SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2001

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

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**
 

 
**NONE

(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 wasrequired 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:
**Common Stock  / 5,133,399 Shares****Drovers Bancshares Corporation and Subsidiaries

CONTENTS**
PART I  Financial Information  
ITEM 1.  Financial Statements   
Consolidated Statements of Condition
4   
March 31, 2001 and December 31, 2000   
Consolidated Statements of Income
5   
Three Months Ended March 31, 2001 and 2000   
Consolidated Statements of Comprehensive Income
6   
Three Months Ended March 31, 2001 and 2000   
Consolidated Statements of Cash Flows
7   
Three Months Ended March 31, 2001 and 2000   
Notes to Consolidated Financial Statements
8 
ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
12 
ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk
18**PART II  Other Information  **ITEM 6.  Exhibits And Reports On Form 8-K   
A.  Listing of Exhibits.   **Exhibit 2 -  Agreement and Plan of Merger dated December 27, 2000 by and between Drovers Bancshares Corporation and Fulton Financial Corporation (Incorporated by reference to Exhibit 2 of the Drovers Bancshares Corporation Form 8-Kfiled with the SEC on January 3, 2001).     **Exhibit 3(i) - Articles of Incorporation. (Incorporated by reference to Exhibit 3(i) of the Drovers Bancshares Corporation Form 10-Q for the period ended June 30, 1999).   **Exhibit 3(ii) - By-laws. (Incorporated by reference to Exhibit 3(ii) of the Drovers Bancshares Corporation Form 10-Q for the period ended June 30, 1999).   **Exhibit 4 - Instruments Defining the Rights of Holders of Long-term Debt of Drovers Bancshares Corporation and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10 percent ofthe consolidated assets of the Corporation.  The Corporation undertakes to file these instruments with the Commission on request.   **Exhibit 10(a) - Salary Continuation Plan, dated June 1, 2000, between The Drovers & Mechanics Bank and A. Richard Pugh (incorporated by reference to Exhibit 10(a) of the Drovers Bancshares Corporation Form 10-Q for the periodended June 30, 2000).   **Exhibit 10(b) - Amended and restated Change of Control Agreement, dated June 30, 1999, among Drovers Bancshares Corporation, The Drovers & Mechanics Bank and A. Richard Pugh. (Incorporated by reference to Exhibit 10(b) of theDrovers Bancshares Corporation Form 10-Q for the period ended September 30, 1999).   **Exhibit 10(c) - Form of Change of Control Agreement among Drovers Bancshares Corporation, The Drovers & Mechanics Bank and each of the following Executive Vice Presidents of the Company: Debra A. Goodling, Michael J. Groft,Michael E. Kochenour and Shawn A. Stine (incorporated by reference to Exhibit 10(c) of the Drovers Bancshares Corporation Form 10-K for the year ended December 31, 1998).   **Exhibit 10(d) - The Drovers Bancshares Corporation 1995 Stock Option Plan. (Incorporated by reference to Exhibit 10(d) of the Drovers Bancshares Corporation Form 10-Q for the period ended June 30, 2000).   **Exhibit 10(e) - The Drovers Bancshares Corporation Incentive Stock Option Plan. (Incorporated by reference to Exhibit 99.1 to the Drovers Bancshares Corporation Registration Statement on Form S-8 as filed with the Securities andExchange Commission on May 24, 1995).   **Exhibit 10(f) - The Drovers Bancshares Corporation 1999 Non-Employee Directors Stock Option Plan.  (Incorporated by reference to Exhibit 99.1 to the Drovers Bancshares Corporation Registration on Form S-8 as filed with theSecurities and Exchange Commission on July 8, 1999).   **Exhibit 10(g) - Executive Bonus Agreement, dated September 1, 2000, between The Drovers & Mechanics Bank and A. Richard Pugh. (Incorporated by reference to Exhibit 10(a) of the Drovers Bancshares Corporation Form 10-Q for theperiod ended June 30, 2000). **Drovers Bancshares Corporation and Subsidiaries

CONTENTS, continued**  **Exhibit 10(h) - Form of Salary Continuation Agreement among The Drovers & Mechanics Bank and each of the following Executive Vice Presidents of the Company:  Debra A. Goodling, Michael J. Groft, Michael E. Kochenour and ShawnA. Stine (Incorporated by reference to Exhibit 10(a) of the Drovers Bancshares Corporation Form 10-Q for the period ended June 30, 2000).   **Exhibit 10(i) - Form of Executive Bonus Agreement among The Drovers & Mechanics Bank and each of the following Executive Vice Presidents of the Company:  Debra A. Goodling, Michael J. Groft, Michael E. Kochenour and Shawn A.Stine. (Incorporated by reference to Exhibit 10(a) of the Drovers Bancshares Corporation Form 10-Q for the period ended June 30, 2000).   **Exhibit 11  - Statements Regarding Computation of Per Share Earnings
8  **B.  Drovers Bancshares Corporation filed the following report on Form 8-K:   **(i) On January 3, 2001, a Form 8-K was filed to announce an Agreement and Plan of Merger dated December 27, 2000 by and between Drovers Bancshares Corporation and Fulton Financial Corporation and to provide the related documents asexhibits to the Form.  ****SIGNATURES
20
 
**Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information

CONSOLIDATED STATEMENTS OF CONDITION** **MARCH 31,**DEC 31,*(In thousands)**2001**2000**ASSETS  
Cash and due from banks
$15,547
$15,342
Money market investments
47,922
5,163
Investment securities (fair value $218,312 and $232,247)
218,312
232,247
Loans (net of unearned income of $2,473 and $2,605)
510,618
507,897
Reserve for loan losses
-5,672
-5,371
Net loans
504,946
502,526
Bank premises and equipment
18,853
19,260
Other assets
21,875
21,719**TOTAL ASSETS**$827,455**$796,257   **LIABILITIES  
Deposits:  
  Noninterest-bearing
$60,168
$57,611
  Interest-bearing
544,740
511,017
Total deposits
604,908
568,628
Federal funds purchased and securities sold under agreements to repurchase
44,179
53,263
Other borrowings
102,533
102,808
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust
7,500
7,500
Other liabilities
10,045
8,893**TOTAL LIABILITIES
769,165
741,092**SHAREHOLDERS' EQUITY  
Common stock - no par, 15,000,000 shares authorized; issued and outstanding  - 5,133,399 shares in 2001 and 5,087,525 shares in 2000
45,313
44,818
Retained earnings
11,915
10,495
Accumulated other comprehensive income
1,062
-148**TOTAL SHAREHOLDERS' EQUITY
58,290
55,165**TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY**$827,455**$796,257
See notes to consolidated financial statements.

Return to Table of Contents.

 
**Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

CONSOLIDATED STATEMENTS OF INCOME** **THREE MONTHS **ENDED MARCH 31,*(In thousands, except per share data)**2001**2000**INTEREST INCOME  
  Interest and fees on loans
$10,726
$9,950
  Interest on deposits with banks
186
11
  Interest and dividends on investment securities
3,830
3,506
Total interest income
14,742
13,467**INTEREST EXPENSE  
  Interest on deposits
6,406
5,323
  Federal funds purchased and securities sold under agreements to repurchase
636
682
  Interest on borrowed funds
1,738
1,598
Total interest expense
8,780
7,603
Net interest income
5,962
5,864
Provision for loan losses
400
1,001
Net interest income after provision for loan losses
5,562
4,863**NONINTEREST INCOME  
  Investment services and trust income
430
389
  Service charges on deposit accounts
543
506
  Securities gains (losses)
16
-191
  Net gains on loan sales
  226
66
  Other
470
309
Total other income
1,685
1,079**NONINTEREST EXPENSES  
  Salaries and employee benefits
2,624
2,447
  Occupancy and premises
382
364
  Furniture and equipment
421
381
  Marketing
83
127
  Supplies
97
98
  Other taxes
128
122
  Other
969
866
Total other expenses
4,704
4,405
Income before income taxes
2,543
1,537
Applicable income taxes
460
130**NET INCOME**$2,083**$1,407**PER SHARE DATA  
  Net income
$0.41
$0.28
  Net income, assuming dilution
$0.38
$0.28
  Dividends
$0.13
$0.12
See notes to consolidated financial statements.

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**Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME** **THREE MONTHS **ENDED MARCH 31,*(In thousands)**2001**2000
Net income
$2,083
$1,407
Other comprehensive income (loss):  
  Unrealized gains (losses) on securities arising during period
1,848
-1,211
  Reclassification adjustment for gains (losses) included in net income
-16
192
Other comprehensive income (loss) before tax
1,832
-1,019
Income taxes (benefits) related to other comprehensive income (loss)
622
-347
Other comprehensive income (loss)
1,210
-672**COMPREHENSIVE INCOME**$3,293**$735
See notes to consolidated financial statements.
**Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

CONSOLIDATED STATEMENTS OF CASH FLOWS** **THREE MONTHS **ENDED MARCH 31,*(In thousands)**2001**2000**CASH FLOWS FROM OPERATING ACTIVITIES:  
Net income
$2,083
$1,407
Adjustments to reconcile net income to net cash from operating activities:  
  Depreciation and amortization
497
452
  Net (accretion) amortization of investment security premiums
-44
20
  Provision for loan losses
400
1,001
  Gain on sale of securities held-to-maturity
-
-1
  (Gain) loss on sale of securities available-for-sale
-16
192
  (Gain) loss on sale of fixed assets
-5
2
  Loans originated for sale
-13,611
-3,545
  Proceeds from sales of loans
13,915
3,665
  Gain on sale of loans
-226
-65
  Loss on other real estate
-
1
  Net deferred loan fees
-139
-9
  Equity in losses of real estate ventures
84
63
  Increase in interest/dividends receivable
-116
-712
  Increase in interest payable
86
170
  Increase in other assets
-353
-7,648
  Increase (decrease) increase in other liabilities
1,064
-139
  Increase in cash surrender value of bank owned life insurance
-110
-
Net cash (used in) provided by operating activities
3,509
-5,146**CASH FLOWS FROM INVESTING ACTIVITIES:  
  Proceeds from sales and maturities of securities held-to-maturity
-
859
  Proceeds from sales and maturities of securities available-for-sale
20,261
9,551
  Purchases of securities available-for-sale
-4,432
-7,153
  Increase in net loans
-3,113
-25,420
  Capital expenditures
-282
-693
  Proceeds from sale of fixed assets
266
6
  Net purchase of investment in unconsolidated subsidiaries
-
-43
  Proceeds from sale of other real estate
-
67
Net cash used in investing activities
12,700
-22,826**CASH FLOWS FROM FINANCING ACTIVITIES:  
  Net increase in demand deposits and savings accounts
34,585
15,527
  Net increase in certificates of deposit
1,696
11,676
  Net decrease in federal funds purchased and repurchase agreements
-9,084
-4,934
  Net (decrease) increase in other borrowings
-275
5,945
  Payments made for capital leases
-
-13
  Dividends paid
-663
-625
  Proceeds from issuance of common stock
496
100
  Net cash provided by financing activities
26,755
27,676**NET DECREASE IN CASH & CASH EQUIVALENTS
42,964
-296**CASH & CASH EQUIVALENTS AT JANUARY 1,
20,505
21,338**CASH & CASH EQUIVALENTS AT MARCH 31,**$63,469**$21,042
See notes to consolidated financial statements.
Return to Table of Contents.
**Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****NOTE A - **BASIS OF PRESENTATION**
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 March31, 2001 and December 31, 2000.

Operating results and changes in cash flows for the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001.  For further information, refer to the consolidatedfinancial statements and footnotes included in Drovers' Annual Report for the year ended December 31, 2000.

Certain reclassifications have been made to prior information to conform to current year's presentation.
**NOTE B - CALCULATION OF EARNINGS PER SHARE**
Net income per share is computed based on the weighted average number of shares outstanding each period, giving retroactive effect to the 5% stock dividend issued in 2000.  Earnings per common share, assuming dilution gives effect to all dilutivepotential common shares during each period.

Net income per share and net income per share, assuming dilution, were calculated as follows:
 **MARCH 31, **2001**2000
Net income
$2,083
$1,407
Average shares outstanding
5,100
5,046
Effect of dilutive securities
387
36
Average shares outstanding assuming dilution
5,487
5,082
Net income per share
$0.41
$0.28
Net income per share, assuming dilution
$0.38
$0.28
Return to Table of Contents.
**NOTE C - INVESTMENT SECURITIES**
The amortized cost and estimated fair value of investment securities classified as available-for-sale as of March 31, 2001 were as follows:
  **Gross**Gross  **Amortized**Unrealized**Unrealized**Fair*(In thousands)**Cost**Gains**Losses**Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$9,488
$58
$-
$9,546
Obligations of states and political subdivisions
19,583
456
33
20,006
Corporate Obligations
19,532
216
720
19,028
Mortgage-backed securities and collateralized mortgage obligations
151,006
1,619
162
152,463
Total debt securities
199,609
2,349
915
201,043
Equity securities
17,094
438
263
17,269**Total investment securities**$216,703**$2,787**$1,178**$218,312
 
**Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)****NOTE C - INVESTMENT SECURITIES, continued**
The amortized cost and estimated fair value of investment securities classified as available-for-sale as of December 31, 2000 were as follows:
  **Gross**Gross  **Amortized**Unrealized**Unrealized**Fair*(In thousands)**Cost**Gains**Losses**Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$13,469
$43
$15
$13,497
Obligations of states and political subdivisions
19,817
267
102
19,982
Corporate Obligations
19,027
-
918
18,109
Mortgage-backed securities and collateralized mortgage obligations
155,920
1,182
536
156,566
Total debt securities
208,233
1,492
1,571
208,154
Equity securities
24,238
232
377
24,093**Total investment securities**$232,471**$1,724**$1,948**$232,247
For additional information, see pages 10-11 of Drovers' 2000 Annual Report.
**NOTE D - LOANS**
Loans are comprised of the following as of March 31, 2001 and December 31, 2000:
 **MARCH 31,**DEC 31,*(In thousands)**2001**2000
Commercial, financial and industrial loans
$126,602
$126,275
Real estate mortgage loans:  
  Real estate construction-related
32,811
30,571
  Real estate mortgage loans secured by 1-4 family residential properties
152,577
149,227
  Other real estate
172,020
174,473
Total real estate mortgage loans
357,408
354,271
Consumer loans:  
  Monthly payment
25,694
26,144
  Other revolving credit
780
887
Total consumer loans
26,474
27,031
Leasing and other
134
320**Total loans**$510,618**$507,897
Residential mortgage loans with a book value of $6,097,000 were held for sale at March 31, 2001.  The cumulative fair value exceeded the book value of these loans.  Loans held for sale are included in total loans.  During the first quarter of 2001, wecapitalized $63,000 in loan servicing rights and amortized $53,000.
** 

Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE D - LOANS, continued**
Nonperforming assets are detailed below:
**MARCH 31,**DEC 31,**2001**2000
Nonaccrual loans
$2,403
$2,325
90 days past due and still accruing
4
8
Restructured loans in compliance with modified terms
-
-
Non-performing loans
2,407
2,333
Assets acquired by foreclosure or repossession
396
104
Non-performing assets
$2,803
$2,437
Non-performing loans as a percentage of total loans, net of unearned income
0.47%
0.46%
Non-performing assets as a percentage of total assets
0.34%
0.31%
As of March 31, 2001, the total recorded investment in impaired loans was $1,353,000 compared to $1,327,000 at December 31, 2000. 

Changes in the reserve for loan losses for the periods ended March 31, were as follows:
*(In thousands)**2001**2000
Balance, beginning of year
$5,371
$3,908
Provision for loan losses
400
1,001
Less: Loans charged-off
109
1,002
Recoveries
10
34**Balance, March 31**$5,672**$3,941**Reserve for loan losses as a percentage of loans as of March 31,**1.11%**0.81%
For additional information, see footnote 7 on pages 12-13 and the Provision for Loan Losses on pages 26-27 of the Drovers' 2000 annual report.
**NOTE E - BANK OWNED LIFE INSURANCE ("BOLI")**
Drovers' primary subsidiary, The Drovers & Mechanics Bank ("Drovers Bank") modified certain benefit plans for specific officers during 2000.  In conjunction with these modifications, Drovers Bank purchased life insurance on certainkey officers.  The BOLI had a balance of $7,708,000 as of March 31, 2001 and $7,598,000 as of December 31, 2000, which approximated cash surrender value at the respective period end.  The BOLI is included in other assets in the consolidated financialstatements.
** 

Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE F - PENDING MERGER**
On December 27, 2000, Drovers entered into a merger agreement with Fulton Financial Corporation ("Fulton"), pursuant to which Drovers will be merged with Fulton, with Fulton as the surviving corporation.  The merger agreement was approved byDrovers' Board of Directors on December 27, 2000.  Under the merger agreement, The Drovers & Mechanics Bank, the sole bank subsidiary of Drovers, will be merged into Fulton Bank, a bank subsidiary of Fulton.  The merger agreement was included as anexhibit to Drovers' Form 8-K filed with the SEC on January 3, 2001.

In the merger, each of the approximately 5,100,000 shares of Drovers' common stock will be exchanged for 1.302 shares of Fulton's common stock, and cash in lieu of fractional shares.  In addition, each of the Drovers options will be converted intooptions to buy Fulton stock.  The merger is subject to approval by bank regulatory authorities and Drovers' shareholders.  The merger is expected to be completed in the third quarter of 2001 and will be accounted for as a pooling of interests.

Concurrently with the execution of the merger agreement, Drovers issued a warrant to purchase up to 1,250,000 shares of common stock at an exercise price of $19.75 per share.  Certain conditions must be met for Fulton to sell, assign, transfer orexercise the warrant.  These conditions are outlined in the warrant agreement that was included as an exhibit to Drovers' Form 8-K filed with the SEC on January 3, 2001.

As required by the merger agreement, Drovers' Board of Directors suspended the Drovers Bancshares Corporation Stockholder Dividend Reinvestment and Stock Purchase Plan.

Return to Table of Contents.

 
**Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW**
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 Bankhas sixteen full service branches, all located throughout York County.  Additionally, Drovers operates corporate banking offices in Mechanicsburg, Pennsylvania and Frederick, Maryland. 
****
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 anduncertainties.  The words "believes", "expects", "may", "will", "should", "projects", "contemplates", "anticipates", "forecasts", "intends" or othersimilar 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 notlimited 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 economiccompetitive, 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 thedate 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.
**FINANCIAL CONDITION**
The following comparison of actual balances indicates how Drovers has generated and employed its funds for the three months ending March 31, 2001:
 **BALANCE  **BALANCE **MARCH 31,**INCREASE **DEC 31,*(In thousands)**2001**(DECREASE)**%**2000**Funding Uses:    
  Money market investments
$47,922
$42,759
828.2%
$5,163
  Investment securities
218,312
-13,935
-6.0%
232,247
  Loans, net of unearned income
510,618
2,721
0.5%
507,897
Total interest-bearing assets
776,852
31,545
4.2%
745,307
Noninterest-bearing assets
50,603
-347
-0.7%
50,950**TOTAL USES**$827,455**$31,198**3.9%**$796,257**Funding Sources:    
  Interest-bearing demand deposits
53,493
-97
-0.2%
53,590
  Savings deposits
190,733
31,165
19.5%
159,568
  Time deposits
300,514
2,655
0.9%
297,859
  Short-term borrowings
44,179
-9,084
-17.1%
53,263
  Long-term borrowings
110,033
-275
-0.2%
110,308
Total interest-bearing liabilities
698,952
24,364
3.6%
674,588
Noninterest-bearing demand deposits
60,168
2,557
4.4%
57,611
Other liabilities
10,045
1,152
13.0%
8,893
Shareholders' equity
58,290
3,125
5.7%
55,165**TOTAL SOURCES**$827,455**$31,198**3.9%**$796,257
 
**Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

FINANCIAL CONDITION, continued**
Total deposits increased $36,280,000 during the first quarter of 2001, while borrowings declined by $9,359,000.  Most of the deposit growth was in savings, which increased $31,165,000.  Time deposits increased $2,655,000 and non-interest bearingdemand increased $2,557,000.  The growth in savings was primarily in our trust savings account, which increased $22,681,000.  The trust savings account is for short-term investment of funds managed by investment services and trust.  The growth in trustsavings is temporary and will likely be withdrawn later in 2001.

The strong growth in deposits coupled with relatively flat loan growth of $2,721,000 and a decline in investments of $13,935,000 contributed to the growth in money market investments of $42,759,000.  A majority of the decline in investments occurredat the end of the first quarter 2001 as $6,674,000 of Federal Home Loan Bank stock and $4,000,000 of U.S. Agencies were called.  In addition, paydowns on mortgage-backed securities increased as a result of falling long-term interest rates.  These declinesin investments were offset by purchases of $4,301,000, primarily mortgage-backed securities.
**LIQUIDITY**
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 collateralizedmortgage obligations.  The loan portfolio provides an additional source of liquidity due to our participation in the secondary mortgage market.  In addition to monthly cash flows from certain investment securities, all of our investments were classifiedas available-for-sale as of March 31, 2001.

Liquidity needs may also be met by:
- attracting deposits with competitive rates, 
- buying federal funds and repurchase agreements or 
- borrowing from the Federal Reserve or the Federal Home Loan Bank of Pittsburgh.  

Drovers maintains informal borrowing arrangements with several correspondent banks to purchase overnight federal funds.  A formal arrangement with the Federal Home Loan Bank allows us to borrow short and intermediate advances based on our investmentin assets secured by real estate.  The maximum borrowings under this agreement at March 31, 2001 were $258,429,000, of which $108,176,000, or 41.9%, was borrowed.  The Federal Home Loan Bank recently changed its collateral requirements allowing members topledge certain loans secured by commercial real estate.  This change resulted in an increase in maximum borrowings allowed.  The ability to renew funding sources depends on the financial institution's strength, asset portfolio, diversity of depositors andtypes of deposit instruments offered.
**RESULTS OF OPERATION**
Drovers recorded net income of $2,083,000 for the three months ended March 31, 2001 compared to $1,407,000 for the same period a year ago, an increase of $676,000, or 48.0%.  The first quarter of 2000 included a provision for loan losses of$1,001,000 compared to $400,000 in 2001.  Basic earnings per share were $0.41 compared to $0.28 for the same period last year.  Return on average equity was 14.76% and return on average assets was 1.06% for the first quarter 2001.
** 

Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

NET INTEREST INCOME**
Net interest income increased $98,000 for the first quarter of 2001 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-bearingcommercial and consumer 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 sensitivity to interest rate movements.  The modest increase in netinterest income during the first three months of 2001 compared to the same period in 2000 was primarily due to volume and a slight increase in the yield on earning assets, which were offset by a higher yield on interest-bearing liabilities.  The followingtable summarizes the net interest spread and the net interest margin during 2001 and 2000:
**MARCH 31, 2001**MARCH 31,2000**AVERAGE**AVERAGE*(in thousands)**BALANCE**RATE**BALANCE**RATE
Earning assets 1,2
$749,124
8.06%
$690,125 
 8.00% 
Financed by:
  Interest-bearing funds
$678,564
5.25%
$620,698 
 4.93% 
  Noninterest-bearing funds
70,560
  -
  69,427 
  -**Total cost of funds**$749,124**4.75%**$690,125 **4.43% **Net interest income**$6,105**$6,126**Net interest spread**2.81%**3.07% **Net interest margin 2**3.31%**3.57% 
1 - Balances include amortized historical cost for available-for-sale securities.  The related unrealized holding gains (losses) on securities of $921,000 in 2001 and $(5,701,000) in 2000 were included in noninterest-bearing assets.

2 - The yield on earning assets and the net interest margin are on a fully tax equivalent basis ("FTE adjustment").  The tax equivalent adjustment is based on a marginal Federal income tax rate of 34%.  The FTE adjustment was 0.08% in 2001and 0.15% in 2000.

The average yield on earning assets increased 0.06% while the cost of funds increased 0.32%.  As a result of a higher increase in the cost of funds than the yield on interest-earning assets, the interest margin declined 0.26%. 

Our average yield on earning assets was adversely affected by: 
- a decline in service charges on loans of $110,000 to $113,000 and
- a slight change in the mix of earning assets towards the lower yielding money market investments.

Service charges were lower during the first three months of 2001 than the same period in 2000 because of several non-recurring commercial loan-related charges that were either taken immediately during the first quarter or spread throughout 2000.****During the first three months of 2001, our average money market investments as a percentage of total interest-bearing assets increased to 1.8% from 0.1% a year ago.  This increase was primarily due to strong deposit growth, negligible loan growth and adecline in investment securities as $10,674,000 of securities were called.

 
**Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

NET INTEREST INCOME, continued**
Our cost of funds increased 0.32% primarily as a result of an increase in the yields on time deposits of 0.58% and on long-term borrowings of 0.39%, as well as the purchase of $7,125,000 million of BOLI at the end of the first quarter 2000.  Theyields on time deposits and long-term borrowings increased throughout 2000 as a result of the Federal Reserve raising the short-term rates three times, or 1.00% during the year.  Our long-term borrowings are primarily comprised of Federal Home Loan Bankconvertible advances.  Several of these advances converted during the last nine months of 2000 and the funds were borrowed again at a higher rate. 

Drovers is slightly liability sensitive.  Our net interest margin fell slowly throughout 2000 as the Federal Reserve increased short-term rates.  Beginning in January 2001, the Federal Reserve began lowering short-term interest rates to combat aslowing economy.  This stabilized our interest margin, which was 3.31% in the first quarter of 2001 compared to 3.28% for the fourth quarter of 2000. 
**PROVISION FOR LOAN LOSSES**
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 itrequires material estimates.  Based on our evaluation of loan quality, we feel that our allowance for loan losses at March 31, 2001 was adequate to absorb losses within the portfolio. 
****
Net charge-offs and loan quality ratios are summarized below:
**MARCH 31,**2001**2000
Loans charged-off:
  Commercial, financial and industrial
$4
$977
  Real estate
29
4
  Consumer
76
21
Total loans charged-off
$109
1,002
Recoveries:
  Commercial, financial and industrial
-
15
  Real estate
-
-
  Consumer
10
19
Total recoveries
10
34**Net charge-offs**$99**$968**Net charge-offs as a percent of average loans**0.02%**0.20%
Net charge-offs during the first quarter of 2000 included a $955,000 charge on a commercial loan secured by trade receivables, which had been classified as impaired late in 1999 when possible credit problems became known.  The provision for loanlosses was $400,000 in 2001 compared to $1,001,000 in 2000.

The reserve for loan losses was increased $301,000 during the first quarter due to further weakening of the economy.  At March 31, 2001, the percent of the reserve for loan losses to total loans was 1.11% as compared to 1.06% at December 31, 2000.The percent of the reserve to nonperforming loans as of the end of the first quarter 2001 was 235.65% compared to 230.22% at yearend 2000.

For additional information, see footnote 7 on 12-13 and the Provision for Loan Losses on pages 26-27 of the Drovers' 2000 annual report.
**Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)****NONINTEREST INCOME**THREE MONTHS
**ENDED MARCH 31,*(In thousands)**2001**2000**2001/2000
Investment services and trust income
$430
$389
10.5%
Service charges on deposit accounts
543
506
7.3%
Securities (losses) gains
16
-191
-108.4%
Net gains on loan sales
226
66
242.4%
Other
470
309
52.1%**Total**$1,685**$1,079**56.2%
Noninterest income increased $606,000 during the first quarter, primarily driven by increases in net gains on loan sales and slight gains on sales of securities compared to losses of $191,000 during the first quarter of 2000.

Income from investment services and trust increased $41,000, or 10.5%, during the first quarter.  The fair value of investments managed by the division was $326,281,000 at March 31, 2001, an increase of 41,064,000, or 14.4%, over the prior year.  Weexperienced growth in all areas, including trust services, 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 $87,000 of revenue this quarter.

Service charges on deposit accounts increased $37,000 during the first quarter.  An increase in the collection of insufficient fund and return check charges caused most of the growth.

During the first quarter of 2001, Drovers recognized a gain on sales of securities of $16,000 compared to a loss of $191,000 during the first quarter of 2000.  The losses during 2000 were related to selling or committing to sell $15,260,000 ofsecurities prior to quarter end.  A majority of the proceeds from the sales were reinvested in higher-yielding mortgage-backed securities, and the remaining proceeds were reinvested in $7,125,000 of BOLI.  See Note E for additional information on the BOLI. 

Net gains on loan sales increased $160,000 as mortgage refinancing volume increased.  The increase was caused by a slowing economy and declines in interest rates.  Mortgage loan sales totaled about $13,752,000 compared to $3,604,000 a year ago.

Other income increased $161,000, or 52.1%.  Income recognized on the BOLI, which was purchased at the end of the first quarter 2000, was $122,000 during the first quarter 2001.  In addition, Drovers Settlement Services ("DSS"), whichprovides real estate title insurance and settlement services, contributed $18,000 during the first three months of 2001.  DSS opened on May 1, 2000.

 

 
**Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)**
 
**NONINTEREST EXPENSE**THREE MONTHS
**ENDED MARCH 31,*(In thousands)**2001**2000**2001/2000
Salaries and employee benefits
$2,624
$2,447
7.2%
Occupancy and premises
382
364
4.9%
Furniture and equipment
421
381
10.5%
Marketing
83
127
-34.6%
Supplies
97
98
-1.0%
Other taxes
128
122
4.9%
Other
969
866
11.9%**Total**$4,704**$4,405**6.8%
Noninterest expense increased $299,000, or 6.8%, compared to the first quarter of 2000.  Salaries and benefits are the largest component of noninterest expense and increased $177,000 for the quarter.  Average full-time equivalent staffing levels were244 during the quarter ended March 31, 2001 compared to 237 a year ago.

Furniture and equipment expense increased $40,000 due to increases in equipment depreciation and maintenance contracts.  Other expenses increased $103,000 due to increases in data processing and other professional services, offset by declines in legal.
**TAXATION**
Drovers recognized a provision for income taxes of $460,000 for the three months ending March 31, 2001.  The average tax rate, applicable income taxes divided by income before taxes, was 18.1%.  This compares to an average tax rate of -7.5% forall of 2000.  Drovers manages its tax rate through the purchase of tax exempt investment securities and investments in low-income housing partnerships that provide historic and low-income tax credits. 
**Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

REGULATORY CAPITAL**
The following table shows Drovers exceeds all minimum capital adequacy standards:
**BALANCE**BALANCE**MARCH 31,**DEC 31,*(in thousands)**2001**2000
Tier 1 capital
$64,707
$62,693
Tier 2 capital
5,751
5,371**Total risk-based capital**$70,458**$68,064
Risk-adjusted on-balance sheet assets
$565,585
$551,654
Risk-adjusted off-balance sheet exposure
26,775
26,660**Total risk-adjusted assets**$592,360 **$578,314 
Ratios:
  Tier 1 risk-based capital ratio
10.9%
10.8%
  Minimum required
4.0%
4.0%
  Total risk-based capital ratio
11.9%
11.8%
  Minimum required
8.0%
8.0%
  Tier 1 leverage ratio
7.8%
7.9%
  Minimum required
4.0%
4.0%
Comparing March 31, 2001 to December 31, 2000, Drovers' Tier 1 capital ratio increased due to an increase in Tier 1 capital of $2,014,000 offset by a $14,046,000 increase in risk-weighted assets.  The leverage ratio decreased due to the increase inTier 1 capital offset by the increase in total assets of $31,198,000.

For additional information, see pages 31-32 of the Drovers' 2000 annual report and page 6 of the Drovers' 2000 10-K.
**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
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 throughmonthly "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 bemisleading 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, fallingand 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, 2000.
** 

Drovers Bancshares Corporation and Subsidiaries

PART I Financial Information, continued

Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

FUTURE OUTLOOK**
On December 27, 2000, Drovers entered into an agreement with Fulton Financial Corporation ("Fulton"), pursuant to which Drovers will be merged with and into Fulton, as the surviving corporation.  The merger agreement was approved by Drovers' Boardof Directors on December 27, 2000.

Under the merger agreement, each share of Drovers common stock outstanding at the time of the merger will be exchanged for 1.302 shares of Fulton common stock, subject to adjustment.  As of December 27, 2000, Drovers had approximately 5,100,000 sharesoutstanding.  The merger is expected to be completed in the third quarter of 2001 and to be accounted for on a pooling of interests basis.

Upon completion of the merger, which is subject to the approval of Drovers' shareholders and bank regulatory authorities, Fulton intends to merge The Drovers & Mechanics Bank into Fulton Bank.  Fulton will operate Drovers' former offices as"Drovers Bank, a division of Fulton Bank."

Fulton Financial Corporation, with assets of approximately $6.5 billion, is headquartered in Lancaster, Pennsylvania and operates approximately 160 offices in Pennsylvania, Maryland, Delaware and New Jersey through its banking affiliates.

Return to Table of Contents.
**Drovers Bancshares Corporation and Subsidiaries**
PART II  Other Information
**Signatures**
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.
**DROVERS BANCSHARES CORPORATION***/S/ A. Richard Pugh__________________

A. Richard Pugh, Chairman, President and

Chief Executive Officer
*/S/ Debra A. Goodling_______________*_*
Debra A. Goodling, Executive Vice President and Treasurer

Principal Financial Officer
*/S/ John D. Blecher_________________*_*
John D. Blecher, Senior Vice President, Secretary and Assistant Treasurer

Principal Accounting Officer

Date*:  May 10, 2000*
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