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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, 2000
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, 2000, 1,756,506 shares of the
registrant's common stock were outstanding. The aggregate
market value of such shares held by nonaffiliates on that
date was $ 34,690,994.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year
ended December 31, 2000 are incorporated by reference into
Parts I and II. Portions of the Proxy Statement for 2001
Annual Meeting of Security Holders are incorporated by
reference in Part III of this Form 10-K.
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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 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.
During 2000 Tower acquired 7,750 shares of its own
common stock and sold 1,655 shares of treasury stock to
First executive officers and directors 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, 2000, First had 75 full-time and 15 part-
time employees.
Tower contemplates that in the future it will
evaluate and may acquire, or may cause its subsidiaries to
acquire, other banks. Tower also may seek to enter
businesses closely related to banking or to acquire existing
- -3-
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 has rendered
services as trustee, executor, administrator, guardian,
managing agent, custodian, investment advisor and other
fiduciary activities authorized by law. In 2000, First
entered into an affiliation agreement with Sentry Trust
Company, a Pennsylvania Limited Purpose Bank, (Sentry)
whereby Sentry acquired from First the right to service the
trust accounts of First. Through this affiliation agreement
trust and other financial services are provided to First's
customers by Sentry.
- -4-
As of December 31, 2000, First had total assets of
approximately $ 225 million, total shareholders' equity of
approximately $ 26.6 million and total deposits of
approximately $ 177 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, 2000, 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. These regulations took effect in 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-
Held Employee Age as
Name/Office Held Since Since of 12/31/00
Kermit G. Hicks, Chairman
of the Board 1983 (1) 65
Harold C. Gayman, Vice
Chairman of the Board 1983 (1) 74
Jeff B. Shank, President
and Director 1992 1983 45
Betty J. Lehman, Director 1985 (1) 75
Robert L. Pensinger,
Director 1987 (1) 67
James H. Craig, Director 1990 (1) 67
Lois Easton, Director 1990 (1) 65
(1) These directors are not employees of the Bank.
Held Bank Employee Age as
Name/Office Held Since Since of 12/31/00
Jeff B. Shank, President 1992 1976 45
John H. McDowell,
Executive Vice President 1994 1977 51
Don Kunkle, Vice President 1987 1987 51
Donald Chlebowski, Vice
President 1991 1980 42
- -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, 2000, the
approximate number of shareholders of record was 1,035. 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.
Cash Dividends
Period Paid Market Price
2000 1st Quarter $ 0 $ 23.00 - $ 23.00
2nd Quarter .18 21.13 - 21.63
3rd Quarter 0 21.00 - 21.63
4th Quarter .38 19.75 - 19.75
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
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, 2000 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 32 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, 2000 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 4.5% 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
ASSETS 2000 1999
Average Average
(000 omitted) Balance Interest Rate Balance Interest Rate
Investment securities:
Taxable interest
income $ 25,767 $ 2,101 8.2% $ 24,679 $ 1,924 6.5%
Nontaxable interest
income 15,673 793 5.1 12,860 667 5.2
Total investment
securities 41,440 2,894 7.0 37,539 2,591 5.9
Loans (net of unearned
discounts) 140,788 11,945 8.5 127,202 10,374 8.2
Other short-term
investments 22,700 684 3.0 24,098 683 6.2
Total interest
earning
assets 204,928 $ 15,523 7.6% 188,839 $ 13,648 7.6%
Allowance for loan
Losses ( 1,652) ( 1,804)
Cash and due
from banks 5,088 5,088
Bank premises and
equipment 3,140 3,061
Other assets 5,946 3,885
Total assets $ 217,450 $ 199,069
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand
deposits $ 52,740 $ 1,230 2.3% $ 47,140 $ 975 2.1%
Savings deposits 30,139 1,004 3.3 32,965 1,040 3.2
Time deposits 69,006 3,669 5.3 63,410 3,111 4.9
Short-term
borrowings 26,077 1,392 5.3 18,923 953 5.1
Total interest
bearing
liabilities 177,962 $ 7,295 4.1% 162,438 $ 6,079 3.6%
Demand deposits 13,857 11,206
Other
liabilities 1,225 3,081
Total
liabilities 193,044 176,725
Stockholders'
equity 24,406 22,344
Total liabilities &
stockholders'
equity $ 217,450 $ 199,069
Net interest income/net
yield on average
earning assets $ 8,228 4.0% $ 7,569 4.0%
- -19-
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Rates and Interest Differential Tax Equivalent Yields
Years Ended December 31
ASSETS 1998
Average
(000 omitted) Balance Interest Rate
Investment securities:
Taxable interest
income $ 19,420 $ 1,272 6.7%
Nontaxable interest
income 10,988 562 5.1
Total investment
securities 30,408 1,834 6.4
Loans (net of unearned
discounts) 111,952 9,869 8.8
Other short-term
investments 18,598 845 6.1
Total interest
earning assets 160,958 $ 12,548 8.1%
Allowance for loan
losses ( 1,870)
Cash and due from banks 4,713
Bank premises and
equipment 2,560
Other assets 2,662
Total assets $ 169,023
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand
deposits $ 33,990 $ 629 1.9
Savings deposits 31,565 1,086 3.4
Time deposits 61,269 3,258 5.3
Short-term borrowings 7,694 369 4.4
Total interest
bearing liabilities 134,518 $ 5,342 4.0
Demand deposits 10,647
Other liabilities 2,365
Total liabilities 147,530
Stockholders' equity 21,493
Total liabilities &
stockholders'
equity $ 169,023
Net interest income/net
yield on average
earning assets $ 7,206 4.5%
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 2000, 1999 and 1998.
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CHANGES IN NET INTEREST INCOME
TAX EQUIVALENT YIELDS
2000 Versus 1999
Increase (Decrease)
Due to Change in
Total
Average Average Increase
Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned
discounts) $ 1,114 $ 457 $ 1,571
Taxable investment securities 71 106 177
Nontaxable investment securities 146 ( 20) 126
Other short-term investments ( 87) 88 1
Total interest income 1,244 631 1,875
Interest Expense
Interest bearing demand 118 137 255
Savings deposits ( 90) 54 ( 36)
Time deposits 274 284 558
Other short-term borrowings 365 74 439
Total interest expense 667 549 1,216
Net interest income $ 659
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-
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
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, 2000, and
weighted average yields of such securities. Yields are
shown on a tax equivalent basis, assuming a 34% federal
income tax rate.
After 1 year After 5 years
Within but within but within
1 year 5 years 10 years
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 100 $ 100 $ 0
Yield 7.75% 6.56%
U. S. Government
agencies/mortgage-
backed securities
Book value $ 250 $ 3,650 $ 13,400
Yield 6.02% 6.31% 6.41%
State and municipal
Book value $ 400 $ 1,002 $ 1,806
Yield 6.83% 7.53% 7.05%
Other
Book value $ 420 $ 1,414 $ 550
Yield 6.89% 6.55% 7.41%
Total book value $ 1,170 $ 6,166 $ 15,756
Yield
- -21-
After
10 years Total
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 0 $ 200
Yield 7.15%
U. S. Government
agencies/mortgage-
backed securities
Book value $ 2,300 $ 19,600
Yield 6.63% 6.42%
State and municipal
Book value $ 11,827 $ 15,035
Yield 7.56% 7.47%
Other
Book value $ 6,598 $ 8,982
Yield 6.39% 6.52%
Total book value $ 20,725 $ 43,817
Yield
Equity Securities:
Total Equity Securities $ 11,847
Yield 2.41%
Total Investment Securities $ 55,664
Yield 5.86%
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:
2000 1999 1998 1997 1996
(000 omitted)
Commercial, financial
& agricultural $ 20,903 $ 15,047 $ 15,164 $ 10,699 $ 10,009
Real estate -
Construction 4,827 4,146 2,378 1,486 2,326
Real estate -
Mortgage 104,838 93,340 87,350 80,597 78,990
Installment & other
personal loans
(net of unearned
income) 17,002 19,227 18,798 11,556 9,716
Total loans $ 147,570 $ 131,760 $ 123,690 $ 104,338 $ 101,041
Presented below are the approximate maturities of the
loan portfolio (excluding real estate mortgage and
installments) at December 31, 2000:
Under One One to Over Five
Year Five Years Years Total
(000 omitted)
Commercial, financial &
agricultural $ 14,633 $ 3,135 $ 3,135 $ 20,903
Real estate -
Construction 4,827 0 0 4,827
Total $ 19,460 $ 3,135 $ 3,135 $ 25,730
The following table presents the approximate amount of
fixed rate loans and variable rate loans due as of
December 31, 2000:
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 16,586 $ 11,967
Due after one but within
five years 36,607 11,029
Due after five years 34,981 36,400
Total $ 88,174 $ 59,396
- -22-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
2000 1999 1998 1997 1996
(000 omitted)
Average total loans
outstanding (net of
unearned
income) $ 140,788 $ 127,202 $ 111,952 $ 102,439 $ 99,046
Allowance for loan
losses, beginning
of period 1,719 1,890 1,850 1,947 1,945
Additions to provision
for loan losses
charged to
operations 0 0 0 0 0
Loans charged off
during the year
Commercial 4 8 0 58 5
Real estate
mortgage 0 29 1 0 0
Instal-
lment 149 179 46 57 9
Total charge-
off's 153 216 47 115 14
Recoveries of loans
previously charged off:
Commercial 4 4 43 11 6
Installment 16 35 20 7 9
Mortgage 0 6 24 0 1
Total
recov-
eries 20 45 87 18 16
Net loans charged off
(recovered) 133 171 ( 40) 97 ( 2)
Allowance for loan
losses, end of
period 1,586 1,719 1,890 1,850 1,947
Ratio of net loans
charged off (recovered)
to average loans
outstanding .09% .13% ( .04%) .09% ( .003)%
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.
2000 1999 1998 1997 1996
(000 omitted)
Nonaccrual loans $ 63 $ 460 $ 488 $ 477 $ 77
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
60 - 89 days past due 800 379 417 315 216
90 days or more past
due 25 27 0 1 87
Total accrual
loans $ 825 $ 406 $ 417 $ 316 $ 303
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:
Years Ended December 31
2000 1999
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 14.2% $ 812 11.2%
Real estate -
Construction 0 3.3 0 3.1
Real estate -
Mortgage 630 71.0 630 70.8
Installment 0 11.5 0 14.9
Unallocated 144 N/A 277 N/A
Total $ 1,586 100.0% $ 1,719 100.0
Years Ended December 31
1998 1997
Percentage of Percentage of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and
agricultural $ 815 12.5% $ 772 10.3%
Real estate -
Construction 0 2.0 0 1.4
Real estate -
Mortgage 653 70.2 630 77.2
Installment 0 15.3 0 11.1
Unallocated 422 N/A 448 N/A
Total $ 1,890 100.0 $ 1,850 100.0%
- -25-
Years Ended December 31
1996
Percentage of
Loans in Each
Allowance Category to
Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 819 9.9%
Real estate -
Construction 0 2.3
Real estate -
Mortgage 630 78.2
Installment 48 9.6
Unallocated 450 N/A
Total $ 1,947 100.0%
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized
below:
Years Ended December 31
2000 1999 1998
(000 omitted)
Demand deposits $ 13,857 $ 11,206 $ 10,647
Interest bearing demand
deposits 52,740 47,140 33,990
Savings deposits 30,139 32,965 31,565
Time deposits 69,006 63,410 61,269
Total deposits $ 165,742 $ 154,721 $ 137,471
The following is a breakdown of maturities of time
deposits of $ 100,000 or more as of December 31, 2000:
Maturity (000 omitted)
Certificates of Deposit
Three months or less $ 4,625
Over three months through twelve
months 10,030
Over twelve months 4,855
$ 19,510
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE
BALANCES)
The following table presents a summary of significant
earnings and capital ratios:
2000 1999 1998
Assets $ 224,512 $ 206,874 $ 187,335
Net income $ 4,093 $ 3,203 $ 2,909
Equity $ 26,676 $ 22,136 $ 22,552
Cash dividends paid $ 986 $ 1,711 $ 751
Return on assets 1.88% 1.63% 1.72%
Return on equity 17.17% 14.09% 13.54%
Dividend payout ratio 24.09% 53.42% 25.82%
Equity to asset ratio 11.22% 11.22% 12.72%
- -26-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
2000 1999 1998 1997 1996
(000 omitted)
Interest income $ 15,523 $ 13,648 $ 12,548 $ 11,977 $ 11,156
Interest
expense 7,295 6,079 5,342 5,167 4,811
Net interest
income 8,228 7,569 7,206 6,810 6,345
Provision for loan
losses 0 0 0 0 0
Net interest income
after provision
for loan
losses 8,228 7,569 7,206 6,810 6,345
Other income:
Trust 577 492 391 293 252
Service charges -
deposits 335 291 281 288 277
Other service charges,
collection and exchange,
charges, commission
fees 1,630 388 212 181 159
Other operating
income 1,073 1,651 1,198 628 302
Total other
income 3,615 2,822 2,082 1,390 990
Income before
operating
expense 11,843 10,391 9,288 8,200 7,335
Operating expenses:
Salaries and employees
benefits 3,026 2,922 2,483 2,179 1,995
Occupancy and equipment
expense 1,393 1,252 1,220 964 952
Other operating
expenses 1,842 1,767 1,430 1,253 1,108
Total operating
expenses 6,261 5,941 5,133 4,396 4,055
Income before income
Taxes 5,582 4,450 4,155 3,804 3,280
Income tax 1,489 1,247 1,246 1,110 944
Net income applicable
to common
stock $ 4,093 $ 3,203 $ 2,909 $ 2,694 $ 2,336
Per share data:
Earnings per common
share $ 2.32 $ 1.82 $ 1.68 $ 1.53 $ 1.32
Cash dividend -
Common $ .56 $ .97 $ .43 $ .38 $ .31
Average number of
common
shares 1,761,699 1,763,548 1,732,479 1,765,056 1,775,069
- -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 2001 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, 2000,
are incorporated by reference in Item 8:
Consolidated balance sheets - December 31,
2000 and 1999
Consolidated statements of income - Years
ended December 31, 2000, 1999 and 1998
Consolidated statements of stockholders'
equity - Years ended December 31, 2000, 1999,
and 1998
Consolidated statements of cash flows - Years
ended December 31, 2000, 1999, and 1998
Notes to consolidated financial statements -
December 31, 2000
(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, 2001
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, 2001
Jeff B. Shank Director
/s/ Betty J. Lehman Director March 15, 2001
Betty J. Lehman
/s/ Kermit G. Hicks Chairman of the March 15, 2001
Kermit G. Hicks Board & Director
/s/Robert L. Pensinger Director March 15, 2001
Robert L. Pensinger
/s/ Harold C. Gayman Vice Chairman of March 15, 2001
Harold C. Gayman the Board & Director
/s/James H. Craig, Jr. Director March 15, 2001
James H. Craig, Jr.
/s/ Lois Easton ____ Director March 15, 2001
Lois Easton
- -35-
Exhibit Index
Exhibit No.
13 Annual report to security holders
21 Subsidiaries of the Registrant
23.1 Consent of independent auditors
27 Financial data schedule
Exhibit 13
Tower Bancorp, Inc.
2000 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 - 2000 AND 1999 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 - 32
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Tower Bancorp Inc.
Greencastle, Pennsylvania
We have audited the accompanying consolidated balance
sheets of Tower Bancorp Inc. and its wholly-owned subsidiary as of
December 31, 2000 and 1999, 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, 2000. 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 auditing
standards generally accepted in the United States of America.
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, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years
ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/SMITH ELLIOTT KEARNS & COMPANY,
LLC
Chambersburg, Pennsylvania
January 26, 2001
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
ASSETS
2000
1999
(000 omitted)
Cash and due from banks $ 5,115 $ 5,062
Interest bearing deposits with banks 4,450 6,215
Investment Securities
Available for sale 56,927 53,067
Federal Reserve, Federal Home Loan Bank, Citigroup Capital and
Atlantic Central Bankers' Bank stock; at cost which approximates
fair value 3,095 2,779
Loans
Commercial, financial and agricultural 20,903 15,047
Real estate - Mortgages (net of deferred loan origination fees
$ 295 - 2000; $ 249 - 1999) 104,838 93,340
Real estate - Construction and land development 4,827 4,146
Consumer 17,002 19,227
147,570 131,760
Less: Allowance for loan losses 1,586 1,719
Total loans 145,984 130,041
Premises, equipment, furniture and fixtures 3,066 3,213
Real estate owned other than premises 441 446
Prepaid federal taxes 210 215
Accrued interest receivable 1,344 1,137
Deferred income tax charges 16 1,094
Cash surrender value of life insurance 3,121 2,895
Other assets 743 710
Total assets $ 224,512 $ 206,874
The Notes to Consolidated Financial Statements are an integral part
of these statements.
- -2-
LIABILITIES
2000
1999
(000 omitted)
Deposits in domestic offices
Demand, noninterest bearing $ 16,359 $ 13,746
Savings 86,444
81,678
Time 74,194 64,300
Total deposits 176,997 159,724
Accrued interest payable 515 385
Liabilities for other borrowed funds 18,864 23,025
Other liabilities 1,460 1,604
Total liabilities 197,836 184,738
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 6,705 6,707
Retained earnings 17,568 14,461
Accumulated other comprehensive income (loss) 834 (
725)
27,332 22,668
Less: Cost of Treasury stock, 23,594 shares - 2000; 17,499 shares
- -
1999 ( 656) ( 532)
Total stockholders' equity 26,676 22,136
Total liabilities and stockholders' equity $ 224,512 $ 206,874
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
2000 1999
1998
(000
omitted)
Interest and Dividend Income
Interest and fees on loans $ 11,945 $ 10,374 $ 9,869
Interest and dividends on investment securities
Taxable 2,398 2,184 1,816
Federal tax exempt 793 667 562
Interest on federal funds sold 0 85 46
Interest on deposits with banks 387 338 255
Total interest income 15,523 13,648 12,548
Interest Expense
Interest on time certificates of deposit of
$ 100,000 or more 962 763 783
Interest on other deposits 4,941 4,363 4,190
Interest on federal funds purchased and other borrowed funds
1,392 953 369
Total interest expense 7,295 6,079 5,342
Net interest income 8,228 7,569 7,206
Provision for loan losses 0 0
0
Net interest income after provision
for loan losses 8,228 7,569 7,206
Other Income
Investment services income 671 563 465
Service charges on deposit accounts 335 291 281
Other service charges, collection and exchange
charges, commissions and fees 316 388 212
Investment securities gains 974 1,453 973
Gain on trust services affiliation 1,078 0 0
Gain on sale of other real estate 0 0 150
Gain on sale of property and equipment 5 0 1
Proceeds from director's life insurance 0 127
0
Other income 236 0
0
3,615 2,822 2,082
Other Expenses
Salaries, wages and other employee benefits 3,026 2,922 2,483
Occupancy expense 356 330 302
Furniture and equipment expenses 1,037 922 918
FDIC insurance premiums 39 13 20
Other operating expenses 1,803 1,754 1,410
6,261 5,941 5,133
Income before income taxes 5,582 4,450 4,155
Applicable income tax expense 1,489 1,247 1,246
Net income $ 4,093 $ 3,203 $ 2,909
Earnings per share:
Basic earnings per share $ 2.32 $ 1.82 $ 1.68
Weighted average shares outstanding 1,761,699 1,763,548
1,732,479
Diluted earnings per share $ 2.30 $ 1.80 $ 1.67
Weighted average shares outstanding 1,781,647 1,779,596
1,744,447
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, 2000, 1999 and 1998
Accumulated
Additional
Other
Common
Paid-In Retained Comprehensive
Treasury Total
Stock Capital Earnings
Income Stock Equity
(000 omitted)
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
Comprehensive income:
Net income 0 0 4,093 0 0 4,093
Net unrealized gain on
available for sale
securities (net of tax
$ 803) 0 0 0 1,559
0 1,559
Total comprehensive income
5,652
Cash dividends declared
on common stock ($ .56
per share) 0 0 ( 986) 0 0
( 986)
Purchase of treasury stock
(7,750 shares) 0 0 0 0 ( 162) (
162)
Sale of treasury stock
(1,655 shares) 0 ( 2) 0 0
38 36
Balance at December 31, 2000 $ 2,225 $ 6,705 $ 17,568 $ 834 ($ 656)
$ 26,676
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, 2000, 1999 and 1998
2000
1999 1998
(000
omitted)
Cash flows from operating activities:
Net income $ 4,093 $ 3,203 $ 2,909
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 413 385 344
(Gain) on sale of investment securities ( 974) (
1,453) ( 973)
(Gain) on sale of other real estate 0 0 (
150)
(Gain) on trust services affiliation ( 1,078) 0 0
Provision for deferred taxes 274 8 13
(Increase) decrease in:
Other assets ( 33) 310 (
124)
Interest receivable ( 207) ( 153) 10
Prepaid income taxes 5 ( 175) 60
Increase (decrease) in:
Interest payable 130 ( 16) (
23)
Other liabilities ( 147) 185 (
29)
Net cash provided by operating activities 2,476 2,294
2,037
Cash flows from investing activities:
Net (increase) in loans ( 15,943) ( 8,241) (
19,312)
Purchases of property and equipment ( 261) ( 683) (
1,043)
Proceeds from the sale of other real estate 0 121 150
Net (increase) decrease in interest bearing deposits
with banks 1,765 ( 16) (
170)
Maturity/sales of available for sale securities 11,763 10,758
17,191
Purchases of available for sale securities ( 11,207) ( 18,451)
( 21,982)
Purchase of Federal Home Loan Bank stock ( 316) ( 403)
( 121)
Purchase of Federal Home Loan Mortgage Corporation
preferred stock 0 0 (
250)
Purchase of Citigroup Capital Preferred 0 ( 500)
0
Purchase of life insurance policies ( 226) ( 2,895)
0
Net cash (used) by investing activities ( 14,425) ( 20,310) (
25,537)
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, 2000, 1999 and 1998
2000
1999 1998
(000
omitted)
Cash flows from financing activities:
Net increase in deposits $ 17,275 $ 17,258 $ 9,682
Net (decrease) increase in borrowings ( 4,161) 2,526 15,516
Purchase of treasury stock ( 162) ( 271) (
357)
Proceeds from sale of treasury stock 36 162 213
Cash dividends paid ( 986) ( 1,711) (
751)
Net cash provided by financing activities 12,002 17,964 24,303
Net increase (decrease) in cash and cash equivalents 53 (
52) 803
Cash and cash equivalents at beginning of year 5,062 5,114
4,311
Cash and cash equivalents at end of year $ 5,115 $ 5,062 $ 5,114
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 7,165 $ 6,095 $ 5,365
Income taxes 1,418 1,421 1,184
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain (loss) on securities available for sale (net
of tax effects) $ 1,559 ($ 1,799) $ 105
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 2000 or 1999.
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.
Real Estate Owned Other Than Premises
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 operations.
Retirement Plan
The Bank has a money purchase 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 average shares outstanding, after giving retroactive
recognition to a 100% stock dividend in July 1998. For
diluted earnings per share, net income is divided by the
weighted average number of shares outstanding plus the
incremental number of shares added as a result of converting
common stock equivalents. The corporation's common stock
equivalents consist of outstanding stock options (See Note 11
for further details).
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, 2000, 1999 and
1998 was $ 235,621, $ 247,368 and $ 165,501, respectively.
Comprehensive Income
The Corporation follows 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 components of the change in net unrealized gains (losses)
on securities were as follows:
2000
1999 1998
Gross unrealized holding gains (losses) arising during the
year $ 3,336 ($ 4,178) $ 1,132
Reclassification adjustment for gains realized in net income
( 974) 1,453 ( 973)
Net unrealized holding gains (losses) before taxes 2,362 ( 2,725) 159
Tax effect ( 803) 926 ( 54)
Net change $ 1,559 ($ 1,799) $ 105
Note 2. Investment Securities
The investment securities portfolio is comprised of
securities classified as available for sale at December 31,
2000 and 1999, 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)
2000
U.S. Treasury securities $ 200 $ 2 $ 0 $ 202
Obligations of other U.S. government
agencies 19,603 19 326 19,296
Mortgage-backed securities 6,165 24 70 6,119
Corporate bonds 2,814 17 65 2,766
Equities 11,847 1,738 319 13,266
Obligations of state and political
subdivisions 15,035 345 102 15,278
$ 55,664 $ 2,145 $ 882 $ 56,927
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
The fair values of investment securities available for sale at
December 31, 2000, 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 $ 949 $ 950
Due after one year through
five years 5,615 5,602
Due after five years through
ten years 15,422 15,227
Due after ten years 15,666 15,763
37,652 37,542
Mortgage-backed securities 6,165 6,119
Equity securities 11,847 13,266
$ 55,664 $ 56,927
- -12-
Note 2. Investment Securities (Continued)
Proceeds from sales and maturities of investment securities
available for sale during 2000, 1999, and 1998 were $
11,763,000, $ 10,758,000 and $ 17,191,000, respectively.
Gross realized gains and losses on those sales and maturities
were $ 1,003,000 and $ 29,000 for 2000, $ 1,454,000 and
$ 1,000 for 1999 and $ 977,000 and $ 4,000 for 1998,
respectively.
Securities carried at $ 20,229,000 and $ 13,035,000 at
December 31, 2000 and 1999, 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:
2000
1999
Federal Reserve Bank stock $ 81 $ 81
Federal Home Loan Bank stock 1,469 1,153
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 500 500
$ 3,095 $ 2,779
Note 3. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as
follows:
2000
1999 1998
(000 omitted)
Balance at beginning of period $ 1,719 $ 1,890 $ 1,850
Recoveries 20 45 87
Provision for possible loan losses charged to income
0 0 0
Total 1,739 1,935 1,937
Losses 153 216 47
Balance at end of period $ 1,586 $ 1,719 $ 1,890
Note 4. Premises, Equipment, Furniture and Fixtures
Accumulated Depreciated
Cost Depreciation Cost
(000 omitted)
- - - - - - - - - - - - - - - 2000 - - -
- - - - - - - - - - - -
Premises (including land $ 442,000) $ 4,016 $ 1,626
$ 2,390
Equipment, furniture and fixtures 2,331 1,655 676
Totals, December 31, 2000 $ 6,347 $ 3,281 $ 3,066
- - - - - - - - - - - - - - - 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
Depreciation expense amounted to $ 413,000 in 2000, $ 385,000
in 1999 and $ 344,000 in 1998.
- -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 $
440,707, $ 445,647 and $ 450,587 at December 31, 2000, 1999
and 1998, respectively.
Note 6. Loans to Related Parties
The company's subsidiary has granted loans to the officers
and directors of the company and its subsidiary and to their
associates. Related party loans are made on substantially the same
terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of
collectibility. The aggregate dollar amount of these loans was
$ 1,720,509 and $ 2,340,524 at December 31, 2000 and 1999,
respectively. During 2000, $ 565,839 of new loans were made
and repayments totaled $ 959,992.
During 1999, $ 1,451,896 of new loans were made and
repayments totaled $ 961,077.
Outstanding loans to bank employees totaled $ 1,704,848 and $
1,619,387 at December 31, 2000 and 1999, 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
2000
1999
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 21,968,438 $ 12,144,216
Standby letters of credit and financial
guarantees written 1,728,944 909,095
$ 23,697,382 $ 13,053,311
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:
2000 1999
1998
Nonaccrual loans $ 63,187 $ 459,702 $ 487,905
Interest income that would have been
accrued at original contract rates $ 1,861 $ 44,439
$ 54,607
Amount recognized as interest income 82 18,054
661
Foregone revenue $ 1,779 $ 26,385 $ 53,946
The corporation had no impaired loans at December 31, 1998.
The average recorded investment in impaired loans amounted
to approximately $ 343,000 for 1998. Interest income of $
13,147 was recognized on cash payments received on these
loans in 1998.
The corporation had no impairment of loans in 2000 and 1999.
Note 9. Retirement Plan
The Bank maintains a money purchase 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 the minimum funding
standards established by the plan. Contributions charged to
operations were $ 45,000 for 2000, $ 62,000 for 1999 and
$ 39,000 for 1998.
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 $
90,000, $ 81,000 and
$ 75,000 for 2000, 1999 and 1998, 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
$ 894,000 and $ 951,000 at December 31, 2000 and 1999,
respectively. Annual expense of
$ 118,000, $ 100,000 and $ 116,000 was charged to operations
for 2000, 1999 and, 1998, 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 $ 200,755 and $
222,178 as of December 31, 2000 and 1999, respectively. The
Bank recorded a gain on life insurance 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 $ 8,283 and
$ 3,342 at
December 31, 2000 and 1999, respectively. Total annual
expense for this plan was $ 4,941 and
$ 3,342 for 2000 and 1999, respectively.
The Bank maintains an employee stock ownership plan (ESOP)
that generally covers all employees who have completed one
year of service and attained the age of twenty.
Contributions to the plan are determined annually by the
Board of Directors as a percentage of the participants
total compensation. Compensation for the plan is defined as
compensation paid including salary reduction and Sections
125 and 401(k) but excluding nontaxable fringe benefits and
any compensation over $ 200,000. 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 $ 90,000, $ 162,000 and $
150,000 for 2000, 1999 and 1998, 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. Total
shares of the plan were 73,611 and 78,214 at December 31,
2000 and 1999, respectively.
Note 11. Stock Option Plans
In 1996 the Bank implemented two nonqualified stock option
plans, which are described below. The compensation cost that
has been charged against income for those plans was
$ 29,201, $ 28,870 and $ 32,077 for 2000, 1999 and 1998,
respectively.
The first plan is for select key employees. This plan
granted options for up to 975 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 3,900, 4,080 and 1,411 shares for each director
at $ 24.375, $ 32.125 and $ 22.25 per share for the years
ended
December 31, 2000, 1999 and 1998, respectively, which was
based on the market 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. At
December 31, 2000 the range of exercise prices were from $
11.91 to $ 24.37 per share.
A summary of the status of the company's two fixed stock
option plans as of December 31, 2000 is as follows:
Weighted Average
Fixed Options
Shares Exercise Price Per Share
Outstanding at beginning of year 16,728 $ 21
Granted 4,875 20
Exercised 1,655 6
Forfeited/expired 0 0
Outstanding at end of year 19,948 $ 22
Options exercisable at year end 16,048
Weighted average fair value of options per
share granted during the year $ 24
- -16-
Note 11. Stock Option Plans (Continued)
Outstanding options at December 31, 2000 consist of the
following:
Shares
Shares Remaining
Exercise
Outstanding
Exercisable Contractual Life
Price
3,400 3,400 6 years 11.91
4,284 4,284 7 years 16.19
4,284 4,284 8 years 22.25
4,080 4,080 9 years 32.13
3,900 0 10 years 24.37
Total/average 19,948 16,048 8 years 21.62
Note 12. Deposits
Included in savings deposits at December 31 are NOW and
Money Market Account balances totaling $ 57,039,000 and $
51,160,000 for 2000 and 1999, respectively.
Time deposits of $ 100,000 and over aggregated $ 19,509,560
and $ 14,424,451 at December 31, 2000 and 1999,
respectively.
At December 31, 2000 scheduled maturities of time deposits
are as follows:
2001 $ 47,018,587
2002 13,131,251
2003 8,975,706
2004 1,176,836
2005 3,891,620
$ 74,194,000
The aggregate amount of demand deposits reclassified as loan
balances were $ 573,400 and
$ 38,200 at December 31, 2000 and 1999, respectively.
The bank accepts deposits of the officers, directors, and
employees of the corporation and its subsidiary on the same
terms, including interest rates, as those prevailing at the
time for comparable transactions with unrelated persons.
The aggregate dollar amount of deposits of officers,
directors and employees totaled $ 1,743,191 and $ 2,194,722
at December 31, 2000 and 1999, 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, 2000 and 1999, $ 1,169,000 and $ 1,213,900,
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, 2000 and 1999 was
$ 2,800,000 and $ 2,675,000, respectively. Interest on
these lines ranged from 7.25% to 9.25% for 2000 and 1999.
In addition, $ 288,377 and $ 295,275 of the balance of
liabilities for other borrowed funds at December 31, 2000
and 1999, 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 at December 31,
2000 and 1999.
- -17-
Note 13. Liabilities for Borrowed Money (Continued)
The Bank also had the following borrowings from the Federal
Home Loan Bank:
2000 1999
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) 6.63 2,407,000 4.05
6,516,000 6/30/01
(1) Total amount available under this line is $ 17,593,000
and $ 13,484,000 at December 31, 2000 and 1999.
Collateral for borrowings consists of certain securities and
the Bank's 1-4 family mortgage loans totaling approximately
$ 87.5 million at December 31, 2000.
Note 14. Income Taxes
The components of federal income tax expense are summarized
as follows:
2000
1999 1998
(000 omitted)
Current year provision:
Federal $ 1,149 $ 1,074 $ 1,165
State 66 161 68
Deferred income taxes (benefit) 274 12
13
$ 1,489 $ 1,247 $ 1,246
Federal income taxes were computed after reducing pretax
accounting income for non-taxable income in the amount of $
1,018,310, $ 871,583 and $ 599,571 for 2000, 1999 and 1998,
respectively.
A reconciliation of the effective applicable income tax rate
to the federal statutory rate is as follows:
2000
1999 1998
Federal income tax rate 34.0% 34.0% 34.0%
Increase resulting from:
State taxes, net of federal tax benefit 1.2 3.6 1.6
Reduction resulting from:
Nontaxable interest income 8.5 9.5 5.7
Effective income tax rate 26.7% 28.1% 29.9%
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:
2000
1999
Total deferred tax assets $ 1,094 $ 1,379
Total deferred tax liabilities ( 1,078) ( 285)
Net deferred tax assets $ 16 $ 1,094
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
2000
1999
(000 omitted)
Securities available for sale $ 13,266 $ 11,649
Investment in The First National Bank of Greencastle
17,769 14,889
Total assets $ 31,035 $
26,538
Liabilities
Other liabilities $ 1,390 $ 788
Notes payable 2,969 3,614
Total liabilities 4,359 4,402
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 6,705 6,707
Retained earnings 17,568 14,461
Accumulated other comprehensive income 834 (
725)
27,332 22,668
Less: Cost of Treasury stock, 23,594 shares - 2000;
17,499 shares - 1999 ( 656) (
532)
Total stockholders' equity 26,676 22,136
Total liabilities and stockholders' equity $ 31,035
$ 26,538
Statements of Income
Years Ended December 31
2000
1999 1998
(000 omitted)
Income
Dividends $ 285 $ 260 $ 220
Net gain on sale of securities 980 1,440 942
Cash dividends from wholly-owned subsidiary 1,905
1,829 2,386
3,170 3,529 3,548
Expenses
Interest 288 209
123
Commissions 89 107 68
Taxes 262 538 318
Postage and printing 20 14 15
Meetings 0 3
3
Management fees 100 100 60
Professional fees 15 26 28
Other expenses 23 0
0 797 997 615
Income before equity in undistributed income 2,373 2,532
2,933
Equity in undistributed income of subsidiary 1,720
671 ( 24)
Net income $ 4,093 $ 3,203 $ 2,909
- -19-
Note 15. Tower Bancorp Inc. (Parent Company Only) Financial
Information (Continued)
Statements of Cash Flows
Years Ended December 31
2000
1999 1998
(000
omitted)
Cash flows from operating activities:
Net income $ 4,093 $ 3,203 $ 2,909
Adjustments to reconcile net income to cash
provided by operating activities:
Net gain on sale of investment securities ( 980) (
1,440) ( 942)
(Gain) on trust services affiliation ( 1,078) 0
0
Equity in undistributed income of subsidiary ( 1,720) (
671) 24
Increase in accrued expenses 385 159 188
Net cash provided by operating activities 700 1,251
2,179
Cash flows from investing activities:
Purchase of investment securities ( 1,759) ( 3,995) (
4,755)
Sales of investment securities 2,813 3,506 2,658
Net cash (used) by investing activities 1,054 ( 489) (
2,097)
Cash flows from financing activities:
Purchase of treasury stock ( 162) ( 271) (
357)
Proceeds from sale of treasury stock 36 162 213
Dividends paid ( 986) ( 1,711) (
751)
Net proceeds (payments) on/from borrowing ( 642)
1,058 813
Net cash (used) by financing activities ( 1,754) ( 762) (
82)
Net (decrease) in cash 0 0 0
Cash, beginning 0 0
0
Cash, ending $ 0 $ 0 $
0
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, 2000 and 1999, required
deposit balances at Atlantic Central Banker's Bank of $
515,000 at both December 31, 2000 and 1999 and required
deposit balances at Equifax of $ 29,462 and $ 21,180 at
December 31, 2000 and 1999. 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 for 2000,
1999 and 1998.
The corporation also leases a site for an Automatic Teller
Machine under a noncancellable operating lease that expires in
2003 with the right to negotiate an extended lease of two
additional five year terms. Total rent expense charged to
operations was $ 9,000 for 2000 and 1999. 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, 2000:
Year Ending
2001 $ 29,700
2002 31,200
2003 31,200
2004 22,200
2005 22,200
2006 and after 22,200
$ 158,700
Note 19. Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial
instruments were as follows at December 31:
- - - - - - 2000 - - - - - - - -
- - - - - 1999 - - - - - -
Carrying Fair
Carrying Fair
Amount Value Amount
Value
FINANCIAL ASSETS
Cash and due from banks $ 5,115 $ 5,115 $ 5,062 $
5,062
Interest bearing deposits with banks 4,450 4,450 6,215
6,206
Securities available for sale 56,927 56,927 53,067 53,067
Loans receivable 147,570 146,658 131,760 134,546
Accrued interest receivable 1,344 1,344 1,137 1,137
Other bank stock 3,095 3,095 2,779 2,779
FINANCIAL LIABILITIES
Time certificates 74,194 73,964 64,300 65,185
Other deposits 102,803 102,803 95,424 95,424
Short-term borrowed funds 18,864 18,864 23,025 23,025
Accrued interest payable 515 515 398 398
- -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 $ 6,813,873 and
$ 5,106,914 for 2000 and 1999, respectively.
The corporation 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 corporation's
financial statements. Under capital adequacy guidelines,
the corporation 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
2000 1999
Requirements
Leverage ratio 11.88% 10.70% 3%
Risk-based capital ratio
Tier I (core capital) 21.90% 20.88% 4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 23.18% 22.42% 8%
As of December 31, 2000 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
2000
1999 1998 1997
1996
Income (000 omitted)
Interest income $ 15,523 $ 13,648 $ 12,548 $ 11,977 $ 11,156
Interest expense 7,295 6,079 5,342 5,167 4,811
Provision for loan losses 0 0 0
0 0
Net interest income after
provision for loan losses 8,228 7,569 7,206 6,810
6,345
Other operating income 3,615 2,822 2,082 1,390 990
Other operating expenses 6,261 5,941 5,133 4,396
4,055
Income before income taxes 5,582 4,450 4,155 3,804
3,280
Applicable income tax
(benefit) 1,483 1,247 1,246 1,110 944
Net income $ 4,093 $ 3,203 $ 2,909 $ 2,694 $ 2,336
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:
2000 - 1,761,699 1998 - 1,732,479 1996 -
1,775,069
1999 - 1,763,548 1997 - 1,765,056
Net income 2.32 1.82 1.68 1.53 1.32
Cash dividend paid .56 .97 .43 .38 .31
Book value 15.14 12.56 13.02 11.58 9.99
Year-End Balance Sheet Figures
(000 omitted)
Total assets $ 224,512 $ 206,874 $ 187,335 $ 159,935 $ 148,673
Net loans 145,984 130,041 121,800 102,388 99,094
Total investment securities 60,022 55,846 48,517 42,217
37,673
Deposits-noninterest bearing 16,359 13,746 11,346 9,651
7,959
Deposits-interest bearing 160,638 145,978 131,120 123,133
118,645
Total deposits 176,997 159,724 142,466 132,784 126,604
Total stockholders' equity 26,676 22,136 22,552 20,433
17,704
Ratios
Average equity/average assets 10.96 11.42 12.72 12.25
11.76
Return on average equity 17.17 14.09 13.54 14.17
13.80
Return on average assets 1.88 1.63 1.72 1.74
1.62
- -23-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
CHANGES IN INCOME AND EXPENSE - 2000 AND 1999
The schedule below reflects comparative changes in income
and expense included in the Consolidated Statements of Income for
2000 and 1999 together with changes in asset and liability volumes
associated with these income and expense items.
2000
Compared to 1999 1999 Compared to 1998
Average Volumes
Income/Expense Average Volumes Income/Expense
($ 000 omitted) $ %
$ % $ % $
%
Loans 13,586 10.7 1,571 15.1 15,250 13.6 505 5.1
Investment securities 4,265 7.9 340 11.9 12,095 28.9 473 19.9
Other short-term invest-
ments ( 1,762) (22.7) ( 36) ( 8.5) 536 7.4
122 40.5
Total 16,089 8.5 1,875 13.7 27,881 17.3 1,100 8.8
Interest bearing demand
deposits 5,600 11.9 255 26.2 13,150 38.7 346 55.1
Savings deposits ( 2,826) ( 8.6) ( 37) 3.6 1,400 4.4 ( 46) (
4.2)
Time deposits 5,596 8.8 559 17.9 2,141 3.5 ( 147) 4.5
Short-term borrowings 7,154 37.8 439 46.1 11,229 145.9
584 158.3
Total 15,524 9.6 1,216 20.0 27,920 20.7 737 13.8
Net interest income 659 8.7 363 5.0
Provision for loan losses 0 .0
0 .0
Net interest income after
provision for loan losses 659 8.7
363 5.0
Security transactions ( 479) (32.9) 480 49.3
Other operating income 1,272 92.9 260
23.4
Income before operating
expense 1,452 13.9 1,103 11.9
Salaries & employee
benefits 57 1.9 439 17.7
Occupancy & equipment
expense 188 15.0 32 2.6
FDIC insurance premiums 26 200.0 (
7) ( 35.0)
Other operating
expenses 49 2.8 344 11.7
Total operating expenses 320 5.4
808 15.7
Income before income taxes 1,132 26.4 295
7.1
Applicable income tax expense 242 19.4
1 .1
Net income 890 27.8 294 10.1
- -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, 2000 and 1999 are as follows:
2000 1999
($ 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 $ 3,699 $ 3,824 $ 4,035 $ 3,965 $ 3,288 $ 3,381 $ 3,470 $
3,509
Interest expense 1,703 1,790 1,934 1,868 1,441 1,577
1,549 1,512
Net interest income 1,996 2,034 2,101 2,097 1,847 1,804 1,921
1,997
Provision for loan
losses 0 0 0 0 0 0
0 0
Net interest income
after provision
for loan losses 1,996 2,034 2,101 2,097 1,847 1,804 1,921
1,997
Other income 767 669 698 1,481 560 831 817 614
Other expenses 1,603 1,548 1,636 1,474 1,427 1,637 1,510
1,367
Operating income
before income
taxes 1,160 1,155 1,163 2,104 980 998 1,228 1,244
Applicable income
taxes 303 282 297 607 294 301 368
284
Net income $ 857 $ 873 $ 866 $ 1,497 $ 686 $ 697 $ 860 $
960
Net income applicable
to common stock
Per share data:
Net income $ .49 $ .50 $ .49 $ .84 $ .39 $ .39 $ .49 $
.55
- -25-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES
2000 1999 1998 1997 1996
($ 000 omitted)
LOANS
Commercial $ 26,331 $ 23,260 $ 18,372 $ 15,854 $
14,594
Mortgage 81,155 70,808 65,160 64,833 65,296
Consumer 33,302 33,134 28,420 21,752
19,156
Total loans 140,788 127,202 111,952 102,439
99,046
INVESTMENT SECURITIES
U.S. Government 200 288 484 698 931
U.S. Government agencies 25,567 24,391 18,936 21,898 20,404
State & municipal 15,673 12,860 10,988 9,608 8,413
Other 16,699 16,335 11,371 7,377
4,839
Total investment securities 58,139 53,874 41,779
39,581 34,587
OTHER SHORT-TERM INVESTMENTS
Federal funds sold 3 1,711 870 1,371 758
Certificates of deposit 5,998 6,052 6,357
5,571 3,633
Total other short-term
investments 6,001 7,763 7,227 6,942
4,391
Total earning assets 204,928 188,839 160,958 148,962
138,024
Total assets $ 217,450 $ 199,069 $ 169,023 $ 155,264 $
144,504
Percent increase 9.2% 17.8% 8.8% 7.4% 5.3%
DEPOSITS
Demand $ 13,857 $ 11,206 $ 10,647 $ 8,835 $
8,222
Interest-bearing demand 52,740 47,140 33,990 31,820 21,091
Savings 30,139 32,965 31,565 27,647 33,265
Time 69,006 63,410 61,269 62,592
61,609
Total deposits 165,742 154,721 137,471 130,894
124,187
Short-term borrowings 26,077 18,923 7,694 2,288
1,984
AVERAGE RATES EARNED (TAXABLE
EQUIVALENT BASIS) % %
% % %
Loans
Commercial 8.6 8.0 9.3 9.7 9.4
Mortgage 8.4 7.9 8.6 8.9 8.7
Consumer 9.1 8.8 8.9 9.1 9.0
Total 8.6 8.2 8.8 9.0 8.9
Investment Securities
U. S. Government 7.2 6.7 6.7 6.6 6.7
U.S. Government agencies 6.4 6.3 6.7 6.7 6.5
State & municipal 5.1 5.2 5.1 5.2 5.3
Other 6.6 6.1 6.4 7.0 6.2
Total 6.0 5.9 6.4 6.2 6.2
Total other short-term
investments 6.4 6.4 6.1 6.2 6.4
Total earning assets 7.9 7.6 8.1 8.2 8.2
AVERAGE RATES PAID
Time & savings deposits 3.9 3.6 3.9 4.1 4.1
Short-term borrowings 5.6 5.1 4.4 5.9 5.3
- -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 $ 4,093,000 in 2000 compared to $ 3,203,000
in 1999, and $ 2,909,000 in 1998. Net income on an adjusted per share
basis for 2000 was $ 2.32, up $ .50 from $ 1.82 realized during 1999.
Total interest income increased $ 1,875,000 from 1999 to
2000 and $ 1,100,000 from 1998 to 1999. Increases in 2000 and 1999
were primarily due to volume increases in average earning assets.
Average loans outstanding in 2000 increased 10.7% over 1999. This
coupled with marginally higher rates resulted in a 15% increase in
interest income from loans in 2000 as compared to a 5.0% increase
realized in 1999. Earnings on investments (excluding gains from
sales) increased 11.9% in 2000 compared to a 19.9% increase in 1999.
This increase was primarily the result of increased average volume of
investment securities which increased 7.9% in 2000 compared to a 28.9%
increase in 1999. Total average earning assets increased 8.5% in 2000
compared to 17.3% in 1999. Increases in earning assets during 2000
and 1999 were proportionately higher in loans, which typically produce
higher yields than investments thus producing the higher earnings
during 2000 and 1999.
Interest from loans accounted for 77% of total interest
income for 2000, as compared to 76% and 79% for 1999 and 1998,
respectively. Interest and dividends on investments amounted to
$ 3,578,000 or 23% of interest income for 2000, as compared to $
3,274,000 or 24% in 1999 and
$ 2,679,000 or 21% in 1998.
Total interest expense was $ 7,295,000 for 2000, an increase
of $ 1,216,000 over the
$ 6,079,000 for 1999. The increase in total average deposits was 7.1%
in 2000 compared to 12.5% in 1999. Overall growth was moderate during
2000 and 1999 with interest bearing demand, savings deposits, and time
deposits having increased 5.8% and 13.2%, respectively. Although
growth was moderate during 2000, rates increased .30% which caused an
increase in interest expense on deposits of 15.1%. There were some
significant changes in the level of borrowed funds which caused total
interest expense to increase by 20.0%. This change in volume along
with the increased level of rates paid for deposits and increased
rates on borrowed funds was offset by proportional increases in
average volumes and rates for earning assets which caused the overall
interest spread to stay constant at 3.7% for 2000 and 1999.
The Bank's net charge-offs have been lower than peer group
performance for the past four years. Certain loan workout situations
had materialized resulting in net recoveries for 1998. Net charge-
offs were $ 125,000 and $ 171,000 for 2000 and 1999, respectively,
while net recoveries were $ 40,000 for 1998. Previous years' net
recoveries, as well as an improving loan portfolio, have allowed the
bank to have a current year provision of $ 0 for 2000, 1999 and 1998.
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
$ 63,000 and $ 460,000 at year-end 2000 and 1999, 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 $ 793,000 or 28.1% for 2000
over 1999, and $ 740,000 or 35.3% for 1999 over 1998. The increase in
2000 was due to $ 1,314,412 of income derived from a trust department
affiliation and the demutualization of the insurance company that
insured the deferred compensation contracts. The increase in 1999 was
largely due to an increase in investment gains of $ 480,000 and fees on
trust services of $ 101,000.
The noninterest expenses are classified into five main
categories: salaries and employee benefits; occupancy expenses, which
include depreciation, maintenance, utilities, taxes and insurance;
equipment expenses, which include depreciation, rents and maintenance;
FDIC insurance premiums; and other operating expenses, which include all
other expenses incurred in operating the Bank and the parent company.
Personnel related expenses increased $ 104,000 or 3.6% in 2000
over 1999, compared to an increase of $ 439,000 or 17.7% in 1999 over
1998. Occupancy and equipment expense increased by 15.0% from 2000 to
1999 compared to 9.2% from 1999 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
5.4% in 2000, compared to 15.7% and 16.8% in 1999 and 1998,
respectively.
Applicable income taxes changed between 1998, 1999 and 2000 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 2000 and 1999 is 34%. At December
31, 2000 and 1999, deferred taxes amounted to $ 16,000 and $ 1,094,000,
respectively. If all timing differences reversed in 2000, 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.
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board (FASB) issued Statement
No. 133 as amended by SFAS No. 138, Accounting For Derivative
Instruments and Hedging Activities, effective for fiscal years beginning
after
June 15, 2000. 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-
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In September 2000, the FASB issued Statement No. 140
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This Statement provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. It replaces
previously issued Statement No. 125. Statement No. 140 revises
accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but
otherwise carries over most of Statement 125's provisions without
reconsideration. Statement No. 140 is effective for transfers,
servicing and extinguishments occurring after March 31, 2001.
Management is evaluating the impact of this statement, but does not
anticipate that it will have a material impact.
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, 2000, based on the results of the simulation model,
the Bank would expect an increase in net interest income of $
293,000 and a decrease in net interest income of $ 397,000 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 quarterly and reports to the Board
on interest rate risk and trends on a quarterly basis.
- -29-
The following table sets forth the amounts of interest-
earning assets and interest-bearing liabilities outstanding at
December 31, 2000 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 and
investment securities $ 4,011 $ 2,716 $ 54,650 $ 61,377
Real estate, commercial and consumer loans 16,772 47,513
83,285 147,570
$ 20,783 $ 50,229 $ 137,935 $ 208,947
Rate sensitive liabilities
Certificates of deposit over $ 100,000 $ 4,625 $ 10,030 $
4,855 $ 19,510
Other certificates of deposit 9,546 23,802 21,336 54,684
Money market deposit accounts 8,380 8,380 8,378 25,138
NOW accounts and other savings deposits 20,435 20,435 20,437
61,307
Federal funds and other liabilities 3,864 5,000 10,000
18,864
$ 46,850 $ 67,647 $ 65,006 $ 179,503
Cumulative interest sensitive GAP ($ 26,067) ($ 43,485) $ 29,444 $
29,444
Cumulative interest sensitive GAP ratio ( .44) ( .62)
1.16 1.16
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 2001 2002 2003 2004
2005 Thereafter Total Value
Fixed interest rate
Loans $ 16,586 $ 10,942 $ 10,157 $ 8,038 $ 7,470 $ 34,981 $ 88,174 $ 86,528
Average interest rate 8.9 9.3 9.0 8.8 8.8 8.9
8.9
Variable interest rate
Loans 11,967 4,319 2,297 2,114 2,299 36,400 59,396 60,130
Average interest rate 9.2 9.3 8.8 8.5 8.6 8.4
8.7
Fixed interest rate
Securities 20,308 3,445 3,826 5,798 1,432 9,008 43,817 43,661
Average interest rate 6.5 6.2 5.9 5.8 5.3 5.7
6.13
- -30-
(In Millions) - - - - - - - - - - -
Principal/Notional Amount Maturing In: - - - - - - - - - -
Fair
2001 2002
2003 2004 2005 Thereafter Total
Value
Rate sensitive liabilities
Noninterest bearing
Checking $ 2,606 $ 781 $ 781 $ 781 $ 260 $ 0
$ 5,209 $ 5,209
Savings and interest
bearing checking 2,622 1,749 1,749 1,749 874 0 8,743 8,743
Average interest rates 2.67 2.67 2.67 2.67 2.67
0.0 2.67
Time deposits 49,018 13,295 8,976 1,177 1,728 0 74,194 73,964
Average interest rates 5.5 5.97 5.9 4.84 5.9 0.0 5.63
Fixed interest rate
Borrowings 0 0 5,000 0 10,000 0 15,000 15,000
Average rate 0.0 0.0 4.63 0.0 5.2 0.0 5.06
Variable interest rate
Borrowings 3,864 0 0 0 0 0 3,864 3,864
Average interest rate 6.6 0.0 0.0 0.0 0.0 0.0 6.6
CAPITAL FUNDS
Internal capital generation has been the primary
method utilized by Tower Bancorp Inc. to increase its
capital. Stockholders' equity, which exceeded $ 26.6
million at December 31, 2000 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
2000 1999
Leverage ratio 11.88% 10.70%
3%
Risk-based capital ratio
Tier I (core capital) 21.90% 20.88%
4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 23.18% 22.42%
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.
2000 1999
1998
Equity capital at December 31
($ 000 omitted) $ 26,676 $ 22,136 $ 22,552
Equity capital as a percent of
assets at December 31 11.88% 10.70% 12.04%
Return on average assets 1.88% 1.63% 1.72%
Return on average equity 17.17% 14.09% 13.54%
Cash dividend payout ratio 24.09% 53.42%
25.82%
- -31-
STOCK MARKET ANALYSIS AND DIVIDENDS
The corporation's common stock is traded
inactively in the over-the-counter market. As of December
31, 2000 the approximate number of shareholders of record
was 1,035.
Market
Cash
2000
Price Dividend
First Quarter $ 23.00 - 23.00 $ 0
Second Quarter 21.13 - 21.63 .18
Third Quarter 21.00 - 21.63 0
Fourth Quarter 19.75 - 19.75 .38
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
- -32-
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 26, 2001, with respect to
the consolidated balance sheets of Tower Bancorp, Inc. and
subsidiary as of December 31, 2000 and 1999 and the related
consolidated statements of income, stockholders' equity and cash
flows for the three year period ended December 31, 2000, which
report is incorporated by reference in the December 31, 2000 annual
report to stockholders on Form 10-K of Tower Bancorp, Inc.
/s/SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, PA
March 15, 2001
12-MOS
DEC-31-2000
DEC-31-2000
5,115
4,450
0
0
56,927
0
0
147,570
1,586
224,512
176,997
18,864
1,975
0
0
0
2,225
24,451
224,512
11,945
3,191
387
15,523
5,903
7,295
8,228
0
974
6,261
5,582
5,582
0
0
4,093
2.32
2.30
4.0
63
25
0
0
1,719
153
20
1,586
1,586
0
144