DROVERS BANCSHARES CORP, 10-K, 1997-03-27

DROVERS BANCSHARES CORP
10-K, 1997-03-27
STATE COMMERCIAL BANKS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Fiscal year ended December 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

Commission file number 0-10958

DROVERS BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)

PENNSYLVANIA 23-2209390
(State or other jurisdiction of incorporation or organization)(IRS Employer ID)

30 SOUTH GEORGE STREET, YORK, PA 17401
(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code (717) 843-1586

Securities registered pursuant to Section 12(g) of the act:

COMMON STOCK $5.00 PAR OVER-THE-COUNTER
(Title of each class) (Name of exchange on which registered)

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

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

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 28, 1997 was $50,182,678. The number of shares of
Drovers Bancshares Corporation Common Stock, $5.00 par value, outstanding at
February 28, 1997 was 2,809,180.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report for the year ended December 31, 1996 are
incorporated by reference into Parts I, II and IV. Portions of the Proxy
Statement for the annual shareholders meeting to be held May 23, 1997
incorporated by reference in Part III.

<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONTENTS

PART I

Item 1. Business ......................................................... 4

Item 2. Properties ....................................................... 9

Item 3. Legal Proceedings
The information required by this item is contained on page 19 of the
Corporation's 1996 Annual Report.

Item 4. Submission of Matters to a Vote of Security Holders
This item is omitted since it is not applicable.

PART II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The information required by this item is contained on page 1 and 19 of the
Corporation's 1996 Annual Report.

Item 6. Selected Financial Data
The information required by this item is contained on pages 10-11 of the
Corporation's 1996 Annual Report.

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The information required by this item is contained on pages 30-37 of the
Corporation's 1996 Annual Report.

Item 8. Financial Statements and Supplementary Data ...................... 11
Additional information required by this item is contained on pages 13-28
and page 38 of the Corporation's 1996 Annual Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
This item is omitted since it is not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant ............... 21
Additional information required by this item is contained on pages 3-11
of the Definitive Proxy Statement dated April 18, 1997.

Item 11. Executive Compensation
The information required by this item is contained on pages 9-16
of the Definitive Proxy Statement dated April 18, 1997.

Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is contained on pages 3-9
of the Definitive Proxy Statement dated April 18, 1997.

Item 13. Certain Relationships and Related Transactions
The information required by this item is contained on pages 17-19
of the Definitive Proxy Statement dated April 18, 1997.

<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONTENTS

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

A. Financial statements are incorporated by reference to pages 1-38 of the
Corporation's 1996 Annual Report.

B. There were no filings on Form 8-K for the year ended December 31, 1996.

C. Listing of Exhibits.

Exhibit 3 - Articles of Incorporation and By-laws. Filed December 31, 1991
with the Securities and Exchange Commission

Exhibit 4 - Instruments Defining the Rights of Security Holders
(incorporated by reference to Exhibit B to the Holding Company's
Registration Statement on Form S-14, No. 2-77871 filed June 29, 1982,
with the Securities and Exchange Commission)

Exhibit 13 - Annual Report to Security Holders.

Exhibit 21 - Subsidiaries of the Registrant. (incorporated by reference
to page 30 of the Corporation's 1996 Annual Report)

Exhibit 23 - Consents of experts and Counsel.

Exhibit 27 - Financial Data Schedule.

SIGNATURES ................................................................ 22

Page numbers of Annual Report to shareholders and Definitive Proxy Statement
referenced in this document refer to hard copy only. See electronic copy of
documents for corresponding page numbers.

<PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS

GENERAL

Drovers Bancshares Corporation was organized on October 27, 1982, under
Pennsylvania Business Corporation Law and held all the stock of Drovers Interim
Bank, a Pennsylvania state-chartered bank established to effect the
reorganization. The Interim Bank was then merged into The Drovers & Mechanics
Bank and the Common Stock of the Interim Bank was converted into and exchanged
on a share-for-share basis for Common Stock of Drovers Bancshares Corporation.
The Management of The Drovers & Mechanics Bank formed Drovers Bancshares
Corporation for greater flexibility in providing a wider variety of banking
services and in engaging in nonbanking activities permitted under the Bank
Holding Company Act of 1956, as amended.

The Drovers & Mechanics Bank is a wholly-owned subsidiary of Drovers Bancshares
Corporation. The Bank is chartered pursuant to the laws of the Commonwealth of
Pennsylvania and is subject to the supervision of the Banking Department of the
Commonwealth and the Federal Deposit Insurance Corporation. The Drovers &
Mechanics Bank was organized in 1883 as a national bank and became a state-
chartered non-member of the Federal Reserve System on February 14, 1979.

The Bank offers a wide variety of banking and trust services to individuals and
commercial customers in its service area. Personal banking services include
checking accounts, savings and time accounts, certificates of deposit, personal
and mortgage loans, home improvement loans, safe deposit services, estate
planning and administration, personal trust management and discount brokerage
services. Commercial banking services are provided to businesses, nonprofit
organizations and local municipalities. These services include checking
accounts, savings and time accounts, financing activities and corporate trust
services in the areas of pension, profit sharing and employee benefit plans.

On December 31, 1996, the Bank employed 193 full-time equivalents throughout its
offices. The Main Office of the Bank is located at 30 South George Street, York,
Pennsylvania. A Research and Administrative Services Center and eight branches
are located in the surrounding suburbs of York City. On September 27, 1996, our
Windsor Office was closed. On November 16, 1996, our first full-service
bank/convenience store office opened in Dover, PA. In addition, there are four
other out-of-town offices located in Emigsville, York Haven, Dover and Red Lion,
Pennsylvania. The Bank also has five remote service facilities located at the
York Fairgrounds, Harley Davidson, Inc., York College of Pennsylvania, Shipley
Stores, Inc.-Dallastown Exxon, and Shipley Stores Inc.- Shrewsbury Exxon.

In December 1993, the Bank purchased the office building attached to the Bank's
main office and corporate headquarters. The five-story complex, known as 96
South George, provides for future growth and enables the Corporation to maintain
its headquarters in downtown York. In January of 1996, the executive offices of
the Bank were relocated to the fifth floor of 96 South George.

The Bank is the sole limited partner in two ventures to renovate and operate
apartment buildings. The first building opened in 1994. The second opened in
March 1996. Both buildings provide low income housing to qualified families.
The investments are accounted for under the equity method of accounting. The
combined carrying values of the investments at December 31, 1996 and 1995 were
$2,391,000 and $2,527,000, respectively.

4 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS

COMPETITION

The principal competition with the service area of the Corporation is provided
by other financial institutions, including commercial banks, savings and loan
associations, credit unions, brokerage firms and mortgage and insurance
companies. The competition within the banking industry has increased
significantly due to the elimination of many distinctions between various types
of financial institutions.

SUPERVISION AND REGULATION OF THE HOLDING COMPANY

Drovers Bancshares Corporation is a bank holding company as defined by the Bank
Holding Company Act of 1956, as amended, "the Act". As a bank holding company,
we are required to file with the Federal Reserve Bank an annual report and such
additional information as the Board may require pursuant to the Act. The
Federal Reserve Board also makes examinations of the Holding Company and its
subsidiaries. The Federal Reserve Board has the authority to issue cease-and-
desist orders against a bank holding company and its nonbank subsidiaries if it
determines their actions represent unsafe or unsound practice or violation of
law.

Under Pennsylvania law, a holding company is permitted to control one or more
banks in Pennsylvania. However, a holding company is required under the Act to
obtain prior approval from the Federal Reserve Board to acquire all or
substantially all of the assets of any bank, or acquire ownership or control of
any voting shares of any bank other than the Bank, if after such acquisition, it
would own or control more than five percent of the voting shares of such bank.
The Act does not permit the Federal Reserve Board to approve the acquisition by
the holding company or any subsidiary of any voting shares of, or interest in,
all or substantially all of the assets of any bank located outside the
Commonwealth of Pennsylvania, unless the acquisition is specifically authorized
by laws of the state in which that bank is located.

Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Banking and Branch Act"), bank holding companies can
acquire a bank located in any state subject to certain limitations. The Act
limits the activities which may be engaged in by the Holding Company and its
subsidiaries to certain specified activities, including those activities which
the Federal Reserve Board may find, by order of regulation, to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.

Although, the United States Supreme Court has rendered a decision in favor of
nationwide insurance sales by banks and which also bars states from blocking
insurance sales by national banks in towns with populations of no more than
5,000, the entrance of banks into the insurance industry is hotly contested. On
the heels of the Supreme Court's ruling, the Office of the Comptroller of the
Currency has issued draft guidelines for national banks to sell insurance. The
federal guidance, however, will not necessarily ease state restrictions which
currently hinder bank insurance sales. States that have traditionally been
opposed to bank insurance sales could impose licensing requirements and other
restrictions hampering bank insurance activities. Because the insurance
industry is opposed to banks selling and underwriting insurance, it is difficult
to determine to what extent banks will be allowed to engage in insurance
activities and the regulatory costs that will be attached to such activities.

5 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS

Congress is currently considering legislative reform centered on repealing the
Glass-Steagall Act which prohibits commercial banks from engaging in the
securities industry. The major initiative proposed by the House Banking
Committee Chairman, James Leach, has recently been defeated. Leach's proposal
required a financial services holding company structure which would be permitted
to own a bank and a separately capitalized securities firm. Under Leach's
proposal, banks, however, would be prohibited from affiliating with insurance
companies or nonfinancial firms. The holding company structure would be
regulated by the Federal Reserve Board, and its subsidiaries would be supervised
by the applicable regulator based on their respective functions. Alternatively,
Leach's proposal also permitted a securities firm to establish an investment
bank holding company to own an uninsured wholesale financial institution and a
securities unit. Although Leach's proposal, as currently drafted, has been
canceled, he has announced his plans to introduce legislation proposing limited
regulatory relief.

From time to time, various types of federal and state legislation have been
proposed that could result additional regulation of, and restrictions on, the
business of the Corporation and the Bank. It cannot be predicted whether such
legislation will be adopted or, if adopted, how such legislation would affect
the business of the Corporation and the Bank. As a consequence of the extensive
regulation of commercial banking activities in the United States, the
Corporation's and the Bank's business is particularly susceptible to being
affected by federal legislation and regulations that may increase the cost of
doing business.

Federal Reserve Board approval may be required before a holding company or its
non-bank subsidiary, if any, may begin to engage in any such activity and before
any such business may be acquired. The Federal Reserve Board is empowered to
differentiate between activities commenced by acquisition of a going concern.
The Holding Company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.

SUPERVISION AND REGULATION OF THE BANK

The Drovers & Mechanics Bank is a state chartered, FDIC insured bank which makes
it subject to the regulations of the Pennsylvania Department of Banking and the
FDIC. Although the Bank is not a member of the Federal Reserve System, it can
access Federal Reserve Bank services, including the discount window. The
Pennsylvania Department of Banking and the FDIC regularly examine such areas as
reserves, loans, investments, management practices and other aspects of
operation. These examinations are designed primarily for the protection of the
Bank's depositors rather than its shareholders. The Bank is also required to
furnish annual and quarterly reports to the FDIC. The FDIC has the authority
under the Financial Institutions Supervisory Act to prevent a bank under its
regulation from engaging in any unsafe or unsound practices in the conduct of
business.

Federal and state banking laws and regulations govern, among other things, the
scope of a bank's business, the types of investments a bank makes, the reserves
a bank maintains, loans a bank makes and collateral it accepts and the
activities of a bank with respect to mergers, consolidations and the
establishment of branches. Under Pennsylvania law, the amount of funds which
the Bank may lend to a single borrower may not exceed fifteen percent of the
Bank's capital, surplus, undivided profits, loan loss reserve and capital
securities. The amount of indebtedness which the Bank is permitted to incur is
6 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS

also limited, with certain exceptions, to the aggregate of its capital and one-
half of the amount of its surplus.

A subsidiary bank of a bank holding company is subject to certain restrictions
imposed by the Federal Reserve Act on any extensions of credit to the bank
holding company or its subsidiaries, on investments in the stock or other
securities of the bank holding company or its subsidiaries and on taking such
stock or securities as collateral for loans. The Federal Reserve Act and
Federal Reserve Board regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal shareholders of its
parent holding company, among others, and to related interest of such principal
shareholders. In addition, such legislation and regulations may affect the
terms upon which any person becoming a principal shareholder of a holding
company may obtain credit from banks with which the subsidiary bank maintains a
correspondent relationship.

Federal law also prohibits acquisition or control of a bank or bank holding
company without prior notice to certain Federal bank regulators. Control is
defined for this purpose as the power, directly or indirectly, to direct the
management or policies of the bank or bank holding company or to vote 25% or
more of any class of voting securities of the bank or bank holding company. From
time to time, various types of federal and state legislation have been proposed
that would result in additional regulations of, and restrictions on, the
business of the Bank. The Corporation and the Bank are affected by the credit
policies of the Federal Reserve System. An important function of the Federal
Reserve System is to regulate the national supply of bank credit. Among the
instruments of monetary policy which have been used by the Federal Reserve
System are open market operations in U.S. Government securities, changes in the
discount rate on bank borrowings and changes in reserve requirements on bank
deposits. These instruments are used in varying combinations to influence
overall growth and distribution of Bank loans, investments, and deposits. Their
use may also affect interest rates charged on loans or paid for deposits.

The Federal Deposit Insurance Corporation Improvement Act of 1991 addresses
recapitalization of the insurance fund. The Act contains provisions concerning
the utilization of risk-based assessments in generating deposit insurance funds,
a nominal charge to insurance coverage, assessment reductions for banks involved
in community related activities and miscellaneous regulatory procedures and
standards to ensure bank safety and limit systemic risk. Implementation has not
had and is not expected to have a material adverse impact on the Corporation.
Under FDICIA, institutions must be classified in one of five defined categories
as illustrated below.
Under a
Tier 1 Capital
Total Risk- Tier 1 Risk- Leverage Order or
Based Ratio Based Ratio Ratio Directive
CAPITAL CATEGORY
Well capitalized .............. > or = 10.0 > or = 6.0 > or = 5.0 No
Adequately capitalized ........ > or = 8.0 > or = 4.0 > or = 4.0*
Undercapitalized .............. < 8.0 < 4.0 < 4.0*
Significantly undercapitalized. < 6.0 < 3.0 < 3.0
Critically undercapitalized ... < or = 2.0

* 3.0 for those banks having the highest available regulatory rating.

7 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS

In the event an institution's capital deteriorates to the undercapitalized
category or below, FDICIA prescribes an increasing amount of regulatory
intervention. For well capitalized institutions, FDICIA provides authority for
regulatory intervention where the institution is deemed to be engaging in unsafe
or unsound practices or receives a less than satisfactory examination report
rating for asset quality, management, earnings or liquidity. All but well
capitalized institutions are prohibited from accepting brokered deposits without
prior regulatory approval.

Under FDICIA, financial institutions are subject to increased regulatory
scrutiny and must comply with certain operational, managerial and compensation
standards to be developed by Federal Reserve Board regulations. FDICIA also
requires the regulators to issue new rules establishing certain minimum
standards to which an institution must adhere including standards requiring a
minimum ratio of classified assets to capital, minimum earnings necessary to
absorb losses and minimum ratio of market value to book value for publicly held
institutions. Additional regulations are required to be developed relating to
internal controls, loan documentation, credit underwriting, interest rate
exposure, asset growth and excessive compensation, fees and benefits.

FDICIA also requires that banking agencies reintroduce loan-to-value ("LTV")
ratio regulations which were previously repealed by the 1982 Act. LTV's limit
the amount of money a financial institution may lend to a borrower, when the
loan is secured by real estate, to no more than a percentage to be set by
regulation of the value of the real estate.

On September 30, 1996, the President signed into law the Deposit Insurance Funds
Act of 1996 to recapitalize the Savings Association Insurance Fund ("SAIF")
administered by the Federal Deposit Insurance Corporation ("FDIC") and to
provide for repayment of the FICO (Financial Institution Collateral Obligation)
bonds issued by the United States Treasury Department. The FDIC levied a one-
time special assessment on SAIF deposits equal to 65.7 cents per $100 of the
SAIF-assessable deposit base as of March 31, 1995. During the years 1997, 1998
and 1999, the Bank Insurance Fund ("BIF") will pay $322 million of FICO debt
service, and SAIF will pay $458 million.

During 1997, 1998 and 1999, the average regular annual deposit insurance
assessment is estimated to be about 1.29 cents per $100 of deposits for BIF
deposits and 6.44 cents per $100 of deposits for SAIF deposits. Individual
institution's assessments will continue to vary according to their capital and
management ratings. As always, the FDIC will be able to raise the assessments
as necessary to maintain the funds at their target capital ratios provided by
law. After 1999, BIF and SAIF will share the FICO costs equally. Under current
estimates, BIF and SAIF assessment bases would each be assessed at the rate of
approximately 2.43 cents per $100 of deposits. The FICO bonds will mature in
2018-2019, ending the interest payment obligation.

The law also provides that BIF and SAIF are to merge to form the Deposit
Insurance Fund ("DIF") at the beginning of 1999, provided that there are no SAIF
institutions in existence at that time. Merger of the Funds will require state
laws to be amended in those states authorizing savings associations to eliminate
that authorization. This provision reflects Congress's apparent intent to merge
thrift and commercial bank charters by January 1999; however, no law has yet
been enacted to achieve that purpose. The Act also provides regulatory relief
to the financial services industry relative to environmental risks, frequency of
examinations, and the simplification of forms and disclosures.

8 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 2. PROPERTIES

The Corporation and Subsidiaries own in fee simple unencumbered the following
land and buildings:

Main Office Northwest Office - closed July 29, 1994
30 S George Street 1120 Roosevelt Avenue
York, PA 17401 York, PA 17404

Research & Administrative Westgate Office
Services Center 1500 Kenneth Road
915 Indian Rock Dam Road York, PA 17404
York, PA 17403

Richland Avenue Office Memory Lane Office
905 Indian Rock Dam Road 200 Memory Lane
York, PA 17403 York, PA 17402

York Haven Office Emigsville Office
Landvale Street 2123 N George Street
York Haven, PA 17370 Emigsville, PA 17318

The Drovers & Mechanics Bank is the sole occupant of all land and buildings
listed above. The Windsor Office, located at 2 East Main Street, Windsor, PA
17366, was closed on September 27, 1996 and sold on October 30, 1996. The
Northwest Office, listed above, was sold on January 6, 1997.

The following property is pledged as collateral for a mortgage loan secured
to purchase the property:

96 South George Office Building
96 South George Street
York, PA 17401

The five-story office building adjacent to the Main Office provides for
future growth and enables the Corporation to maintain headquarters in
downtown York. In January of 1996, the executive offices of The Drovers &
Mechanics Bank relocated to the fifth floor of the office building.

The following branch offices are leased:

Queensgate Office
Queensgate Shopping Center
York, PA 17403

$1,750.00 per month rental; lease expires October 1, 2000.

Dover Office
Dover Square, adjacent to Shipley Stores, Inc.
1 South Main Street
Dover, PA 17315

$4,800.00 per month rental; lease expires November 10, 2006.

9 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 2. PROPERTIES

South York Plaza Office
275 Pauline Drive
in the Giant Food Store
York, PA 17402

$2,916.67 per month rental; lease expires August 22, 2000, and is renewable for
one five-year option.

Cape Horn Office
Cape Horn Square
RD#2 Lombard Street
Red Lion, PA 17356

$2,500.00 per month land rental; lease expires March 1, 2012, and is renewable
six five-year options. Building owned by the Corporation.

West Manchester Office
1750 Loucks Road
in the Giant Food Store
York, PA 17404

$2,500.00 per month rental; lease expires March 1, 1999, and is renewable for
two five-year options.

York Marketplace Office
2415 East Market Street
in the Giant Food Store
York, PA 17402

$2,500.00 per month rental; lease expires May 1, 1999, and is renewable for
two five-year options.

Mt. Rose Avenue Office
Mt. Rose Avenue at
Albemarle Street
York, PA 17403

$20,000.00 per year land rental; lease expires January 1, 2001. Additionally,
and leased equipment of $45,840.00 per year is required to be paid by the Bank.
This transaction has been classified as a capitalized lease.

Although the facilities currently owned or leased by the Corporation are
sufficient for its operations, the Corporation may obtain additional space as
required.

The Corporation is planning to increase its branch office network in York County
by two newly constructed offices in 1997. The new sites would target high
growth areas in the immediate market. Construction would be funded out of
operations. The expanded branch network would provide for continued deposit
growth.

10 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INVESTMENT PORTFOLIO

The following table sets forth the carrying amount of investment securities at
the dates indicated:

(In thousands) 1996 1995 1994
U.S. Government ............. $10,538 $6,562 $5,937
U.S. Agencies ............... 90,348 66,188 65,260
Municipal ................... 18,465 14,488 16,430
Corporate ................... 500 1,782 3,566
Total debt securities ....... 119,851 89,020 91,193
Equity securities ........... 8,231 2,803 3,166
Total investment securities . $128,082 $91,823 $94,359

The following table sets forth the contractual maturities of debt securities
classified as held-to-maturity at December 31, 1996:

AFTER AFTER
ONE YR ONE TO FIVE TO OVER
(In thousands) OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. $ 0 $1,000 $ 0 $ 0 $1,000
U.S. Agencies .... 227 3,366 566 8,620 12,779
Municipal ........ 860 5,199 2,811 5,879 14,749
Total ............ $1,087 $9,565 $3,377 $14,499 $28,528

The following table depicts the average weighted yields of the held-to-maturity
investments by maturity at December 31, 1996:

AFTER AFTER
ONE YR ONE TO FIVE TO OVER
OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. 0.00% 7.00% 0.00% 0.00% 7.00%
U.S. Agencies .... 9.45% 5.70% 9.33% 6.34% 6.36%
Municipal ........ 6.01% 7.31% 5.89% 5.20% 6.12%
Total ............ 6.73% 6.71% 6.46% 5.88% 6.26%

11 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INVESTMENT PORTFOLIO (continued)

The following table sets forth the contractual maturities of debt securities
classified as available-for-sale at December 31, 1996:

AFTER AFTER
ONE YR ONE TO FIVE TO OVER
(In thousands) OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. $2,504 $7,034 $ 0 $ 0 $9,538
U.S. Agencies .... 2,306 9,537 9,623 56,102 77,568
Municipal ........ 200 1,595 899 1,023 3,717
Other ............ 0 0 0 500 500
Total ............ $5,010 $18,166 $10,522 $57,625 $91,323

The following table depicts the average weighted yields of the available-for-
sale investments by maturity at December 31, 1996:

AFTER AFTER
ONE YR ONE TO FIVE TO OVER
OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. 5.96% 6.09% 0.00% 0.00% 6.06%
U.S. Agencies .... 5.13% 6.97% 6.93% 7.02% 6.94%
Municipal ........ 4.75% 4.35% 5.15% 5.10% 4.77%
Other ............ 0.00% 0.00% 0.00% 7.90% 7.90%
Total ............ 5.53% 6.40% 6.77% 6.99% 6.77%

The average yields are computed by dividing annual interest income, including
the accretion of discounts and amortization of premiums, by the amortized cost
of securities at December 31, 1996. The yield on Municipal investments has not
been restated on a fully tax equivalent basis.

For additional information see Note 6 on pages 20-21 of the Corporation's 1996
Annual Report.

12 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LOAN DATA

Loans are comprised of the following:
YEAR ENDED DECEMBER 31,
(In thousands) 1996 1995 1994 1993 1992
Domestic loans:
Commercial, financial and
industrial ................ $72,776 $66,798 $59,943 $54,714 $52,415
Real estate:
Construction ............. 8,908 5,910 7,163 5,831 1,927
Mortgage ................. 167,751 141,565 120,392 114,320 100,259
Consumer ................... 37,150 45,548 46,168 37,802 31,809
Leasing and other (net) .... 26 9 6 15 10
Total domestic loans ......... 286,611 259,830 233,672 212,682 186,420
Foreign loans ................ 0 0 0 0 0
Total domestic and
foreign loans ............... 286,611 259,830 233,672 212,682 186,420
Unearned income .............. -3,494 -4,425 -4,297 -3,736 -3,342
Loans net of unearned ........ 283,117 255,405 229,375 208,946 183,078
Reserve for loan losses ...... -3,130 -2,937 -2,638 -2,332 -2,022
Net loans .................... $279,987 $252,468 $226,737 $206,614 $181,056

For additional information see Note 7 on page 21-22 of the Corporation's 1996
Annual Report.

13 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MATURITIES AND RATE SENSITIVITY OF THE LOAN PORTFOLIO
(EXCLUDING CONSUMER AND RESIDENTIAL REAL ESTATE LOANS)

The following table shows the amounts of loans (excluding consumer, residential
real estate and other loans) outstanding as of December 31, 1996 which, based on
remaining scheduled repayments of principal, are due in the periods indicated:

AFTER
REMAINING MATURITIES ONE YR ONE TO OVER
(In thousands) OR LESS FIVE YRS FIVE YRS TOTAL
Domestic loans:
Commercial, financial and industrial . $60,958 $ 8,652 $3,166 $ 72,776
Real estate construction ............. 6,245 2,012 651 8,908
Foreign loans .......................... 0 0 0 0
Total .................................. $67,203 $ 10,664 $ 3,817 $ 81,684

Rate sensitivity:
Predetermined rate ................... $2,756 $6,937 $3,789 $ 13,482
Floating or adjustable rate .......... 64,447 3,727 28 68,202
Total .................................. $67,203 $ 10,664 $ 3,817 $ 81,684

Drovers Bancshares Corporation has no set rollover policy. Many of our loans
are made on a short-term basis with full intention of renewal at time of
maturity. All loans, however, are reviewed on a continual basis for
creditworthiness. Should a loan become questionable or approach problem loan
status, it then undergoes a formal review process by all appropriate levels of
authority.

14 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NONACCRUAL, RESTRUCTURED LOANS AND NONPERFORMING ASSETS

The following table shows loans on nonaccrual status or loans which have been
restructured for the past five years:

PRINCIPAL AMOUNT AT YEAR END DECEMBER 31,
(In thousands) 1996 1995 1994 1993 1992
Domestic:
Nonaccrual loans ................. $ 615 $ 934 $ 416 $ 385 $ 237
90 days past due still accruing .. 0 9 6 2 3
Restructured loans ............... 1,139 791 818 0 0
Foreign:
Nonaccrual loans ................. 0 0 0 0 0
90 days past due still accruing .. 0 0 0 0 0
Restructured loans ............... 0 0 0 0 0
Total .............................. $1,754 $1,734 $1,240 $ 387 $ 240

Nonaccrual loans as a percentage of net loans decreased from 0.37% in 1995 to
0.22% at December 31, 1996. The change is attributed to decreases in nonaccrual
loans secured by real estate and commercial loans of $167,000 and $151,000,
respectively. Restructured loans consists of commercial loans to one party.
Interest is recognized under the accrual method of accounting.

Additionally, the Corporation held $1,501,000 of impaired loans at December 31,
1996 under court-ordered restructuring due to bankruptcy. All loans are fully
colateralized.

The following table presents the changes in the balance of other real estate
over the past five years:

(In thousands) 1996 1995 1994 1993 1992
Balance at beginning of year ....... $ 195 $ 0 $ 141 $ 25 $ 131
Assets acquired by foreclosure
or repossession ................... 822 300 0 161 199
Dispositions ....................... -203 -106 -152 -32 -281
Other (net) ........................ -11 1 11 -13 -24
Balance at end of year ............. $ 803 $ 195 $ 0 $ 141 $ 25

Other real estate consists of assets which have been repossessed or acquired
through workout situations on defaulted loans.

For additional information on nonperforming assets see Note 1 and Note 7 on
pages 17-18 and 21-22, respectively, of the Corporation's 1996 Annual Report.

15 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ANALYSIS OF RESERVE FOR LOAN LOSSES

YEARS ENDED DECEMBER 31,
(In thousands) 1996 1995 1994 1993 1992
Balance, January 1, ............... $ 2,937 $ 2,638 $ 2,332 $ 2,022 $ 1,630
Provision for loan losses ......... 645 501 382 447 552
Charge-offs:
Commercial, financial
and industrial ................. 25 31 19 0 48
Real estate - construction ...... 0 0 0 0 0
Real estate - mortgage .......... 215 45 0 0 15
Consumer ........................ 369 257 157 179 155
Total charge-offs ................. 609 333 176 179 218
Recoveries:
Commercial, financial
and industrial ................. 6 11 0 0 5
Real estate - construction ...... 0 0 0 0 0
Real estate - mortgage .......... 36 0 6 0 0
Consumer ........................ 115 120 94 42 53
Total recoveries .................. 157 131 100 42 58
Net charge-offs ................... 452 202 76 137 160
Balance, December 31, ............. $ 3,130 $ 2,937 $ 2,638 $ 2,332 $ 2,022
Ratio of net charge-offs to average
loans outstanding ................ 0.17% 0.08% 0.04% 0.07% 0.09%

Drovers Bancshares Corporation manages the risk characteristics of its loan
portfolio through various control processes. Risk is further controlled through
the application of lending procedures such as the holding of adequate
collateral, contractual guarantees, and compensating balances.

Management also considers the amount of recent and expected charge-offs, the
loan portfolio mix and changes in the economy when determining the provision for
loan losses. Management believes these procedures provide adequate assurance
against losses and the level of the Reserve for Loan Losses is sufficient to
meet any present or potential risks.

For additional information see Note 1 and Note 7 on pages 17-18 and 21-22,
respectively, of the Corporation's 1996 Annual Report.

16 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ALLOCATION OF RESERVE FOR LOAN LOSSES

The following table presents the amount of the reserve allocated to each of
the loan categories and the percentage of total loans for the past five years:

YEARS ENDED DECEMBER 31,
1996 1995 1994
Percent Percent Percent
of Loans of Loans of Loans
Reserve to Total Reserve to Total Reserve to Total
(In thousands) Amount Loans Amount Loans Amount Loans
Commercial, financial
and industrial ...... $657 25.7% $515 26.2% $630 26.2%
Real Estate:
Construction ........ 46 3.1% 16 2.3% 29 3.1%
Mortgage ............ 321 59.1% 327 55.3% 204 52.3%
Consumer .............. 123 12.1% 140 16.2% 120 18.4%
Leasing and other ..... 0 0.0% 0 0.0% 0 0.0%
Unallocated ........... 1,983 n/a 1,939 n/a 1,655 n/a
Total ................. $3,130 100.0% $2,937 100.0% $2,638 100.0%

YEARS ENDED DECEMBER 31,
1993 1992
Percent Percent
of Loans of Loans
Reserve to Total Reserve to Total
(In thousands) Amount Loans Amount Loans
Commercial, financial
and industrial ...... $723 26.2% $964 28.6%
Real Estate:
Construction ........ 48 2.8% 45 1.1%
Mortgage ............ 328 54.4% 419 54.4%
Consumer .............. 110 16.6% 86 15.9%
Leasing and other ..... 0 0.0% 0 0.0%
Unallocated ........... 1,123 n/a 508 n/a
Total ................. $2,332 100.0% $2,022 100.0%

For additional information see Note 1 and Note 7 on pages 17-18 and 21-22,
respectively, of the Corporation's 1996 Annual Report.

17 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

DEPOSIT STRUCTURE

Maturities of time deposits of $100,000 or more outstanding at December 31, are
summarized as follows:

(In thousands) 1996 1995 1994
Three months or less ............... $3,674 $3,996 $1,149
Over three months to six months .... 927 2,336 2,213
Over six months to twelve months ... 7,047 3,061 1,289
Over twelve months ................. 6,354 6,798 6,935
Total .............................. $18,002 $16,191 $11,586

SHORT-TERM BORROWINGS

Short-term borrowings are borrowed funds generally with an original maturity of
one year or less. Securities sold under repurchase agreements and federal funds
purchased mature in one day. Other short-term borrowings have a maturity of
greater than one day.

(In thousands) 1996 1995 1994
Federal funds purchased and securities sold under repurchase agreements
Balance at year-end $15,254 $ 7,302 $11,893
Average amount outstanding 12,210 7,530 4,357
Maximum amount outstanding at any month-end 18,843 14,707 13,743
Average interest rate for the year 4.75% 5.60% 5.12%
Average interest rate on year-end balance 5.24% 5.31% 6.39%

Other short-term borrowings
Balance at year-end $ 0 $ 0 $2,699
Average amount outstanding 77 0 66
Maximum amount outstanding at any month-end 4,000 0 2,699
Average interest rate for the year 5.47% 0.00% 5.61%
Average interest rate on year-end balance 0.00% 0.00% 6.22%

18 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

QUARTERLY FINANCIAL DATA

Unaudited
1996
(In thousands, FIRST SECOND THIRD FOURTH
except per share data) QUARTER QUARTER QUARTER QUARTER TOTAL
Net interest income ...... $3,646 $3,746 $3,889 $3,983 $15,264
Provision for loan losses 105 180 105 255 645
Total noninterest income . 902 863 727 872 3,364
Total noninterest expense
and income taxes ....... 3,295 3,218 3,306 3,315 13,134
Net income ............... $1,148 $1,211 $1,205 $1,285 $4,849
PER SHARE DATA
Net income ............... $0.41 $0.43 $0.43 $0.46 $ 1.73

1995
(In thousands, FIRST SECOND THIRD FOURTH
except per share data) QUARTER QUARTER QUARTER QUARTER TOTAL
Net interest income ...... $3,563 $3,653 $3,667 $3,641 $14,524
Provision for loan losses 105 155 105 136 501
Total noninterest income . 659 683 763 732 2,837
Total noninterest expense
and income taxes ....... 3,085 3,093 3,120 3,281 12,579
Net income ............... $1,032 $1,088 $1,205 $ 956 $4,281
PER SHARE DATA
Net income ............... $0.37 $0.39 $0.43 $0.34 $ 1.53

Data adjusted for the 5 for 4 split in the form of a 25% stock dividend issued
in 1996 and the 7% stock dividend issued in 1995.

19 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INTEREST DIFFERENTIAL

December 31,
1996 1995
(In thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
INTEREST INCOME
Increase (decrease) in:
Money market investments and
Interest-bearing deposits
with banks ...................... $ 73 $-12 $61 $-26 $52 $26
Federal funds sold ............... 0 0 0 0 -2 -2
Total money market investments ... 73 -12 61 -26 50 24
Investment securities
Taxable investment securities ... 519 -31 488 -129 594 465
Equity securities ............... 157 3 160 41 15 56
Tax-exempt investment securities -68 -116 -184 -9 -58 -67
Total investment securities ...... 608 -144 464 -97 551 454
Total loans ...................... 1,819 -342 1,477 2,736 1,539 4,275
Total interest income ............ 2,500 -498 2,002 2,613 2,140 4,753

INTEREST EXPENSE
Increase (decrease) in:
Interest-bearing deposits
Demand .......................... 58 -210 -152 -12 15 3
Savings ......................... 136 90 226 -326 130 -196
Time ............................ 801 189 990 1,587 1,043 2,630
Total interest-bearing deposits .. 995 69 1,064 1,249 1,188 2,437
Borrowed funds
Short-term borrowings ........... 226 -64 162 174 21 195
Long-term borrowings ............ 120 -84 36 380 111 491
Total borrowed funds ............. 346 -148 198 554 132 686
Total interest expense ........... 1,341 -79 1,262 1,803 1,320 3,123
Increase in interest differential $1,159 $-419 $ 740 $810 $820 $1,630

The change in interest due to both rate and volume has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in cash.

20 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The principal executive officers of Drovers Bancshares Corporation and its
principal subsidiary, The Drovers & Mechanics Bank, as of January 1, 1997, are
as follows:

Name: A. Richard Pugh Age: 56
Position and Office: Chairman of the Board, President, and Chief Executive
Officer of Drovers Bancshares Corporation and The Drovers & Mechanics Bank.
Mr. Pugh joined the organization in 1988, he was appointed President in 1990 and
C.E.O. in 1994. He has extensive and diversified experience in bank management.
Mr. Pugh succeeded Mr. Linder as Chairman of the Board on March 1, 1996.

Name: George L.F. Guyer, Jr. Age: 63
Position and Office: Senior Vice President and Secretary of Drovers Bancshares
Corporation and The Drovers & Mechanics Bank. Mr. Guyer joined the organization
in 1964. He served as Marketing Coordinator from 1972 to 1990.

Name: Michael J. Groft Age: 41
Position and Office: Executive Vice President of Drovers Bancshares Corporation
and Executive Vice President and Senior Loan Officer of The Drovers & Mechanics
Bank. Mr. Groft joined the organization in March 1978. He has served in
various loan officer positions since 1978.

Name: Debra A. Goodling Age: 38
Position and Office: Executive Vice President and Treasurer of Drovers
Bancshares Corporation and Executive Vice President, Treasurer and Chief
Financial Officer of The Drovers & Mechanics Bank. Ms. Goodling joined the
organization in February 1977. She has served in various financial officer
positions since 1981.

Name: Lorie Y. Runion Age: 45
Position and Office: Senior Vice President-Marketing and Human Resources of The
Drovers & Mechanics Bank. Ms. Runion joined the organization in 1983. She has
served in various Human Resource positions since 1983 and assumed responsibility
for Marketing in 1990.

Name: Kerry McLaughlin Age: 42
Position and Office: Senior Vice President and Senior Trust Officer of The
Drovers & Mechanics Bank. Mr. McLaughlin joined the organization in April 1992.
He has extensive experience in the banking industry, specializing in the Trust
function. Prior to joining Drovers Bank, Mr. McLaughlin was employed with the
Trust Group of United Carolina Bank of South Carolina in the position of Vice
President and Trust Officer.

Name: Shawn A. Stine Age: 41
Position and Office: Senior Vice President and Senior Corporate Banking Officer
of The Drovers & Mechanics Bank. Mr. Stine joined the organization in August
1991 in the position of Vice President and Senior Corporate Banking Officer.

Richard M. Linder retired March 1, 1996. He continues to serve on the Board of
Directors.

Additional information required for this item is contained on pages 3-11 of the
Definitive Proxy Statement dated April 18, 1997.

21 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART IV. SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

DROVERS BANCSHARES CORPORATION Date __March 26, 1997_____
(Registrant)

By__/s/_A._Richard_Pugh__________________
A. Richard Pugh, Chairman of the Board,
President and Chief Executive Officer

Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.

__/s/_L._Doyle_Ankrum____________ _________________________________
L. Doyle Ankrum, Director Frank Motter, Director

__/s/_Josephine_D._Appell________ __/s/_Robert_L._Myers____________
Josephine D. Appell, Director Robert L. Myers, Jr., Director

__/s/_J._Samuel_Gregory__________ __/s/_Harlowe_R._Prindle_________
J. Samuel Gregory, Director Harlowe R. Prindle, Director

__/s/_Daniel_E._Hess_____________ __/s/_Basil_A._Shorb,_III________
Daniel E. Hess, Director Basil A. Shorb, III, Director

__/s/_George_W._Hodges___________ __/s/_D._John_Sparler,_Jr._______
George W. Hodges, Director D. John Sparler, Jr., Director

__/s/_Herbert_D._Lavetan_________ __/s/_Gary_A._Stewart____________
Herbert D. Lavetan, Director Gary A. Stewart, Director

__/s/_Richard_M._Linder__________ __/s/_Robert_H._Stewart,_Jr._____
Richard M. Linder, Director Robert H. Stewart, Jr., Director

__/s/_David_C._McIntosh__________ __/s/_Delaine_A._Toerper_________
David C. McIntosh, Director Delaine A. Toerper, Director

__/s/_Debra_A._Goodling__________ __/s/_John_D._Blecher____________
Debra A. Goodling, Executive Vice John D. Blecher, Vice President
President and Treasurer and Assistant Treasurer
Principal Financial Officer Principal Accounting Officer

22 <PAGE>

EXHIBIT 23
DROVERS BANCSHARES CORPORATION AND SUBSIDIARIES

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the incorporation by reference in this Form 10-K of Drovers
Bancshares Corporation and Subsidiaries of our report dated January 15, 1997,
included in the 1996 Annual Report to Shareholders of Drovers Bancshares
Corporation and Subsidiaries.

We also consent to the incorporation by reference in the Registration Statement
on Form S-3 pertaining to the shelf registration of the Dividend Reinvestment
and Stock Purchase Plan of Drovers Bancshares Corporation and Subsidiaries and
the Registration Statement on Form S-8 pertaining to the Drovers Bancshares
Corporation Incentive Stock Option Plan of our report dated January 15, 1997,
with respect to the consolidated financial statements incorporated herein by
reference.

/S/ Stambaugh Ness P.C.

(Successor to Harry Ness & Company)

York, Pennsylvania

March 25, 1997

<ARTICLE> 9
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 17512
<INT-BEARING-DEPOSITS> 271
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 99554
<INVESTMENTS-CARRYING> 28528
<INVESTMENTS-MARKET> 29051
<LOANS> 283117
<ALLOWANCE> 3130
<TOTAL-ASSETS> 446713
<DEPOSITS> 360204
<SHORT-TERM> 15254
<LIABILITIES-OTHER> 3778
<LONG-TERM> 29385
0
0
<COMMON> 14046
<OTHER-SE> 24046
<TOTAL-LIABILITIES-AND-EQUITY> 446713
<INTEREST-LOAN> 23199
<INTEREST-INVEST> 6701
<INTEREST-OTHER> 155
<INTEREST-TOTAL> 30055
<INTEREST-DEPOSIT> 12322
<INTEREST-EXPENSE> 14791
<INTEREST-INCOME-NET> 15264
<LOAN-LOSSES> 645
<SECURITIES-GAINS> 196
<EXPENSE-OTHER> 12050
<INCOME-PRETAX> 5933
<INCOME-PRE-EXTRAORDINARY> 5933
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4849
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.73
<YIELD-ACTUAL> 8.06
<LOANS-NON> 615
<LOANS-PAST> 0
<LOANS-TROUBLED> 1139
<LOANS-PROBLEM> 1501
<ALLOWANCE-OPEN> 2937
<CHARGE-OFFS> 609
<RECOVERIES> 157
<ALLOWANCE-CLOSE> 3130
<ALLOWANCE-DOMESTIC> 1147
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1983

</TABLE>

EXHIBIT 13. Annual Report to Shareholders - Electronic copy
Drovers Bancshares Corporation and Subsidiaries

This document contains excerpts of the annual report referenced in Form 10-K.

CONTENTS
Cross Reference for electronic filing/hard copy

Electronic Hard
Copy Copy
Consolidated Financial Highlights.......................... 2 .... 1
Common Stock Market Prices and Dividends................... 3 .... 1
Eleven-Year Summary of Selected Financial Information...... 41 .... 10
Consolidated Statements of Condition....................... 4 .... 13
Consolidated Statements of Income.......................... 5 .... 14
Consolidated Statements of Changes in Shareholders' Equity. 6 .... 15
Consolidated Statements of Cash Flows...................... 7 .... 16
Notes to Consolidated Financial Statements ................ 8 .... 17
Report of Independent Certified Public Accountants ........ 28 .... 29
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29 .... 30
Supplemental Financial Data ............................... 43 .... 38

<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED FINANCIAL HIGHLIGHTS
(All dollar amounts presented in thousands except per share data)

1996 1995 % Change
FINANCIAL POSITION AT DECEMBER 31,
Assets .................................. $446,713 $382,791 16.70%
Net loans ............................... 279,987 252,468 10.90%
Deposits ................................ 360,204 306,653 17.46%
Shareholders' equity .................... 38,092 34,921 9.08%

INCOME FOR THE YEAR
Interest income ......................... $30,055 $28,053 7.14%
Interest expense ........................ 14,791 13,529 9.33%
Net interest income ..................... 15,264 14,524 5.10%
Net income .............................. 4,849 4,281 13.27%

FINANCIAL RATIOS
Return on average assets ................ 1.20% 1.16% 3.45%
Return on average shareholders' equity .. 13.31% 13.04% 2.07%

PER SHARE DATA*
Net income .............................. $1.73 $1.53 13.07%
Cash dividends .......................... $0.57 $0.50 14.00%
Book value (year-end) ................... $13.56 $12.47 8.74%
Weighted average shares outstanding ..... 2,806,920 2,800,878 0.22%
Number of shareholders .................. 1,417 1,373 3.20%

INVESTMENT SERVICES AND TRUST DIVISION
Fair value of trust assets administered . $159,972 $134,364 19.06%

* Data adjusted for the 5 for 4 stock split in the form of a 25% stock dividend
issued in 1996.

2 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED FINANCIAL HIGHLIGHTS

COMMON STOCK MARKET PRICES AND DIVIDENDS
The common stock of Drovers Bancshares Corporation is traded in the over-the-
counter market by several brokers. Quotations as to bid and asked prices are
published in the local newspaper. The quarterly year-to-date average shares
outstanding and quarterly bid and asked prices were as follows:
Cash
1996 Bid** Asked** Shares* Dividends Paid*
March 29 .................. $20.00 $21.20 2,802,935 $0.14
June 28 ................... 21.10 21.60 2,804,523 0.14
September 30 .............. 22.25 24.25 2,806,157 0.15
December 31 ............... 20.75 21.50 2,806,920 0.15

1995
March 31 .................. $16.80 $17.40 2,800,715 $0.11
June 30 ................... 17.00 17.60 2,800,823 0.13
September 29 .............. 17.60 18.60 2,800,859 0.13
December 29 ............... 19.00 19.00 2,800,878 0.14

* Data adjusted for the 5 for 4 split in the form of a 25% stock dividend issued
in 1996 and the 7% stock dividend issued in 1995.

** Data adjusted for the 5 for 4 split in the form of a 25% stock dividend
issued in 1996.

3 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION

December 31,
(in thousands) 1996 1995
ASSETS
Cash and due from banks ............................... $17,512 $17,418
Money market investments .............................. 271 1,353
Investment securities (fair value $128,605 and $92,554) 128,082 91,823
Loans (net of unearned income of $3,494 and $4,425) ... 283,117 255,405
Reserve for loan losses ............................... 3,130 2,937
Net loans ........................................... 279,987 252,468
Bank premises and equipment ........................... 14,007 13,880
Other assets .......................................... 6,854 5,849
TOTAL ASSETS .......................................... $446,713 $382,791

LIABILITIES
Deposits:
Noninterest-bearing ................................. $34,702 $34,154
Interest-bearing .................................... 325,502 272,499
Total deposits .................................... 360,204 306,653
Federal funds purchased and securities sold
under agreements to repurchase ...................... 15,254 7,302
Other borrowings....................................... 29,385 30,172
Other liabilities ..................................... 3,778 3,743
TOTAL LIABILITIES ..................................... 408,621 347,870
SHAREHOLDERS EQUITY
Common stock ($5 par value)10,000,000 shares authorized;
issued and outstanding--2,809,180 shares in 1996
and 2,240,775 in 1995 ............................... 14,046 11,204
Additional paid-in capital ............................ 14,707 14,657
Retained earnings...................................... 8,969 8,536
Unrealized holding gains on available-for sale
securities ............................... 370 524
TOTAL SHAREHOLDERS' EQUITY ............................ 38,092 34,921
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $446,713 $382,791

See notes to consolidated financial statements.

4 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31,
(in thousands, except per share data) 1996 1995 1994
INTEREST INCOME
Interest and fees on loans ...................... $23,199 $21,722 $17,447
Interest on deposits with banks ................. 155 94 68
Interest on federal funds sold .................. 0 0 2
Interest and dividends on investment securities:
Taxable investment securities ................. 5,492 5,004 4,539
Equity securities ............................. 336 176 120
Tax-exempt investment securities .............. 873 1,057 1,124
Total interest income ....................... 30,055 28,053 23,300
INTEREST EXPENSE
Interest on deposits ............................ 12,322 11,258 8,821
Federal funds purchased and securities sold
under agreements to repurchase................. 584 422 227
Interest on borrowed funds ...................... 1,885 1,849 1,358
Total interest expense ...................... 14,791 13,529 10,406
Net interest income ......................... 15,264 14,524 12,894
Provision for loan losses ....................... 645 501 382
Net interest income after provision for loan
losses ........................................ 14,619 14,023 12,512
OTHER INCOME
Trust income ................................... 1,020 924 834
Service charges on deposit accounts ............. 1,199 982 917
Securities gains ................................ 196 106 30
Net gains on loan sales ......................... 390 278 253
Equity in losses of real estate ventures......... -137 -64 -35
Other ........................................... 696 611 458
Total other income .......................... 3,364 2,837 2,457
OTHER EXPENSES
Salaries and employee benefits .................. 6,818 6,426 6,031
Occupancy and premises .......................... 827 798 564
Furniture and equipment ......................... 896 734 703
Marketing ....................................... 627 389 323
FDIC insurance assessment ....................... 2 331 610
Net cost of operation of other real estate ...... 26 3 -11
Supplies ........................................ 442 346 316
Other taxes ..................................... 325 294 266
Other............................................ 2,087 1,737 1,553
Total other expenses ........................ 12,050 11,058 10,355
Income before income taxes....................... 5,933 5,802 4,614
Applicable income taxes ......................... 1,084 1,521 845
NET INCOME ...................................... $4,849 $4,281 $3,769

PER SHARE DATA
NET INCOME ...................................... $1.73 $1.53 $1.35
See notes to consolidated financial statements.

5 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>

Unrealized
Gains
(Losses)
Additional Available- Minimum
(in thousands, except Common Paid-in Retained for-Sale Pension
number of shares) Shares Stock Capital Earnings Securities Liability
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 .. 1,654,013 $8,270 $11,781 $8,462 $769 $-33
Net income................ 3,769
Cash dividends ........... -1,156
25% stock dividend issued. 415,639 2078 -2,078
Shares issued ............ 20,913 105 208
Change in unrealized
holding losses on
available-for-sale
securities .............. -2,484
Change in minimum pension
liability .......... .... 33
BALANCE, DECEMBER 31, 1994. 2,090,565 $10,453 $11,989 $8,997 $-1,715 $ 0
Net income ............... 4,281
Cash dividends ........... -1,407
7% stock dividend issued.. 146,590 733 2,602 -3,335
Shares issued ............. 3,620 18 66
Change in unrealized
holding gains on
available-for-sale
securities............... 2,239
BALANCE, DECEMBER 31, 1995. 2,240,775 $11,204 $14,657 $8,536 $ 524 $ 0
Net income ............... 4,849
Cash dividends ........... -1,606
25% stock dividend issued. 561,919 2,810 -2,810
Shares issued ............. 6,486 32 50
Change in unrealized
holding gains on
available-for-sale
securities............... -154
BALANCE, DECEMBER 31, 1996. 2,809,180 $14,046 $14,707 $8,969 $ 370 $ 0
</TABLE>
See notes to consolidated financial statements.

6 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,
(in thousands) 1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................ $4,849 $4,281 $3,769
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization .................. 1,179 972 925
Net amortization of investment
security premiums ............................ 3 105 187
Provision for loan losses ...................... 645 501 382
Gain on sale of investment securities
held-to-maturity ............................. -10 -59 -70
(Gain) loss on sale of investment securities
available-for-sale ........................... -186 -47 40
(Gain) loss on sale of fixed assets ............ -46 6 1
Gain on sale of loans .......................... -390 -278 -253
(Gain) loss on sale of other real estate ....... 2 -1 -11
Net deferred loan fees ......................... -290 -2 -178
Equity in losses of real estate ventures........ 137 64 35
Increase in interest/dividend receivable ....... -142 -224 -243
Increase in other assets ....................... -1,007 -340 -186
Increase in interest payable ................... 101 788 415
Increase (decrease) in other liabilities ....... -83 116 -67
Loans originated for sale ...................... -23,370 0 0
Proceeds from sale of loans .................... 24,028 0 0
(Increase) decrease in other noncash items ..... 9 -6 -5
Net cash provided by operating activities ......... 5,429 5,876 4,741

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of investment
securities held-to-maturity ..................... 5,756 9,612 5,107
Proceeds from sales and maturities of investment
securities available-for-sale ................... 26,931 7,795 20,159
Purchases of investment securities
held-to-maturity ................................ -5,292 -2,223 -17,791
Purchases of investment securities available-
for-sale ........................................ -63,694 -9,030 -19,919
Net increase in loans ............................. -28,316 -25,952 -20,074
Capital expenditures .............................. -1,300 -1,416 -1,375
Proceeds from sale of fixed assets ................ 108 8 1
Purchase of investment in real estate ventures..... 0 -1,285 -600
Proceeds from sale of other real estate ........... 203 106 153
Net cash used in investing activities ............. -65,604 -22,385 -34,339

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and
savings ......................................... 32,648 -3,441 -2,000
Net increase in certificates of deposit ........... 20,898 26,901 19,256
Net increase (decrease) in federal funds purchased
and repurchase agreements ....................... 7,952 -10,825 14,592
Payments made for capital leases .................. -30 -26 -23
Net increase (decrease) in other borrowings ....... -758 11,486 -1,138
Proceeds from issuance of common stock ............ 83 84 313
Dividends paid .................................... -1,606 -1,407 -1,156
Net cash provided by financing activities ......... 59,187 22,772 29,844
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS. -988 6,263 246
CASH & CASH EQUIVALENTS AT JANUARY 1, ............. 18,771 12,508 12,262
CASH & CASH EQUIVALENTS AT DECEMBER 31, ........... $17,783 $18,771 $12,508

See notes to consolidated financial statements.

7 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All dollar amounts presented in the tables are in thousands, except per share
data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Drovers Bancshares Corporation is a one bank holding company with a principal
subsidiary, The Drovers & Mechanics Bank. The Bank offers a wide variety of
banking and trust services to individuals and commercial customers. The
accounting and reporting policies followed by Drovers Bancshares Corporation and
its subsidiaries conform with generally accepted accounting principles (GAAP)
and general practice within the banking industry. Preparing financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts and disclosure of contingencies.
Actual results could differ from those estimates.

BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of all subsidiaries,
including The Drovers & Mechanics Bank, 96 South George Street, Inc. and Drovers
Realty Company. All significant intercompany accounts and transactions have
been eliminated in consolidation. Income and expenses are recorded on the
accrual basis of accounting except for trust and certain other fees which are
recorded principally on the cash basis, which does not differ materially from
the accrual basis. Production costs of advertising are expensed when
advertising begins.

STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents include cash,
due from banks and federal funds sold. Generally, federal funds are sold for
one-day periods.

INVESTMENT SECURITIES:
The Corporation accounts for investment securities in accordance with Statement
of Financial Accounting Standard No. 115, Accounting for Certain Investments in
Debt and Equity Securities. The Statement requires each debt and equity
security to be classified into one of three categories: held-to-maturity,
available-for-sale or trading. Investments in debt securities which the
Corporation has the positive intent and ability to hold to maturity are
classified as held-to-maturity. These securities are accounted for at amortized
cost. Other securities are classified as available-for- sale. Differences
between the amortized cost and fair value are considered an unrealized holding
gain or loss and are shown net of taxes in Shareholders' Equity. The Corporation
classified no securities as trading at December 31, 1996 or 1995. Such
securities would be bought principally for the purpose of selling them in the
near term. Management reassesses the appropriateness of the classifications
each quarter. The Corporation did not reclassify any securities from held-to-
maturity to available- for-sale as permitted by the Financial Accounting
Standards Board in December 1995. The Corporation calculates amortization and
accretion using the straight-line method which does not differ materially from
the interest method. Security gains and losses are determined using the
specific identification method.

8 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION:
Interest on commercial and real estate mortgage loans is accrued and credited to
operations based upon the principal amount outstanding. Interest on consumer
loans is recognized on the accrual basis using the actuarial method or simple
interest method. Origination fees and costs are deferred and recognized as an
adjustment to yield.

NONPERFORMING ASSETS:
Nonperforming assets are comprised of loans for which the accrual of interest
has been discontinued due to a serious weakening of the borrower's financial
condition. In addition, nonperforming assets include other real estate received
in foreclosure and loans modified in troubled debt restructurings.

Loans are generally placed on a nonaccrual basis when principal or interest is
past due90 days or more and when, in the opinion of management, full collection
of principal or interest is unlikely. At the time a loan is placed on
nonaccrual status, the accrual of interest is discontinued. Income on such loans
is then recognized only to the extent of cash received. When prospects of
recovery of the loan principal have significantly diminished, the loan is
charged against the reserve for loan losses and any subsequent recoveries are
credited to the reserve account.

The basis in other real estate is carried at the lower of fair market value less
costs to liquidate or the carrying value of the related loan at the time of
acquisition.

RESERVE FOR LOAN LOSSES:
The reserve for loan losses is based on management's evaluation of the loan
portfolio and reflects an amount which, in management's opinion, is adequate to
absorb losses in the existing portfolio. Management evaluates the adequacy of
its loan loss reserve each quarter. Provided that the quarterly review does not
reflect a significant disparity from estimates in loan growth, quality and
charge-offs, the quarterly provision remains constant. A significant change in
estimate could result in a material change to net income.

Beginning January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by SFAS No. 118. Under the Standard, the allowance for credit
losses related to loans that are identified for evaluation in accordance with
Statement No. 114 is based on discounted cash flows using the loan's initial
effective interest rate or the fair value of collateral for certain collateral
dependent loans. The fair value of collateral is used whenever the collateral
value is substantial in comparison to the loan balance. Loans are deemed
impaired when it is probable that the Corporation will be unable to collect all
amounts due in accordance with the terms of the loan agreement. Loans are
identified as impaired through various means including a formal loan review
process, quarterly review of loan loss reserve adequacy, past due listings and
watch lists. Statement No. 114 excludes large groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment.

9 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
MORTGAGE SERVICING RIGHTS:
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 122 (SFAS No. 122), "Accounting for Mortgage Servicing
Rights." Statement No. 122 requires mortgage servicers that sell loans and
retain servicing rights to allocate the total cost of the loans between the
servicing rights and loans based on fair value. The mortgage servicing rights
are amortized, using the straight- line method, over the expected life of the
serviced loans. The Corporation evaluates the fair value of the rights each
quarter and recognizes impairment immediately if it occurs. The Corporation
uses quoted market prices to determine fair value. Mortgage servicing rights
are stratified based on original term and date of origination. This Standard
only affects loans sold after December 31, 1995. In addition, any mortgages
designated as held-for-sale are valued at the lower of cost or fair value. The
Corporation uses quoted market prices and evaluates the loans on an individual
loan basis. Mortgage loans that the Corporation has both the ability and intent
to hold for the foreseeable future or until maturity are classified as a long-
term investment.

PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation, computed on the straight-line method, is charged to
operations based on the following range of lives: buildings - 20 to 60 years and
equipment - 3 to 20 years. Leasehold improvements are amortized over the terms
of the respective leases or the estimated useful lives of the improvements,
whichever is shorter. Maintenance, repairs and minor replacements are expensed
as incurred. Gains and losses on dispositions are reflected in current
operations.

TRUST ASSETS:
Assets held by the Corporation's subsidiary in fiduciary or agency capacity for
customers are not included in the consolidated financial statements as such
items are not assets of the Corporation or its subsidiaries.

INCOME TAXES:
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities due to changes in tax rates is recognized in income in
the period that includes the enactment date.

10 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PER SHARE DATA:
Primary earnings per common share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding during each
period.

NOTE 2 - CASH AND DUE FROM BANKS
The subsidiary Bank of the Corporation maintains average reserve balances to
comply with Federal Reserve Bank guidelines. Reserve balances are based on
outstanding deposits and consist primarily of vault cash. These reserves
were $7,025,000 and $6,433,000 at December 31, 1996 and 1995, respectively.
Average required reserves during 1996 and 1995 were $6,366,000 and $5,225,000,
respectively.

NOTE 3 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of financial condition. The amounts of
those instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.

The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and financial guarantees is represented by the amount
of those instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
1996 1995
Commitments to extend credit (legally binding) ............ $72,119 $64,912
Standby letters of credit and financial guarantees ........ $4,619 $5,823

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation evaluates each
customer's creditworthiness on a case by case basis. The amount of collateral
obtained, if deemed necessary by the Corporation upon extension of credit, is
based on management's credit evaluation of the counter party. Collateral held
varies but may include accounts receivable; inventory; property, plant and
equipment; and income-producing commercial properties.

Standby letters of credit and financial guarantees written are conditional
commitments issued by the Corporation to guarantee the performance of a
customer to a third party. Most guarantees extend for one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Corporation holds
collateral supporting those commitments for which collateral is deemed
necessary.

11 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 4 - CONTINGENT LIABILITIES AND RESTRICTIONS ON DIVIDENDS
In the normal course of business, there are various legal proceedings pending
against the Corporation. Management considers that the aggregate liabilities, if
any, arising from such actions would not have a material adverse effect on the
consolidated financial position of the Corporation.

The Drovers & Mechanics Bank is a Pennsylvania state-chartered bank and must
comply with the State's banking code. Under the code, cash dividends may be
declared and paid only out of accumulated net earnings. In addition, surplus
(additional paid-in capital) cannot be reduced by the payment of a dividend.

NOTE 5 - CONCENTRATION OF CREDIT RISK
The Corporation maintains thirteen branch offices, all of which are located in
York County, Pennsylvania. The Corporation grants credit to customers,
substantially all of whom are local residents. The Corporation emphasizes
diversification of credit risk among industries and borrowers. Concentrations
of credit risk can exist in relation to certain groups. A group concentration
arises when a number of customers have economic characteristics that could
similarly affect their ability to repay obligations due to changes in economic
or other conditions. The Corporation has a diversified loan portfolio and does
not have any loan concentrations exceeding ten percent of total loans.

NOTE 6 - MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES
Money market investments are stated at cost, which approximates fair value.
Money market investments as of December 31, 1996 and 1995 were $271,000 and
$1,353,000, respectively. All money market investments were in the form of
interest-bearing deposits with other financial institutions.

The amortized cost and estimated fair value of investment securities classified
as held-to-maturity as of December 31, 1996 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ...... $1,000 $23 $0 $1,023
Obligations of states and political
subdivisions ................... 14,748 496 22 15,222
Mortgage-backed securities and
collateralized mortgage
obligations .................... 12,780 175 149 12,806
Total investment securities ....... $28,528 $ 694 $ 171 $29,051

12 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 6 - MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES, (continued)
The amortized cost and estimated fair value of investment securities classified
as available-for-sale as of December 31, 1996 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ...... $24,338 $108 $58 $24,388
Obligations of states and political
subdivisions ................... 3,697 22 2 3,717
Corporate obligations ............. 500 0 0 500
Mortgage-backed securities and
collateralized mortgage
obligations .................... 62,482 465 229 62,718
Total debt securities ............. 91,017 595 289 91,323
Equity securities ................. 7,976 255 0 8,231
Total investment securities ....... $98,993 $ 850 $ 289 $99,554

The amortized cost and estimated fair value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because some issuers have the right to call or
prepay obligations with or without call or prepayment penalties.
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less ............. $860 $864 $5,038 $5,011
Due after one year through five years 6,198 6,554 18,090 18,166
Due after five years
through ten years .................. 2,811 2,925 3,887 3,905
Due after ten years ................. 5,879 5,902 1,520 1,523
15,748 16,245 28,535 28,605
Mortgage-backed securities and
collateralized mortgage
obligations ...................... 12,780 12,806 62,482 62,718
Total debt securities ............... $28,528 $29,051 $91,017 $91,323

13 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 6 - MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES, (continued)
The amortized cost and estimated fair value of investment securities classified
as held-to-maturity as of December 31, 1995 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ...... $1,000 $50 $0 $1,050
Obligations of states and political
subdivisions ................... 11,421 667 8 12,080
Mortgage-backed securities and
collateralized mortgage
obligations .................... 16,501 217 195 16,523
Total investment securities ....... $28,922 $ 934 $ 203 $29,653

The amortized cost and estimated fair value of investment securities classified
as available-for-sale as of December 31, 1995 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ...... $16,882 $220 $53 $17,049
Obligations of states and political
subdivisions ................... 3,047 23 2 3,068
Corporate obligations.............. 1,768 16 2 1,782
Mortgage-backed securities and
collateralized mortgage
obligations .................... 37,682 678 161 38,199
Total debt securities ............. 59,379 937 218 60,098
Equity securities ................. 2,727 78 2 2,803
Total investment securities ....... $62,106 $1,015 $220 $62,901

Proceeds from sales of investment securities classified as available-for-sale
during 1996, 1995 and 1994 were $14,560,000, $109,000 and $7,190,000,
respectively. Gross realized gains during 1996, 1995, and 1994 were $293,000,
$47,000 and $52,000, respectively. Gross realized losses during 1996, 1995 and
1994 were $108,000, $0 and $92,000, respectively.

No held-to-maturity investment securities were sold during 1996, 1995 or 1994,
however, gains were recognized on securities with call options exercised by the
issuer. Realized gains were $11,000, $59,000 and $70,000 in 1996, 1995 and
1994, respectively.

14 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 6 - MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES, (continued)
At December 31, 1996 and 1995, assets with a carrying value of $46,347,000 and
$27,078,000, respectively, were pledged as required or permitted by law to
secure certain public and trust deposits and repurchase agreements. The
aggregate book value of debt securities from a single issuer did not exceed 10%
of stockholders' equity at December 31, 1996 or 1995.

NOTE 7 - LOANS AND RESERVE FOR LOAN LOSSES
Loans were comprised of the following as of December 31:
1996 1995
Commercial, financial and industrial loans...... $72,828 $66,840
Real estate mortgage loans:
Real estate construction-related ............. 8,908 5,910
Real estate mortgage loans secured by 1-4
family residential properties ............... 98,559 91,262
Other real estate ............................ 68,637 49,903
Total real estate mortgage loans ............... 176,104 147,075
Consumer loans:
Monthly payment .............................. 32,616 39,987
Other revolving credit ....................... 1,543 1,494
Total consumer loans ........................... 34,159 41,481
Other .......................................... 26 9
Total loans .................................... $283,117 $255,405

Changes in the reserve for loan losses for the years ended December 31, were as
follows:
1996 1995 1994
Balance, beginning of year ............ $2,937 $2,638 $2,332
Provision for loan losses ............. 645 501 382
Loans charged-off:
Commercial, financial and industrial. 25 31 19
Real estate ......................... 215 45 0
Consumer ............................ 369 257 157
Total loans charged-off ............... 609 333 176
Recoveries:
Commercial, financial and industrial. 6 11 0
Real estate ......................... 36 0 6
Consumer ............................ 115 120 94
Total recoveries ...................... 157 131 100
Balance, end of year .................. $3,130 $ 2,937 $ 2,638

15 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 7 - LOANS AND RESERVE FOR LOAN LOSSES, (continued)
Nonaccrual loans were $615,000, $934,000 and $416,000 at December 31, 1996, 1995
and 1994, respectively. If interest due on all nonaccrual loans had been
accrued at the original contract rates, it is estimated that income before taxes
would have been greater by $37,000, $34,000 and $14,000 at December 31, 1996,
1995 and 1994, respectively. Accruing loans which were contractually past due
90 days or more were $0, $9,000 and $6,000 at December 31, 1996, 1995 and 1994,
respectively.

The total recorded investment in impaired loans was $2,682,000 and $851,000 at
December 31, 1996 and 1995, respectively. The amount of the recorded investments
for which there is a related allowance is $0. Loans classified as impaired as a
result of troubled debt restructurings which are in compliance with modified
terms recognize interest under the accrual method of accounting. Interest on
all other impaired loans is recognized on the accrual method of accounting until
principal or interest is past due 90 days or more and when full principal or
interest is unlikely. At that time the loans would be placed on nonaccrual
status. The average recorded investment in impaired loans during 1996 and 1995
was $1,764,000 and $880,000, respectively. The Corporation recognized interest
income on impaired loans of $193,000 in 1996 and $70,000 in 1995. Interest
income recognized on a cash basis would have been $214,000 in 1996 and $70,000
in 1995.

The Corporation's banking subsidiary has granted loans to officers, directors
and their associates. Related party loans are made on substantially the same
terms, including rates and collateral, as those prevailing at the time for
comparable transactions with unrelated parties and do not represent more than a
normal risk of collection. The aggregate dollar amounts of the loans were
$13,017,000 and $14,155,000 at December 31, 1996 and 1995, respectively. During
1996, $21,686,000 of new loans were made to related parties and repayments
totaled $22,824,000.

Residential mortgage loans with a book value of $4,194,000 and $2,499,000 were
committed for sale and awaiting settlement at December 31, 1996 and 1995,
respectively. The cumulative market value exceeded the book value of these
loans.

16 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment were comprised of the following as of December 31:
1996 1995
Land and land improvements ............................. $1,111 $1,149
Buildings .............................................. 10,934 11,884
Capitalized leased premises and equipment .............. 442 442
Furniture and equipment ................................ 9,552 7,638
22,039 21,113
Less accumulated depreciation .......................... 8,032 7,233
Total bank premises and equipment ...................... $14,007 $13,880

Provisions for depreciation charged to operating expenses were $1,110,000,
$972,000 and $925,000 for 1996, 1995 and 1994, respectively.

NOTE 9 - MORTGAGE SERVICING RIGHTS
The Corporation capitalized $176,000 in mortgage servicing rights during 1996
and amortized $18,000. The cost basis of the rights at December 31, 1996 was
$158,000. The estimated fair value was $213,000.

NOTE 10 - INVESTMENT IN REAL ESTATE VENTURES
The Drovers & Mechanics Bank, a wholly-owned subsidiary of Drovers Bancshares
Corporation, is the sole limited partner in two ventures to renovate and operate
apartment buildings. The first building opened in 1994. The second opened in
March 1996. Both buildings provide low-income housing to qualified families.
The investments are accounted for under the equity method of accounting. The
combined carrying values of the investments at December 31, 1996 and 1995 were
$2,391,000 and $2,527,000, respectively.

NOTE 11 - TIME DEPOSITS
At December 31, 1996 and 1995, time deposits of $100,000 or more aggregated
$18,002,000 and $16,191,000, respectively. Interest expense on these time
deposits amounted to approximately $1,010,000 in 1996, $902,000 in 1995 and
$582,000 in 1994.

17 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 12 - OTHER BORROWINGS AND LEASE COMMITMENTS
1996 1995
Notes payable to FHLB Pittsburgh:
Due 1996, 5.97% - 6.10% .................................. $0 $2,100
Due 1996, variable ....................................... 0 13,500
Due 1997, 6.50% .......................................... 1,000 1,000
Due 1997, variable ....................................... 5,000 0
Due 1998, 5.43% - 6.72% .................................. 3,500 3,500
Due 1998, variable ....................................... 10,000 0
Due 2000, 6.01% .......................................... 100 100
Due 2000, variable ....................................... 4,000 4,000
Due 2003, 6.40% .......................................... 400 400

Note payable to CoreStates Financial Corp:
Due 2003, 6.95% .......................................... 5,157 5,314
29,157 29,914
Capital lease obligations .................................. 228 258
$29,385 $30,172

The Federal Home Loan Bank of Pittsburgh (FHLB) notes payable are secured by
FHLB stock, deposits held by the FHLB and other mortgage collateral. The
interest rates on the variable notes reprices quarterly or more frequently and
are based on LIBOR or prime. The Corporation also maintains a credit line with
the FHLB secured by the same collateral. The amounts of notes payable and
capital leases maturing in the years ended December 31, 1997 through 2001 are as
follows: $6,205,000; $13,722,000, $242,000; $4,363,000 and $265,000,
respectively.

The CoreStates note payable is secured by a mortgage on the 96 South George
Street office building. The note is payable in monthly installments based on a
twenty-year amortization. The interest rate is fixed until 1998.

At December 31, 1996 and 1995, the Corporation and its subsidiaries were
obligated under noncancelable leases for premises and equipment. The terms
include various renewal options and provide for rental increases based upon
predetermined factors. The rental expense under such leases amounted to
$164,000 in 1996, $143,000 in 1995 and $128,000 in 1994.

18 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued):

NOTE 12 - OTHER BORROWINGS AND LEASE COMMITMENTS (continued)
Future minimum rental payments under capital leases and noncancelable operating
leases with terms of one year or more at December 31, 1996 were:
Capital Operating
Leases Leases
1997 ..................................................... $66 $242
1998 ..................................................... 66 242
1999 ..................................................... 66 192
2000 ..................................................... 66 127
2001 ..................................................... 46 89
Thereafter ............................................... 11 629
Total future minimum rental payments ..................... 321 $1,521
Less interest ............................................ 93
Present value of minimum rental payments ................. $ 228

NOTE 13 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The
estimated fair value amounts have been determined by the Corporation using
available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to develop
the estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Corporation could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.

The information presented is based on pertinent information available to
management as of December 31, 1996 and 1995. Although management is not aware
of any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued since that time and current
estimated fair value of these financial instruments may have changed
significantly.

19 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 13 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS, (continued)
1996 1995
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
FINANCIAL ASSETS:
Cash and short-term investments $17,783 $17,783 $18,771 $18,771
Investment securities ......... 128,082 128,605 91,823 92,554
Net loans ..................... 279,987 280,855 252,468 255,513
Interest receivable ........... 2,157 2,157 2,015 2,015
FINANCIAL LIABILITIES:
Demand and savings deposits ... 174,752 174,752 142,328 142,328
Time deposits ................. 185,452 185,005 164,325 164,663
Federal funds purchased and
securities sold under
agreement to repurchase ..... 15,254 15,254 7,302 7,302
Notes payable ................. 29,157 29,157 29,914 30,005
Interest payable .............. 2,414 2,414 2,333 2,333

The following methods and assumptions were used to estimate fair value of each
class of financial instruments for which it is practicable to estimate that
value: For short-term instruments, the carrying amount is a reasonable
estimate of fair value. The fair value of investment securities is based on
quoted market prices, dealer quotes and prices obtained from independent
pricing services. For floating rate loans which experienced no significant
change in credit risk and for deposits with floating interest rates, it is
presumed that estimated fair values generally approximate the carrying
amount. The fair value of fixed rate loans and time deposits is estimated
based on present values using applicable risk-adjusted spreads to the U.S.
Treasury curve to approximate current rates offered for loans and deposits of
similar maturities. Management believes that the risk factor embedded in the
currently offered rates results in a fair valuation of the loan portfolio.
The primary risks included in the risk factor are credit risk and prepayment
risk. Rates currently available to the Corporation for debt with similar
terms and remaining maturities are used to estimate fair value of other
borrowings.

There is no material difference between the notional amount and the estimated
fair value of off-balance sheet items which total $76,738,000. Off-balance
sheet items are primarily comprised of unfunded loan commitments, which are
generally priced at market at the time of funding.

20 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 14 - INCOME TAXES
Total income tax expense for the year ended December 31, 1996, 1995 and 1994 was
allocated as follows:
1996 1995 1994
Income from continuing operations ................... $1,084 $1,521 $845
Shareholders' equity, for minimum pension
liability adjustment ............................. 0 0 17
Shareholders' equity, for unrealized holding
gains (losses) for available-for-sale securities .. -79 1,154 -1,280
Total income tax expense ............................ $1,005 $2,675 $- 418

Income tax expense attributable to income from continuing operations consists of
the following at December 31,
1996 1995 1994
Currently payable .......................... $1,145 $1,485 $ 912
Deferred expense (benefit).................. -61 36 -67
Income tax expense ......................... $1,084 $1,521 $ 845

For the years ended December 31, the income tax expense attributable to income
from continuing operations differed from the tax expense which would be computed
by applying the Federal statutory rate to pretax earnings. The reasons for the
differences were as follows:
1996 1995 1994
Income before income tax ............ $5,933 $5,802 $4,614
Tax at federal income tax rate ...... $2,017 $1,973 $1,569
Differences resulting from:
Effect of tax-exempt income ........ -256 -322 -357
Historic and low income tax credits. -633 -103 -353
Other items, net ................... -44 -27 -14
Applicable income tax ............... $1,084 $1,521 $ 845

21 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 14 - INCOME TAXES, (continued)
The significant components of deferred income tax expense attributable to income
from continuing operations for the years ended December 31, 1996 1995 and 1994
were as follows:
1996 1995 1994
Excess provision for loan losses ........... $-65 $-102 $-104
Deferred loan income ....................... 57 111 61
Alternative minimum tax credit carryforward. -133 0 0
Other items, net ........................... 80 27 -24
$-61 $ 36 $-67

The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 are presented below:
1996 1995
Deferred tax assets:
Allowance for loan losses .................... $772 $706
Pension ...................................... 214 224
Alternative minimum tax credit carryforward .. 133 0
Other ........................................ 71 64
Total gross deferred tax assets ............ 1,190 994
Deferred tax liabilities:
Bank premises and equipment .................. 437 414
Unrealized holding gains on available-
for-sale securities ........................ 191 270
Other ........................................ 137 26
Total gross deferred tax liabilities ....... 765 710
Net deferred tax assets ........................ $ 425 $ 284

Federal income taxes on security gains were $67,000, $36,000 and $10,000 in
1996, 1995 and 1994, respectively.

Management believes the deferred tax asset is realizable since the Corporation
has had a long history of strong earnings and has a carryback potential
exceeding the deferred tax asset. Management is not aware of any evidence that
would preclude the Corporation from ultimately realizing this asset.

22 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 15 - NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
shares of stock outstanding during each year, giving retroactive effect to a
25% and a 7% stock dividend issued in 1996 and 1995, respectively. The weighted
average shares outstanding for the years ended December 31, were 2,806,920 in
1996; 2,800,878 in 1995; and 2,780,325 in 1994.

NOTE 16 - COMMON STOCK
The Board of Directors of the Corporation declared the following stock dividends
which includes a 5 for 4 stock split in the form of a stock dividend during
1996:
1996 1995
Percentage ................................... 25% 7%
Record date .................................. 07-19-96 10-20-95
Payable date ................................. 08-16-96 11-10-95

NOTE 17 - CASH FLOW DISCLOSURES
The Corporation paid interest and income taxes of $14,689,000 and $1,250,000 in
1996; $12,741,000 and $1,425,000 in 1995 and $9,991,000 and $985,000 in 1994,
respectively. Transfers from loans to other real estate as a result of
foreclosure were $822,000,$300,000 and $0 in 1996, 1995 and 1994, respectively.

NOTE 18 - RETIREMENT PLAN
The Corporation and its subsidiaries have a noncontributory pension plan
covering all eligible employees. The plan provides retirement benefits which are
a function of both the years of service and the highest level of compensation
during any consecutive five- year period of the last ten years before
retirement. It is the Corporation's policy to fund the plan sufficient to meet
the minimum funding requirements set forth in the Employee Retirement Income
Security Act, plus such additional amounts as the Corporation determines to be
appropriate from time to time. Pension expense was $164,000 in 1996, $95,000 in
1995 and $140,000 in 1994. The Corporation also has two nonqualified
supplemental retirement plans covering the present and former chairmen of the
board. The plans are based on a targeted wage replacement percentage and are
unfunded.

23 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 18 - RETIREMENT PLAN, (continued)
The following table sets forth the plan's funded status and amounts recognized
in the Corporation's consolidated financial statements at December 31:
1996 1995
Actuarial present value of benefit obligations:
Vested benefit obligation ............................... $-1,420 $-2,209
Accumulated benefit obligation .......................... $-1,492 $-2,277
Projected benefit obligation ............................... $-2,365 $-3,249
Plan assets at fair value .................................. 2,554 3,400
Projected plan assets in excess of benefit obligation ...... 189 151
Recognized net asset existing at December 31 ............... -154 -166
Unrecognized prior service cost ............................ 11 12
Unrecognized net gain ...................................... -232 -79
Contribution during period October 1 to December 31 ........ 0 60
Accrued pension cost ....................................... $-186 $-22

The net pension expense included the following:
1996 1995
Service costs - benefits earned during the period .......... $258 $174
Interest costs on projected benefit obligation ............. 227 189
Net amortization and deferral .............................. -93 294
392 657
Less return on plan assets ................................. 228 562
Net pension expense included in
salaries and employee benefits ............................ $164 $ 95

The following weighted average assumptions were used for the Plan:
1996 1995
Discount rate .............................................. 7.8% 7.0%
Rate of increase in salary levels .......................... 5.0% 5.0%
Long-term rate of return on plan assets .................... 9.0% 9.0%

Plan assets consist of corporate and government bonds and domestic and foreign
equity securities.

The Corporation has a 401(k) Salary Deferral Plan. This plan covers all
eligible employees who elect to contribute to the plan. An eligible employee
is anyone over the age of 21 who has completed one year of service. The
Corporation's contribution equals 25% of the employee's contribution up to a
maximum of 6% of annual salary. The annual expense included in salaries and
employee benefits amounted to $42,000, $40,000 and $32,000 in 1996, 1995 and
1994, respectively.

24 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)

NOTE 19 - STOCK OPTION PLAN
The Corporation has adopted a Stock Option Plan. A committee of the
Corporation's Board of Directors administers the plan and, at its discretion,
grants options to eligible key employees. The option price is the fair value of
shares on the day granted. No options may be exercised after ten years. The
options vest as follows: 50% on day of grant; 50% one year following grant
date. Under the current plan, 109,999 options have been authorized and not yet
granted. The following shares and options prices have been adjusted for
subsequent stock dividends.

1996 1995 1994
Stock Exercise Stock Exercise Stock Exercise
Options Price Options Price Options Price
Balance at January 1, ....... 61,112 $15.34 28,076 $14.37 32,986 $8.49
Granted ..................... 23,750 20.60 33,036 16.17 12,706 17.57
Exercised ................... 17,954 15.69 0 -- 17,616 5.68
Canceled .................... 0 -- 0 -- 0 --
Balance at December 31, ..... 66,908 $17.12 61,112 $15.34 28,076 $14.37
Exercisable at December, 31 . 55,033 $16.36 44,587 $15.03 21,716 $13.43

The following options were outstanding at December 31, 1996:

Stock Exercise Remaining Options
Options Price Life Exercisable
Issued 1990 .......... 8,778 $10.11 3.9 years 8,778
Issued 1994 .......... 8,025 17.57 7.9 8,025
Issued 1995 .......... 26,355 16.17 8.3 26,355
Issued 1996 .......... 23,750 20.60 9.3 11,875
66,908 $17.12 8.0 years 55,033

The weighted average grant-date fair value of options granted during 1996 and
1995 was $6.21 and $7.41, respectively. The Corporation uses the Black-Scholes
Option Pricing Model to calculate the grant-date fair value. The following
significant assumptions were used:

1996 1995
Risk free interest rate ........ 6.5% 6.6%
Expected life .................. 9.5 years 10 years
Expected volatility ............ 14.0% 14.0%
Expected dividends ............. 2.7% 2.7%

The Corporation applies APB Opinion 25 and related interpretations in accounting
for its plan. Accordingly, no compensation cost has been recognized for its
stock option plan. Had compensation cost for the Corporation's stock option
plan been determined based on the fair value at the grant dates for awards
consistent with the method of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Corporation's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:

25 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued):

NOTE 19 - STOCK OPTION PLAN, (continued)
1996 1995
Net Income As reported ... $4,849 $4,281
Pro forma ..... $4,731 $4,098
Earnings per share As reported ... $1.73 $1.53
Pro forma ..... $1.69 $1.46

NOTE 20 - PARENT CORPORATION FINANCIAL STATEMENTS
December 31,
STATEMENTS OF CONDITION 1996 1995
ASSETS
Cash ................................................ $ 20 $ 2
Investments in and advances to subsidiaries:
The Drovers & Mechanics Bank ...................... 36,808 33,694
Drovers Realty Company ............................ 748 745
Other assets ........................................ 556 507
TOTAL ASSETS .......................................... $ 38,132 $ 34,948
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities ................................... $ 40 $ 27
Total shareholders' equity .......................... 38,092 34,921
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $ 38,132 $ 34,948

Years Ended December 31,
STATEMENTS OF INCOME 1996 1995 1994
INCOME
Dividends from subsidiaries ............ $1,644 $1,407 $1,335
Other income ........................... 21 59 8
Total income ....................... 1,665 1,466 1,343
OPERATING EXPENSES
Other .................................. 147 153 153
Total operating expenses ........... 147 153 153
Income before income taxes ............. 1,518 1,313 1,190
Applicable income taxes (benefit) ...... -47 -35 -51
Income before undistributed earnings of
subsidiaries ......................... 1,565 1,348 1,241
Undistributed earnings of subsidiaries:
The Drovers & Mechanics Bank ......... 3,282 2,933 2,529
Drovers Realty Company ............... 2 0 -1
NET INCOME .............................. $4,849 $4,281 $3,769

26 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued):

NOTE 20 - PARENT CORPORATION FINANCIAL STATEMENTS, (continued)
Years Ended December 31,
STATEMENTS OF CASH FLOWS 1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................... $4,849 $4,281 $3,769
Undistributed earnings of subsidiaries ....... -3,285 -2,933 -2,528
Gain on sale of investment securities
available-for-sale ......................... -5 -47 0
Increase in other assets ..................... 0 0 7
Net cash provided by operating activities .... 1,559 1,301 1,248
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments (receipts) from intercompany account. -12 16 -13
Purchases of investment securities
available-for-sale .......................... -55 -116 -156
Proceeds from sales of investment securities
available-for-sale .......................... 49 109 0
Investment in subsidiary ..................... 0 0 -330
Net cash provided by (used in) investing
activities ................................. -18 9 -499
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock ............................ 83 83 313
Dividends paid ............................... -1,606 -1,407 -1,156
Net cash used in financing activities ........ -1,523 -1,324 -843
NET INCREASE (DECREASE) IN CASH ............... 18 -14 -94
CASH AT JANUARY 1, ............................ 2 16 110
CASH AT DECEMBER 31, .......................... $ 20 $ 2 $ 16

27 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
Report of Independent Certified Public Accountants

Board of Directors and Shareholders
Drovers Bancshares Corporation

We have audited the accompanying consolidated statement of condition of Drovers
Bancshares Corporation and Subsidiaries as of December 31, 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated statement of
condition of Drovers Bancshares Corporation and Subsidiaries as of December 31,
1995 and the related consolidated statements of income, shareholders' equity and
cash flows for each of the two years in the period ended December 31, 1995 were
audited by Harry Ness & Company whose report dated January 18, 1996, expressed
an unqualified opinion on those statements.

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

In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Drovers
Bancshares Corporation and Subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with generally accepted accounting principles.

/s/ Stambaugh Ness P.C.

(successor to Harry Ness & Company)
York, Pennsylvania
January 15, 1997

28 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The purpose of this discussion is to focus on information about Drovers
Bancshares Corporation, its financial condition and results of operations not
otherwise apparent in the consolidated financial statements of this Annual
Report. The reader of this Annual Report should make reference to those
statements and other selected financial data presented elsewhere in the report
to fully understand the following discussion and analysis.

RESULTS OF OPERATIONS
The consolidated earnings of Drovers Bancshares Corporation are derived
primarily from the operations of its wholly-owned subsidiaries: The Drovers &
Mechanics Bank and Drovers Realty Company. Drovers Bancshares Corporation is a
bank holding company. The Drovers & Mechanics Bank is a Pennsylvania state-
chartered FDIC insured bank. The Bank has one wholly-owned subsidiary, 96 South
George Street, Inc. The Bank subsidiary's primary asset is an office building
attached to the Bank's main office and housing its corporate headquarters.
Drovers Realty Company has various real estate holdings, including ground and
building leases. It rents the real estate to the Bank for use as branch
offices.

FINANCIAL SUMMARY
The Corporation recorded net income of $4,849,000 in 1996 and $4,281,000 in
1995. The return on average assets (ROA) and return on average equity (ROE) in
1996 were 1.20% and 13.31%, respectively. This compares to an ROA and ROE in
1995 of 1.16% and 13.04%, respectively.

NET INTEREST INCOME
Net interest income represents the difference between interest income and
interest expense. Net interest income is a measurement of how well management
balances the Corporation's interest rate sensitive assets and liabilities while
maintaining adequate interest margins. Net interest income rose 5.1% or
$740,000 in 1996, after advancing 12.6% or $1,630,000 in 1995.

Increase(Decrease)
(in thousands) 1996 1995 1994 96/95 95/94 94/93
Total interest income .. $ 30,055 $ 28,053 $23,300 7.1% 20.4% 3.8%
Total interest expense . 14,791 13,529 10,406 9.3% 30.0% 1.6%
Net interest income .... $ 15,264 $14,524 $12,894 5.1% 12.6% 5.7%

The Corporation's largest category of earning assets consists of loans to
businesses and individuals. The majority of earning assets are supported by
interest-bearing commercial and consumer deposits and other borrowings. In
addition to interest-bearing funds, assets are also supported by noninterest-
bearing funds including demand deposits and shareholders' equity. Changes in
net interest income are determined by variations in the volume and mix of assets
and liabilities as well as their relative sensitivity to interest rate
movements. Increased volume drove the increase in 1996 net interest income.
Increased volume and rates together increased 1995 net interest income.

29 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

NET INTEREST INCOME (continued)
The following table depicts the changes in rate and volume components of net
interest income:

1996 over 1995 1995 over 1994
Total Change due to Total Change due to
(in thousands) Change Rate Volume Change Rate Volume
Total interest income . $2,002 $-498 $2,500 $4,753 $2,140 $2,613
Total interest expense. 1,262 -79 1,341 3,123 1,320 1,803
Net interest income ... $ 740 $-419 $1,159 $1,630 $ 820 $ 810

There are two performance measures that indicate how successful a bank is in
managing its asset and liability structure. The first, net interest spread, is
the average rate earned on earning assets less the average rate paid on
interest-bearing funds. The second, net interest income margin, incorporates
both the net interest spread and margin on earning assets financed by
noninterest-bearing funds. The following table illustrates the net interest
spread and the net interest income margin:

1996 Average 1995 Average
(in thousands) Balance Rate Balance Rate
Earning assets .................... $372,889 8.06% $341,121 8.22%
Financed by:
Interest-bearing funds .......... $330,697 4.47% $300,524 4.50%
Noninterest-bearing funds ....... 42,192 - 40,597 -
Total ........................ $372,889 3.97% $341,121 3.97%

Net interest income ............... $ 15,264 $ 14,524
Net interest spread ............... 3.59% 3.72%
Net interest income margin ........ 4.09% 4.26%

The reliance upon interest-bearing liabilities as a funding source is reflected
by the ratio of average interest-bearing liabilities to average earning assets,
which increased from 88.1% in 1995 to 88.7% in 1996. The Federal Reserve effects
short-term interest rates through its control of the money supply, including the
setting of its "discount rate." The discount rate is the rate the Federal
Reserve charges banks for overnight borrowings. There is a direct correlation
between the discount rate and the prime rate banks use to set short-term
interest rates on commercial and some consumer loans. After raising the
discount rate several times in 1994, discount rates peaked in early 1995,
leveled off and then began to decline. The discount rate was lowered once more
in early 1996.

The Corporation's net interest spread and margin are directly related to
movements in short-term interest rates. The Corporation is asset sensitive in
that it has more interest-earning assets that reprice when short-term interest
rates change than it has interest-bearing liabilities. This is attributed to an
increase in commercial loans with interest rates that reprice each quarter or
more frequently. The Corporation benefited from higher short-term rates in 1994
and in most of 1995. However, the spread and margin have slowly fallen with the
decrease in short-term interest rates. The average spread and margin in 1994

30 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

NET INTEREST INCOME (continued)
were 3.68% and 4.13%, respectively. The spread and margin peaked in the second
quarter of 1995 and finished the year with an average spread and margin of 3.72%
and 4.26%, respectively. The fourth quarter 1995 spread and margin were 3.57%
and 4.13%, respectively. The Corporation took several steps in 1996 to lessen
its asset sensitivity. The Corporation restructured the investment portfolio by
selling variable rate investments and replacing them with fixed rate securities.
Lower yielding securities were sold at a loss and replaced with longer term,
higher yielding fixed rate investments. Total investment holdings were
increased and funded with shorter term certificates of deposit, savings products
paying interest rates tied to short-term money market interest rates and
variable rate borrowings from the Federal Home Loan Bank of Pittsburgh. The
Corporation preserved the 1996 spread and margin near the late 1995 levels
finishing the year with an average spread and margin of 3.59% and 4.09%,
respectively. The reliance on higher yielding funds, however, has squeezed the
spread and margin. The fourth quarter 1996 spread and margin were 3.50% and
4.02%, respectively. Despite the narrowing spread and margin, the Corporation
increased net interest income by $740,000. Average earning assets grew
$31,768,000 in 1996, while average interest-bearing funds increased $30,173,000.

PROVISION FOR LOAN LOSSES
The provision for loan losses was $645,000, $501,000 and $382,000 for 1996, 1995
and 1994, respectively. As described in the summary of significant accounting
policies, management analyzes the loan portfolio and the reserve for loan losses
each quarter. The analysis estimates loan losses and helps determine the
required provision. The analysis considers many factors including charge-off
history, loan quality and loan growth. Net charge-offs for 1996, 1995 and 1994
were $452,000, $202,000 and $76,000, respectively. As a percentage of average
loans, net charge-offs were .17%, .08% and .04% in 1996, 1995 and 1994,
respectively. Nonaccrual loans as a percentage of total loans at December 31,
1996, 1995 and 1994 were .22%, .37% and .18%, respectively. Loans grew
$27,712,000, $26,030,000 and $20,429,000 in 1996, 1995 and 1994, respectively.
The reserve for loan losses as a percentage of loans at December 31, 1996, 1995
and 1994 was 1.11%, 1.15% and 1.15%, respectively. Strong loan growth and an
increase in charge-offs caused management to increase the 1996 provision.
Management believes the present reserve is adequate to absorb losses in the
existing portfolio. A significant degradation of loan quality, however, could
require a significant change in estimated losses and cause a material change in
net income.

OTHER INCOME
Years Ended December 31, Increase(Decrease)
(in thousands) 1996 1995 1994 96/95 95/94 94/93
Trust income ............... $1,020 $924 $834 10.4% 10.8% 3.2%
Service charges on deposit
accounts .................. 1,199 982 917 22.1% 7.1% 12.9%
Securities gains ........... 196 106 30 84.9% 253.3% -78.6%
Net gains on loan sales .... 390 278 253 40.3% 9.9% -46.3%
Equity in losses
of real estate ventures.... -137 -64 -35 114.1% 82.9% -999.9%
Other ...................... 696 611 458 13.9% 33.4% 9.3%
Total other income ......... $3,364 $2,837 $2,457 18.6% 15.5% -7.3%

31 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

OTHER INCOME (continued)
Noninterest income was $3,364,000 in 1996, an increase of $527,000 from 1995.
The 1995 noninterest income was $2,837,000, an increase of $380,000 over the
1994 level of $2,457,000.

Income from the financial services and trust division increased $96,000, or
10.4%, in 1996. The fair value of investments managed by the division was
$159,972,000 at the end of 1996 an increase of 19.1% over the prior year. The
division experienced strong growth in the trust services area, including
employee benefits and personal trust, and in investment management accounts.
Nonrecurring estate fees accounted for about $38,000 of the increase in 1996.
Many of the fees derived from the division are based on the fair value of
managed assets. Overall increases in the equity markets throughout 1995 and
1996 helped increase the value of assets managed and the related fee income.

Service charges on deposit accounts increased $217,000, or 22.1%, in 1996. The
successful introduction in late 1995 of a the new "Winner" checking account
product increased fees from checking accounts in 1996. In April 1996, the
Corporation raised automatic teller machine (ATM) transaction fees which also
contributed to the growth in deposit service charges. Increases in collected
overdraft and returned check charges along with ATM transaction fees caused most
of the increase in 1995.

Net gains from investment securities sales were $196,000 in 1996 compared to
$106,000 and $30,000 in 1995 and 1994, respectively. The 1996 gains were the
result of restructuring the investment portfolio to increase holdings in higher
yielding fixed rate investments. The strategy decreases the Corporation's asset
sensitivity and increases future interest income.

Net gains on loan sales are comprised of gains from the sale of residential
mortgages. Mortgage loans sold were $23,814,000, $22,510,000 and $26,542,000 in
1996, 1995 and 1994, respectively. Total 1996 loan sales increased 5.8% over
1995 while net gains increased $112,000, or 40.3%. The 1996 gains included
$176,000 as the result of the adoption of a new accounting standard, SFAS No.
122, "Accounting for Mortgage Servicing Rights." The Standard causes the
measurement of gains to increase from sales of mortgages where servicing is
retained. The Corporation continued to emphasize residential mortgage lending in
1996, adding two mortgage originators and several new products. Sales in 1995
included $4,500,000 in adjustable rate mortgages sold to lessen overall asset
sensitivity. Sales in 1994 included about $12,198,000 of loans originated and
sold in 1993 that were awaiting settlement at December 31, 1993.

The Corporation recognized a $137,000 loss during 1996 from its equity
investments in two real estate limited partnerships. Both partnerships were
formed to renovate properties for lease as low-income housing apartments. The
first opened in August 1994. The second opened in February 1996. Both
buildings were fully occupied at the end of 1996. The Corporation receives
substantial financial benefits from these investments in the form of historic
and low-income tax credits.

Other income increased $85,000, or 13.9%, in 1996. Increases in cash management
fees, mortgage servicing income and lease rentals drove the increase in 1996.
In late 1995, the Corporation began a program allowing associates to lease new
personal computers from the Corporation at the Corporation's cost. Other income

32 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

OTHER INCOME (continued)
includes a $40,000 increase in computer lease revenue. An equal amount of
depreciation expense related to the computer equipment is included in other
noninterest expense. Higher cash management fees, insurance clerical fees and
mortgage servicing income drove the 1995 increase. Mortgage servicing provided
most of the growth in 1994. Total loans serviced were $93,327,000, $88,711,000
and $74,976,000 at the end of 1996, 1995 and 1994, respectively.

OTHER EXPENSES
Years Ended December 31, Increase(Decrease)
(in thousands) 1996 1995 1994 96/95 95/94 94/93
Salaries and employee benefits . $6,818 $6,426 $6,031 6.1% 6.5% 12.0%
Occupancy and premises ......... 827 798 564 3.6% 41.5% -22.5%
Furniture and equipment ........ 896 734 703 22.1% 4.4% 9.8%
Marketing ...................... 627 389 323 61.2% 20.4% -3.9%
FDIC insurance assessment ...... 2 331 610 -99.4% -45.7% 5.0%
Net cost of operation
of other real estate .......... 26 3 -11 766.7% -127.3% -152.4%
Supplies........................ 442 346 316 27.7% 9.5% 8.6%
Other taxes .................... 325 294 266 10.5% 10.5% 9.0%
Other .......................... 2,087 1,737 1,553 20.1% 11.8% -5.3%
Total other expenses ...........$12,050 $11,058 $10,355 9.0% 6.8% 5.0%

Other expenses includes all expenses except interest, provision for loan losses
and income taxes. In 1996, total other expenses increased $992,000, or 9.0%, as
compared to increases of 6.8% and 5.0% in 1995 and 1994, respectively.

Salaries and employee benefits are the most significant noninterest expense
category, representing 56.6%, 58.1% and 58.2% of total other expenses for 1996,
1995 and 1994, respectively. In 1996, salaries and employee benefits increased
$392,000, or 6.1%. Salaries increased $419,000, or 8.3%. This compares to a
salary increase of $308,000, or 6.5%, in 1995. The Corporation has two
incentive compensation plans. Both plans require a minimum return on assets of
1.00% before incentives are paid. The Corporation paid incentives of $234,000,
$224,000 and $202,000 in 1996, 1995 and 1994, respectively. The Corporation
employed 193 full-time equivalents at December 31, 1996 compared to 186 and 184
in 1995 and 1994, respectively. Employee benefits decreased $54,000, or 5.5%,
during 1996 compared to an increase of $87,000, or 9.8% in 1995. The decrease
in 1996 was due to a reduction in pension expense, including supplemental
retirement plans. Total pension expense decreased $60,000 in 1996 after
increasing $24,000 in 1995 and $87,000 in 1994. A mid-year reduction in medical
insurance premiums held the 1996 increase to $15,000, or 3.2%, compared to
$54,000 in 1995 and $79,000 in 1994.

Occupancy and premises expense increased $29,000, or 3.6%, during 1996.
Occupancy and premises includes the lease revenues less operating expenses of
the 96 South George Street office building for office space not occupied by the
Corporation. This resulted in a reduction of total occupancy and premises
expense of $134,000, $121,000 and $304,000 in 1996, 1995 and 1994, respectively.
The positive impact to occupancy and premises expense has declined due to an
increase in space taken by the Corporation for its corporate headquarters. The
remaining increases in 1996 and 1995 occupancy and premises expense were caused
by lease expense for two new branch offices opened in 1994 and one in 1996.

33 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

OTHER EXPENSES (continued)
Furniture and equipment expense increased $162,000, or 22.1% in 1996 compared
to $31,000, or 4.4%, in 1995. The Corporation installed a wide area computer
network and renovated office space in two buildings in the fourth quarter of
1995. The full impact of the depreciation from these capital expenditures
occurred in 1996.

Marketing expense was $627,000 in 1996 compared to $389,000 and $323,000 in 1995
and 1994, respectively. The Corporation conducted several extensive advertising
campaigns beginning in late 1995. The Corporation introduced its new "Winner"
checking account product in October 1995. Advertising continued into the first
quarter 1996. An image campaign followed along with the introduction of a new
savings product, the Indexed Money Fund (IMF). Both the Winner and IMF accounts
have been successful. In the fourth quarter 1996, the Corporation opened its
first full service branch office inside a convenience store. Deposit growth and
customer acceptance of the new branch has been very good.

FDIC insurance assessments were $2,000 during 1996. Effective June 1, 1995, the
FDIC lowered the insurance assessment minimum from $0.23 per $100 of deposits to
$0.04. The Corporation has always paid the minimum assessment rate. Effective
January 1, 1995, the minimum assessment rate was eliminated and qualifying banks
were required to pay a $2,000 annual fee. Recent legislation will reimpose a
minimum assessment rate of 0.13% of deposits beginning January 1, 1997. The
Corporation estimates FDIC insurance will cost about $45,000 in 1997.

The net cost of operating other real estate was $26,000 in 1996. Other real
estate held at December 31, 1996 was $803,000 compared to $195,000 in 1995. The
increase in other real estate is related to an increase in residential mortgage
foreclosures. The properties will be liquidated in 1997.

Other expenses increased $350,000, or 20.1%, in 1996 compared to a $184,000
increase in 1995. Expenses to purchase checking account benefits from a third
party for "Winner" customers increased $74,000. Legal expenses grew $68,000 due
to an increase in troubled loans. Higher third party data processing costs,
legal and professional fees caused the 1995 increase.

TAXATION
The Corporation recognized provisions for income taxes of $1,084,000, $1,521,000
and $845,000 in 1996, 1995 and 1994, respectively. The average tax rate was
18.3% in 1996, 26.2% in 1995 and 18.3% in 1994. The changes in the effective
tax rates were caused by changes in historic and low-income tax credits received
from the Corporation's investments in low-income housing partnerships. When the
partnership opened its renovated apartment building in 1994, the Corporation
received $353,000 in historic tax credits. Beginning in 1995 and for the next
nine years, the Corporation will receive $100,000 in low-income tax credits. In
1995, the Corporation invested in a second low-income housing partnership. Its

34 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

TAXATION, continued
renovated apartment building opened in March 1996. The Corporation received
$397,000 in historic tax credits and $136,000 in low-income tax credits in 1996.
The Corporation expects to receive about $169,000 in low income tax credits from
this project in each of the next nine years. The Corporation also minimizes its
tax liability through the purchase of tax-free municipal bonds and equity
investments eligible for partially tax-free dividends.

FORWARD OUTLOOK
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. It also makes consistent the
accounting for all servicing assets and liabilities. The Standard was to take
effect beginning January 1, 1997. The FASB has delayed certain provisions of
the Statement until January 1, 1998. The Corporation does not anticipate any
material impact to earnings from applying this Standard.

The Corporation has received approval to open two new branch offices in the
greater York area. A third site is being evaluated as well. Construction would
be funded out of operations. The expanded branch network would provide for
continued deposit growth.

LIQUIDITY
The primary purpose of asset/liability management is to maintain adequate
liquidity and a desired balance between interest sensitive assets and
liabilities. Liquidity management focuses on the ability to meet the cash flow
requirements of customers wanting to withdraw or borrow funds for their personal
or business needs. Interest rate sensitivity management focuses on consistent
growth of net interest income in times of fluctuating interest rates. The
management of liquidity and interest rate sensitivity must be coordinated since
decisions involving one may influence the other.

Liquidity needs can be met by either reducing assets or increasing liabilities.
Sources of asset liquidity include short-term investments, maturing and repaying
loans and monthly cash flows from mortgage-backed securities and collateralized
mortgage obligations. The loan portfolio provides an additional source of
liquidity due to the Corporation's participation in the secondary mortgage
market. In addition to monthly cash flows from certain investment securities,
the Corporation designates a substantial portion of its investment portfolio as
available-for-sale. At December 31, 1996, this segment totaled $99,554,000, or
77.7% of the investment portfolio.

Liquidity needs can be met by attracting deposits with competitive rates, using
repurchase agreements, buying federal funds or utilizing the facilities of the
Federal Reserve or the Federal Home Loan Bank of Pittsburgh. The Corporation
maintains informal borrowing arrangements with several correspondent banks to
purchase overnight federal funds. A formal arrangement with the Federal Home
Loan Bank allows the Corporation to borrow short and intermediate advances up to
approximately 80% of its investment in assets secured by one to four family
residential real estate. The maximum borrowings under this agreement at

35 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

LIQUIDITY, continued
December 31, 1996 were $111,517,000, of which $25,700,000, or 23.0% was
borrowed. The ability to renew funding sources depends on the financial
institution's strength, asset portfolio, diversity of depositors and types of
deposit instruments offered.

Liquidity can be further analyzed by using the Statement of Cash Flows. Cash
and cash equivalents decreased $988,000 during 1996. Cash used in investing
activities was $65,604,000 primarily as a result of a $28,316,000 increase in
net loans and a $36,299,000 increase in investment securities. Funds were also
required for $1,300,000 of capital expenditures. Cash provided by financing
activities was $59,187,000. Deposits provided most of the cash. Demand and
savings deposits increased $32,648,000 and certificates of deposit increased
$20,898,000. An increase in short-term borrowings provided an additional
$7,952,000. Operating activities provided the remaining cash flows of
$5,429,000. The significant components of operating activities are net income
and the add-back of noncash expenses like depreciation and provision for loan
losses. Operating activities also include the origination and sale of mortgage
loans generated for sale.

INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity management focuses on minimizing interest rate risk.
Interest rate risk arises when earning assets and their supporting liabilities
are priced at different rates or in different pricing periods during changing
market conditions. An interest rate sensitivity "gap" is a measure of the net
dollar exposure at a given time for various repricing periods. The following
table illustrates the Corporation's cumulative gap position within one year of
$83,203,000 or 18.6% liability sensitive at December 31, 1996:
0-1 1-5 Over
(in thousands) Year Years 5 Years Total
Money market investments ........ $271 $0 $0 $ 271
Investment securities ........... 43,685 60,522 23,314 127,521
Loans ........................... 148,614 103,494 31,009 283,117
Rate sensitive assets ........... $192,570 $164,016 $54,323 $410,909

Interesting-bearing deposits .... $240,314 $64,314 $20,874 $325,502
Short-term borrowings ........... 15,254 0 0 15,254
Long-term borrowings ............ 20,205 9,168 12 29,385
Rate sensitive liabilities ...... $275,773 $73,482 $20,886 $370,141
Interest sensitivity gaps:
Gap for period .................. $-83,203 $90,534 $33,437 $40,768
Cumulative gap .................. $-83,203 $7,331 $40,768
Cumulative gap as a percentage
of total assets ................ -18.6% 1.6% 9.1%

36 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

INTEREST RATE SENSITIVITY MANAGEMENT(continued)
The cumulative gap position can be misleading since many repriceable interest-
bearing deposit liabilities are not as sensitive to interest rate movements as
the repriceable assets which they help fund. While these deposits provide
excellent liquidity, they present interest rate risk in a downward moving rate
environment. The Corporation mitigates some of this risk through variable rate
borrowings from the Federal Home Loan Bank. Management monitors interest rate
risk through quarterly computer simulations of net interest income in both
rising and falling interest rate cycles. These simulations consistently
demonstrate the Corporation's asset sensitivity which is further confirmed by
the correlation between the net interest spread and short-term interest rates
during the last three years. Management has taken several steps to lessen the
asset sensitivity including restructuring the investment portfolio to hold a
greater percentage of fixed rate instruments and successfully introducing a new
savings product tied directly to short-term money market rates. The present
interest rate risk is within the tolerance limits established by management.

The table includes prepayment assumptions for mortgage-backed securities and
collateralized mortgage obligations based on recent prepayment experience. A
prepayment rate of 12.0% was used on fixed rate mortgages. Investment
securities are shown at amortized cost. Scheduled amortization is assumed for
all other loans. In addition, passbook savings accounts are considered core
deposits. A 5.00% annual decay rate was assumed based on historical experience
which allocated the majority of the balance in the over five year category.

Effective asset/liability management also considers the effects of changing
market prices on investment values. As a financial institution, a large portion
of the Corporation's assets are monetary in nature and subject to an
increase/decrease in purchasing power during periods of deflation/inflation.
The gain/loss in purchasing power on these assets is primarily affected by the
degree of change in their interest rate spread relationships and, accordingly,
is a function of the level and magnitude of interest rate movements. Minimizing
the effects of inflation on investment values is necessary in the management
of interest rate risk.

CAPITAL
Total shareholders' equity increased $3,171,000, or 9.1%, in 1996. The increase
included a $154,000 decrease in the fair value of investment securities
available-for-sale which are shown net of tax in shareholders' equity. Not
including the changes from fair value, equity increased $3,325,000, or 9.7%.

Newly generated capital can result from both internal and external sources. The
majority of the Corporation's capital is generated internally. A measure of
internal capital generation is the percentage of return on average equity times
the percentage of earnings retained. The return on average equity was 13.3% for
1996 and 13.0% for 1995. Total cash dividends declared in 1996 represented
33.1% of net income, as compared to 32.9% in 1995. The resulting internal
capital growth percentage was 8.9% in 1996 and 8.7% in 1995. The percentage of
average shareholders' equity to average total assets was 9.0% in 1996 and 8.9%
in 1995, indicative of a strong capital base. All of the above calculations
involving average equity included an average gain on available-for-sale
investment securities of $123,000 in 1996 and an average loss of $408,000 in
1995.

37 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

The Federal Reserve Board implemented risk-based capital guidelines for bank
holding companies in 1989. The guidelines establish a systematic framework
making capital requirements more sensitive to differences in risk structure
among banking organizations. The regulations require banking organizations to
maintain capital equivalent to 8.0% of risk weighted assets, at least half of
which must be common equity. Capital is divided into two tiers. Tier I capital
includes common stock, additional paid-in capital and retained earnings. Tier
II includes the allowance for loan losses up to a maximum of 1.25% of risk
adjusted assets. In addition to the risk-based capital requirements,
regulations require a minimum leverage ratio of 3.0% to 5.0% depending on the
strength of the organization. The leverage ratio divides Tier I capital by
total assets.

The following table shows that the Corporation exceeds all minimum capital
adequacy standards:
December 31,
1996 1995
Tier I -- Total qualified shareholders' equity . $37,722 $34,397
Tier II - Allowance for loan losses ............ 3,130 2,937
Total risk-based capital ..................... $40,852 $37,334

Risk-adjusted on-balance sheet assets .......... $292,374 $254,899
Risk-adjusted off-balance sheet exposure ....... 9,509 10,421
Total risk-adjusted assets ................... $301,883 $265,320

Ratios:
Tier I risk-based capital ratio .............. 12.5% 13.0%
Minimum required for December 31, ............ 4.0% 4.0%

Total risk-based capital ratio ............... 13.5% 14.1%
Minimum required for December 31, ............ 8.0% 8.0%

Tier I leverage ratio ........................ 8.4% 9.0%
Minimum required ............................. 4.0% 4.0%

FINANCIAL CONDITION
The Corporation functions as a financial intermediary and, therefore, its
financial condition and progress may be examined in terms of trends in its
sources and uses of funds. The following comparison of average daily balances
indicates how the Corporation has generated and employed its funds:

38 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

FINANCIAL CONDITION, continued
<TABLE>
<CAPTION>
1996 1995 1994
Average Increase Average Increase Average
(in thousands) Balance (Decrease) % Balance (Decrease) % Balance
<S> <C> <C> <C> <C> <C> <C> <C>
Funding uses:
Money market
investments .......... $2,875 1,357 89.4% $1,518 $ - 471 -23.7% $1,989
Investment securities . 104,481 9,398 9.9% 95,083 -1,405 -1.5% 96,488
Loans (net) ........... 265,533 21,013 8.6% 244,520 30,834 14.4% 213,686
Total interest-
earning assets ..... 372,889 31,768 9.3% 341,121 28,958 9.3% 312,163
Noninterest-earning
assets ............... 31,732 3,068 10.7% 28,664 1,178 4.3% 27,486
Total uses .............. $404,621 $34,836 9.4% $369,785 $30,136 8.9% $339,649

Funding sources:
Demand deposits ....... $41,446 4,678 12.7% $36,768 $- 669 -1.8% $37,437
Savings deposits ...... 74,302 4,698 6.7% 69,604 -11,839 -14.5% 81,443
Time deposits ......... 171,626 14,054 8.9% 157,572 28,834 22.4% 128,738
Short-term borrowings . 12,287 4,757 63.2% 7,530 3,107 70.2% 4,423
Long-term borrowings .. 31,036 1,986 6.8% 29,050 5,946 25.7% 23,104
Total interest-
bearing liabilities. 330,697 30,173 10.0% 300,524 25,379 9.2% 275,145
Demand deposits ....... 33,254 1,006 3.1% 32,248 252 0.8% 31,996
Other liabilities ..... 4,241 51 1.2% 4,190 1,220 41.1% 2,970
Shareholders' equity .. 36,429 3,606 11.0% 32,823 3,285 11.1% 29,538
Total sources ........... $404,621 $34,836 9.4% $369,785 $30,136 8.9% $339,649
</TABLE>
Total average assets were $404,621,000, representing a $34,836,000, or 9.4%,
increase from 1995. Loans and investments accounted for the growth in assets.
The Corporation experienced strong commercial, commercial mortgage and
residential mortgage loan demand. Only consumer loan balances, mainly auto
loans, declined in 1996. The Corporation traditionally generates most of its
auto loans through local auto dealers. Competition among lenders for these loans
has increased and driven down interest rates. These loans have historically
suffered higher credit losses than other segments of the portfolio. The
Corporation has maintained above market rates and tightened credit standards
which has caused balances to fall slowly. The increase in investments came from
increased holdings of fixed rate securities, mainly mortgage-backed securities
and municipal bonds. Fixed rate securities were added to minimize interest rate
risk.

Average total deposits grew $24,436,000 during 1996, funding 70.1% of the
increase in assets. Interest-bearing demand accounts increased $4,678,000 mainly
from the success of the "Winner" checking products. In July, overnight
investments managed by the Corporation's trust division were deposited into the
Bank. Overnight balances have averaged $10,720,000 since July. In June, the
Corporation introduced the Drovers Indexed Money Fund (IMF) account. The
account offers rates comparable to money market mutual funds and is FDIC
insured. Balances in IMF accounts totaled $20,922,000 at December 31, 1996.

39 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

FINANCIAL CONDITION, continued
The trust deposits and IMF account caused the increase in savings deposits. The
Corporation offered a thirteen-month certificate of deposit throughout 1996
which was well received by customers. As a result, average time deposits
increased $14,054,000, or 8.9%. The remaining assets were funded with a
combination of short and long-term borrowings and an increase in shareholders'
equity.

40 <PAGE>

Drovers Bancshares Corporation
ELEVEN YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
(dollar amounts in thousands,
except per share data) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA AT DECEMBER 31,
Assets .................................. $446,713 $382,791 352,287 $320,851 $308,319
Investment securities ................... 128,082 91,823 94,359 85,836 99,011
Net loans ............................... 279,987 252,468 226,737 206,614 181,056
Deposits ................................ 360,204 306,653 283,173 265,917 256,806
Shareholders' equity .................... 38,092 34,921 29,724 29,249 25,554

Total average assets .................... 404,621 369,785 339,649 315,138 288,792
Total average shareholders' equity ...... 36,429 32,823 29,538 27,379 24,570

INCOME DATA
Interest income ......................... $30,055 $28,053 $23,300 $22,445 $22,490
Interest expense ........................ 14,791 13,529 10,406 10,246 11,363
Net interest income ................... 15,264 14,524 12,894 12,199 11,127
Provision for loan losses ............... 645 501 382 447 552
Net interest income after
provision for loan losses .............. 14,619 14,023 12,512 11,752 10,575
Other income ............................ 3,168 2,731 2,427 2,511 2,173
Securities gains (losses) ............... 196 106 30 140 43
Other expenses and income taxes ......... 13,134 12,579 11,200 10,892 9,594
Income before cumulative effect of change
in accounting for income taxes ........ 4,849 4,281 3,769 3,511 3,197
Cumulative effect of change in
accounting for income taxes ........... 0 0 0 352 0
Net income .............................. 4,849 4,281 3,769 3,863 3,197
Dividends paid .......................... 1,606 1,407 1,156 1,080 1,019

RATIOS
Return on average assets ................ 1.20% 1.16% 1.11% 1.23% 1.11%
Return on average equity ................ 13.31% 13.04% 12.76% 14.11% 13.01%
Equity to assets (year-end) ............. 8.53% 9.12% 8.44% 9.12% 8.29%
Net loans to deposits (year-end) ........ 77.73% 82.33% 80.07% 77.70% 70.50%
Dividend payout ......................... 33.12% 32.87% 30.67% 27.96% 31.87%

PER SHARE DATA*
Net income .............................. $1.73 $1.53 $1.36 $1.40 $1.16
Cash dividends .......................... 0.57 0.50 0.42 0.39 0.37
Book value (year-end) ................... 13.56 12.47 10.63 10.58 9.28
Weighted average number of
shares outstanding .................... 2,806,920 2,800,878 2,780,325 2,758,602 2,752,875
Stock dividends declared ................ 25% 7% 25% 5% 0%
</TABLE>
* Per share figures are based on weighted average shares outstanding for
the respective years as restated after giving effect to stock
dividends.

41 <PAGE>
Drovers Bancshares Corporation
ELEVEN YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION (Continued)

<TABLE>
<CAPTION>
(dollar amounts in thousands, except per
share data) 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA AT DECEMBER 31,
Assets .................................. $276,537 $253,324 $240,886 $236,007 $221,224
$201,514
Investment securities ................... 86,054 66,222 63,682 68,556 56,434
62,313
Net loans ............................... 166,691 164,063 150,880 137,094 142,728
115,728
Deposits ................................ 243,717 227,916 216,532 213,249 196,888
180,421
Shareholders' equity .................... 23,377 21,715 20,321 19,042 17,785
16,291

Total average assets .................... 266,000 247,502 234,210 223,991 208,200
192,824
Total average shareholders' equity ...... 22,507 21,085 20,152 18,641 17,145
15,758

INCOME DATA
Interest income ......................... $23,651 $23,290 $21,829 $19,608 18,687
18,929
Interest expense ........................ 13,561 14,106 13,334 11,814 10,893
11,429
Net interest income ................... 10,090 9,184 8,495 7,794 7,794
7,500
Provision for loan losses ............... 568 416 365 0 34
495
Net interest income after provision
for loan losses ....................... 9,522 8,768 8,130 7,794 7,760
7,005
Other income ............................ 1,648 1,280 1,167 1,065 962
861
Securities gains (losses) ............... 67 101 76 50 4
(40)
Other expenses and income taxes ......... 8,574 7,853 7,221 6,907 6,701
5,818
Income before cumulative effect of change
in accounting for income taxes ........ 2,663 2,296 2,152 2,002 2,025
2,008
Cumulative effect of change in accounting
for income taxes ...................... 0 0 0 0 0
0
Net income .............................. 2,663 2,296 2,152 2,002 2,025
2,008
Dividends paid .......................... 1,003 930 875 776 687
640

RATIOS
Return on average assets ................ 1.00% 0.93% 0.92% 0.89% 0.97%
1.04%
Return on average equity ................ 11.83% 10.89% 10.68% 10.74% 11.81%
12.74%
Equity to assets (year-end) ............. 8.45% 8.57% 8.44% 8.07% 8.04%
8.08%
Net loans to deposits (year-end) ........ 68.40% 71.98% 69.68% 64.29% 72.49%
64.14%
Dividend payout ......................... 37.66% 40.51% 40.66% 38.76% 33.93%
31.87%

PER SHARE DATA*
Net income .............................. $0.97 $0.83 $0.78 $0.73 $0.74
$0.74
Cash dividends .......................... 0.36 0.34 0.32 0.28 0.25
0.23
Book value (year-end) ................... 8.49 7.89 7.39 6.92 6.47
5.96
Weighted average number of shares
outstanding ........................... 2,751,653 2,751,064 2,749,919 2,749,085 2,742,442
2,729,629
Stock dividends declared ................ 0% 50% 5% 5% 10%
7%
</TABLE>
* Per share figures are based on weighted average shares outstanding for
the respective years as restated after giving effect to stock dividends.

42 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
AVERAGE BALANCES AND RATES

<TABLE>
<CAPTION>
1996 1995 1994
Average Average Average Average Average
Average
(in thousands) Balance Interest Rate Balance Interest Rate Balance Interest
Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
ASSETS
Interest-earning assets:
Interest-bearing deposits
with banks ................. $2,875 $155 5.39% $1,518 $94 6.19% $1,930 $68
3.52%
Federal funds sold ........... 0 0 0.00% 0 0 0.00% 59 2
3.39%
Taxable investment
securities ................. 84,232 5,492 6.52% 76,251 5,004 6.56% 78,218 4,539
5.80%
Equity securities ............ 5,503 336 6.11% 2,930 176 6.01% 2,242 120
5.35%
Tax-exempt investment
securities ................. 14,746 873 5.92% 15,902 1,057 6.65% 16,028 1,124
7.01%
Loans ........................ 265,533 23,199 8.74% 244,520 21,722 8.88% 213,686 17,447
8.16%
TOTAL .................. 372,889 $ 30,055 8.06% 341,121 $ 28,053 8.22% 312,163 $ 23,300
7.46%
Noninterest-earning assets ..... 31,732 28,664 27,486
TOTAL ASSETS ................... $404,621 $369,785 $339,649
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits .............. $41,446 $510 1.23% $36,768 $662 1.80% $37,437 $659
1.76%
Savings deposits ............. 74,302 2,116 2.85% 69,604 1,890 2.72% 81,443 2,086
2.56%
Time deposits ................ 171,626 9,696 5.65% 157,572 8,706 5.53% 128,738 6,076
4.72%
Short-term borrowings ........ 12,287 584 4.75% 7,530 422 5.60% 4,423 227
5.13%
Long-term borrowings ......... 31,036 1,885 6.07% 29,050 1,849 6.36% 23,104 1,358
5.88%
TOTAL .................. 330,697 $ 14,791 4.47% 300,524 $ 13,529 4.50% 275,145 $ 10,406
3.78%
Noninterest-bearing liabilities:
Demand deposits .............. 33,254 32,248 31,996
Other liabilities ............ 4,241 4,190 2,970
Shareholders' equity ......... 36,429 32,823 29,538
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ......... $404,621 $369,785 $339,649
NET INTEREST SPREAD ............ 3.59% 3.72%
3.68%
INTEREST EXPENSE AS A
PERCENT OF EARNING ASSETS .... 3.97% 3.97%
3.33%
NET INTEREST INCOME MARGIN ..... $ 15,264 4.09% $ 14,524 4.26% $ 12,894
4.13%
</TABLE>

Average nonaccrual loans included in average loans for 1996, 1995 and 1994 were
$2,167,000, $592,000 and $507,000, respectively. Loan fees included in interest
income were $356,000, $275,000 and $363,000 in 1996, 1995 and 1994,
respectively.

43 <PAGE>