558	175,585

2. Ratification of Beard Miller Company LLP as the Company’s independent auditors for the year ending December 31, 2004.

The votes cast in this matter were as follows:

For	Against	Withheld

3,016,166	32,388	3,589

Item 5 Other Information - None

Item 6 Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit No.			Title

3.1			Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.)

3.2			Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.)

31.1			Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2			Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1			Rule 1350 Certification of Chief Executive Officer and Chief Financial Officer

(b) Reports on Form 8-K – The Company furnished a Current Report on Form 8-K, dated April 27, 2004, to report the Company’s first quarter 2004 earnings.

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		LEESPORT FINANCIAL CORP.
		(Registrant)

Dated: August 12, 2004	By	/s/Raymond H. Melcher, Jr.

			Raymond H. Melcher, Jr.
			Chairman, President and Chief
			Executive Officer

Dated: August 12, 2004	By	/s/Stephen A. Murray

			Stephen A. Murray
			Senior Vice President and
			Chief Financial Officer