(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-10958

(Exact name of registrant as specified in its charter)

(State or other jurisdiction of incorporation or organization) (IRS employer ID)

(Address of principal executive office) (Zip Code)

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

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

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

Class / Outstanding at September 30, 2000

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The accompanying unaudited consolidated financial statements contain all adjustments (including normal recurring accruals) considered necessary to present fairly Drovers Bancshares Corporation's ("Drovers") financial position as of September 30, 2000 and December 31, 1999.

Operating results and changes in cash flows for the nine months ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. For further information, refer to the consolidated financial statements and footnotes included in Drovers' Annual Report for the year ended December 31, 1999.

Certain reclassifications have been made to prior information to conform to current year's presentation.

On May 26, 2000, Drovers distributed a 5% stock dividend to shareholders of record on May 5, 2000. Net income per share is computed based on the weighted average number of shares outstanding each period, giving retroactive effect to the 5% stock dividends issued in 2000 and 1999. Earnings per common share, assuming dilution gives effect to all dilutive potential common shares during each period.

Net income per share and net income per share, assuming dilution, were calculated as follows:

The amortized cost and estimated fair value of investment securities classified as available-for-sale as of September 30, 2000 are as follows:

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During the third quarter 2000, we adopted Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities. In conjunction with the adoption of the Statement, we reclassified $18,399,000 of securities from held-to-maturity to available-for-sale. The reclassification resulted in a $204,000 increase to the unrealized gains on investments and a $134,000 increase to accumulated other comprehensive income during the third quarter 2000.

The amortized cost and estimated fair value of investment securities classified as held-to-maturity as of December 31, 1999 are as follows:

The amortized cost and estimated fair value of investment securities classified as available-for-sale as of December 31, 1999 are as follows:

For additional information, see pages 24-25 of Drovers' 1999 Annual Report.

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Loans are comprised of the following as of September 30, 2000 and December 31, 1999:

Residential mortgage loans with a book value of $2,886,000 were held for sale at September 30, 2000. The cumulative fair value exceeded the book value of these loans. Loans held for sale are included in total loans. During the first nine months of 2000, we capitalized $24,000 in loan servicing rights and amortized $126,000.

Nonperforming assets are detailed below:

As of September 30, 2000, the total recorded investment in impaired loans was $2,168,000 compared to $5,468,000 at December 31, 1999.

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Changes in the reserve for loan losses for the periods ended September 30, were as follows:

For additional information, see footnote 7 on pages 26-27 and the Provision for Loan Losses on pages 39-40 of the Drovers' 1999 annual report.

Drovers' primary subsidiary, The Drovers & Mechanics Bank ("Drovers Bank") modified certain benefit plans for specific officers during the second quarter of 2000. In conjunction with these modifications, Drovers Bank purchased life insurance on certain key officers on March 30, 2000. The BOLI had a balance of $7,339,000 at September 30, 2000, which approximated the cash surrender value. The BOLI is included in other assets in the consolidated financial statements.

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Drovers is headquartered in York, Pennsylvania and offers a variety of financial products and services through its bank, The Drovers & Mechanics Bank ("Drovers Bank"), and its other specialized non-bank subsidiaries. Drovers Bank has sixteen full service branches, located throughout York County. Additionally, Drovers operates corporate lending offices in Mechanicsburg, Pennsylvania and Frederick, Maryland. The Frederick office was our first location outside of Pennsylvania. It was granted full banking powers and began accepting deposits from corporate customers in February 2000.

In addition to historical information, this Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements (within the meaning of the Private Litigation Reform Act of 1995), which involve significant risks and uncertainties. The words "believes", "expects", "may", "will", "should", "projects", "contemplates", "anticipates", "forecasts", "intends" or other similar words or terms are intended to identify forward-looking statements. Actual results may differ materially from the results discussed in these forward-looking statements. Factors that might cause such a difference might include, but are not limited to, general economic conditions, changes in interest rates, deposit flow, loan demand, real estate values and competition, changes in accounting or tax principles, policies or guidelines, changes in legislation or regulation and other economic competitive, government, regulatory and technological factors affecting Drovers' operations, pricing, products and services. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our analysis only as of the date hereof. Drovers undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

The following comparison of actual balances indicates how Drovers has generated and employed its funds for the nine months ending September 30, 2000:

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Total assets increased $35,200,000 during the first nine months of 2000. Loans grew $30,075,000, or 6.6%, while investments remained flat. Commercial loan demand was strong, accounting for $22,994,000 of the loan growth. The growth in commercial loans secured by real estate was $21,768,000, or 94.7%, of the total increase in commercial loans. Residential mortgages grew $9,231,000, or 6.5%, during the period.

During the first half of 2000, we sold $15,260,000 of securities and reinvested the proceeds in higher-yielding mortgage-backed securities and $7,125,000 of BOLI. See Note E for additional information on the BOLI. The investment transactions resulted in losses in the first quarter, but will provide higher earnings throughout 2000 and into the future. During the third quarter of 2000, we sold $5,221,000 of obligations of states and political subdivisions and purchased $14,385,000 of mortgage-backed securities and collateralized mortgage obligations.

Total deposits and customer repurchase agreements grew $68,188,000, or 13.2%, and funded the asset growth since yearend. Most of the deposit growth was in savings, which increased $7,592,000, or 5.6%; noninterest bearing demand, which increased $7,774,000, or 16.2%, and certificates of deposit and other time deposits, which increased $27,316,000, or 10.3%, from December 31, 1999.

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. Liquidity needs may 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 also provides a source of liquidity due to our participation in the secondary mortgage market. In addition, at September 30, 2000, all of our investments were classified as available-for-sale.

Liquidity needs may 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. Drovers Bank maintains a formal arrangement with the Federal Home Loan Bank, which allows us to borrow short and intermediate advances up to approximately 80% of our investment in assets secured by one-to-four family residential real estate. The maximum borrowings under this agreement at September 30, 2000 were $158,385,000, of which $98,802,000, or 62.4%, was borrowed. The ability to renew funding sources depends on our financial strength, asset portfolio, diversity of deposit customers and types of deposit instruments offered.

Drovers recorded net income of $2,015,000 for the third quarter of 2000 compared to $1,925,000 for the third quarter of 1999. Basic earnings per share were $0.40 compared to $0.39 a year ago. Return on average equity was 15.19% compared to 15.39% and return on average assets was 1.07% compared to 1.16% for the same period in 1999.

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Drovers recorded net income of $3,525,000 for the nine months ended September 30, 2000 compared to $5,613,000 for the same period a year ago. Year-to-date earnings show a decline over the first nine months of 1999 due to the increase in provision for loan losses caused by the write-down of a corporate relationship in the first half of 2000. Basic earnings per share were $0.70 for the first nine months of 2000.

Net interest income is the difference between the interest earned on loans and investments and the interest paid on deposits and other sources of funds. The following table presents the trends in net interest income:

Net interest income increased $1,212,000, or 7.4%, for the first nine months of 2000 compared to a year ago. The 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, customer repurchase agreements, borrowings 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 sensitivity to interest rate movements. Increased volume drove the increase in net interest income for the second quarter and the first nine months of 2000.

The following table summarizes the net interest spread and the net interest margin for the first nine months of 2000 and 1999:

The average yield on earning assets increased 0.42% while the cost of earning assets increased 0.75%. As a result of a higher increase in the cost of earning assets than the yield on interest-earning assets, the net interest margin declined 0.33%.

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The decline in interest margin was primarily related to the following factors:

• The yield on earning assets was adversely affected by nonaccrual loans. Our average nonaccrual loans during the first nine months of 2000 were higher than they had been in prior years. This was primarily due to the corporate relationship that was written down at the end of the second quarter of 2000.

• The issuance of $7,500,000 of 9.25% capital securities in September 1999 contributed to the increase in the yield on interest bearing liabilities.
• The net interest margin was adversely affected by a change in the mix of our assets. At the end of the first quarter 2000, we sold investment securities and reinvested in $7,125,000 of BOLI. The income on the BOLI is included in other income. See note E for additional information on the BOLI.
• The net interest margin was also affected by the fact that we are slightly liability sensitive. Beginning in July 1999, the Federal Reserve raised short term rates six times, or 1.75%. Overall, our interest-bearing liabilities reprice faster than the interest-bearing assets they fund; as such, our spread and margin have declined.

The net interest margin was 3.30% in the third quarter of 2000 compared to 3.36% in the second quarter of 2000.

The allowance for loan losses is based on our quarterly assessment of the losses inherent in the loan portfolio and other relevant factors. This assessment takes into account both quantitative and qualitative factors and is subjective as it requires material estimates. Based on our evaluation of loan quality, we feel that our allowance for loan losses at September 30, 2000 was adequate to absorb losses within the portfolio.

Net charge-offs and loan quality ratios are summarized below:

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Net charge-offs include the write-down of a significant corporate relationship during the first half of the year. The subsequent restoration of the reserve for loan losses contributed to the increase in the provision for loan losses from $1,064,000 last year to $4,603,000 in the first nine months of 2000.

At September 30, 2000, the percent of the reserve for loan losses to total loans was 0.88% as compared to 0.85% at December 31, 1999. The percent of the reserve to nonperforming loans as of September 30, 2000 was 210.62% compared to 58.75% at yearend 1999.

For additional information, see footnote 7 on pages 26-27 and the Provision for Loan Losses on pages 39-40 of the Drovers' 1999 annual report.

During the third quarter 2000, noninterest income increased $320,000, or 26.0%, compared to a year ago. Nearly all categories of noninterest income contributed to the increase.

Noninterest income for the nine months ended September 30, 2000 was $4,129,000 compared to $3,954,000 a year ago, an increase of $175,000. The increase was primarily the result of increases in investment services and trust income, deposit service charges and other, offset by net losses on sales of securities recognized during the first quarter of 2000 and reductions in net gains on loan sales.

Compared to a year ago, income from investment services and trust increased $24,000, or 6.6%, during the third quarter 2000 and $151,000, or 14.6%, for the first nine months of 2000. The fair value of investments managed was $288,758,000 at September 30, 2000, an increase of $33,690,000, or 13.2%, over the prior year. We have experienced growth in employee benefits, personal trust and investment management accounts. Additionally, investment services and trust launched a new initiative at the end of 1999, the Oak Tree Investment Group, which provides enhanced investment management, financial planning and brokerage services. The Oak Tree Investment Group contributed about $104,000 of revenue so far this year.

During the first six months of 2000, Drovers recognized a loss on sales of securities of $189,000. The losses were related to selling $15,260,000 of securities. The proceeds from the sales were reinvested in higher-yielding securities and $7,125,000 of BOLI. See Note E for additional information on the BOLI. The investment transactions resulted in losses in the first quarter 2000, but will provide higher earnings throughout 2000 and into the future.

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Net gains on loan sales increased $33,000 for the third quarter but declined $326,000 year-to-date. The increase for the third quarter is primarily due to increased volume. Mortgage loan sales totaled about $7,682,000 for the third quarter 2000 compared to $6,838,000 a year ago. The decline in the nine month period is primarily related to the refinancing boom, which occurred during the first half of 1999. Mortgage loan sales totaled about $42,953,000 during the first nine months of 1999 compared to $18,982,000 so far this year.

Service charges on deposit accounts increased $41,000 during the second quarter 2000 and $127,000 year-to-date. During 2000, we experienced an increase in the collection of insufficient fund and return check charges. Additionally, fees on deposit accounts have increased due to an increase in the number of accounts.

Other income increased $228,000, or 85.1%, for the third quarter 2000 and $485,000, or 62.1%, for the first nine months of 2000 compared to a year ago. We purchased $7,125,000 of BOLI on March 30, 2000, which contributed $117,000 of income during the third quarter and $233,000 year-to-date. Surcharges for non-customers using our ATM machines and fees for electronic interchange services have steadily increased. Additionally, fees received on letters of credit have increased from last year.

Noninterest expenses increased $206,000 for the third quarter 2000 and $1,112,000 so far this year. Salaries and benefits are the largest component of noninterest expense and increased $79,000 for the third quarter and $574,000 for the nine month period. Staffing at the new Dillsburg, Pennsylvania branch office, which opened in the third quarter 1999, and the corporate lending office in Frederick, Maryland, which opened in the third quarter 1999, contributed to the increase. Average full-time equivalent staffing levels were 243 during the quarter ended September 30, 2000 compared to 230 a year ago. Pension expense increased $62,000 during the third quarter and $167,000 for the first nine months of 2000 from a year ago due primarily to an increase in the number of eligible employees. Modifications to benefit plans for certain key officers contributed $66,000 of the increase in pension expense during the first nine months of 2000. The increase in staffing and higher pension costs were partially offset by a decline in accrued incentive compensation caused by lower earnings during the first nine months of 2000.

Occupancy and premises expense increased $4,000 for the third quarter and $104,000 for the nine month period ended September 30, 2000. The opening of the Dillsburg branch office, the new Memory Lane branch and Frederick corporate lending office contributed to this increase. Furniture and equipment expense increased $56,000 for the quarter and $159,000 so far this year due to increases in equipment depreciation and maintenance contracts.

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Other expenses increased by $184,000 for the third quarter 2000 and $434,000 so far this year. Affecting this increase were increases in data processing, legal, consulting and other real estate expenses.

The Corporation recognized income tax expense of $374,000 for the third quarter and $10,000 for the nine months ending September 30, 2000. Drovers manages its tax rate through the purchase of tax-exempt investment securities, bank owned life insurance and investments in low-income housing partnerships that provide historic and low-income tax credits.

The following table shows Drovers exceeds all minimum capital adequacy standards:

Comparing September 30, 2000 to December 31, 1999, Drovers' Tier 1 capital ratio decreased due to a $49,071,000 increase in risk-weighted assets, offset by an increase in Tier 1 capital of $2,024,000. The leverage ratio decreased due to an increase in total assets of $35,200,000, offset by the increase in Tier 1 capital.

For additional information, see page 44 of the Drovers' 1999 annual Report and page 7 of the Drovers' 1999 10-K.

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Drovers' primary market risk is the risk of changes in net interest income caused by changes in interest rates. Interest rate sensitivity management focuses on minimizing interest rate risk. Management measures ongoing interest rate risk through monthly "gap" reports and quarterly computer simulations of net interest income. A "gap" report measures the net dollar exposure to changes in interest rates, at a given time, for various repricing periods. Results can sometimes be misleading since many interest-bearing liabilities are not as sensitive to interest rate movements as the repriceable assets which they help fund. A better measure of interest rate risk is simulations which project net interest income in rising, falling and stable interest rate cycles. We perform and review income simulations on a quarterly basis. The interest rate risk has not changed materially from December 31, 1999.

Construction on the Newberrytown branch, to be located at the Newberrytown exit of I-83, is underway. The Newberrytown branch is scheduled to open on November 4, 2000. In conjunction with the opening of the Newberrytown branch, we will be closing the York Haven branch.

Drovers Bank has committed to purchase a limited partnership interest in a new low-income housing partnership. The partnership will renovate two historic buildings located in the West York Borough. When completed, the buildings will provide apartments for seventeen families. Drovers Bank will begin receiving tax credits when renovations are complete in 2001.

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Pursuant to the requirements 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.

A. Richard Pugh, Chairman, President and Chief Executive Officer

Debra A. Goodling, Executive Vice President and Treasurer

Principal Financial Officer

John D. Blecher, Senior Vice President and Secretary

Principal Accounting Officer

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