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, 1997
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, 1997, 883,098 shares of the registrant's
common stock were outstanding. The aggregate market value
of such shares held by nonaffiliates on that date was
$ 40,180,959.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year
ended December 31, 1997 are incorporated by reference into
Parts I and II. Portions of the Proxy Statement for 1998
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.
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
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.
- -2-
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.
In 1997 Tower acquired 459 shares of its own
common stock and sold 5,259 shares of treasury stock to
First's ESOP plan, and 348 shares to First's president as
part of a stock option plan. On July 1, 1997 Tower also
issued a 5% stock dividend of 41,870 shares, increasing the
total number of shares outstanding at December 31, 1997 to
883,098.
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.
Tower has no employees other than its four
officers who are also employees of First, its subsidiary.
On December 31, 1997, First had 65 full-time and 15 part-
time employees.
- -3-
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
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.
- -4-
As of December 31, 1997, First had total assets of
approximately $ 160 million, total shareholders' equity of
approximately $ 20 million and total deposits of
approximately $ 133 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
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.
- -5-
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.
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 20 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.
- -6-
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.
The OCC issued guidelines which, effective
December 31, 1990, imposed upon national banks risk-based
capital and leverage standards. These new capital
requirements of bank regulators, are discussed in Note 20 of
the notes to financial statements. 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
- -7-
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
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.
- -8-
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
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 subsidiaries, would be assumed by the
bankruptcy trustee and entitled to priority in payment.
Based on their respective regulatory capital
ratios at December 31, 1997, 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" in
management's discussion and analysis in the corporation's
annual report as shown in Exhibit 13.
- -9-
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
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.
- -10-
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.
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
The following table sets forth selected
information about the principal officers of the holding
company, each of whom is elected by the Board of Directors
and each of whom holds office at the discretion of the
Board.
- -11-
<TABLE>
<S> <C> <C> <C>
Held Bank Employee Age as
Name/Office Held Since Since of 12/31/97
Kermit G. Hicks, Chairman
of the Board 1983 (1) 62
Harold C. Gayman, Vice
Chairman of the Board 1983 (1) 71
Jeff B. Shank, President
and Director 1992 42
Betty J. Lehman, Director 1985 (1) 72
Robert L. Pensinger,
Director 1987 (1) 64
James H. Craig, Director 1990 (1) 64
Lois Easton, Director 1990 (1) 62
(1) These directors are not employees of the Bank.
Held Bank Employee Age as
Name/Office Held Since Since of 12/31/97
Jeff B. Shank, President 1992 1976 42
John H. McDowell,
Executive Vice President 1994 1977 48
Don Kunkle, Vice President 1987 1987 48
Donald Chlebowski, Vice
President 1991 1980 39
Darlene Niswander, Vice
President/Senior Trust
Officer 1991 1971 51
</TABLE>
- -12-
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,
1997, the approximate number of shareholders of record was
961. 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
1997 (1)1st Quarter $ 0 $ 35.00 - $ 35.00
2nd Quarter .23 34.25 - 36.00
3rd Quarter 0 35.00 - 41.00
4th Quarter .53 36.00 - 45.50
1996 (1)1st Quarter $ 0 $ 25.50 - $ 26.50
2nd Quarter .19 26.00 - 28.00
3rd Quarter 0 33.50 - 36.00
4th Quarter .43 34.25 - 34.75
</TABLE>
(1) Note: Cash dividends per share were based on
weighted average shares of common stock
outstanding after giving retroactive
recognition to a 5% stock dividend
issued in July 1997 and a 100% stock
dividend issued in April 1996.
Item 6. Selected Financial Data
The selected five-year financial data on page 22
of the annual shareholders' report for the year ended
December 31, 1997 is incorporated herein by reference.
- -13-
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, including quantitative
and qualification disclosures about market risk on pages 26
through 30 of the annual shareholders report are
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data,
some of which is required under Guide 3 (statistical
disclosures by bank holding companies) are shown on pages 2
through 25 of the annual shareholders report for the year
ended December 31, 1997 and are incorporated herein by
reference. Additional schedules required in addition to
those included in the annual shareholders report are
submitted herewith.
- -14-
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 4.1% to 4.6% 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 1997 1996
Average Average
(000 omitted) Balance Interest Rate Balance Interest Rate
Investment securities:
Taxable interest
income $ 22,596 $ 1,724 6.7% $ 26,174 $ 1,701 6.5%
Nontaxable interest
income 9,608 495 5.2 8,413 447 5.3
Total investment
securities 32,204 2,219 6.4 34,587 2,148 6.2
Loans (net of unearned
discounts) 102,439 9,221 9.0 99,046 8,809 8.9
Other short-term
investments 14,319 537 7.1 4,391 199 4.5
Total interest
earning
assets 148,962 $ 11,977 8.2% 138,024 $ 11,156 8.1%
Allowance for loan
losses ( 1,931) ( 1,946)
Cash and due
from banks 3,450 3,510
Bank premises and
equipment 2,262 2,295
Other assets 2,521 2,621
Total assets $ 155,264 $ 144,504
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand
deposits $ 31,820 $ 638 2.1% $ 21,091 $ 597 2.8%
Savings deposits 27,647 905 3.3 33,265 770 2.3
Time deposits 62,592 3,503 5.5 61,609 3,379 5.5
Short-term
borrowings 2,288 121 5.9 1,984 65 3.3
Total interest
bearing
liabilities 124,347 $ 5,167 4.1% 117,949 $ 4,811 4.1%
Demand deposits 8,835 8,222
Other
liabilities 3,013 1,779
Total
liabilities 136,195 127,950
Stockholders'
equity 19,069 16,554
Total liabilities &
stockholders'
equity $ 155,264 $ 144,504
Net interest income/net
yield on average
earning assets $ 6,810 4.1% $ 6,345 4.6%
</TABLE>
- -15-
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 1995
Average
(000 omitted) Balance Interest Rate
Investment securities:
Taxable interest
income $ 23,898 $ 1,587 6.3%
Nontaxable interest
income 8,157 449 5.5
Total investment
securities 32,055 2,036 6.2
Loans (net of unearned
discounts) 95,088 8,809 9.2
Other short-term
investments 3,809 157 5.6
Total interest
earning assets 130,952 $ 11,002 8.5%
Allowance for loan
losses ( 1,905)
Cash and due from banks 3,511
Bank premises and
equipment 1,993
Other assets 2,653
Total assets $ 137,204
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand
deposits $ 19,729 $ 390 1.9%
Savings deposits 31,705 957 3.0
Time deposits 58,271 3,142 5.4
Short-term borrowings 3,369 214 6.2
Total interest
bearing liabilities 113,074 $ 4,703 4.3%
Demand deposits 7,613
Other liabilities 1,598
Total liabilities 122,285
Stockholders' equity 14,919
Total liabilities &
stockholders'
equity $ 137,204
Net interest income/net
yield on average
earning assets $ 6,299 4.2%
</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 1997, 1996 and 1995.
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CHANGES IN NET INTEREST INCOME
TAX EQUIVALENT YIELDS
<TABLE>
<S> <C> <C> <C>
1997 Versus 1996
Increase (Decrease)
Due to Change in
Total
Average Average Increase
Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned
discounts) $ 302 $ 110 $ 412
Taxable investment securities ( 233) 256 23
Nontaxable investment securities 63 ( 15) 48
Other short-term investments 447 ( 109) 338
Total interest income 579 242 821
Interest Expense
Interest bearing demand 300 ( 259) 41
Savings deposits ( 129) 264 135
Time deposits 54 70 124
Other short-term borrowings 10 46 56
Total interest expense 235 121 356
Net interest income $ 465
</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.
- -16-
<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.
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
The following table shows the maturities of investment
securities at book value as of December 31, 1997, 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 $ 100 $ 399 $ 0
Yield (1)
U. S. Government
agencies/mortgage-
backed securities
Book value $ 867 $ 3,684 $ 13,427
Yield (1)
State and municipal
Book value $ 425 $ 2,639 $ 3,133
Yield (1)
Other
Book value $ 0 $ 618 $ 100
Yield (1)
Total book value $ 1,392 $ 7,340 $ 16,660
Yield
</TABLE>
(1) Average yields by maturity on investments were not
available.
- -17-
<TABLE>
<S> <C> <C>
After
10 years Total
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 0 $ 499
Yield 6.79%
U. S. Government
agencies/mortgage-
backed securities
Book value $ 3,920 $ 21,898
Yield 6.79%
State and municipal
Book value $ 4,063 $ 10,260
Yield 7.73%
Other
Book value $ 0 $ 718
Yield 7.95%
Total book value $ 7,983 $ 33,375
Yield
Equity Securities:
Total Equity Securities $ 5,869
Yield 2.48%
Total Investment Securities $ 39,244
Yield 6.41%
</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>
1997 1996 1995 1994 1993
(000 omitted)
Commercial, financial
& agricultural $ 10,699 $ 10,009 $ 8,736 $ 8,506 $ 5,897
Real estate -
Construction 1,486 2,326 1,494 1,004 809
Real estate -
Mortgage 80,597 78,990 76,624 76,655 72,862
Installment & other
personal loans
(net of unearned
income) 11,556 9,716 8,996 8,973 6,742
Total loans $ 104,338 $ 101,041 $ 95,850 $ 95,138 $ 86,310
</TABLE>
Presented below are the approximate maturities of the
loan portfolio (excluding real estate mortgage and
installments) at December 31, 1997:
<TABLE>
<S> <C> <C> <C> <C>
Under One One to Over Five
Year Five Years Years Total
(000 omitted)
Commercial, financial &
agricultural $ 8,320 $ 1,618 $ 1,618 $ 11,556
Real estate -
Construction 1,486 0 0 1,486
Total $ 9,806 $ 1,618 $ 1,618 $ 13,042
</TABLE>
The following table presents the approximate amount of
fixed rate loans and variable rate loans due as of
December 31, 1997:
<TABLE>
<S> <C> <C>
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 6,980 $ 18,110
Due after one but within
five years 20,821 8,211
Due after five years 18,928 31,288
Total $ 46,729 $ 57,609
</TABLE>
- -18-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
(000 omitted)
Average total loans
outstanding (net of
unearned
income) $ 102,439 $ 99,046 $ 95,088 $ 90,989 $ 81,673
Allowance for loan
losses, beginning
of period 1,947 1,945 1,856 1,560 1,397
Additions to provision
for loan losses
charged to
operations 0 0 0 13 235
Loans charged off
during the year
Commercial 58 5 0 0 272
Real estate
mortgage 0 0 7 0 0
Instal-
lment 57 9 13 18 26
Total charge-
off's 115 14 20 31 298
Recoveries of loans
previously charged off:
Commercial 11 6 75 261 160
Installment 7 9 27 39 19
Mortgage 0 1 7 1 47
Total
recov-
eries 18 16 109 301 226
Net loans charged off
(recovered) 97 ( 2) ( 89) ( 270) 72
Allowance for loan
losses, end of
period 1,850 1,947 1,945 1,856 1,560
Ratio of net loans
charged off (recovered)
to average loans
outstanding .09% ( .003)% ( .09)% ( .29%) .09%
</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.
- -19-
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>
1997 1996 1995 1994 1993
(000 omitted)
Nonaccrual loans $ 477 $ 77 $ 135 $ 79 $ 619
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
60 - 89 days past due 315 216 252 14 470
90 days or more past
due 1 87 115 1 46
Total accrual
loans $ 316 $ 303 $ 367 $ 15 $ 516
</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, and
disclosures of impaired loans.
Management has not identified any significant
problem loans in the accrual loan categories shown above.
- -20-
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
1997 1996
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 $ 772 10.3% $ 819 9.9%
Real estate -
Construction 0 1.4 0 2.3
Real estate -
Mortgage 630 77.2 630 78.2
Installment 0 11.1 48 9.6
Unallocated 448 N/A 450 N/A
Total $ 1,850 100.0% $ 1,947 100.0
Years Ended December 31
1995 1994
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 $ 818 9.1% $ 743 8.9%
Real estate -
Construction 0 1.6 0 1.1
Real estate -
Mortgage 629 79.9 629 80.5
Installment 48 9.4 33 9.5
Unallocated 450 N/A 451 N/A
Total $ 1,945 100.0% $ 1,856 100.0%
</TABLE>
- -21-
<TABLE>
<S> <C> <C>
Years Ended December 31
1993
Percentage of
Loans in Each
Allowance Category to
Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 482 6.8%
Real estate -
Construction 0 1.0
Real estate -
Mortgage 628 84.4
Installment 29 7.8
Unallocated 421 N/A
Total $ 1,560 100.0%
</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
1997 1996 1995
(000 omitted)
Demand deposits $ 8,835 $ 8,222 $ 7,613
Interest bearing demand
deposits 31,820 21,091 19,729
Savings deposits 27,647 33,265 31,705
Time deposits 62,592 61,609 58,271
Total deposits $ 130,894 $ 124,187 $ 117,318
</TABLE>
The following is a breakdown of maturities of time
deposits of $ 100,000 or more as of December 31, 1997:
<TABLE>
<S> <C> <C>
Maturity (000 omitted)
Certificates of Deposit
Three months or less $ 3,860
Over three months through twelve
months 9,245
Over twelve months 1,361
$ 14,466
</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>
1997 1996 1995
Assets $ 159,935 $ 148,673 $ 139,182
Net income $ 2,694 $ 2,336 $ 2,285
Equity $ 20,433 $ 17,704 $ 16,148
Cash dividends paid $ 675 $ 547 $ 492
Return on assets 1.74% 1.62% 1.67%
Return on equity 14.17% 13.80% 15.49%
Dividend payout ratio 25.06% 23.42% 21.53%
Equity to asset ratio 12.25% 11.76% 11.60%
</TABLE>
- -22-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended December 31
1997 1996 1995 1994 1993
(000 omitted)
Interest
income $ 11,977 $ 11,156 $ 11,002 $ 9,666 $ 9,034
Interest
expense 5,167 4,811 4,703 3,661 3,585
Net interest
income 6,810 6,345 6,299 6,005 5,449
Provision for loan
losses 0 0 0 13 235
Net interest income
after provision
for loan
losses 6,810 6,345 6,299 5,992 5,214
Other income:
Trust 293 252 200 190 166
Service charges -
deposits 288 277 288 269 272
Other service charges,
collection and exchange,
charges, commission
fees 181 159 102 103 84
Other operating
income 628 302 129 135 213
Total other
income 1,390 990 719 697 735
Income before
operating
expense 8,200 7,335 7,018 6,689 5,949
Operating expenses:
Salaries and employees
benefits 2,179 1,995 1,917 1,836 1,705
Occupancy and equipment
expense 964 952 898 871 751
Other operating
expenses 1,253 1,108 1,106 1,117 1,120
Total operating
expenses 4,396 4,055 3,921 3,824 3,576
Income before income
taxes 3,804 3,280 3,097 2,865 2,373
Income tax 1,110 944 812 748 684
Net income applicable
to common
stock $ 2,694 $ 2,336 $ 2,285 $ 2,117 $ 1,689
Per share data:
Earnings per common
share $ 3.05 $ 2.64 $ 2.58 $ 2.40 $ 1.90
Cash dividend -
Common $ .76 $ .62 $ .55 $ .47 $ .41
Average number of
common
shares 883,833 885,750 887,288 885,978 888,539
</TABLE>
- -23-
Item 9. Disagreements on Accounting and Financial
Disclosures.
Not applicable.
- -24-
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 1998 Annual Meeting of
Shareholders filed pursuant to Regulation 14A.
- -25-
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports of Form 8-K.
(a) (1) - List of Financial Statements
The following consolidated financial statements of
Tower Bancorp and its subsidiary, included in the
annual report of the registrant to its
shareholders for the year ended December 31, 1997,
are incorporated by reference in Item 8:
Consolidated balance sheets - December 31,
1997 and 1996
Consolidated statements of income - Years
ended December 31, 1997, 1996 and 1995
Consolidated statements of stockholders'
equity - Years ended December 31, 1997, 1996,
and 1995
Consolidated statements of cash flows - Years
ended December 31, 1997, 1996, and 1995
Notes to consolidated financial statements -
December 31, 1997
(2) List of Financial Statement Schedules
Schedule I - Distribution of assets,
liabilities and stockholders' equity, interest
rate and interest differential and changes in
net interest income
Schedule II - Investment portfolio
Schedule III - Loan portfolio
- -26-
Schedule IV - Summary of loan loss experience
and allocation of allowance for loan losses
Schedule V - Deposits
Schedule VI - Return on equity and assets
All other schedules for which provision is made in
the applicable accounting regulation of the
Securities and Exchange Commission are not
required under the related instructions or are
inapplicable and therefore have been omitted.
(3) Listing of Exhibits
Exhibit (3) (i) Articles of incorporation
Exhibit (3) (ii) Bylaws
Exhibit (4) Instruments defining the rights of
security holders including indentures
Exhibit (13) Annual report to security
holders
Exhibit (21) Subsidiaries of the registrant
Exhibit (27) Financial data schedule
All other exhibits for which provision is made in
the applicable accounting regulation of the
Securities and Exchange Commission are not
required under the related instructions or are
inapplicable and therefore have been omitted.
(b) Reports on Form 8-K filed
None.
- -27-
(c) Exhibits
(3)(i) Articles of incorporation. Incorporated
by reference to Exhibit C to the
Registrant's Registration Statement on
Form S-14, Registration No. 2-89573.
(ii) 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:
(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).
(13) Annual report to security holders - filed
herewith
(21) Subsidiaries of the registrant - filed
herewith
(27) Financial data schedule - filed herewith
- -28-
(d) Financial statement schedules
The following financial statement schedules
required under Article 9 Industry Guide 3 have
been included on pages 15 to 23 under Item 8
of this report:
Schedule I - Distribution of assets,
liabilities and stockholders' equity, interest
rates and interest differential and changes in
net interest income
Schedule II - Investment portfolio
Schedule III - Loan portfolio
Schedule IV - Summary of loan loss experience
and allocation of allowance for loan losses
Schedule V - Deposits
Schedule VI - Return on equity and assets
- -29-
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 , 1998
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 , 1998
Jeff B. Shank Director
Director March , 1998
Betty J. Lehman
Chairman of the March , 1998
Kermit G. Hicks Board & Director
Director March , 1998
Robert L. Pensinger
Vice Chairman of March , 1998
Harold C. Gayman the Board & Director
Director March , 1998
James H. Craig, Jr.
_______________________ Director March ____, 1998
Lois Easton
- -30-
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.
- -31-
Exhibit Index
Exhibit No. Sequentially numbered
pages
13 Annual report to security holders 32-62
21 Subsidiaries of the Registrant 31
27 Financial data schedule
C 0 N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 2
Statements of income 3
Statements of changes in stockholders' equity 4
Statements of cash flows 5 and 6
Notes to consolidated financial statements 7 - 21
ACCOMPANYING FINANCIAL INFORMATION
Selected five year financial data 22
Changes in income and expense 23
Summary of quarterly financial data 24
Statements of average balances and average rates 25
Management's discussion and analysis of consolidated financial condition
and results of operations 26 - 29
Stock market analysis and dividends 29 and 30
- -32-
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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years ended December 31, 1997
in conformity with generally accepted accounting principles.
Chambersburg, Pennsylvania
January 30, 1998
- -33-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<S> <C> <C>
ASSETS 1997 1996
(000 omitted)
Cash and due from banks $ 4,311 $ 3,034
Interest bearing deposits with banks 6,029 4,071
Investment Securities
Available for sale 27,988 24,322
Held to maturity, fair value of $ 8,183 - 1997; $ 9,336 - 1996 7,995
9,170
Federal Reserve, Federal Home Loan Bank, Atlantic Central
Bankers' Bank, and other bank stock; at cost which approximates
fair value 6,234 4,181
Loans
Commercial, financial and agricultural 10,699 10,009
Real estate - Mortgages (net of deferred loan origination fees
$ 199 - 1997; $ 211 - 1996) 80,597 78,990
Real estate - Construction and land development 1,486 2,326
Consumer 11,556 9,716
104,338 101,041
Less: Allowance for loan losses 1,850 1,947
Total loans 102,488 99,094
Premises, equipment, furniture and fixtures 2,211 1,628
Real estate owned other than premises 579 665
Prepaid federal taxes 100 89
Accrued interest receivable 993 948
Deferred income tax charges 246 629
Other assets 761 842
Total assets $ 159,935 $ 148,673
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -34-
<TABLE>
<S> <C> <C>
LIABILITIES
1997 1996
(000 omitted)
Deposits in domestic offices
Demand, noninterest bearing $ 9,651 $ 7,959
Savings 60,625 54,490
Time 62,508 64,155
Total deposits 132,784 126,604
Accrued interest payable 424 409
Federal funds purchased 2,769 865
Liabilities for other borrowed funds 2,212 1,866
Other liabilities 1,313 1,225
Total liabilities 139,502 130,969
STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock: par value $ 2.50; authorized 5,000,000 shares,
issued 890,050 shares - 1997; 848,180 shares - 1996 2,225 2,120
Additional paid-in capital 6,699 5,356
Retained earnings 10,811 10,237
Unrealized holding gain on securities available for sale -
net of tax - $ 499 - 1997; $ 122 - 1996 969 236
20,704 17,949
Less: Cost of Treasury stock, 6,952 shares - 1997; 7,967 shares -
1996 ( 271) ( 245)
Total stockholders' equity 20,433 17,704
Total liabilities and stockholders' equity $ 159,935 $ 148,673
</TABLE>
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
(000 omitted)
Interest and Dividend Income
Interest and fees on loans $ 9,221 $ 8,809 $ 8,809
Interest and dividends on investment securities
Taxable 1,987 1,701 1,587
Federal tax exempt 495 447 449
Interest on federal funds sold 75 40 57
Interest on deposits with banks 199 159 100
Total interest income 11,977 11,156 11,002
Interest Expense
Interest on time certificates of deposit of
$ 100,000 or more 804 735 588
Interest on other deposits 4,242 4,011 3,901
Interest on federal funds purchased and other borrowed funds 121
65 214
Total interest expense 5,167 4,811 4,703
Net interest income 6,810 6,345 6,299
Provision for loan losses 0 0 0
Net interest income after provision
for loan losses 6,810 6,345 6,299
Other Income
Trust department income 293 252 200
Service charges on deposit accounts 288 277 288
Other service charges, collection and exchange
charges, commissions and fees 181 159 102
Investment securities gains 573 278 118
Investment services income 44 24 0
Gain on sale of other real estate 11 0 0
Gain on sale of property, equipment, furniture & fixtures 0
0 11
1,390 990 719
Other Expenses
Salaries, wages and other employee benefits 2,179 1,995 1,917
Occupancy expense 296 291 258
Furniture and equipment expenses 668 661 640
FDIC insurance premiums 16 2 134
Other operating expenses 1,237 1,106 972
4,396 4,055 3,921
Income before income taxes 3,804 3,280 3,097
Applicable income tax expense 1,110 944 812
Net income $ 2,694 $ 2,336 $ 2,285
Earnings per share of common stock
Net income $ 3.05 $ 2.64 $ 2.58
</TABLE>
The Notes to Consolidated Financial Statements are an integral part
of these statements.
- -35-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<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, 1994 $ 965 $ 3,749 $ 9,415 ($ 663) ($ 123)
Net income 0 0 2,285 0 0
Cash dividends declared on
common stock ($ .55 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 ($ .62
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)
Net income 0 0 2,694 0 0
Cash dividends declared on
common stock ($ .76 per share) 0 0 ( 675) 0 0
Net unrealized gain on available
for sale securities 0 0 0 733 0
Purchase of treasury stock
(4,592 shares) 0 0 0 0 ( 189)
Sale of treasury stock
(5,607 shares) 0 3 0 0 163
Stock dividend issued 105 1,340 ( 1,445)
0 0
Balance at December 31, 1997 $ 2,225 $ 6,699 $ 10,811 $ 969 ($ 271)
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
- -36-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
(000 omitted)
Cash flows from operating activities:
Net income $ 2,694 $ 2,336 $ 2,285
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 229 249 244
(Gain) on sale of investment securities ( 573) ( 332)
(
118)
(Gain) on disposal of property, equipment,
furniture and fixtures 0 0 ( 11)
(Gain) on sale of other real estate ( 11) 0 0
Provision for deferred taxes 6 ( 9) 11
(Increase) decrease in:
Other assets ( 74) ( 140) ( 166)
Interest receivable ( 45) ( 57) ( 75)
Prepaid income taxes ( 11) 18 ( 107)
Incre
ase (decrease) in:
Interest payable 15 20 120 Accrued income taxes
0 0 ( 70)
Other liabilities 223 48 48
Net cash provided by operating activities 2,453 2,133 2,161
Cash flows from investing activities:
Net (increase) in loans ( 3,394) ( 5,189) ( 623)
Purchases of bank premises, equipment,
furniture and fixtures ( 805) ( 47) ( 140)
Proceeds from sale of property, equipment,
furniture and fixtures 0 0 55
Purchases of other real estate ( 38) ( 346) 0
Proceeds from the sale of other real estate 128 0 0
Net (increase) decrease in interest bearing deposits
with banks ( 1,958) ( 636) ( 1,301)
Maturity/sales of available for sale securities 8,569 7,931 5,072
Maturities of held to maturity securities 1,890 1,113 935
Purchases of available for sale securities ( 10,534) ( 9,640)
(
6,630)
Purchases of held to maturity securities ( 2,978) ( 2,257)
(
701)
Purchase of Federal Home Loan Bank stock ( 38) ( 1)
(
37)
Purchase of Federal National Mortgage Association stock 250 (
750) 0
Purchase of Federal Reserve Bank stock 0 ( 4)
0
Net cash (used) by investing activities ( 8,908) ( 9,826) (
3,370)
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
- -37-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
(000 omitted)
Cash flows from financing activities:
Net increase in deposits $ 6,180 $ 6,846 $ 5,546
Net increase (decrease) in short-term borrowings 2,250 1,023 (
4,645)
Purchase of treasury stock ( 189) ( 275) ( 31)
Proceeds from sale of treasury stock 166 58 126
Cash dividends paid ( 675) ( 547) ( 492)
Net cash provided by financing activities 7,732 7,105 504
Net increase (decrease) in cash and cash equivalents 1,277 ( 588)
(
705)
Cash and cash equivalents at beginning of year 3,034 3,622 4,327
Cash and cash equivalents at end of year $ 4,311 $ 3,034 $ 3,622
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 5,152 $ 4,754 $ 4,583 Income taxes 1,187
911 9
01
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain (loss) on securities available for sale (net
of tax effects) $ 733 ($ 18) $ 917 Issuance of stock
dividends 1,445 1,060 1,700
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
- -38-
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
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.
- -39-
Note 1. Summary of Significant Accounting Policies (Continued)
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 securities 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 1997 or 1996.
Federal Home Loan Bank Stock, Federal Reserve Bank, and
Other Bank Stock
The corporation is required to maintain minimum investment
balances in The Federal Reserve Bank, Federal Home Loan
Bank and Atlantic Central Banker's bank. These investments
and other various bank stock holdings are carried at cost
because they are not actively traded and have no readily
determinable market value.
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.
- -40-
Note 1. Summary of Significant Accounting Policies (Continued)
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.
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/Impaired 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 883,833, 885,750 and 887,288 shares
outstanding in 1997, 1996 and 1995, respectively, after giving
retroactive recognition to a 5% stock dividend in July 1997, a
100% stock dividend issued in April 1996 and a 10% stock dividend
issued in July 1995.
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
when paid. There are also differences between the amount of
depreciation expensed for tax and financial reporting purposes, and 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.
- -41-
Note 1. Summary of Significant Accounting Policies (Continued)
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 caption "cash and due from banks". 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. See Note 19 for
further detail.
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.
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 maturities
on time deposits.
- -42-
Note 1. Summary of Significant Accounting Policies (Continued)
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.
Advertising
The Bank expenses advertising costs as they are incurred.
Advertising expense for the years ended December 31, 1997,
1996 and 1995 were $ 158,451, $ 111,269 and $ 118,836,
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)
1997
U.S. Treasury securities $ 499 $ 12 $ 0 $ 511
Obligations of other U.S. government
agencies 16,733 173 33 16,873
Mortgage-backed securities 5,165 43 31 5,177
Corporate bonds 718 21 1 738
Equities 1,140 1,224 1 2,363
Obligations of state and political
subdivisions 2,265 61 0 2,326
$ 26,520 $ 1,534 $ 66 $ 27,988
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
</TABLE>
- -43-
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)
1997
Obligations of state and political subdivisions $ 7,995 $ 197 $
9 $ 8,183
1996
Obligations of state and political subdivisions $ 9,170 $ 186 $
20 $ 9,336
</TABLE>
The amortized cost and fair values of investment securities
available for sale and held to maturity at December 31, 1997, 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 $ 830 $ 830 $ 425 $ 429
Due after one year through
five years 3,815 3,858 2,839 2,890
Due after five years through
ten years 12,437 12,570 2,834 2,908
Due after ten years 3,133 3,190 1,897 1,956
20,215 20,448 7,995 8,183
Mortgage-backed securities 5,165 5,177 0 0
Equity securities 1,140 2,363 0 0
$ 26,520 $ 27,988 $ 7,995 $ 8,183
</TABLE>
Proceeds from sales and maturities of investment securities
available for sale during 1997, 1996 and 1995 were $
8,569, $ 7,931 and $ 5,072, respectively. Gross realized gains and
losses on those sales and maturities were $ 576 and $ 3 for 1997;
$ 327
and $ 60 for 1996; and $ 131 and $ 13 for 1995, respectively.
Included
in shareholders' equity at December 31, 1997 and 1996 are $ 969 and
$ 236 of net unrealized gains on securities available for sale,
respectively, net of related tax effects.
Securities carried at $ 12,462,948 and $ 13,608,144 at
December 31, 1997 and 1996, 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>
1997 1996
Federal Reserve Bank stock $ 81 $ 81
Federal Home Loan Bank stock 629 591
Federal Home Mortgage Bank stock 250 250
Federal Home Loan Mortgage Corporation preferred stock 500 750
Atlantic Central Bankers Bank 45 45
Other bank stock 4,729 2,464
$ 6,234 $ 4,181
</TABLE>
- -44-
Note 3. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
(000 omitted)
Balance at beginning of period $ 1,947 $ 1,945 $ 1,856
Recoveries 18 16 109
Provision for possible loan losses charged to income 0 0
0
Total 1,965 1,961 1,965
Losses 115 14 20
Balance at end of period $ 1,850 $ 1,947 $ 1,945
</TABLE>
Note 4. Premises, Equipment, Furniture and Fixtures
<TABLE>
<S> <C> <C> <C> <C>
Accumulated Depreciated
Cost
Depreciation Cost
(000 omitted)
-
- - - - - - - - -
- - - - - - 1997 - - - - - - - - - - - - - -
Premises (including land $ 287,000) $ 2,799 $ 1,310 $ 1,489
Equipment, furniture and fixtures 2,003 1,281 722
Totals, December 31, 1997 $ 4,802 $ 2,591 $ 2,211
-
- - - - - - - - -
- - - - - - 1996 - - - - - - - - - - - - - -
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
Depreciation expense amounted to $ 229,000 in 1997, $
249,000 in 1996 and $ 244,000 in 1995.
</TABLE>
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 $ 458,189, $ 427,140 and $ 81,000 at
December 31, 1997, 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 with unrelated persons and do
not involve more than normal risk of collectibility. The aggregate
dollar amount of these loans was $ 1,548,668 and $ 1,204,753
at December 31, 1997 and 1996, respectively. During 1997, $
910,024 of new loans were made and repayments totaled $ 566,109.
During 1996, $ 994,829 of new loans were made and
repayments totaled $ 1,062,709.
Outstanding loans to bank employees totaled $ 2,275,556 and
$ 2,306,936 at December 31, 1997 and 1996, respectively.
- -45-
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.
Contract or Notional Amount
1997 1996
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 11,551,970 $ 11,228,809
Standby letters of credit and financial
guarantees written 1,949,714 1,175,714
$ 13,501,684 $ 12,404,523
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/Impaired Loans
The following table shows the principal balances of
nonaccrual loans as of December 31:
<TABLE>
<S> <C> <C> <C>
1997
1996 1995
Nonaccrual loans $ 477,917 $ 77,000 $ 135,000
Interest income that would have been
accrued at original contract rates $ 38,785 $ 7,409 $ 11,583
Amount recognized as interest income 13,321 0
0
Foregone revenue $ 25,464 $ 7,409 $ 11,583
</TABLE>
- -46-
Note 8. Nonaccrual/Impaired Loans (Continued)
Impaired loans at December 31, 1997 and 1995 had a
carrying value of $ 686,000 and
$ 54,000, respectively which have been recognized in
conformity with FASB Statement No. 114, Accounting by Creditors
for Impairment of Loans. The average recorded investment in
impaired loans amounted to approximately $ 684,000 and $
54,000 for 1997 and 1995, respectively. Interest income of $
41,907 and $ 1,500 was recognized on cash payments received on
these loans in 1997 and 1995, respectively. The total allowance for
credit losses related to these loans was $ 250,000 and $ 20,000 at
December 31, 1997 and 1995, respectively.
The corporation had no impairment of loans in 1996.
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 annually
an amount, as determined under plan provisions, necessary to meet
target benefits established by the plan. Contributions charged to
operations were $ 48,000 for 1997, $ 34,000 for 1996, and
$ 32,000 for 1995.
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 $ 67,000,
$ 63,000, and $ 64,000 for 1997, 1996, and 1995,
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
$ 983,530 and $ 955,083 at December 31, 1997 and 1996,
respectively. Annual expense of
$ 131,751, $ 120,812, and $ 120,895 was charged to
operations for 1997, 1996 and, 1995, 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 $ 134,000, $ 127,000 and $ 126,000
for 1997, 1996 and 1995, 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.
Note 11. Stock Option Plans
In 1996 the Bank implemented 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 $ 10,375 and $ 8,262 for 1997 and 1996,
respectively.
- -47-
Note 11. Stock Option Plans (Continued)
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 373 and 324 shares for each director at $ 34.00 and $
25.00 per share for the year ended December 31, 1997 and 1996,
respectively 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, 1997 is as follows:
<TABLE>
<S> <C> <C>
Weighted Average
Fixed Options
Shares
Exercise Price Per Share
Outstanding at beginning of year 2,268 $ 25
Granted 2,959 30
Exercised 348 1
Forfeited/expired 0 0
Outstanding at end of year 4,879 28
Options exercisable at year end 2,268 25
Weighted average fair value of options per
share granted during the year $ 30
</TABLE>
Note 12. Deposits
Included in savings deposits at December 31 are NOW and
Money Market Account balances totalling $ 30,463,000 and $
30,123,000 for 1997 and 1996, respectively.
Time deposits of $ 100,000 and over aggregated $
14,465,517 and $ 13,969,000 at
December 31, 1997 and 1996, respectively.
At December 31, 1997 scheduled maturities of time deposits
are as follows:
1998 $ 44,627,155
1999 11,036,565
2000 4,126,274
2001 856,134
2002 1,861,886
$ 62,508,014
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 $
1,907,317 and $ 1,571,913 at December 31, 1997 and 1996,
respectively.
- -48-
Note 13. Liabilities for Borrowed Money
Federal funds purchased generally mature within one day
from transaction date. Other borrowed funds are as follows:
At December 31, 1997 and 1996, $ 1,740,000 and $
878,000, respectively of other borrowed funds represents the
outstanding balance on lines of credit at other area banks. Total
amount of the lines at December 31, 1997 and 1996 were $ 2,000,000
and $ 1,500,000, respectively. Interest on these lines ranged
from 6.75% to 8.75% for 1997 and 1996.
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, $ 271,000 and $ 787,000 of the balance of
liabilities for other borrowed funds at December 31, 1997 and 1996,
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 at December 31, 1997
and 1996.
The Bank also has available a line of credit totalling $
5,000,000 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, 1997. Collateral for the line
consists of certain securities and the Bank's 1-4 family mortgage
loans totaling $ 55,575,000 at December 31, 1997.
Note 14. Income Taxes
The components of federal income tax expense are
summarized as follows:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
(000 omitted)
Current year provision $ 921 $ 857 $ 762
Deferred income taxes (benefit) ( 6) ( 8) 10
Applicable income taxes 915 849 772
Add: Income tax effect of securities gains 195 95 40
Net income tax expense $ 1,110 $ 944 $ 812
</TABLE>
Federal income taxes were computed after reducing pretax
accounting income for non-taxable income in the amount of $
543,472, $ 547,946, and $ 742,135 for 1997, 1996 and 1995,
respectively.
A reconciliation of the effective applicable income tax rate
to the federal statutory rate is as follows:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
Nontaxable interest income and other timing differences 4.8 5.2
7.8
Effective income tax rate 29.2% 28.8% 26.2%
</TABLE>
- -49-
Note 14. Income Taxes (Continued)
Deferred tax assets have been provided for deductible
temporary differences related to the 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:
<TABLE>
<S> <C> <C> <C> 1997
1996
Total deferred tax assets $ 745 $ 756
Total deferred tax liabilities ( 499) ( 127)
Net deferred tax assets $ 246 $ 629
</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:
Balance Sheets
December 31
<TABLE>
<S> <C> <C> <C>
Assets
1997 1996
(000 omitted)
Cash $ 0 $ 2
Securities available for sale 2,363 1,383
Other bank stock 4,728 2,464
Investment in The First National Bank of Greencastle 15,668 14,883
Total assets $ 22,759 $ 18,732
Liabilities
Other liabilities $ 585 $ 149
Notes payable 1,741 879
Total liabilities 2,326 1,028
Stockholders' Equity
Common stock, par value $ 2.50; authorized 5,000,000
shares,
issued 890,050 shares - 1997; 848,180 shares - 1996 2,225 2,120
Additional paid-in capital 6,699 5,356
Retained earnings 10,811 10,237
Unrealized gain on investment securities available for sale 969
236
20,704 17,949
Less: Cost of Treasury stock, 6,952 shares - 1997;
7,967 shares - 1996 ( 271) ( 245)
Total stockholders' equity 20,433 17,704
Total liabilities and stockholders' equity $ 22,759 $ 18,732
</TABLE>
- -50-
Note 15. Tower Bancorp Inc. (Parent Company Only) Financial
Information (Continued)
Statements of Income
Years Ended December 31
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
(000 omitted)
Income
Dividends $ 146 $ 95 $ 65
Net gain on sale of securities 565 332 129
Cash dividends from wholly-owned subsidiary 1,725 1,507
727
2,436 1,934 921
Expenses
Interest 62 45 35
Commissions 48 26 11
Taxes 150 24 12
Postage and printing 9 10 11
Meetings 3 2 2
Management fees 50 40 35
Professional fees 25 8 19
347 155 125
Income before equity in undistributed income 2,089 1,779 796
Equity in undistributed income of subsidiary 605 557 1,489
Net income $ 2,694 $ 2,336 $ 2,285
Statements of Cash Flows
Years Ended December 31
1997 1996 1995
(000 omitted)
Cash flows from operating activities:
Net income $ 2,694 $ 2,336 $ 2,285
Adjustments to reconcile net income to cash
provided by operating activities:
Net gain on sale of investment securities ( 565) (
332) ( 129)
Equity in undistributed income of subsidiary ( 605) (
557) ( 1,489)
Increase in accrued expenses 151 3 9
Net cash provided by operating activities 1,675 1,450 676
Cash flows from investing activities:
Purchase of investment securities ( 3,683) ( 2,463) ( 976)
Sales of investment securities 1,842 1,567 329
Net cash (used) by investing activities ( 1,841) ( 896) (
647)
Cash flows from financing activities:
Purchase of treasury stock ( 189) ( 275) (
31)
Proceeds from sale of treasury stock 166 58 126 Dividends
paid ( 675) ( 547) ( 492)
Net proceeds from short-term borrowing 862 210 366
Net cash (used) by financing activities 164 ( 554) (
31)
Net (decrease) in cash ( 2) 0 ( 2)
Cash, beginning 2 2 4 Cash, ending $
0 $ 2 $ 2
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 62 $ 45 $ 35
Income taxes 1 15 12
</TABLE>
-51-
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, 1997 and 1996 and
required deposit balances at Atlantic Central Banker's Bank of $
515,000 and $ 300,000 at December 31, 1997 and 1996,
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, 1997:
Loans to finance agricultural production and
loans to farmers ($ 5,211,318 secured by real estate)
$ 5,741,190
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 $ 15,250, $ 15,000 and $ 15,000
for 1997, 1996 and 1995, respectively.
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 1997 and 1996. The lease rental for the
second five years of the initial term is subject to negotiation.
Following is a schedule, by years, of future minimum
rentals under the lease agreements as of December 31, 1997:
Year Ending
1998 $ 25,500
1999 25,500
2000 25,500
2001 25,500
2002 22,750
Thereafter 3,000
$ 127,750
- -52-
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> - - - - - - 1997 -
- - - - - - - - - - - - 1996 - - - - - -
Carrying
Fair Carrying Fair
Amount
Value Amount Value
FINANCIAL ASSETS
Cash and due from banks $ 4,311 $ 4,311 $ 3,034 $ 3,034
Interest bearing deposits with banks 6,029 6,079 4,071
4,104
Securities available for sale 27,988 27,988 24,322 24,322
Securities to be held to maturity 7,995 8,183 9,170
9,336
Loans receivable 104,338 104,984 101,041 102,313
Accrued interest receivable 993 993 948 948
Other bank stock 6,234 6,234 4,181 4,181
FINANCIAL LIABILITIES
Time certificates 62,508 62,533 64,155 64,241
Other deposits 70,276 70,276 62,449 62,449
Short-term borrowed funds 4,981 4,981 2,731 2,731
Accrued interest payable 424 424 409 409
</TABLE>
Note 20. Regulatory Matters
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 $ 3,295,110 and $ 4,291,026 for 1997 and
1996, respectively.
In addition, 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>
Tower
Bancorp
Regulatory Minimum
1997
1996
Requirements
Leverage ratio 10.12% 10.26% 4%
Risk-based capital ratio
Tier I (core capital) 17.17% 16.94% 4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 17.83% 17.75% 8%
</TABLE>
- -53-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED
SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996
1995
1994 1993
Income (000 omitted)
Interest income $ 11,977 $ 11,156 $ 11,002 $ 9,666 $ 9,034
Interest expense 5,167 4,811 4,703 3,661 3,585
Provision for loan losses 0 0 0
13 235
Net interest income after
provision for loan losses 6,810 6,345 6,299 5,992 5,214
Other operating income 1,390 990 719 697 735
Other operating expenses 4,396 4,055 3,921 3,824
3,576
Income before income taxes 3,804 3,280 3,097 2,865 2,373
Applicable income tax
(benefit) 1,110 944 812 748 684
Net income $ 2,694 $ 2,336 $ 2,285 $ 2,117 $ 1,689
Per share amounts are based on the following weighted average shares
outstanding after giving retroactive recognition to a 5% stock dividend
issued in July 1997, 100% stock dividend issued in April 1996 and a
10% stock dividend issued in July 1995:
1997 - 883,833 1995 - 887,288
1993 - 888,539
1996 - 885,750 1994 - 885,978
Net income 3.05 2.64 2.58 2.40 1.90
Cash dividend paid .76 .62 .55 .47 .41
Book value 23.12 19.99 18.20 15.06 13.86
Year-End Balance Sheet Figures
(000 omitted)
Total assets $ 159,935 $ 148,673 $ 139,182 $ 135,378 $ 125,495
Net loans 102,388 99,094 93,905 93,282 84,750
Total investment securities 42,217 37,673 33,733 30,841 29,687
Deposits-noninterest bearing 9,651 7,959 8,201 7,308 7,542
Deposits-interest bearing 123,133 118,645 111,559 106,906 101,74
2
Total deposits 132,784 126,604 119,760 114,214 109,284
Total stockholders' equity 20,433 17,704 16,148 13,343 12,319
Ratios
Average equity/average assets 12.25 11.76 10.74 9.84 9.62
Return on average equity 14.17 13.80 15.49 16.50 14.46
Return on average assets 1.74 1.62 1.67 1.62 1.39
</TABLE>
- -54-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED
SUBSIDIARIES
CHANGES IN INCOME AND EXPENSE - 1997 AND 1996
The schedule below reflects comparative changes in
income and expense included in the Consolidated Statements of Income
for 1997 and 1996 together with changes in asset and liability volumes
associated with these income and expense items.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
1997 Compared to 1996
1996 Compared to 1995
Average Volumes Income/Expense
Average Volumes Income/Expense
($ 000 omitted) $ % $ %
$ % $ %
Loans 3,393 3.4 412 4.7 3,958 4.2 0 .0
Investment securities 4,994 14.4 334 15.5 2,532 7.9 112 5.5
Other short-term invest-
ments 2,551 58.1 75 37.7 582 15.3 42 26.8
Total 10,938 7.9 821 7.4 7,072 5.4 154 1.4
Interest bearing demand
deposits 10,729 50.8 79 6.8 1,362 6.9 207 530.7
Savings deposits ( 5,618) (16.9) 135 17.5 1,560 4.9 (187) (195.4
)
Time deposits 983 1.6 124 3.7 3,338 5.7 237 7.5
Short-term borrowings 304 15.3 18 27.6 (1,385) (411.1) ( 149)
(
69.6)
Total 6,398 5.4 356 7.4 4,875 4.3 108 2.3
Net interest income 465 7.3 46 .7
Provision for loan losses 0 .0 0 .0
Net interest income after
provision for loan losses 465 7.3 46 .7
Security transactions 295 106.1 160 135.5
Other operating income 105 14.7 111 18.5
Income before operating
expense 865 11.8 271 37.7
Salaries & employee
benefits 184 9.2 78 4.1
Occupancy & equipment
expense 12 1.3 54 6.0
FDIC insurance premiums 14 700.0 (132) ( 98.5)
Other operating
expenses 131 11.8 134 13.8
Total operating expenses 341 8.4 134 3.4
Income before income taxes 524 15.9 183 5.9
Applicable income tax expense 166 17.6 132 16.3
Net income 358 15.3 51 22.3
</TABLE>
- -55-
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, 1997 and 1996 are as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
1997
1996
($ 000 omitted - - - - - - - -Quarter Ended- - - - - - - - - - - -
- - - - - -Quarter Ended- - - - - - - - -
except per share) Mar. 31 June 30 Sept. 30 Dec. 31 Mar.
31 June 30 Sept. 30 Dec. 31
Interest income $ 2,918 $ 2,943 $ 3,037 $ 3,079 $ 2,731 $ 2,809
$
2,780 $ 2,836
Interest expense 1,256 1,254 1,320 1,337 1,202 1,201
1,216 1,192
Net interest income 1,662 1,689 1,717 1,742 1,529 1,608
1,564 1,644
Provision for loan
losses 0 0 0 0 0 0 0
0
Net interest income
after provision
for loan losses 1,662 1,689 1,717 1,742 1,529 1,608
1,564 1,644
Other income 434 236 438 282 217 238 293 242
Other expenses 1,088 1,094 1,074 1,140 964 1,000
993 1,098
Operating income
before income
taxes 1,008 831 1,081 884 782 846 864 788
Applicable income
taxes 293 242 316 259 217 232 252
243
Net income $ 715 $ 589 $ 765 $ 625 $ 565 $ 614
$
612 $ 545
Net income applicable
to common stock
Per share data:
Net income $ .81 $ .67 $ .86 $ .71 $ .64 $ .69
$
.69 $ .62
</TABLE>
- -56-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995
1994 1993
($ 000 omitted)
LOANS
Commercial $ 15,854 $ 14,594 $ 11,848 $ 10,395 $
8,985
Mortgage 64,833 65,296 66,699 66,570 61,737
Consumer 21,752 19,156 16,541 14,024 10,951
Total loans 102,439 99,046 95,088 90,989
81,673
INVESTMENT SECURITIES
U.S. Government 698 931 1,460 1,640 1,302
U.S. Government agencies 21,898 20,404 18,854 17,855 18,228
State & municipal 9,608 8,413 8,157 8,000 7,206
Other 7,377 4,839 3,584 3,864
3,416
Total investment securities 39,581 34,587 32,055
31,359 30,152
OTHER SHORT-TERM INVESTMENTS
Federal funds sold 1,371 758 990 86 784
Certificates of deposit 5,571 3,633 2,819
1,997 2,469
Total other short-term
investments 6,942 4,391 3,809
2,083 3,253
Total earning assets 148,962 138,024 130,952 124,431
115,078
Total assets $ 155,264 $ 144,504 $ 137,204 $ 130,433 $ 121,325
Percent increase 7.4% 5.3% 5.2% 7.5% 5.1%
DEPOSITS
Demand $ 8,835 $ 8,222 $ 7,613 $ 7,083 $
6,277
Interest-bearing demand 31,820 21,091 19,729 20,308 19,011
Savings 27,647 33,265 31,705 33,548 35,804
Time 62,592 61,609 58,271 51,973 46,152
Total deposits 130,894 124,187 117,318 112,912 107,244
Short-term borrowings 2,288 1,984 3,369 2,620
826
AVERAGE RATES EARNED (TAXABLE
EQUIVALENT BASIS) % % %
% %
Loans
Commercial 9.7 9.4 10.2 8.5 8.1
Mortgage 8.9 8.7 8.9 8.0 8.3
Consumer 9.1 9.0 9.1 8.8 9.6
Total 9.0 8.9 9.2 8.4 8.4
Investment Securities
U. S. Government 6.6 6.7 6.8 6.6 6.9
U.S. Government agencies 6.7 6.5 6.4 6.0 6.7
State & municipal 5.2 5.3 5.5 5.6 6.1
Other 7.0 6.2 7.3 8.0 8.8
Total 6.2 6.2 6.2 6.0 6.6
Total other short-term
investments 6.2 6.4 5.6 6.4 5.5
Total earning assets 8.2 8.2 8.5 7.8 7.9
AVERAGE RATES PAID
Time & savings deposits 4.1 4.1 4.1 3.3 3.5
Short-term borrowings 5.9 5.3 6.2 4.3 4.0
</TABLE>
- -57-
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 $ 2,694,000 in 1997, compared to $
2,336,000 in 1996 and $ 2,285,000 in 1995. Net income on an
adjusted per share basis for 1997 was $ 3.05, up $ .41 from $ 2.64
realized during 1996.
Total interest income increased $ 821,000 from 1996 to
1997 and $ 154,000 from 1995 to 1996. Increases in 1997 were due to
both an increase in interest rates and average earning assets, while
increases in 1996 were primarily due to volume increases. Average
loans outstanding in 1997 increased 3.4% over 1996. This coupled
with increasing rates resulted in a 7.4% increase in interest income in
1997 as compared to a 1% increase realized in 1996. Total average
earning assets increased 7.4% in 1997 compared to 5.3% in 1996.
However, where this growth has occurred directly impacts the growth
in earnings. Increases in earning assets during 1997 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 77% of total interest
income for 1997, as compared to 79% and 80% for 1996 and 1995
respectively. Interest and dividends on investments amounted to
$ 2,756,000 or 23% of interest income for 1997, as compared to $
2,148,000 or 19% in 1996 and
$ 2,036,000 or 18% in 1995.
Total interest expense was $ 5,167,000 for 1997, an
increase of $ 356,000 over the
$ 4,811,000 for 1996. The increase in total average deposits was
5.4% in 1997 compared to 5.8% in 1996. Overall growth was
moderate during 1997 with interest bearing demand, savings deposits,
and time deposits having increased 5.4%. Although growth was
moderate there were some significant changes in the mix of deposits,
with saving deposits shifting to the interest bearing demand and time
deposits. This change in mix along with the constant level of rates
paid allowed the overall interest spread to decrease to 4.1% for 1997
compared to 4.6% in 1996.
The Bank's net charge-offs have been lower than peer
group performance for the past three years. Certain loan workout
situations have materialized resulting in net recoveries for the two prior
years. Net charge-offs were $ 97,000 for 1997, and net recoveries
were $ 3,000 for 1996 and
$ 89,000 for 1995. These net recoveries as well as an improving loan
portfolio have allowed the bank to have a current year provision of $ 0
for 1997, 1996 and 1995. 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.
- -58-
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 have decreased over the past several years
and have become more in line with peer banks. Balances were $
478,000 and $ 77,000 at year-end 1997 and 1996, 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,
such as safe deposit box rents. Other income increased $ 400,000 or
40.4% for 1997 over 1996, and $ 271,000 or 37.7% for 1996 over
1995. The increase in 1997 and 1996 was largely due to an increase in
investment gains of $ 295,000 and $ 160,000, respectively, fees on
trust services of $ 41,000 in 1997 and fees on investment services of $
20,000 in 1997.
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 $ 184,000 or
9.2% in 1997 over 1996, compared to an increase of $ 78,000 or 4.1%
in 1996 over 1995. Occupancy and equipment expense increased by
1.7% from 1996 to 1997 compared to 6.0% from 1995 to 1996. The
Bank expects noninterest expenses to continue to increase as their plans
to expand take place. Total noninterest expenses increased 8.4% in
1997, compared to 3.4% and 7.5% in 1996 and 1995, respectively.
Applicable income taxes changed between 1995, 1996
and 1997 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 1997
and 1996 is 34%. At December 31, 1997 and 1996, deferred taxes
amounted to $ 246,000 and $ 629,000, respectively. If all timing
differences reversed in 1997, 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.
The Bank has begun to prepare for the year 2000
changes to its computer system. A year 2000 plan has been developed
and implementation was begun at the end of 1997. During 1997 all
personal computers to include all LAN and WAN hardware and
software have been updated and/or replaced. All vendors that supply
software have been contacted and testing of updated software is
expected to begin in the fall of 1998. Currently, the Bank does not
expect there to be any problems with any conversion; and the
expenditures have been budgeted over the next two years.
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING
STANDARDS
In June 1997, The Financial Accounting Standards
Board (FASB) issued SFAS 30 "Reporting Comprehensive Income",
with the main objective of disclosing and reporting all changes in
equity that result from recognized transactions; and other economic
events of the period being reported. This statement is effective for
fiscal years beginning after December 15, 1997, with quarterly
reporting to begin March 31, 1998. The impact of this statement on
the Bank will be limited to reporting on market value adjustments
under SFAS 115 and disclosure of any activity of treasury stock.
- -59-
LIQUIDITY RISK MANAGEMENT
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
A number of measures are used to monitor and manage
interest rate risk including income simulation and interest sensitivity
(gap) analysis. An income simulation model is used to assess the
direction and magnitude of changes in net interest income resulting
from changes in interest rates. Key assumptions in the model include
prepayment, repricing and maturity of loan related assets; deposit
sensitivity; market conditions and changes in other financial
instruments. The Bank's policy objective is to limit the change in
annual earnings to 20% of projected earnings. At December 31, 1997,
based on the results of the simulation model, the Bank would expect an
increase in net interest income of $ 309,000 and a decrease in net
interest income of $ 252,000 if interest rates gradually decreased or
increased, respectively, from current rates by 300 basis points over a
12-month period.
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 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, 1997 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 -
360 Due After
Days Days
1 Year Total
Rate sensitive assets
Interest bearing deposits with banks $ 500 $ 1,176 $ 4,353 $
6,029
Investment securities 833 1,018 38,898 40,749
Real estate, commercial and consumer loans 27,993 27,680 48,665
104,338
$ 29,326 $ 29,874 $ 91,916 $ 151,116
- -60-
Due 0 - 90 Due 91 -
360 Due After
Days Days
1 Year Total
Rate sensitive liabilities
Certificates of deposit over $ 100,000 $ 3,858 $ 9,245 $ 1,363 $
14,466
Other certificates of deposit 11,454 21,817 14,771 48,042
Money market deposit accounts 5,210 2,605 0 7,815
NOW accounts and other savings deposits 35,204 17,606 0 52,810
Federal funds and other liabilities 4,781 0 200
4,981
$ 60,507 $ 51,273 $ 16,334 $ 128,114
Cumulative interest sensitive GAP ( 31,181) ( 52,580) 23,002
23,002
Cumulative interest sensitive GAP ratio .48 .53 1.18 1.18
</TABLE>
MARKET RISK MANAGEMENT
The corporation has risk management policies to
monitor and limit exposure to market risk, and strives to take
advantage of profit opportunities available in interest rate movements.
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, while minimizing structual interest
rate risk.
The following table sets forth the projected maturities
and average rates for all rate sensitive assets and liabilities based on the
following assumptions. All fixed and variable rate loans were based on
original maturity of the note since the Bank has not experienced a
significant rewriting of loans. Investments are based on maturity date
except certain long-term agencies which are classified by call date.
The Bank has historically experienced very little deposit runoff and has
in fact had net gains in deposits over the past fifteen years. Based on
this experience, it was estimated that maximum runoff of noninterest
bearing checking would be 33% and for all other deposits except time
deposits, which would be 10%. Time deposits are classified by
original maturity date.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In Millions) - - - - - - - - - - - Principal/Notional Amount
Maturing In: - - - - - - - - - - Fair
Rate sensitive assets 1998 1999 2000 2001 2002
Thereafter Total Value
Fixed interest rate
loans $ 6,982 $ 6,582 $ 5,674 $ 4,721 $ 3,844 $ 18,928 $
46,729 $ 47,058
Average interest rate 9.41 9.25 9.13 9.07 9.06 9.07 9.15
Variable interest rate
loans 18,110 1,875 2,004 2,108 2,224 31,288 57,609
57,926
Average interest rate 9.33 8.53 8.54 8.57 8.58 8.50 8.77
Fixed interest rate
securities 13,192 9,461 5,695 4,695 3,296 4,209
40,54
4 42,250
Average interest rate 6.9 7.15 6.45 5.79 5.79 5.60 6.54
Rate sensitive liabilities
Noninterest bearing
checking 1,588 476 476 476 160 0 3,176 3,176
Average interest rate - - - - - - - - - - - -
- -
- -
Savings and interest
bearing checking 1,861 1,241 1,241 1,241 620 0 8,204
8,204
Average interest rates 2.4 2.4 2.4 2.4 2.4 - - 2.4
Time deposits 45,958 7,795 4,417 994 1,931 - - 61,095
61,1
20
Average interest rates 5.45 5.4 6.00 5.3 5.77 0 5.49
Fixed interest rate
borrowings 0 200 0 0 0 0 200 200
Average rate - - 9.00 - - - - - - - - 9.00
Variable interest rate
borrowings 2,769 0 0 0 0 0 2,769 2,769
Average interest rate 5.3 - - - - - - - - - -
5.
3
</TABLE>
- -61-
CAPITAL FUNDS
Internal capital generation has been the primary method
utilized by Tower Bancorp Inc. to increase its capital. Stockholders'
equity, which exceeded $ 20.4 million at December 31, 1997 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
1997
1996
Leverage ratio 10.12% 10.26% 4%
Risk-based capital ratio
Tier I (core capital) 17.17% 16.94% 4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 17.83% 17.75% 8%
</TABLE>
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>
1997
1996 1995
Equity capital at December 31
($ 000 omitted) $ 20,433 $ 17,704 $ 16,148
Equity capital as a percent of
assets at December 31 12.77% 11.91% 11.60%
Return on average assets 1.74% 1.62% 1.67%
Return on average equity 14.17% 13.80% 15.49%
Cash dividend payout ratio 25.06% 23.42% 21.53%
</TABLE>
STOCK MARKET ANALYSIS AND DIVIDENDS
The corporation's common stock is traded inactively in
the over-the-counter market. As of December 31, 1997 the
approximate number of shareholders of record was 961.
<TABLE>
<S> <C> <C> <C> <C>
Market
Cash
1997 (1) Price
Dividend
First Quarter $ 35.00 - 35.00 $ 0
Second Quarter 34.25 - 36.00 .23
Third Quarter 35.00 - 41.00 0
Fourth Quarter 36.00 - 45.50 .53
Market
Cash
1996 (1) Price
Dividend
First Quarter $ 25.50 - 26.50 $ 0
Second Quarter 26.00 - 28.00 .19
Third Quarter 33.50 - 36.00 0
Fourth Quarter 34.25 - 34.75 .43
</TABLE>
(1) Note: Cash dividends per share were based on
weighted average shares of common stock outstanding after
giving retroactive recognition to a 5% stock dividend issued
in July 1997 and 100% stock dividend issued in April 1996.
- -62-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,311
<INT-BEARING-DEPOSITS> 6,029
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,717
<INVESTMENTS-CARRYING> 7,995
<INVESTMENTS-MARKET> 8,183
<LOANS> 104,338
<ALLOWANCE> 1,850
<TOTAL-ASSETS> 159,935
<DEPOSITS> 132,784
<SHORT-TERM> 2,212
<LIABILITIES-OTHER> 4,506
<LONG-TERM> 0
0
0
<COMMON> 2,225
<OTHER-SE> 18,313
<TOTAL-LIABILITIES-AND-EQUITY> 159,935
<INTEREST-LOAN> 9,221
<INTEREST-INVEST> 2,482
<INTEREST-OTHER> 274
<INTEREST-TOTAL> 11,977
<INTEREST-DEPOSIT> 5,046
<INTEREST-EXPENSE> 5,167
<INTEREST-INCOME-NET> 6,810
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 573
<EXPENSE-OTHER> 4,396
<INCOME-PRETAX> 3,804
<INCOME-PRE-EXTRAORDINARY> 3,804
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,694
<EPS-PRIMARY> 3.05
<EPS-DILUTED> 3.05
<YIELD-ACTUAL> 4.10
<LOANS-NON> 477
<LOANS-PAST> 1
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,947
<CHARGE-OFFS> 115
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 1,850
<ALLOWANCE-DOMESTIC> 1,850
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
