PREMIER BANCORP INC /PA/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-15513

PREMIER BANCORP, INC.
(Name of Registrant as Specified in Its Charter)

PENNSYLVANIA 23-2921058
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

379 NORTH MAIN STREET, 18901
DOYLESTOWN, PENNSYLVANIA (Zip Code)
(Address of Principal Executive Offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 345-5100

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
NONE
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(Title of Class)

Check whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

As of March 21, 2003, 3,417,515 shares of common stock of the registrant
were outstanding. The aggregate market value of the voting and non-voting common
stock of the registrant, held by non-affiliates was approximately $24,294,000 at
June 28, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's proxy statement for the registrant's 2003
annual meeting of shareholders which is part of the proxy statement/prospectus
on Form S-4 filed by Fulton Financial Corporation are incorporated by reference
into Part III of this report.
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PREMIER BANCORP, INC.

FORM 10-K

INDEX

[THIS PAGE INTENTIONALLY LEFT BLANK]

PART I

ITEM 1 -- BUSINESS

PREMIER BANCORP, INC.

Premier Bancorp, Inc. (PBI) is a registered financial holding company. We
were incorporated in the Commonwealth of Pennsylvania in July 1997 and
reorganized on November 17, 1997 as the one-bank holding company of Premier
Bank. Our primary business is the operation of our wholly-owned principal
subsidiary, Premier Bank, which we manage as a single business segment and which
is a state chartered Federal Reserve member commercial bank whose deposits are
insured by the Federal Deposit Insurance Corporation's Bank Insurance Fund to
the fullest extent provided by law. Premier Bank was organized in 1990 and began
operations on April 24, 1992.

Our consolidated financial condition and results of operations consist
almost entirely of those of Premier Bank. At December 31, 2002, we had total
consolidated assets of $609,972,000, total deposits of $456,486,000 and total
shareholders' equity of $38,436,000.

Other wholly owned subsidiaries include PBI Capital Trust, Premier Capital
Trust II, Lenders Abstract, LLC and Premier Bank Insurance Services, LLC. PBI
Capital Trust and Premier Capital Trust II are Delaware statutory business
trusts established for the sole purpose of issuing $10,000,000 and $15,000,000,
respectively, in trust preferred securities. PBI Capital Trust and Premier
Capital Trust II were established in 1998 and 2002, respectively. Lenders
Abstract, LLC is a Pennsylvania limited liability company organized in December
2000 to sell title insurance policies. Premier Bank Insurance Services, LLC is a
Pennsylvania limited liability company organized in March 2002 principally to
sell long-term health care insurance policies.

As of December 31, 2002, PBI did not own or lease any property and had no
employees.

On January 16, 2003, PBI announced that it had entered into a definitive
agreement to be acquired by Fulton Financial Corporation based in Lancaster,
Pennsylvania. Under the terms of the agreement, Fulton Financial will acquire
all of PBI's issued and outstanding shares of common stock. Each share of PBI
common stock outstanding will be exchanged for 1.34 shares of Fulton Financial
common stock, subject to adjustment. All outstanding shares of PBI preferred
stock are expected to be redeemed as of or before the closing date of the
transaction. This acquisition, which is subject to the approval of bank
regulators and PBI shareholders, is expected to close by the third quarter of
2003.

PREMIER BANK

Premier Bank is a Pennsylvania chartered financial services provider whose
business primarily consists of originating loans to small to mid-sized
businesses and attracting retail deposits from the general public. The bank also
invests in securities such as mortgage-backed securities, obligations of U.S.
government agencies and government sponsored entities, corporate bonds and
municipal bonds. The bank's revenues are primarily derived from net interest
income. Over our eleven-year history, we have grown significantly through
internal growth.

Our deposit products include checking, savings, and money market accounts,
as well as certificates of deposit. We offer numerous credit products, but
specialize in lending to small to mid-sized businesses and professionals. We
offer a full array of lending products including loans secured by real estate
and other assets, working capital lines and other commercial loans. We make a
wide range of consumer loan products available such as residential mortgage
loans, home equity loans and lines of credit, personal lines of credit and other
consumer loans. We sell our residential mortgage loans immediately in the
secondary market. We also offer other services such as internet banking,
telephone banking, cash management services, automated teller services and safe
deposit boxes. Further, through our subsidiary, Lenders Abstract, LLC, we sell
title insurance. We also offer long-term health care insurance products through
our subsidiary, Premier Bank Insurance Services, LLC.

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Premier Bank conducts business from seven full-service Pennsylvania banking
offices in Doylestown, Easton, Southampton, Floral Vale, Bethlehem,
Montgomeryville, and Bensalem. In addition, the bank operates a limited service
branch in the Heritage Towers Retirement Community in Doylestown. We plan to
open our eighth full-service Pennsylvania banking office in Abington, Montgomery
County during the second quarter of 2003.

At December 31, 2002, Premier Bank had 78 full-time and 36 part-time
employees.

MARKET AREA

Our primary market area is Doylestown, Pennsylvania and the surrounding
Bucks County and Greater Lehigh and Delaware Valley communities. These markets
are, in our opinion, among the best in Pennsylvania. The bank has four Bucks
County based offices and one office in Montgomery County. We also service parts
of the Lehigh Valley from our Bethlehem and Easton, Northampton County,
Pennsylvania offices. Though the vast majority of our deposit and lending
business comes from these specific areas, we will from time to time do business
in a wider geographic region including all of Eastern Pennsylvania and portions
of New Jersey, including the New Jersey coastline.

LENDING ACTIVITIES

Premier Bank offers a variety of loan products to its customers, including
loans secured by real estate, commercial and consumer loans. Our lending
objectives are as follows:

- to establish a diversified commercial loan portfolio;

- to properly price loans to include the cost of funds, administrative
costs, bad debts, local economic conditions, competition, customer
relationships, the term of the loan, credit risk, collateral quality and
a reasonable profit margin.

We manage credit risk through portfolio diversification, underwriting
policies and procedures, and loan monitoring practices. Premier Bank generally
secures its loans with real estate, with such collateral values dependent and
subject to change based on real estate market conditions within the bank's
market area. Premier Bank also has a significant number of borrowers engaged in
medical, dental, legal and real estate professions, as well as restaurant and
hotel businesses.

Gross loans totaled $361,495,000 at December 31, 2002 compared to
$316,066,000 at December 31, 2001. The $45,429,000 or 14% increase is primarily
due to the continued success of our lending staff in servicing the small to
mid-sized business community. Gross loans represented approximately 59% and 70%
of total assets at year-end 2002 and 2001, respectively. At December 31, 2002,
$315,921,000 or 87% of loans were secured by real estate compared to
$269,736,000 or 85% at December 31, 2001.

Loans secured by commercial properties include owner occupied commercial
properties and investment income producing properties. Commercial mortgages
totaled $253,357,000 and $208,412,000 at December 31, 2002 and 2001,
respectively.

Loans secured by residential properties include both first and second
mortgages on single family homes. Many of these loans were made to small
business owners and professionals. Loans secured by residential property totaled
$32,446,000 and $30,188,000 at December 31, 2002 and 2001, respectively.

Loans secured by apartments and other multi-family residential properties
totaled $19,350,000 at December 31, 2002 and $15,011,000 at December 31, 2001.

Construction loans are secured by real estate primarily for the building of
residential properties. Construction loans totaled $10,574,000 and $15,911,000
at December 31, 2002 and 2001, respectively.

Other loans not secured by real estate include commercial and consumer
loans. Commercial loans are generally made to finance the acquisition of
machinery and equipment and to provide working capital for local commercial,
retail and professional companies. These loans are usually secured by business
assets,

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excluding real property, and guaranteed by the owners. Commercial loans totaled
$44,387,000 and $45,238,000 at December 31, 2002 and 2001, respectively.

Consumer loans consist generally of automobile loans and personal loans. At
December 31, 2002 and 2001, these loans totaled $1,187,000 and $1,092,000,
respectively.

INVESTMENT ACTIVITIES

At December 31, 2002 and 2001, PBI's investment portfolio totaled
$203,141,000 and $98,351,000, respectively. Investments consisted primarily of
mortgage-backed securities, corporate bonds and municipal securities. At
December 31, 2002, our corporate bond portfolio included intermediate term debt
issued by investment grade companies, single issuer trust preferred capital
securities issued by other banking companies and pooled debt securities secured
by the trust preferred capital securities of various banking companies. At
December 31, 2001, our corporate bond portfolio consisted primarily of single
issuer trust preferred capital securities issued by other banking companies.
Equity securities included stock in the Federal Home Loan Bank of Pittsburgh,
the Federal Reserve Bank of Philadelphia and the Atlantic Central Bankers Bank,
Premier Bank's principal correspondent bank. Investment securities available for
sale are recorded at market value with the unrealized holding gain or loss, net
of tax, included in shareholders' equity. Investment securities held to maturity
are recorded at amortized cost.

The carrying value of the held to maturity portfolio was $500,000 at both
December 31, 2002 and 2001, respectively. At December 31, 2002 and 2001, the
carrying value of the available for sale portfolio was $202,641,000 and
$97,851,000, respectively.

During 2002, we utilized excess liquidity to grow and restructure our
investment portfolio. Our investment portfolio, exclusive of the SFAS 115
valuation allowance, grew $100,206,000 or 97% in 2002. Mortgage-backed
securities and corporate bonds, exclusive of the SFAS 115 valuation allowance,
grew $67,241,000 and $35,601,000, respectively, during 2002. The net unrealized
gain on available for sale securities was $36,000 at December 31, 2002 compared
to a net unrealized loss of $4,548,000 at December 31, 2001. The appreciation of
the fair value of our AFS investments is due to lower interest rates and the
restructuring of our portfolio.

Gross unrealized losses at December 31, 2002 and 2001 were concentrated in
single issuer trust preferred securities. Unrealized losses on these securities
were $1,802,000 and $3,848,000 at December 31, 2002 and 2001, respectively. In
addition to changes in interest rates, valuations of single issuer trust
preferred securities have been influenced by perceived credit risk in response
to certain world events. Management believes that the credit quality of these
securities is sound and that the unrealized loss is temporary.

Management views the investment portfolio as a source of earnings and
liquidity. Decisions on maturity and type of investment are dictated by
investment and balance sheet management policies as approved annually by the
Board of Directors. The Chief Financial Officer makes the decision regarding the
specific selection of investments for the portfolio. The Asset Liability
Committee sets investment guidelines and strategy based on PBI's financial goals
and interest rate sensitivity.

SOURCES OF FUNDS

Premier Bank primarily uses deposits and borrowings to finance lending and
investment activities. Borrowing sources include advances from the Federal Home
Loan Bank of Pittsburgh, reverse repurchase agreements with investment banks and
overnight borrowings from Premier Bank's depositors and correspondent bank. All
borrowings, except for the line of credit with Premier Bank's correspondent
bank, require collateral in the form of loans or securities. Borrowings are,
therefore, limited by collateral levels and the available lines of credit
extended by the bank's creditors. As a result, deposits remain key to the future
funding and growth of the business. Competition for deposits may require banks
to increase deposit prices or expand their branch office networks (increasing
costs) to adequately grow deposits in the future.

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COMPETITION

Premier Bank actively competes with other financial services companies for
deposit and loan business. Competitors include other commercial banks, savings
banks, savings and loan associations, insurance companies, securities brokerage
firms, credit unions, finance companies, mutual funds, and money market funds.
Financial institutions compete primarily on the quality of services rendered,
interest rates on loans and deposits, service charges, the convenience of
banking facilities, location and hours of operation and, in the case of loans to
larger commercial borrowers, relative lending limits.

Many competitors are significantly larger than Premier Bank and have
significantly greater financial resources, personnel and locations from which to
conduct business. In addition, the bank is subject to banking regulations while
certain competitors may not be. Consequently, competition exists from both
regulated and non-regulated entities. For more information, see the "Supervision
and Regulation" section below.

The growth of mutual funds over the past decade has made it increasingly
difficult for financial institutions to attract deposits. Much of the cash flow
into mutual funds is from tax deferred investment vehicles such as 401(k) plans.
In addition, insurance companies recently have become more significant
competitors for deposits through their thrift subsidiaries.

SUPERVISION AND REGULATION

GENERAL

Bank holding companies and banks are extensively regulated under both
federal and state laws. The regulation and supervision of PBI and Premier Bank
are designed primarily for the protection of depositors, the FDIC and the
monetary system, and not PBI or its shareholders. Enforcement actions may
include the imposition of a conservator or receiver, cease-and-desist orders and
written agreements, the termination of insurance on deposits, the imposition of
civil money penalties and removal and prohibition orders. If any enforcement
action is taken by a banking regulator, the value of an equity investment in PBI
could be substantially reduced or eliminated.

HOLDING COMPANY REGULATION

As a registered financial holding company under the Bank Holding Company
Act of 1956 and a Pennsylvania business corporation, PBI is regulated by the
Federal Reserve Board and the provisions of Section 115 of the Pennsylvania
Banking Code of 1965.

The Bank Holding Company Act requires PBI to file an annual report with the
Federal Reserve Board regarding the financial holding company and its subsidiary
bank. The Federal Reserve Board also makes examinations of the financial holding
company and its subsidiary bank. The Federal Reserve Board possesses
cease-and-desist powers over bank holding companies and their subsidiaries where
their actions would constitute an unsafe or unsound practice or violation of
law.

The Bank Holding Company Act restricts a bank holding company's ability to
acquire control of additional banks. In addition, the Act restricts the
activities in which bank holding companies may engage directly or through
non-bank subsidiaries.

The Gramm-Leach-Bliley Financial Services Modernization Act of l999 amended
the Bank Holding Company Act of 1956 to create a new category of holding
company -- the "financial holding company." To be designated as a financial
holding company, a bank holding company must file an application with the
Federal Reserve Board. The holding company must be well capitalized and well
managed, as determined by Federal Reserve Board regulations. When a bank holding
company becomes a financial holding company, the holding company or its
affiliates may engage in any financial activities that are "financial in nature
or incidental to such activities." Furthermore, the Federal Reserve may approve
a proposed activity if it is "complementary" to financial activities and does
not threaten the safety and

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soundness of banking. The Act provides an initial list of activities that
constitute activities that are financial in nature, including:

- lending and deposit activities;

- insurance activities, including underwriting, agency and brokerage;

- providing financial investment advisory services;

- underwriting in, and acting as a broker or dealer in, securities;

- merchant banking;

- insurance company portfolio investment;

- support services;

- making equity and debt investments in corporations or projects designed
primarily to promote community welfare, and providing advisory services
to these programs;

- subject to certain limitations, providing others financially oriented
data processing or bookkeeping services;

- issuing and selling money orders, travelers' checks and United States
savings bonds;

- providing consumer financial counseling that involves counseling,
educational courses and distribution of instructional materials to
individuals on consumer-oriented financial management matters, including
debt consolidation, mortgage applications, bankruptcy, budget management,
real estate tax shelters, tax planning, retirement and estate planning,
insurance and general investment management, so long as this activity
does not include the sale of specific products or investments; and

- providing tax planning and preparation advice.

In addition to permitting financial services providers to enter into new
lines of business, the law allows companies the freedom to streamline existing
operations and to potentially reduce costs. The Act may increase both
opportunity as well as competition. Many community banks are less able to devote
the capital and management resources needed to facilitate broad expansion of
financial services including insurance and brokerage services.

In the fourth quarter of 2000, PBI became a registered financial holding
company. Under this designation, PBI operates a title insurance agency through
its subsidiary, Lenders Abstract, LLC and an insurance agency specializing in
long-term health care insurance through its subsidiary, Premier Bank Insurance
Services, LLC. PBI's ability to retain its ownership of these subsidiaries and
its authority to expand into other activities permissible for financial holding
companies but not permissible for bank holding companies that are not financial
holding companies, is contingent on maintaining PBI as a well capitalized and
well managed company in the view of the applicable regulatory authorities.

SARBANES-OXLEY ACT OF 2002

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002. The stated goals of the Act are to increase corporate responsibility, to
provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities laws.

The Act is the most far-reaching U.S. securities legislation enacted in
decades. The Act generally applies to all companies, both U.S. and non-U.S.,
that file or are required to file periodic reports with the Securities and
Exchange Commission under the Securities Exchange Act of 1934. Due to the SEC's
extensive role in implementing rules relating to many of the Act's new
requirements, the final scope of these requirements remains to be determined.

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The Act includes very specific additional disclosure requirements and new
corporate governance rules, requires the SEC and securities exchanges to adopt
extensive additional disclosure, corporate governance and other related rules
and mandates further studies of certain issues by the SEC. The Act represents
significant federal involvement in matters traditionally left to state
regulatory systems, such as the regulation of the accounting profession, and to
state corporate law, such as the relationship between a board of directors and
management and between a board of directors and its committees.

The Act addresses, among other matters:

- audit committees for all reporting companies;

- certification of financial statements by the chief executive officer and
the chief financial officer;

- the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve month period following initial publication of any
financial statements that later require restatement;

- a prohibition on insider trading during pension plan black out periods;

- disclosure of off-balance sheet transactions;

- a prohibition on personal loans to directors and officers; expedited
filing requirements for Forms 4's;

- disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;

- "real time" filing of periodic reports;

- the formation of a public accounting oversight board;

- auditor independence; and

- various increased criminal penalties for violations of securities laws.

The Act contains provisions that were effective upon enactment on July 30,
2002 and provisions that will be phased in for up to one year after enactment.
The SEC was delegated the task of enacting rules to implement various provisions
with respect to, among other matters, disclosure in periodic filings pursuant to
the Exchange Act.

BANK REGULATION

Premier Bank is subject to supervision, regulation and examination by the
Pennsylvania Department of Banking, the FDIC and the Federal Reserve Board. In
addition, the bank is subject to a variety of local, state and federal laws.

Banking regulations include, but are not limited to, permissible types and
amounts of loans, investments and other activities, capital adequacy, branching,
interest rates on loans and the safety and soundness of banking practices.

CAPITAL REQUIREMENTS

Under risk-based capital requirements for bank holding companies, PBI is
required to maintain a minimum ratio of total capital to risk-weighted assets
(including certain off-balance-sheet activities, such as standby letters of
credit) of eight percent. At least half of the total capital ("tier 1 capital"
together with "tier 2 capital") is to be composed of common equity, retained
earnings and qualifying perpetual preferred stock, less goodwill. The remainder
may consist of subordinated debt, non-qualifying preferred stock and a limited
amount of the loan loss allowance ("tier 2 capital").

In addition, the Federal Reserve Board has established minimum leverage
ratio requirements for bank holding companies. These requirements provide for a
minimum leverage ratio of tier 1 capital to adjusted average quarterly assets
("leverage ratio") equal to three percent for bank holding companies that meet
certain specified criteria, including having the highest regulatory rating. All
other bank holding companies

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will generally be required to maintain a leverage ratio of at least four to five
percent. The requirements also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the requirements
indicate that the Federal Reserve Board will continue to consider a "tangible
tier 1 leverage ratio" (deducting all intangibles) in evaluating proposals for
expansion or new activity. The Federal Reserve Board has not advised PBI of any
specific minimum tier 1 leverage ratio applicable to it.

Premier Bank is subject to similar capital requirements adopted by the
Federal Reserve Board for state member banks. The Federal Reserve Board has not
advised the bank of any specific minimum leverage ratios applicable to it.

The capital ratios of PBI and Premier Bank are described below in the
"Management's Discussion and Analysis" section.

Banking regulators continue to indicate their desire to further develop
capital requirements applicable to banking organizations. Changes to capital
requirements could materially affect the profitability of PBI or the market
value of PBI stock.

PROMPT CORRECTIVE ACTION

In addition to the required minimum capital levels described above, federal
law establishes a system of "prompt corrective actions" which Federal banking
agencies are required to take, and certain actions which they have discretion to
take, based upon the capital category into which a federally regulated
depository institution falls. Regulations set forth detailed procedures and
criteria for implementing prompt corrective action in the case of any
institution which is not adequately capitalized. Under the rules, an institution
will be deemed to be "adequately capitalized" or better if it exceeds the
minimum Federal regulatory capital requirements. However, it will be deemed
"undercapitalized" if it fails to meet the minimum capital requirements,
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0 percent, a Tier 1 risk-based capital ratio that is less than
3.0 percent, or a leverage ratio that is less than 3.0 percent, and "critically
undercapitalized" if the institution has a ratio of tangible equity to total
assets that is equal to or less than 2.0 percent.

The prompt corrective action rules require an undercapitalized institution
to file a written capital restoration plan, along with a performance guaranty by
its holding company or a third party. In addition, an undercapitalized
institution becomes subject to certain automatic restrictions including a
prohibition on payment of dividends, a limitation on asset growth and expansion,
in certain cases, a limitation on the payment of bonuses or raises to senior
executive officers, and a prohibition on the payment of certain "management
fees" to any "controlling person". Institutions that are classified as
undercapitalized are also subject to certain additional supervisory actions,
including increased reporting burdens and regulatory monitoring, a limitation on
the institution's ability to make acquisitions, open new branch offices, or
engage in new lines of business, obligations to raise additional capital,
restrictions on transactions with affiliates, and restrictions on interest rates
paid by the institution on deposits. In certain cases, bank regulatory agencies
may require replacement of senior executive officers or directors, or sale of
the institution to a willing purchaser. If an institution is deemed to be
"critically undercapitalized" and continues in that category for four quarters,
the statute requires, with certain narrowly limited exceptions, that the
institution be placed in receivership.

DEPOSIT INSURANCE

Deposits of the bank are insured by the FDIC through the Bank Insurance
Fund ("BIF"). Deposits of certain savings associations are insured by the FDIC
through the Savings Association Insurance Fund ("SAIF"). The insurance
assessments paid by an institution are based on the probability that the fund
will incur a loss with respect to the institution. The FDIC has adopted deposit
insurance regulations under which insured institutions are assigned to one of
the following three capital groups based on their capital levels:
"well-capitalized," "adequately capitalized" and "undercapitalized." Banks in
each of these three
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groups are further classified into three subgroups based upon the level of
supervisory concern with respect to each bank. The resulting matrix creates nine
assessment risk classifications to which are assigned deposit insurance premiums
ranging from 0.00% for the best capitalized, healthiest institutions, to 0.27%
for undercapitalized institutions with substantial supervisory concerns.

The FDIC sets deposit insurance assessment rates on a semiannual basis and
will increase deposit insurance assessments whenever the ratio of reserves to
insured deposits in a fund is less than 1.25. Under the current assessment
matrix Premier Bank does not pay any assessments for deposit insurance.

Premier Bank is also subject to quarterly assessments relating to interest
payments on Financing Corporation (FICO) bonds issued in connection with the
resolution of the thrift industry crisis. The FICO assessment rate is adjusted
quarterly to reflect changes in the assessment bases of the BIF and SAIF. The
FICO assessments on BIF-insured deposits are set at an annual rate of 1.72% of
assessable deposits.

ENVIRONMENTAL LAWS

Management does not anticipate that compliance with environmental laws and
regulations will have any material effect on PBI's capital, expenditures,
earnings, or competitive position. However, environmentally related hazards have
become a source of high risk and potentially unlimited liability for financial
institutions.

In 1995, the Pennsylvania General Assembly enacted the Economic Development
Agency, Fiduciary and Lender Environmental Liability Protection Act which, among
other things, provides protection to lenders from environmental liability and
remediation costs under the environmental laws for releases and contamination
caused by others. A lender who engages in activities involved in the routine
practices of commercial lending, including, but not limited to, the providing of
financial services, holding of security interests, workout practices,
foreclosure or the recovery of funds from the sale of property shall not be
liable under the environmental acts or common law equivalents to the
Pennsylvania Department of Environmental Resources or to any other person by
virtue of the fact that the lender engages in such commercial lending practice.
A lender, however, will be liable if it, its employees or agents, directly cause
an immediate release or directly exacerbate a release of regulated substance on
or from the property, or known and willfully compelled the borrower to commit an
action which caused such release or violate an environmental act. The Economic
Development Agency, Fiduciary and Lender Environmental Liability Protection Act,
however, does not limit federal liability which still exists under certain
circumstances.

FEDERAL RESERVE BOARD RESERVE REQUIREMENTS

Regulation D of the Federal Reserve Board requires all depository
institutions to maintain reserves on transaction accounts. These reserves may be
in the form of cash or non-interest-bearing deposits with the Federal Reserve
Bank of Philadelphia. Under Regulation D, Premier Bank's reserve requirement was
$14,183,000 and $3,002,000 at December 31, 2002 and 2001, respectively.

REGULATION W

Transactions between a bank and its "affiliates" are quantitatively and
qualitatively restricted under the Federal Reserve Act. The Federal Deposit
Insurance Act applies Sections 23A and 23B to insured nonmember banks in the
same manner and to the same extent as if they were members of the Federal
Reserve System. The Federal Reserve Board has also recently issued Regulation W,
which codifies prior regulations under Sections 23A and 23B of the Federal
Reserve Act and interpretative guidance with respect to affiliate transactions.
Regulation W incorporates the exemption from the affiliate transaction rules but
expands the exemption to cover the purchase of any type of loan or extension of
credit from an affiliate. Affiliates of a bank include, among other entities,
the bank's holding company and companies that are under common control with the
bank. PBI is considered to be an affiliate of Premier Bank. In general,

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subject to certain specified exemptions, a bank or its subsidiaries are limited
in their ability to engage in "covered transactions" with affiliates:

- to an amount equal to 10% of the bank's capital and surplus, in the case
of covered transactions with any one affiliate; and

- to an amount equal to 20% of the bank's capital and surplus, in the case
of covered transactions with all affiliates.

In addition, a bank and its subsidiaries may engage in covered transactions
and other specified transactions only on terms and under circumstances that are
substantially the same, or at least as favorable to the bank or its subsidiary,
as those prevailing at the time for comparable transactions with nonaffiliated
companies. A "covered transaction" includes:

- a loan or extension of credit to an affiliate;

- a purchase of, or an investment in, securities issued by an affiliate;

- a purchase of assets from an affiliate, with some exceptions;

- the acceptance of securities issued by an affiliate as collateral for a
loan or extension of credit to any party; and

- the issuance of a guarantee, acceptance or letter of credit on behalf of
an affiliate.

In addition, under Regulation W:

- a bank and its subsidiaries may not purchase a low-quality asset from an
affiliate;

- covered transactions and other specified transactions between a bank or
its subsidiaries and an affiliate must be on terms and conditions that
are consistent with safe and sound banking practices; and

- with some exceptions, each loan or extension of credit by a bank to an
affiliate must be secured by collateral with a market value ranging from
100% to 130%, depending on the type of collateral, of the amount of the
loan or extension of credit.

Regulation W generally excludes all non-bank and non-savings association
subsidiaries of banks from treatment as affiliates, except to the extent that
the Federal Reserve Board decides to treat these subsidiaries as affiliates.

Concurrently with the adoption of Regulation W, the Federal Reserve Board
has proposed a regulation which would further limit the amount of loans that
could be purchased by a bank from an affiliate to not more than 100% of the
bank's capital and surplus.

RECENT DEVELOPMENTS

As described above, the Gramm-Leach-Bliley Act, adopted November 12, 1999,
enacted significant changes to the bank holding company laws, providing
significantly expanded opportunities for combinations of banking, insurance and
securities activities. The law also establishes significant new consumer privacy
protections, which went into effect in July, 2001, including stringent
restrictions on the disclosure of non-public consumer financial information to
third parties. The Gramm-Leach-Bliley Act is sweeping legislation that PBI
believes will affect the financial services industry for years to come.
Implementing regulations with respect to many areas are still being developed,
and it remains too early to determine the effect the law will have on PBI or its
business, operations and financial performance.

In the wake of the tragic events, of September 11th, on October 26, 2001,
the President signed the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act
of 2001. Under the USA PATRIOT Act, financial institutions are subject to
prohibitions against specified financial transactions and account relationships
as well as enhanced due diligence and "know your customer" standards in their
dealings with foreign financial institutions and
9

foreign customers. For example, the enhanced due diligence policies, procedures,
and controls generally require financial institutions to take reasonable steps:

- to conduct enhanced scrutiny of account relationships to guard against
money laundering and report any suspicious transaction;

- to ascertain the identity of the nominal and beneficial owners of, and
the source of funds deposited into, each account as needed to guard
against money laundering and report any suspicious transactions;

- to ascertain for any foreign bank, the shares of which are not publicly
traded, the identity of the owners of the foreign bank, and the nature
and extent of the ownership interest of each such owner; and

- to ascertain whether any foreign bank provides correspondent accounts to
other foreign banks and, if so, the identity of those foreign banks and
related due diligence information.

Under the USA PATRIOT Act, financial institutions had until April 25, 2002
to establish anti-money laundering programs. The USA PATRIOT Act sets forth
minimum standards for these programs, including:

- the development of internal policies, procedures, end controls;

- the designation of a compliance officer;

- an ongoing employee training program; and

- an independent audit function, to test, the programs.

The Secretary of the Treasury has prescribed regulations that consider the
extent to which these new requirements are commensurate with the size, location,
and activities of financial institutions subject to the Act.

In addition, the USA PATRIOT Act authorized the Secretary of the Treasury
to adopt rules increasing the cooperation and information sharing between
financial institutions, regulators, and law enforcement authorities regarding
individuals, entities and organizations engaged in, or reasonably suspected
based on credible evidence of engaging in, terrorist acts or money laundering
activities. Any financial institutions complying with these rules will not be
deemed to have violated the privacy provisions of the Gramm-Leach-Bliley Act, as
discussed above.

Premier Bank does not have any significant international banking
relationships and does not anticipate that the USA PATRIOT Act will have a
material effect on its business or operations.

INTERNATIONAL MONEY LAUNDERING ABATEMENT AND FINANCIAL ANTI-TERRORISM ACT
OF 2001 (IMLAFATA)

As part of the USA PATRIOT Act, Congress adopted the International Money
Laundering Abatement and Financial Anti-Terrorism Act of 2001. IMLAFATA amended
the Bank Secrecy Act and adopted certain additional measures that increase the
obligation of financial institutions, including Premier Bank, to identify their
customers, watch for and report upon suspicious transactions, respond to
requests for information by federal banking regulatory authorities and law
enforcement agencies, and share information with other financial institutions.
The Secretary of the Treasury has adopted several regulations to implement these
provisions. Premier Bank is also barred from dealing with foreign "shell" banks.
In addition, IMLAFATA expands the circumstances under which funds in a bank
account may be forfeited. IMLAFATA also amended the BHC Act and the Bank Merger
Act to require the federal banking regulatory authorities to consider the
effectiveness of a financial institution's anti-money laundering activities when
reviewing an application to expand operations. Premier Bank has in place a Bank
Secrecy Act compliance program.

10

EFFECTS OF GOVERNMENT POLICY AND POTENTIAL CHANGES IN REGULATION

Changes in regulations applicable to PBI or Premier Bank, or shifts in
monetary or other government policies, could have a material affect on their
business. PBI's and the bank's business is also affected by the state of the
financial services industry in general. As a result of legal and industry
changes, management believes that the industry will continue to experience an
increased rate of change as the financial services industry strives for greater
product offerings, market share and economies of scale.

AVAILABLE INFORMATION

Our common and Series A preferred stock are registered under Section 12(b)
of the Securities Exchange Act of 1934 and are traded on the American Stock
Exchange under the trading symbols "PPA" and "PPA.Pr.A", respectively. We are
subject to the informational requirements of the Exchange Act and, accordingly,
file reports, proxy statements and other information with the Securities and
Exchange Commission. The reports, proxy statements and other information filed
with the SEC are available for inspection and copying at the SEC's Public
Reference Room at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. We are an electronic filer with the SEC.
The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. The SEC's Internet site address is: http://www.sec.gov. Our
Internet site is: http://www.premierbankonline.com.

You may also inspect materials and other information concerning us at the
offices of the American Stock Exchange, Inc. at 86 Trinity Place, New York, New
York 10006. The American Stock Exchange's Internet site address is:
http://www.amex.com.

You may obtain copies of Premier Bancorp, Inc.'s annual reports on Form
10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K as filed
with the SEC upon request and at no charge by writing to John C. Soffronoff,
President and Chief Executive Officer, Premier Bancorp, Inc., 379 North Main
Street, Doylestown, Pennsylvania 18091 or from Premier Bank's website within two
business days of filing the report electronically with the SEC.

ITEM 2 -- PROPERTIES

Our main office is located at 379 North Main Street, Doylestown,
Pennsylvania. Premier Bank currently conducts business from the main office and
six other full service Pennsylvania retail offices located in Southampton,
Bensalem and Lower Makefield Township, Bucks County; Bethlehem and Easton,
Northampton County; and Montgomeryville, Montgomery County. We also have a
limited service branch in the Heritage Towers Retirement Community in
Doylestown. We plan to open our eighth full-service Pennsylvania banking office
in Abington, Montgomery County during the second quarter of 2003. In January
2003 we signed a 10-year lease on the Abington branch.

11

The following table details the ownership of our properties at December 31,
2002.

1) Doylestown, PA Main office and branch -- owned
2) Bensalem, PA Branch -- leased requiring rental
payments of $96,000 per year
3) Bethlehem, PA Branch -- owned
4) Easton, PA Branch -- owned
5) Lower Makefield Twp., PA Branch -- owned
6) Montgomeryville, PA Branch -- land leased requiring rental
payments of $85,000 per year
7) Southampton, PA Branch and operations center -- leased
requiring rental payments of $40,000 per
year for the branch and $2,000 per month
for operations center. Operations center
lease expires in February 2004.

Lenders Abstract, LLC operates from the Lower Makefield Township branch.
Premier Bank Insurance Services, LLC operates from the Montgomeryville branch.

ITEM 3 -- LEGAL PROCEEDINGS

At December 31, 2002, there were no known material legal proceedings
pending against PBI, its subsidiaries, or its property. In addition, no material
proceedings are known to be contemplated by governmental authorities against
PBI, its subsidiaries, or its property.

ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5 -- MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS

PBI's common stock was listed and began trading on the American Stock
Exchange (AMEX) on December 30, 1999 under the trading symbol "PPA." At December
31, 2002, 30,000,000 shares of common stock were authorized and 3,342,215 shares
were outstanding. We had 553 shareholders of record as of March 10, 2003. No
other class of common stock is authorized or outstanding.

Shares of our common stock traded on AMEX in the range of $8.75 to $14.50
per share during 2002 and $6.25 to $10.21 per share during 2001. PBI's ability
to pay dividends to shareholders is dependent upon its ability to obtain
dividends from the bank. The bank's ability to pay dividends is subject to
certain regulatory restrictions that are described in greater detail at Note 25
to the 2002 Consolidated Financial Statements.

On February 13, 2003 we declared a cash dividend of $0.05 per share payable
on April 15, 2003 to common shareholders of record on March 21, 2003. This is
the first cash dividend declared on our common stock.

12

The following table summarizes our equity compensation plan information as
of December 31, 2002.

PBI has no equity compensation plans at December 31, 2002 which were not
approved by its shareholders.

ITEM 6 -- SELECTED FINANCIAL DATA

- ---------------

(1) Calculated as net interest income on a tax equivalent basis divided by
average interest-earning assets

(2) Calculated as net income applicable to common shareholders divided by
average assets

(3) Calculated as net income applicable to common shareholders divided by
average total equity less preferred stock

(4) Calculated as shareholders' equity less preferred stock divided by the
number of common shares outstanding

ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL

Our revenues are derived principally from interest income on our loan and
securities portfolios. Our primary sources of funds are deposits, repayments of
loans and investment securities, and borrowed funds. Currently, we have seven
full service Pennsylvania banking offices: Doylestown, Easton, Southampton,
Bethlehem, Yardley-Floral Vale, Bensalem and Montgomeryville. We also operate a
limited service branch in the Heritage Towers Retirement Community in
Doylestown. We face significant competition from other financial services
companies, many of which are larger organizations with more resources and
locations.

Our consolidated results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and investment securities, and the
interest expense paid on interest-bearing liabilities, such as deposits and
borrowed money. We generate non-interest income such as service charges, gains
from sales of residential mortgages, fees from sales of title insurance and
other fees. Our non-interest expense primarily consists of employee compensation
and benefits, occupancy expenses, marketing, data processing costs and other
operating expenses. We are subject to losses from our loan and investment
portfolios if borrowers/issuers fail to meet their obligations or if the market
value of our securities declines. Our results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory agencies.

On January 16, 2003, PBI announced that it had entered into a definitive
agreement to be acquired by Fulton Financial Corporation based in Lancaster,
Pennsylvania. Under the terms of the agreement, Fulton Financial will acquire
all of PBI's issued and outstanding shares of common stock. Each share of PBI
common stock outstanding will be exchanged for 1.34 shares of Fulton Financial
common stock, subject to adjustment. All outstanding shares of PBI preferred
stock are expected to be redeemed as of or before the closing date of the
transaction. This acquisition, which is subject to the approval of bank
regulators and PBI shareholders, is expected to close by the third quarter of
2003.

The following discussion focuses on the major components of our operations
and presents an overview of the significant changes in the results of operations
and financial condition for the last three fiscal years. This discussion section
should be read in conjunction with the Consolidated Financial Statements and
accompanying Notes. Current performance may not be indicative of future
performance.

Management has made forward-looking statements in this Annual Report on
Form 10-K. These forward-looking statements may be subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of Premier Bancorp, Inc. and
its subsidiaries, Premier Bank, PBI Capital Trust, Premier Capital Trust II,
Lenders Abstract, LLC and

14

Premier Bank Insurance Services, LLC. When words such as "believes", "expects",
"anticipates" or similar expressions occur in this Annual Report, management is
making forward-looking statements.

Shareholders should note that many factors, some of which are discussed
elsewhere in this Annual Report, could affect the future financial results of
Premier Bancorp, Inc. and its subsidiaries, both individually and collectively,
and could cause those results to differ materially from those expressed in the
forward-looking statements contained in this Annual Report. These factors
include, but are not limited to the following:

- operating, legal and regulatory risks, such as continued levels of loan
quality and origination volumes, continued relationships with major
customers, and technological changes;

- economic, political and competitive forces affecting our banking
business, such as changes in economic conditions, especially in the
bank's market area, interest rate fluctuations, competitive product and
pricing pressures within the bank's market, personal and corporate
bankruptcies, monetary policy and inflation; and

- the risk that management's analyses of these risks and forces could be
incorrect and or that the strategies developed to address them could be
unsuccessful.

Management cautions readers not to place undue reliance on these
forward-looking statements that reflects its analysis only as of this date.
Management is not obliged to publicly revise or update these forward-looking
statements to reflect events or circumstances that arise after this date.
Readers should carefully review the risk factors described in other documents we
file from time to time with the Securities and Exchange Commission, including
quarterly reports on Form 10-Q and any current reports on Form 8-K.

CRITICAL ACCOUNTING POLICIES

The following discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities at the date of the financial statements.
Actual results may differ from these estimates under different assumptions and
conditions.

In management's opinion, the most critical accounting policies impacting
our consolidated financial statements are:

EVALUATION OF THE ALLOWANCE FOR LOAN LOSSES

The loan loss allowance policy involves significant judgments and
assumptions by management that may have a material impact on the carrying value
of net loans and, potentially, on the net income recognized from period to
period. For a description of our accounting policies and estimation methodology
related to the allowance for loan losses, see discussion entitled "Allowance for
loan losses," below.

ACCRUAL AND RECOGNITION OF INTEREST ON LOANS

These policies involve significant judgments and assumptions by management,
which may have a material impact on the interest income recognized from period
to period. For a description of our accounting policies in connection with
accrual and recognition of interest on loans, see Note 1 to our Consolidated
Financial Statements included herein.

REALIZATION OF DEFERRED INCOME TAX ITEMS

Estimates of deferred tax assets and deferred tax liabilities make up the
asset category titled, "Deferred income taxes." These estimates involve
significant judgments and assumptions by management,
15

which may have a material impact on the carrying value of deferred tax assets
for financial reporting purposes. For a more detailed description of these items
and estimates, see Note 13 to the Consolidated Financial Statements included
herein.

UNREALIZED GAINS AND LOSSES ON DEBT SECURITIES AVAILABLE FOR SALE

We receive estimated fair values of debt securities from an independent
valuation service and brokers. In developing these fair values, the valuation
service and brokers use estimates of cash flows based on historical performance
of similar instruments in similar rate environments. Based on experience,
management is aware that estimated fair values of debt securities vary among
brokers and other valuation services. Debt securities available for sale are
mostly comprised of mortgage-backed securities and corporate bonds. For more
detail on the estimated fair value of debt securities, see the discussion
entitled "Investment securities."

The Notes to our Consolidated Financial Statements set forth herein
identify other significant accounting policies used in the development and
presentation of our financial statements. This discussion and analysis, the
significant accounting policies and other financial statement disclosures
identify and address key variables and other qualitative and quantitative
factors that are necessary for an understanding and evaluation of our results of
operations.

RESULTS OF OPERATIONS

We reported net income applicable to common shareholders of $4,246,000 or
$1.22 earnings per common share on a diluted basis for the year ended December
31, 2002. This represents an increase of $1,712,000 or 68% from the net income
of $2,534,000 or $.74 earnings per common share on a diluted basis reported in
2001. Net interest income was $4,503,000 or 35% higher in 2002 compared to 2001
due primarily to a $115,581,000 increase in average interest-earning assets and
a 150 basis point decrease in the rate on average interest-bearing liabilities.
Loans accounted for $76,289,000 of the growth in average interest-earning
assets. The rate on average interest-bearing deposits decreased 163 basis points
from 5.00% in 2001 to 3.37% in 2002 primarily due to the repricing of
certificates of deposit in the lower rate environment and the shift in deposit
mix toward interest-bearing checking accounts. Other income was $343,000 or 58%
higher in 2002 due primarily to a $66,000 increase in service charges and other
deposit related fees, a $90,000 increase in gains on sales of investment
securities available for sale, and a $79,000 increase in gains on sales of
residential mortgages held for sale. In addition, we recorded a $33,000 gain on
the sale of other real estate owned in 2002 compared to a loss of $17,000 in
2001. Overhead expenses were $1,548,000 or 16% higher in 2002 compared to 2001.
This increase is consistent with the overall growth of the company. Salaries and
employee benefits increased $945,000 in 2002 as the number of full-time
equivalent employees increased from 81 at December 31, 2001 to 94 at December
31, 2002.

We reported net income of $2,534,000 or $.74 earnings per common share on a
diluted basis for the year ended December 31, 2001. This represents an increase
of $473,000 or 23% from net income of $2,061,000 or $.60 earnings per common
share on a diluted basis reported in 2000. Interest income grew $2,958,000 or
11% in 2001 compared to 2000 primarily due to loan growth. Loans grew
$76,621,000 or 32% in 2001. However, growth in net interest income was slowed by
eleven decreases in the prime lending rate and the Federal Reserve's targeted
federal funds rate totaling 4.75% during 2001. These rate cuts lowered the rates
on new loans and existing adjustable/variable rate loans. Other income was
$275,000 or 86% higher in 2001 due primarily to $137,000 in fees generated from
our title insurance business and a $50,000 non-recurring fee related to one loan
pay-off. Overhead expenses were $1,134,000 or 14% higher in 2001 compared to
2000, exclusive of $183,000 in one-time charges in 2000 related to two
discontinued Internet projects and a relocated branch site. Overhead expenses
were higher in 2001 due primarily to the recognition of a full year of operating
expenses associated with the opening of two new branches in October 2000 and the
overall growth of the company.

Our net income for 2000 was $344,000 or 14% lower than the net income of
$2,405,000 or $.72 earnings per common share on a diluted basis reported in
1999. Earnings were lower in 2000 due primarily

16

to an increase in overhead expenses related to branch expansion. In addition,
our net interest margin compressed in 2000 due to the combination of generally
higher interest rates and increased competition for loans and deposits.

Return on average assets and return on average common shareholders' equity
were .81% and 18.74%, respectively, in 2002 compared to .63% and 13.66%,
respectively, in 2001 and .61% and 15.26%, respectively, in 2000. Return on
average common shareholders' equity, exclusive of the unrealized gain (loss) on
investment securities available for sale, was 17.35%, 11.94% and 11.12% for
2002, 2001 and 2000, respectively.

The following tables and discussions related to net interest income,
interest income and interest expense were prepared on a tax-equivalent basis.

NET INTEREST INCOME

Net interest income is the most significant component of our operating
income. Net interest income depends upon the levels of interest-earning assets
and interest-bearing liabilities and the difference or "spread" between the
respective yields earned and rates paid. The interest rate spread is influenced
by the overall interest rate environment, the composition and characteristics of
interest-earning assets and interest-bearing liabilities, and by competition.
The interest rate spread is also influenced by differences in the maturity and
repricing of assets versus the liabilities that fund them.

Responding to generally weak economic conditions, the Federal Reserve cut
the targeted federal funds rate by .50% in 2002 and 4.75% in 2001. As a result,
the current interest rate environment is at a historically low level. The bank's
interest-earning assets and interest-bearing liabilities continue to originate
and reprice in this lower rate environment. The yields on our average
interest-earning assets were 6.61%, 7.79% and 8.15% for the year ended December
31, 2002, 2001, and 2000, respectively. The rates on our average
interest-bearing liabilities were 3.45%, 4.95%, and 5.33% for the year ended
December 31, 2002, 2001, and 2000, respectively.

Net interest income on a tax-equivalent basis increased $4,424,000 or 33%
for 2002 compared to 2001. This increase was primarily a function of asset
growth and a lower rate on average interest-bearing liabilities. These positive
factors were partially offset by a lower yield on average interest-earning
assets and a lower ratio of average interest-earning assets to average
interest-bearing liabilities. Average interest-earning assets grew $115,581,000
or 30% in 2002 while the yield on average interest-earning assets declined 118
basis points. Average loans grew $76,289,000 in 2002 with a decrease in the
average yield on such loans of 94 basis points. Average investments grew
$19,523,000 in 2002 with a decrease in the average yield on such investments of
117 basis points. The average rate on interest-bearing liabilities improved due
mostly to the repricing of certificates of deposits in the lower rate
environment, the change in deposit mix and new long-term borrowings at lower
rates. The offering rates on our deposit products have been lowered in response
to the interest rate environment. Despite this lower interest rate environment
we had considerable success in raising non-maturity deposits that are generally
less costly than time deposits. The average balance of non-maturity deposits
grew $98,791,000 during 2002 and was concentrated in interest checking accounts.
The net interest margin increased 8 basis points from 3.50% in 2001 to 3.58% in
2002. The ratio of average interest-earning assets to average interest-bearing
liabilities decreased from 115.44% in 2001 to 113.74% in 2002. The net interest
rate spread improved 32 basis points from 2.84% in 2001 to 3.16% in 2002.

Net interest income on a tax-equivalent basis increased $1,684,000 or 14%
for 2001 compared to 2000. This increase was primarily a function of asset
growth and a lower rate on average interest-bearing liabilities. These positive
factors were partially offset by a lower yield on average interest-earning
assets and a lower ratio of average interest-earning assets to average
interest-bearing liabilities. Average interest-earning assets grew $54,394,000
or 16% in 2001 while the yield on average interest-earning assets declined 36
basis points. Average loans grew $53,776,000 in 2001 with a decrease in the
average yield on such loans of 45 basis points. The average rate on
interest-bearing liabilities decreased 38 basis points. The average rate on
interest-bearing liabilities improved in part due to the maturity of higher rate
certificates of deposit,
17

which were retained or replaced at a lower rate. The offering rates on most
deposit products were lowered in response to the reductions in the federal funds
and prime lending rate. Short-term borrowings and subordinated debt also
repriced lower in 2001. The ratio of average interest-earning assets to average
interest-bearing liabilities decreased from 116.12% in 2000 to 115.44% in 2001.
The net interest margin decreased 7 basis points from 3.57% in 2000 to 3.50% in
2001. The net interest rate spread improved 2 basis points from 2.82% in 2000 to
2.84% in 2001.

During 2002, we accelerated the deferred fee recognition on certain
renegotiated loans in accordance with FASB Statement No. 91. Net interest income
for 2002 included $172,000 of such fees. Excluding these fees the yield on
average loans, the yield on average interest-earning assets, and the net
interest margin would have been 7.34%, 6.57% and 3.54%, respectively.

18

The following table presents certain key average balance sheet amounts and
the corresponding earnings/expenses and rates.

AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY

- ---------------

(1) Excludes the SFAS 115 valuation allowance on investment securities available
for sale.

(2) Interest income on tax-exempt investment securities was presented on a
tax-equivalent basis. Tax exempt yields were adjusted to a tax equivalent
basis using a 34% rate.

(3) Includes non-accrual loans of $5,332,000, $458,000, and $106,000 on average
in 2002, 2001 and 2000, respectively.

(4) Includes tax-exempt loans of $2,882,000, $1,733,000, and $1,077,000 on
average in 2002, 2001 and 2000, respectively. Tax exempt yields were
adjusted to a tax equivalent basis using a 34% rate.

(5) Excludes the deferred tax asset related to the SFAS 115 valuation allowance
on investment securities available for sale.

(6) Excludes the SFAS 115 valuation allowance on investment securities available
for sale, net of tax.

(7) Net interest margin is calculated as net interest income divided by average
interest-earning assets.

19

The following table sets forth certain information regarding changes in net
interest income attributable to changes in the volumes of interest-earning
assets and interest-bearing liabilities and changes in rates for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to:

- changes in volume (change in volume multiplied by prior year rate);

- changes in rates (change in rate multiplied by prior year volume); and

- total change.

Changes due to the combination of rate and volume changes (changes in
volume multiplied by changes in rate) were allocated proportionately between
changes in rate and changes in volume.

Interest income foregone on non-accrual loans is presented as a change in
rate.

RATE VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME

INTEREST INCOME

Total interest income on a tax equivalent basis increased $3,064,000 or 10%
for 2002 to $33,268,000 compared to $30,204,000 for 2001. Higher average loan
and AFS investment balances added $5,896,000 and $1,426,000, respectively, to
interest income. Lower yields on loans and AFS investments reduced interest
income by $2,811,000 and $1,324,000, respectively. The yield on average
interest-earning assets decreased 118 basis points as the decline in overall
interest rates continued through 2002. The lower yield on average
interest-earning assets reduced interest income by $4,426,000 in 2002.

Total interest income on a tax-equivalent basis increased $3,015,000 or 11%
for 2001 to $30,204,000 compared to $27,189,000 for 2000. Higher average loan
balances added $4,534,000 to interest income while lower average investment
balances reduced interest income by $212,000 in 2001. The yield on

20

average interest-earning assets decreased 36 basis points to 7.79% as overall
interest rates moved lower in 2001. The lower yield on average interest-earning
assets reduced interest income by $1,492,000 in 2001.

INTEREST EXPENSE

Total interest expense decreased $1,360,000 or 8% for 2002 to $15,265,000
compared to $16,625,000 for 2001. Lower rates on deposits and borrowings reduced
interest expense by $3,862,000, and $555,000, respectively. The rate on average
interest-bearing liabilities decreased 150 basis points during 2002 as we
lowered the offering rates on our deposit products and short-term borrowings,
shifted our deposit mix toward less costly interest checking accounts, and added
long-term borrowings in the lower rate environment. Higher average interest
checking account balances and long-term borrowings added $2,360,000 and
$1,138,000 to interest expense in 2002. Average time deposits decreased in 2002
reducing interest expense by $643,000.

Total interest expense increased $1,331,000 or 9% for 2001 to $16,625,000
compared to $15,294,000 for 2000. Higher average deposit balances and higher
average borrowings added $2,435,000 and $275,000, respectively, to total
interest expense. The rate on average interest-bearing liabilities decreased 38
basis points to 4.95% as overall interest rates moved lower in 2001. The lower
rate on average interest-bearing liabilities reduced interest expense by
$1,379,000 in 2001.

INTEREST RATE SENSITIVITY

We are subject to the interest rate risk inherent in our lending, investing
and financing activities. Fluctuations in interest rates will impact both the
interest income and expense and market value of all interest-earning assets and
interest-bearing liabilities, other than those with a short term to maturity.

The primary objective in managing interest rate risk is to minimize the
adverse impact of changes in interest rates on our net interest income while
creating an asset/liability structure that maximizes earnings. The Asset
Liability Management Committee actively monitors and manages our interest rate
exposure using gap analysis and simulation models. Simulation models require
significant assumptions about future business trends and interest rates.

Gap analysis measures the difference between volumes of rate-sensitive
assets and liabilities and quantifies these repricing differences for various
time intervals. Static gap analysis depicts interest sensitivity at a point in
time. However, it alone does not accurately measure the magnitude of changes in
net interest income because changes in interest rates do not always impact
assets and liabilities at the same time or in the same magnitude. Furthermore,
gap analysis does not consider future growth, changes in asset and liability
composition or market conditions.

A positive gap results when the amount of interest rate-sensitive assets
exceeds interest rate-sensitive liabilities repricing within the relevant time
period and, generally means that the institution will benefit during periods of
rising interest rates. A negative gap results when the amount of interest
rate-sensitive liabilities exceeds interest rate-sensitive assets repricing
within the relevant time period and, generally means that the institution will
benefit during periods of falling interest rates.

21

As depicted in the table below, we have a cumulative positive gap within
the one-year and after three-year time intervals. We have a cumulative negative
gap in the over one year to three year time interval.

Our gap analysis at December 31, 2002 is as follows.

INTEREST RATE SENSITIVITY

We use two different simulation models to measure and monitor interest rate
risk. One model is a licensed software program that is run internally and
incorporates management's assumptions including future growth. The other is a
program developed by an outside consulting firm utilizing data we supply (the
"consulting model"), and considers only the existing composition and
characteristics of the balance sheet without giving effect to anticipated future
growth and interest rate changes. Although management expects to continue to
grow interest-sensitive assets and liabilities, its assumptions about future
growth and interest rates are excluded from the consulting model. Management
believes that this approach provides a more conservative measure of our interest
rate risk because assumed growth at current market interest rates lessens the
effects of rate changes in simulation models in the short-term.

Simulation models require assumptions about certain categories of assets
and liabilities. The models schedule existing assets and liabilities by their
contractual maturity, estimated likely call date, or earliest repricing
opportunity. Mortgage-backed securities and amortizing loans are scheduled based
on their anticipated cash flow including estimated prepayments. For investment
securities, we use a third party service to provide cash flow estimates in the
various rate environments. Savings accounts, including
22

passbook, statement savings, money market, and interest checking accounts, do
not have a stated maturity or repricing term and can be withdrawn or repriced at
any time. This may impact the margin if more expensive alternative sources of
deposits are required to fund loans or deposit runoff. Management projects the
repricing characteristics of these accounts based on historical performance and
assumptions that it believes reflect their rate sensitivity. The consulting
model reinvests all maturities, repayments and prepayments for each type of
asset or liability into the same product for a new like term. As a result, the
mix of interest-earning assets and interest-bearing liabilities is held
constant.

The table below summarizes estimated changes in net interest income over a
twelve-month period beginning January 1, 2003, under alternate interest rate
scenarios using the consulting model described above.

Actual results may differ from simulated results due to various factors
including the time and magnitude of interest rate changes, changes in customer
behavior, effects of competition, and other factors. These variables influence
the interest-rate spread and product mix. The consulting model predicts a base
net interest income amount that is larger than that earned in the past 12 months
or last fiscal year. This is principally the result of an increase in earning
assets over the past year, which created a larger starting point for the
12-month projection. Past experience drives many of the assumptions used in the
models. Actual results could vary substantially if our future performance
differs from past experience.

NON-INTEREST INCOME COMPARISON

Non-interest income consists primarily of service charges on deposits, fees
from sales of title insurance policies and gains (losses) on the sale of
investment securities available for sale and loans held for sale.

Non-interest income increased $343,000 for 2002 to $937,000 compared to
$594,000 for 2001. Gains on sales of investment securities available for sale
and loans held for sale were higher by $90,000 and $79,000, respectively. Gains
on sales of loans held for sale were higher in 2002 due to an increase in
residential mortgage originations and sales as a result of lower interest rates
and the hiring of a seasoned mortgage lender in the third quarter of 2002.
Service charges and other deposit related fees were $66,000 higher in 2002 due
primarily to an increase in the number of deposit accounts and transactions.
During 2002 we recorded a gain of $33,000 on the sale of other real estate owned
compared to a $17,000 loss in 2001. Other income for 2002 included a $46,000
gain on the sale of a small business administration loan.

23

Non-interest income increased $275,000 for 2001 to $594,000 compared to
$319,000 for 2000. This increase is primarily due to $137,000 in fees from sales
of title insurance policies and $50,000 in fees related to one loan pay-off. In
addition, fees from ATM/debit card transactions increased $50,000 due to an
increase in the number of cardholders and ATM locations. Gains on sales of loans
held for sale were $23,000 higher in 2001 due to an increase in residential
mortgage loan originations and sales as a result of lower interest rates.

NON-INTEREST EXPENSE COMPARISON

Non-interest expense increased $1,548,000 or 16% for 2002 to $10,953,000
compared to $9,405,000 for 2001. Overhead expense increased principally due to
increased staffing and other costs related to the continued growth of the
company. Salaries and employee benefits were $945,000 or 22% higher due
primarily to an increase in the number of employees and salary adjustments. The
number of full-time equivalent employees grew from 81 at December 31, 2001 to 94
at December 31, 2002. Marketing expense was $138,000 lower because deposit
growth exceeded expectations in 2002. The $209,000 increase in the minority
interest in expense of subsidiaries related to the issuance of $15,000,000 in
trust preferred securities in September 2002. Other expense consisted primarily
of furniture and equipment expense, shareholder-related expenses, loan expenses,
Pennsylvania shares tax expense, employee travel and entertainment,
stationary/supplies, postage, and board of directors' fees. The $309,000 or 18%
increase in other expense is principally attributed to the growth of the company
and increases in loan collection costs, shareholder-related expenses and
Pennsylvania shares tax expense. Other expense included $224,000 in fair market
value adjustments on derivatives related to our IPCD product. This adjustment,
which was $66,000 higher than the amount recorded in 2001, was due to the
continued decline in interest rates in 2002. These adjustments will reverse in
future periods as IPCD's approach maturity or if interest rates increase.

Non-interest expense increased $951,000 or 11% for 2001 to $9,405,000
compared to $8,454,000 for 2000. Overhead expense in 2000 included one-time
charges of $115,000 related to two discontinued Internet initiatives and $68,000
for a relocated branch site. Excluding these one-time charges, overhead
increased $1,134,000 or 14% for 2001 principally due to the continued growth of
the company, which included the opening of two new branches in October 2000.
Salaries and employee benefits grew $464,000 or 12% for 2001 compared to 2000
due to an increase in the number of employees and salary adjustments. The number
of full-time equivalent employees increased from 76 at December 31, 2000 to 81
at December 31, 2001. Occupancy costs grew $126,000 for 2001 primarily due to
the additional rent, maintenance and utility costs for new branches. Data
processing costs increased $132,000 principally due to the growth of the company
and variable costs associated with item processing and account volumes.
Professional services and marketing were lower in 2001 due in part to the
one-time charges in 2000. Other expense in 2000 included $68,000 for the
write-off of land improvements related to a relocated branch. Exclusive of this
one-time charge, other expense increased $411,000 or 32% in 2001 due principally
to the growth of the company and increases in loan collection costs, other real
estate owned expenses, and

24

Pennsylvania shares tax. Other expense in 2001 included $158,000 in fair market
value adjustments on derivatives related to our IPCD product. This adjustment
was due to falling interest rates in 2001 and will reverse in future periods as
IPCD's approach maturity or if interest rates increase in the future.

PROVISION FOR LOAN LOSSES

The provision for loan losses represents the amount necessary to be charged
to operations to bring the allowance for loan losses to a level that represents
management's best estimate for known and inherent losses in our loan portfolio.
The amount of the allowance for loan losses is subject to ongoing analysis of
the loan portfolio which considers current economic conditions, actual loss
experience, the current risk profile of the portfolio, and composition of loan
types within the portfolio. Net charge-offs were $458,000, $33,000 and $7,000 in
2002, 2001 and 2000, respectively. Our loan portfolio is relatively immature
given our recent growth rates. Therefore, charge-off and non-performing trends
may not be indicative of future performance.

The provision for loan losses increased from $818,000 in 2001 to $870,000
in 2002. This increase was primarily due to an increase in non-performing loans
and higher net charge-offs. Non-performing loans totaled $4,849,000 at December
31, 2002 compared to $2,687,000 at December 31, 2001. The allowance for loan
losses was $4,229,000 or 1.17% of total loans at December 31, 2002 compared to
$3,817,000 or 1.21% at December 31, 2001.

The provision for loan losses increased from $528,000 for 2000 to $818,000
for 2001. This increase was primarily due to greater loan growth in 2001
compared to 2000. Total gross loans grew $76,621,000 or 32% in 2001 compared to
$40,221,000 or 20% in 2000. The allowance for loan losses was $3,817,000 or
1.21% of total loans at December 31, 2001 compared to $3,032,000 or 1.27% at
December 31, 2000.

INCOME TAXES

We recorded a $1,929,000 tax provision representing an effective tax rate
of 29.0% for the year ended December 31, 2002 compared to an $863,000 tax
provision and a 25.4% effective tax rate for 2001. The effective tax rate was
higher in 2002 principally due to a lower ratio of tax-exempt interest to total
pre-tax income.

We recorded an $863,000 tax provision representing an effective tax rate of
25.4% for the year ended December 31, 2001 compared to a $675,000 tax provision
and a 24.7% effective tax rate for 2000. The effective tax rate was higher in
2001 principally due to a lower ratio of tax-exempt interest to total pre-tax
income.

PREFERRED STOCK DIVIDENDS

We issued 552,000 shares of Series A 9.25% Non-Cumulative Perpetual
Preferred Stock in June 2002. Dividends are payable quarterly, but only if
declared by our board of directors. On July 31, 2002 and October 31, 2002 we
paid dividends on our preferred stock in the amount of $149,000 and $319,000,
respectively.

All outstanding shares of our preferred stock are expected to be redeemed
in connection with our pending acquisition by Fulton Financial Corporation. This
acquisition is expected to close by the third quarter of 2003.

FINANCIAL CONDITION

Consolidated assets grew $159,403,000 or 35% during 2002 to $609,972,000.
Cash and cash equivalents and investments, exclusive of the SFAS 115 valuation
allowance, grew $8,439,000 and $100,206,000, respectively, during 2002. Total
gross loans grew $45,429,000 in 2002. During 2002 we raised $27,345,000 in new
capital through the issuance of preferred stock and capital securities. This new
capital, together with a $98,204,000 increase in deposits, mostly interest
checking accounts, and a $30,000,000 increase in long-term FHLB advances, funded
our asset growth. Shareholders' equity
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increased $18,827,000 from $19,609,000 at December 31, 2001 to $38,436,000 at
December 31, 2002. This increase was attributable to $4,246,000 in earnings
after preferred stock dividends, a $3,025,000 improvement in the estimated fair
value of investment securities available for sale, net of tax, $529,000 from the
exercise of common stock options and $12,345,000 in net proceeds from the
issuance of preferred stock. Shareholders' equity was reduced by $1,318,000 due
to the repurchase of common stock.

Consolidated assets grew $95,368,000 or 27% during the year ended December
31, 2001 to $450,569,000. Total loans grew $76,621,000 or 32% while total
investments, exclusive of the SFAS 115 valuation allowance, decreased $2,675,000
or 3% during 2001. We funded our asset growth in 2001 with a $54,989,000 or 18%
increase in deposits and a $35,201,000 or 244% increase in borrowings.
Shareholders' equity grew $3,154,000 or 19% to $19,609,000 at December 31, 2001.
This increase was attributable to $2,534,000 in earnings, $338,000 in common
stock option exercises and a $282,000 increase in the estimated fair value of
investment securities available for sale, net of tax.

INVESTMENT SECURITIES

Investment policies and applicable legal restrictions dictate permissible
investment categories, credit quality, maturity intervals and investment
concentrations. Management is responsible for making specific investment
purchases within these standards. The carrying value of investment securities at
December 31, 2002 totaled $203,141,000 or 33% of total assets. At December 31,
2002 approximately 55% of the investment portfolio was comprised of
mortgage-backed securities which amortize and provide monthly cash flow to
reinvest. Corporate bonds and municipal bonds comprised 35% and 6% of the
investment portfolio, respectively. At December 31, 2002, approximately 66% of
the investment portfolio was fixed rate compared to 82% at December 31, 2001.

Management buys and sells investment securities from time to time depending
on market conditions, business trends, liquidity and capital levels. Investment
purchases provide a way to add assets quickly and generate additional earnings.
The bank generally earns a positive interest spread by assuming interest rate
risk and using deposits and borrowings to purchase securities with longer
maturities.

Management classifies investment securities at the time of purchase by one
of three categories: trading, available for sale (AFS) or, held to maturity
(HTM). To date, management has not purchased any securities for trading
purposes. Management classifies most of its securities as AFS. The AFS
designation affords management the flexibility to sell securities and adjust the
balance sheet in response to capital levels, liquidity needs and/or changes in
market conditions. AFS securities are marked to market in the Consolidated
Balance Sheets with an adjustment to equity, net of tax, and presented in the
caption "Accumulated other comprehensive income (loss)."

During 2002, we utilized excess liquidity to grow and restructure our
investment portfolio. Our investment portfolio, exclusive of the SFAS 115
valuation allowance, grew $100,206,000 or 97% in 2002. The yield on our
investment portfolio declined in 2002 as a result of significant investing in a
low interest rate environment.

Mortgage backed securities, exclusive of the SFAS 115 valuation allowance,
grew $67,241,000 in 2002. We purchased and sold approximately $94,694,000 and
$36,119,000, respectively, of mortgage-backed securities in 2002. We also
purchased $5,000,000 of a mutual fund that invests principally in adjustable
rate mortgage-backed securities.

Corporate bonds, exclusive of the SFAS 115 valuation allowance, grew
$35,601,000 in 2002. We purchased and sold approximately $56,460,000 and
$20,731,000, respectively, of corporate bonds in 2002. We significantly reduced
our holdings in single issuer fixed rate trust preferred securities issued by
other banking companies. Prior to 2002, the corporate bond portfolio consisted
primarily of single issuer trust preferred securities. We also grew and
diversified our corporate bond portfolio in 2002 by purchasing pooled trust
preferred securities issued by various financial companies and intermediate term
corporate bonds issued by investment grade companies. The variable rate
component of our corporate bond portfolio increased from $9,855,000 or 30% at
December 31, 2001 to $35,764,000 or 51% at December 31, 2002.

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At December 31, 2002 the AFS portfolio had an estimated market appreciation
of $36,000 before tax and an equity adjustment of $24,000, net of tax. This
represents a $3,025,000 improvement in the estimated fair value of AFS
securities, net of tax, over the prior year end due to lower interest rates and
the aforementioned restructuring of our portfolio. At December 31, 2001 the AFS
portfolio had an estimated unrealized loss of $4,548,000, before tax, and an
equity adjustment of $3,001,000, net of tax. This was a $282,000 or 9%
improvement in the estimated fair value of AFS securities, net of tax, compared
to December 31, 2000. At December 31, 2000 the AFS portfolio had an estimated
unrealized loss of $4,975,000, before tax, and an equity adjustment of
$3,283,000, net of tax.

At December 31, 2002, 2001, and 2000 gross unrealized losses on our single
issuer trust preferred securities were $1,802,000, $3,848,000 and $3,808,000,
respectively. Management evaluated the credit quality of single issuer trust
preferred securities prior to purchasing them and monitors them on an ongoing
basis. Management believes that the credit quality of these securities is sound
and that the company will ultimately be repaid. Therefore, management views the
unrealized loss in the market value of single issuer trust preferred securities
temporary. If, at some future date, management believes that this loss is other
than temporary or that the recovery of the unrealized loss on these securities
is not probable, we will recognize the loss through earnings which will reduce
regulatory capital.

The composition and maturity of our investment portfolio is as follows.