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, 1998
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, no Par Value The Common Stock is not
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, 1998, 1,765,400 shares of the
registrant's common stock were outstanding. The aggregate
market value of such shares held by nonaffiliates on that
date was $ 58,258,200.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year
ended December 31, 1998 are incorporated by reference into
Parts I and II. Portions of the Proxy Statement for 1999
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 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.
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.
- -2-
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.
During 1998 Tower acquired 9,807 shares of its own
common stock and sold 5,005 shares of treasury stock to
First's ESOP plan, and 1,504 shares to First executive
officers and directors as part of a stock option plan. On
July 1, 1998 Tower issued a 2 for 1 stock split of 885,600
shares, increasing the total number of shares outstanding at
December 31, 1998 to 1,765,400.
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, 1998, First had 77 full-time and 18 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. During 1998 Tower secured approval and purchased
property for a branch office in Waynesboro, Pennsylvania.
Construction on this branch was started during 1998 and the
new branch is scheduled to open in the first quarter of
1999.
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, 1998, First had total assets of
approximately $ 187 million, total shareholders' equity of
approximately $ 22.5 million and total deposits of
approximately $ 143 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 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.
FDICIA contains provisions limiting activities and
business methods of depository institutions. FDICIA
requires the primary federal banking regulators to
promulgate regulations setting forth standards relating to,
among other things, internal controls and audit systems;
- -7-
credit underwriting and loan documentation; interest rate
exposure and other off-balance sheet assets and liabilities;
and compensation of directors and officers. FDICIA also
provides for expanded regulation of depository institutions
and their affiliates, including parent holding companies, by
such institutions' primary federal banking regulator. Each
primary federal banking regulator is required to specify, by
regulation, capital standards for measuring the capital
adequacy of the depository institutions it supervises and,
depending upon the extent to which a depository institution
does not meet such capital adequacy measures, the primary
federal banking regulator may prohibit such institution from
paying dividends or may require such institution to take
other steps to become adequately capitalized.
FDICIA establishes five capital tiers, ranging
from "well capitalized", to "critically undercapitalized".
A depository institution is well capitalized if it
significantly exceeds the minimum level required by
regulation for each relevant capital measure. Under FDICIA,
an institution that is not well capitalized is generally
prohibited from accepting brokered deposits and offering
interest rates on deposits higher than the prevailing rate
in its market; in addition, "pass through" insurance
coverage may not be available for certain employee benefit
accounts. FDICIA also requires an undercapitalized
depository institution to submit an acceptable capital
- -8-
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, 1998, 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.
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.
- -9-
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.
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; Quincy, Pennsylvania and Waynesboro,
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.
- -10-
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 Employee Age as
Name/Office Held Since Since of 12/31/98
Kermit G. Hicks, Chairman
of the Board 1983 (1) 63
Harold C. Gayman, Vice
Chairman of the Board 1983 (1) 72
Jeff B. Shank, President
and Director 1992 1983 43
Betty J. Lehman, Director 1985 (1) 73
Robert L. Pensinger,
Director 1987 (1) 65
James H. Craig, Director 1990 (1) 65
Lois Easton, Director 1990 (1) 63
(1) These directors are not employees of the Bank.
Held Bank Employee Age as
Name/Office Held Since Since of 12/31/98
Jeff B. Shank, President 1992 1976 43
John H. McDowell,
Executive Vice President 1994 1977 49
Don Kunkle, Vice President 1987 1987 49
Donald Chlebowski, Vice
President 1991 1980 40
Darlene Niswander, Vice
President/Senior Trust
Officer 1991 1971 52
</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 through the local and
over-the-counter local markets. At December 31, 1998, the
approximate number of shareholders of record was 1,039. 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
1998 (1)1st Quarter $ 0 $ 24.00 - $ 28.75
2nd Quarter .13 28.50 - 32.00
3rd Quarter 0 30.00 - 36.00
4th Quarter .30 30.00 - 33.00
1997 (1)1st Quarter $ 0 $ 17.50 - $ 17.50
2nd Quarter .12 17.12 - 18.00
3rd Quarter 0 17.50 - 20.50
4th Quarter .26 18.00 - 22.75
</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 July 1998.
Item 6. Selected Financial Data
The selected five-year financial data on page 21
of the annual shareholders' report for the year ended
December 31, 1998 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 24
through 27 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 9
through 23 of the annual shareholders report for the year
ended December 31, 1998 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 1998 1997
Average Average
(000 omitted) Balance Interest Rate Balance Interest Rate
Investment securities:
Taxable interest
income $ 19,420 $ 1,272 6.7% $ 22,596 $ 1,724 6.7%
Nontaxable interest
income 10,988 562 5.1 9,608 495 5.2
Total investment
securities 30,408 1,834 6.4 32,204 2,219 6.4
Loans (net of unearned
discounts) 111,952 9,869 8.8 102,439 9,221 9.0
Other short-term
investments 18,598 845 6.1 14,319 537 7.1
Total interest
earning
assets 160,958 $ 12,548 8.1% 148,962 $ 11,977 8.2%
Allowance for loan
Losses ( 1,870) ( 1,931)
Cash and due
from banks 4,713 3,450
Bank premises and
equipment 2,560 2,262
Other assets 2,662 2,521
Total assets $ 169,023 $ 155,264
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand
deposits $ 33,990 $ 629 1.9% $ 31,820 $ 638 2.1%
Savings deposits 31,565 1,086 3.4 27,647 905 3.3
Time deposits 61,269 3,258 5.3 62,592 3,503 5.5
Short-term
borrowings 7,694 369 4.4 2,288 121 5.9
Total interest
bearing
liabilities 134,518 $ 5,342 4.0% 124,347 $ 5,167 4.1%
Demand deposits 10,647 8,835
Other
liabilities 2,365 3,013
Total
liabilities 147,530 136,195
Stockholders'
equity 21,493 19,069
Total liabilities &
stockholders'
equity $ 169,023 $ 155,264
Net interest income/net
yield on average
earning assets $ 7,206 4.1% $ 6,810 4.1%
</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 1996
Average
(000 omitted) Balance Interest Rate
Investment securities:
Taxable interest
income $ 26,174 $ 1,701 6.5%
Nontaxable interest
income 8,413 447 5.3
Total investment
securities 34,587 2,148 6.2
Loans (net of unearned
discounts) 99,046 8,809 8.9
Other short-term
investments 4,391 199 4.5
Total interest
earning assets 138,024 $ 11,156 8.1%
Allowance for loan
losses ( 1,946)
Cash and due from banks 3,510
Bank premises and
equipment 2,295
Other assets 2,621
Total assets $ 144,504
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand
deposits $ 21,091 $ 597 2.8%
Savings deposits 33,265 770 2.3
Time deposits 61,609 3,379 5.5
Short-term borrowings 1,984 65 3.3
Total interest
bearing liabilities 117,949 $ 4,811 4.1%
Demand deposits 8,222
Other liabilities 1,779
Total liabilities 127,950
Stockholders' equity 16,554
Total liabilities &
stockholders'
equity $ 144,504
Net interest income/net
yield on average
earning assets $ 6,345 4.6%
</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 1998, 1997 and 1996.
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CHANGES IN NET INTEREST INCOME
TAX EQUIVALENT YIELDS
<TABLE>
<S> <C> <C> <C>
1998 Versus 1997
Increase (Decrease)
Due to Change in
Total
Average Average Increase
Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned
discounts) $ 856 ($ 208) $ 648
Taxable investment securities ( 213) ( 239) ( 452)
Nontaxable investment securities 72 ( 5) 67
Other short-term investments 304 4 308
Total interest income 1,019 ( 448) 571
Interest Expense
Interest bearing demand 46 ( 55) ( 9)
Savings deposits 129 52 181
Time deposits ( 73) ( 172) ( 245)
Other short-term borrowings 319 ( 71) 248
Total interest expense 421 ( 246) 175
Net interest income $ 396
</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>
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.
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
The following table shows the maturities of investment
securities at book value as of December 31, 1998, and
weighted average yields of such securities. Yields are
shown on a tax equivalent basis, assuming a 34% federal
income tax rate.
<TABLE>
<S> <C> <C> <C>
After 1 year After 5 years
Within but within but within
1 year 5 years 10 years
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 200 $ 199 $ 0
Yield (1)
U. S. Government
agencies/mortgage-
backed securities
Book value $ 321 $ 2,887 $ 11,654
Yield (1)
State and municipal
Book value $ 300 $ 2,549 $ 3,566
Yield (1)
Other
Book value $ 516 $ 454 $ 219
Yield (1)
Total book value $ 1,337 $ 6,089 $ 15,439
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 $ 399
Yield 6.71%
U. S. Government
agencies/mortgage-
backed securities
Book value $ 6,721 $ 21,583
Yield 6.44%
State and municipal
Book value $ 5,056 $ 11,471
Yield 7.65%
Other
Book value $ 1,465 $ 2,654
Yield 7.01%
Total book value $ 13,242 $ 36,107
Yield
Equity Securities:
Total Equity Securities $ 8,906
Yield 2.47%
Total Investment Securities $ 45,013
Yield 6.01%
</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>
1998 1997 1996 1995 1994
(000 omitted)
Commercial, financial
& agricultural $ 15,164 $ 10,699 $ 10,009 $ 8,736 $ 8,506
Real estate -
Construction 2,378 1,486 2,326 1,494 1,004
Real estate -
Mortgage 87,350 80,597 78,990 76,624 76,655
Installment & other
personal loans
(net of unearned
income) 18,798 11,556 9,716 8,996 8,973
Total loans $ 123,690 $ 104,338 $ 101,041 $ 95,850 $ 95,138
</TABLE>
Presented below are the approximate maturities of the
loan portfolio (excluding real estate mortgage and
installments) at December 31, 1998:
<TABLE>
<S> <C> <C> <C> <C>
Under One One to Over Five
Year Five Years Years Total
(000 omitted)
Commercial, financial &
agricultural $ 10,615 $ 2,275 $ 2,274 $ 15,164
Real estate -
Construction 2,378 0 0 2,378
Total $ 12,993 $ 2,275 $ 2,274 $ 17,542
</TABLE>
The following table presents the approximate amount of
fixed rate loans and variable rate loans due as of
December 31, 1998:
<TABLE>
<S> <C> <C>
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 8,926 $ 13,493
Due after one but within
five years 27,446 14,870
Due after five years 36,253 22,702
Total $ 72,625 $ 51,065
</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>
1998 1997 1996 1995 1994
(000 omitted)
Average total loans
outstanding (net of
unearned
income) $ 111,952 $ 102,439 $ 99,046 $ 95,088 $ 90,989
Allowance for loan
losses, beginning
of period 1,850 1,947 1,945 1,856 1,560
Additions to provision
for loan losses
charged to
operations 0 0 0 0 13
Loans charged off
during the year
Commercial 0 58 5 0 0
Real estate
mortgage 1 0 0 7 0
Instal-
lment 46 57 9 13 18
Total charge-
off's 47 115 14 20 31
Recoveries of loans
previously charged off:
Commercial 43 11 6 75 261
Installment 20 7 9 27 39
Mortgage 24 0 1 7 1
Total
recov-
eries 87 18 16 109 301
Net loans charged off
(recovered)( 40) 97 ( 2)( 89) ( 270)
Allowance for loan
losses, end of
period 1,890 1,850 1,947 1,945 1,856
Ratio of net loans
charged off (recovered)
to average loans
outstanding ( .04%) .09% ( .003)% ( .09)% ( .29%)
</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>
1998 1997 1996 1995 1994
(000 omitted)
Nonaccrual loans $ 488 $ 477 $ 77 $ 135 $ 79
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
60 - 89 days past due 417 315 216 252 14
90 days or more past
due 0 1 87 115 1
Total accrual
loans $ 417 $ 316 $ 303 $ 367 $ 15
</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
1998 1997
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 $ 815 12.5% $ 772 10.3%
Real estate -
Construction 0 2.0 0 1.4
Real estate -
Mortgage 653 70.2 630 77.2
Installment 0 15.3 0 11.1
Unallocated 422 N/A 448 N/A
Total $ 1,890 100.0 $ 1,850 100.0%
Years Ended December 31
1996 1995
Percentage of Percentage of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and
agricultural $ 819 9.9% $ 818 9.1%
Real estate -
Construction 0 2.3 0 1.6
Real estate -
Mortgage 630 78.2 629 79.9
Installment 48 9.6 48 9.4
Unallocated 450 N/A 450 N/A
Total $ 1,947 100.0 $ 1,945 100.0%
</TABLE>
- -21-
<TABLE>
<S> <C> <C>
Years Ended December 31
1994
Percentage of
Loans in Each
Allowance Category to
Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 743 8.9%
Real estate -
Construction 0 1.1
Real estate -
Mortgage 629 80.5
Installment 33 9.5
Unallocated 451 N/A
Total $ 1,856 100.0%
</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
1998 1997 1996
(000 omitted)
Demand deposits $ 10,647 $ 8,835 $ 8,222
Interest bearing demand
deposits 33,990 31,820 21,091
Savings deposits 31,565 27,647 33,265
Time deposits 61,269 62,592 61,609
Total deposits $ 137,471 $ 130,894 $ 124,187
</TABLE>
The following is a breakdown of maturities of time
deposits of $ 100,000 or more as of December 31, 1998:
<TABLE>
<S> <C> <C>
Maturity (000 omitted)
Certificates of Deposit
Three months or less $ 2,711
Over three months through twelve
months 8,703
Over twelve months 3,467
$ 14,881
</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>
1998 1997 1996
Assets $ 187,335 $ 159,935 $ 148,673
Net income $ 2,909 $ 2,694 $ 2,336
Equity $ 22,552 $ 20,433 $ 17,704
Cash dividends paid $ 751 $ 675 $ 547
Return on assets 1.72% 1.74% 1.62%
Return on equity 13.54% 14.17% 13.80%
Dividend payout ratio 25.82% 25.06% 23.42%
Equity to asset ratio 12.72% 12.25% 11.76%
</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
1998 1997 1996 1995 1994
(000 omitted)
Interest income$ 12,548 $ 11,977 $ 11,156 $ 11,002 $ 9,666
Interest
expense 5,342 5,167 4,811 4,703 3,661
Net interest
income 7,206 6,810 6,345 6,299 6,005
Provision for loan
losses 0 0 0 0 13
Net interest income
after provision
for loan
losses 7,206 6,810 6,345 6,299 5,992
Other income:
Trust 391 293 252 200 190
Service charges -
deposits 281 288 277 288 269
Other service charges,
collection and exchange,
charges, commission
fees 212 181 159 102 103
Other operating
income 1,198 628 302 129 135
Total other
income 2,082 1,390 990 719 697
Income before
operating
expense 9,288 8,200 7,335 7,018 6,689
Operating expenses:
Salaries and employees
benefits 2,483 2,179 1,995 1,917 1,836
Occupancy and equipment
expense 1,220 964 952 898 871
Other operating
expenses 1,430 1,253 1,108 1,106 1,117
Total operating
expenses 5,133 4,396 4,055 3,921 3,824
Income before income
Taxes 4,155 3,804 3,280 3,097 2,865
Income tax 1,246 1,110 944 812 748
Net income applicable
to common
stock $ 2,909 $ 2,694 $ 2,336 $ 2,285 $ 2,117
Per share data:
Earnings per common
share $ 1.68 $ 1.53 $ 1.32 $ 1.29 $ 1.20
Cash dividend -
Common $ .43 $ .38 $ .31 $ .28 $ .24
Average number of
common
shares 1,732,479 1,765,056 1,775,069 1,771,728 1,770,338
</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 1999 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, 1998,
are incorporated by reference in Item 8:
Consolidated balance sheets - December 31,
1998 and 1997
Consolidated statements of income - Years
ended December 31, 1998, 1997 and 1996
Consolidated statements of stockholders'
equity - Years ended December 31, 1998, 1997,
and 1996
Consolidated statements of cash flows - Years
ended December 31, 1998, 1997, and 1996
Notes to consolidated financial statements -
December 31, 1998
(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
Schedule VII - Consolidated summary of
operations
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 (10) Material contracts
Exhibit (13) Annual report to security
holders
Exhibit (21) Subsidiaries of the registrant
Exhibit (23.1) Consent of independent auditors
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.
- -27-
(b) Reports on Form 8-K filed
The following Form 8-K filed by Tower Bancorp,
Inc. is incorporated herein by reference:
Form 8-K dated May 26, 1998, reporting item
number 5 other events which reported the
Articles of Incorporation as amended and
restated reflecting a reduction of the par
value of Tower's common stock to no par value.
(c) Exhibits
(3)(i) Articles of incorporation. Incorporated
by reference to Form 8-K dated May 26,
1998.
(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:
- -28-
(i) Articles of Incorporation of Tower
Bancorp, Inc., incorporated by
reference to Form 8-K dated May 26,
1998.
(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).
(10)(i) Change of control agreements - filed
herewith
(ii) Non-Qualified stock option plan;
stock option plan for outside
directors and amended and restated
employee stock ownership plan filed
as Exhibit 99.1 to the Registrant's
Statement on Form S-8 (Registration
No. 333-40661).
(13) Annual report to security holders - filed
herewith
(21) Subsidiaries of the registrant - filed
herewith
(23.1) Consent of independent auditors
(27) Financial data schedule - filed herewith
- -29-
(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
Schedule VII - Consolidated summary of
operations
- -30-
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 /s/ Jeff B. Shank
Jeff B. Shank, President
(Principal Executive
Officer and
Principal Financial
Officer)
By /s/ Donald F. Chlebowski
Donald F. Chlebowski, Jr.,
Treasurer (Principal
Accounting Officer)
Dated: March 22 , 1999
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
/s/ Jeff B. Shank President & March 22 , 1999
Jeff B. Shank Director
/s/ Betty J. Lehman Director March 22 , 1999
Betty J. Lehman
/s/ Kermit G. Hicks Chairman of the March 22 , 1999
Kermit G. Hicks Board & Director
/s/Robert L. Pensinger Director March 22 , 1999
Robert L. Pensinger
/s/ Harold C. Gayman Vice Chairman of March 22 , 1999
Harold C. Gayman the Board & Director
/s/James H. Craig, Jr. Director March 22 , 1999
James H. Craig, Jr.
/s/ Lois Easton ____ Director March 22 , 1999
Lois Easton
- -31-
Exhibit Index
Exhibit No. Sequentially numbered
pages
10-1 Change in control agreement -
Jeff Shank
10-2 Change in control agreement -
John McDowell, Sr.
13 Annual report to security holders
21 Subsidiaries of the Registrant
23.1 Consent of independent auditors
27 Financial data schedule
Exhibit 10-1
CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT is made as of this 31st day of May 1995,
among THE FIRST NATIONAL BANK OF GREENCASTLE, a national
banking association (the "Bank"), TOWER BANCORP, INC., a
Pennsylvania business corporation (the "Corporation"), and
JEFF B. SHANK, an adult individual (the "Executive").
WITNESSETH:
WHEREAS, the Bank is a subsidiary of the Corporation;
WHEREAS, the Bank and the Corporation employ the
Executive as President and Chief Executive Officer, and
Executive is an integral part of the management team of the
Bank and Corporation;
WHEREAS, as a result of changes in federal and state
banking laws, there has been a dramatic increase in the
number of mergers and other acquisitions of Pennsylvania
banks; while Bank and Corporation remain committed to the
policy of Bank remaining an independent bank, it recognizes
that it might nevertheless be acquired as a result of an
unsolicited takeover attempt or in a negotiated transaction;
and Executive will play a critical role in any such
acquisition, as it falls principally upon his and the other
members of Management to vigorously and aggressively
represent and protect the interests of the shareholders of
the Corporation;
- -1-
WHEREAS, Bank and Corporation believe that Executive
should not be forced to sacrifice his future financial
security in order to fulfill his responsibilities to the
shareholders, and the Board of Directors of the Bank has
carefully considered this issue and has determined that it
should be addressed; specifically, the Board of Directors
has concluded that basic financial protection should be
provided to Executive in the event that he is discharged or
resigns following, and for reasons relating to, a Change in
Control of the Bank or Corporation;
AND WHEREAS, the purpose of this Agreement is to define
the terms for Executive's financial protection, and to
specify the conditions under which they are to be paid.
NOW, THEREFORE, in consideration of the mutual
covenants and agreements set forth herein and intending to
be legally bound hereby, the parties agree as follows:
1. UNDERTAKING OF THE BANK AND CORPORAITON.
(a) This Agreement is not intended to affect the
terms of Executive's employment at will in the absence of a
Change in Control of the Bank or Corporation. Accordingly,
although this Agreement will take effect upon execution as a
binding legal obligation of the Bank and Corporation, it
will become operative only upon a Change in Control of the
Bank or Corporation as that concept is defined below.
- -2-
Nothing in this Agreement shall constitute or give rise to
any guarantee or contract of employment of the Executive by
the Corporation and/or the Bank, and shall not give the
Executive any right to be employed by or retained in the
employ of the Corporation and/or the Bank as the President
and Chief Executive Officer of the Corporation and the Bank,
or in any other position or capacity, except in the event of
Change of Control.
(b) The Bank and Corporation shall provide to
Executive the compensation and benefits specified in
paragraph 6 immediately following a Change in Control of the
Bank or Corporation.
(c) The Bank and Corporation shall provide to
Executive the compensation and benefits specified in
Paragraph 7 below in the event that at any time following a
Change in Control of the Bank or Corporation:
(i) Executive is discharged by the Bank or
Corporation, other than for Cause pursuant to Paragraph 4
below; or
(ii) Executive resigns from the Bank for Good Reason
pursuant to Paragraph 5 below.
Executive's employment needs to have been terminated under
this Agreement prior to Executive having obtained the age of
sixty-five (65), or this Agreement shall have no effect. In
- -3-
the event that Executive's employment is terminated pursuant
to paragraph 1(c) between his 62nd and 65th birthday, the
terms of his employment under paragraph 6 and the Severance
Benefit Period in paragraph 7 shall be modified to the
actual term remaining between Executive's 62nd and 65th
birthdays, rather than three (3) years.
2. DEFINITION OF CHANGE OF CONTROL. For purposes of this
Agreement, the term "Change of Control" shall mean a change
of control (other than one occurring by reason of an
acquisition of the Corporation by Executive) of a nature
that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A or any successor rule
or regulation promulgated under the Securities Exchange Act
of 1934, as amended (the "Act"); provided that, without
limiting the foregoing, a Change of Control shall be deemed
to have occurred if (a) any "person" or group of "persons"
(as such term is defined or used in Sections 3, 13(d) and
14(d) of the Act), other than the Corporation, the Bank, the
Executive or any "person" who on the date hereof is a
director or officer of the Bank, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 and Rule 13d-5,
or any successor rule or regulation, promulgated under the
Act), directly or indirectly, of securities of the
Corporation which represent twenty percent (20%) or more of
- -4-
the combined voting power of the Corporation's then
outstanding securities, or (b) during any period of two
consecutive years during the initial term of this Agreement
and any extension thereof, individuals who at the beginning
of such period constitute the Board of Directors of the
Corporation cease for any reason to constitute at least a
majority thereof, unless the election of each director who
was not a director at the beginning of such period has been
approved in advance by directors representing at least
three-fourths of the directors then in office who were
directors at the beginning of the period, or (c) the
Corporation or Bank shall be merged or consolidated or
substantially all of the assets of either of them shall be
purchased by another person (as defined above) and, as a
result of such merger, consolidation or sale of assets, less
than a majority of the outstanding voting stock of the
surviving, resulting or purchasing person is owned,
immediately after the transaction, by the holders of the
voting stock of the Corporation before the transaction.
3. DEFINITION OF DATE OF CHANGE OF CONTROL. For
purposes of this Agreement, the date of Change of Control
shall mean:
(a) the first date on which a single person and/or
entity, or group of affiliated persons and/or entities,
- -5-
acquire the beneficial ownership of twenty percent (20%) or
more of the Corporation's voting securities;
(b) the date of the transfer of all or substantially
all of the Bank or Corporation's assets;
(c) the date on which a merger, consolidation or
combination is consummated, as applicable; or
(d) the date on which individuals who formerly
constituted a majority of the Board of Directors of the Bank
or Corporation under paragraph 2 above, ceased to be a
majority.
4. DISCHARGE FOR CAUSE.
(a) The Bank or Corporation may at any time
following a Change in Control discharge Executive for
"Cause", in which event Executive shall not be entitled to
receive the compensation and benefits specified in
Paragraphs 6 or 7 below.
(b) For purposes of this Agreement, the Bank
shall have "Cause" to discharge Executive only under the
following circumstances:
(i) Executive shall have committed an act of
dishonesty constituting a felony and resulting or intending
to result directly or indirectly in gain or personal
enrichment of Executive at the expense of the Bank; or
(ii) The dishonesty or gross negligence of the
Executive in the performance of his duties; or
- -6-
(iii)The willful violation by Executive of law,
rule or regulation governing banks or bank officers, or of
any final Cease and Desist order issued by a bank regulatory
authority, any of which materially jeopardizes the business
of the Corporation or Bank;
5. RESIGNATION FOR GOOD REASON
(a) Executive may at any time following a Change
in Control resign from the Bank and/or Corporation for Good
Reason, in which event Executive shall be entitled to
receive the benefits specified in Paragraph 7 below.
(b) For purposes of this Agreement, Executive
shall have Good Reason to resign under the following
circumstances:
(i) The Bank and/or Corporation, without
Executive's prior written consent, shall have changed or
attempted to change in any significant respect the
authority, duties, compensation, benefits or other terms or
conditions of Executive's employment; or
(ii) Executive shall have determined in good
faith and in his sole and absolute discretion that he is
unable to work harmoniously and effectively with the new
management of the Bank and/or Corporation or that he is
otherwise unable effectively to carry out his duties and
discharge his responsibilities to the Bank and Corporation.
- -7-
(iii)Executive's health should become
impaired to an extent that it makes continued performance of
his duties hereunder hazardous to his physical or mental
health or his life.
6. EMPLOYMENT AGREEMENT UPON CHANGE OF CONTROL.
Immediately upon the occurrence of a Change in Control,
Executive shall be employed by the Bank and Corporation
pursuant to this Agreement and subject to the following
terms and conditions:
(a) Term of Employment. The Corporation and Bank
shall hereby employ the Executive, and the Executive hereby
accepts employment with the Corporation and Bank, for a term
of three (3) years beginning on the Effective Date of Change
of Control. Furthermore, upon the expiration of the first
twelve (12) full calendar months after the Effective Date of
the Change of Control, the term hereof shall be extended for
another twelve (12) full calendar months, and upon
expiration of each subsequent twelve (12) full calendar
months thereafter, the term of this Agreement shall likewise
be extended for an additional twelve (12) full calendar
months. Each such extension of this Agreement's term shall
be automatic unless the Corporation provides the Executive
written notice of its intention not to extend this Agreement
for such additional twelve (12) month period; such written
notice must be given by the Corporation not less than
fifteen (15) days before the expiration of the current
twelve (12) months.
- -8-
(b) Position and Duties. The Executive shall serve as
the President and Chief Executive Officer of the Corporation
and of the Bank and shall serve as a member of the Board of
Directors of the Corporation and of the Bank, reporting only
to the Boards of Directors of the Corporation and Bank. The
Executive shall have supervision and control over, and
responsibility for, the general management and operation of
the Corporation and Bank, and shall have such other powers
and duties as may from time to time be prescribed by the
Board of Directors of the Corporation and Bank, provided
that such powers and duties are consistent with the
Executive's position as the Chief Executive Officer in
charge of the general management of the Corporation and
Bank.
(c) Engagement in Other Employment. The Executive
shall devote all of his working time, ability and attention
to the business of the Corporation and Bank during the term
of this Agreement. The Executive shall notify the Board of
Directors of the Corporation and Bank in writing and receive
written approval from the Corporation and Bank before the
Executive engages in any other business or commercial duties
or pursuits, including, but not limited to, directorships of
other companies. Under no circumstances may the Executive
engage in any business or commercial activities, duties or
pursuits which compete with the business or commercial
- -9-
activities of the Corporation or Bank, nor may the Executive
serve as a director or officer or in any other capacity in a
company which competes with the Corporation or Bank.
Executive shall not be precluded, however, upon written
notification to the Boards of Directors, from engaging in
voluntary or philanthropic endeavors, or from engaging in
activities incident or necessary to personal investments, so
long as they are, in the Boards' reasonable opinion, not in
conflict with or detrimental to the Executive's rendition of
services on behalf of the Corporation and Bank.
(d) Compensation.
(1) ANNUAL DIRECT SALARY: As compensation for services
rendered to the Corporation and Bank under this Agreement,
the Executive shall be entitled to receive from the
Corporation an Annual Direct Salary equivalent to at least
the median salary for financial institutions within the peer
group of Bank, as set forth in the L. R. Webber Associates,
Inc. Annual Salary Survey (or an equivalent salary survey
in the event of discontinuance of such survey) for the
calendar year immediately preceding the Effective Date of
Change in Control, but in no event less than the actual
annual salary set for Executive during the calendar year in
which the Effective Date of Change of Control occurs, (the
- -10-
"Initial Annual Direct Salary"), payable in substantially
equal periodic installments consistent with the Bank's
payroll policy, prorated for any partial employment period.
The Annual Direct Salary shall be reviewed annually, no
later than December 15 of the then calendar year and shall
be subject to such annual change (but not reduced below the
Initial Annual Direct Salary as set forth in this subsection
without the Executive's consent, except in cases of national
financial depression or emergency when compensation
reduction has been implemented by the Board of Directors for
the Bank's senior management) as may be set by the Board of
Directors of the Corporation and Bank taking into account
the position and duties of the Executive and the performance
of the Corporation and Bank under the Executive's
leadership.
(2) BONUS. A periodic bonus to the Executive in such
an amount or nature as it may deem appropriate to provide
incentive to the Executive and to reward the Executive for
his performance, in a manner reasonably consistent with the
bonus programs of the Bank and Corporation immediately prior
to the Change of Control.
(3) DIRECTOR FEES. The Executive shall be entitled to
any director's fee or other compensation as paid to other
members of the Board of Directors of the Bank and/or
- -11-
Corporation or subsidiaries of either. The Executive also
agrees to serve on any committee of the Board of Directors
of the Bank and/or Corporation or subsidiary of either
without any additional compensation or fees. If, for any
reason, the Executive is not elected a director of any
successor to the Bank and/or Corporation after Change in
Control, then in such event Executive shall continue to
receive, as additional Annual Direct Salary under
subparagraph 6(d)(1) hereof, a sum equivalent to the mean
average of the total director's fees and other compensation
paid to Executive as a member of the Board of Directors of
the Bank and/or Corporation during the immediately preceding
three calendar years.
(e) FRINGE BENEFITS, VACATION, EXPENSES, AND
PERQUISITES.
(1) Employee Benefit Plans. The Executive
shall be entitled to participate in or receive benefits
under all Bank and Corporation employment benefit plans
including, but not limited to, any pension plan, profit-
sharing plan, deferred compensation plan, savings plan, life
insurance plan or disability insurance plan as made
available by the Bank and Corporation to its employees,
subject to and on a basis consistent with terms, conditions
and overall administration of such plans and arrangements.
These benefits shall include, but not be limited to:
- -12-
(A) Vacation, Holidays, Sick Days and Personal Days.
Executive shall be entitled to the number of paid vacation
days in each calendar year determined by the Bank and
Corporation from time to time for its senior executive
officers (prorated in any calendar year during which the
Executive is employed hereunder for less than the entire
such year in accordance with the number of days in such
calendar year during which he is so employed). The
Executive also shall be entitled to all paid holidays, sick
days and personal days given by the Bank and Corporation to
its employees.
(B) Business Expenses. During the term of his
employment hereunder, Executive shall be entitled to receive
prompt reimbursement for all reasonable expenses incurred by
him (in accordance with the policies and procedures
established by the Board of Directors of the Bank for its
senior executive officers) in performing services hereunder,
provided that the Executive properly accounts therefor in
accordance with policy.
(C) Liability Insurance. The Corporation shall use its
best efforts to obtain insurance coverage for the Executive
under an insurance policy covering officers and directors of
the Bank against lawsuits, arbitrations or other legal or
regulatory proceedings; however, nothing herein shall be
- -13-
construed to require the Corporation to obtain such
insurance, if the Board of Directors of the Corporation
determines that such coverage cannot be obtained at
commercially reasonable rates.
(D) Term Life Insurance Benefits equivalent to not
less than the greater of: $600,000.00 or four (4) times
Executive's annual salary.
(E) A Deferred Compensation Plan, involving both
Executive's salary and Board of Director's fees, in a form
similar to that currently provided to Executive through the
Tiger's Eye Benefits Consulting - Theodore G. Reeder,
III) C.P.A.) P.C.
(F) An automobile to be provided at Bank or
Corporation's expense of a value at least comparable to that
of a Honda Accord.
(G) Memberships in such service clubs, country
clubs, and professional associations, as provided to
Executive as of the date of the Change in Control.
7. PAYMENTS UPON TERMINATION AFTER A CHANGE OF
CONTROL.
(a) If the Corporation or Bank shall for any
reason terminate Executive's employment as a result of or
following a Change of Control (as defined herein),
other than for "Cause" pursuant to paragraph 4 hereof, or if
Executive should terminate his employment for "Good Reason"
- -14-
pursuant to paragraph 7 hereof, then, in such event, the
Executive shall receive a lump sum payment equal to 2.99
times his "Base Amount" which is defined as the mean average
of the total Annual Direct Salary [paid under paragraph
6(d)(1)] plus the mean average of the annual total bonuses
paid to the Executive [paid under paragraph 6(d)(2)] during
the five (5) calendar years immediately preceding the
Effective Date of the Change in Control.
(b) The Executive also shall receive during the
Severance Benefit Period the employee benefits as set forth
in paragraph 6(e)(1)(A) through (G) above. If participation
in these benefits is prevented by law or the terms of a
plan, the Corporation and/or Bank shall provide a
substantially equivalent substitute. Any of Executive's
benefits under any of the employee benefit plans, including,
but not limited to a pension, profit sharing, 401 (k),
ESOP, and/or deferred compensation plan shall be fully
vested in the event of the implementation of this paragraph
7. Further, Bank and Corporation shall provide for the
transfer to Executive, at the minimum legally permissible
cost, the policies for insurance benefits including, but not
necessarily limited to, life, disability and health
insurance programs.
8. NOTICE. For the purposes of this Agreement,
notices and all other communications provided for in the
- -15-
Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States
certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: Jeff B. Shank
856 McDowell Road
Greencastle, Pa. 17225
If to the Bank: The First National
Bank of Greencastle
Center Square, P.O. Box 8
Greencastle, Pa. 17225-0008
If to the Corporation: Tower Bancorp, Inc.
Center Square, P.O. Box 8
Greencastle, Pa. 17225-0008
or to such other address as any party may have furnished to
the other in writing in accordance herewith, except that
notices of change of address shall be effective only upon
receipt.
9. SUCCESSORS AND PARTIES IN INTEREST
(a) This Agreement shall be binding upon and
shall inure to the benefit of the Bank and Corporation and
their successors and assigns, including, without limitation,
any corporation which acquires, directly or indirectly, by
purchase, merger, consolidation or otherwise, all or
substantially all of the business or assets of the Bank or
- -16-
Corporation. Without limitation of the foregoing, the Bank
and Corporation shall require any such successor, by
agreement in form and substance satisfactory to Executive,
expressly to assume and agree to perform this Agreement in
the same manner and to the same extent that it is required
to be performed by the Bank and Corporation. Failure to
obtain such assumption and agreement shall serve as Good
Reason for termination under Paragraph 5.
(b) This Agreement is binding upon and shall
inure to the benefit of Executive, his heirs and personal
representatives.
10. SEVERANCE BENEFIT PERIOD. The Severance Benefit
Period under paragraph 7 shall commence upon the Effective
Date of Executive's discharge (for reasons other than
"Cause") or of Executive's resignation (for "Good Reason")
and shall terminate upon the expiration period of 2.99
years.
11. MITIGATION AND SETOFF.
(a) Executive shall not be required to mitigate the
amount of any payment or benefit provided for in Paragraph 7
above by seeking employment or otherwise, and the Bank and
Corporation shall not be entitled to setoff against the
amount of any payment or benefit provided for in Paragraph 7
above by any amounts earned by Executive in other employment
during the Severance Benefit Period.
- -17-
(b) The Bank and Corporation hereby waive any and all
rights to setoff in respect to any claim, debt, obligation
or other liability of any kind whatsoever, against any
payment or benefit provided for in Paragraph 7 above.
12. SEVERABILITY. If any provision of this Agreement
is declared unenforceable for any reason, the remaining
provisions of this Agreement shall be unaffected thereby and
shall remain in full force and effect.
13. AMENDMENT. This Agreement may be amended or
cancelled only by mutual agreement of the parties in
writing.
14. ATTORNEYS FEES AND COSTS. If any action at law or
in equity is necessary to enforce the Executive's rights
hereunder following a Change of Control, the Executive shall
be entitled to recover all such attorney's fees, costs and
disbursements reasonably incurred by him in connection with
any such suit brought by him.
15. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. In the
event of Executive's death, any monies or benefits that may
be due him from the Corporation or Bank under this Agreement
as of the date of death or thereafter shall be paid to the
person designated by him in writing for this purpose, or, in
the absence of any such designation, to his estate.
16. LIMITATION OF DAMAGES FOR BREACH OF AGREEMENT. In
the event of a breach of this Agreement by either the
Corporation, the Bank or the Executive, each hereby waives
- -18-
to the fullest extent permitted by law the right to assert
any claim against the others for punitive or exemplary
damages.
17. LAW GOVERNING. This Agreement shall be governed
by and construed in accordance with the laws of the
Commonwealth of Pennsylvania. In the event that any
party shall institute any suit or other legal proceeding,
whether or law or in equity, arising from or relating to
this Agreement, the courts of the Commonwealth of
Pennsylvania shall have exclusive jurisdiction and venue
shall lie exclusively in the Court of Common Pleas of
Franklin County, Pennsylvania.
18. ENTIRE AGREEMENT. This Agreement supersedes any
and all prior agreements, either oral or in writing, between
the parties with respect to payments after a Change of
Control, and this Agreement contains all the covenants and
agreements between the parties with respect to same.
19. RIGHTS UNDER OTHER PLANS. This Agreement is not
intended to reduce, restrict or eliminate any benefit to
which Executive may otherwise be entitled at the time of his
discharge or resignation under any employee benefit plan of
the Bank then in effect.
20. TERMINATION. This Agreement may not be terminated
except by mutual consent of the parties, as evidenced by a
written instrument duly executed by the Bank and Executive.
- -19-
21. INDEPENDENT REPRESENTATION. The provisions of
this Agreement and their legal effect have been fully
explained to the parties by their respective, independent
counsel. Each party acknowledges that he/it has received
independent legal advice, and that each fully understands
the facts and has been fully informed as to his/its legal
rights and obligations. Each party accepts this Agreement
as fair and equitable, and that it is being entered into
freely and voluntarily, after having received such advice
and with such knowledge.
22. "EXCESS PARACHUTE PAYMENT". Notwithstanding any
other provisions of this Agreement, Corporation shall not be
required to pay any Severance Benefits pursuant to paragraph
7 hereof which would be deemed an "Excess Parachute
Payment", and thus non-deductible to the Bank and/or
Corporation, under the Internal Revenue Code. Provided,
however, it is the express intent of this Agreement to
provide to Executive the maximum amount to which he would be
entitled under the Internal Revenue Code, which amount will
result in no portion of such payment being deemed an "Excess
Parachute Payment".
IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound hereby, have caused this Agreement to be duly
executed in their respective names and, in the case of the
- -20-
Corporation and Bank, by its authorized representatives the
day and year above mentioned.
ATTEST: THE FIRST NATIONAL BANK
OF GREENCASTLE
By
John H. McDowell, Exec. V. Pres. Kermit G. Hicks, Chairman
ATTEST: TOWER BANCORP, INC.
By
John H. McDowell, Exec. V. Pres. Kermit G. Hicks, Chairman
WITNESS:
Jeff B. Shank
- -21-
Execution Copy
EXHIBIT 10-2
CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT is made as of this 23rd day Of December,
1998, among THE FIRST NATIONAL BANK OF GREENCASTLE, a
national banking association (the "Bank"), TOWER BANCORP,
INC., a Pennsylvania business corporation (the
"Corporation"), and JOHN H. McDOWELL, SR., an adult
individual (the "Executive").
WITNESSETH:
WHEREAS, the Corporation is a registered bank holding
company;
WHEREAS, the Bank is a subsidiary of the Corporation;
WHEREAS, the Bank employs the Executive as Executive
Vice President and Chief Operating Officer of the Bank, and
Executive is an integral part of the management team of the
Bank;
WHEREAS, as a result of changes in federal and state
banking laws, there has been a dramatic increase in the
number of mergers and other acquisitions of Pennsylvania
banks; while Bank and Corporation remain committed to the
policy of Bank remaining an independent bank, it recognizes
that it might nevertheless be acquired as a result of an
unsolicited takeover attempt or in a negotiated transaction;
and Executive will play a critical role in any such
acquisition, as it falls principally upon his and the other
members of Management to vigorously and aggressively
represent and protect the interests of the shareholders of
the Corporation;
WHEREAS, Bank and Corporation believe that Executive
should not be forced to sacrifice his future financial
security in order to fulfill his responsibilities to the
shareholders, and the Board of Directors of the Bank has
carefully considered this issue and has determined that it
should be addressed; specifically, the Board of Directors
has concluded that basic financial protection should be
provided to Executive in the event that he is discharged or
resigns following, and for reasons relating to, a Change of
Control of the Bank or Corporation;
- -1-
AND WHEREAS, the purpose of this Agreement is to define
the terms for Executive's financial protection, and to
specify the conditions under which they are to be paid.
NOW, THEREFORE, in consideration of the mutual
covenants and agreements set forth herein and intending to
be legally bound hereby, the parties agree as follows:
I. UNDERTAKING OF THE BANK AND CORPORATION
This Agreement is not intended to affect the terms of
Executive's employment at will in the absence of a Change of
Control of the Bank or Corporation. Accordingly, although
this Agreement will take effect upon execution as a binding
legal obligation of the Bank and Corporation, it will become
operative only upon a Change of Control of the Bank or
Corporation as that concept is defined below. Nothing in
this Agreement shall constitute or give rise to any
guarantee or contract of employment of the Executive by the
Bank and/or the Corporation, and shall not give the
Executive any right to be employed by or retained in the
employ of the Bank as Executive Vice President and Chief
Operating Officer of the Bank, or in any other position or
capacity, except in the event of Change of Control.
2. TERMINATION OF EMPLOYMENT FOLLOWING CHANGE OF CONTROL
(a) If a Change of Control (as defined in Paragraph
2(b) of this Agreement) shall occur and if at any
time thereafter any one of the following shall
occur:
(i) any involuntary termination of Executive's
employment (other than for the Cause pursuant
to Paragraph 4 of this Agreement);
(ii) any reduction in Executive's title,
responsibilities, including reporting
responsibilities, or authority, including
such title, responsibilities or authority
as such may be increased from time to time
during the term of this Agreement;
(iii)the assignment to Executive of duties
inconsistent with Executive's office on the
date of the Change of Control or as the same
may be increased from time to time after the
Change of Control;
(iv) any reassignment of Executive to a location
greater than one hundred (100) miles from the
location of Executive's office on the date of
the Change of Control;
- -2-
(v) any reduction in Executive's annual base
salary in effect on the date of the Change of
Control or as the same may be increased from
time to time after the Change of Control;
(vi) any failure to provide Executive with
benefits at least as favorable as those
enjoyed by Executive under any of Bank's or
Corporation's retirement or pension, life
insurance, medical, health and accident,
disability or other employee plans in which
Executive participated at the time of the
Change of Control, or the taking of any
action that would materially reduce any of
such benefits in effect at the time of the
Change of Control;
(vii)any requirement that Executive travel in
performance of his duties on behalf of Bank
or Corporation for a significantly greater
period of time during any year than was
required of Executive during the year
preceding the year in which the Change of
Control occurred;
(viii)Executive determines in good faith and in
his sole and absolute discretion that he is
unable to work harmoniously and effectively
with the new management of the Bank and/or
Corporation or that he is otherwise unable
effectively to carry out his duties and
discharge his responsibilities to the Bank
and Corporation;
(ix) Executive's health should become impaired to
an extent that it makes continued performance
of his duties hereunder hazardous to his
physical or mental health or his life;
then, at the option of Executive, exercisable by
Executive within one hundred twenty (120) days of
the occurrence of any of the foregoing events,
Executive may resign from employment with Bank (or,
if involuntarily terminated, give notice of
intention to collect benefits under this Agreement)
by delivering a notice in writing (the "Notice of
Termination") to Bank and Corporation and the
provisions of Paragraph 5 of this Agreement shall
apply.
- -3-
(b) For purposes of this Agreement, the term "Change
of Control" shall mean a change of control (other
than one occurring by reason of an acquisition of
the Corporation by Executive) of a nature that
would be required to be reported in response to
Item 6(e) of Schedule 14A of Regulation 14A or any
successor rule or regulation promulgated under the
Securities Exchange Act of 1934, as amended (the
"Act"); provided that, without limiting the
foregoing, a Change of Control shall be deemed to
have occurred if (1) any "person" or group of
"persons" (as such term is defined or used in
Sections 3, 13(d) and 14(d) of the Act), other
than the Corporation, the Bank, the Executive or
any "person" who on the date hereof is a director
or officer of the Bank, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 and
Rule 13d-5, or any successor rule or regulation,
promulgated under the Act), directly or
indirectly, of securities of the Corporation which
represent twenty percent (20%) or more of the
combined voting power of the Corporation's then
outstanding securities, or (ii) during any period
of two consecutive years during the initial term
of this Agreement and any extension thereof,
individuals who at the beginning of such period
constitute the Board of Directors of the
Corporation cease for any reason to constitute at
least a majority thereof, unless the election of
each director who was not a director at the
beginning of such period has been approved in
advance by directors representing at least three-
fourths of the directors then in office who were
directors at the beginning of the period, or (iii)
the Corporation or Bank shall be merged or
consolidated or substantially all of the assets of
either of them shall be purchased by another
person (as defined above) and, as a result of such
merger, consolidation or sale of assets, less than
a majority of the outstanding voting stock of the
surviving, resulting or purchasing person is
owned, immediately after the transaction, by the
holders of the voting stock of the Corporation
before the transaction.
3. DEFINITION OF EFFECTIVE DATE OF CHANGE OF CONTROL
For purposes of this Agreement, the Effective Date of
Change of Control shall mean:
(a) the date on which a merger, consolidation or
combination is consummated, as applicable;
- -4-
(b) the date on which a sale, exchange, transfer or
other disposition of substantially all of the
assets of the Bank or Corporation has occurred, as
applicable; or
(c) the date of the purchase by the Bank or
Corporation of substantially all of the assets of
another entity, as applicable.
4. DISCHARGE FOR CAUSE
(a) The Bank or Corporation may at any time following
a Change of Control discharge Executive for
"Cause", in which event Executive shall not be
entitled to receive the compensation and benefits
specified in Paragraph 5 below.
(b) For purposes of this Agreement, the Bank shall
have "Cause" to discharge Executive only under the
following circumstances:
(i) Executive shall have committed an act of
dishonesty constituting a felony and
resulting or intending to result directly or
indirectly in gain or personal enrichment of
Executive at the expense of the Bank; or
(ii) The dishonesty or gross negligence of the
Executive in the performance of his duties;
or
(iii)The willful violation by Executive of law,
rule or regulation governing banks or bank
officers, or of any final Cease and Desist
order issued by a bank regulatory authority,
any of which materially jeopardizes the
business of the Bank or Corporation.
5. PAYMENTS UPON TERMINATION AFTER A CHANGE OF
CONTROL
(a) In the event that Executive delivers a Notice
of Termination (as defined in Section 2(a) of
this Agreement) to Bank and Corporation,
Executive shall be entitled to receive the
compensation and benefits set forth below:
- -5-
If, pursuant to Paragraph 2 of this
Agreement, a termination of Executive's
employment following a Change of Control has
occurred, Bank and/or Corporation shall pay
Executive an amount equal to and no greater
than 2.0 times the Executive's Base Amount as
defined in Paragraph 5(b) herein, minus
applicable taxes and withholdings, which
shall be payable in twenty-four (24) equal
monthly installments. In addition, for a
period of two (2) years from the date of
termination of employment, Executive shall
receive a continuation of all life,
disability, medical insurance and other
normal health and welfare benefits in effect
with respect to Executive during the two (2)
years prior to his termination of employment,
or, if Bank and/or Corporation cannot provide
such benefits because Executive is no longer
an employee, a dollar amount equal to the
cost to Executive of obtaining such benefits
(or substantially similar benefits). If
permitted under the terms of the plan,
Executive shall receive additional retirement
benefits for a period of two (2) years from
the date of termination of employment.
However, in the event the payment described
herein, when added to all other amounts or
benefits provided to or on behalf of the
Executive in connection with his termination
of employment, would result in the imposition
of an excise tax under Code Section 4999,
such payments shall be retroactively (if
necessary) reduced to the extent necessary to
avoid such excise tax imposition. Upon
written notice to Executive, together with
calculations of Bank's independent auditors,
Executive shall remit to Bank the amount of
the reduction plus such interest as may be
necessary to avoid the imposition of such
excise tax. Notwithstanding the foregoing or
any other provision of this Agreement to the
contrary, if any portion of the amount herein
payable to the Executive is determined to be
non-deductible pursuant to the regulations
promulgated under Section 280G of the
Internal Revenue Code of 1986, as amended
(the "Code"), then Bank and/or Corporation
shall be required only to pay to Executive
the amount determined to be deductible under
Section 280G.
- -6-
(b) "Base Amount" shall be defined as the mean
average of the Executive's total annual base
salary plus the mean average of the annual
total bonuses paid to the Executive during
the five (5) calendar years immediately
preceding the Effective Date of Change of
Control.
(c) Executive shall not be required to mitigate
the amount of any payment provided for in
this Paragraph 5 by seeking other employment
or otherwise; and the Bank and Corporation
shall not be entitled to setoff against the
amount of any payment or benefit provided for
in this Paragraph 5 by any amounts earned by
Executive in other employment.
(d) The Bank and Corporation hereby waive any and
all rights to setoff in respect to any claim,
debt, obligation or other liability of any
kind whatsoever, against any payment or
benefit provided for in this Paragraph 5.
6. NOTICE
For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be
in writing and shall be deemed to have been duly given when
delivered or mailed by United States certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Executive: John H. McDowell, Sr.
P.O. Box 212
Greencastle, PA 17225
If to the Bank: Jeff B. Shank, President
The First National Bank of
Greencastle
Center Square, P.O. Box 8
Greencastle, PA 17225-0008
If to the Corporation: Jeff B. Shank, President
Tower Bancorp, Inc.
Center Square, P.O. Box 8
Greencastle, PA 17225-0008
or to such other address as any party may have
furnished to the other in writing in accordance
herewith, except that notices of change of address
shall be effective only upon receipt.
- -7-
7. SUCCESSORS AND PARTIES IN INTEREST
(a) This Agreement shall be binding upon and shall
inure to the benefit of the Bank and Corporation
and their successors and assigns, including,
without limitation, any corporation which
acquires, directly or indirectly, by purchase,
merger, consolidation or otherwise, all or
substantially all of the business or assets of the
Bank or Corporation. Without limitation of the
foregoing, the Bank and Corporation shall require
any such successor, by agreement in form and
substance satisfactory to Executive, expressly to
assume and agree to perform this Agreement in the
same manner and to the same extent that it is
required to be performed by the Bank and
Corporation. Failure to obtain such assumption
and agreement shall serve as a termination of
Executive's employment following a Change of
Control under Paragraph 2 of this Agreement and
Executive shall be automatically entitled to the
payments and benefits under Paragraph 5 of this
Agreement.
(b) This Agreement is binding upon and shall inure to
the benefit of Executive, his heirs and personal
representatives.
8. SEVERABILITY
If any provision of this Agreement is declared
unenforceable for any reason, the remaining provisions of
this Agreement shall be unaffected thereby and shall remain
in full force and effect.
9. AMENDMENT
This Agreement may be amended or canceled only by
mutual agreement of the parties in writing.
10. ATTORNEY'S FEES AND COSTS
If any action at law or in equity is necessary to
enforce the Executive's rights hereunder following a Change
of Control, the Executive shall be entitled to recover all
such attorney's fees, costs and disbursements reasonably
incurred by him in connection with any such suit brought by
him.
- -8-
11. PAYMENT OF MONEY DUE DECEASED EXECUTIVE
In the event of Executive's death, any monies or
benefits that may be due him from the Bank or Corporation
under this Agreement as of the date of death or thereafter
shall be paid to the person designated by him in writing for
this purpose, or, in the absence of any such designation, to
his estate.
12. LIMITATION OF DAMAGES FOR BREACH OF AGREEMENT
In the event of a breach of this Agreement by either
the Bank, Corporation, or the Executive, each hereby waives
to the fullest extent permitted by law the right to assert
any claim against the others for punitive or exemplary
damages.
13. LAW GOVERNING
This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of
Pennsylvania. In the event that any party shall institute
any suit or other legal proceeding, whether or law or in
equity, arising from or relating to this Agreement, the
courts of the Commonwealth of Pennsylvania shall have
exclusive jurisdiction and venue shall lie exclusively in
the Court of Common Pleas of Franklin County, Pennsylvania.
14. ENTIRE AGREEMENT
This Agreement supersedes any and all prior agreements,
either oral or in writing, between the parties with respect
to payments after a Change of Control, and this Agreement
contains all the covenants and agreements between the
parties with respect to same.
15. RIGHTS UNDER OTHER PLANS
This Agreement is not intended to reduce, restrict or
eliminate any benefit to which Executive may otherwise be
entitled at the time of his termination of employment under
any employee benefit plan of the Bank then in effect.
16. TERMINATION
This Agreement may not be terminated except by mutual
consent of the parties, as evidenced by a written instrument
duly executed by the Bank and Executive.
17. INDEPENDENT REPRESENTATION
The provisions of this Agreement and their legal effect
have been fully explained to the parties by their
respective, independent counsel. Each party acknowledges
- -9-
that he/it has received independent legal advice, and that
each fully understands the facts and has been fully informed
as to his/its legal rights and obligations. Each party
accepts this Agreement as fair and equitable, and that it is
being entered into freely and voluntarily, after having
received such advice and with such knowledge.
IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound hereby, have caused this Agreement to be duly
executed in their respective names and, in the case of the
Bank and Corporation, by its authorized representatives the
day and year above mentioned.
ATTEST: THE FIRST NATIONAL BANK
OF GREENCASTLE
_______________________ By
Don F. Chlebowski, Jr., Jeff B. Shank, President
Corporate Treasurer
ATTEST: TOWER BANCORP, INC.
________________________ By ________________________
Don F. Chlebowski, Jr., Jeff B. Shank, President
Corporate Treasurer
WITNESS:
________________________ _________________________
John H. McDowell, Sr.
"Executive"
- -10-
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.
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Tower Bancorp, Inc.
We consent to the incorporation by reference in the
registration statements (Form S-14 No. 2-89573 and Form S-8 No.
333-40661) of our report dated January 29, 1999, with respect to
the consolidated balance sheets of Tower Bancorp, Inc. and
subsidiary as of December 31, 1998 and 1997 and the related
consolidated statements of income, stockholders' equity and cash
flows for the three year period ended December 31, 1998, which
report is incorporated by reference in the December 31, 1998
annual report to stockholders on Form 10-K of Tower Bancorp, Inc.
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, PA
March 22, 1999
Consolidate Balance Sheets
ASSETS 1998 1997
________ ________
(000 omitted)
Cash and due from banks $ 5,114 $ 4,311
Interest-bearing deposits with banks 6,199 6,029
Investment Securities
Available for sale 46,641 32,717
Held to maturity, fair value of $ 8,183 - 1997 0 7,995
Federal Reserve, Federal Home Loan Bank, and Atlantic Central
Bankers Bank stock; at cost which approximates fair value 1,876
1,505
Loans
Commercial, financial and agricultural 15,164 10,699
Real estate - Mortgages (net of deferred loan origination fees
$ 191 - 1998; $ 199 - 1997) 87,350 80,597
Real estate - Construction and land development 2,378 1,486
Consumer 18,798 11,556
________ ________
123,690 104,338
Less: Allowance for loan losses 1,890 1,850
________ _______
Total loans 121,800 102,488
Premises, equipment, furniture and fixtures 2,910 2,211
Real estate owned other than premises 572 579
Prepaid federal taxes 40 100
Accrued interest receivable 984 993
Deferred income tax charges 179 246
Other assets 1,020 761
________ ________
Total Assets $ 187,335 $ 159,935
________ ________
________ ________
LIABILITIES
Deposits in domestic offices
Demand, noninterest bearing $ 11,346 $ 9,651
Savings 69,281 60,625
Time 61,839 62,508
________ ________
Total Deposits 142,466 132,784
Accrued interest payable 401 424
Federal funds purchased 2,366 2,769
Liabilities for other borrowed funds 18,131 2,212
Other liabilities 1,419 1,313
________ ________
Total Liabilities 164,783 139,502
________ ________
STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock: no par value; authorized 5,000,000 shares,
issued 1,765,400 shares - 1998; 1,765,056 shares - 1997 2,225
2,225
Additional paid-in capital 6,705 6,699
Retained earnings 12,969 10,811
Accumulated other comprehensive income 1,074 969
________ ________
22,973 20,704
Less: Cost of Treasury stock, 14,700 shares - 1998; 6,952 shares - 1997
( 421) ( 271)
________ ________
Total Stockholders' Equity 22,552 20,433
________ _______
Total Liabilities and Stockholders' Equity $ 187,335 $ 159,935
________ ________
________ ________
Consolidated Statements of Income
1998 1997 1996
_______ _______ _______
(000 omitted)
Interest and Dividend Income
Interest and fees on loans $ 9,869 $ 9,221 $ 8,809
Interest and dividends on investment securities
Taxable 1,816 1,987 1,701
Federal tax exempt 562 495 447
Interest on federal funds sold 46 75 40
Interest on deposits with banks 255 199
159
_______ _______ _______
Total interest income 12,548 11,977 11,156
_______ _______ _______
Interest Expense
Interest on time certificates of deposit of
$ 100,000 or more 783 804 735
Interest on other deposits 4,190 4,242 4,011
Interest on federal funds purchased and other borrowed funds 369
121 65
_______ _______ _______
Total interest expense 5,342 5,167 4,811
_______ _______ _______
Net interest income 7,206 6,810 6,345
Provision for loan losses 0 0 0
_______ _______ _______
Net interest income after provision
for loan losses 7,206 6,810 6,345
_______ _______ _______
Other Income
Trust department income 391 293 252
Service charges on deposit accounts 281 288 277
Other service charges, collection and exchange
charges, commissions and fees 212 181 159
Investment securities gains 973 573 278
Investment services income 74 44 24
Gain on sale of other real estate 150 11 0
Gain on sale of property, equipment, furniture & fixtures 1
0 0
_______ _______ _______
2,082 1,390 990
_______ _______ _______
Other Expenses
Salaries, wages and other employee benefits 2,483 2,179 1,995
Occupancy expense 302 296 291
Furniture and equipment expenses 918 668 661
FDIC insurance premiums 20 16 2
Other operating expenses 1,410 1,237 1,106
_______ _______ _______
5,133 4,396 4,055
_______ _______ _______
Income before income taxes 4,155 3,804 3,280
Applicable income tax expense 1,246 1,110 944
_______ _______ _______
Net income $ 2,909 $ 2,694 $ 2,336
_______ _______ _______
_______ _______ _______
Earnings per share of common stock
Net income $ 1.68 $ 1.53 $ 1.32
_______ _______ _______
_______ _______ _______
Consolidated Statements of Changes in Stockholder's Equity
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury Total
Stock Capital Earnings Income Stock Equity
_______ _______ _______ _______ _______ _______
(000 omitted)
Balance at December 31, 1995 $ 1,060 $ 5,354 $ 9,508 $ 254 ($ 28)
$ 16,148
Comprehensive income:
Net income 0 0 2,336 0 0 2,336
Net unrealized loss on
available for sale securities
(net of tax $9) 0 0 0 ( 18) 0 ( 18)
_______ _______ _______ _______ _______ _______
Total comprehensive income 2,318
Purchase of treasury stock
(6,475 shares) 0 0 0 0 ( 275) ( 275)
Sale of treasury stock
(1,618 shares) 0 2 0 0 58 60
Cash dividends declared
on common stock ($ .31
per share) 0 0 ( 547) 0 0 ( 547)
Stock dividend issued 1,060 0 ( 1,060)
0
0 0
_______ _______ _______ _______ _______ _______
Balance at December 31, 1996 2,120 5,356 10,237 236 ( 245) 17,704
Comprehensive income:
Net income 0 0 2,694 0 0 2,694
Net unrealized gain on available
for sale securities (net of tax $377) 0 0
0 733 0 733
_______ _______ _______ _______ _______ _______
Total comprehensive income 3,427
Cash dividends declared on
common stock ($ .38
per share) 0 0 ( 675) 0 0 ( 675)
Purchase of treasury stock
(4,592 shares) 0 0 0 0 ( 189) ( 189)
Sale of treasury stock
(5,607 shares) 0 3 0 0 163 166
Stock dividend issued 105 1,340 ( 1,445)
0
0 0
_______ _______ _______ _______ _______ _______
Balance at December 31, 1997 2,225 6,699 10,811 969 ( 271) 20,433
Comprehensive income:
Net income 0 0 2,909 0 0 2,909
Net unrealized gain on
available for sale securities
(net of tax $ 54) 0 0 0 105
0 105
_______ _______ _______ _______ _______ _______
Total comprehensive income
3,014
Cash dividends declared on
common stock ($ .43 per share) 0 0 ( 751) 0 0
(
751)
Purchase of treasury stock
(9,806 shares) 0 0 0 0 ( 357) ( 357)
Sale of treasury stock (6,509 shares) 0 6
0
0
207 213
_______ _______ _______ _______ _______ _______
Balance at December 31, 1998 $ 2,225 $ 6,705 $ 12,969 $ 1,074 ($ 421)
$
22,552
_______ _______ _______ _______ _______ _______
_______ _______ _______ _______ _______ _______
Consolidated Statements of Cash Flows
1998 1997 1996
_______ _______ _______
Cash flows from operating activities: (000 omitted)
Net income $ 2,909 $ 2,694 $ 2,336
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 344 229 249
(Gain) on sale of investment securities ( 973) (
573) ( 332)
(Gain) on sale of other real estate ( 150) (
11) 0
Provision for deferred taxes 13 6 ( 9)
(Increase) decrease in:
Other assets ( 124) ( 74) ( 140)
Interest receivable 10 ( 45) ( 57)
Prepaid income taxes 60 ( 11) 18
Increase (decrease) in:
Interest payable ( 23) 15 20
Other liabilities ( 29) 223 48
_______ _______ _______
Net cash provided by operating activities 2,037 2,453
2,133
_______ _______ _______
Cash flows from investing activities:
Net (increase) in loans ( 19,312) ( 3,394) ( 5,189)
Purchases of bank premises, equipment, furniture and fixtures (
1,043)
( 805) ( 47)
Purchases of other real estate 0 ( 38) ( 346)
Proceeds from the sale of other real estate 150 128 0
Net (increase) decrease in interest-bearing deposits
with banks ( 170) ( 1,958) ( 636)
Maturity/sales of available for sale securities 17,191 8,569
7,931
Maturities of held to maturity securities 0 1,890 1,113
Purchases of available for sale securities ( 21,982) ( 10,534)
( 9,640)
Purchases of held to maturity securities 0 ( 2,978) (
2,257)
Purchase of Federal Home Loan Bank stock ( 121) (
38) ( 1)
Purchase of Federal Home Loan Mortgage Corporation
preferred stock ( 250) 0 0
Purchase of Federal National Mortgage Association stock 0 250
(
750)
Purchase of Federal Reserve Bank stock 0 0
(
4)
_______ _______ _______
Net cash (used) by investing activities (25,537) ( 8,908) ( 9,826)
_______ _______ _______
Cash flows from financing activities:
Net increase in deposits $ 9,682 $ 6,180 $ 6,846
Net increase in short-term borrowings 15,516 2,250 1,023
Purchase of treasury stock ( 357) ( 189) (
275)
Proceeds from sale of treasury stock 213 166 58
Cash dividends paid ( 751) ( 675) ( 547)
_______ _______ _______
Net cash provided by financing activities 24,303 7,732 7,105
_______ _______ _______
Net increase (decrease) in cash and cash equivalents 803 1,277 (
588)
Cash and cash equivalents at beginning of year 4,311 3,034
3,622
_______ _______ _______
Cash and cash equivalents at end of year $5,114 $ 4,311 $3,034
_______ _______ _______
_______ _______ _______
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 5,365 $ 5,152 $ 4,754
Income taxes 1,184 1,187 911
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on securities available for sale (net
of tax effects) $ 105 $ 733 ($ 18)
Issuance of stock dividends 0 1,445 1,060
_______ _______ _______
_______ _______ _______
Note 1. Summary of Significant Accounting Policies
Nature of Operations: Tower Bancorps 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 six offices are located in
Greencastle, Quincy, Shady Grove, Laurich, Mercersburg, and Waynesboro,
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 Corporations 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 ava
heir examination. Because of these factors, managements estimate of credit
losses inherent in the loan portfolio and the related allowance may change
in the near term.
Investment Securities: The Corporations investments in securities are
classified in three categories and accounted for as follows:
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.
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.
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 other comprehensive income.
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 1998 or 1997.
Restricted Bank Stock: The Corporation is required to maintain minimum
investment balances in The Federal Reserve Bank, Federal Home Loan Bank and
Atlantic Central Bankers bank. These investments 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
Banks cost (loan balance) or the assets fair value, less estimated costs
to sell, which becomes the propertys new basis. Any write-downs based on
the assets fair value at date of acquisition are charged to the allowance
for loan losses. Costs incurred in maintaining foreclosed real estate and
subsequent write-downs to reflect declines in the fair value of the property
are included in income (loss) on other real estate owned.
Retirement Plan: The Bank has a target-benefit pension plan which covers all
full-time employees who have attained the age of twenty (20) and have
completed a minimum of one year of continuous service with the Bank. The
Bank's policy is to fund pension costs accrued.
Loans and Allowance for Loan Losses: Loans are stated at the amount of
unpaid principal, reduced by unearned discount, deferred loan origination
fees, and an allowance for loan losses. Unearned discount on installment
loans is recognized as income over the terms of the loans by the interest
method. Interest on other loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding.
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
e 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 balan
me, 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 1,732,479, 1,765,056 and 1,775,069
shares outstanding in 1998, 1997 and 1996, respectively, after giving
retroactive recognition to a 100% stock dividend in July 1998, a 5% stock
dividend in July 1997 and a 100% stock dividend issued in April 1996.
During 1998 the shareholders approved to reduce the par value of stock to
zero (no par value).
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 a
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.
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 deposits in the
Statements 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
. 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 IRAs are estimated using a discounted cash
flow calculation that applies interest rates currently being offered to a
d maturities on time deposits.
Short-Term Borrowings. The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
maturing within 90 days approximate their fair values. Fair values of other
short-term borrowings are estimated using discounted cash flow analyses
based on the Banks 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, 1998, 1997 and 1996
were $165,501, $158,451 and $111,269, respectively.
Comprehensive Income: In 1998 the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 130 Reporting Comprehensive Income.
Under SFAS No. 130, comprehensive income is defined as the change in equity
from transactions and other events from nonowner sources. It includes all
changes in equity except those resulting from investments by stockholders
and distributions to stockholders. Comprehensive income includes net income
and certain elements of other comprehensive income such as
accounting for future contracts; employers accounting for pensions; and
accounting for certain investments in debt and equity securities.
The Corporation has elected to report its comprehensive income in the
statement of stockholders equity. The only element of other comprehensive
income that the Corporation has is the unrealized gains or losses on
available for sale securities. The 1997 financial statements have been
reclassified to reflect these changes in reporting format.
The components of the change in net unrealized gains (losses) on securities
were as follows:
1998 1997 1996
Gross unrealized holding gains
(losses) arising during the year $ 1,132 $ 1,683 ($ 305)
Reclassification adjustment for
gains realized in net income ( 973) ( 573) 278
_____ _____ _____
Net unrealized holding gains
(losses) before taxes 159 1,110 ( 27)
Tax effect ( 54) ( 377) 9
_____ _____ _____
Net change $ 105 $ 733 ($ 18)
_____ _____ _____
_____ _____ _____
Note 2. Investment Securities
The investment securities portfolio is comprised of securities classified as
available for sale at December 31, 1998 and as available for sale and held
to maturity at December 31, 1997, 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:
Gross Un- Gross Un-
Amortized realized realized Fair
Cost Gains Losses Value
(000 omitted)
1998
U.S. Treasury securities $ 399 $ 14 $ 0 $ 413
Obligations of other U.S.
government agencies 15,194 173 22 15,345
Mortgage-backed securities 6,390 38 25 6,403
Corporate bonds 2,654 16 27 2,643
Equities 8,906 1,251 85 10,072
Obligations of state and
political subdivisions 11,470 325 30 11,765
_____ _____ ____ _____
$45,013 $ 1,817 $ 189 $46,641
_____ _____ ____ _____
_____ _____ ____ _____
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 5,869 1,224 1 7,092
Obligations of state and
political subdivisions 2,265 61 0 2,326
_____ _____ ____ _____
$31,249 $ 1,534 $ 66 $32,717
_____ _____ ____ _____
_____ _____ ____ _____
Effective January 1, 1998 all obligations of state and political subdivisions
that were classified as held to maturity at December 31, 1997 were
reclassified to available for sale. All unrealized gains and losses on
these securities are shown as part of other comprehensive income in the
stockholders equity section.
The amortized cost and fair values of investment securities held to maturity
at December 31 were:
Gross Un- Gross Un-
Amortized realized realized Fair
Cost Gains Losses Value
(000 omitted)
1997
Obligations of state and
political subdivisions $ 7,995 $ 197 $ 9 $ 8,183
_____ _____ ____ _____
_____ _____ ____ _____
The amortized cost and fair values of investment securities available for
sale at December 31, 1998, 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.
Securities Available for Sale
Amortized Fair
Cost Value
(000 omitted)
Due in one year or less $ 1,115 $ 1,129
Due after one year through
five years 5,652 5,742
Due after five years through
ten years 14,795 15,036
Due after ten years 8,155 8,259
_______ _______
29,717 30,166
Mortgage-backed securities 6,390 6,403
Equity securities 8,906 10,072
_______ _______
$ 45,013 $ 46,641
_______ _______
_______ _______
Proceeds from sales and maturities of investment securities available for
sale during 1998, 1997, and 1996 were $17,191,000, $8,569,000 and
$7,931,000, respectively. Gross realized gains and losses on those sales
and maturities were $977,000 and $4,000 for 1998; $576,000 and $3,000 for
1997; and $338,000 and $60,000 for 1996, respectively.
Securities carried at $13,300,000 and $12,462,948 at December 31, 1998 and
1997, respectively, were pledged to secure public funds and for other
purposes as required or permitted by law.
Restricted bank stock on the balance sheet includes:
1998 1997
Federal Reserve Bank stock $ 81 $ 81
Federal Home Loan Bank stock 750 629
Federal Home Mortgage Bank stock 750 750
Federal Home Loan Mortgage
Corporation preferred stock 250 0
Atlantic Central Bankers Bank 45 45
_______ _______
$ 1,876 $ 1,505
_______ _______
_______ _______
Note 3. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
1998 1997 1996
(000 omitted)
Balance at beginning of period $ 1,850 $ 1,947 $ 1,945
Recoveries 87 18 16
Provision for possible loan losses
charged to income 0 0 0
_____ _____ _____
Total 1,937 1,965 1,961
Losses 47 115 14
_____ _____ _____
Balance at end of period $ 1,890 $ 1,850 $ 1,947
_____ _____ _____
_____ _____ _____
Note 4. Premises, Equipment, Furniture and Fixtures
Accumulated Depre-
Depre- ciated
Cost ciation Cost
_____ _____ _____
(000 omitted)
- - - - - - - - - - - - - - - - 1998 - - - - - - - - - - - - - -
Premises (including land $442,000) $ 3,592 $ 1,406 $ 2,186
Equipment, furniture and fixtures 2,085 1,361 724
_____ _____ _____
Totals, December 31, 1998 $ 5,677 $ 2,767 $ 2,910
_____ _____ _____
_____ _____ _____
- - - - - - - - - - - - - - - - 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
_____ _____ _____
_____ _____ _____
Depreciation expense amounted to $344,000 in 1998, $229,000 in 1997 and
$249,000 in 1996.
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 $ 450,587,
$ 458,189 and $ 427,140 at December 31, 1998, 1997 and 1996, 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 $ 1,907,270
and $ 1,548,668 at December 31, 1998 and 1997, respectively. During 1998
made and repayments totaled $ 778,781. During 1997, $ 910,024 of new loans
were made and repayments totaled $ 566,109.
Outstanding loans to bank employees totaled $ 1,362,656 and $ 2,275,556 at
December 31, 1998 and 1997, respectively.
Note 7. Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financial needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
balance sheets. The contract amounts of those instruments reflect
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
1998 1997
_________ _________
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 11,962,920 $ 11,551,970
Standby letters of credit and
financial guarantees written 1,329,118 1,949,714
_________ _________
$ 13,292,038 $ 13,501,684
_________ _________
_________ _________
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
med 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:
1998 1997 1996
Nonaccrual loans $487,905 $477,917 $77,000
______ ______ _____
______ ______ _____
Interest income that would have been
accrued at original contract rates $ 54,607 $ 38,785 $ 7,409
Amount recognized as interest
income 661 13,321 0
______ ______ _____
Foregone revenue $ 53,946 $ 25,464 $ 7,409
______ ______ _____
______ ______ _____
Impaired loans at December 31, 1998 and 1997 had a carrying value of $0 and
$686,000, 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
$343,000 and $684,000 for 1998 and 1997, respectively. Interest income of
$13,147 and $41,907 was recognized on cash payments received on these loans
in 1998 and 1997, respectively. The total allowance for credit lo
$0 and $250,000 at December 31, 1998 and 1997, 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 $39,000 for 1998, $48,000 for 1997, and $34,000
for 1996.
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 $75,000, $67,000, and
$63,000 for 1998, 1997, and 1996, 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 $982,373 and $983,530 at December 31, 1998 and
1997, respectively. Annual expense of $116,289, $131,751, and $120,812 was
charged to o
996, 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 $150,000, $134,000 and $127,000 for 199
The number of shares of the companys 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 on the next page. 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 $32,077, $10,375 and $8,262 for 1998, 1997 and 1996, respectively.
The first plan is for select key employees. This plan granted options for up
to 807 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
1,411; 373; and 324 shares for each director at $22.25, $34.00 and $25.00
per share for the years ended December 31, 1998, 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
A summary of the status of the companys two fixed stock option plans as of
December 31, 1998 is as follows:
Weighted Average
Exercise Price
Fixed Options Shares Per Share
Outstanding at beginning of year 4,879 $ 28
Granted 9,273 17
Exercised 1,504 14
Forfeited/expired 0 0
_____ _____
Outstanding at end of year 12,648 17
_____
_____
Options exercisable at year end 4,182 28
Weighted average fair value of options
per share granted during the year $ 36
Note 12. Deposits
Included in savings deposits at December 31 are NOW and Money Market Account
balances totaling $38,773,000 and $30,463,000 for 1998 and 1997, respectively.
Time deposits of $100,000 and over aggregated $14,880,466 and $14,465,517 at
December 31, 1998 and 1997, respectively.
At December 31, 1998 scheduled maturities of time deposits are as follows:
1999 $ 39,424,621
2000 12,461,714
2001 3,305,734
2002 2,104,610
2003 4,542,015
_________
$ 61,838,694
_________
_________
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, directors and
employees totaled $ 1,986,734 and $ 1,907,317 at December 31, 1998 and 1997,
respectively.
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, 1998 and 1997, $2,554,000 and $1,740,000, 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, 1998 and
1997 were $2,675,000 and $2,000,000, respectively. Interest on these lines
ranged from 6.75% to 8.75% for 1998 and 1997.
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. During 1998 $50,000
was paid on this note leaving an outstanding balance of $150,000 at December
31, 1998.
In addition, $427,000 and $271,000 of the balance of liabilities for other
borrowed funds at December 31, 1998 and 1997, 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 Fede
ote is secured by U.S. Government obligations with a par value of $900,000
and $600,000 at December 31, 1998 and 1997, respectively.
The Bank also has available a line of credit totaling $5,000,000 at
December 31, 1998 and 1997, respectively with The Federal Home Loan Bank of
Pittsburgh. The borrowings against the line were $0 at both December 31,
1998 and 1997. In addition, the Bank also has three $5,000,000 loans with
the Federal Home Loan Bank of Pittsburgh bearing interest at 4.63% to 5.39%
and maturing 9/15/2008 through 11/24/2008. Collateral for the borrowings
consists of certain securities and the Banks 1-4 family mortgage loan
ly $53 million at December 31, 1998.
Note 14. Income Taxes
The components of federal income tax expense are summarized as follows:
1998 1997 1996
_____ _____ _____
(000 omitted)
Current year provision $ 902 $ 921 $ 857
Deferred income taxes (benefit) 13 ( 6) ( 8)
_____ _____ _____
Applicable income taxes 915 915 849
Add: Income tax effect of
securities gains 331 195 95
_____ _____ _____
Net income tax expense $ 1,246 $ 1,110 $ 944
_____ _____ _____
_____ _____ _____
Federal income taxes were computed after reducing pretax accounting income
for non-taxable income in the amount of $599,571, $543,472 and $547,946 for
1998, 1997 and 1996, respectively.
A reconciliation of the effective applicable income tax rate to the federal
statutory rate is as follows:
1998 1997 1996
_____ _____ _____
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
Nontaxable interest income 4.1 4.8 5.2
_____ _____ _____
Effective income tax rate 29.9% 29.2% 28.8%
_____ _____ _____
_____ _____ _____
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:
1998 1997
_____ _____
Total deferred tax assets $ 745 $ 745
Total deferred tax liabilities ( 566) ( 499)
_____ _____
Net deferred tax assets $ 179 $ 246
_____ _____
_____ _____
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, statements of income, and
statements of cash flows for the parent company:
Balance Sheets
December 31
1998 1997
______ ______
Assets (000 omitted)
Cash $ 0 $ 0
Securities available for sale 10,072 7,092
Investment in The First National
Bank of Greencastle 15,786 15,668
______ ______
Total assets $25,858 $22,760
______ ______
______ ______
Liabilities
Other liabilities $ 752 $ 586
Notes payable 2,554 1,741
______ ______
Total liabilities 3,306 2,327
______ ______
Stockholders' Equity
Common stock, no par value;
authorized 5,000,000 shares,
issued 1,765,400 shares - 1998;
1,765,056 shares - 1997 2,225 2,225
Additional paid-in capital 6,705 6,699
Retained earnings 12,969 10,811
Accumulated other
comprehensive income 1,074 969
______ ______
22,973 20,704
Less: Cost of Treasury stock, 14,700
shares - 1998; 6,952 shares - 1997 ( 421) ( 271)
______ ______
Total stockholders' equity 22,552 20,433
______ ______
Total liabilities and
stockholders' equity $25,858 $22,760
______ ______
______ ______
Statements of Income
Years Ended December 31
1998 1997 1996
______ ______ ______
(000 omitted)
Income
Dividends $ 220 $ 146 $ 95
Net gain on sale of securities 942 565 332
Cash dividends from
wholly-owned subsidiary 2,386 1,725 1,507
______ ______ ______
3,548 2,436 1,934
______ ______ ______
Expenses
Interest 123 62 45
Commissions 68 48 26
Taxes 318 150 24
Postage and printing 15 9 10
Meetings 3 3 2
Management fees 60 50 40
Professional fees 28 25 8
______ ______ ______
615 347 155
______ ______ ______
Income before equity in
undistributed income 2,933 2,089 1,779
Equity in undistributed income
of subsidiary ( 24) 605 557
______ ______ ______
Net income $2,909 $2,694 $2,336
______ ______ ______
______ ______ ______
Statements of Cash Flows
Years Ended December 31
1998 1997 1996
______ ______ ______
(000 omitted)
Cash flows from operating activities:
Net income $ 2,909 $ 2,694 $ 2,336
Adjustments to reconcile net income to
cash provided by operating activities:
Net gain on sale of
investment securities ( 942) ( 565) ( 332)
Equity in undistributed
income of subsidiary 24 ( 605) ( 557)
Increase in accrued expenses 188 151 3
______ ______ ______
Net cash provided by operating
activities 2,179 1,675 1,450
______ ______ ______
Cash flows from investing activities:
Purchase of investment securities ( 4,755) ( 3,683) ( 2,463)
Sales of investment securities 2,658 1,842 1,567
______ ______ ______
Net cash (used) by investing
activities ( 2,097) ( 1,841) ( 896)
______ ______ ______
Cash flows from financing activities:
Purchase of treasury stock ( 357) ( 189) ( 275)
Proceeds from sale of treasury
stock 213 166 58
Dividends paid ( 751) ( 675) ( 547)
Net proceeds from short-term
borrowing 813 862 210
______ ______ ______
Net cash (used) by financing activities ( 82) 164 (
554)
______ ______ ______
Net (decrease) in cash 0 ( 2) 0
Cash, beginning 0 2 2
______ ______ ______
Cash, ending $ 0 $ 0 $ 2
______ ______ ______
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 123 $ 62 $ 45
Income taxes 23 1 15
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, 1998 and 1997 and required
deposit balances at Atlantic Central Banker's Bank of $515,000 at both
December 31, 1998 and 1997. These are maintained to cover processing costs
and service charges.
Note 17. Concentration of Credit Risk
The Bank grants agribusiness, commercial and residential loans to customers
throughout the Cumberland Valley area. Although the Bank has a diversified
loan portfolio, a substantial portion of its customers' ability to honor
their contracts is dependent upon the agribusiness economic sector.
The following is a summary of the loans to the agribusiness sector at
December 31, 1998:
Loans to finance agricultural production and loans
to farmers ($ 4,834,854 secured by real estate) $ 5,130,367
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. Commitments
The corporation leases its facilities in Mercersburg under a noncancellable
operating lease that expires in 2006. Total rent expense charged to
operations was $20,700, $15,250 and $15,000 for 1998, 1997 and 1996,
respectively.
The corporation also leases a site for an Automatic Teller Machine under a
noncancellable 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 1998 and 1997. 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, 1998:
Year Ending
1999 $ 29,700
2000 29,700
2001 29,700
2002 22,575
2003 22,200
2004 and after 66,600
_______
$ 200,475
_______
_______
During 1998 the Bank started construction on a new branch office in
Waynesboro, Pennsylvania at an estimated cost of $850,000. As of
December 31, 1998 the Bank had spent $658,000 on this project. The branch
is scheduled to open during the first quarter of 1999.
Note 19. Fair Value of Financial Instruments
The estimated fair values of the Corporations financial instruments were as
follows at December31:
- - - 1998 - - - - - - 1997 - - -
Carrying Fair Carrying Fair
Amount Value Amount Value
FINANCIAL ASSETS
Cash and due from banks $ 5,114 $ 5,114 $ 4,311 $ 4,311
Interest-bearing deposits with
banks 6,199 6,307 6,029 6,079
Securities available for sale 46,641 46,641 32,717 32,717
Securities to be held to maturity 0 0 7,995 8,183
Loans receivable 123,690 122,390 104,338 104,984
Accrued interest receivable 984 984 993 993
Other bank stock 1,876 1,876 1,505 1,505
FINANCIAL LIABILITIES
Time certificates 61,839 60,970 62,508 62,533
Other deposits 80,627 80,627 70,276 70,276
Short-term borrowed funds 20,497 20,497 4,981 4,981
Accrued interest payable 401 401 424 424
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 dividends 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, with
roller of the Currency, declare dividends in excess of the sum of the current
years earnings (as defined) plus retained earnings (as defined) from the
prior two years. Dividends that the Bank could declare without approval of
the Comptroller of the Currency, amounted to approximately $3,384,966 and
$4,972,613 for 1998 and 1997, 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 Bancorps capital
ratios to regulatory minimums at December 31 is as follows:
Tower Bancorp Regulatory Minimum
1998 1997 Requirements
Leverage ratio 8.71% 10.12% 4%
Risk-based capital ratio
Tier I (core capital) 13.20% 17.17% 4%
Combined Tier I and Tier II
(core capital plus
allowance for loan losses) 14.45% 17.83% 8%
Selected Five-Year Financial Data
1998 1997 1996 1995 1994
________ ________ ________ ________ ________
Income (000 omitted)
Interest income $ 12,548 $ 11,977 $ 11,156 $ 11,002
$ 9,666
Interest expense 5,342 5,167 4,811 4,703 3,661
Provision for loan losses 0 0 0
0 13
________ ________ ________ ________ ________
Net interest income after
provision for loan losses 7,206 6,810 6,345 6,299 5,992
Other operating income 2,082 1,390 990 719 697
Other operating expenses 5,133 4,396 4,055 3,921
3,824
________ ________ ________ ________ ________
Income before income taxes 4,155 3,804 3,280 3,097 2,865
Applicable income tax
(benefit) 1,246 1,110 944 812 748
________ ________ ________ ________ ________
Net income $ 2,909 $ 2,694 $ 2,336 $ 2,285 $ 2,117
________ ________ ________ ________ ________
________ ________ ________ ________ ________
Per share amounts are based on the following weighted average shares
outstanding after giving retroactive recognition to a 100% stock dividend
issued in July 1998, 5% stock dividend issued in July 1997 and a 100% stock
dividend issued in April 1996:
1998 1,732,479 1996 1,775,069 1994 1,770,338
1997 1,765,056 1995 1,771,728
Net income 1.68 1.53 1.32 1.29 1.20
Cash dividend paid .43 .38 .31 .28 .24
Book value 13.02 11.58 9.99 9.10 7.53
Year-End Balance Sheet Figures
(000 omitted)
Total assets $ 187,335 $ 159,935 $ 148,673 $ 139,182 $ 135,378
Net loans 121,800 102,388 99,094 93,905 93,282
Total investment securities 48,517 42,217 37,673 33,733 30,841
Deposits-noninterest bearing 11,346 9,651 7,959 8,201 7,308
Deposits-interest-bearing 131,120 123,133 118,645 111,559 106,90
6
Total deposits 142,466 132,784 126,604 119,760 114,214
Total stockholders' equity 22,552 20,433 17,704 16,148 13,343
Ratios
Average equity/average assets 12.72 12.25 11.76 10.74
9.84
Return on average equity 13.54 14.17 13.80 15.49 16.50
Return on average assets 1.72 1.74 1.62 1.67 1.62
Changes in Income and Expense 1998 and 1997
The schedule below reflects comparative changes in income and expense
included in the Consolidated Statements of Income for 1998 and 1997 together
with changes in asset and liability volumes associated with these income and
expense items.
1998 Compared to 1997 1997 Compared to 1996
Average Volumes Income/Expense Average Volumes Income/Expe
nse
__________________ __________________ __________________ ______
___________
($ 000 omitted)
$ % $ % $ % $ %
_______ _______ _______ _______ _______ _______ ______
_ _______
Loans 9,513 9.3 648 7.0 3,393 3.4 412 4.7
Investment securities 2,198 5.5 ( 104) ( 4.1) 4,994 14.4
3
34 15.5
Other short-term investments 285 4.1 27 9.9
2,551 58.1
75 37.7
_______ _______ _______ _______ _______ _______ ______
_ _______
Total 11,996 8.1 571 4.8 10,938 7.9
821
7.4
_______ _______ _______ _______ _______ _______ ______
_ _______
Interest-bearing demand deposits 2,170 6.8 180 19.9 10,729 50.8
7
9 6.8
Savings deposits 3,918 114.2 ( 8) ( 1.4) ( 5,618)
(
16.9) 135 17.5
Time deposits ( 1,323) ( 2.1) ( 245) ( 7.0) 983 1.6 124 3.7
Short-term borrowings 5,406 236.3 248 204.9 304
1
5.3 18 27.6
_______ _______ _______ _______ _______ _______ ______
_ _______
Total 10,171 8.2 175 3.4 6,398 5.4
356
7.4
_______ _______ _______ _______ _______ _______ ______
_ _______
Net interest income 396 5.8 465 7.3
Provision for loan losses 0 .0 0 .0
_______ _______
Net interest income after
provision for loan losses 396 5.8 465 7.3
_______ _______
Security transactions 400 69.8 295 106.1
Other operating income 292 35.7 105 14.7
_______ _______
Income before operating expense 1,088 13.3 865
11
.8
_______ _______
Salaries & employee benefits 304 13.9 184 9.2
Occupancy & equipment expense 6 2.0 12 1.3
FDIC insurance premiums 4 25.0 14 700.0
Other operating expenses 423 22.2 131 11.8
_______ _______
Total operating expenses 737 16.8 341 8.4
_______ _______
Income before income taxes 351 9.2 524 15.9
Applicable income tax expense 136 12.3 166
17
.6
_______ _______
Net income 215 8.0 358 15.3
_______ _______
_______ _______
Summary of Quarterly Financial Data
The unaudited quarterly results of operations for the years ended December
31, 1998 and 1997 are as follows:
1998 Quarter Ended 1997 Quarter Ended
($ 000 omitted except per share) Mar. 31 June 30 Sept. 30 Dec. 31
Mar
. 31
June 30 Sept. 30 Dec. 31
_______ _______ _______ _______ _______ _______ ______
_ _______
Interest income $ 3,019 $ 3,072 $ 3,143 $ 3,314 $ 2,918 $
2,943 $ 3,037 $ 3,079
Interest expense 1,301 1,292 1,371 1,378 1,256
1,254 1,320
1,337
_______ _______ _______ _______ _______ _______ ______
_ _______
Net interest income 1,718 1,780 1,772 1,936 1,662
1,689
1,717 1,742
Provision for loan losses 0 0 0
0
0 0 0 0
_______ _______ _______ _______ _______ _______ ______
_ _______
Net interest income after provision
for loan losses 1,718 1,780 1,772 1,936 1,662
1,689
1,717 1,742
Other income 604 553 639 286 434 236 438 282
Other expenses 1,220 1,359 1,282 1,272 1,088
1,094 1,074
1,140
_______ _______ _______ _______ _______ _______ ______
_ _______
Operating income
before income taxes 1,102 974 1,129 950 1,008 831
1,
081 884
Applicable income taxes 325 289 331 301
293
242 316 259
_______ _______ _______ _______ _______ _______ ______
_ _______
Net income $ 777 $ 685 $ 798 $ 649 $ 715 $
589 $ 765 $ 625
_______ _______ _______ _______ _______ _______ ______
_ _______
_______ _______ _______ _______ _______ _______ ______
_ _______
Net income applicable to common stock
Per share data: Net income $ .45 $ .40 $ .46 $ .37 $
.41 $ .33
$ .43 $ .36
Statements of Average Balances and Average Rates
1998 1997 1996 1995 1994
________ ________ ________ ________ ________
($ 000 omitted)
LOANS
Commercial $ 18,372 $ 15,854 $ 14,594 $ 11,848
$ 10,395
Mortgage 65,160 64,833 65,296 66,699 66,570
Consumer 28,420 21,752 19,156 16,541
14,024
________ ________ ________ ________ ________
Total Loans 111,952 102,439 99,046 95,088 90,989
________ ________ ________ ________ ________
INVESTMENT SECURITIES
U.S. Government 484 698 931 1,460 1,640
U.S. Government agencies 18,936 21,898 20,404 18,854 17,855
State & municipal 10,988 9,608 8,413 8,157 8,000
Other 11,371 7,377 4,839 3,584
3,864
________ ________ ________ ________ ________
Total investment securities 41,779 39,581 34,587
32,055
31,359
________ ________ ________ ________ ________
OTHER SHORT-TERM INVESTMENTS
Federal funds sold 870 1,371 758 990 86
Certificates of deposit 6,357 5,571 3,633
2,819
1,997
________ ________ ________ ________ ________
Total other short-term investments 7,227 6,942
4,391
3,809 2,083
________ ________ ________ ________ ________
Total earning assets 160,958 148,962 138,024
130,952 124,431
________ ________ ________ ________ ________
Total assets $169,023 $155,264 $144,504 $137,204 $130,433
________ ________ ________ ________ ________
Percent increase 8.8% 7.4% 5.3% 5.2% 7.5%
DEPOSITS
Demand $ 10,647 $ 8,835 $ 8,222 $ 7,613
$
7,083
Interest-bearing demand 33,990 31,820 21,091 19,729 20,308
Savings 31,565 27,647 33,265 31,705 33,548
Time 61,269 62,592 61,609 58,271
51,973
________ ________ ________ ________ ________
total deposits 137,471 130,894 124,187 117,318 112,912
________ ________ ________ ________ ________
Short-term borrowings 7,694 2,288 1,984 3,369
2,620
________ ________ ________ ________ ________
AVERAGE RATES EARNED
(TAXABLE EQUIVALENT BASIS)
Loans % % % % %
________ ________ ________ ________ ________
Commercial 9.3 9.7 9.4 10.2 8.5
Mortgage 8.6 8.9 8.7 8.9 8.0
Consumer 8.9 9.1 9.0 9.1 8.8
________ ________ ________ ________ ________
Total 8.8 9.0 8.9 9.2 8.4
________ ________ ________ ________ ________
Investment Securities
U. S. Government 6.7 6.6 6.7 6.8 6.6
U.S. Government agencies 6.7 6.7 6.5 6.4 6.0
State & municipal 5.1 5.2 5.3 5.5 5.6
Other 6.4 7.0 6.2 7.3 8.0
________ ________ ________ ________ ________
Total 6.4 6.2 6.2 6.2 6.0
________ ________ ________ ________ ________
Total other short-term investments 6.1 6.2 6.4 5.6 6.4
________ ________ ________ ________ ________
Total earning assets 8.1 8.2 8.2 8.5 7.8
________ ________ ________ ________ ________
AVERAGE RATES PAID
Time & savings deposits 3.9 4.1 4.1 4.1 3.3
Short-term borrowings 4.4 5.9 5.3 6.2 4.3
Management's Discussion & Analysis of Consolidated Financial Condition &
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 depo
nds and the level of interest-free deposits.
Net income was $ 2,909,000 in 1998, compared to $ 2,694,000 in 1997 and
$ 2,336,000 in 1996. Net income on an adjusted per share basis for 1998 was
$ 1.68, up $ .15 from $ 1.53 realized during 1997.
Total interest income increased $ 571,000 from 1997 to 1998 and $ 821,000
from 1996 to 1997. Increases in 1998 were primarily due to volume
increases, and increases in 1997 were due to both an increase in interest
rates and average earning assets. Average loans outstanding in 1998
increased 9.3% over 1997. This coupled with steady rates resulted in a 7.0%
increase in interest income in 1998 as compared to a 7.4% increase realized
in 1997. Total average earning assets increased 8.1% in 1998 compared to 7
is growth has occurred directly impacts the growth in earnings. Increases in
earning assets during 1998 and 1997 were proportionately higher in loans,
which typically produce higher yields than investments thus producing the
higher earnings during 1998.
Interest from loans accounted for 79% of total interest income for 1998, as
compared to 77% and 79% for 1997 and 1996 respectively. Interest and
dividends on investments amounted to $ 2,679,000 or 21% of interest income
for 1998, as compared to $ 2,756,000 or 23% in 1997 and $ 2,148,000 or 19%
in 1996.
Total interest expense was $ 5,342,000 for 1998, an increase of $ 175,000
over the $ 5,167,000 for 1997. The increase in total average deposits was
5.0% in 1998 compared to 5.4% in 1997. Overall growth was moderate during
1998 and 1997 with interest-bearing demand, savings deposits, and time
deposits having increased 3.9% and 5.4%, respectively. Although growth was
moderate during 1998 there were some significant changes in the mix of
deposits, with savings and time deposits shifting to the interest-bear
along with the constant level of rates paid allowed the overall interest
spread to increase to 4.4% for 1998 compared to 4.1% in 1997.
The Banks 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 two of the past three years. Net recoveries
were $40,000 for 1998, net charge-offs were $97,000 for 1997, and net
recoveries were $3,000 for 1996. These net recoveries, as well as an
improving loan portfolio, have allowed the Bank to have a current year
provision of $0 for 1998, 1997 and 1996. The provisions were based on manag
acy of the reserve balance and represent amounts considered necessary to
maintain the reserve at the appropriate level based on the quality of the
loan portfolio and other economic conditions.
Management has significantly expanded its detailed review of the loan
portfolio, which is performed quarterly, in an effort to identify and act
more readily on loans with deteriorating trends. As a result, nonaccrual
loans have decreased over the past several years and have become more in
line with peer banks. Balances were $488,000 and $478,000 at year-end 1998
and 1997, respectively. Management is not aware of any other problem loans
that are indicative of trends, events, or uncertainties that would si
tions, 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 $692,000 or 49.7% for 1996 over 1997, and $400,000 or 40.4%
for 1997 over 1996. The increase in 1998 and 1997 was largely due to an
increase in investment gains of $400,000 and $295,000, fees on t
1,000 and fees on investment services of $30,000 and $20,000, respectively.
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 $304,000 or 13.9% in 1998 over 1997,
compared to an increase of $184,000 or 9.2% in 1997 over 1996. Occupancy
and equipment expense increased by 2.0% from 1997 to 1998 compared to 1.3%
from 1996 to 1997. The Bank expects noninterest expenses to continue to
increase as their plans to expand take place. Total noninterest expenses
increased 16.8% in 1998, compared to 8.4% and 3.4% in 1997 and 1996,
respectively.
Applicable income taxes changed between 1996, 1997 and 1998 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
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 1998 and 1997 is 34%. At December 31, 1998 and 1997,
deferred taxes amounted to $179,000 and $246,000, respectively. If all
timing differences reversed in 1998, 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 re
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 1998 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
began in the summer of 1998. Currently, the Bank does not expect there to
be any problems with any conversion; and the remaining expenditur
next year, and will be funded through operating cash flows. The Banks
service center (FiServ) has been updating their systems and expect to be
compliant. In the event that the Banks service center is not compliant,
other systems have been considered to be used as part of their contingency
plan.
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133 Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivatives and hedging activities.
In October 1998, the FASB issued SFAS No. 134 Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise. This statement require
mortgage banking activities to classify mortgage-backed securities as trading
securities following the securitization of mortgage loans held for sale.
Tower Bancorp Inc. has no derivative instruments and does not engage in
hedging activities. The corporation has no loans held for sale nor do they
engage in securitization of loans. Therefore, management does not expect
that either of the aforementioned statements will impact future results of
operations.
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
borrow
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 Banks policy objective is to limit t
20% of projected earnings. At December 31, 1998, based on the results of
the simulation model, the Bank would expect an increase in net interest
income of $774,000 and a decrease in net interest income of $333,000 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 institutions 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 tim
rest-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
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 Banks 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, 1998 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 days due to these
funds being subject to immediate withdrawal.
Due Due Due
0-90 91-360 After
Days Days 1 Year Total
______ ______ ______ ______
Rate sensitive assets
Interest-bearing deposits
with banks $ 499 $ 1,983 $ 3,717 $ 6,199
Investment securities 305 1,032 45,552 46,889
Real estate, commercial
and consumer loans 11,969 50,027 61,694 123,690
______ ______ ______ ______
$12,773 $53,042 $110,963 $176,778
______ ______ ______ ______
______ ______ ______ ______
Due Due Due
0-90 91-360 After
Days Days 1 Year Total
______ ______ ______ ______
Rate sensitive liabilities
Certificates of deposit
over $100,000 $ 2,711 $ 8,703 $ 3,467 $ 14,881
Other certificates of deposit 9,277 19,772 17,909 46,958
Money market deposit
accounts 13,569 0 0 13,569
NOW accounts and other
savings deposits 55,712 0 0 55,712
Federal funds and other
liabilities 2,793 0 15,000 17,793
______ ______ ______ ______
$84,062 $28,475 $ 36,376 $148,913
______ ______ ______ ______
______ ______ ______ ______
Cumulative interest
sensitive GAP ($71,289) ($46,722) $ 27,865 $ 27,865
Cumulative interest
sensitive GAP ratio ( .15) ( .58) 1.19 1.19
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
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.
(In Millions) Principal/Notional Amount Maturing In: Fair
Rate sensitive assets 1999 2000 2001 2002 2003 Thereafter Total Value
Fixed interest rate
loans $8,926 $8,045 $7,977 $5,096 $6,328 $36,253 $72,62
5 $71,862
Average interest rate 9.11 8.95 8.93 8.53 8.63 7.93 7.99
Variable interest rate
loans 13,493 3,760 2,720 5,460 2,930 22,702 51,065
50,528
Average interest rate 8.00 8.62 8.64 8.77 8.74 8.41 8.38
Fixed interest rate
securities 13,802 8,219 8,554 4,001 3,038 7,259
44,87
3 48,517
Average interest rate 6.31 6.00 5.81 5.63 5.63 5.95 5.99
Rate sensitive liabilities
Noninterest-bearing
checking 1,866 560 560 560 187 0 3,733 3,733
Average interest rate 0 0 0 0 0 0 0
Savings and interest-
bearing checking 2,121 1,414 1,414 1,414 707 0 7,070
7,070
Average interest rates 0 0 0 0 0 0 0
Time deposits 40,174 7,821 5,341 4,791 2,290 0 60,417
60,970
Average interest rates 5.20 5.40 5.40 5.50 5.50 0 5.28
Fixed interest rate
Borrowings 150 0 5,000 0 10,000 0 15,150 15,150
Average rate 9.0 0 4.63 0 5.2 0 5.06
Variable interest rate
Borrowings 2,366 0 0 0 0 0 2,366 2,366
Average interest rate 4.75 0 0 0 0 0 4.75
CAPITAL FUNDS
Internal capital generation has been the primary method utilized by Tower
Bancorp Inc. to increase its capital. Stockholders' equity, which exceeded
$ 22.5 million at December 31, 1998 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 orde
ensitive to risk profiles of individual banks. A comparison of Tower
Bancorp's capital ratios to regulatory minimums at December 31 is as follows:
Regulatory Minimum
Tower Bancorp Requirements
1998 1997
Leverage ratio 8.71% 10.12% 4%
Risk-based capital ratio
Tier I (core capital) 13.20% 17.17% 4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 14.45% 17.83% 8%
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.
1998 1997 1996
_______ _______ ______
Equity capital at December 31
($ 000 omitted) $ 22,552 $ 20,433 $ 17,704
Equity capital as a percent of
assets at December 31 12.04% 12.77% 11.91%
Return on average assets 1.72% 1.74% 1.62%
Return on average equity 13.54% 14.17% 13.80%
Cash dividend payout ratio 25.82% 25.06% 23.42%
STOCK MARKET ANALYSIS AND DIVIDENDS
The corporation's common stock is traded inactively in the over-the-counter
market. As of December 31, 1998 the approximate number of shareholders of
record was 1,039.
1998 (1) Market Price Cash Dividend
_____________ _________
First Quarter $ 24.00 - 28.75 $ 0
Second Quarter 28.50 32.00 .13
Third Quarter 30.00 36.00 0
Fourth Quarter 30.00 33.00 .30
1997 (1) Market Price Cash Dividend
_____________ _________
First Quarter $ 17.50 17.50 $ 0
Second Quarter 17.50 18.00 .12
Third Quarter 17.50 20.50 0
Fourth Quarter 18.00 22.75 .26
(1) Note: Cash dividends per share were based on weighted average shares of
common stock outstanding after giving retroactive recognition to a 100%
stock dividend issued in July 1998 and 5% stock dividend issued in July 1997.
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