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, 1999
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, 1999, 1,762,601 shares of the
registrant's common stock were outstanding. The aggregate
market value of such shares held by nonaffiliates on that
date was $ 58,165,833.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year
ended December 31, 1999 are incorporated by reference into
Parts I and II. Portions of the Proxy Statement for 2000
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 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.
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.
- -2-
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.
During 1999 Tower acquired 9,691 shares of its own
common stock and sold 5,872 shares of treasury stock to
First's ESOP plan, and 1,020 shares to First executive
officers as part of a stock option plan.
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 five branches are located in
Quincy, Shady Grove, Waynesboro, 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, 1999, First had 82 full-time and 20 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 opened 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, 1999, First had total assets of
approximately $ 207 million, total shareholders' equity of
approximately $ 22.1 million and total deposits of
approximately $ 159 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, 1999, 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.
A federal depositor preference statute was enacted
in 1993 providing that deposits and certain claims for
administrative expenses and employee compensation against an
insured depository institution would be afforded a priority
over other general claims against such an institution,
including federal funds and letters of credit, in the
"liquidation or other resolution" of such an institution by
any receiver.
Federal regulations recently issued proposed
regulations to implement the privacy provisions of the
- -9-
Gramm-Leach-Bliley Act (Financial Services Modernization
Act). This new law requires banks to notify consumers about
their privacy policies and to give them an opportunity to
"opt-out" or prevent the bank from sharing "nonpublic
personal information" about them with nonaffiliated third
parties. Proposed regulations are expected to take effect
in November 2000. The corporation is in the process of
developing privacy policies and procedures to provide timely
disclosure of such policies and a convenient means for
consumers to opt out of the sharing of their information
with unaffiliated third parties.
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 to banking and securities laws,
regulations and regulatory agencies, the Corporation also is
subject to various other laws, regulations and regulatory
agencies throughout the United States. Furthermore, various
proposals, bills and regulations have been and are being
considered in the United States Congress, and various other
governmental regulatory and legislative bodies, which could
result in changes in the profitability and governance of the
Corporation. It cannot be predicted whether new legislation
or regulations will be adopted and, if so, how they would
affect the Corporation.
References under the caption "Supervision and
Regulation" to applicable statutes, regulations and orders
are brief summaries of portions thereof which do not purport
to be complete and which are qualified in their entirety by
reference thereto.
Important Factors Relating to Forward Looking Statements
The Private Securities Litigation Reform Act of
1995 provides a "safe harbor" for forward-looking statements
to encourage companies to provide prospective information
about their companies without fear of litigation so long as
- -10-
those statements are identified as forward-looking and are
accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ
materially from those projected in such statements. In
connection with certain statements made in this report and
those that may be made in the future by or on behalf of the
Corporation which are identified as forward-looking
statements, the Corporation notes that the following
important factors, among others, could cause actual results
to differ materially from those set forth in any such
forward-looking statements. Further, such forward-looking
statements speak only as of the date on which such statement
or statements are made, and the Corporation undertakes no
obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date
on which such statement is made or to reflect the occurrence
of unanticipated events.
The business and profitability of a financial
services organization such as the Corporation is influenced
by prevailing economic conditions and governmental policies.
The actions and policy directives of the Federal Reserve
Board determine to a significant degree the cost and the
availability of funds obtained from money market sources for
lending and investing. Federal Reserve Board policies and
regulations also influence, directly and indirectly, the
rates of interest paid by commercial banks on their
interest-bearing deposits and may also impact the value of
financial instruments held by the Corporation. The nature
and impact on the Corporation of future changes in economic
and market conditions and monetary and fiscal policies, both
foreign and domestic, are not predictable and are beyond the
- -11-
Corporation's control. In addition, these conditions and
policies can impact the Corporation's customers and
counterparties which may increase the risk of default on
their obligations to the Corporation and its affiliates.
They can also affect the competitive conditions in the
markets and products within which the Corporation operates,
which can have an adverse impact on the Corporation's
ability to maintain its revenue streams.
As part of its ongoing business, the Corporation
assumes financial exposures to interest rates, currencies,
equities and other financial products. In doing so, the
Corporation is subject to unforeseen events which may not
have been anticipated or which may have effects which exceed
those assumed within its risk management processes. This
risk can be accentuated by volatility and reduction in
liquidity in those markets which in turn can impact the
Corporation's ability to hedge and trade the positions
concerned. In addition, the Corporation is dependent on its
ability to access the financial markets for its funding
needs.
As noted in "Supervision and Regulation", the
Corporation is regulated by and subject to various
regulators. The actions of these regulators can have an
impact on the profitability and governance of the
Corporation. Increases by regulatory authorities of minimum
- -12-
capital, reserve, deposit insurance and other financial
viability requirements can also affect the Corporation's
profitability.
The Corporation is subject to operational and
control risk which is the potential for loss caused by a
breakdown in communication, information, processing and
settlement systems or processes or a lack of compliance with
the procedures on which they rely either within the
Corporation or within the broader financial systems
infrastructure.
As with any financial institution, the Corporation
is also subject to the risk of litigation and to an
unexpected or adverse outcome in such litigation.
Competitive pressures in the marketplace and unfavorable or
adverse publicity and news coverage can have the effect of
lessening customer demand for the Corporation's services.
Ultimately, the Corporation's businesses and their success
are dependent on the Corporation's ability to attract and
retain high quality employees.
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.
- -13-
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.
- -14-
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.
- -15-
<TABLE>
<S> <C> <C> <C>
Held Employee Age as
Name/Office Held Since Since of 12/31/99
Kermit G. Hicks, Chairman
of the Board 1983 (1) 64
Harold C. Gayman, Vice
Chairman of the Board 1983 (1) 73
Jeff B. Shank, President
and Director 1992 1983 44
Betty J. Lehman, Director 1985 (1) 74
Robert L. Pensinger,
Director 1987 (1) 66
James H. Craig, Director 1990 (1) 66
Lois Easton, Director 1990 (1) 64
(1) These directors are not employees of the Bank.
Held Bank Employee Age as
Name/Office Held Since Since of 12/31/99
Jeff B. Shank, President 1992 1976 44
John H. McDowell,
Executive Vice President 1994 1977 50
Don Kunkle, Vice President 1987 1987 50
Donald Chlebowski, Vice
President 1991 1980 41
Darlene Niswander, Vice
President/Senior Trust
Officer 1991 1971 53
</TABLE>
- -16-
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, 1999, the
approximate number of shareholders of record was 1,040. 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
1999 1st Quarter $ 0 $ 29.50 - $ 33.00
2nd Quarter .15 28.00 - 30.25
3rd Quarter .50 23.75 - 28.38
4th Quarter .32 23.50 - 26.75
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
</TABLE>
(1) Note: Cash dividends per share were based on
weighted average shares of common stock
outstanding after giving retroactive
recognition to a 100% stock
dividend issued in July 1998.
Item 6. Selected Financial Data
The selected five-year financial data on page 23
of the annual shareholders' report for the year ended
December 31, 1999 is incorporated herein by reference.
- -17-
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 27
through 31 of the annual shareholders report are
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data,
some of which is required under Guide 3 (statistical
disclosures by bank holding companies) are shown on pages 2
through 31 of the annual shareholders report for the year
ended December 31, 1999 and are incorporated herein by
reference. Additional schedules required in addition to
those included in the annual shareholders report are
submitted herewith.
- -18-
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 4.0% to 4.1% 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 1999 1998
Average Average
(000 omitted) Balance Interest Rate Balance Interest Rate
Investment securities:
Taxable interest
income $ 24,679 $ 1,924 6.5% $ 19,420 $ 1,272 6.7%
Nontaxable interest
income 12,860 667 5.2 10,988 562 5.1
Total investment
securities 37,539 2,591 5.9 30,408 1,834 6.4
Loans (net of unearned
discounts) 127,202 10,374 8.2 111,952 9,869 8.8
Other short-term
investments 24,098 683 6.2 18,598 845 6.1
Total interest
earning
assets 188,839 $ 13,648 7.6% 160,958 $ 12,548 8.1%
Allowance for loan
Losses ( 1,804) ( 1,870)
Cash and due
from banks 5,088 4,713
Bank premises and
equipment 3,061 2,560
Other assets 3,885 2,662
Total assets $ 199,069 $ 169,023
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand
deposits $ 47,140 $ 975 2.1% $ 33,990 $ 629 1.9%
Savings deposits 32,965 1,040 3.2 31,565 1,086 3.4
Time deposits 63,410 3,111 4.9 61,269 3,258 5.3
Short-term
borrowings 18,923 953 5.1 7,694 369 4.4
Total interest
bearing
liabilities 162,438 $ 6,079 3.6% 134,518 $ 5,342 4.0%
Demand deposits 11,206 10,647
Other
liabilities 3,081 2,365
Total
liabilities 176,725 147,530
Stockholders'
equity 22,344 21,493
Total liabilities &
stockholders'
equity $ 199,069 $ 169,023
Net interest income/net
yield on average
earning assets $ 7,569 4.0% $ 7,206 4.1%
</TABLE>
- -19-
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 1997
Average
(000 omitted) Balance Interest Rate
Investment securities:
Taxable interest
income $ 22,596 $ 1,724 6.7%
Nontaxable interest
income 9,608 495 5.2
Total investment
securities 32,204 2,219 6.4
Loans (net of unearned
discounts) 102,439 9,221 9.0
Other short-term
investments 14,319 537 7.1
Total interest
earning assets 148,962 $ 11,977 8.2%
Allowance for loan
losses ( 1,931)
Cash and due from banks 3,450
Bank premises and
equipment 2,262
Other assets 2,521
Total assets $ 155,264
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand
deposits $ 31,820 $ 638 2.1%
Savings deposits 27,647 905 3.3
Time deposits 62,592 3,503 5.5
Short-term borrowings 2,288 121 5.9
Total interest
bearing liabilities 124,347 $ 5,167 4.1%
Demand deposits 8,835
Other liabilities 3,013
Total liabilities 136,195
Stockholders' equity 19,069
Total liabilities &
stockholders'
equity $ 155,264
Net interest income/net
yield on average
earning assets $ 6,810 4.1%
</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 1999, 1998 and 1997.
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CHANGES IN NET INTEREST INCOME
TAX EQUIVALENT YIELDS
<TABLE>
<S> <C> <C> <C>
1999 Versus 1998
Increase (Decrease)
Due to Change in
Total
Average Average Increase
Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned
discounts) $ 1,342 ($ 837) $ 505
Taxable investment securities 352 300 652
Nontaxable investment securities 95 10 105
Other short-term investments 335 ( 497) ( 162)
Total interest income 2,124 ( 1,024) 1,100
Interest Expense
Interest bearing demand 250 96 346
Savings deposits 48 ( 94) ( 46)
Time deposits 113 ( 260) ( 147)
Other short-term borrowings 494 90 584
Total interest expense 905 ( 168) 737
Net interest income $ 363
</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.
- -20-
<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.
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
The following table shows the maturities of investment
securities at book value as of December 31, 1999, 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 $ 0 $ 0
Yield 7.16%
U. S. Government
agencies/mortgage-
backed securities
Book value $ 7,437 $ 10,711 $ 2,585
Yield 6.55 6.26 6.77
State and municipal
Book value $ 780 $ 2,080 $ 12,618
Yield 7.97 7.51 7.63
Other
Book value $ 533 $ 3,318 $ 2,719
Yield 6.67 5.98 5.09
Total book value $ 8,950 $ 16,109 $ 17,922
Yield
</TABLE>
- -21-
<TABLE>
<S> <C> <C>
After
10 years Total
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 0 $ 200
Yield 7.16%
U. S. Government
agencies/mortgage-
backed securities
Book value $ 250 $ 20,983
Yield 7.00% 6.44%
State and municipal
Book value $ 0 $ 15,478
Yield 7.63%
Other
Book value $ 94 $ 6,664
Yield 6.58% 6.17%
Total book value $ 344 $ 43,325
Yield
Equity Securities:
Total Equity Securities $ 10,835
Yield 2.40%
Total Investment Securities $ 54,160
Yield 5.94%
</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>
1999 1998 1997 1996 1995
(000 omitted)
Commercial, financial
& agricultural $ 15,047 $ 15,164 $ 10,699 $ 10,009 $ 8,736
Real estate -
Construction 4,146 2,378 1,486 2,326 1,494
Real estate -
Mortgage 93,340 87,350 80,597 78,990 76,624
Installment & other
personal loans
(net of unearned
income) 19,227 18,798 11,556 9,716 8,996
Total loans $ 131,760 $ 123,690 $ 104,338 $ 101,041 $ 95,850
</TABLE>
Presented below are the approximate maturities of the
loan portfolio (excluding real estate mortgage and
installments) at December 31, 1999:
<TABLE>
<S> <C> <C> <C> <C>
Under One One to Over Five
Year Five Years Years Total
(000 omitted)
Commercial, financial &
agricultural $ 10,533 $ 2,257 $ 2,257 $ 15,047
Real estate -
Construction 4,146 0 0 4,146
Total $ 14,679 $ 2,257 $ 2,257 $ 19,193
</TABLE>
The following table presents the approximate amount of
fixed rate loans and variable rate loans due as of
December 31, 1999:
<TABLE>
<S> <C> <C>
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 16,171 $ 11,172
Due after one but within
five years 32,570 11,050
Due after five years 33,094 27,703
Total $ 81,835 $ 49,925
</TABLE>
- -22-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
<TABLE>
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
(000 omitted)
Average total loans
outstanding (net of
unearned
income) $ 127,202 $ 111,952 $ 102,439 $ 99,046 $ 95,088
Allowance for loan
losses, beginning
of period 1,890 1,850 1,947 1,945 1,856
Additions to provision
for loan losses
charged to
operations 0 0 0 0 0
Loans charged off
during the year
Commercial 8 0 58 5 0
Real estate
mortgage 29 1 0 0 7
Instal-
lment 179 46 57 9 13
Total charge-
off's 216 47 115 14 20
Recoveries of loans
previously charged off:
Commercial 4 43 11 6 75
Installment 35 20 7 9 27
Mortgage 6 24 0 1 7
Total
recov-
eries 45 87 18 16 109
Net loans charged off
(recovered) 171 ( 40) 97 ( 2)( 89)
Allowance for loan
losses, end of
period 1,719 1,890 1,850 1,947 1,945
Ratio of net loans
charged off (recovered)
to average loans
outstanding .13% ( .04%) .09% ( .003)% ( .09)%
</TABLE>
The provision is based on an evaluation of the
adequacy of the allowance for possible loan losses. The
evaluation includes, but is not limited to, review of net
loan losses for the year, the present and prospective
financial condition of the borrowers and evaluation of
current and projected economic conditions.
- -23-
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>
1999 1998 1997 1996 1995
(000 omitted)
Nonaccrual loans $ 460 $ 488 $ 477 $ 77 $ 135
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
60 - 89 days past due 379 417 315 216 252
90 days or more past
due 27 0 1 87 115
Total accrual
loans $ 406 $ 417 $ 316 $ 303 $ 367
</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.
- -24-
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
1999 1998
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 $ 812 11.2% $ 815 12.5%
Real estate -
Construction 0 3.1 0 2.0
Real estate -
Mortgage 630 70.8 653 70.2
Installment 0 14.9 0 15.3
Unallocated 277 N/A 422 N/A
Total $ 1,719 100.0 $ 1,890 100.0
Years Ended December 31
1997 1996
Percentage of Percentage of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and
agricultural $ 772 10.3% $ 819 9.9%
Real estate -
Construction 0 1.4 0 2.3
Real estate -
Mortgage 630 77.2 630 78.2
Installment 0 11.1 48 9.6
Unallocated 448 N/A 450 N/A
Total $ 1,850 100.0 $ 1,947 100.0%
</TABLE>
- -25-
<TABLE>
<S> <C> <C>
Years Ended December 31
1995
Percentage of
Loans in Each
Allowance Category to
Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 818 9.1%
Real estate -
Construction 0 1.6
Real estate -
Mortgage 629 79.9
Installment 48 9.4
Unallocated 450 N/A
Total $ 1,945 100.0%
</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
1999 1998 1997
(000 omitted)
Demand deposits $ 11,206 $ 10,647 $ 8,835
Interest bearing demand
deposits 47,140 33,990 31,820
Savings deposits 32,965 31,565 27,647
Time deposits 63,410 61,269 62,592
Total deposits $ 154,721 $ 137,471 $ 130,894
</TABLE>
The following is a breakdown of maturities of time
deposits of $ 100,000 or more as of December 31, 1999:
<TABLE>
<S> <C> <C>
Maturity (000 omitted)
Certificates of Deposit
Three months or less $ 2,579
Over three months through twelve
months 8,754
Over twelve months 3,091
$ 14,424
</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>
1999 1998 1997
Assets $ 206,874 $ 187,335 $ 159,935
Net income $ 3,203 $ 2,909 $ 2,694
Equity $ 22,136 $ 22,552 $ 20,433
Cash dividends paid $ 1,711 $ 751 $ 675
Return on assets 1.63% 1.72% 1.74%
Return on equity 14.09% 13.54% 14.17%
Dividend payout ratio 53.42% 25.82% 25.06%
Equity to asset ratio 11.42% 12.72% 12.25%
</TABLE>
- -26-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended December 31
1999 1998 1997 1996 1995
(000 omitted)
Interest income $ 13,648 $ 12,548 $ 11,977 $ 11,156 $ 11,002
Interest
expense 6,079 5,342 5,167 4,811 4,703
Net interest
income 7,569 7,206 6,810 6,345 6,299
Provision for loan
losses 0 0 0 0 0
Net interest income
after provision
for loan
losses 7,569 7,206 6,810 6,345 6,299
Other income:
Trust 492 391 293 252 200
Service charges -
deposits 291 281 288 277 288
Other service charges,
collection and exchange,
charges, commission
fees 388 212 181 159 102
Other operating
income 1,651 1,198 628 302 129
Total other
income 2,822 2,082 1,390 990 719
Income before
operating
expense 10,391 9,288 8,200 7,335 7,018
Operating expenses:
Salaries and employees
benefits 2,922 2,483 2,179 1,995 1,917
Occupancy and equipment
expense 1,252 1,220 964 952 898
Other operating
expenses 1,767 1,430 1,253 1,108 1,106
Total operating
expenses 5,941 5,133 4,396 4,055 3,921
Income before income
Taxes 4,450 4,155 3,804 3,280 3,097
Income tax 1,247 1,246 1,110 944 812
Net income applicable
to common
stock $ 3,203 $ 2,909 $ 2,694 $ 2,336 $ 2,285
Per share data:
Earnings per common
share $ 1.82 $ 1.68 $ 1.53 $ 1.32 $ 1.29
Cash dividend -
Common $ .97 $ .43 $ .38 $ .31 $ .28
Average number of
common
shares 1,763,548 1,732,479 1,765,056 1,775,069 1,771,728
</TABLE>
- -27-
Item 9. Disagreements on Accounting and Financial
Disclosures.
Not applicable.
- -28-
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 2000 Annual Meeting of
Shareholders filed pursuant to Regulation 14A.
- -29-
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, 1999,
are incorporated by reference in Item 8:
Consolidated balance sheets - December 31,
1999 and 1998
Consolidated statements of income - Years
ended December 31, 1999, 1998 and 1997
Consolidated statements of stockholders'
equity - Years ended December 31, 1999, 1998,
and 1997
Consolidated statements of cash flows - Years
ended December 31, 1999, 1998, and 1997
Notes to consolidated financial statements -
December 31, 1999
(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
- -30-
Schedule IV - Summary of loan loss experience,
nonaccrual loans 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.
- -31-
(b) Reports on Form 8-K filed
None
(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:
(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,
Incorporated by reference to the
registrant's Form 10K filing dated
March 22, 1999 Exhibit 10-1 and 10-2
for the year ended December 31, 1998.
- -32-
(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 - filed
herewith
(27) Financial data schedule - filed herewith
(d) Financial statement schedules
The following financial statement schedules
required under Article 9 Industry Guide 3 have
been included on pages 18 to 27 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
- -33-
Schedule IV - Summary of loan loss experience,
nonaccrual loans, and allocation of allowance
for loan losses
Schedule V - Deposits
Schedule VI - Return on equity and assets
Schedule VII - Consolidated summary of
operations
- -34-
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 15, 2000
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 15, 2000
Jeff B. Shank Director
/s/ Betty J. Lehman Director March 15, 2000
Betty J. Lehman
/s/ Kermit G. Hicks Chairman of the March 15, 2000
Kermit G. Hicks Board & Director
/s/Robert L. Pensinger Director March 15, 2000
Robert L. Pensinger
/s/ Harold C. Gayman Vice Chairman of March 15, 2000
Harold C. Gayman the Board & Director
/s/James H. Craig, Jr. Director March 15, 2000
James H. Craig, Jr.
/s/ Lois Easton ____ Director March 15, 2000
Lois Easton
- -35-
Exhibit Index
Exhibit No. Sequentially numbered
pages
13 Annual report to security holders
21 Subsidiaries of the Registrant
23.1 Consent of independent auditors
27 Financial data schedule
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 28, 2000, with respect to
the consolidated balance sheets of Tower Bancorp, Inc. and
subsidiary as of December 31, 1999 and 1998 and the related
consolidated statements of income, stockholders' equity and cash
flows for the three year period ended December 31, 1999, which
report is incorporated by reference in the December 31, 1999
annual report to stockholders on Form 10-K of Tower Bancorp, Inc.
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, PA
March 15, 2000
Tower Bancorp, Inc.
1999 Annual Financial Report
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 2
Statements of income 3
Statements of changes in stockholders' equity 4
Statements of cash flows 5 and 6
Notes to consolidated financial statements 7 - 22
SELECTED FIVE-YEAR FINANCIAL DATA 23
CHANGES IN INCOME AND EXPENSE - 1999 AND 1998 24
SUMMARY OF QUARTERLY FINANCIAL DATA 25
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 27 - 31
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Tower Bancorp Inc.
Greencastle, Pennsylvania
We have audited the accompanying consolidated balance sheets of Tower
Bancorp Inc. and
its wholly-owned subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of
income, changes in stockholders' equity and statements of cash flows for
each of the three years ended
December 31, 1999. These consolidated financial statements are the
responsibility of the company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all
material respects, the financial position of Tower Bancorp Inc. and its
wholly-owned subsidiary as of
December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three
years ended December 31, 1999 in conformity with generally accepted
accounting principles.
Chambersburg, Pennsylvania
January 28, 2000
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS 1999 1998
(000 omitted)
Cash and due from banks $ 5,062 $ 5,114
Interest bearing deposits with banks 6,215 6,199
Investment Securities
Available for sale 53,067 46,641
Federal Reserve, Federal Home Loan Bank, Citigroup Capital and
Atlantic Central Bankers' Bank stock; at cost which approximates
fair value 2,779 1,876
Loans
Commercial, financial and agricultural 15,047 15,164
Real estate - Mortgages (net of deferred loan origination fees
$ 249 - 1999; $ 191 - 1998) 93,340 87,350
Real estate - Construction and land development 4,146 2,378
Consumer 19,227 18,798
131,760 123,690
Less: Allowance for loan losses 1,719 1,890
Total loans 130,041 121,800
Premises, equipment, furniture and fixtures 3,213 2,910
Real estate owned other than premises 446 572
Prepaid federal taxes 215 40
Accrued interest receivable 1,137 984
Deferred income tax charges 1,094 179
Cash surrender value of life insurance 2,895 0
Other assets 710 1,020
Total assets $ 206,874 $ 187,335
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -2-
LIABILITIES 1999 1998
(000 omitted)
Deposits in domestic offices
Demand, noninterest bearing $ 13,746 $ 11,346
Savings 81,678 69,281
Time 64,300 61,839
Total deposits 159,724 142,466
Accrued interest payable 385 401
Federal funds purchased 0 2,366
Liabilities for other borrowed funds 23,025 18,131
Other liabilities 1,604 1,419
Total liabilities 184,738 164,783
STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock: no par value, authorized 5,000,000 shares,
issued 1,780,100 shares 2,225 2,225
Additional paid-in capital 6,707 6,705
Retained earnings 14,461 12,969
Accumulated other comprehensive income ( 725) 1,074
22,668 22,973
Less: Cost of Treasury stock, 17,499 shares - 1999; 14,700 shares -
1998 ( 532) ( 421)
Total stockholders' equity 22,136 22,552
Total liabilities and stockholders' equity $ 206,874 $ 187,335
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
(000 omitted)
Interest and Dividend Income
Interest and fees on loans $ 10,374 $ 9,869 $ 9,221
Interest and dividends on investment securities
Taxable 2,184 1,816 1,987
Federal tax exempt 667 562 495
Interest on federal funds sold 85 46 75
Interest on deposits with banks 338 255 199
Total interest income 13,648 12,548 11,977
Interest Expense
Interest on time certificates of deposit of
$ 100,000 or more 763 783 804
Interest on other deposits 4,363 4,190 4,242
Interest on federal funds purchased and other borrowed
funds 953 369 121
Total interest expense 6,079 5,342 5,167
Net interest income 7,569 7,206 6,810
Provision for loan losses 0 0 0
Net interest income after provision
for loan losses 7,569 7,206 6,810
Other Income
Trust department income 492 391 293
Service charges on deposit accounts 291 281 288
Other service charges, collection and exchange
charges, commissions and fees 388 212 181
Investment securities gains 1,453 973 573
Investment services income 71 74 44
Gain on sale of other real estate 0 150 11
Gain on sale of property, equipment, furniture & fixtures
0 1 0
Proceeds from director's life insurance 127 0
0
2,822 2,082 1,390
Other Expenses
Salaries, wages and other employee benefits 2,922 2,483 2,179
Occupancy expense 330 302 296
Furniture and equipment expenses 922 918 668
FDIC insurance premiums 13 20 16
Other operating expenses 1,754 1,410 1,237
5,941 5,133 4,396
Income before income taxes 4,450 4,155 3,804
Applicable income tax expense 1,247 1,246 1,110
Net income $ 3,203 $ 2,909 $ 2,694
Earnings per share of common stock
Net income $ 1.82 $ 1.68 $ 1.53
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -3-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
Accumulated
Additional
Other
Common
Paid-In Retained Comprehensive Treasury Total
Stock
Capital Earnings Income Stock
Equity
(000 omitted)
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
Comprehensive income:
Net income 0 0 3,203 0 0 3,203
Net unrealized loss on
available for sale
securities (net of tax
$ 926) 0 0 0 ( 1,799)
0 ( 1,799)
Total comprehensive income
1,404
Cash dividends declared
on common stock ($ .97
per share) 0 0 ( 1,711) 0
0
( 1,711)
Purchase of treasury stock
(9,691 shares) 0 0 0 0 ( 271) ( 271)
Sale of treasury stock
(6,892 shares) 0 2 0
0
160 162
Balance at December 31, 1999 $ 2,225 $ 6,707 $ 14,461 ($ 725)
($ 532) $ 22,136
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -4-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
(000 omitted)
Cash flows from operating activities:
Net income $ 3,203 $ 2,909 $ 2,694
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 385 344 229
(Gain) on sale of investment securities ( 1,453) ( 973)
( 573)
(Gain) on sale of other real estate 0 ( 150) (
11)
Provision for deferred taxes 8 13 6
(Increase) decrease in:
Other assets 310 ( 124) ( 74)
Interest receivable ( 153) 10 ( 45)
Prepaid income taxes ( 175) 60 ( 11)
Increase (decrease) in:
Interest payable ( 16) ( 23) 15
Other liabilities 185 ( 29) 223
Net cash provided by operating activities 2,294 2,037
2,453
Cash flows from investing activities:
Net (increase) in loans ( 8,241) ( 19,312) ( 3,394)
Purchases of bank premises, equipment,
furniture and fixtures ( 683) ( 1,043) ( 805)
Purchases of other real estate 0 0 ( 38)
Proceeds from the sale of other real estate 121 150 128
Net (increase) decrease in interest bearing deposits
with banks ( 16) ( 170) ( 1,958)
Maturity/sales of available for sale securities 10,758 17,191 8,569
Maturities of held to maturity securities 0 0 1,890
Purchases of available for sale securities ( 18,451)
( 21,982) ( 10,534)
Purchases of held to maturity securities 0 0 ( 2,978)
Purchase of Federal Home Loan Bank stock ( 403) ( 121)
( 38)
Purchase of Federal Home Loan Mortgage Corporation
preferred stock 0 ( 250) 0
Purchase of Federal National Mortgage Association stock 0 0 250
Purchase of Citigroup Capital Preferred ( 500) 0
0
Purchase of life insurance policies ( 2,895) 0
0
Net cash (used) by investing activities ( 20,310) ( 25,537) (
8,908)
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- -5-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
(000 omitted)
Cash flows from financing activities:
Net increase in deposits $ 17,258 $ 9,682 $ 6,180
Net increase in short-term borrowings 2,526 15,516 2,250
Purchase of treasury stock ( 271) ( 357) ( 189)
Proceeds from sale of treasury stock 162 213 166
Cash dividends paid ( 1,711) ( 751) ( 675)
Net cash provided by financing activities 17,964 24,303 7,732
Net increase (decrease) in cash and cash equivalents ( 52) 803 1,277
Cash and cash equivalents at beginning of year 5,114 4,311
3,034
Cash and cash equivalents at end of year $ 5,062 $ 5,114 $ 4,311
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 6,095 $ 5,365 $ 5,152
Income taxes 1,421 1,184 1,187
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain (loss) on securities available for sale (net
of tax effects) ($ 1,799) $ 105 $ 733
Issuance of stock dividends 0 0 1,445
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- -6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of Operations
Tower Bancorp's primary activity consists of owning and supervising its
subsidiary, The First
National Bank of Greencastle, which is engaged in providing banking and bank
related services in
South Central Pennsylvania, principally Franklin County. Its six offices
are located in
Greencastle, Quincy, Shady Grove, Laurich, Waynesboro and Mercersburg,
Pennsylvania.
Principles of Consolidation
The consolidated financial statements include the accounts of the
corporation and its wholly-
owned subsidiary, The First National Bank of Greencastle. All significant
intercompany
transactions and accounts have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting
principles requires management to make estimates and assumptions that affect
the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting
period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination
of the allowance for losses on loans and the valuation of real estate
acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowances for
losses on loans and foreclosed real estate, management obtains independent
appraisals for
significant properties.
While management uses available information to recognize losses on loans and
foreclosed real
estate, future additions to the allowances may be necessary based on changes
in local economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process,
periodically review the Corporation's allowances for losses on loans and
foreclosed real estate.
Such agencies may require the Corporation to recognize additions to the
allowances based on their
judgments about information available to them at the time of their
examination. Because of these
factors, management's estimate of credit losses inherent in the loan
portfolio and the related
allowance may change in the near term.
Investment Securities
The Corporation's investments in securities are classified in three
categories and accounted for as
follows:
? 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.
- -7-
Note 1. Summary of Significant Accounting Policies (Continued)
? 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 or held to maturity securities in 1999 or
1998.
Restricted Bank Stock
The corporation is required to maintain minimum investment balances in The
Federal Reserve
Bank, Federal Home Loan Bank and Atlantic Central Banker's bank. These
investments are carried
at cost because they are not actively traded and have no readily determinable
market value.
Premises, Equipment, Furniture and Fixtures and Depreciation
Premises, equipment, and furniture and fixtures are carried at cost less
accumulated depreciation.
Depreciation has been provided generally on the straight-line method and is
computed over the
estimated useful lives of the various assets as follows:
Years
Premises 15-30
Equipment, furniture and fixtures 3-15
Repairs and maintenance are charged to operations as incurred.
Other Real Estate Owned
Other real estate owned includes foreclosed properties for which the
institution has taken physical
possession in connection with loan foreclosure proceedings.
At the time of foreclosure, the real estate is recorded at the lower of the
Bank's cost (loan
balance) or the asset's fair value, less estimated costs to sell, which
becomes the property's new
basis. Any write-downs based on the asset's fair value at date of
acquisition are charged to the
allowance for loan losses. Costs incurred in maintaining foreclosed real
estate and subsequent
write-downs to reflect declines in the fair value of the property are
included in income (loss) on
other real estate owned.
Retirement Plan
The Bank has a target-benefit pension plan which covers all full-time
employees who have
attained the age of twenty (20) and have completed a minimum of one year of
continuous service
with the Bank. The Bank's policy is to fund pension costs accrued.
- -8-
Note 1. Summary of Significant Accounting Policies (Continued)
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned
discount, deferred loan
origination fees, and an allowance for loan losses. Unearned discount on
installment loans is
recognized as income over the terms of the loans by the interest method.
Interest on other loans is
calculated by using the simple interest method on daily balances of the
principal amount
outstanding.
The allowance for loan losses is established through a provision for loan
losses charged to expense.
Loans are charged against the allowance for loan losses when management
believes that the
collectibility of the principal is unlikely. The allowance is an amount that
management believes will
be adequate to absorb possible losses on existing loans that may become
uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect
the borrowers' ability to pay.
In accordance with SFAS No. 91 loan origination fees and certain direct loan
origination costs are
being deferred and the net amount amortized as an adjustment of the related
loan's yield. The
Corporation is amortizing these amounts over the contractual life of the
related loans.
Nonaccrual/Impaired Loans
The accrual of interest income on loans ceases when principal or interest is
past due 90 days or
more and collateral is inadequate to cover principal and interest or
immediately if, in the opinion
of management, full collection is unlikely. Interest accrued but not
collected
as of the date of
placement on nonaccrual status is reversed and charged against current
income
unless fully
collateralized. Subsequent payments received are either applied to the
outstanding principal
balance or recorded as interest income, depending on management's
assessment of
the ultimate
collectibility of principal.
Earnings per Share of Common Stock
Earnings per share of common stock were computed based on weighted averages of
1,763,548,
1,732,479 and 1,765,056 shares outstanding in 1999, 1998 and 1997,
respectively, after giving
retroactive recognition to a 100% stock dividend in July 1998 and a 5% stock
dividend in July 1997.
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 amount of depreciation expensed for tax and financial reporting
purposes, and an
income tax effect caused by the adjustment to fair value for available for
sale securities. As a
result of these timing differences, deferred income taxes are provided in
the
financial statements.
See Note 14 for further details.
- -9-
Note 1. Summary of Significant Accounting Policies (Continued)
Cash Flows
For purposes of the Statements of Cash Flows, the company has defined cash
and
cash equivalents
as highly liquid debt instruments with maturities of three months or less.
They are included in the
balance sheet caption "cash and due from banks". As permitted by Statement
of
Financial
Accounting Standards No. 104, the company has elected to present the net
increase or decrease in
deposits in banks, loans and 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
estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the
instruments. Statement No. 107 excludes certain financial instruments and all
nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate
fair value amounts presented
do not represent the underlying value of the corporation. See Note 19 for
further detail.
The following methods and assumptions were used by the corporation in
estimating fair values of
financial instruments as disclosed herein:
Cash and Cash Equivalents. The carrying amounts of cash and short-term
instruments
approximate their fair value.
Interest Bearing Balances with Banks. Interest bearing balances with
banks
having a
maturity greater than one year have estimated fair values using
discounted
cash flows based
on current market interest rates.
Securities to be Held to Maturity and Securities Available for Sale.
Fair
values for
investment securities are based on quoted market prices.
Loans Receivable. For variable-rate loans that reprice frequently and
have
no significant
change in credit risk, fair values are based on carrying values. Fair
values for fixed rate
loans are estimated using discounted cash flow analyses, using interest
rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. Fair values for
impaired loans are estimated using discounted cash flow analyses or
underlying collateral
values, where applicable.
Deposit Liabilities. The fair values disclosed for demand deposits
are, by
definition, equal
to the amount payable on demand at the reporting date (that is, their
carrying amounts). The
carrying amounts of variable-rate, fixed-term money market accounts and
certificates of
deposit approximate their fair values at the reporting date. Fair
values
for fixed-rate
certificates of deposits and IRA's are estimated using a discounted
cash
flow calculation that
applies interest rates currently being offered to a schedule of
aggregated
expected maturities
on time deposits.
- -10-
Note 1. Summary of Significant Accounting Policies (Continued)
Short-Term Borrowings. The carrying amounts of federal funds
purchased,
borrowings
under repurchase agreements, and other short-term borrowings maturing
within
90 days
approximate their fair values. Fair values of other short-term
borrowings
are estimated using
discounted cash flow analyses based on the Bank's current incremental
borrowing rates for
similar types of borrowing arrangements.
Accrued Interest. The carrying amounts of accrued interest approximate
their fair values.
Off-Balance-Sheet Instruments. The Bank generally does not charge
commitment fees. Fees
for standby letters of credit and their off-balance-sheet instruments
are
not significant.
Advertising
The Bank expenses advertising costs as they are incurred. Advertising
expense for the years
ended December 31, 1999, 1998 and 1997 was $ 247,368, $ 165,501 and $
158,451,
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 foreign currency transactions; accounting for futures 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:
1999 1998 1997
Gross unrealized holding gains (losses) arising during the year ($ 4,178)
$ 1,132 $ 1,683
Reclassification adjustment for gains realized in net income 1,453
( 973) ( 573)
Net unrealized holding gains (losses) before taxes ( 2,725) 159
1,
110
Tax effect 926 ( 54) ( 377)
Net change ($ 1,799) $ 105 $ 733
Note 2. Investment Securities
The investment securities portfolio is comprised of securities classified as
available for sale at
December 31, 1999 and 1998, resulting in investment securities available for
sale being carried at
fair value.
- -11-
Note 2. Investment Securities (Continued)
The amortized cost and fair value of investment securities available for
sale at December 31 were:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(000 omitted)
1999
U.S. Treasury securities $ 199 $ 3 $ 0 $ 202
Obligations of other U.S. government
agencies 20,984 1 1,149 19,836
Mortgage-backed securities 5,129 5 195 4,939
Corporate bonds 1,534 0 56 1,478
Equities 10,835 1,119 305 11,649
Obligations of state and political
subdivisions 15,479 47 563 14,963
$ 54,160 $ 1,175 $ 2,268 $ 53,067
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
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 fair values of investment securities available for sale at December 31,
1999, by contractual
maturity, are shown below. Contractual maturities will differ from expected
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 $ 8,418 $ 8,137
Due after one year through
five years 13,460 12,733
Due after five years through
ten years 16,068 15,383
Due after ten years 250 226
38,196 36,479
Mortgage-backed securities 5,129 4,939
Equity securities 10,835 11,649
$ 54,160 $ 53,067
- -12-
Note 2. Investment Securities (Continued)
Proceeds from sales and maturities of investment securities available for
sale
during 1999, 1998,
and 1997 were $ 10,758,000, $ 17,191,000 and $ 8,569,000, respectively. Gross
realized gains and
losses on those sales and maturities were $ 1,454,301 and $ 1,148 for 1999;
$ 977,000 and $ 4,000
for 1998 and $ 576,000 and $ 3,000 for 1997, respectively.
Securities carried at $ 13,035,000 and $ 13,300,000 at December 31, 1999 and
1998, 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:
1999 1998
Federal Reserve Bank stock $ 81 $ 81
Federal Home Loan Bank stock 1,153 750
Federal Home Mortgage Bank stock 750 750
Federal Home Loan Mortgage Corporation preferred stock 250 250
Atlantic Central Bankers Bank 45 45
Citigroup Capital preferred stock 500 0
$ 2,779 $ 1,876
Note 3. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
1999 1998 1997
(000 omitted)
Balance at beginning of period $ 1,890 $ 1,850 $ 1,947
Recoveries 45 87 18
Provision for possible loan losses charged to income 0
0
0
Total 1,935 1,937 1,965
Losses 216 47 115
Balance at end of period $ 1,719 $ 1,890 $ 1,850
Note 4. Premises, Equipment, Furniture and Fixtures
Accumulated Depreciated
Cost Depreciation Cost
(000 omitted)
- - - - - - - - - - - - - - - 1999 - - - - - - - - - - - - - -
Premises (including land $ 442,000) $ 3,980 $ 1,515 $ 2,465
Equipment, furniture and fixtures 2,106 1,358 748
Totals, December 31, 1999 $ 6,086 $ 2,873 $ 3,213
- - - - - - - - - - - - - - - 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
Depreciation expense amounted to $ 385,000 in 1999, $ 344,000 in 1998 and
$ 229,000 in 1997.
- -13-
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 $ 445,647, $ 450,587 and $ 458,189 at December
31, 1999, 1998 and
1997, 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 $ 2,340,524 and $ 1,907,270 at December 31,
1999 and 1998,
respectively. During 1999, $ 1,451,896 of new loans were made and
repayments
totaled $ 961,077.
During 1998, $ 1,137,383 of new loans were made and repayments totaled
$ 778,781.
Outstanding loans to bank employees totaled $ 1,619,387 and $ 1,362,656 at
December 31, 1999
and 1998, respectively.
Note 7. Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of
business to meet the financial needs of its customers and to reduce its own
exposure to fluctuations
in interest rates. These financial instruments include commitments to extend
credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate
risk in excess of the amount recognized in the balance sheets. The contract
amounts of those
instruments reflect the extent of involvement the Bank has in particular
classes of financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other
party to the
financial instrument for commitments to extend credit and standby letters of
credit and financial
guarantees written is represented by the contractual amount of those
instruments. The Bank uses
the same credit policies in making commitments and conditional obligations
as
it does for on
balance sheet instruments.
Contract or Notional Amount
1999 1998
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 12,144,216 $ 11,962,920
Standby letters of credit and financial
guarantees written 909,095 1,329,118
$ 13,053,311 $ 13,292,038
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation
of any condition established in the contract. Commitments generally have
fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of
the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-
by-case basis. The amount of collateral obtained, if deemed necessary by the
Bank upon extension
of credit, is based on management's credit evaluation of the customer.
Collateral held varies, but
may include accounts receivable, inventory, real estate, equipment, and
income-producing
commercial properties.
- -14-
Note 7. Financial Instruments With Off-Balance-Sheet Risk (Continued)
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:
1999 1998 1997
Nonaccrual loans $ 459,702 $ 487,905 $ 477,917
Interest income that would have been
accrued at original contract rates $ 44,439 $ 54,607 $
38,785
Amount recognized as interest income 18,054 661
13,321
Foregone revenue $ 26,385 $ 53,946 $ 25,464
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 losses
related to these loans
was $ 0 and $ 250,000 at December 31, 1998 and 1997, respectively.
The corporation had no impairment of loans in 1999.
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 $ 62,000 for 1999, $ 39,000 for 1998, and $ 48,000 for 1997.
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
$ 81,000, $ 75,000, and
$ 67,000 for 1999, 1998, and 1997, 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
$ 950,790 and $ 982,373 at December 31, 1999 and 1998, respectively. Annual
expense of
$ 100,009, $ 116,289, and $ 131,751 was charged to operations for 1999, 1998
and, 1997,
respectively.
- -15-
Note 10. Employee Benefit Plans (Continued)
During 1999 a director who was a participant of the plan deceased. The present
value of this
participant's benefits, which will be paid out over ten years, was $ 222,178 as
of December 31,
1999. The Bank recorded a gain on the proceeds of $ 127,338 which is reflected
in other income
for 1999.
During 1999 the Bank adopted a supplemental group term retirement plan which
covers all
officers of the Bank. This plan is funded with single premium life insurance
on the plan
participants. The cash surrender value of the policies is an unrestricted
asset of the Bank. The
estimated present value of the future benefits to be paid totaled $ 3,342 at
December 31, 1999.
Total annual expense for this plan was $ 3,342 for 1999.
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 $ 162,000, $ 150,000 and $ 134,000 for 1999, 1998 and
1997,
respectively. The number of shares of the company's stock acquired for the
plan are based
upon the fair market value per share at the end of the year. All shares
held
in the plan are
considered issued and outstanding for earnings per share calculations and
all
dividends earned
on ESOP shares are charged against retained earnings, the same as other
outstanding shares.
Note 11. Stock Option Plans
In 1996 the Bank implemented two nonqualified stock option plans, which are
described
below. The Bank accounts for the fair value of grants under those plans in
accordance with
Statement of Financial Accounting Standards (SFAS) Statement 123, Accounting
for Stock-
Based Compensation. The compensation cost that has been charged against
income for those
plans was $ 28,870, $ 32,077 and $ 10,375 for 1999, 1998 and 1997,
respectively.
The first plan is for select key employees. This plan granted options for
up
to 1,020 shares at a
purchase price of $ 1.00 per share. These options can be exercised only by
the key employees
during his/her lifetime.
The second plan is for outside directors. This plan granted options of 4,080,
1,411, and 373
shares for each director at $ 32.12, $ 22.25 and $ 34.00 per share for the
years ended
December 31, 1999, 1998 and 1997, respectively, which was based on the fair
value of the stock
at the grant date. Options are vested one year following the grant date and
expire upon the earlier
of 120 months following the date of the grant or one year following the date
on which a director
ceases to serve in such a capacity for the corporation.
A summary of the status of the company's two fixed stock option plans as of
December 31,
1999 is as follows:
Weighted Average
Fixed Options Shares Exercise Price Per Share
Outstanding at beginning of year 12,648 $ 17
Granted 5,100 26
Exercised 1,020 1
Forfeited/expired 0 0
Outstanding at end of year 16,728 21
Options exercisable at year end 12,648 17
Weighted average fair value of options per
share granted during the year $ 32
- -16-
Note 12. Deposits
Included in savings deposits at December 31 are NOW and Money Market Account
balances
totaling $ 51,160,000 and $ 38,773,000 for 1999 and 1998, respectively.
Time deposits of $ 100,000 and over aggregated $ 14,424,451 and $
14,880,466 at
December 31, 1999 and 1998, respectively.
At December 31, 1999 scheduled maturities of time deposits are as follows:
2000 $ 42,220,172
2001 9,928,264
2002 3,005,452
2003 4,372,888
2004 4,773,470
$ 64,300,246
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 $ 2,194,722 and $ 1,986,734 at
December 31, 1999 and
1998, 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, 1999 and 1998, $ 1,213,900 and $ 2,554,000, 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, 1999 and 1998 was $ 2,675,000. Interest on these
lines ranged from
6.75% to 8.25% for 1999 and 1998.
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. This note was paid off in 1999.
In addition, $ 295,275 and $ 427,000 of the balance of liabilities for other
borrowed funds at
December 31, 1999 and 1998, respectively, represents the balance of the
Treasury Tax and Loan
Investment Program. The Bank elected to enter into this program in accordance
with federal
regulations. This program permits the Bank to borrow these Treasury Tax and
Loan funds by
executing an open-ended interest bearing note to the Federal Reserve Bank.
Interest is payable
monthly and is computed at 1/4% below the Federal Funds interest rate. The
note is secured by
U.S. Government obligations with a par value of $ 1,006,950 and $ 900,000 at
December 31, 1999
and 1998, respectively.
- -17-
Note 13. Liabilities for Borrowed Money (Continued)
The Bank also had the following borrowings from the Federal Home Loan Bank:
1999 1998
Loan Type Interest Rate Balance
Interest Rate Balance Maturity
Convertible 5.01 $ 5,000,000 5.01 $ 5,000,000 11/24/08
Convertible 4.63 5,000,000 4.63 5,000,000 11/24/08
Convertible 5.395 5,000,000 5.395 5,000,000 9/15/08
Line of credit (1) 5.02 0 5.02 0 - -
Line of credit (2) 4.05 6,516,000 N/A N/A 6/30/00
(1) Total amount available under this line is $ 5,000,000 at December 31,
1999 and 1998.
(2) Total amount available under this line is $ 20,000,000 at December 31, 1999.
Collateral for borrowings consists of certain securities and the Bank's 1-4
family mortgage loans
totaling approximately $ 55 million at December 31, 1999.
Note 14. Income Taxes
The components of federal income tax expense are summarized as follows:
1999 1998 1997
(000 omitted)
Current year provision:
Federal $ 1,074 $ 1,165 $ 1,081
State 161 68 35
Deferred income taxes (benefit) 12 13 ( 6)
$ 1,247 $ 1,246 $ 1,110
Federal income taxes were computed after reducing pretax accounting income
for
non-taxable
income in the amount of $ 871,583, $ 599,571, and $ 543,472 for 1999, 1998
and
1997,
respectively.
A reconciliation of the effective applicable income tax rate to the federal
statutory rate is as
follows:
1999 1998 1997
Federal income tax rate 34.0% 34.0% 34.0%
Increase resulting from:
State taxes, net of federal tax benefit 3.6 1.6 1.0
Reduction resulting from:
Nontaxable interest income 9.5 5.7 5.8
Effective income tax rate 28.1% 29.9% 29.2%
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:
1999 1998
Total deferred tax assets $ 1,379 $ 745
Total deferred tax liabilities ( 285) ( 566)
Net deferred tax assets $ 1,094 $ 179
The company has not recorded a valuation allowance for the deferred tax
assets
as management
feels that it is more likely than not that they will be ultimately realized.
- -18-
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
Assets 1999 1998
(000 omitted)
Cash $ 0 $ 0
Securities available for sale 11,649 10,072
Investment in The First National Bank of Greencastle 14,889 15,786
Total assets $ 26,538 $ 25,858
Liabilities
Other liabilities $ 788 $ 752
Notes payable 3,614 2,554
Total liabilities 4,402 3,306
Stockholders' Equity
Common stock, no par value; authorized 5,000,000 shares,
issued 1,780,100 shares 2,225 2,225
Additional paid-in capital 6,707 6,705
Retained earnings 14,461 12,969
Accumulated other comprehensive income ( 725) 1,074
22,668 22,973
Less: Cost of Treasury stock, 17,499 shares - 1999;
14,700 shares - 1998 ( 532) ( 421)
Total stockholders' equity 22,136 22,552
Total liabilities and stockholders' equity $ 26,538 $ 25,858
Statements of Income
Years Ended December 31 1999 1998 1997
(000 omitted)
Income
Dividends $ 260 $ 220 $ 146
Net gain on sale of securities 1,440 942 565
Cash dividends from wholly-owned subsidiary 1,829 2,386
1,725
3,529 3,548 2,436
Expenses
Interest 209 123 62
Commissions 107 68 48
Taxes 538 318 150
Postage and printing 14 15 9
Meetings 3 3 3
Management fees 100 60 50
Professional fees 26 28 25
997 615 347
Income before equity in undistributed income 2,532 2,933 2,089
Equity in undistributed income of subsidiary 671 ( 24)
605
Net income $ 3,203 $ 2,909 $ 2,694
- -19-
Note 15. Tower Bancorp Inc. (Parent Company Only) Financial Information
(Continued)
Statements of Cash Flows
Years Ended December 31
1999 1998 1997
(000 omitted)
Cash flows from operating activities:
Net income $ 3,203 $ 2,909 $ 2,694
Adjustments to reconcile net income to cash
provided by operating activities:
Net gain on sale of investment securities ( 1,440) (
942)
( 565)
Equity in undistributed income of subsidiary ( 671) 24
(
605)
Increase in accrued expenses 159 188 151
Net cash provided by operating activities 1,251 2,179 1,675
Cash flows from investing activities:
Purchase of investment securities ( 3,995) ( 4,755) (
3,683)
Sales of investment securities 3,506 2,658 1,842
Net cash (used) by investing activities ( 489) ( 2,097) (
1,841)
Cash flows from financing activities:
Purchase of treasury stock ( 271) ( 357) (
189)
Proceeds from sale of treasury stock 162 213 166
Dividends paid ( 1,711) ( 751) ( 675)
Net proceeds from short-term borrowing 1,058 813 862
Net cash (used) by financing activities ( 762) ( 82)
164
Net (decrease) in cash 0 0 ( 2)
Cash, beginning 0 0 2
Cash, ending $ 0 $ 0 $ 0
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 209 $ 123 $ 62
Income taxes 171 23 1
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, 1999 and 1998 and required deposit balances at
Atlantic Central
Banker's Bank of $ 515,000 at both December 31, 1999 and 1998. 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. The Bank maintains a diversified loan portfolio and
evaluates each
customer's credit-worthiness 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.
The Bank maintains deposit balances at several correspondent banks, which
provide check
collection and item processing services to the bank. The balances with these
correspondent banks,
at times, exceed federally insured limits, which management considers to be a
normal business
risk.
- -20-
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,
$ 20,700 and $ 15,250
for 1999, 1998 and 1997, respectively.
The corporation also leases a site for an Automatic Teller Machine under a
noncancellable
operating lease that expires in 2008 with the right to negotiate an extended
lease of two
additional five year terms. Total rent expense charged to operations was
$ 9,000 for 1999 and
1998. 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, 1999:
Year Ending
2000 $ 29,700
2001 29,700
2002 31,200
2003 31,200
2004 31,200
2005 and after 74,400
$ 227,400
Note 19. Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial instruments were as
follows at
December 31:
- - - - - - 1999 - - - - - - - - - - - - 1998 - - - - - -
Carrying Fair Carrying Fair
Amount Value Amount Value
FINANCIAL ASSETS
Cash and due from banks $ 5,062 $ 5,062 $ 5,114
$
5,114
Interest bearing deposits with banks 6,215 6,206 6,199
6,307
Securities available for sale 53,067 53,067 46,641 46,641
Loans receivable 131,760 134,546 123,690 122,390
Accrued interest receivable 1,137 1,137 984 984
Other bank stock 2,779 2,779 1,876 1,876
FINANCIAL LIABILITIES
Time certificates 64,300 65,185 61,839 60,970
Other deposits 95,424 95,424 80,627 80,627
Short-term borrowed funds 23,025 23,025 20,497 20,497
Accrued interest payable 398 398 401 401
- -21-
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, without prior approval of the Comptroller
of the Currency,
declare dividends in excess of the sum of the current year's earnings (as
defined) plus retained
earnings (as defined) from the prior two years. Dividends that the Bank could
declare without
approval of the Comptroller of the Currency, amounted to approximately
$ 5,106,914 and
$ 3,384,966 for 1999 and 1998, respectively.
The financial institution is also subject to various regulatory capital
requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain
mandatory, and possibly additional discretionary actions by regulators that, if
undertaken, could
have a direct material effect on the financial institution's financial
statements. Under capital
adequacy guidelines, the financial institution is required to maintain minimum
capital ratios. The
"leverage ratio", which compares capital to adjusted total balance sheet assets
while risk-based
ratios compare capital to risk-weighted assets and off-balance sheet activity
in order to make
capital levels more sensitive to risk profiles of individual banks. A
comparison of Tower
Bancorp's capital ratios to regulatory minimums at December 31 is as follows:
Tower Bancorp Regulatory Minimum
1999 1998 Requirements
Leverage ratio 10.56% 8.71% 4%
Risk-based capital ratio
Tier I (core capital) 15.06% 13.20% 4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 16.16% 14.45% 8%
As of December 31, 1999 the most recent notification from the Office of the
Comptroller of the
Currency categorized the financial institution as well capitalized under the
regulatory framework
for prompt corrective action. There are no conditions or events since that
notification that
management believes have changed the financial institution's category.
- -22-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA
1999 1998 1997 1996
1995
Income (000 omitted)
Interest income $ 13,648 $ 12,548 $ 11,977 $ 11,156 $ 11,002
Interest expense 6,079 5,342 5,167 4,811 4,703
Provision for loan losses 0 0 0
0
0
Net interest income after
provision for loan losses 7,569 7,206 6,810 6,345 6,299
Other operating income 2,822 2,082 1,390 990 719
Other operating expenses 5,941 5,133 4,396 4,055
3,921
Income before income taxes 4,450 4,155 3,804 3,280 3,097
Applicable income tax
(benefit) 1,247 1,246 1,110 944 812
Net income $ 3,203 $ 2,909 $ 2,694 $ 2,336 $ 2,285
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:
1999 - 1,763,548 1997 - 1,765,056 1995 - 1,771,728
1998 - 1,732,479 1996 - 1,775,069
Net income 1.82 1.68 1.53 1.32 1.29
Cash dividend paid .97 .43 .38 .31 .28
Book value 12.56 13.02 11.58 9.99 9.10
Year-End Balance Sheet Figures
(000 omitted)
Total assets $ 206,874 $ 187,335 $ 159,935 $ 148,673 $ 139,182
Net loans 130,041 121,800 102,388 99,094 93,905
Total investment securities 55,846 48,517 42,217 37,673 33,733
Deposits-noninterest bearing 13,746 11,346 9,651 7,959 8,201
Deposits-interest bearing 145,978 131,120 123,133 118,645 111,55
9
Total deposits 159,724 142,466 132,784 126,604 119,760
Total stockholders' equity 22,136 22,552 20,433 17,704 16,148
Ratios
Average equity/average assets 11.42 12.72 12.25 11.76 10.74
Return on average equity 14.09 13.54 14.17 13.80 15.49
Return on average assets 1.63 1.72 1.74 1.62 1.67
- -23-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
CHANGES IN INCOME AND EXPENSE - 1999 AND 1998
The schedule below reflects comparative changes in income and expense
included
in the
Consolidated Statements of Income for 1999 and 1998 together with changes in
asset and liability volumes
associated with these income and expense items.
1999 Compared to 1998 1998 Compared to 1997
Average Volumes Income/Expense Average Volumes Income/Expense
($ 000 omitted) $ % $ % $ % $ %
Loans 15,250 13.6 505 5.1 9,513 9.3 648 7.0
Investment securities 12,095 28.9 473 19.9 2,198 5.5 ( 104)
(
4.1)
Other short-term invest-
ments 536 7.4 122 40.5 285 4.1 27
9.9
Total 27,881 17.3 1,100 8.8 11,996 8.1
571 4.8
Interest bearing demand
deposits 13,150 38.7 346 55.1 2,170 6.8 180 19.9
Savings deposits 1,400 4.4 ( 46) ( 4.2) 3,918 114.2 (
8) ( 1.4)
Time deposits 2,141 3.5 ( 147) 4.5 ( 1,323) ( 2.1) ( 245) (
7.0)
Short-term borrowings 11,229 145.9 584 158.3 5,406 236.3
248 204.9
Total 27,920 20.7 737 13.8 10,171 8.2
175 3.4
Net interest income 363 5.0 396 5.8
Provision for loan losses 0 .0 0 .0
Net interest income after
provision for loan losses 363 5.0 396 5.8
Security transactions 480 49.3 400 69.8
Other operating income 260 23.4 292 35.7
Income before operating
expense 1,103 11.9 1,088 13.3
Salaries & employee
benefits 439 17.7 304 13.9
Occupancy & equipment
expense 32 2.6 6 2.0
FDIC insurance premiums ( 7) ( 35.0) 4 25.0
Other operating
expenses 344 11.7 423 22.2
Total operating expenses 808 15.7 737 16.8
Income before income taxes 295 7.1 351 9.2
Applicable income tax expense 1 .1 136
12.
3
Net income 294 10.1 215 8.0
- -24-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended December
31,
1999 and
1998 are as follows:
1999 1998
($ 000 omitted - - - - - - - -Quarter Ended- - - - - - - - -
- - - - - - - -Quarter Ended- - - - - - - - -
except per share) Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31
June 30 Sept. 30 Dec. 31
Interest income $ 3,288 $ 3,381 $ 3,470 $ 3,509 $ 3,019 $ 3,072
$
3,143 $ 3,314
Interest expense 1,441 1,577 1,549 1,512 1,301 1,292
1,371
1,378
Net interest income 1,847 1,804 1,921 1,997 1,718 1,780
1,772 1,936
Provision for loan
losses 0 0 0 0 0
0
0 0
Net interest income
after provision
for loan losses 1,847 1,804 1,921 1,997 1,718 1,780
1,772 1,936
Other income 560 831 817 614 604 553 639 286
Other expenses 1,427 1,637 1,510 1,367 1,220 1,359
1,282
1,272
Operating income
before income
taxes 980 998 1,228 1,244 1,102 974 1,129 950
Applicable income
taxes 294 301 368 284 325 289
331
301
Net income $ 686 $ 697 $ 860 $ 960 $ 777 $ 685
$
798 $ 649
Net income applicable
to common stock
Per share data:
Net income $ .39 $ .39 $ .49 $ .55 $ .45 $ .40
$
.46 $ .37
- -25-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES
1999 1998 1997 1996
1995
($ 000 omitted)
LOANS
Commercial $ 23,260 $ 18,372 $ 15,854 $ 14,594 $ 11,848
Mortgage 70,808 65,160 64,833 65,296 66,699
Consumer 33,134 28,420 21,752 19,156 16,541
Total loans 127,202 111,952 102,439 99,046 95,088
INVESTMENT SECURITIES
U.S. Government 288 484 698 931 1,460
U.S. Government agencies 24,391 18,936 21,898 20,404 18,854
State & municipal 12,860 10,988 9,608 8,413 8,157
Other 16,335 11,371 7,377 4,839
3,584
Total investment securities 53,874 41,779 39,581
34,587
32,055
OTHER SHORT-TERM INVESTMENTS
Federal funds sold 1,711 870 1,371 758 990
Certificates of deposit 6,052 6,357 5,571
3,633
2,819
Total other short-term
investments 7,763 7,227 6,942
4,391 3,809
Total earning assets 188,839 160,958 148,962
138,024 130,952
Total assets $ 199,069 $ 169,023 $ 155,264 $ 144,504 $ 137,204
Percent increase 17.8% 8.8% 7.4% 5.3% 5.2%
DEPOSITS
Demand $ 11,206 $ 10,647 $ 8,835 $ 8,222 $
7,613
Interest-bearing demand 47,140 33,990 31,820 21,091 19,729
Savings 32,965 31,565 27,647 33,265 31,705
Time 63,410 61,269 62,592 61,609 58,271
Total deposits 154,721 137,471 130,894 124,187
117,318
Short-term borrowings 18,923 7,694 2,288 1,984
3,369
AVERAGE RATES EARNED (TAXABLE
EQUIVALENT BASIS) % % % % %
Loans
Commercial 8.0 9.3 9.7 9.4 10.2
Mortgage 7.9 8.6 8.9 8.7 8.9
Consumer 8.8 8.9 9.1 9.0 9.1
Total 8.2 8.8 9.0 8.9 9.2
Investment Securities
U. S. Government 6.7 6.7 6.6 6.7 6.8
U.S. Government agencies 6.3 6.7 6.7 6.5 6.4
State & municipal 5.2 5.1 5.2 5.3 5.5
Other 6.1 6.4 7.0 6.2 7.3
Total 5.9 6.4 6.2 6.2 6.2
Total other short-term
investments 6.4 6.1 6.2 6.4 5.6
Total earning assets 7.6 8.1 8.2 8.2 8.5
AVERAGE RATES PAID
Time & savings deposits 3.6 3.9 4.1 4.1 4.1
Short-term borrowings 5.1 4.4 5.9 5.3 6.2
- -26-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
selected
supplementary financial information presented in this report.
OPERATING RESULTS
The results of operations and financial condition are explained through an
analysis of
fluctuations in net interest income and other noninterest income and expense
items.
Net interest income is the difference between total interest income and
total
interest expense.
Interest income is generated through earning assets which include loans,
deposits with other banks and
investments. The amount of interest income is dependent on many factors
including the volume of earning
assets, the level of and changes in interest rates, and volumes of
nonperforming loans. The cost of funds
varies with the volume of funds necessary to support earning assets, the rates
paid to maintain deposits, rates
paid on borrowed funds and the level of interest-free deposits.
Net income was $ 3,203,000 in 1999 compared to $ 2,909,000 in 1998, and
$ 2,694,000 in
1997. Net income on an adjusted per share basis for 1999 was $ 1.82, up $ .14
from $ 1.68 realized during
1998.
Total interest income increased $ 1,100,000 from 1998 to 1999 and $ 571,000
from 1997 to
1998. Increases in 1999 and 1998 were primarily due to volume increases in
average earning assets.
Average loans outstanding in 1999 increased 13.6% over 1998. This coupled with
marginal lower rates
resulted in a 5% increase in interest income from loans in 1999 as compared to
a 7.0% increase realized in
1998. Earnings on investments (excluding gains from sales) increased 19.9% in
1999 compared to a 4.1%
decrease in 1998. This increase was primarily the result of increased average
volume of investment
securities which increased 28.9% in 1999 compared to a 5.5% increase in 1998.
Total average earning assets
increased 17.3% in 1999 compared to 8.1% in 1998. Increases in earning assets
during 1999 and 1998 were
proportionately higher in loans, which typically produce higher yields than
investments thus producing the
higher earnings during 1999 and 1998.
Interest from loans accounted for 76% of total interest income for 1999, as
compared to 79%
and 77% for 1998 and 1997, respectively. Interest and dividends on investments
amounted to $ 3,274,000 or
24% of interest income for 1999, as compared to $ 2,679,000 or 21% in 1998 and
$ 2,756,000 or 23% in
1997.
Total interest expense was $ 6,079,000 for 1999, an increase of $ 737,000
over
the
$ 5,342,000 for 1998. The increase in total average deposits was 12.5% in 1999
compared to 5.0% in 1998.
Overall growth was high during 1999 and moderate in 1998 with interest bearing
demand, savings deposits,
and time deposits having increased 13.2% and 3.9%, respectively. Although
growth was high during 1999
which caused an increase in interest expense on deposits of 3.0%, there were
some significant changes in the
level of borrowed funds which caused total interest expense to increase by
13.8%. This change in volume
along with the constant level of rates paid for deposits and increased rates on
borrowed funds caused the
overall interest spread to decrease to 3.7% for 1999 compared to 4.8% in 1998.
The Bank's net charge-offs have been lower than peer group performance for
the
past three
years. Certain loan workout situations have materialized resulting in net
recoveries for 1998. Net charge-
offs were $ 171,000 for 1999, net recoveries were $ 40,000 for 1998, and net
charge-offs were $ 97,000 for
1997. Previous years' net recoveries, as well as an improving loan portfolio,
have allowed the bank to have a
current year provision of $ 0 for 1999, 1998 and 1997. The provisions were
based on management's
evaluation of the adequacy of the reserve balance and represent amounts
considered necessary to maintain
the reserve at the appropriate level based on the quality of the loan portfolio
and other economic conditions.
Management has significantly expanded its detailed review of the loan
portfolio, which is
performed quarterly, in an effort to identify and act more readily on loans
with deteriorating trends. As a
result, nonaccrual loans have decreased over the past several years and have
become more in line with peer
group averages. Balances were $ 460,000 and $ 488,000 at year-end 1999 and
1998, respectively.
- -27-
Management is not aware of any other problem loans that are indicative of
trends, events, or uncertainties that
would significantly impact future operations, liquidity or capital. Management
also recognizes the need to
maintain an adequate reserve to meet the constant risks associated with a
growing loan portfolio and an
expanding customer base and intends to continue to maintain the reserve at
appropriate levels based on ongoing
evaluations of the loan portfolio.
Other income represents service charges on deposit accounts, commissions and
fees received for
the sale of travelers' checks, money orders and savings bonds, fees for trust
services, fees for investment services,
securities gains and losses and other income, such as safe deposit box rents.
Other income increased $ 740,000
or 35.5% for 1999 over 1998, and $ 692,000 or 49.7% for 1998 over 1997. The
increase in 1999 and 1998 was
largely due to an increase in investment gains of $ 480,000 and $ 400,000, fees
on trust services of $ 101,000 and
$ 98,000, 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 $ 439,000 or 17.7% in 1999 over 1998,
compared to an
increase of $ 304,000 or 13.9% in 1998 over 1997. Occupancy and equipment
expense increased by 9.2% from
1999 to 1998 compared to 2.0% from 1997 to 1998. Management expected
noninterest expenses to increase in
1999 with the opening of their new branch and they expect noninterest expense
to continue increasing as their
plans to expand take place. Total noninterest expenses increased 15.7% in 1999,
compared to 16.8% and 8.4% in
1998 and 1997, respectively.
Applicable income taxes changed between 1997, 1998 and 1999 as a result of
changes in pre-tax
accounting income and taxable income. As described in Note 1 of the Notes to
Consolidated Financial
Statements, deferred income taxes have been provided for timing differences in
the recognition of certain
expenses between financial reporting and tax purposes. Deferred income taxes
have been provided at prevailing
tax rates for such items as depreciation, provision for loan losses, deferred
compensation, interest income on
nonaccrual loans and unrealized gains and losses on investment securities
available for sale as accounted for
under SFAS 115. The marginal tax rate at which deferred taxes were provided
during 1999 and 1998 is 34%. At
December 31, 1999 and 1998, deferred taxes amounted to $ 1,094,000 and
$ 179,000, respectively. If all timing
differences reversed in 1999, the actual income taxes saved by the recognition
of the aforementioned expenses
would not be significantly different from the deferred income taxes recognized
for financial reporting purposes.
The current level of nontaxable investment and loan income is such that the
Bank is not affected
by the alternative minimum tax rules.
The Bank has successfully prepared for the year 2000 changes to its computer
systems and
experienced no interruptions in its operations beyond January 1, 2000.
Management will continue to monitor and
evaluate its information technology to ensure that adequate safeguards and
back-up systems are in place.
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and
Hedging Activities, effective for fiscal years beginning after June 15, 1999.
This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or
liabilities in the balance sheet and measure them at fair value. If certain
conditions are met, an entity may elect to
designate a derivative as follows: (a) a hedge of the exposure to changes in
the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of an unrecognized
firm commitment, an available-
for-sale security, a foreign currency denominated forecasted transaction, or
a net investment in a foreign
operation. The Statement generally provides for matching the timing of the
recognition of the gain or loss on
derivatives designated as hedging instruments with the recognition of the
changes in the fair value of the item
being hedged. Depending on the type of hedge, such recognition will be in
either net income or other
comprehensive income. For a derivative not designated as a hedging instrument,
changes in fair value will be
recognized in net income in the period of change. Management is currently
evaluating the impact of adopting
this Statement on the consolidated financial statements, but does not
anticipate that it will have a material impact.
- -28-
LIQUIDITY RISK MANAGEMENT
Liquidity and interest rate sensitivity are related but distinctly different
from one another.
Liquidity involves the Bank's ability to meet cash withdrawal needs of
customers and their credit
needs in the form of loans. Liquidity is provided by cash on hand and
transaction balances held at correspondent
banks. Liquidity available to meet credit demands and/or adverse deposit flows
is also made available from sales
or maturities of short-term assets. Additional sources providing funds to meet
credit needs is provided by access
to the marketplace to obtain interest-bearing deposits and other borrowings.
Interest Rate Sensitivity Analysis
A number of measures are used to monitor and manage interest rate risk
including income
simulation and interest sensitivity (gap) analysis. An income simulation model
is used to assess the direction and
magnitude of changes in net interest income resulting from changes in interest
rates. Key assumptions in the
model include prepayment, repricing and maturity of loan related assets; deposit
sensitivity; market conditions
and changes in other financial instruments. The Bank's policy objective is to
limit the change in annual earnings
to 20% of projected earnings. At December 31, 1999, based on the results of the
simulation model, the Bank
would expect an increase in net interest income of $ 88,000 and a decrease in
net interest income of $ 68,000 if
interest rates gradually decreased or increased, respectively, from current
rates by 300 basis points over a 12-
month period.
The matching of assets and liabilities may be analyzed by examining the
extent
to which such
assets and liabilities are "interest rate sensitive" and by monitoring an
institution's interest rate sensitivity "gap".
An asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice
within that time period. The interest rate sensitivity gap is defined as the
difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing
liabilities maturing or repricing within that same time period. A gap is
considered positive when the amount of
interest-earning assets maturing or repricing exceeds the amount of interest-
bearing liabilities maturing or
repricing within the same period. A gap is considered negative when the amount
of interest-bearing liabilities
maturing or repricing exceeds the amount of interest-earning assets maturing or
repricing within the same period.
Accordingly, in a rising interest rate environment, an institution with a
positive gap would be in a better position
to invest in higher yielding assets which would result in the yield on its
assets increasing at a pace closer to the
cost of its interest-bearing liabilities, than would be the case if it had a
negative gap. During a period of falling
interest rates, an institution with a positive gap would tend to have its assets
repricing at a faster rate than one
with a negative gap, which would tend to restrain the growth of its net
interest income.
The Bank closely monitors its interest rate risk as such risk relates to its
operational strategies.
The Bank's Board of Directors has established an Asset/Liability Committee
responsible for reviewing its
asset/liability policies and interest rate risk position, which generally meets
monthly and reports to the Board on
interest rate risk and trends on a quarterly basis.
The following table sets forth the amounts of interest-earning assets and
interest-bearing
liabilities outstanding at December 31, 1999 which are anticipated by the Bank,
based upon certain assumptions
described below, to reprice or mature in each of the future time periods shown.
Adjustable-rate assets and
liabilities are included in the table in the period in which their interest
rates can next be adjusted.
Money market, NOW and savings accounts have been included in both rate
sensitive liabilities of
"Zero - 90 days" and "91 - 360" due to these funds being subject to immediate
withdrawal.
Due 0 - 90 Due 91 - 360 Due After
Days Days 1 Year Total
Rate sensitive assets
Interest bearing deposits with banks $ 615 $ 2,537 $
3,063
$ 6,215
Investment securities 5,883 2,254 44,930 53,067
Real estate, commercial and consumer loans 16,399 49,962 65,399
131,760
$ 22,897 $ 54,753 $ 113,392 $ 191,042
- -29-
Due 0 - 90 Due 91 - 360 Due After
Days Days 1 Year Total
Rate sensitive liabilities
Certificates of deposit over $ 100,000 $ 2,917 $ 8,301 $
3,206
$ 14,424
Other certificates of deposit 10,858 20,144 18,874 49,876
Money market deposit accounts 21,388 0 0 21,388
NOW accounts and other savings deposits 60,291 0 0 60,291
Federal funds and other liabilities 0 6,516
16,509
23,025
$ 95,454 $ 34,961 $ 38,589 $ 169,004
Cumulative interest sensitive GAP ($ 72,557) ($ 52,765) $ 22,038
$
22,038
Cumulative interest sensitive GAP ratio ( .24) ( .60) 1.13
1
.13
MARKET RISK MANAGEMENT
The corporation has risk management policies to monitor and limit exposure
to
market risk,
and strives to take advantage of profit opportunities available in interest rate
movements.
Management continuously monitors liquidity and interest rate risk through
its
ALCO
reporting, and reprices products in order to maintain desired net interest
margins. Management expects to
continue to direct its marketing efforts toward attracting more low cost retail
deposits while competitively
pricing its time deposits in order to maintain favorable interest spreads, while
minimizing structual interest
rate risk.
The following table sets forth the projected maturities and average rates
for
all rate sensitive
assets and liabilities based on the following assumptions. All fixed and
variable rate loans were based on
original maturity of the note since the Bank has not experienced a significant
rewriting of loans. Investments
are based on maturity date except certain long-term agencies which are
classified by call date. The Bank has
historically experienced very little deposit runoff and has in fact had net
gains in deposits over the past
fifteen years. Based on this experience, it was estimated that maximum runoff
of noninterest bearing
checking would be 33% and for all other deposits except time deposits, which
would be 10%. Time deposits
are classified by original maturity date.
(In Millions) - - - - - - - - - - - Principal/Notional Amount
Maturing In: - - - - - - - - - - Fair
Rate sensitive assets 2000 2001 2002 2003
2004 Thereafter Total Value
Fixed interest rate
Loans 16,171 10,548 9,033 6,996 5,993 33,094 81,835
83,636
Average interest rate 9.00 9.10 9.00 8.80 8.50 8.30 8.70
Variable interest rate
Loans 11,172 2,164 4,268 2,309 2,309 27,703 49,925
50,910
Average interest rate 8.30 7.50 8.60 7.50 7.50 7.40 7.70
Fixed interest rate
Securities 15,000 9,920 3,957 2,846 6,756 11,318
49,7
97 48,792
Average interest rate 6.30 6.10 5.80 5.60 5.70 5.50 5.90
Rate sensitive liabilities
Noninterest bearing
Checking 2,263 678 678 678 226 0 4,523 4,523
Savings and interest
bearing checking 2,490 1,659 1,659 1,659 830 0 8,297
8,297
Average interest rates 2.55 2.55 2.55 2.55 2.55 0.0 2.55
Time deposits 42,219 9,928 3,005 5,523 2,331 1,294
64,30
0 65,185
Average interest rates 4.70 5.10 5.40 5.20 5.00 4.3 5.28
Fixed interest rate
Borrowings 0 0 5,150 0 10,000 0 15,150 15,150
Average rate 0 0.0 4.53 0 5.20 0.0 5.06
Variable interest rate
Borrowings 7,875 0 0 0 0 0 7,875 7,875
Average interest rate 5.50 0.0 0.0 0.0 0.0 0.0 5.50
- -30-
CAPITAL FUNDS
Internal capital generation has been the primary method utilized by Tower
Bancorp Inc. to
increase its capital. Stockholders' equity, which exceeded $ 22.1 million at
December 31, 1999 has steadily
increased. Regulatory authorities have established capital guidelines in the
form of the "leverage ratio" and
"risk-based capital ratios." The leverage ratio compares capital to total
balance sheet assets, while the risk-
based ratios compare capital to risk-weighted assets and off-balance-sheet
activity in order to make capital
levels more sensitive to risk profiles of individual banks. A comparison of
Tower Bancorp's capital ratios to
regulatory minimums at December 31 is as follows:
Regulatory Minimum
Tower Bancorp Requirements
1999 1998
Leverage ratio 10.56% 8.71% 4%
Risk-based capital ratio
Tier I (core capital) 15.06% 13.20% 4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 16.16% 14.45% 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.
1999 1998 1997
Equity capital at December 31
($ 000 omitted) $ 22,136 $ 22,552 $ 20,433
Equity capital as a percent of
assets at December 31 10.70% 12.04% 12.77%
Return on average assets 1.63% 1.72% 1.74%
Return on average equity 14.09% 13.54% 14.17%
Cash dividend payout ratio 53.42% 25.82% 25.06%
STOCK MARKET ANALYSIS AND DIVIDENDS
The corporation's common stock is traded inactively in the over-the-counter
market. As of
December 31, 1999 the approximate number of shareholders of record was 1,040.
Market
Cash
1999 Price
Dividend
First Quarter $ 29.50 - 33.00 $ 0
Second Quarter 28.00 - 30.25 .15
Third Quarter 23.75 - 28.38 .50
Fourth Quarter 23.50 - 26.75 .32
Market
Cash
1998 (1) Price
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
(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.
- -31-
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