SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number: 0-12826
TOWER BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1445946
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Center Square, Greencastle, Pennsylvania 17225
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (717) 597-2137
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, Par Value $ 2.50 The Common Stock is not
Per Share registered on any exchange.
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 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
As of December 31, 1996, 840,213 shares of the registrant's
common stock were outstanding. The aggregate market value
of such shares held by nonaffiliates on that date was
$ 28,567,242.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year
ended December 31, 1996 are incorporated by reference into
Parts I and II. Portions of the Proxy Statement for 1997
Annual Meeting of Security Holders are incorporated by
reference in Part III of this Form 10-K.
- -1-
Item 1. Business.
History and Business
Tower Bancorp, Inc. ("Tower") is a bank holding
company registered under the Bank Holding Company Act of
1956, as amended. Tower was organized on October 12, 1983,
under the laws of the Commonwealth of Pennsylvania for the
purpose of acquiring The First National Bank of Greencastle,
Greencastle, Pennsylvania ("First") and such other banks and
bank related activities as are permitted by law and
desirable. On June 1, 1984, Tower acquired 100% ownership
of The First National Bank of Greencastle, issuing 159,753
shares of Tower's common stock to the former First
shareholders.
In April of 1991, Tower sold 335 shares of its
common stock that were held as Treasury Stock increasing the
total number of outstanding shares at December 31, 1991 to
349,436. During 1992 Tower acquired 2,512 shares of its
common stock and sold 1,850 shares of its common stock that
was held as Treasury Stock to First's ESOP plan, decreasing
the total number of shares outstanding at December 31, 1992
to 348,774. During 1993 Tower acquired 2,400 shares of its
common stock and sold 1,662 shares of its common stock that
was held as treasury stock to First's ESOP plan, decreasing
the total number of shares outstanding at December 31, 1993
to 348,036. During 1994 Tower acquired 1,634 shares of its
own common stock and sold 1,841 shares of its common stock
that was held as treasury stock to First's ESOP plan. Tower
- -2-
also issued a 10% stock dividend on July 15, 1994 of 34,662
shares, increasing the total number of shares outstanding at
December 31, 1994 to 382,875.
During 1995 Tower acquired 667 shares of its own
common stock and sold 2,931 shares of its common stock that
was held as treasury stock to First's ESOP plan and 144
shares to First's president as part of a stock option plan.
Tower also issued a 10% stock dividend on July 7, 1995 of
38,202 shares, increasing the total number of shares
outstanding at December 31, 1995 to 423,485.
During 1996 Tower acquired 6,475 shares of its own
common stock and sold 1,394 shares of its own common stock
that was held as treasury stock to First's ESOP plan, and
324 shares to First's president as part of a stock option
plan. Tower also issued a 100% stock dividend on April 15,
1996 of 424,090 shares, increasing the total number of
shares outstanding at December 31, 1996 to 840,213.
Tower's primary activity consists of owning and
supervising its subsidiary, The First National Bank of
Greencastle, which is engaged in providing banking and bank
related services in South Central Pennsylvania, principally
Franklin County, where its four branches are located in
Quincy, Shady Grove, Mercersburg and Laurich, as well as its
main office in Greencastle, Pennsylvania. The day-to-day
management of First is conducted by the subsidiary's
officers. Tower derives the majority of its current income
from First.
- -3-
Tower has no employees other than its four
officers who are also employees of First, its subsidiary.
On December 31, 1996, First had 61 full-time and 15 part-
time employees.
Tower contemplates that in the future it will
evaluate and may acquire, or may cause its subsidiaries to
acquire, other banks. Tower also may seek to enter
businesses closely related to banking or to acquire existing
companies already engaged in such activities. Any
acquisition by Tower will require prior approval of the
Board of Governors of the Federal Reserve System, the
Pennsylvania Department of Banking, and, in some instances,
other regulatory agencies and its shareholders. During 1996
Tower secured approval and purchased property for use as a
possible future branch office, in Washington County,
Maryland.
Business of First
First was organized as a national bank in 1983 as
part of an agreement and plan of merger between Tower and
The First National Bank of Greencastle, the predecessor of
First, under which First became a wholly-owned subsidiary of
Tower. As indicated, First is the successor to The First
National Bank of Greencastle which was originally organized
in 1864.
First is engaged in commercial banking and trust
business as authorized by the National Bank Act. This
involves accepting demand, time and savings deposits and
- -4-
granting loans (consumer, commercial, real estate, business)
to individuals, corporations, partnerships, associations,
municipalities and other governmental bodies.
Through its trust department, First renders
services as trustee, executor, administrator, guardian,
managing agent, custodian, investment advisor and other
fiduciary activities authorized by law.
As of December 31, 1996, First had total assets of
approximately $ 149 million, total shareholders' equity of
approximately $ 18 million and total deposits of
approximately $ 127 million.
Regulation and Supervision
Tower Bancorp, Inc. (Tower) is a bank holding
company within the meaning of the Bank Holding Company Act
of 1956 (BHC Act), and is registered as such with the Board
of Governors of the Federal Reserve System (FRB). As a
registered bank holding company, the parent company is
required to file with the FRB certain reports and
information. Tower is also subject to examination by the
FRB and is restricted in its acquisitions, certain of which
are subject to approval by the FRB. In addition, the parent
company would be required to obtain the approval of the
Pennsylvania State Banking Department in order for it to
acquire certain bank and nonbank subsidiaries.
Under the BHC Act, a bank holding company is, with
limited exceptions, prohibited from (i) acquiring direct or
indirect ownership or control of more than 5% of the voting
- -5-
shares of any company which is not a bank or (ii) engaging
in any activity other than managing or controlling banks.
With the prior approval of the FRB, however, a bank holding
company may own shares of a company engaged in activities
which the FRB determines to be so closely related to banking
or managing or controlling banks as to be a proper incident
thereto. In addition, federal law imposes certain
restrictions on transactions between Tower and its
subsidiary, First National Bank of Greencastle (First). As
an affiliate of First, Tower is subject, with certain
exceptions, to provisions of federal law imposing
limitations on, and requiring collateral for, extensions of
credit by First to its affiliates.
The operations of First are subject to federal and
state statutes applicable to banks chartered under the
banking laws of the United States, to members of the Federal
Reserve System and to banks whose deposits are insured by
the Federal Deposit Insurance Corporation. Bank operations
are also subject to regulations of the Office of the
Comptroller of the Currency, the Federal Reserve Board and
the Federal Deposit Insurance Corporation.
The primary supervisory authority of First is the
Office of the Comptroller of the Currency (OCC), who
regularly examines such areas as reserves, loans,
investments, management practices and other aspects of bank
operations. These examinations are designed primarily for
the protection of the Bank depositors.
- -6-
Federal and state banking laws and regulations
govern, among other things, the scope of a bank's business,
the investments a bank may make, the reserves against
deposits a bank must maintain, the loans a bank makes and
collateral it takes, the maximum interest rates a bank may
pay on
deposits, the activities of a bank with respect to mergers
and consolidations, and the establishment of branches, and
management practices and other aspects of banking
operations. See Note 15 of the Notes to Financial
Statements for a discussion of the limitations on the
availability of Tower's subsidiary's undistributed earnings
for the payment of dividends due to such regulation and
other reasons.
The Financial Institutions Reform, Recovery and
Enforcement Act of 1989(FIRREA) provides among other things
that a financial institution insured by the Federal Deposit
Insurance Corporation(FDIC) sharing common ownership with a
failed institution can be required to indemnify the FDIC for
its losses resulting from the insolvency of the failed
institution, even if such indemnification causes the
affiliated institution also to become insolvent. Tower
currently has only one subsidiary and as a result has not
been significantly affected by the aforementioned provisions
of FIRREA.
- -7-
The OCC issued guidelines which, effective
December 31, 1990, imposed upon national banks new risk-
based capital and leverage standards. These new capital
requirements of bank regulators, are discussed on page 43
under "Capital Funds". Failure to meet applicable capital
guidelines could subject a national bank to a variety of
enforcement remedies available to the federal regulatory
authorities. Depending upon circumstances, the regulatory
agencies may require an institution to surpass minimum
capital ratios established by the OCC and the FRB.
In December 1991, the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") was enacted.
Among other things, FDICIA provides increased funding for
the Bank Insurance Fund of the FDIC by granting authority
for special assessments against insured deposits through a
general risk-based assessment systems. The FDICIA also
contains provisions limiting activities and business methods
of depository institutions. FDICIA requires the primary
federal banking regulators to promulgate regulations setting
forth standards relating to, among other things, internal
controls and audit systems; credit underwriting and loan
documentation; interest rate exposure and other off-balance
sheet assets and liabilities; and compensation of directors
and officers. FDICIA also contains provisions limiting the
acceptance of brokered deposits by certain depository
institutions, placing restrictions on the terms of "bank
investment contracts" that may be offered by depository
- -8-
institutions and provisions requiring the FDIC to study the
current rules applicable to the aggregation of accounts of
depositors at an institution that are entitled to FDIC
insurance. Finally, FDICIA provides for expanded regulation
of depository institutions and their affiliates, including
parent holding companies, by such institutions' primary
federal banking regulator. Each primary federal banking
regulator is required to specify, by regulation, capital
standards for measuring the capital adequacy of the
depository institutions it supervises and, depending upon
the extent to which a depository institution does not meet
such capital adequacy measures, the primary federal banking
regulator may prohibit such institution from paying
dividends or may require such institution to take other
steps to become adequately capitalized.
FDICIA establishes five capital tiers, ranging
from "well capitalized", to "critically undercapitalized".
A depository institution is well capitalized if it
significantly exceeds the minimum level required by
regulation for each relevant capital measure. Under FDICIA,
an institution that is not well capitalized is generally
prohibited from accepting brokered deposits and offering
interest rates on deposits higher than the prevailing rate
in its market; in addition, "pass through" insurance
coverage may not be available for certain employee benefit
accounts. FDICIA also requires an undercapitalized
depository institution to submit an acceptable capital
restoration plan to the appropriate federal bank regulatory
- -9-
agency. One requisite element of such a plan is that the
institution's parent holding company must guarantee
compliance by the institution with the plan, subject to
certain limitations. In the event of the parent holding
company's bankruptcy, the guarantee, and any other
commitments that the parent holding company has made to
federal bank regulators to maintain the capital of its
depository institution subisidaries, would be assumed by the
bankruptcy trustee and entitled to priority in payment.
Based on their respective regulatory capital
ratios at December 31, 1996, the Bank is considered well
capitalized, based on the definitions in the regulations
issued by the Federal Reserve Board and the other federal
bank regulatory agencies setting forth the general capital
requirements mandated by FDICIA. See "Capital Funds" on
page 43 for information regarding the Bank's regulatory
capital ratios.
The earnings of First, and therefore the earnings
of Tower, are affected by general economic conditions,
management policies, and the legislative and governmental
actions of various regulatory authorities
including the FRB, the OCC and the FDIC. In addition, there
are numerous governmental requirements and regulations that
affect the activities of Tower.
Competition
First's principal market area consists of the
southern portion of Franklin County, Pennsylvania, the
- -10-
northeastern portion of Washington County, Maryland, and a
portion of Fulton County, Pennsylvania. It services a
substantial number of depositors in this market area, with
the greatest concentration within a limited radius of
Greencastle, Pennsylvania.
First, like other depository institutions, has
been subjected to competition from less heavily regulated
entities such as brokerage firms, money market funds,
consumer finance and credit card companies and other
commercial banks, many of which are larger than First.
First is generally competitive with all competing financial
institutions in its service area with respect to interest
rates paid on time and savings deposits, service charges on
deposit accounts and interest rates charged on loans.
Item 2. Properties.
The First National Bank of Greencastle owns
buildings at Center Square, Greencastle, Pennsylvania (its
corporate headquarters); Shady Grove, Pennsylvania; 4136
Lincoln Way West, (Laurich Branch), Chambersburg,
Pennsylvania; and in Quincy, Pennsylvania. In addition,
First leases approximately 1,500 square feet in a building
located at 305 North Main Street, Mercersburg, Pennsylvania.
Offices of the bank are located in each of these buildings.
First also owns a building at 18233 Maugans Avenue in
Washington County, Maryland which may be used as a branch
office at some point in the future.
- -11-
Item 3. Legal Proceedings.
Tower is an occasional party to legal actions
arising in the ordinary course of its business. In the
opinion of Tower's management, Tower has adequate legal
defenses and/or insurance coverage respecting any and each
of these actions and does not believe that they will
materially affect Tower's operations or financial position.
Item 4. Submission of Matters to Vote of Security Holders.
None
Part II
Item 5. Market for Registrant's Common Stock and Related
Security Holder Matters.
Tower's common stock is not traded on a national
securities exchange, but is traded inactively through the
local and over-the-counter local markets. At December 31,
1996, the approximate number of shareholders of record was
932. The price ranges for Tower common stock set forth
below are the approximate bid prices obtained from brokers
who make a market in the stock and don't reflect prices in
actual transactions.
<TABLE>
<S> <C> <C> <C>
Cash Dividends
Period Paid Market Price
1996 (1)1st Quarter $ 0 $ 22.50 - $ 26.50
2nd Quarter .20 26.00 - 28.00
3rd Quarter 0 33.50 - 36.00
4th Quarter .45 34.25 - 34.75
1995 (1)1st Quarter $ 0 $ 22.50 - $ 23.00
2nd Quarter .18 24.00 - 24.00
3rd Quarter 0 22.50 - 24.00
4th Quarter .40 22.50 - 22.50
</TABLE>
(1) Note: Market prices and cash dividends were
based on weighted average shares of
common stock outstanding after giving
retroactive recognition to a 100% stock
dividend in April 1996 and a 10% stock
dividend in July 1995.
- -12-
Item 6. Selected Financial Data.
<TABLE>
1996 1995 1994 1993 1992
Income (000 omitted)
<S> <C> <C> <C> <C> <C>
Interest income $ 11,156 $ 11,002 $ 9,666 $ 9,034 $ 9,676
Interest expense 4,811 4,703 3,661 3,585 4,393
Provision for
loan losses 0 0 13 235 290
Net interest
income after
provision for
loan losses 6,345 6,299 5,992 5,214 4,993
Other operating
income 990 719 697 735 809
Other operating
expenses 4,055 3,921 3,824 3,576 3,836
Income before
income taxes 3,280 3,097 2,865 2,373 1,966
Applicable income
tax(benefit) 944 812 748 684 473
Net income $ 2,336 $ 2,285 $ 2,117 $ 1,689 $ 1,493
</TABLE>
Per share amounts are based on the following weighted
average shares outstanding after giving retroactive
recognition to a 100% stock dividend issued April 15, 1996
and a 10% stock dividend issued in July 1995 and 1994:
1996 - 843,402 1994 - 843,867 1992 - 848,005
1995 - 845,172 1993 - 846,282
<TABLE>
1996 1995 1994 1993 1992
Income (000 omitted)
<S> <C> <C> <C> <C> <C>
Net income $ 2.77 $ 2.70 $ 2.51 $ 1.96 $ 1.76
Cash dividend
paid .65 .58 .49 .43 .40
Book value 20.99 19.11 15.81 14.56 13.01
Year-End Balance Sheet Figures
(000 omitted)
Total assets$ 148,673 $ 139,182 $ 135,378 $ 125,495 $ 120,435
Net loans 99,094 93,905 93,282 84,750 77,048
Total
investment
securities 37,673 33,733 30,841 29,687 30,030
Deposits-
noninterest
bearing 7,959 8,201 7,308 7,542 6,306
Deposits-
interest
bearing 118,645 111,559 106,906 101,742 100,587
Total deposits 126,604 119,760 114,214 109,284 106,893
Total stock-
holders'
equity 17,704 16,148 13,343 12,319 11,029
</TABLE>
- -13-
<TABLE>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Ratios
Average equity/
average assets 11.76 10.74 9.84 9.62 9.10
Return on
average equity 13.80 15.49 16.50 14.46 14.26
Return on
average assets 1.62 1.67 1.62 1.39 1.29
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Management's discussion and analysis of financial
condition and results of operations on pages 39 through 44
of this report for the year ended December 31, 1996 are
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The report of independent auditors and the
following consolidated financial statements and schedules of
Tower are submitted herewith:
Page
Independent Auditor's Report 13
Consolidated balance sheets
December 31, 1996 and 1995 14
Consolidated statements of income
for the years ended December 31,
1996, 1995 and 1994 15
Consolidated statements of changes
in stockholders' equity for the years
ended December 31, 1996, 1995 and 1994 16
Consolidated statements of cash flows
for the years ended December 31,
1996, 1995 and 1994 17 and 18
Notes to consolidated financial
statements 19 - 37
Summary of quarterly financial
data (unaudited) 38
- -14-
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Tower Bancorp Inc.
Greencastle, Pennsylvania
We have audited the accompanying consolidated
balance sheets of Tower Bancorp Inc. and its wholly-owned
subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders'
equity and statements of cash flows for each of the three
years ended December 31, 1996. These consolidated financial
statements are the responsibility of the company's
management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with
generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Tower Bancorp Inc. and
its wholly-owned subsidiary as of December 31, 1996 and
1995, and the results of their operations and their cash
flows for each of the three years ended December 31, 1996 in
conformity with generally accepted accounting principles.
Chambersburg, Pennsylvania
January 30, 1997
- -15-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<S> <C> <C>
ASSETS
1996 1995
(000 omitted)
Cash and due from banks $ 3,034 $ 3,622
Interest bearing deposits with banks 4,071 3,435
Investment Securities
Available for sale 24,322 23,285
Held to maturity, fair value of
$ 9,336 - 1996; $ 8,218 - 1995 9,170 8,011
Other bank stock 4,181 2,437
Loans
Commercial, financial and agricultural 10,009 8,736
Real estate - Mortgages (net of deferred
loan origination fees $ 211 - 1996;
$ 201 - 1995) 78,990 76,624
Real estate - Construction and land
development 2,326 1,494
Consumer 9,716 8,996
101,041 95,850
Less: Allowance for loan losses 1,947 1,945
Total loans 99,094 93,905
Premises, equipment, furniture and
fixtures 1,628 1,830
Real estate owned other than premises 665 319
Prepaid federal taxes 89 107
Accrued interest receivable 948 891
Deferred income tax charges 629 612
Other assets 842 728
Total assets $ 148,673 $ 139,182
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these statements.
- -16-
<TABLE>
<S> <C> <C>
LIABILITIES
1996 1995
(000 omitted)
Deposits in domestic offices
Demand, noninterest bearing $ 7,959 $ 8,201
Savings 54,490 51,312
Time 64,155 60,247
Total deposits 126,604 119,760
Accrued interest payable 409 389
Federal funds purchased 865 486
Liabilities for borrowed money 1,866 1,222
Other liabilities 1,225 1,177
Total liabilities 130,969 123,034
STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock: par value $ 2.50;
authorized 5,000,000 shares, issued
848,180 shares - 1996; 424,090
shares - 1995 2,120 1,060
Additional paid-in capital 5,356 5,354
Retained earnings 10,237 9,508
Unrealized holding gain on
securities available for sale - net
of tax - $ 122 - 1996 and $ 131 -
1995 236 254
17,949 16,176
Less: Cost of Treasury stock, 7,967
shares - 1996; 605 shares - 1995 ( 245) ( 28)
Total stockholders' equity 17,704 16,148
Total liabilities and
stockholders' equity $ 148,673 $ 139,182
</TABLE>
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
(000 omitted)
Interest and Dividend Income
Interest and fees on loans $ 8,809 $ 8,809 $ 7,634
Interest and dividends on
investment securities
Taxable 1,701 1,587 1,443
Federal tax exempt 447 449 449
Interest on federal funds sold 40 57 3
Interest on deposits with banks 159 100 137
Total interest income 11,156 11,002 9,666
Interest Expense
Interest on time certificates of
deposit of $ 100,000 or more 735 588 474
Interest on other deposits 4,011 3,901 3,055
Interest on borrowed money 65 214 132
Total interest expense 4,811 4,703 3,661
Net interest income 6,345 6,299 6,005
Provision for loan losses 0 0 13
Net interest income after
provision for loan losses 6,345 6,299 5,992
Other Income
Trust department income 252 200 190
Service charges on deposit accounts 277 288 269
Other service charges, collection
and exchange charges, commissions
and fees 159 102 103
Investment securities gains 278 118 135
Investment services income 24 0 0
Gain on sale of property, equipment,
furniture & fixtures 0 11 0
990 719 697
Other Expenses
Salaries, wages and other employee
benefits 1,995 1,917 1,836
Occupancy expense 291 258 254
Furniture and equipment expenses 661 640 617
FDIC insurance premiums 2 134 251
Other operating expenses 1,106 972 866
4,055 3,921 3,824
Income before income taxes 3,280 3,097 2,865
Applicable income tax expense 944 812 748
Net income $ 2,336 $ 2,285 $ 2,117
Earnings per share of common stock
Net income $ 2.77 $ 2.70 $ 2.51
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these statements.
- -17-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<S> <C> <C> <C> <C> <C>
Unrealized
Holding Gain (Loss)
Additional on Available
Common Paid-In Retained for Sale Treasury
Stock Capital Earnings Securities Stock
(000 omitted)
Balance at
December 31, 1993 $ 878 $ 2,328 $ 9,221 $ 0 ($ 108)
Net income 0 0 2,117 0 0
Cash dividends declared
on common stock
($ .49 per share) 0 0 ( 415) 0 0
Net unrealized
loss on available
for sale securities 0 0 0 ( 663) 0
Purchase of treasury
stock (1,634 shares) 0 0 0 0 ( 73)
Sale of treasury
stock (1,811 shares) 0 0 0 0 58
Stock dividend
issued 87 1,421 ( 1,508) 0 0
Balance at
December 31, 1994 965 3,749 9,415 ( 663) ( 123)
Net income 0 0 2,285 0 0
Cash dividends
declared on
common stock
($ .58 per share) 0 0 ( 492) 0 0
Purchase of
treasury stock
(667 shares) 0 0 0 0 ( 31)
Sale of treasury
stock (3,075 shares) 0 0 0 0 126
Net unrealized
gain on available
for sale securities 0 0 0 917 0
Stock dividend
issued 95 1,605 ( 1,700) 0 0
Balance at
December 31, 1995 1,060 5,354 9,508 254 ( 28)
Net income 0 0 2,336 0 0
Purchase of
treasury stock
(6,475 shares) 0 0 0 0 ( 275)
Sale of treasury
stock (1,618 shares) 0 2 0 0 58
Cash dividends declared
on common stock
($ .65 per share) 0 0 ( 547) 0 0
Stock dividend
issued 1,060 0 ( 1,060) 0 0
Net unrealized
loss on
available for
sale securities 0 0 0 ( 18) 0
Balance at
December 31, 1996 $ 2,120 $ 5,356 $ 10,237 $ 236 ($ 245)
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -18-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
(000 omitted)
Cash flows from operating activities:
Net income $ 2,336 $ 2,285 $ 2,117
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 249 244 234
Provision for loan losses 0 0 13
(Gain) loss on sale of
investment securities ( 332) ( 118) ( 135)
(Gain) loss on disposal of
property, equipment, furniture
and fixtures 0 ( 11) ( 1)
Provision for deferred
taxes ( 9) 11 ( 14)
(Increase) decrease in:
Other assets ( 140) ( 166) ( 60)
Interest receivable ( 57) ( 75) ( 19)
Prepaid income taxes 18 ( 107) 0
Increase (decrease) in:
Interest payable 20 120 17
Accrued income taxes 0 ( 70) ( 22)
Other liabilities 48 48 ( 167)
Net cash provided by operating
activities 2,133 2,161 1,863
Cash flows from investing activities:
Net (increase) in loans ( 5,189) ( 623) ( 8,545)
Purchases of bank premises,
equipment, furniture and
fixtures ( 47) ( 140) ( 249)
Proceeds from sale of property,
equipment, furniture and
fixtures 0 55 1
Purchases of other real estate ( 346) 0 0
Net (increase) decrease in
interest bearing deposits with
banks ( 636) ( 1,301) 828
Maturity/sales of available for
sale securities 7,931 5,072 4,110
Maturities of held to maturity
securities 1,113 935 920
Purchases of available for sale
securities ( 9,640) ( 6,630) ( 5,505)
Purchases of held to maturity
securities ( 2,257) ( 701) ( 1,480)
Purchase of Federal Home Loan Bank
stock ( 1) ( 37) ( 53)
Purchase of Federal National
Mortgage Association stock ( 750) 0 0
Purchases of Federal Reserve Bank
stock ( 4) 0 0
Net cash (used) by investing
activities ( 9,826) ( 3,370) ( 9,973)
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these statements.
- -19-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<S> <C> <C>
<C> 1996
1995 1994
(000 omitted)
Cash flows from financing activities:
Net increase in deposits $ 6,846 $ 5,546 $ 4,930
Net increase (decrease) in
short-term borrowings 1,023 ( 4,645) 4,101
Purchase of treasury stock ( 275) ( 31) ( 73)
Proceeds from sale of treasury
stock 58 126 58
Cash dividends paid ( 547) ( 492) ( 415)
Net cash provided by financing
activities 7,105 504 8,601
Net increase (decrease) in cash
and cash equivalents ( 588) ( 705) 491
Cash and cash equivalents at
beginning of year 3,622 4,327 3,836
Cash and cash equivalents at end
of year $ 3,034 $ 3,622 $ 4,327
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 4,754 $ 4,583 $ 3,664
Income taxes 911 901 705
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain (loss) on securities available for sale
(net of tax effects) $ 236 $ 254 ($ 663)
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these statements.
- -20-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of Operations
Tower Bancorp's primary activity consists of owning
and supervising its subsidiary, The First National
Bank of Greencastle, which is engaged in providing
banking and bank related services in South Central
Pennsylvania, principally Franklin County. Its
five offices are located in Greencastle, Quincy,
Shady Grove, Laurich and Mercersburg, Pennsylvania.
Principles of Consolidation
The consolidated financial statements include the
accounts of the corporation and its wholly-owned
subsidiary, The First National Bank of Greencastle.
All significant intercompany transactions and
accounts have been eliminated.
During 1990 Antrim-Tower Development Corporation
was formed to be a wholly-owned subsidiary of Tower
Bancorp for the purpose of developing and/or
selling real estate that from time to time may be
conveyed to the Bank as settlement for outstanding
delinquent loans. Antrim-Tower Development
Corporation has not had any development activity
and to date has been an inactive corporation.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual
results could differ from those estimates.
Material estimates that are particularly
susceptible to significant change relate to the
determination of the allowance for losses on loans
and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of
loans. In connection with the determination of the
allowances for losses on loans and foreclosed real
estate, management obtains independent appraisals
for significant properties.
While management uses available information to
recognize losses on loans and foreclosed real
estate, future additions to the allowances may be
necessary based on changes in local economic
- -21-
Note 1. Summary of Significant Accounting Policies
(Continued)
conditions. In addition, regulatory agencies, as
an integral part of their examination process,
periodically review the Corporation's
allowances for losses on loans and foreclosed real
estate. Such agencies may require the Corporation
to recognize additions to the allowances based on
their judgments about information available to them
at the time of their examination. Because of these
factors, management's estimate of credit losses
inherent in the loan portfolio and the related
allowance may change in the near term.
Investment Securities
The Corporation's investments in securities are
classified in three categories and accounted for as
follows:
d Trading Securities. Securities held principally
for resale in the near term are classified as
trading securities and recorded at their fair
values. Unrealized gains and losses on trading
securities are included in other income.
d Securities to be Held to Maturity. Bonds and
notes for which the Corporation has the positive
intent and ability to hold to maturity are
reported at cost, adjusted for amortization of
premiums and accretion of discounts which are
recognized in interest income using the interest
method over the period to maturity.
d Securities Available for Sale. Securities
available for sale consist of bonds and notes not
classified as trading securities nor as
securities to be held to maturity. These are
securities that management intends to use as a
part of its asset and liability management
strategy and may be sold in response to changes
in interest rates, resultant prepayment risk and
other related factors.
Unrealized holding gains and losses, net of tax, on
securities available for sale are reported as a net
amount in a separate component of shareholders'
equity until realized.
Gains and losses on the sale of securities
available for sale are determined using the
specific-identification method.
Fair values for investment securities are based on
quoted market prices.
The Corporation had no trading securities in 1996
and 1995.
- -22-
Note 1. Summary of Significant Accounting Policies
(Continued)
Premises, Equipment, Furniture and Fixtures and
Depreciation
Premises, equipment, and furniture and fixtures are
carried at cost less accumulated depreciation.
Depreciation has been provided generally on the
straight-line method and is computed over the
estimated useful lives of the various assets as
follows:
Years
Premises 15-30
Equipment, furniture and fixtures 3-15
Repairs and maintenance are charged to operations
as incurred.
Other Real Estate Owned
Other real estate owned includes foreclosed
properties for which the institution has taken
physical possession in connection with loan
foreclosure proceedings.
At the time of foreclosure, the real estate is
recorded at the lower of the Bank's cost (loan
balance) or the asset's fair value, less estimated
costs to sell, which becomes the property's new
basis. Any write-downs based on the asset's fair
value at date of acquisition are charged to the
allowance for loan losses. Costs incurred in
maintaining foreclosed real estate and subsequent
write-downs to reflect declines in the fair value
of the property are included in income (loss) on
other real estate owned.
Retirement Plan
The Bank has a target-benefit pension plan which
covers all full-time employees who have attained
the age of twenty (20) and have completed a minimum
of one year of continuous service with the Bank.
The Bank's policy is to fund pension costs accrued.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal,
reduced by unearned discount, deferred loan
origination fees, and an allowance for loan losses.
Unearned discount on installment loans is
recognized as income over the terms of the loans by
the interest method. Interest on other loans is
calculated by using the simple interest method on
daily balances of the principal amount outstanding.
- -23-
Note 1. Summary of Significant Accounting Policies
(Continued)
The allowance for loan losses is established
through a provision for loan losses charged to
expense. Loans are charged against the allowance
for loan losses when management believes that the
collectibility of the principal is unlikely. The
allowance is an amount that management believes
will be adequate to absorb possible losses on
existing loans that may become uncollectible, based
on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take
into consideration such factors as changes in the
nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem
loans, and current economic conditions that may
affect the borrowers' ability to pay.
In accordance with SFAS No. 91 loan origination
fees and certain direct loan origination costs are
being deferred and the net amount amortized as an
adjustment of the related loan's yield. The
Corporation is amortizing these amounts over the
contractual life of the related loans.
Nonaccrual Loans
The accrual of interest income on loans ceases when
principal or interest is past due 90 days or more
and collateral is inadequate to cover principal and
interest or immediately if, in the opinion of
management, full collection is unlikely. Interest
accrued but not collected as of the date of
placement on nonaccrual status is reversed and
charged against current income unless fully
collateralized. Subsequent payments received are
either applied to the outstanding principal balance
or recorded as interest income, depending on
management's assessment of the ultimate
collectibility of principal.
Earnings per Share of Common Stock
Earnings per share of common stock were computed
based on weighted averages of 843,402, 845,172 and
843,867 shares outstanding in 1996, 1995 and 1994,
respectively, after giving retroactive recognition
to a 100% stock dividend issued in April 1996 and
10% stock dividends issued in July 1995 and 1994.
Federal Income Taxes
For financial reporting purposes, the provision for
loan losses charged to operating expense is based
on management's judgment, whereas for federal
income tax purposes, the amount allowable under
present tax law is deducted. Additionally,
deferred compensation is charged to operating
expense in the period the liability is incurred for
financial reporting purposes, whereas, for federal
income tax purposes, these expenses are deducted
- -24-
Note 1. Summary of Significant Accounting Policies
(Continued)
when paid. There are also differences between the
amount of depreciation expensed for tax and
financial reporting purposes. There also exists an
income tax effect caused by the adjustment to fair
value for available for sale securities. As a
result of these timing differences, deferred income
taxes are provided in the financial statements.
See Note 14 for further details.
Cash Flows
For purposes of the Statements of Cash Flows, the
company has defined cash and cash equivalents as
highly liquid debt instruments with maturities of
three months or less. They are included in the
balance sheet captions "cash and due from banks"
and "federal funds sold". As permitted by
Statement of Financial Accounting Standards No.
104, the company has elected to present the net
increase or decrease in deposits in banks, loans
and time deposits in the Statement of Cash Flows.
Fair Values of Financial Instruments
Statement of Financial Accounting Standards No.
107, Disclosures About Fair Value of Financial
Instruments, requires disclosure of fair value
information about financial instruments, whether or
not recognized in the balance sheet. In cases
where quoted market prices are not available, fair
values are based on estimates using present value
or other valuation techniques. Those techniques
are significantly affected by the assumptions used,
including the discount rate and estimates of future
cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not
be realized in immediate settlement of the
instruments. Statement No. 107 excludes certain
financial instruments and all nonfinancial
instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of
the corporation.
The following methods and assumptions were used by
the corporation in estimating fair values of
financial instruments as disclosed herein:
Cash and Cash Equivalents. The carrying amounts
of cash and short-term instruments approximate
their fair value.
- -25-
Note 1. Summary of Significant Accounting Policies
(Continued)
Interest Bearing Balances with Banks. Interest
bearing balances with banks having a maturity
greater than one year have estimated fair values
using discounted cash flows based on current
market interest rates.
Securities to be Held to Maturity and Securities
Available for Sale. Fair values for investment
securities are based on quoted market prices.
Loans Receivable. For variable-rate loans that
reprice frequently and have no significant
change in credit risk, fair values are based on
carrying values. Fair values for fixed rate
loans are estimated using discounted cash flow
analyses, using interest rates currently being
offered for loans with similar terms to
borrowers of similar credit quality. Fair
values for impaired loans are estimated using
discounted cash flow analyses or underlying
collateral values, where applicable.
Deposit Liabilities. The fair values disclosed
for demand deposits are, by definition, equal to
the amount payable on demand at the reporting
date (that is, their carrying amounts). The
carrying amounts of variable-rate, fixed-term
money market accounts and certificates of
deposit approximate their fair values at the
reporting date. Fair values for fixed-rate
certificates of deposits and IRA's are estimated
using a discounted cash flow calculation that
applies interest rates currently being offered
to a schedule of aggregated expected monthly
maturities on time deposits.
Short-Term Borrowings. The carrying amounts of
federal funds purchased, borrowings under
repurchase agreements, and other short-term
borrowings maturing within 90 days approximate
their fair values. Fair values of other short-
term borrowings are estimated using discounted
cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of
borrowing arrangements.
Accrued Interest. The carrying amounts of
accrued interest approximate their fair values.
Off-Balance-Sheet Instruments. The Bank
generally does not charge commitment fees. Fees
for standby letters of credit and their off-
balance-sheet instruments are not
significant.
- -26-
Note 1. Summary of Significant Accounting Policies
(Continued)
Advertising. The Bank expenses advertising
costs as they are incurred. Advertising
expenses for the years ended December 31, 1996,
1995 and 1994 were $ 111,269, $ 118,836 and
$ 98,188, respectively.
Note 2. Investment Securities
The investment securities portfolio is comprised of
securities classified as available for sale and
held to maturity, resulting in investment
securities available for sale being carried at fair
value and investment securities held to maturity
being carried at cost, adjusted for amortization of
premiums and accretions of discounts.
The amortized cost and fair value of investment
securities available for sale at December 31 were:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(000 omitted)
1996
U.S. Treasury
securities $ 698 $ 13 $ 0 $ 711
Obligations of other
U.S. government
agencies 16,018 91 107 16,002
Mortgage-backed
securities 5,429 33 75 5,387
Corporate bonds 818 30 8 840
Equities 999 397 14 1,382
$ 23,962 $ 564 $ 204 $ 24,322
1995
U.S. Treasury
securities $ 1,098 $ 31 $ 1 $ 1,128
Obligations of other
U.S. government
agencies 13,216 178 115 13,279
Mortgage-backed
securities 7,008 44 71 6,981
Corporate bonds 820 41 1 860
Equities 760 289 12 1,037
$ 22,902 $ 583 $ 200 $ 23,285
</TABLE>
- -27-
Note 2. Investment Securities (Continued)
The amortized cost and fair values of investment
securities held to maturity at December 31 were:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(000 omitted)
1996
Obligations of
state and
political
subdivisions $ 9,170 $ 186 $ 20 $ 9,336
1995
Obligations of
state and
political
subdivisions $ 8,011 $ 225 $ 18 $ 8,218
</TABLE>
The amortized cost and fair values of investment
securities available for sale and held to maturity
at December 31, 1996, by expected maturity are
shown below. Expected maturities will differ from
contractual maturities because borrowers may have
the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<S> <C> <C> <C>
<C>
Securities Available Securities Held
for Sale to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
(000 omitted) (000 omitted)
Due in one year
or less $ 2,149 $ 2,139 $ 725 $ 726
Due after one
year through
five years 4,341 4,390 2,816 2,866
Due after five
years through
ten years 10,044 10,039 3,772 3,839
Due after ten
years 1,000 985 1,857 1,905
17,534 17,553 9,170 9,336
Mortgage-backed
securities 5,429 5,387 0 0
Equity
securities 999 1,382 0 0
$ 23,962 $ 24,322 $ 9,170 $ 9,336
</TABLE>
- -28-
Note 2. Investment Securities (Continued)
Proceeds from sales and maturities of investment
securities available for sale during 1996, 1995 and
1994 were $ 7,931,319, $ 5,072,590 and $ 4,110,460,
respectively. Gross realized gains and losses on
those sales and maturities were $ 327,456 and
$ 59,868 for 1996; $ 130,833 and $ 12,834 for 1995;
and $ 145,724 and $ 10,625 for 1994, respectively.
Included in shareholders' equity at December 31,
1996 and 1995 are $ 236,000 and $ 254,000 of net
unrealized gains on securities available for sale,
respectively, net of related tax effects.
Securities carried at $ 13,608,144 and $ 14,638,701
at December 31, 1996 and 1995, respectively, were
pledged to secure public funds and for other
purposes as required or permitted by law.
Other bank stock on the balance sheet includes:
<TABLE>
<S> <C> <C>
1996 1995
Federal Reserve Bank stock $ 81 $ 77
Federal Home Loan Bank stock 591 590
Federal Home Mortgage Bank stock 250 250
Federal Home Loan Mortgage
Association preferred stock 750 0
Atlantic Central Bankers Bank 45 45
Other bank stock 2,464 1,475
$ 4,181 $ 2,437
</TABLE>
Note 3. Allowance for Loan Losses
Activity in the allowance for loan losses is
summarized as follows:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
(000 omitted)
Balance at beginning
of period $ 1,945 $ 1,856 $ 1,560
Recoveries 16 109 301
Provision for possible loan
losses charged to income 0 0 13
Total 1,961 1,965 1,874
Losses 14 20 18
Balance at end of period $ 1,947 $ 1,945 $ 1,856
</TABLE>
The corporation had no impairment of loans in 1996
or 1994.
- -29-
Note 3. Allowance for Loan Losses (Continued)
Impairment of loans during 1995 consisted of one
loan with a carrying value of $ 54,000 at December
31, 1995 which has been recognized in conformity
with FASB Statement No. 114, Accounting by
Creditors for Impairment of Loans. Interest income
of $ 1,500 was recognized on cash payments received
on this loan in 1995. The total allowance for
credit losses related to this loan was $ 20,000 at
December 31, 1995. This loan was more than 180
days delinquent and the Bank subsequently
foreclosed on the loan's collateral.
Note 4. Premises, Equipment, Furniture and Fixtures
<TABLE>
<S> <C> <C> <C>
Accumulated Depreciated
Cost Depreciation Cost
(000 omitted)
Premises (including
land $ 287,000) $ 2,536 $ 1,222 $ 1,314
Equipment, furniture and
fixtures 1,557 1,243 314
Totals, December 31,
1996 $ 4,093 $ 2,465 $ 1,628
Premises (including land
$ 287,000) $ 2,536 $ 1,134 $ 1,402
Equipment, furniture and
fixtures 1,517 1,089 428
Totals, December 31,
1995 $ 4,053 $ 2,223 $ 1,830
</TABLE>
Depreciation expense amounted to $ 249,000 in 1996,
$ 244,000 in 1995 and $ 234,000 in 1994.
Note 5. Real Estate Owned Other Than Premises
Included in real estate owned other than premises
are certain properties which are located adjacent
to the main office, and property in Washington
County Maryland. The Bank intends to hold these
properties for future expansion purposes in order
to protect its competitive position, and are
renting certain of these properties until such time
as the Bank decides they are needed. The
depreciated cost of these properties was $ 427,140
and $ 81,000 at December 31, 1996 and 1995,
respectively.
Note 6. Loans to Related Parties
The company's subsidiary has granted loans to the
officers and directors of the company and its
subsidiary and to their associates. Related party
loans are made on substantially the same terms,
including interest rates and collateral, as those
prevailing at the time for comparable transactions
- -30-
Note 6. Loans to Related Parties (Continued)
with unrelated persons and do not involve more than
normal risk of collectibility. The aggregate
dollar amount of these loans was $ 1,204,753 and
$ 1,272,633 at December 31, 1996 and 1995,
respectively. During 1996, $ 994,829 of new loans
were made and repayments totalled $ 1,062,709.
During 1995, $ 627,445 of new loans were made and
repayments totalled $ 754,072.
Outstanding loans to bank employees totalled
$ 2,306,936 and $ 1,641,412 at December 31, 1996
and 1995, respectively.
Note 7. Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of
business to meet the financial needs of its
customers and to reduce its own exposure to
fluctuations in interest rates. These financial
instruments include commitments to extend credit
and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount
recognized in the balance sheets. The contract
amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial
instrument for commitments to extend credit and
standby letters of credit and financial guarantees
written is represented by the contractual amount of
those instruments. The Bank uses the same credit
policies in making commitments and conditional
obligations as it does for on balance sheet
instruments.
<TABLE>
<S> <C> <C>
Contract or Notional Amount
1996 1995
Financial instruments whose
contract amounts represent
credit risk at December 31:
Commitments to extend
credit $ 11,228,809 $ 11,525,604
Standby letters of credit
and financial guarantees
written 1,175,714 1,311,920
$ 12,404,523 $ 12,837,524
</TABLE>
- -31-
Note 7. Financial Instruments With Off-Balance-Sheet Risk
(Continued)
Commitments to extend credit are agreements to lend
to a customer as long as there is no violation of
any condition established in the contract.
Commitments generally have fixed expiration dates
or other termination clauses and may require
payment of a fee. Since many of the commitments
are expected to expire without being drawn upon,
the total commitment amounts do not necessarily
represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's
credit evaluation of the customer. Collateral held
varies, but may include accounts receivable,
inventory, real estate, equipment, and income-
producing commercial properties.
Standby letters of credit and financial guarantees
written are conditional commitments issued by the
Bank to guarantee the performance of a customer to
a third party. Those guarantees are primarily
issued to support public and private borrowing
arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that
involved in extending loans to customers. The Bank
holds collateral supporting those commitments when
deemed necessary by management.
Note 8. Nonaccrual Loans
The following table shows the principal balances of
nonaccrual loans as of December 31:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Nonaccrual loans $ 77,000 $ 135,000 $ 79,000
Interest income that
would have been accrued
at original contract
rates $ 7,409 $ 11,583 $ 9,336
Amount recognized as
interest income 0 0 0
Foregone revenue $ 7,409 $ 11,583 $ 9,336
</TABLE>
Note 9. Retirement Plan
The Bank maintains a target benefit retirement plan
for those employees who meet the eligibility
requirements set forth in the plan. Substantially
all of the Bank's employees are covered by the
plan. The Bank's funding policy is to contribute
- -32-
Note 9. Retirement Plan (Continued)
annually an amount, as determined under plan
provisions, necessary to meet target benefits
established by the plan. Contributions charged to
operations were $ 34,000 for 1996, $ 32,000 for
1995, and $ 39,000 for 1994.
Note 10. Employee Benefit Plans
The Bank maintains a profit-sharing plan for those
employees who meet the eligibility requirements set
forth in the plan. Contributions to the plan are
based on Bank performance and are at the discretion
of the Bank's Board of Directors. Substantially
all of the Bank's employees are covered by the plan
and the contribution charged to operations was
$ 63,000, $ 64,000, and $ 59,000 for 1996, 1995,
and 1994, respectively.
The Bank maintains a deferred compensation plan for
certain key executives and directors, which
provides supplemental retirement and life insurance
benefits. The plan is partially funded by life
insurance on the participants, which lists the bank
as beneficiary. The estimated present value of
future benefits to be paid, which are included in
other liabilities amounted to $ 955,083 and
$ 931,598 at December 31, 1996 and 1995,
respectively. Annual expense of $ 89,427,
$ 120,895, and $ 119,272 was charged to operations
for 1996, 1995 and 1994, respectively.
The Bank maintains an employee stock ownership plan
(ESOP) that generally covers all employees who have
completed one year of service and attained the age
of twenty. Contributions to the plan are
determined annually by the Board of Directors as a
percentage of the participants total earnings. The
payments of benefits to participants are made at
death, disability, termination or retirement.
Contributions to the plan for all employees charged
to operations amounted to $ 127,000, $ 126,000 and
$ 117,000 for 1996, 1995 and 1994, respectively.
The number of shares of the company's stock
acquired for the plan are based upon the fair
market value per share at the end of the year. All
shares held in the plan are considered issued and
outstanding for earnings per share calculations and
all dividends earned on ESOP shares are charged
against retained earnings, the same as other
outstanding shares.
- -33-
Note 11. Stock Option Plans
At December 31, 1996 the Bank had two nonqualified
stock option plans, which are described below. The
Bank accounts for the fair value of grants under
those plans in accordance with Statement of
Financial Accounting Standards (SFAS) Statement
123, Accounting for Stock- Based Compensation. The
compensation cost that has been charged against
income for those plans was $ 8,262 for 1996.
The first plan is for select key employees. This
plan granted options for up to 324 shares at a
purchase price of $ 1.00 per share. These options
can be exercised only by the key employee during
his/her lifetime.
The second plan is for outside directors. This
plan granted options of 324 shares for each
director at $ 25.00 per share which was based on
the fair value of the stock at the grant date.
Options are vested one year following the grant
date and expire upon the earlier of 120 months
following the date of the grant or one year
following the date on which a director ceases to
serve in such a capacity for the corporation.
A summary of the status of the company's two fixed
stock option plans as of December 31, 1996 is as
follows:
<TABLE>
<S> <C> <C> <C>
Weighted Average
Fixed Options Shares Exercise Price
Outstanding at beginning of year 0 $ 0
Granted 2,592 22
Exercised 324 1
Forfeited 0 0
Outstanding at end of year 2,268 25
Options exercisable at year
end 0
Weighted average fair value
of options granted during
the year $ 25
</TABLE>
Note 12. Deposits
Included in savings deposits at December 31 are NOW
and Money Market Account balances totalling
$ 30,123,000 and $ 27,104,000 for 1996 and 1995,
respectively.
Time deposits of $ 100,000 and over aggregated
$ 13,969,000 and $ 11,469,000 at December 31, 1996
and 1995, respectively.
- -34-
Note 12. Deposits (Continued)
At December 31, 1996 scheduled maturities of time
deposits are as follows:
<TABLE>
<S> <C> <C>
1997 $ 40,041,099
1998 17,590,549
1999 2,991,191
2000 2,693,988
2001 838,105
$ 64,154,932
</TABLE>
The bank accepts deposits of the officers,
directors, and employees of the corporation and its
subsidiary on the same terms, including interest
rates, as those prevailing at the time for
comparable transactions with unrelated persons.
The aggregate dollar amount of deposits of officers
and directors totaled $ 1,571,913 and $ 1,544,533
at December 31, 1996 and 1995, respectively.
Note 13. Liabilities for Borrowed Money
At December 31, 1996 and 1995, $ 878,000 and
$ 669,000, respectively of the balance of
liabilities for borrowed money represents the
outstanding balance on lines of credit at other
area banks. Total amount of the lines at
December 31, 1996 was $ 1,500,000. Interest on
these lines ranged from 7.75% to 8.75% for 1996 and
1995.
During 1989, the Bank purchased a property adjacent
to the Greencastle office for $ 265,000 by paying
$ 65,000 in cash and issuing a note payable to the
sellers for $ 200,000. The note, which bears
interest at 9% per year, is due on demand or
January 31, 1999, whichever is earlier.
In addition, $ 787,000 and $ 353,000 of the balance
of liabilities for borrowed money at December 31,
1996 and 1995, respectively, represents the balance
of the Treasury Tax and Loan Investment Program.
The Bank elected to enter into this program in
accordance with federal regulations. This program
permits the Bank to borrow these Treasury Tax and
Loan funds by executing an open-ended interest
bearing note to the Federal Reserve Bank. Interest
is payable monthly and is computed at 1/4% below
the Federal Funds interest rate. The note is
secured by U.S. Government obligations with a par
value of $ 600,000 and $ 900,000 at December 31,
1996 and 1995, respectively.
- -35-
Note 13. Liabilities for Borrowed Money (Continued)
The Bank also has available a line of credit
totalling $ 5,439,000 with The Federal Home Loan
Bank of Pittsburgh. There have been no borrowings
against the line and the entire amount was
available at December 31, 1996. Collateral for the
line consists of all bank assets, with a book value
of approximately $ 149,000,000.
Note 14. Income Taxes
The components of federal income tax expense are
summarized as follows:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
(000 omitted)
Current year provision $ 826 $ 762 $ 716
Deferred income taxes (benefit) ( 8) 10 ( 14)
Applicable income taxes 818 772 702
Add: Income tax effect of
securities gains 126 40 46
Net income tax expense $ 944 $ 812 $ 748
</TABLE>
Federal income taxes were computed after reducing
pretax accounting income for non-taxable income in
the amount of $ 547,946, $ 742,135, and $ 748,050
for 1996, 1995 and 1994, respectively.
A reconciliation of the effective applicable income
tax rate to the federal statutory rate is as
follows:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
Nontaxable interest income and other
timing differences 5.2 7.8 7.9
Effective income tax rate 28.8% 26.2% 26.1%
</TABLE>
Deferred tax assets have been provided for
deductible temporary differences in allowance for
loan loss, deferred compensation, interest on
nonaccrual loans, and unrealized losses on
securities available for sale. Deferred tax
liabilities have been provided for taxable
temporary differences related to depreciation and
unrealized gains on securities available for sale.
The net deferred tax assets included in other
assets in the accompanying balance sheets at
December 31 are as follows:
- -36-
Note 14. Income Taxes (Continued)
<TABLE>
<S> <C> <C>
1996 1995
Total deferred tax assets $ 756 $ 755
Total deferred tax liabilities ( 127) ( 143)
Net deferred tax assets $ 629 $ 612
</TABLE>
The company has not recorded a valuation allowance
for the deferred tax assets as they feel that it is
more likely than not that they will be ultimately
realized.
Note 15. Tower Bancorp Inc. (Parent Company Only) Financial
Information
The following are the condensed balance sheets,
income statements, and statements of cash flows for
the parent company:
<TABLE>
<S> <C> <C> <C>
Balance Sheets
December 31
Assets
1996 1995
(000 omitted)
Cash $ 2 $ 2
Securities available for sale 1,383 1,036
Other bank stock 2,464 1,475
Investment in The First National
Bank of Greencastle 14,883 14,414
Total assets $ 18,732 $ 16,927
Liabilities
Other liabilities $ 149 $ 110
Notes payable 879 669
Total liabilities 1,028 779
Stockholders' Equity
Capital stock, par value $ 2.50;
authorized 5,000,000 shares,
issued 848,180 shares - 1996;
424,090 shares - 1995 2,120 1,060
Additional paid-in capital 5,356 5,354
Retained earnings 10,237 9,508
Unrealized gain on investment
securities available for sale 236 254
17,949 16,176
Less: Cost of Treasury stock, 7,967
shares - 1996; 605 shares -
1995 ( 245) ( 28)
Total stockholders' equity 17,704 16,148
Total liabilities and
stockholders' equity $ 18,732 $ 16,927
</TABLE>
- -37-
Note 15. Tower Bancorp Inc. (Parent Company Only) Financial
Information (Continued)
Statements of Income
Years Ended December 31
<TABLE>
<S> <C> <C> <C> <C>
1996 1995 1994
(000 omitted)
Income
Dividends $ 95 $ 65 $ 42
Net gain on sale of
securities 332 129 134
Cash dividends from
wholly-owned
subsidiary 1,507 727 490
1,934 921 666
Expenses
Interest 45 35 11
Commissions 26 11 10
Taxes 24 12 8
Postage and printing 10 11 8
Meetings 2 2 2
Management fees 40 35 35
Professional fees 8 19 4
155 125 78
Income before equity in
undistributed income 1,779 796 588
Equity in undistributed
income of subsidiary 557 1,489 1,529
Net income $ 2,336 $ 2,285 $ 2,117
</TABLE>
Statements of Cash Flows
Years Ended December 31
<TABLE>
<S> <C> <C> <C> <C>
1996 1995 1994
(000 omitted)
Cash flows from operating
activities:
Net income $ 2,336 $ 2,285 $ 2,117
Adjustments to reconcile net
income to cash provided by
operating activities:
Net gain on sale of
investment
securities ( 332) ( 129) ( 134)
Equity in undistributed
income of
subsidiary ( 557) ( 1,489) ( 1,529)
Increase in accrued
expenses 3 9 8
Net cash provided by operating
activities 1,450 676 462
</TABLE>
- -38-
Note 15. Tower Bancorp Inc. (Parent Company Only) Financial
Information (Continued)
<TABLE>
<S> <C> <C> <C> <C>
1996 1995 1994
(000 omitted)
Cash flows from investing
activities:
Purchase of investment
securities ($ 2,463) ($ 976) ($ 650)
Sales of investment
securities 1,567 329 347
Net cash (used) by investing
activities ( 896) ( 647) ( 303)
Cash flows from financing activities:
Purchase of treasury
stock ( 275) ( 31) ( 73)
Proceeds from sale of
treasury stock 58 126 58
Dividends paid ( 547) ( 492) ( 415)
Net proceeds from short-
term borrowing 210 366 265
Net cash (used) by financing
activities ( 554) ( 31) ( 165)
Net (decrease) in cash 0 ( 2) ( 6)
Cash, beginning 2 4 10
Cash, ending $ 2 $ 2 $ 4
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 45 $ 35 $ 11
Income taxes 15 12 1
</TABLE>
Dividends paid by Tower Bancorp Inc. are generally
provided from the Bank's dividends to Tower. The
Federal Reserve Board, which regulates bank holding
companies, establishes guidelines Which indicate
that cash should be covered by current year
earnings and the debt to equity ratio of the
holding company must be below thirty percent. The
Bank, as a national bank, is subject to the
dividend restrictions set forth by the Comptroller
of the Currency. Under such restrictions, the Bank
may not, without prior approval of the Comptroller
of the Currency, declare dividends in excess of the
sum of the current year's earnings (as defined)
plus retained earnings (as defined) from the prior
two years. The dividends as of December 31 that
the Bank could declare without approval of the
Comptroller of the Currency, amounted to
approximately $ 4,291,026 and $ 5,278,565 for 1996
and 1995, respectively.
- -39-
Note 16. Compensating Balance Arrangements
Included in cash and due from banks are required
deposit balances at the Federal Reserve of
$ 100,000 at both December 31, 1996 and 1995 and
required deposit balances at Atlantic Central
Banker's Bank of $ 300,000 and $ 500,000 at
December 31, 1996 and 1995, respectively. These
are maintained to cover processing costs and
service charges.
Note 17. Concentration of Credit Risk
The Bank grants agribusiness, commercial and
residential loans to customers throughout the
Cumberland Valley area. Although the Bank has a
diversified loan portfolio, a substantial portion
of its customers' ability to honor their contracts
is dependent upon the agribusiness economic sector.
The following is a summary of the loans to the
agribusiness sector at December 31, 1996:
<TABLE>
<S> <C> <C>
Loans to finance agricultural
production and loans to farmers
($ 6,110,099 secured by real estate) $ 6,534,914
</TABLE>
The Bank evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Bank upon the
extension of credit is based on management's credit
evaluation of the customer. Collateral held
varies, but generally includes equipment and real
estate.
Note 18. Operating Lease Commitment
The corporation leases its facilities in
Mercersburg under a noncancelable operating lease
that expires in 2002. Total rent expense charged
to operations was $ 15,000 for both 1996, 1995 and
1994.
The corporation also leases a site for an Automatic
Teller Machine under a noncancelable operating
lease that expires in 2003 with the right to
negotiate an extended lease of two additional five
year terms. Total rent expense charged to
operations was $ 9,000 for 1996 and 1995. The
lease rental for the second five years of the
initial term is subject to negotiation.
- -40-
Note 18. Operating Lease Commitment (Continued)
Following is a schedule, by years, of future
minimum rentals under the lease agreements as of
December 31, 1996:
<TABLE>
<S> <C> <C>
Year Ending
1997 $ 24,250
1998 25,500
1999 25,500
2000 25,500
2001 25,500
Thereafter 25,750
$ 152,000
</TABLE>
Note 19. Fair Value of Financial Instruments
The estimated fair values of the Corporation's
financial instruments were as follows at
December 31:
<TABLE>
<S> <C> <C> <C> <C>
Carrying Fair Carrying Fair
Amount Value Amount Value
- - - - 1996 - - - - - - 1995 - - -
FINANCIAL ASSETS
Cash and due from
banks $ 3,034 $ 3,034 $ 3,622 $ 3,622
Interest bearing
deposits with banks 4,071 4,104 3,435 3,499
Securities available
for sale 23,962 24,322 22,902 23,285
Securities to be held
to maturity 9,170 9,336 8,011 8,218
Loans receivable 101,041 102,313 95,850 95,774
Accrued interest
receivable 948 948 891 891
Other bank stock 4,181 4,181 2,437 2,437
FINANCIAL LIABILITIES
Time certificates 64,155 64,241 60,247 61,002
Other deposits 62,449 62,449 59,513 59,513
Short-term borrowed
funds 2,731 2,731 1,708 1,708
Accrued interest
payable 409 409 389 389
</TABLE>
- -41-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for
the years ended December 31, 1996 and 1995 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
1996
($ 000 omitted - - - - - -Quarter Ended- - - - - -
except per share) Mar. 31 June 30 Sept. 30 Dec. 31
Interest income $ 2,731 $ 2,809 $ 2,780 $ 2,836
Interest expense 1,202 1,201 1,216 1,192
Net interest income 1,529 1,608 1,564 1,644
Provision for loan
losses 0 0 0 0
Net interest income
after provision
for loan losses 1,529 1,608 1,564 1,644
Other income 217 238 293 242
Other expenses 964 1,000 993 1,098
Operating income
before income
taxes 782 846 864 788
Applicable income
taxes 217 232 252 243
Net income $ 565 $ 614 $ 612 $ 545
Net income applicable
to common stock
Per share data:
Net income $ .67 $ .72 $ .72 $ .66
</TABLE>
- -42-
<TABLE>
<S> <C> <C> <C> <C>
1995
($ 000 omitted - - - - - -Quarter Ended- - - - - -
except per share) Mar. 31 June 30 Sept. 30 Dec. 31
Interest income $ 2,625 $ 2,755 $ 2,770 $ 2,852
Interest expense 1,083 1,179 1,210 1,231
Net interest income 1,542 1,576 1,560 1,621
Provision for loan
losses 0 0 0 0
Net interest income
after provision
for loan losses 1,542 1,576 1,560 1,621
Other income 182 143 204 190
Other expenses 1,013 1,010 919 979
Operating income
before income
taxes 711 709 845 832
Applicable income
taxes 183 207 247 175
Net income $ 528 $ 502 $ 598 $ 657
Net income applicable
to common stock
Per share data:
Net income $ .62 $ .60 $ .71 $ .77
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be
read in conjunction with the selected supplementary
financial information presented in this report.
OPERATING RESULTS
The results of operations and financial
condition are explained through an analysis of
fluctuations in net interest income and other noninterest
income and expense items.
Net interest income is the difference between
total interest income and total interest expense.
Interest income is generated through earning assets which
include loans, deposits with other banks and investments.
The amount of interest income is dependent on many
factors including the volume of earning assets, the level
of and changes in interest rates, and volumes of
nonperforming loans. The cost of funds varies with the
volume of funds necessary to support earning assets, the
rates paid to maintain deposits, rates paid on borrowed
funds and the level of interest-free deposits.
Net income was $ 2,336,000 in 1996, compared to
$ 2,285,000 in 1995 and $ 2,117,000 in 1994. Net income
on an adjusted per share basis for 1996 was $ 2.77, up
$ .07 from $ 2.70 realized during 1995.
Total interest income increased $ 154,000 from
1995 to 1996 and $ 1,336,000 from 1994 to 1995.
Increases in 1996 were primarily due to volume increases,
while 1995 increases were due to both an increase in
interest rates and average earning assets. Average loans
outstanding in 1996 increased 4.2% over 1995; however,
the loan demand remained relatively flat throughout most
of 1996. This coupled with decreasing rates resulted in
the modest increase in interest income in 1996 as
compared to increases realized in 1995. Total average
earning assets increased 5.4% in 1996 compared to 5.2% in
1995. However, where this growth has occurred directly
impacts the growth in earnings. Increases in earning
assets during 1995 were proportionately higher in loans,
which typically produce higher yields than investments.
During 1996 the increases in earning assets shifted more
toward investments.
Interest from loans accounted for 79% of total
interest income for 1996, as compared to 80% and 78% for
1995 and 1994 respectively. Interest and dividends on
investments amounted to $ 2,148,000 or 19% of interest
income for 1996, as compared to $ 2,036,000 or 18% in
1995 and $ 1,892,000 or 20% in 1994.
- -43-
Total interest expense was $ 4,811,000 for
1996, an increase of $ 108,000 over the $ 4,703,000 for
1995. The increase in total deposits was 5.8% in 1996
compared to 3.9% in 1995. Overall growth was moderate
during 1996 with interest bearing demand, savings
deposits, and time deposits having increased 5.7%. This
even growth in deposits allowed the mix of the deposit
portfolio to remain consisent with 1995. This mix along
with the constant level of rates paid allowed the overall
interest spread to increase to 4.6% for 1996 compared to
4.2% in 1995.
Management continuously monitors liquidity and
interest rate risk through its ALCO reporting, and
reprices products in order to maintain desired net
interest margins. Management expects to continue to
direct its marketing efforts toward attracting more low
cost retail deposits while competitively pricing its time
deposits in order to maintain favorable interest spreads.
The Bank's net charge-offs have historically
been higher than peer group performance. This trend has
improved as certain loan workout situations have
materialized resulting in net recoveries for the third
straight year of $ 3,000 for 1996, $ 89,000 for 1995 and
$ 300,932 for 1994. These net recoveries as well as an
improving loan portfolio have allowed the bank to have a
current year provision of $ 0 for 1996 and 1995 compared
to $ 13,000 in 1994 and $ 235,000 in 1993. The provisions
were based on management's evaluation of the adequacy of
the reserve balance and represent amounts considered
necessary to maintain the reserve at the appropriate
level based on the quality of the loan portfolio and
other economic conditions.
Management has significantly expanded its
detailed review of the loan portfolio, which is performed
quarterly, in an effort to identify and act more readily
on loans with deteriorating trends. As a result,
nonaccrual loans continue to decrease, and were $ 77,000
and $ 135,000 at year-end 1996 and 1995, respectively.
Management is not aware of any other problem loans that
are indicative of trends, events, or uncertainties that
would significantly impact future operations, liquidity
or capital. Management also recognizes the need to
maintain an adequate reserve to meet the constant risks
associated with a growing loan portfolio and an expanding
customer base and intends to continue to maintain the
reserve at appropriate levels based on ongoing
evaluations of the loan portfolio.
Other income represents service charges on
deposit accounts, commissions and fees received for the
sale of travelers' checks, money orders and savings
bonds, fees for trust services, fees for investment
services, securities gains and losses and other income,
- -44-
such as safe deposit box rents. Other income increased
$ 271,000 or 37.7% for 1996 over 1995, and $ 22,000 or
3.2% for 1995 over 1994. The increase in 1996 was
largely due to an increase in investment gains of
$ 160,000, fees on trust services of $ 52,000 and fees on
investment services of $ 24,000.
The noninterest expenses are classified into
five main categories: salaries and employee benefits;
occupancy expenses, which include depreciation,
maintenance, utilities, taxes and insurance; equipment
expenses, which include depreciation, rents and
maintenance; FDIC insurance premiums; and other operating
expenses, which include all other expenses incurred in
operating the Bank and the parent company.
Personnel related expenses increased $ 78,000
or 4.1% in 1996 over 1995, compared to an increase of
$ 81,000 or 4.4% in 1995 over 1994. Occupancy and
equipment expense increased by 6.0% from 1995 to 1996
compared to 3.1% from 1996 to 1995. The Bank expects
noninterest expenses to continue to increase as their
plans to expand take place and additional branches are
opened. The most significant change in noninterest
expenses was for FDIC insurance premiums which decreased
by $ 132,000 or 98.5% in 1996 due to the lowering of this
cost to all banks. The FDIC premiums had decreased by
46.6% in 1995 and increased 4.5% in 1994. Total
noninterest expenses increased 3.4% in 1996, compared to
7.5% and 6.8% in 1995 and 1994, respectively.
Applicable income taxes changed between 1994,
1995 and 1996 as a result of changes in pre-tax
accounting income and taxable income. As described in
Note 1 of the Notes to Consolidated Financial Statements,
deferred income taxes have been provided for timing
differences in the recognition of certain expenses
between financial reporting and tax purposes. Deferred
income taxes have been provided at prevailing tax rates
for such items as depreciation, provision for loan
losses, deferred compensation, interest income on
nonaccrual loans and unrealized gains and losses on
investment securities available for sale as accounted for
under SFAS 115. The marginal tax rate at which deferred
taxes were provided during 1996 and 1995 is 34%. At
December 31, 1996 and 1995, deferred taxes amounted to
$ 629,000 and $ 612,000, respectively. If all timing
differences reversed in 1996, the actual income taxes
saved by the recognition of the aforementioned expenses
would not be significantly different from the deferred
income taxes recognized for financial reporting purposes.
The current level of nontaxable investment and
loan income is such that the Bank is not affected by the
alternative minimum tax rules.
- -45-
Future Impact of Recently Issued Accounting Standards
In June of 1996 the Financial Accounting
Standards Board issued SFAS No. 125 Accounting for
Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. Management has not
concluded on the impact on future operations. This
statement may significantly affect accounting for and
disclosures about certain bank transactions including the
following:
d Assets subject to prepayment risk
d Servicing assets and liabilities
d Securities lending transactions
d Loan participations
d Extinguishment of liabilities
d Collateral controlled by an institution as a
secured party
This statement is effective for transfers and
servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996.
LIQUIDITY
Liquidity and interest rate sensitivity are
related but distinctly different from one another.
Liquidity involves the Bank's ability to meet
cash withdrawal needs of customers and their credit needs
in the form of loans. Liquidity is provided by cash on
hand and transaction balances held at correspondent
banks. Liquidity available to meet credit demands and/or
adverse deposit flows is also made available from sales
or maturities of short-term assets. Additional sources
providing funds to meet credit needs is provided by
access to the marketplace to obtain interest-bearing
deposits and other borrowings.
Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be
analyzed by examining the extent to which such assets and
liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity
"gap". An asset or liability is said to be interest rate
sensitive within a specific time period if it will mature
or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-
bearing liabilities maturing or repricing within that
same time period. A gap is considered positive when the
- -46-
amount of interest-earning assets maturing or repricing
exceeds the amount of interest-bearing liabilities
maturing or repricing within the same period. A gap is
considered negative when the amount of interest-bearing
liabilities maturing or repricing exceeds the amount of
interest-earning assets maturing or repricing within the
same period. Accordingly, in a rising interest rate
environment, an institution with a positive gap would be
in a better position to invest in higher yielding assets
which would result in the yield on its assets increasing
at a pace closer to the cost of its interest-bearing
liabilities, than would be the case if it had a negative
gap. During a period of falling interest rates, an
institution with a positive gap would tend to have its
assets repricing at a faster rate than one with a
negative gap, which would tend to restrain the growth of
its net interest income.
The Bank closely monitors its interest rate
risk as such risk relates to its operational strategies.
The Bank's Board of Directors has established an
Asset/Liability Committee responsible for reviewing its
asset/liability policies and interest rate risk position,
which generally meets monthly and reports to the Board on
interest rate risk and trends on a quarterly basis.
The following table sets forth the amounts of
interest-earning assets and interest-bearing liabilities
outstanding at December 31, 1996 which are anticipated by
the Bank, based upon certain assumptions described below,
to reprice or mature in each of the future time periods
shown. Adjustable-rate assets and liabilities are
included in the table in the period in which their
interest rates can next be adjusted.
Money market NOW and savings accounts have been
included in both rate sensitive liabilities of "Zero - 90
days" and "91 - 360" due to these funds being subject to
immediate withdrawal.
<TABLE>
<S> <C> <C> <C> <C>
Due 0 - 90 Due 91 - Due After
Days 360 Days 1 Year Total
Rate sensitive assets
Interest bearing
deposits with
banks $ 400 $ 986 $ 2,685 $ 4,071
Investment
securities 3,071 1,455 28,966 33,492
Real estate,
commercial
and consumer
loans 25,684 23,219 52,138 101,041
$ 29,155 $ 25,660 $ 83,789 $ 138,604
</TABLE>
- -47-
<TABLE>
<S> <C> <C> <C> <C>
Due 0 - 90 Due 91 - Due After
Days 360 Days 1 Year Total
Rate sensitive liabilities
Certificates of
deposit over
$ 100,000 $ 3,380 $ 6,941 $ 3,648 $ 13,969
Other certificates
of deposit 9,475 21,284 19,427 50,186
Money market
deposit accounts 6,194 3,099 0 9,293
NOW accounts and
other savings
deposits 30,132 15,065 0 45,197
$ 49,181 $ 46,389 $ 23,075 $ 118,645
Cumulative interest
sensitive GAP ($ 20,026) ($ 40,755) $ 19,959
Cumulative interest
sensitive ratio .59 .57 1.17
</TABLE>
CAPITAL FUNDS
Internal capital generation has been the
primary method utilized by Tower Bancorp Inc. to
increase its capital. Stockholders' equity, which
exceeded $ 17.7 million at December 31, 1996 has
steadily increased. Regulatory authorities have
established capital guidelines in the form of the
"leverage ratio" and "risk-based capital ratios." The
leverage ratio compares capital to total balance sheet
assets, while the risk-based ratios compare capital to
risk-weighted assets and off-balance-sheet activity in
order to make capital levels more sensitive to risk
profiles of individual banks. A comparison of Tower
Bancorp's capital ratios to regulatory minimums at
December 31 is as follows:
<TABLE>
<S> <C> <C> <C>
Regulatory Minimum
Tower Bancorp Requirements
1996 1995
Leverage ratio 10.26% 10.50% 4%
Risk-based capital
ratio
Tier I (core
capital) 16.94% 16.34% 4%
Combined Tier I and
Tier II (core
capital plus
allowance for
loan losses) 17.75% 18.28% 8%
</TABLE>
- -48-
Tower Bancorp, Inc. has traditionally been well
above required levels and expects equity capital to
continue to exceed regulatory guidelines. Certain ratios
are useful in measuring the ability of a company to
generate capital internally.
The following chart indicates the growth in
equity capital for the past three years.
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Equity capital at December 31
($ 000 omitted) $ 17,704 $ 16,148 $ 13,343
Equity capital as a percent of
assets at December 31 11.91% 11.60% 9.86%
Return on average assets 1.62% 1.67% 1.62%
Return on average equity 13.80% 15.49% 16.50%
Cash dividend payout ratio 23.42% 21.53% 19.53%
</TABLE>
STOCK MARKET ANALYSIS AND DIVIDENDS
The corporation's common stock is traded
inactively in the over-the-counter market. As of
December 31, 1996 the approximate number of shareholders
of record was 932.
<TABLE>
<S> <C> <C>
<C>
Market Cash
1996 (1) Price Dividend
First Quarter $ 25.50 - 26.50 $ 0
Second Quarter 26.00 - 28.00 .20
Third Quarter 33.50 - 36.00 0
Fourth Quarter 34.25 - 34.75 .45
1995 (1)
First Quarter $ 22.50 - 23.00 $ 0
Second Quarter 24.00 - 24.00 .18
Third Quarter 22.50 - 24.00 0
Fourth Quarter 22.50 - 22.50 .40
</TABLE>
(1) Note: Cash dividends per share were
based on weighted average shares
of common stock outstanding after
giving retroactive recognition to
a 100% stock dividend issued in
April 1996, and a 10% stock
dividend issued in July 1995.
- -49-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
CHANGES IN INCOME AND EXPENSE - 1996 AND 1995
The schedule below reflects comparative changes in
income and expense included in the Consolidated Statements
of Income for 1996 and 1995 together with changes in asset
and liability volumes associated with these income and
expense items.
<TABLE>
<S> <C> <C> <C> <C>
1996 Compared to 1995
Average Volumes Income/Expense
($ 000 omitted) $ % $ %
Loans 3,958 4.2 0 .0
Investment securities 2,532 7.9 112 5.5
Other short-term
investments 582 15.3 42 26.8
Total 7,072 5.4 154 1.4
Interest bearing demand
deposits 1,362 6.9 207 530.7
Savings deposits 1,560 4.9 (187) (195.4)
Time deposits 3,338 5.7 237 7.5
Short-term borrowings ( 1,385) (411.1) (149) ( 69.6)
Total 4,875 4.3 108 2.3
Net interest income 46 .7
Provision for loan losses 0 .0
Net interest income after
provision for loan losses 46 .7
Security transactions 160 135.5
Other operating income 111 18.5
Income before operating expense 271 37.7
Salaries & employee benefits 78 4.1
Occupancy & equipment expense 54 6.0
FDIC insurance premiums (132) ( 98.5)
Other operating expenses 134 13.8
Total operating expenses 134 3.4
Income before income taxes 183 5.9
Applicable income tax expense 132 16.3
Net income 51 22.3
</TABLE>
- -50-
<TABLE>
<S> <C> <C> <C> <C>
1995 Compared to 1994
Average Volumes Income/Expense
($ 000 omitted) $ % $ %
Loans 4,099 4.5 1,175 15.4
Investment securities 696 2.2 144 9.9
Other short-term
investments 1,726 82.8 17 12.1
Total 6,521 5.5 1,336 13.8
Interest bearing demand
deposits ( 577) ( 2.8) ( 16) ( 3.9)
Savings deposits ( 1,843) ( 5.5) 38 4.1
Time deposits 6,298 12.1 937 42.5
Short-term borrowings 749 28.5 83 62.1
Total 4,627 3.9 1,042 28.4
Net interest income 294 5.4
Provision for loan losses ( 13) (100.0)
Net interest income after
provision for loan losses 307 5.6
Security transactions ( 17) ( 12.6)
Other operating income 39 6.9
Income before operating expense 329 4.9
Salaries & employee benefits 81 4.4
Occupancy & equipment expense 27 3.1
FDIC insurance premiums ( 117) ( 46.6)
Other operating expenses 106 12.2
Total operating expenses 97 2.5
Income before income taxes 232 8.1
Applicable income tax expense 64 8.6
Net income 168 7.9
</TABLE>
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
For additional information concerning liquidity,
refer to statistical disclosures applicable to the investment
and loan portfolio.
Closely related to the management of liquidity is the
management of rate sensitivity, which focuses on maintaining
stability in the net interest margin. As illustrated in the
table below the tax equivalent net interest margin ranged from
4.2% to 4.8% of average earning assets for the past 3 years. An
asset/liability committee monitors and coordinates overall the
asset/liability strategy.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Rates and Interest Differential Tax Equivalent Yields
Years Ended December 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ASSETS 1996 1995
Average Average
(000 omitted) Balance Interest Rate Balance Interest Rate
Investment securities:
Taxable interest
income $ 26,174 $ 1,701 6.5% $ 23,898 $ 1,587 6.3%
Nontaxable interest
income 8,413 447 5.3 8,157 449 5.5
Total investment
securities 34,587 2,148 6.2 32,055 2,036 6.2
Loans (net of unearned
discounts) 99,046 8,809 8.9 95,088 8,809 9.2
Other short-term
investments 4,391 199 4.5 3,809 157 5.6
Total interest
earning
assets 138,024 $ 11,156 8.1% 130,952 $ 11,002 8.5%
Allowance for loan
losses ( 1,946) ( 1,905)
Cash and due
from banks 3,510 3,511
Bank premises and
equipment 2,295 1,993
Other assets 2,621 2,653
Total assets $ 144,504 $ 137,204
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand
deposits $ 21,091 $ 597 2.8% $ 19,729 $ 390 1.9%
Savings deposits 33,265 770 2.3 31,705 957 3.0
Time deposits 61,609 3,379 5.5 58,271 3,142 5.4
Short-term
borrowings 1,984 65 3.3 3,369 214 6.2
Total interest
bearing
liabilities 117,949 $ 4,811 4.1% 113,074 $ 4,703 4.3%
Demand deposits 8,222 7,613
Other
liabilities 1,779 1,598
Total
liabilities 127,950 122,285
Stockholders'
equity 16,554 14,919
Total liabilities &
stockholders'
equity $ 144,504 $ 137,204
Net interest income/net
yield on average
earning assets $ 6,345 4.6% $ 6,299 4.2%
</TABLE>
- -51-
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Rates and Interest Differential Tax Equivalent
Yields
Years Ended December 31
<TABLE>
<S> <C> <C> <C>
ASSETS 1994
Average
(000 omitted) Balance Interest Rate
Investment securities:
Taxable interest
income $ 23,359 $ 1,443 6.2%
Nontaxable interest
income 8,000 449 5.6
Total investment
securities 31,359 1,892 6.0
Loans (net of unearned
discounts) 90,989 7,634 8.4
Other short-term
investments 2,083 140 6.7
Total interest
earning assets 124,431 $ 9,666 7.8%
Allowance for loan
losses ( 1,752)
Cash and due from banks 3,670
Bank premises and
equipment 2,077
Other assets 2,007
Total assets $ 130,433
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand
deposits $ 20,306 $ 406 2.0%
Savings deposits 33,548 919 2.7
Time deposits 51,973 2,204 4.2
Short-term borrowings 2,620 132 5.0
Total interest
bearing liabilities 108,447 $ 3,661 3.4%
Demand deposits 7,083
Other liabilities 3,945
Total liabilities 119,475
Stockholders' equity 10,958
Total liabilities &
stockholders'
equity $ 130,433
Net interest income/net
yield on average
earning assets $ 6,005 4.8%
</TABLE>
For purposes of calculating loan yields, the
average loan volume includes nonaccrual loans. For purposes
of calculating yields on nontaxable interest income, the
taxable equivalent adjustment is made to equate nontaxable
interest on the same basis as taxable interest. The
marginal tax rate was 34% for 1996, 1995 and 1994.
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CHANGES IN NET INTEREST INCOME
TAX EQUIVALENT YIELDS
<TABLE>
<S> <C> <C> <C>
1995 Versus 1996
Increase (Decrease)
Due to Change in
Total
Average Average Increase
Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned
discounts) $ 364 ($ 364) $ 0
Taxable investment securities 143 ( 29) 114
Nontaxable investment securities 14 ( 16) ( 2)
Other short-term investments 33 9 42
Total interest income 554 ( 400) 154
Interest Expense
Interest bearing demand 26 181 207
Savings deposits 47 ( 234) ( 187)
Time deposits 180 57 237
Other short-term borrowings ( 86) ( 63) ( 149)
Total interest expense 167 ( 59) 108
Net interest income $ 46
</TABLE>
Changes which are attributed in part to volume and in
part to rate are allocated in proportion to their
relationships to the amounts of changes.
- -52-
<TABLE>
<S> <C> <C> <C>
1994 Versus 1995
Increase (Decrease)
Due to Change in
Total
Average Average Increase
Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned
discounts) $ 344 $ 831 $ 1,175
Taxable investment securities 115 29 144
Nontaxable investment securities 8 ( 8) 0
Other short-term investments 48 ( 31) 17
Total interest income 515 821 1,336
Interest Expense
Interest bearing demand ( 11) ( 5) ( 16)
Savings deposits ( 50) 88 38
Time deposits 265 672 937
Other short-term borrowings 37 46 83
Total interest expense 241 801 1,042
Net interest income $ 294
</TABLE>
Changes which are attributed in part to volume and in
part to rate are allocated in proportion to their
relationships to the amounts of changes.
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
The following table shows the maturities of investment
securities at carrying value as of December 31, 1996, and
weighted average yields of such securities. Yields are
shown on a tax equivalent basis, assuming a 34% federal
income tax rate.
<TABLE>
<S> <C> <C> <C>
After 1 year After 5 years
Within but within but within
1 year 5 years 10 years
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 200 $ 399 $ 99
Yield (1)
U. S. Government
agencies/mortgage-
backed securities
Book value $ 2,441 $ 4,234 $ 11,175
Yield (1)
State and municipal
Book value $ 725 $ 2,816 $ 3,772
Yield (1)
Other
Book value $ 0 $ 618 $ 100
Yield (1)
Total book value $ 3,366 $ 8,067 $ 15,146
Yield
</TABLE>
(1) Average yields by maturity on investments were not
available.
- -53-
<TABLE>
<S> <C> <C>
After
10 years Total
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 0 $ 698
Yield 6.60%
U. S. Government
agencies/mortgage-
backed securities
Book value $ 3,597 $ 21,447
Yield 6.69%
State and municipal
Book value $ 1,857 $ 9,170
Yield 7.90%
Other
Book value $ 100 $ 818
Yield 7.53%
Total book value $ 5,554 $ 32,133
Yield
Equity Securities:
Total Equity Securities $ 3,463
Yield 2.74%
Total Investment Securities $ 35,586
Yield 6.63%
</TABLE>
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
LOAN PORTFOLIO
The following table presents the loan portfolio at
the end of each of the last five years:
<TABLE>
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
(000 omitted)
Commercial, financial
& agricultural $ 10,009 $ 8,736 $ 8,506 $ 5,897 $ 5,249
Real estate -
Construction 2,326 1,494 1,004 809 1,085
Real estate -
Mortgage 78,990 76,624 76,655 72,862 65,769
Installment & other
personal loans
(net of unearned
income) 9,716 8,996 8,973 6,742 6,342
Total loans $ 101,041 $ 95,850 $ 95,138 $ 86,310 $ 78,445
</TABLE>
Presented below are the approximate maturities of the
loan portfolio (excluding real estate mortgage and
installments) at December 31, 1996:
<TABLE>
<S> <C> <C> <C> <C>
Under One One to Over Five
Year Five Years Years Total
(000 omitted)
Commercial, financial &
agricultural $ 7,667 $ 1,022 $ 1,320 $ 10,009
Real estate -
Construction 2,326 0 0 2,326
Total $ 9,993 $ 1,022 $ 1,320 $ 12,335
</TABLE>
The following table presents the approximate amount of
fixed rate loans and variable rate loans due as of
December 31, 1996:
<TABLE>
<S> <C> <C>
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 1,092 $ 58,074
Due after one but within
five years 13,268 0
Due after five years 28,607 0
Total $ 42,967 $ 58,074
</TABLE>
- -54-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
<TABLE>
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
(000 omitted)
Average total loans
outstanding (net of
unearned
income) $ 99,046 $ 95,088 $ 90,989 $ 81,673 $ 76,053
Allowance for loan
losses, beginning
of period 1,945 1,856 1,560 1,397 1,357
Additions to provision
for loan losses
charged to
operations 0 0 13 235 290
Loans charged off
during the year
Commercial 5 0 0 272 257
Real estate
mortgage 0 7 0 0 209
Instal-
lment 9 13 18 26 50
Total charge-
off's 14 20 31 298 516
Recoveries of loans
previously charged off:
Commercial 6 75 261 160 38
Installment 9 27 39 19 23
Mortgage 1 7 1 47 205
Total
recov-
eries 16 109 301 226 266
Net loans charged off
(recovered) ( 2) ( 89) ( 270) 72 250
Allowance for loan
losses, end of
period 1,947 1,945 1,856 1,560 1,397
Ratio of net loans
charged off (recovered)
to average loans
outstanding ( .003)% ( .09)% ( .29%) .09% .32%
</TABLE>
The provision is based on an evaluation of the
adequacy of the allowance for possible loan losses. The
evaluation includes, but is not limited to, review of net
loan losses for the year, the present and prospective
financial condition of the borrowers and evaluation of
current and projected economic conditions.
- -55-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
LOANS
The following table sets forth the outstanding
balances of those loans on a nonaccrual status and those on
accrual status which are contractually past due as to
principal or interest payments for 60 days and 90 days or
more at December 31.
<TABLE>
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
(000 omitted)
Nonaccrual loans $ 77 $ 135 $ 79 $ 619 $ 1,624
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
60 - 89 days past due 216 252 14 470 65
90 days or more past
due 87 115 1 46 15
Total accrual
loans $ 303 $ 367 $ 15 $ 516 $ 80
</TABLE>
See Note 8 of the Notes to Consolidated Financial
Statements for details of income recognized and foregone
revenue on nonaccrual loans for the past three years.
Management has not identified any significant
problem loans in the accrual loan categories shown above.
- -56-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
The following is an allocation by loan categories
of the allowance for loan losses at December 31 for the last
five years. In retrospect the specific allocation in any
particular category may prove excessive or inadequate and
consequently may be reallocated in the future to reflect the
then current conditions. Accordingly, the entire allowance
is available to absorb losses in any category:
<TABLE>
<S> <C> <C> <C> <C>
Years Ended December 31
1996 1995
Percentage of Percentage of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and
agricultural $ 819 9.9% $ 818 9.1%
Real estate -
Construction 0 2.3 0 1.6
Real estate -
Mortgage 630 78.2 629 79.9
Installment 48 9.6 48 9.4
Unallocated 450 N/A 450 N/A
Total $ 1,947 100.0% $ 1,945 100.0
Years Ended December 31
1994 1993
Percentage of Percentage of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and
agricultural $ 743 8.9% $ 482 6.8%
Real estate -
Construction 0 1.1 0 1.0
Real estate -
Mortgage 629 80.5 628 84.4
Installment 33 9.5 29 7.8
Unallocated 451 N/A 421 N/A
Total $ 1,856 100.0% $ 1,560 100.0%
</TABLE>
- -57-
<TABLE>
<S> <C> <C>
Years Ended December 31
1992
Percentage of
Loans in Each
Allowance Category to
Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 370 6.7%
Real estate -
Construction 10 1.3
Real estate -
Mortgage 675 83.8
Installment 22 8.2
Unallocated 320 N/A
Total $ 1,397 100.0%
</TABLE>
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized
below:
<TABLE>
<S> <C> <C> <C>
Years Ended December 31
1996 1995 1994
(000 omitted)
Demand deposits $ 8,222 $ 7,613 $ 7,083
Interest bearing demand
deposits 21,091 19,729 20,308
Savings deposits 33,265 31,705 33,548
Time deposits 61,609 58,271 51,973
Total deposits $ 124,187 $ 117,318 $ 112,911
</TABLE>
The following is a breakdown of maturities of time
deposits of $ 100,000 or more as of December 31, 1996:
<TABLE>
<S> <C> <C>
Maturity (000 omitted)
Certificates of Deposit
Three months or less $ 3,380
Over three months through twelve
months 6,941
Over twelve months 3,648
$ 13,969
</TABLE>
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE
BALANCES)
The following table presents a summary of significant
earnings and capital ratios:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Assets $ 148,673 $ 139,182 $ 135,378
Net income $ 2,336 $ 2,285 $ 2,117
Equity $ 17,704 $ 16,148 $ 13,343
Cash dividends paid $ 547 $ 492 $ 415
Return on assets 1.62% 1.67% 1.62%
Return on equity 13.80% 15.49% 16.50%
Dividend payout ratio 23.42% 21.53% 19.53%
Equity to asset ratio 11.76% 11.60% 9.84%
</TABLE>
- -58-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended December 31
1996 1995 1994 1993 1992
(000 omitted)
Interest
income $ 11,156 $ 11,002 $ 9,666 $ 9,034 $ 9,676
Interest
expense 4,811 4,703 3,661 3,585 4,393
Net interest
income 6,345 6,299 6,005 5,449 5,283
Provision for loan
losses 0 0 13 235 290
Net interest income
after provision
for loan
losses 6,345 6,299 5,992 5,214 4,993
Other income:
Trust 252 200 190 166 127
Service charges -
deposits 277 288 269 272 254
Other service charges,
collection and exchange,
charges, commission
fees 159 102 103 84 69
Other operating
income 302 129 135 213 359
Total other
income 990 719 697 735 809
Income before
operating
expense 7,335 7,018 6,689 5,949 5,802
Operating expenses:
Salaries and employees
benefits 1,995 1,917 1,836 1,705 1,725
Occupancy and equipment
expense 952 898 871 751 767
Other operating
expenses 1,108 1,106 1,117 1,120 1,344
Total operating
expenses 4,055 3,921 3,824 3,576 3,836
Income before income
taxes 3,280 3,097 2,865 2,373 1,966
Income tax 944 812 748 684 473
Net income
applicable to
common
stock $ 2,336 $ 2,285 $ 2,117 $ 1,689 $ 1,493
Per share data:
Earnings per common
share $ 2.77 $ 2.70 $ 2.51 $ 1.96 $ 1.76
Cash dividend -
Common $ .65 $ .58 $ .49 $ .43 $ .40
Average number of
common
shares 843,402 845,172 843,867 846,282 848,005
</TABLE>
- -59-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES
<TABLE>
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
($ 000 omitted)
LOANS
Commercial $ 14,594 $ 11,848 $ 10,395 $ 8,985 $ 10,496
Mortgage 65,296 66,699 66,570 61,737 58,384
Consumer 19,156 16,541 14,024 10,951 7,173
Total loans 99,046 95,088 90,989 81,673 76,053
INVESTMENT SECURITIES
U.S. Government 931 1,460 1,640 1,302 998
U.S. Government
agencies 20,404 18,854 17,855 18,228 18,816
State & municipal 8,413 8,157 8,000 7,206 5,743
Other 4,839 3,584 3,864 3,416 3,948
Total investment
securities 34,587 32,055 31,359 30,152 29,505
OTHER SHORT-TERM INVESTMENTS
Federal funds sold 758 990 86 784 1,562
Certificates of
deposit 3,633 2,819 1,997 2,469 2,642
Total other short-term
invest-
ments 4,391 3,809 2,083 3,253 4,204
Total earning
assets 138,024 130,952 124,431 115,078 109,762
Total
assets $ 144,504 $ 137,204 $ 130,433 $ 121,325 $ 115,391
Percent increase 5.3% 5.2% 7.5% 5.1% 5.6%
DEPOSITS
Demand $ 8,222 $ 7,613 $ 7,083 $ 6,277 $ 5,993
Interest-bearing
demand 21,091 19,729 20,308 19,011 16,937
Savings 33,265 31,705 33,548 35,804 32,258
Time 61,609 58,271 51,973 46,152 47,578
Total
deposits 124,187 117,318 112,911 107,244 102,766
Short-term
borrowings 1,984 3,369 2,620 826 548
AVERAGE RATES EARNED (TAXABLE
EQUIVALENT BASIS) % % % % %
Loans
Commercial 9.4 10.2 8.5 8.1 9.2
Mortgage 8.7 8.9 8.0 8.3 9.3
Consumer 9.0 9.1 8.8 9.6 11.4
Total 8.9 9.2 8.4 8.4 9.5
Investment Securities
U. S. Government 6.7 6.8 6.6 6.9 7.3
U.S. Government
agencies 6.5 6.4 6.0 6.7 7.9
State & municipal 5.3 5.5 5.6 6.1 6.8
Other 6.2 7.3 8.0 8.8 9.0
Total 6.2 6.2 6.0 6.6 7.7
Total other
short-term
investments 6.4 5.6 6.4 5.5 5.5
Total earning
assets 8.2 8.5 7.8 7.9 8.9
AVERAGE RATES PAID
Time & savings
deposits 4.1 4.1 3.3 3.5 4.5
Short-term
borrowings 5.3 6.2 4.3 4.0 4.9
</TABLE>
- -60-
Item 9. Disagreements on Accounting and Financial
Disclosures.
Not applicable.
- -61-
PART III
The information required by Items 10, 11, 12 and
13 is incorporated by reference from Tower Bancorp, Inc.'s
definitive proxy statement for the 1997 Annual Meeting of
Shareholders filed pursuant to Regulation 14A.
- -62-
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.
Financial Statement Schedules and Exhibits
(1) Financial statements. See Item 8 of this
report for the index to financial statements.
(2) Financial statement schedules. Not
applicable.
(3) Exhibits.
Exhibit Numbers
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession. Not
applicable.
(3)(a) Articles of incorporation. Incorporated
by reference to Exhibit C to the
Registrant's Registration Statement on
Form S-14, Registration No. 2-89573.
(b) By-laws. Incorporated by reference to
Exhibit D to the Registrant's
Registration Statement on Form
S-14, Registration No. 2-89573.
(4) Instruments defining the rights of security
holders including indentures. The rights of
the holders of Registrant's common stock are
contained in:
- -63-
(I) Articles of Incorporation of Tower
Bancorp, Inc., filed as Exhibit C to
Registrant's Registration Statement on
Form S-14 (Registration No. 2-89573).
(ii) By-laws of Tower Bancorp, Inc., filed as
Exhibit D to the Registrant's
Registration Statement on Form S-14
(Registration No. 2-89573).
(9) Voting trust agreement. Not applicable.
(10) Material contracts. None.
(11) Statement re: computation of per share
earnings. Not applicable.
(12) Statements re: computation of ratios. Not
applicable.
(13) Annual report to security holders. Form 10-Q
or quarterly report to security holders.
Not applicable.
(16) Letter re: change in accounting principles.
Not applicable.
(21) Subsidiaries of the registrant. Filed
herewith.
(22) Published report regarding matters submitted
to vote of security holders. Not applicable.
(23) Consents of experts and counsel. Not
applicable.
(24) Power of attorney. Not applicable.
- -64-
(27) Financial data schedule.
(99) Additional exhibits. Not applicable.
(b) Reports on Form 8-K.
None
- -65-
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TOWER BANCORP, INC.
(Registrant)
By
Jeff B. Shank, President
(Principal Executive
Officer and
Principal Financial
Officer)
By
Donald F. Chlebowski, Jr.,
Treasurer (Principal
Accounting Officer)
Dated: March , 1997
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title
Date
President & March , 1997
Jeff B. Shank Director
Director March , 1997
Betty J. Lehman
Chairman of the March , 1997
Kermit G. Hicks Board & Director
Director March , 1997
Robert L. Pensinger
Director March , 1997
Nelson M. Elliott
Vice Chairman of March , 1997
Harold C. Gayman the Board & Director
Director March , 1997
James H. Craig, Jr.
_______________________ Director March ____, 1997
Lois Easton
- -66-
Exhibit Index
Exhibit No. Sequentially numbered pages
21 Subsidiaries of the
Registrant 62
27 Financial data schedule 63 and 64
- -67-
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. The First National Bank of Greencastle, Center Square,
Greencastle, Pennsylvania; a National Bank organized
under the National Bank Act.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,034
<INT-BEARING-DEPOSITS> 4,071
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,786
<INVESTMENTS-CARRYING> 9,170
<INVESTMENTS-MARKET> 9,336
<LOANS> 101,041
<ALLOWANCE> 1,947
<TOTAL-ASSETS> 148,673
<DEPOSITS> 126,604
<SHORT-TERM> 1,866
<LIABILITIES-OTHER> 2,499
<LONG-TERM> 0
<COMMON> 2,120
0
0
<OTHER-SE> 15,584
<TOTAL-LIABILITIES-AND-EQUITY> 148,673
<INTEREST-LOAN> 8,809
<INTEREST-INVEST> 2,148
<INTEREST-OTHER> 199
<INTEREST-TOTAL> 11,156
<INTEREST-DEPOSIT> 4,746
<INTEREST-EXPENSE> 4,811
<INTEREST-INCOME-NET> 6,345
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 278
<EXPENSE-OTHER> 4,055
<INCOME-PRETAX> 3,280
<INCOME-PRE-EXTRAORDINARY> 3,280
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,336
<EPS-PRIMARY> 2.77
<EPS-DILUTED> 2.77
<YIELD-ACTUAL> 4.60
<LOANS-NON> 77
<LOANS-PAST> 87
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,945
<CHARGE-OFFS> 14
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 1,947
<ALLOWANCE-DOMESTIC> 1,947
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
