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, 2001
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, 2001, 1,747,210 shares of the
registrant's common stock were outstanding. The aggregate
market value of such shares held by nonaffiliates on that
date was $ 42,492,147.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year
ended December 31, 2001 are incorporated by reference into
Parts I and II. Portions of the Proxy Statement for 2002
Annual Meeting of Security Holders are incorporated by
reference in Part III of this Form 10-K.
- -1-
Item 1. Business.
History and Business
Tower Bancorp, Inc. ("Tower") is a bank holding
company registered under the Bank Holding Company Act of
1956, as amended. Tower was organized on October 12, 1983,
under the laws of the Commonwealth of Pennsylvania for the
purpose of acquiring The First National Bank of Greencastle,
Greencastle, Pennsylvania ("First") and such other banks and
bank related activities as are permitted by law and
desirable. On June 1, 1984, Tower acquired 100% ownership
of The First National Bank of Greencastle, issuing 159,753
shares of Tower's common stock to the former First
shareholders.
In 1997 Tower acquired 459 shares of its own
common stock and sold 5,259 shares of treasury stock to
First's ESOP plan, and 348 shares to First's president as
part of a stock option plan. On July 1, 1997 Tower also
issued a 5% stock dividend of 41,870 shares, increasing the
total number of shares outstanding at December 31, 1997 to
883,098.
During 1998 Tower acquired 9,807 shares of its own
common stock and sold 5,005 shares of treasury stock to
First's ESOP plan, and 1,504 shares to First executive
officers and directors as part of a stock option plan. On
July 1, 1998 Tower issued a 2 for 1 stock split of 885,600
shares, increasing the total number of shares outstanding at
December 31, 1998 to 1,765,400.
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.
- -2-
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.
During 2001 Tower acquired 19,024 shares of its
own common stock and sold 8,454 shares of treasury stock to
First's ESOP plan, and 1,374 shares to First executive
officers as part of a stock option plan.
Tower's primary activity consists of owning and
supervising its subsidiary, The First National Bank of
Greencastle, which is engaged in providing banking and bank
related services in South Central Pennsylvania, principally
Franklin County, where its five branches are located in
Quincy, Shady Grove, Waynesboro, Mercersburg and Laurich, as
well as its main office in Greencastle, Pennsylvania. The
day-to-day management of First is conducted by the
subsidiary's officers. Tower derives the majority of its
current income from First.
Tower has no employees other than its four
officers who are also employees of First, its subsidiary.
On December 31, 2001, First had 86 full-time and 21 part-
time employees.
Tower contemplates that in the future it will
evaluate and may acquire, or may cause its subsidiaries to
acquire, other banks. Tower also may seek to enter
businesses closely related to banking or to acquire existing
companies already engaged in such activities. Any
acquisition by Tower will require prior approval of the
Board of Governors of the Federal Reserve System, the
Pennsylvania Department of Banking, and, in some instances,
other regulatory agencies and its shareholders. During 1996
Tower secured approval and purchased property for use as a
possible future branch office, in Washington County,
Maryland. 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.
- -3-
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.
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.
As of December 31, 2001, First had total assets of
approximately $ 245 million, total shareholders' equity of
approximately $ 28.5 million and total deposits of
approximately $ 178 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
- -4-
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.
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.
- -5-
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.
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
- -6-
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;
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.
- -7-
FDICIA establishes five capital tiers, ranging
from "well capitalized", to "critically undercapitalized".
A depository institution is well capitalized if it
significantly exceeds the minimum level required by
regulation for each relevant capital measure. Under FDICIA,
an institution that is not well capitalized is generally
prohibited from accepting brokered deposits and offering
interest rates on deposits higher than the prevailing rate
in its market; in addition, "pass through" insurance
coverage may not be available for certain employee benefit
accounts. FDICIA also requires an undercapitalized
depository institution to submit an acceptable capital
restoration plan to the appropriate federal bank regulatory
agency. One requisite element of such a plan is that the
institution's parent holding company must guarantee
compliance by the institution with the plan, subject to
certain limitations. In the event of the parent holding
company's bankruptcy, the guarantee, and any other
commitments that the parent holding company has made to
federal bank regulators to maintain the capital of its
depository institution subsidiaries, would be assumed by the
bankruptcy trustee and entitled to priority in payment.
Based on their respective regulatory capital
ratios at December 31, 2001, 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
- -8-
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.
In 1999, Federal regulatiors issued regulations to
implement the privacy provisions of the 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 has
developed 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.
- -9-
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
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
- -10-
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
Corporation's control. In addition, these conditions and
policies can impact the Corporation's customers and
- -11-
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
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
- -12-
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.
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
- -13-
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 and 365 square feet located at
685 Fifth Avenue, Chambersburg, Pennsylvania used as a loan
origination office. 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 12/31/01
Kermit G. Hicks, Chairman
of the Board 1983 (1) 66
Harold C. Gayman, Vice
Chairman of the Board 1983 (1) 75
Jeff B. Shank, President
and Director 1992 1983 46
Robert L. Pensinger,
Director 1987 (1) 68
James H. Craig, Director 1990 (1) 68
Lois Easton, Director 1990 (1) 66
(1) These directors are not employees of the Bank.
Held Bank Employee Age as
Name/Office Held Since Since of 12/31/01
Jeff B. Shank, President 1992 1976 46
John H. McDowell,
Executive Vice President 1994 1977 52
Don Kunkle, Vice President 1987 1987 52
Franklin T. Klink, III, Vice
President/Treasurer 2001 2001 46
- -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, 2001, the
approximate number of shareholders of record was 1,039. The
price ranges for Tower common stock set forth below are the
approximate bid prices obtained from brokers who make a
market in the stock and don't reflect prices in actual
transactions.
Cash Dividends
Period Paid Market Price
2001 1st Quarter $ 0 $ 18.68 - $ 19.51
2nd Quarter .22 18.44 - 20.97
3rd Quarter .50 19.48 - 23.60
4th Quarter .40 21.53 - 24.75
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
Item 6. Selected Financial Data
The selected five-year financial data on page 25
of the annual shareholders' report for the year ended
December 31, 2001 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 30
through 35 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 29 of the annual shareholders report for the year
ended December 31, 2001 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
LOAN PORTFOLIO
The following table presents the loan portfolio at
the end of each of the last five years:
2001
2000
1999
1998
1997
(000 omitted)
Commercial,
financial &
agricultural
$ 33,606
$ 20,903
$ 15,047
$ 15,164
$ 10,699
Real estate -
Construction
6,029
4,827
4,146
2,378
1,486
Real estate -
Mortgage
111,709
104,838
93,340
87,350
80,597
Installment &
other
personal
loans
(net of
unearned
income)
16,333
17,002
19,227
18,798
11,556
Total loans
$ 167,677
$ 147,570
$ 131,760
$ 123,690
$ 104,338
- -19-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
2001
2000
1999
1998
1997
(000 omitted)
Average total loans
outstanding (net of
unearned income)
$ 158,570
$ 140,788
$ 127,202
$ 111,952
$ 102,439
Allowance for loan
losses, beginning
of period
1,586
1,719
1,890
1,850
1,947
Additions to
provision for loan
losses Charged to
operations
120
0
0
0
0
Loans charged off
during the year
Commercial
0
4
8
0
58
Real estate
mortgage
0
0
29
1
0
Installment
192
149
179
46
57
Total charge-
off's
192
153
216
47
115
Recoveries of loans
previously charged
off:
Commercial
4
4
4
43
11
Installment
39
16
35
20
7
Mortgage
20
0
6
24
0
Total recoveries
63
20
45
87
18
Net loans charged
off (recovered)
129
133
171
( 40)
97
Allowance for loan
losses, end of
period
1,577
1,586
1,719
1,890
1,850
Ratio of net loans
charged off
(recovered) to
average loans
outstanding
.08%
.09%
.13%
( .04%)
.09%
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.
- -20-
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.
2001
2000
1999
1998
1997
(000 omitted)
Nonaccrual loans
$ 64
$ 63
$ 460
$ 488
$ 477
Accrual loans:
Restructured
$ 0
$ 0
$ 0
$ 0
$ 0
60 - 89 days
past due
802
800
379
417
315
90 days or more
past due
734
25
27
0
1
Total accrual
loans
$ 1,536
$ 825
$ 406
$ 417
$ 316
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.
- -21-
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
2001
2000
Allowance
Amount
Percentage
of Loans
in Each
Category
to Total
Loans
Allowance
Amount
Percentage
of Loans
in Each
Category
to Total
Loans
(000 omitted)
Commercial, financial
and agricultural
$ 816
20.0%
$ 812
14.2%
Real estate -
Construction
0
3.6
0
3.3
Real estate - Mortgage
650
66.6
630
71.0
Installment
0
9.7
0
11.5
Unallocated
111
N/A
144
N/A
Total
$ 1,577
100.0%
$ 1,586
100.0%
Years Ended December 31
1999
1998
Allowance
Amount
Percentage
of Loans
in Each
Category
to Total
Loans
Allowance
Amount
Percentage
of Loans
in Each
Category
to Total
Loans
(000 omitted)
Commercial, financial
and agricultural
$ 812
11.2%
$ 815
12.5%
Real estate -
Construction
0
3.1
0
2.0
Real estate - Mortgage
630
70.8
653
70.2
Installment
0
14.9
0
15.3
Unallocated
277
N/A
422
N/A
Total
$ 1,719
100.0%
$ 1,890
100.0%
- -22-
Years Ended December 31
1997
Allowance
Amount
Percentage of
Loans in Each
Category to
Total Loans
(000 omitted)
Commercial, financial and
agricultural
$ 772
10.3%
Real estate - Construction
0
1.4
Real estate - Mortgage
630
77.2
Installment
0
11.1
Unallocated
448
N/A
Total
$ 1,850
100.0%
- -23-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized
below:
Years Ended December 31
2001
2000
1999
(000 omitted)
Demand deposits
$ 12,840
$ 13,857
$ 11,206
Interest bearing demand
deposits
63,422
52,740
47,140
Savings deposits
24,828
30,139
32,965
Time deposits
77,054
69,006
63,410
Total deposits
$ 178,144
$ 165,742
$ 154,721
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE
BALANCES)
The following table presents a summary of significant
earnings and capital ratios:
2001
2000
1999
Assets
$ 245,574
$ 224,512
$ 206,874
Net income
$ 4,001
$ 4,093
$ 3,203
Equity
$ 28,518
$ 26,676
$ 22,136
Cash dividends paid
$ 1,965
$ 986
$ 1,711
Return on assets
1.72%
1.88%
1.63%
Return on equity
14.40%
17.17%
14.09%
Dividend payout ratio
49.11%
24.09%
53.42%
Equity to asset ratio
11.96%
10.96%
11.42%
- -24-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
2001
2000
1999
1998
1997
(000 omitted)
Interest income
$ 16,510
$ 15,523
$ 13,648
$ 12,548
$ 11,977
Interest expense
6,988
7,295
6,079
5,342
5,167
Net interest income
9,522
8,228
7,569
7,206
6,810
Provision for loan
losses
120
0
0
0
0
Net interest
income after
provision for
loan losses
9,402
8,228
7,569
7,206
6,810
Other income:
Investment
services income
191
577
492
391
293
Service charges -
deposits
519
335
291
281
288
Other service
charges, collection
and exchange,
charges, commission
fees
305
1,630
388
212
181
Other operating
income
1,922
1,073
1,651
1,198
628
Total other income
2,937
3,615
2,822
2,082
1,390
Income before
operating expense
12,339
11,843
10,391
9,288
8,200
Operating expenses:
Salaries and
employees
benefits
3,211
3,026
2,922
2,483
2,179
Occupancy and
equipment expense
1,627
1,393
1,252
1,220
964
Other operating
expenses
1,864
1,842
1,767
1,430
1,253
Total operating
expenses
6,702
6,261
5,941
5,133
4,396
Income before income
taxes
5,637
5,582
4,450
4,155
3,804
Income tax
1,636
1,489
1,247
1,246
1,110
Net income
applicable to
common stock
$ 4,001
$ 4,093
$ 3,203
$ 2,909
$ 2,694
Per share data:
Earnings per
common share
$ 2.29
$ 2.32
$ 1.82
$ 1.68
$ 1.53
Cash dividend -
Common
$ 1.12
$ .56
$ .97
$ .43
$ .38
Average number of
common shares
1,745,847
1,761,699
1,763,548
1,732,479
1,765,056
- -25-
Item 9. Disagreements on Accounting and Financial
Disclosures.
Not applicable.
- -26-
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 2002 Annual Meeting of
Shareholders filed pursuant to Regulation 14A.
- -27-
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, 2001,
are incorporated by reference in Item 8:
Consolidated balance sheets - December 31,
2001 and 2000
Consolidated statements of income - Years
ended December 31, 2001, 2000, and 1999
Consolidated statements of stockholders'
equity - Years ended December 31, 2001, 2000,
and 1999
Consolidated statements of cash flows - Years
ended December 31, 2001, 2000, and 1999
Notes to consolidated financial statements -
December 31, 2001
(2) List of Financial Statement Schedules
Schedule I - Loan portfolio
Schedule II - Summary of loan loss experience,
nonaccrual loans and allocation of allowance
for loan losses
Schedule III - Deposits
Schedule IV - Return on equity and assets
- -28-
Schedule V - 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.
(b) Reports on Form 8-K filed
Report filed April 10, 2001 for news release
announcing financial results for quarter ended
March 31, 2001.
- -29-
Report filed July 18, 2001 for news release
announcing financial results for quarter ended
June 30, 2001.
Report filed September 26, 2001 for news
release to announce a common stock repurchase
program.
Report filed October 11, 2001 for news release
announcing financial results for quarter ended
September 30, 2001.
(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.
- -30-
(ii) By-laws of Tower Bancorp, Inc., filed
as Exhibit
D to the Registrant's
Registration Statement on
Form S-14
(Registration No. 2-89573).
(10)(i) Change of control agreements, filed
herewith by Exhibit 10-1 and 10-2 and
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.
(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
- -31-
(d) Financial statement schedules
The following financial statement schedules
required under Article 9 Industry Guide 3 have
been included on pages 19 to 25 under Item 8
of this report:
Schedule I - Loan portfolio
Schedule II - Summary of loan loss experience,
nonaccrual loans, and allocation of allowance
for loan losses
Schedule III - Deposits
Schedule IV - Return on equity and assets
Schedule V - Consolidated summary of
operations
- -32-
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/Franklin T. Klink, III__
Franklin T. Klink, III
Treasurer (Principal
Accounting Officer)
Dated: March 15, 2002
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, 2002
Jeff B. Shank Director
/s/ Kermit G. Hicks Chairman of the March 15, 2002
Kermit G. Hicks Board & Director
/s/Robert L. Pensinger Director March 15, 2002
Robert L. Pensinger
/s/ Harold C. Gayman Vice Chairman of March 15, 2002
Harold C. Gayman the Board & Director
/s/James H. Craig, Jr. Director March 15, 2002
James H. Craig, Jr.
/s/ Lois Easton ____ Director March 15, 2002
Lois Easton
- -33-
Exhibit Index
Exhibit No.
10-1 Change of control agreement
10-2 Change of control agreement
13 Annual report to security holders
21 Subsidiaries of the Registrant
23.1 Consent of independent auditors
27 Financial data schedule
Exhibit 10-1
Execution Copy
November 6, 2001
CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT is made as of this 26th day of November, 2001, among Tower
Bancorp, Inc. Corporation ("Corporation"), a Pennsylvania business corporation having a place
of business at Center Square, Greencastle, Pennsylvania 17255, the First National Bank of
Greencastle ("Bank"), a national banking association having a place of business at Center
Square, Greencastle, Pennsylvania 17225 and Franklin T. Klink, III ("Executive"), an individual
residing at 168 East Side Drive, Greencastle, Pennsylvania 17225 (collectively the "Parties" and,
individually, sometimes a "Party").
W I T N E S S E T H:
WHEREAS, the Corporation is a registered bank holding company;
WHEREAS, the Bank is a subsidiary of the Corporation;
WHEREAS, any reference to Corporation in this Agreement shall mean Corporation or
Bank;
WHEREAS, the Executive has been employed by the Corporation as Chief Financial
Officer of the Bank and Treasurer of Corporation; and
WHEREAS, this Agreement will become operative only upon a Change of Control (as
defined herein): and
WHEREAS, the purpose of this Agreement is to define certain severance benefits that
will be paid by the Corporation in the event of a Change of Control (as defined herein), but is not
intended to affect, nor does it affect, the terms of the Executive's employment at will, in the
absence of a change of control (as defined herein) of the Corporation.
NOW THEREFORE, in consideration of the Executive's service to the Corporation and
of the mutual covenants, undertaking and agreements set forth herein and intending to be legally
bound hereby, the Parties agree as follows:
1. TERM. The term of the Agreement shall be effective as of the day and year written
above, and shall continue until either Executive or Corporation gives the other written notice of
termination of employment, with or without cause. Provided, however, that during the period of
time between the execution of an agreement to effect a Change of Control (as defined herein) and
the Date of Change of Control (a defined herein), termination of the Executive's employment
shall only be for Cause (as defined herein).
Execution Copy
November 6, 2001
2. DEFINITION OF CAUSE. The term "Cause" shall be defined, for purposes of this
Agreement, as the occurrence of one or more of the following: (1) the willful failure by the
Executive to substantially perform his duties hereunder, other than a failure resulting from
Executive's incapacity because of physical or mental illness, after notice from the Corporation,
and a failure to cure such violation within twenty (20) days of said notice; (2) the willful
engaging by the Executive in misconduct injurious to the Corporation; (3) dishonesty or gross
negligence of the Executive in the performance of his duties; (4) Executive's breach of fiduciary
duty involving personal profit; (5) Executive's violation of any law, rule or regulation governing
banks or bank officers or any final cease and desist order issued by a bank regulatory authority;
(6) conduct on the part of Executive which brings public discredit to the Corporation, as
determined by a vote of two-thirds of the disinterested members of the Bank's Board of
Directory; (7) Executive's conviction of or plea of guilty or nolo contender to a felony, crime of
falsehood or a crime involving moral turpitude, or the actual incarceration of Executive for a
period of ten (10) consecutive days or more; (8) Executive's unlawful discrimination, including
harassment, against Corporation's employees, customers, business associates, contractors or
visitors; (9) Executive's theft or abuse of Corporation's property or the property of
Corporation's customers, employees, contractors, vendors or business associates; (10) the
direction or recommendation of a state or federal bank regulatory authority to remove Executive
from his positions with Bank as identified herein, including a final removal or prohibition order
issued by a federal banking agency pursuant to Section 8(e) of the Federal Deposit Insurance
Act; or (11) Executive's willful failure to follow the good faith lawful instructions of the Board
of Directors of Corporation with regard to its operations, after written notice from the
Corporation and a failure to cure such violation within twenty (20) days of said notice.
3. DEFINITION OF CHANGE OF CONTROL. For purposes of this agreement, the
term "Change of Control" shall mean a change of control (other than one occurring by reason of
an acquisition of the Corporation by Executive) of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A or Regulation 14A or any successor rule or regulation
promulgated under the Securities Exchange Act of 1934, as amended (the "Act"); provided that,
without limiting the foregoing, a Change of Control shall be deemed to have occurred if:
(a) a merger or consolidation of the Corporation or purchase of substantially all of
the Corporation's assets by another "person" or group of "persons" (as such
term is defined or used in Sections 3, 13(d), and 14(D) of the Act) and, as a
result of such merger, consolidation or sale of assets, less than a majority of the
outstanding voting stock of the surviving, resulting or purchasing person is
owned, immediately after the transaction, by the holders of the voting stock of
the Corporation before the transaction;
(b) any "person" as defined above, other than the Corporation, the Executive or
any "person" who on the date hereof is a director or officer of the Corporation,
Execution Copy
November 6, 2001
is or becomes the "beneficial owner" (as defined in Rule 13d-3 and Rule 13d-5,
or any successor rule or regulation, promulgated under the Act), directly or
indirectly, of securities of the Corporation which represent twenty percent
(20%) or more of the combined voting power of the securities of the
Corporation, then outstanding;
(c) during any period of two (2) consecutive years during the term of this
Agreement and any extension thereof, individuals who at the beginning of such
period constitute the Board of Directors of the Corporation cease for any
reason to constitute at least a majority thereof, unless the election of each
director who was not a director at the beginning of such period has been
approved in advance by directors representing at lease seventy-five (75%) of
the directors then in office who were directors at the beginning of the period;
or
(d) any other change of control of the Corporation similar in effect to any of the
foregoing.
4. DEFINITION OF DATE OF CHANGE OF CONTROL. For purposes of this
Agreement, the "Date of Change of Control" shall mean:
(a) the first date on which a single person and/or entity, or group of affiliated
persons and/or entities, acquire the beneficial ownership of twenty (20%)
percent or more of the Corporation's voting securities; or
(b) the date of the transfer of substantially all of the Corporation's assets, or
(c) the date on which a merger, consolidation or business combination is
consummated, as applicable; or
(d) the date on which individuals who formerly constituted a majority of the Board
of Directors of the Corporation under Paragraph 3(c) above, cease to be a
majority.
5. PAYMENTS UPON TERMINATION.
(c) If, during the period of time between the execution of an agreement to effect a
Change of Control( as defined herein) and the Date of the Change of Control
(as defined herein), Executive's employment is terminated for Cause (as
Execution Copy
November 6, 2001
defined herein), all rights of the Executive under this Agreement shall cease as
of the effective date of such termination, except the Executive (i) shall be
entitled to receive accrued salary through the date of such termination and (ii)
shall be entitled to receive the payments and benefits to which he is then
entitled under the employee benefit plans of the Corporation as of the date of
such termination;
(d) If a Change of Control (as defined herein) occurs and one of the following
events occurs, then the Executive shall be entitled to receive a payment of
twenty-four (24) months of his then current Annual Direct Salary (as defined
herein), minus applicable withholdings and taxes and paid on a biweekly basis
on regular bank pay days, beginning on the earliest of the following events:
(i) if, between the execution of the agreement to effect a Change of Control
(as defined herein) and the Date of a Change of Control (as defined
herein), the Executive's employment with the Bank is terminated, other
than for Cause (as defined herein);
(ii) if the Executive is not offered employment by the acquiring person or
entity as of the Date of Change or Control (as defined herein) in a
position having equivalent responsibilities, title, authority, compensation
and benefits as he received immediately prior to the Change of Control
(as defined herein);
(iii) if, between the Date of Change of Control (as defined herein) and twelve
(12) months after the Date of Change of Control (as defined herein), the
Executive is terminated from employment for any reason other than for
Cause (as defined herein), by the acquiring person or entity; or
(iv) if, between three (3) and (6) months after the Date of Change of Control
(as defined herein), the Executive terminates his employment with the
acquiring person or entity, or
(v) if, between the Date of the Change of Control (as defined herein) and
twelve (12) months after the Date of the Change of Control, the
Executive is reassigned to a position that requires him to travel more
than fifty (50) miles from the location of Corporation's principal
executive offices immediately before the Change of Control.
Execution Copy
November 6, 2001
(c.) If a Change of Control (as defined herein) occurs and one of the events set
forth in Paragraph 5(b) occurs, Executive shall receive, in addition to the
salary set forth in 5(b), continued retirement benefits, including profit-sharing
plans, employee stock ownership plans, and pension plans, and healthcare, life
insurance, and disability insurance coverage with the Corporation providing,
on behalf of Executive, the same contribution level toward Executive's
retirement benefits and health care, life insurance and disability insurance
coverage, that is provided for the Executive immediately before the Change of
Control. These contributions shall continue for a period of twenty-four (24)
months, if permitted under the terms and conditions of Corporation's plans
and/or contracts with the insurance providers. If continued participation is not
permitted, Corporation shall pay to Executive the sum which it would have
paid under the retirement plans and/or to the health care and/or life insurance
and/or disability insurance providers for Executive's continued coverage.
(d.) If, at the end of twelve (12) months after the Date of the Change of Control (as
defined herein), none of the events described above in Subparagraphs (b)(i),
(b)(ii), (b)(iii), (b)(iv), or (b)(v) of this Paragraph 5 have occurred, then the
Executive shall no longer be entitled to receive the Payments upon
Termination set forth in Subparagraphs (b) and (c) of this Paragraph 5, and the
Agreement shall thereafter be null and void.
6. ANNUAL DIRECT SALARY. For purposes of this Agreement, Annual Direct
Salary shall be defined as the fixed, gross, base annual salary paid to the Executive at such time
as the Corporation customarily pays its other senior officers and shall not include any benefits,
bonuses, incentives or other compensation.
7. NO EMPLOYMENT CONTRACT. This Agreement is not an employment contract.
Nothing contained herein shall guarantee or assure Executive of continued employment by
Corporation. Rather, Corporation's obligations to Executive hereunder shall arise only if
Executive continues to be employed by Corporation and Bank in his present or in a higher
capacity and, then, only in the event the conditions described herein for payment to Executive
have been met.
8. NOTICE. For the purposes of this Agreement, notices and all other communications
provided for in this Agreement shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States certified mail, return receipt requested, postage
prepaid, addressed as follows:
Execution Copy
November 6, 2001
If to the Executive: Mr. Franklin T. Klink, III
168 East Side Drive
Greencastle, PA 17225
If to the Bank: Mr. Jeff B. Shank
President and CEO
The First National Bank of Greencastle
Center Square
P. O. Box 8
Greencastle, PA 17225-0008
If to the Corporation: Mr. Jeff B. Shank
President and CEO
The First National Bank of Greencastle
Center Square
P. O. Box 8
Greencastle, PA 17225-0008
or to such other address as Executive or Corporation may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be effective only upon
receipt.
9. SUCCESSORS; BINDING AGREEMENT. This Agreement shall inure to the
benefit of and be binding upon the Corporation, Bank and Executive, their respective personal
representatives, heirs, assigns or successors, provided, however, that the Executive may not
commute, anticipate, encumber, dispose or assign any payment herein except as specifically set
forth in Paragraph 12 herein.
10. SEVERABILITY. If any provision of this Agreement is declared unenforceable for
any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
11. WAIVER; AMENDMENT. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to in writing and
signed by Executive and an executive officer specifically designated by the Boards of Directors
of Corporation and Bank. No waiver by either party, at any time, of any breach by the other
party of, or compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. This Agreement may be amended or canceled only by
mutual agreement of the parties in writing.
Execution Copy
November 6, 2001
12. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. In the event of
Executive's death, any monies that may be due him from the Corporation under this Agreement
as of the date of death or thereafter, shall be paid to the person designated by him in writing for
this purpose, or, in the absence of any such designation, to his estate.
13. LIMITATION OF DAMAGES FOR BREACH OF AGREEMENT. In the event of a
breach of this Agreement, by either the Corporation or the Executive, each hereby waives to the
fullest extent permitted by law, the right to assert any claim against the others for punitive or
exemplary damages. In no event shall any party be entitled to the recovery of attorney's fees or
costs.
14. LAW GOVERNING. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, without regard to its conflicts
of law principles. In the event that any party shall institute any suit or other legal proceeding,
whether in law of equity, arising from or relating to this Agreement, the Courts of the
Commonwealth of Pennsylvania shall have exclusive jurisdiction and venue shall lie exclusively
in the Court of Common Pleas of Franklin County, Pennsylvania.
15. EXCESS PARACHUTE PAYMENT. Notwithstanding any other provisions of this
Agreement, Corporation shall be required to pay any monies or benefits pursuant to Paragraph 5
hereof which would be deemed an "Excess Parachute Payment," and thus, non-deductible to the
Bank and/or Corporation under the Internal Revenue Code. In the event that any such payment,
when added to all amounts or benefits provided to or on behalf of the Executive in connection
with his termination of employment, would result in the imposition of an excise tax under Code
Section 4999, such payments shall be reduced (retroactively if necessary) to the extent necessary
to avoid such excise tax imposition. Upon written notice to Executive, together with calculations
of Corporation's independent auditors, Executive shall remit to Corporation, the amount of the
reduction, plus such interest, as may be necessary to avoid the imposition of the excise tax.
16. HEADINGS. This section headings of the Agreement are for convenience only and
shall not control or affect the meaning or construction or limit the scope or intent of any of the
provisions of this Agreement.
17. ENTIRE AGREEMENT. This Agreement supersedes any and all prior agreements,
either oral or in writing, between the parties with respect to payments upon termination after a
Change of Control, and this Agreement contains all the covenants and agreements between the
parties with respect to same.
Execution Copy
November 6, 2001
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have
caused this agreement to be duly executed in their respective names and, in the case of the
Corporation and Bank, by its authorized representatives the day and year above mentioned.
ATTEST: TOWER BANCORP, INC
_______________________________________ By /S/Jeff B. Shank
Jeff B. Shank, President and CEO
ATTEST: THE FIRST NATIONAL BANK OF
GREENCASTLE
_______________________________________ By /S/Jeff B. Shank
Jeff B. Shank, President and CEO
WITNESS: EXECUTIVE:
_______________________________________ By /S/Franklin T. Klink, III
Franklin T. Klink, III
Exhibit 10-2
Execution Copy
November 6, 2001
CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT is made as of this 4th day of January, 2002, among Tower
Bancorp, Inc. Corporation ("Corporation"), a Pennsylvania business corporation having a place
of business at Center Square, Greencastle, Pennsylvania 17255, the First National Bank of
Greencastle ("Bank"), a national banking association having a place of business at Center
Square, Greencastle, Pennsylvania 17225 and Donald G. Kunkle ("Executive"), an individual
residing at 747 Tristan Trail, Chambersburg, Pennsylvania 17201 (collectively the "Parties" and,
individually, sometimes a "Party").
W I T N E S S E T H:
WHEREAS, the Corporation is a registered bank holding company;
WHEREAS, the Bank is a subsidiary of the Corporation;
WHEREAS, any reference to Corporation in this Agreement shall mean Corporation or
Bank;
WHEREAS, the Executive has been employed by the Corporation as Senior Vice
President and Credit Administrator Manager of the Bank and Vice President of Corporation; and
WHEREAS, this Agreement will become operative only upon a Change of Control (as
defined herein): and
WHEREAS, the purpose of this Agreement is to define certain severance benefits that
will be paid by the Corporation in the event of a Change of Control (as defined herein), but is not
intended to affect, nor does it affect, the terms of the Executive's employment at will, in the
absence of a change of control (as defined herein) of the Corporation.
NOW THEREFORE, in consideration of the Executive's service to the Corporation and
of the mutual covenants, undertaking and agreements set forth herein and intending to be legally
bound hereby, the Parties agree as follows:
1. TERM. The term of the Agreement shall be effective as of the day and year written
above, and shall continue until either Executive or Corporation gives the other written notice of
termination of employment, with or without cause. Provided, however, that during the period of
time between the execution of an agreement to effect a Change of Control (as defined herein) and
the Date of Change of Control (a defined herein), termination of the Executive's employment
shall only be for Cause (as defined herein).
Execution Copy
November 6, 2001
2. DEFINITION OF CAUSE. The term "Cause" shall be defined, for purposes of this
Agreement, as the occurrence of one or more of the following: (1) the willful failure by the
Executive to substantially perform his duties hereunder, other than a failure resulting from
Executive's incapacity because of physical or mental illness, after notice from the Corporation,
and a failure to cure such violation within twenty (20) days of said notice; (2) the willful
engaging by the Executive in misconduct injurious to the Corporation; (3) dishonesty or gross
negligence of the Executive in the performance of his duties; (4) Executive's breach of fiduciary
duty involving personal profit; (5) Executive's violation of any law, rule or regulation governing
banks or bank officers or any final cease and desist order issued by a bank regulatory authority;
(6) conduct on the part of Executive which brings public discredit to the Corporation, as
determined by a vote of two-thirds of the disinterested members of the Bank's Board of
Directory; (7) Executive's conviction of or plea of guilty or nolo contender to a felony, crime of
falsehood or a crime involving moral turpitude, or the actual incarceration of Executive for a
period of ten (10) consecutive days or more; (8) Executive's unlawful discrimination, including
harassment, against Corporation's employees, customers, business associates, contractors or
visitors; (9) Executive's theft or abuse of Corporation's property or the property of
Corporation's customers, employees, contractors, vendors or business associates; (10) the
direction or recommendation of a state or federal bank regulatory authority to remove Executive
from his positions with Bank as identified herein, including a final removal or prohibition order
issued by a federal banking agency pursuant to Section 8(e) of the Federal Deposit Insurance
Act; or (11) Executive's willful failure to follow the good faith lawful instructions of the Board
of Directors of Corporation with regard to its operations, after written notice from the
Corporation and a failure to cure such violation within twenty (20) days of said notice.
3. DEFINITION OF CHANGE OF CONTROL. For purposes of this agreement, the
term "Change of Control" shall mean a change of control (other than one occurring by reason of
an acquisition of the Corporation by Executive) of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A or Regulation 14A or any successor rule or regulation
promulgated under the Securities Exchange Act of 1934, as amended (the "Act"); provided that,
without limiting the foregoing, a Change of Control shall be deemed to have occurred if:
(a) a merger or consolidation of the Corporation or purchase of substantially all of
the Corporation's assets by another "person" or group of "persons" (as such
term is defined or used in Sections 3, 13(d), and 14(D) of the Act) and, as a
result of such merger, consolidation or sale of assets, less than a majority of the
outstanding voting stock of the surviving, resulting or purchasing person is
owned, immediately after the transaction, by the holders of the voting stock of
the Corporation before the transaction;
(b) any "person" as defined above, other than the Corporation, the Executive or
any "person" who on the date hereof is a director or officer of the Corporation,
Execution Copy
November 6, 2001
is or becomes the "beneficial owner" (as defined in Rule 13d-3 and Rule 13d-5,
or any successor rule or regulation, promulgated under the Act), directly or
indirectly, of securities of the Corporation which represent twenty percent
(20%) or more of the combined voting power of the securities of the
Corporation, then outstanding;
(c) during any period of two (2) consecutive years during the term of this
Agreement and any extension thereof, individuals who at the beginning of such
period constitute the Board of Directors of the Corporation cease for any
reason to constitute at least a majority thereof, unless the election of each
director who was not a director at the beginning of such period has been
approved in advance by directors representing at lease seventy-five (75%) of
the directors then in office who were directors at the beginning of the period;
or
(d) any other change of control of the Corporation similar in effect to any of the
foregoing.
3. DEFINITION OF DATE OF CHANGE OF CONTROL. For purposes of this
Agreement, the "Date of Change of Control" shall mean:
(a) the first date on which a single person and/or entity, or group of affiliated
persons and/or entities, acquire the beneficial ownership of twenty (20%)
percent or more of the Corporation's voting securities; or
(b) the date of the transfer of substantially all of the Corporation's assets, or
(c) the date on which a merger, consolidation or business combination is
consummated, as applicable; or
(d) the date on which individuals who formerly constituted a majority of the Board
of Directors of the Corporation under Paragraph 3(c) above, cease to be a
majority.
4. PAYMENTS UPON TERMINATION.
(a) If, during the period of time between the execution of an agreement to effect a
Change of Control( as defined herein) and the Date of the Change of Control
(as defined herein), Executive's employment is terminated for Cause (as
Execution Copy
November 6, 2001
defined herein), all rights of the Executive under this Agreement shall cease as
of the effective date of such termination, except the Executive (i) shall be
entitled to receive accrued salary through the date of such termination and (ii)
shall be entitled to receive the payments and benefits to which he is then
entitled under the employee benefit plans of the Corporation as of the date of
such termination;
(b) If a Change of Control (as defined herein) occurs and one of the following
events occurs, then the Executive shall be entitled to receive a payment of
twenty-four (24) months of his then current Annual Direct Salary (as defined
herein), minus applicable withholdings and taxes and paid on a biweekly basis
on regular bank pay days, beginning on the earliest of the following events:
(ii) if, between the execution of the agreement to effect a Change of Control
(as defined herein) and the Date of a Change of Control (as defined
herein), the Executive's employment with the Bank is terminated, other
than for Cause (as defined herein);
(iii) if the Executive is not offered employment by the acquiring person or
entity as of the Date of Change or Control (as defined herein) in a
position having equivalent responsibilities, title, authority, compensation
and benefits as he received immediately prior to the Change of Control
(as defined herein);
(iv) if, between the Date of Change of Control (as defined herein) and twelve
(12) months after the Date of Change of Control (as defined herein), the
Executive is terminated from employment for any reason other than for
Cause (as defined herein), by the acquiring person or entity; or
(v) if, between three (3) and (6) months after the Date of Change of Control
(as defined herein), the Executive terminates his employment with the
acquiring person or entity, or
(vi) if, between the Date of the Change of Control (as defined herein) and
twelve (12) months after the Date of the Change of Control, the
Executive is reassigned to a position that requires him to travel more
than fifty (50) miles from the location of Corporation's principal
executive offices immediately before the Change of Control.
Execution Copy
November 6, 2001
(c) If a Change of Control (as defined herein) occurs and one of the events set
forth in Paragraph 5(b) occurs, Executive shall receive, in addition to the salary
set forth in 5(b), continued retirement benefits, including profit-sharing plans,
employee stock ownership plans, and pension plans, and healthcare, life
insurance, and disability insurance coverage with the Corporation providing,
on behalf of Executive, the same contribution level toward Executive's
retirement benefits and health care, life insurance and disability insurance
coverage, that is provided for the Executive immediately before the Change of
Control. These contributions shall continue for a period of twenty-four (24)
months, if permitted under the terms and conditions of Corporation's plans
and/or contracts with the insurance providers. If continued participation is not
permitted, Corporation shall pay to Executive the sum which it would have
paid under the retirement plans and/or to the health care and/or life insurance
and/or disability insurance providers for Executive's continued coverage.
(d) If, at the end of twelve (12) months after the Date of the Change of Control (as
defined herein), none of the events described above in Subparagraphs (b)(i),
(b)(ii), (b)(iii), (b)(iv), or (b)(v) of this Paragraph 5 have occurred, then the
Executive shall no longer be entitled to receive the Payments upon Termination
set forth n Subparagraphs (b) and (c) of this Paragraph 5, and the Agreement
shall thereafter be null and void.
6. ANNUAL DIRECT SALARY. For purposes of this Agreement, Annual Direct
Salary shall be defined as the fixed, gross, base annual salary paid to the Executive at such time
as the Corporation customarily pays its other senior officers and shall not include any benefits,
bonuses, incentives or other compensation.
7. NO EMPLOYMENT CONTRACT. This Agreement is not an employment contract.
Nothing contained herein shall guarantee or assure Executive of continued employment by
Corporation. Rather, Corporation's obligations to Executive hereunder shall arise only if
Executive continues to be employed by Corporation and Bank in his present or in a higher
capacity and, then, only in the event the conditions described herein for payment to Executive
have been met.
8. NOTICE. For the purposes of this Agreement, notices and all other communications
provided for in this Agreement shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States certified mail, return receipt requested, postage
prepaid, addressed as follows:
Execution Copy
November 6, 2001
If to the Executive: Mr. Donald G. Kunkle
747 Tristan Trail
Chambersburg, PA 17201
If to the Bank: Mr. Jeff B. Shank
President and CEO
The First National Bank of Greencastle
Center Square
P. O. Box 8
Greencastle, PA 17225-0008
If to the Corporation: Mr. Jeff B. Shank
President and CEO
The First National Bank of Greencastle
Center Square
P. O. Box 8
Greencastle, PA 17225-0008
or to such other address as Executive or Corporation may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be effective only upon
receipt.
9. SUCCESSORS; BINDING AGREEMENT. This Agreement shall inure to the
benefit of and be binding upon the Corporation, Bank and Executive, their respective personal
representatives, heirs, assigns or successors, provided, however, that the Executive may not
commute, anticipate, encumber, dispose or assign any payment herein except as specifically set
forth in Paragraph 12 herein.
10. SEVERABILITY. If any provision of this Agreement is declared unenforceable for
any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
11. WAIVER; AMENDMENT. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to in writing and
signed by Executive and an executive officer specifically designated by the Boards of Directors
of Corporation and Bank. No waiver by either party, at any time, of any breach by the other
party of, or compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. This Agreement may be amended or canceled only by
mutual agreement of the parties in writing.
Execution Copy
November 6, 2001
12. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. In the event of
Executive's death, any monies that may be due him from the Corporation under this Agreement
as of the date of death or thereafter, shall be paid to the person designated by him in writing for
this purpose, or, in the absence of any such designation, to his estate.
13. LIMITATION OF DAMAGES FOR BREACH OF AGREEMENT. In the event of a
breach of this Agreement, by either the Corporation or the Executive, each hereby waives to the
fullest extent permitted by law, the right to assert any claim against the others for punitive or
exemplary damages. In no event shall any party be entitled to the recovery of attorney's fees or
costs.
14. LAW GOVERNING. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, without regard to its conflicts
of law principles. In the event that any party shall institute any suit or other legal proceeding,
whether in law of equity, arising from or relating to this Agreement, the Courts of the
Commonwealth of Pennsylvania shall have exclusive jurisdiction and venue shall lie exclusively
in the Court of Common Pleas of Franklin County, Pennsylvania.
15. EXCESS PARACHUTE PAYMENT. Notwithstanding any other provisions of this
Agreement, Corporation shall be required to pay any monies or benefits pursuant to Paragraph 5
hereof which would be deemed an "Excess Parachute Payment," and thus, non-deductible to the
Bank and/or Corporation under the Internal Revenue Code. In the event that any such payment,
when added to all amounts or benefits provided to or on behalf of the Executive in connection
with his termination of employment, would result in the imposition of an excise tax under Code
Section 4999, such payments shall be reduced (retroactively if necessary) to the extent necessary
to avoid such excise tax imposition. Upon written notice to Executive, together with calculations
of Corporation's independent auditors, Executive shall remit to Corporation, the amount of the
reduction, plus such interest, as may be necessary to avoid the imposition of the excise tax.
16. HEADINGS. This section headings of the Agreement are for convenience only and
shall not control or affect the meaning or construction or limit the scope or intent of any of the
provisions of this Agreement.
17. ENTIRE AGREEMENT. This Agreement supersedes any and all prior agreements,
either oral or in writing, between the parties with respect to payments upon termination after a
Change of Control, and this Agreement contains all the covenants and agreements between the
parties with respect to same.
Execution Copy
November 6, 2001
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have
caused this agreement to be duly executed in their respective names and, in the case of the
Corporation and Bank, by its authorized representatives the day and year above mentioned.
ATTEST: TOWER BANCORP, INC
_______________________________________ By /S/Jeff B. Shank
Jeff B. Shank, President and CEO
ATTEST: THE FIRST NATIONAL BANK OF
GREENCASTLE
_______________________________________ By /S/Jeff B. Shank
Jeff B. Shank, President and CEO
WITNESS: EXECUTIVE:
_______________________________________ By /S/Donald G. Kunkle
Donald G. Kunkle
Exhibit 13
Tower Bancorp, Inc.
2001 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 - 24
SELECTED FIVE-YEAR FINANCIAL DATA 25
SUMMARY OF QUARTERLY FINANCIAL DATA 26
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY 27
CHANGES IN NET INTEREST INCOME-TAX EQUIVALENT YIELDS 28
MATURITIES OF INVESTMENT SECURITIES 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 30 - 35
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three
years ended December 31, 2001 in conformity with accounting principles generally accepted in the United
States of America.
/S/Smith Elliott Kearns & Company, LLC
Chambersburg, Pennsylvania
January 23, 2002
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
2001
2000
(000 omitted)
ASSETS
Cash and due from banks
$ 8,080
$ 5,115
Interest bearing deposits with banks
2,717
4,450
Investment Securities
Available for sale
55,601
56,927
Restricted Bank stock; at cost which approximates fair value
3,404
3,095
Loans
Commercial, financial and agricultural
33,606
20,903
Real estate - Mortgages (net of deferred loan origination fees;
$ 411 - 2001; $ 295 - 2000)
111,709
104,838
Real estate - Construction and land development
6,029
4,827
Consumer
16,333
17,002
167,677
147,570
Less: Allowance for loan losses
1,577
1,586
Total loans
166,100
145,984
Premises, equipment, furniture and fixtures
2,973
3,066
Real estate owned other than premises
624
441
Prepaid federal taxes
51
210
Accrued interest receivable
1,196
1,344
Deferred income tax charges
0
16
Cash surrender value of life insurance
4,047
3,121
Other assets
781
743
Total assets
$ 245,574
$ 224,512
The Notes to Consolidated Financial Statements are an integral part of these statements.
- -2-
2001
2000
(000 omitted)
LIABILITIES
Deposits in domestic offices
Demand, noninterest bearing
$ 13,328
$ 16,359
Savings
87,204
86,444
Time
77,067
74,194
Total deposits
177,599
176,997
Accrued interest payable
429
515
Deferred income tax charges
110
0
Liabilities for other borrowed funds
37,341
18,864
Other liabilities
1,577
1,460
Total liabilities
217,056
197,836
STOCKHOLDERS' EQUITY
Stockholders' equity
Common Stock: no par value, authorized 5,000,000 shares, issued
1,780,100 shares
2,225
2,225
Additional paid-in capital
6,707
6,705
Retained earnings
19,604
17,568
Accumulated other comprehensive income
863
834
29,399
27,332
Less: Cost of treasury stock, 32,790 shares - 2001;
23,594 shares - 2000
( 881)
( 656)
Total stockholders' equity
28,518
26,676
Total liabilities and stockholders' equity
$ 245,574
$ 224,512
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
(000 omitted)
Interest and Dividend Income
Interest and fees on loans $ 13,380 $ 11,945 $ 10,374
Interest and dividends on investment securities
Taxable 1,852 2,398 2,184
Federal tax exempt 1,034 793 667
Interest on federal funds sold 27 0 85
Interest on deposits with banks 217 387 338
Total interest income 16,510 15,523 13,648
Interest Expense
Interest on time certificates of deposit of
$ 100,000 or more 1,192 962 763
Interest on other deposits 4,647 4,941 4,363
Interest on federal funds purchased and other borrowed funds 1,149 1,392 953
Total interest expense 6,988 7,295 6,079
Net interest income 9,522 8,228 7,569
Provision for loan losses 120 0 0
Net interest income after provision
for loan losses 9,402 8,228 7,569
Other Income
Investment services income 191 671 563
Service charges on deposit accounts 519 335 291
Other service charges, collection and exchange
charges, commissions and fees 305 316 388
Investment securities gains 1,761 974 1,453
Gain on trust services affiliation 0 1,078 0
Gain on sale of property and equipment 0 5 0
Proceeds from director's life insurance 0 0 127
Other income 161 236 0
2,937 3,615 2,822
Other Expenses
Salaries, wages and other employee benefits 3,211 3,026 2,922
Occupancy expense 354 356 330
Furniture and equipment expenses 1,273 1,037 922
Other operating expenses 1,864 1,842 1,767
6,702 6,261 5,941
Income before income taxes 5,637 5,582 4,450
Applicable income tax expense 1,636 1,489 1,247
Net income $ 4,001 $ 4,093 $ 3,203
Earnings per share:
Basic earnings per share $ 2.29 $ 2.32 $ 1.82
Weighted average shares outstanding 1,745,847 1,761,699 1,763,548
Diluted earnings per share $ 2.26 $ 2.30 $ 1.80
Weighted average shares outstanding 1,770,949 1,781,647 1,779,596
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, 2001, 2000 and 1999
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Treasury Stockholders'
Stock Capital Earnings Income (Loss) Stock Equity
(000 omitted)
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
Comprehensive income:
Net income 0 0 4,001 0 0 4,001
Net unrealized gain on
available for sale
securities (net of tax
$ 15) 0 0 0 29 0 29
Total comprehensive income 4,030
Cash dividends declared
on common stock ($ 1.12
per share) 0 0 ( 1,965) 0 0 ( 1,965)
Purchase of treasury stock
(19,024 shares) 0 0 0 0 ( 423) ( 423)
Sale of treasury stock
(9,828 shares) 0 2 0 0 198 ____200
Balance at December 31, 2001 $ 2,225 $ 6,707 $ 19,604 $ 863 ($ 881) $ 28,518
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, 2001, 2000 and 1999
2001 2000 1999
(000 omitted)
Cash flows from operating activities:
Net income $ 4,001 $ 4,093 $ 3,203
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 438 413 385
(Gain) on sale of investment securities ( 1,761) ( 974) ( 1,453)
(Gain) on trust services affiliation 0 ( 1,078) 0
Provision for deferred taxes 111 274 8
(Increase) decrease in:
Other assets ( 38) ( 33) 310
Interest receivable 148 ( 207) ( 153)
Prepaid income taxes 159 5 ( 175)
Increase (decrease) in:
Interest payable ( 86) 130 ( 16)
Other liabilities 117 ( 147) 185
Net cash provided by operating activities 3,089 2,476 2,294
Cash flows from investing activities:
Net (increase) in loans ( 20,116) ( 15,943) ( 8,241)
Purchases of property and equipment ( 528) ( 261) ( 683)
Proceeds from the sale of other real estate 0 0 121
Net (increase) decrease in interest bearing deposits
with banks 1,733 1,765 ( 16)
Maturity/sales of available for sale securities 22,880 11,763 10,758
Purchases of available for sale securities ( 19,468) ( 11,207) ( 18,451)
Purchase of Federal Home Loan Bank stock ( 588) ( 316) ( 403)
Purchase of Citigroup Capital Preferred 0 0 ( 500)
Purchase of life insurance policies ( 926) ( 226) ( 2,895)
Net cash (used) by investing activities ( 17,013) ( 14,425) ( 20,310)
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, 2001, 2000 and 1999
2001 2000 1999
(000 omitted)
Cash flows from financing activities:
Net increase in deposits $ 602 $ 17,275 $ 17,258
Net (decrease) increase in borrowings 18,475 ( 4,161) 2,526
Purchase of treasury stock ( 423) ( 162) ( 271)
Proceeds from sale of treasury stock 200 36 162
Cash dividends paid ( 1,965) ( 986) ( 1,711)
Net cash provided by financing activities 16,889 12,002 17,964
Net increase (decrease) in cash and cash equivalents 2,965 53 ( 52)
Cash and cash equivalents at beginning of year 5,115 5,062 5,114
Cash and cash equivalents at end of year $ 8,080 $ 5,115 $ 5,062
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 7,074 $ 7,165 $ 6,095
Income taxes 1,576 1,418 1,421
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain (loss) on securities available for sale (net
of tax effects) $ 29 $ 1,559 ($ 1,799)
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 seven offices are located in
Greencastle, Quincy, Shady Grove, Laurich, Waynesboro, Chambersburg 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 2001 or 2000.
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 15-40
Equipment, furniture and fixtures 3-15
Repairs and maintenance are charged to operations as incurred.
Foreclosed Property
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 Corporation'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 Corporation 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 Corporation. The Corporation'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.
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 details.
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 Corporation'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 Corporation generally does not charge commitment fees.
Fees for standby letters of credit and their off-balance-sheet instruments are not significant.
Advertising
The Corporation expenses advertising costs as they are incurred. Advertising expense for the years
ended December 31, 2001, 2000 and 1999 was $ 250,101, $ 235,621 and $ 247,368, 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:
2001
2000
1999
Gross unrealized holding gains (losses) arising
during the year
$ 1,805
$ 3,336
($ 4,178)
Reclassification adjustment for gains realized in net
Income
( 1,761)
( 974)
1,453
Net unrealized holding gains (losses) before taxes
44
2,362
( 2,725)
Tax effect
( 15)
( 803)
926
Net change
$ 29
$ 1,559
($ 1,799)
Note 2. Investment Securities
The investment securities portfolio is comprised of securities classified as available for sale at
December 31, 2001 and 2000, 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:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
(000 omitted)
2001
U.S. Treasury Securities
$ 100
$ 3
$ 0
$ 103
Obligations of other U.S.
government agencies
6,517
80
4
6,593
Mortgage-backed securities
9,301
86
45
9,342
Corporate bonds
2,884
47
145
2,786
Equities
12,218
1,318
170
13,366
Obligations of state and
political subdivisions
23,273
321
183
23,411
$ 54,293
$ 1,855
$ 547
$ 55,601
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
The fair values of investment securities available for sale at December 31, 2001, 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
$ 710
$ 718
Due after one year through five years
3,043
3,097
Due after five years through ten years
7,462
7,568
Due after ten years
21,559
21,510
32,774
32,893
Mortgage-backed securities
9,301
9,342
Equity securities
12,218
13,366
$ 54,293
$ 55,601
- -12-
Note 2. Investment Securities (Continued)
Proceeds from sales and maturities of investment securities available for sale during 2001, 2000,
and 1999 were $ 22,880,000, $ 11,763,000, and $ 10,758,000, respectively. Gross realized gains
and losses on those sales and maturities were $ 1,762,000 and $ 1,000 for 2001, $ 1,003,000 and
$ 29,000 for 2000, and $ 1,454,000 and $ 1,000 for 1999, respectively.
Securities carried at $ 24,977,000 and $ 20,229,000 at December 31, 2001 and 2000, 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:
2001
2000
(000 omitted)
Federal Reserve Bank stock
$ 81
$ 81
Federal Home Loan Bank stock
1,778
1,469
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
$ 3,404
$ 3,095
Note 3. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
2001
2000
1999
(000 omitted)
Balance at beginning of period
$ 1,586
$ 1,719
$ 1,890
Recoveries
63
20
45
Provision for possible loan losses charged to income
120
0
0
Total
1,769
1,739
1,935
Losses
192
153
216
Balance at end of period
$ 1,577
$ 1,586
$ 1,719
Note 4. Premises, Equipment, Furniture and Fixtures
Cost
Accumulated
Depreciation
Depreciated
Cost
(000 omitted)
- - - - - - - - - - - - - - - - 2001 - - - - - - - - - - - - - - -
Premises (including land $ 442)
$ 4,230
$ 1,853
$ 2,377
Equipment, furniture and fixtures
2,575
1,979
596
Totals, December 31, 2001
$ 6,805
$ 3,832
$ 2,973
- - - - - - - - - - - - - - - - 2000 - - - - - - - - - - - - - - -
Premises (including land $ 442)
$ 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
Depreciation expense amounted to $ 438,920 in 2001, $ 413,000 in 2000, and $ 385,000 in 1999.
- -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 $ 623,399, $ 440,707, and $ 445,647 at December 31, 2001, 2000 and
1999, respectively.
Note 6. Loans
Related Party Loans
The company's subsidiary has granted loans to the officers and directors of the company and its
subsidiary and to their associates. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for comparable transactions
with unrelated persons and do not involve more than normal risk of collectibility. The aggregate
dollar amount of these loans was $ 2,546,044 and $ 1,720,509 at December 31, 2001 and 2000,
respectively. During 2001, $ 1,025,186 of new loans were made and repayments totaled $ 199,651.
Outstanding loans to bank employees totaled $ 1,958,283 and $ 1,704,848 at December 31, 2001
and 2000, respectively. During 2001, $ 1,295,108 of new loans were made and repayments totaled
$ 1,041,673.
Loan Maturities
The following table shows the maturities and sensitivities of loans to changes in interest rates based
upon contractual maturities and terms as of December 31, 2001.
Due within
one year
Due over 1
but within
5 years
Due over 5
years
Nonaccruing
loans
Total
(000 omitted)
Loans at predeter-
mined interest
rates
$ 20,993
$ 38,134
$ 42,701
$ 49
$ 101,877
Loans at floating or
adjustable
interest rates
12,801
9,094
43,890
15
65,800
Total (1)
$ 33,794
$ 47,228
$ 86,591
$ 64
$ 167,677
(1) These amounts have not been reduced by the allowance for possible loan losses.
Note 7. Financial Instruments With Off-Balance-Sheet Risk
The Corporation 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 Corporation has in particular classes of
financial instruments.
- -14-
Note 7. Financial Instruments With Off-Balance-Sheet Risk (Continued)
The Corporation'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 Corporation
uses the same credit policies in making commitments and conditional obligations as it does for on
balance sheet instruments.
Contract or Notional Amount
2001
2000
Financial instruments whose contract amounts represent credit
risk at December 31:
Commitments to extend credit
$ 19,801,447
$ 21,968,438
Standby letters of credit and financial guarantees
written
1,693,602
1,728,944
$ 21,495,049
$ 23,697,382
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 Corporation evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation
upon extension of credit, is based on management's credit evaluation of the customer. Collateral
held varies, but may include accounts receivable, inventory, real estate, equipment, and income-
producing commercial properties.
Standby letters of credit and financial guarantees written are conditional commitments issued by the
Corporation 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 Corporation 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:
2001
2000
1999
Nonaccrual loans
$ 64,170
$ 63,187
$ 459,702
Interest income that would have been accrued at
original contract rates
$ 7,183
$ 1,861
$ 44,439
Amount recognized as interest income
762
82
18,054
Foregone revenue
$ 6,421
$ 1,779
$ 26,385
The Corporation had no impairment of loans in 2001, 2000, and 1999.
- -15-
Note 9. Retirement Plan
The Corporation maintains a money purchase retirement plan for those employees who meet the
eligibility requirements set forth in the plan. Substantially all of the Corporation's employees are
covered by the plan. The Corporation's funding policy is to contribute annually an amount, as
determined under plan provisions, necessary to meet the minimum funding standards established by
the plan. Contributions charged to operations were $ 70,000 for 2001, $ 45,000 for 2000, and
$ 62,000 for 1999.
Note 10. Employee Benefit Plans
The Corporation 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 Corporation performance
and are at the discretion of the Corporation's Board of Directors. Substantially all of the
Corporation's employees are covered by the plan and the contribution charged to operations was
$ 94,000, $ 90,000, and $ 81,000 for 2001, 2000 and 1999, respectively.
The Corporation 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 $ 828,000 and
$ 894,000 at December 31, 2001 and 2000, respectively. Annual expense of $ 110,000, $ 118,000
and $ 100,000 was charged to operations for 2001, 2000 and, 1999, respectively.
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 $ 182,219, $ 200,755, and
$ 222,178 as of December 31, 2001, 2000 and 1999, respectively. The Corporation recorded a gain
on life insurance proceeds of $ 127,338 which is reflected in other income for 1999.
During 1999 the Corporation adopted a supplemental group term retirement plan which covers all
officers of the Corporation. 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 Corporation.
The estimated present value of the future benefits to be paid totaled $ 8,283 and $ 3,342 at
December 31, 2001 and 2000, respectively. Total annual expense for this plan was $ 5,491, $ 4,941
and $ 3,342 for 2001, 2000, and 1999, respectively.
The Corporation 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 $ 94,000, $ 90,000 and $ 162,000 for 2001, 2000 and 1999, 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 80,421 and 73,611 at December 31, 2001 and 2000, respectively.
- -16-
Note 11. Stock Option Plans
In 1996 the Corporation implemented two nonqualified stock option plans, which are described
below. The compensation cost that has been charged against income for those plans was $ 29,555,
$ 29,201, and $ 28,870 for 2001, 2000 and 1999, respectively.
The first plan is for select key employees. This plan granted options for up to 1,374 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 5,154, 3,900, and 4,080
shares for each director at $ 20.125, $ 24.375, and $ 32.125 per share for the years ended
December 31, 2001, 2000 and 1999, 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, 2001 the range of exercise
prices were from $ 20.02 to $ 23.88 per share.
A summary of the status of the Corporation's two fixed stock option plans as of December 31, 2001
is as follows:
Fixed Options
Shares
Weighted
Average
Exercise Price
Per Share
Outstanding at beginning of year
19,948
$ 22
Granted
6,528
16
Exercised
1,374
1
Forfeited/expired
0
0
Outstanding at end of year
25,102
$ 21
Options exercisable at year end
19,948
Weighted average fair value of
options per share granted
during the year
$ 4.53
Outstanding options at December 31, 2001 consist of the following:
Shares
Outstanding
Shares
Exercisable
Remaining
Contractual Life
Exercise
Price
4,297
3,438
1 year
$ 21.07
2,720
2,720
5 years
11.91
3,570
3,570
6 years
16.19
3,570
3,570
7 years
22.25
3,400
3,400
8 years
32.13
3,250
3,250
9 years
24.37
4,295
0
10 years
20.13
Total/Average
25,102
19,948
8 years
$ 21.07
- -17-
Note 11. Stock Option Plans (Continued)
The Corporation applies APB Opinion 25 and related Interpretations in accounting for the stock
option plan. Accordingly, no compensation cost has been recognized. Had compensation cost for
the Corporation's stock option plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the method prescribed by FASB Statement No. 123, the
Corporation's net income and earnings per share would have been adjusted to the pro forma
amounts indicated below:
2001
2000
1999
Net income (000 omitted)
As reported
$ 4,001
$ 4,093
$ 3,203
Pro forma
3,986
4,077
3,172
Earnings per share
As reported
2.29
2.32
1.82
Pro forma
2.28
2.31
1.80
Earnings per share assuming
dilution
As reported
2.26
2.30
1.80
Pro forma
2.25
2.29
1.78
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions.
2001
2000
1999
Dividend yield
3%
2.3%
1.8%
Expected life
8
8
8
Expected volatility
20.06
13.97
23.49
Risk-free interest rate
5.33
5.60
6.82
Note 12. Deposits
Included in savings deposits at December 31 are NOW and Money Market Account balances
totaling$ 51,979,000 and $ 57,039,000 for 2001 and 2000, respectively.
Time deposits of $ 100,000 and over aggregated $ 21,975,890 and $ 19,509,560 at December 31,
2001 and 2000, respectively. The following is a breakdown of maturities of these deposits as of
December 31, 2001.
At December 31, 2001 the scheduled maturities of time deposits of $ 100,000 and over are as
follows:
2001
2000
(000 omitted)
Three months or less
$ 5,090
$ 4,625
Over three months through
twelve months
13,666
10,030
Over twelve months
3,220
4,855
$ 21,976
$ 19,510
- -18-
Note 12. Deposits (Continued)
At December 31, 2001 scheduled maturities of time deposits are as follows:
2002
$ 55,652,263
2003
13,341,843
2004
2,595,126
2005
846,903
2006
4,630,865
$ 77,067,000
The aggregate amount of demand deposits reclassified as loan balances were $ 651,740 and
$ 573,400 at December 31, 2001 and 2000, respectively.
The Corporation accepts deposits of the officers, directors, and employees 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
$ 1,638,199 and $ 1,743,191 at December 31, 2001 and 2000, 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, 2001 and 2000, $ 1,479,000 and $ 1,169,000, respectively, of other borrowed
funds represents the outstanding balance on lines of credit at other area banks. Total amount of the
lines at December 31, 2001 and 2000 was $ 2,800,000 and $ 2,800,000, respectively. Interest on
these lines ranged from 4.50% to 9.25% for 2001 and 2000.
In addition, $ 299,680 and $ 288,377 of the balance of liabilities for other borrowed funds at
December 31, 2001 and 2000, respectively, represents the balance of the Treasury Tax and Loan
Investment Program. The Corporation elected to enter into this program in accordance with federal
regulations. This program permits the Corporation 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 $ 1,256,950 and $ 1,006,950 at December 31,
2001 and 2000, respectively.
The Corporation also had the following borrowings from the Federal Home Loan Bank:
2001
2000
Loan Type
Interest
Rate
Balance
Interest
Rate
Balance
Maturity
Convertible
5.25
$ 5,000,000
0
$ 0
04/06/11
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
09/15/08
Line of credit (1)
1.88
15,561,600
6.63
2,407,000
02/27/02
(1) Total amount available under this line is $ 4,438,400 and $ 17,593,000 at December 31, 2001
and 2000.
Total maximum borrowing capacity from Federal Home Loan Bank at December 31, 2001 was
$ 85,636,000.
Collateral for borrowings consists of certain securities and the Corporation's 1-4 family mortgage
loans totaling approximately $ 86 million at December 31, 2001.
- -19-
Note 14. Income Taxes
The components of federal income tax expense are summarized as follows:
2001
2000
1999
(000 omitted)
Current year provision:
Federal
$ 1,378
$ 1,149
$ 1,074
State
147
66
161
Deferred income taxes (benefit)
111
274
12
$ 1,636
$ 1,489
$ 1,247
Federal income taxes were computed after reducing pretax accounting income for non-taxable
income in the amount of $ 1,321,372, $ 1,018,310, and $ 871,583 for 2001, 2000 and 1999,
respectively.
A reconciliation of the effective applicable income tax rate to the federal statutory rate is as
follows:
2001
2000
1999
Federal income tax rate
34.0%
34.0%
34.0%
Increase resulting from:
State taxes, net of federal tax benefit
2.6
1.2
3.6
Reduction resulting from:
Nontaxable interest income
7.6
8.5
9.5
Effective income tax rate
29.0%
26.7%
28.1%
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:
2001
2000
Total deferred tax assets
$ 702
$ 1,094
Total deferred tax liabilities
( 812)
( 1,078)
Net deferred tax (liability) assets
($ 110)
$ 16
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.
- -20-
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 Sheet
December 31
Assets
2001
2000
(000 omitted)
Cash
$ 2
$ 0
Securities available for sale
13,366
13,266
Investment in The First National Bank of Greencastle
19,840
17,769
Total assets
$ 33,208
$ 31,035
Liabilities
Other liabilities
$ 1,211
$ 1,390
Notes payable - subsidiary
2,000
1,800
Notes payable - other
1,479
1,169
Total liabilities
4,690
4,359
Stockholders' Equity
Common stock, no par value; authorized 5,000,000 shares, issued
1,780,100 shares
2,225
2,225
Additional paid-in capital
6,707
6,705
Retained earnings
19,604
17,568
Accumulated other comprehensive income
863
834
29,399
27,332
Less: Cost of Treasury stock, 32,790 shares - 2001;
23,594 shares - 2000
( 881)
( 656)
Total stockholders' equity
28,518
26,676
Total liabilities and stockholders' equity
$ 33,208
$ 31,035
Statement of Income
Years Ended December 31
2001
2000
1999
(000 omitted)
Income
Dividends
$ 305
$ 285
$ 260
Net gain on sale of securities
1,756
980
1,440
Cash dividends from wholly-owned subsidiary
1,965
1,905
1,829
Miscellaneous
19
0
0
4,045
3,170
3,529
Expenses
Interest
193
288
209
Taxes
478
262
538
Postage and printing
33
20
14
Meetings
0
0
3
Management fees
102
100
100
Professional fees
212
104
133
Other expenses
9
23
0
1027
797
997
Income before equity in undistributed income
3,018
2,373
2,532
Equity in undistributed income of subsidiary
983
1,720
671
Net Income
$ 4,001
$ 4,093
$ 3,203
- -21-
Note 15. Tower Bancorp Inc. (Parent Company Only) Financial Information (Continued)
Statements of Cash Flows
Years Ended December 31
2001
2000
1999
(000 omitted)
Cash flows operating activities:
Net income
$ 4,001
$ 4,093
$ 3,203
Adjustments to reconcile net income to cash provided by
operating activities:
Net gain on sale of investment securities
( 1,756)
( 980)
( 1,440)
(Gain) on trust services affiliation
0
( 1,078)
0
Equity in undistributed income of subsidiary
( 983)
( 1,720)
( 671)
Increase in accrued expenses
( 965)
385
159
Net cash provided by operating activities
297
700
1,251
Cash flows from investing activities:
Purchase of investment securities
( 2,769)
( 1,759)
( 3,995)
Sales of investment securities
4,154
2,813
3,506
Net cash provided (used) by investing activities
1,385
1,054
( 489)
Cash flows from financing activities:
Purchase of treasury stock
( 423)
( 162)
( 271)
Proceeds from sale of treasury stock
200
36
162
Dividends paid
( 1,965)
( 986)
( 1,711)
Net proceeds (payments) on/from borrowing
508
( 642)
1,058
Net cash (used) by financing activities
( 1,680)
( 1,754)
( 762)
Net increase (decrease) in cash
2
0
0
Cash, beginning
0
0
0
Cash, ending
$ 2
$ 0
$ 0
Note 16. Compensating Balance Arrangements
Included in cash and due from banks are required deposit balances at the Federal Reserve of
$ 615,000 and $ 100,000 at December 31, 2001 and 2000, respectively, required deposit balances at
Atlantic Central Banker's Bank of $ 515,000 at December 31, 2001 and required deposit balances at
Equifax of $ 28,124 and $ 29,462 at December 31, 2001 and 2000, respectively. These are
maintained to cover processing costs and service charges.
Note 17. Concentration of Credit Risk
The Corporation grants agribusiness, commercial and residential loans to customers throughout the
Cumberland Valley area. The Corporation 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 Corporation 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 Corporation 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.
- -22-
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 2001, 2000 and 1999.
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 2001, 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, 2001:
Year Ending
2002
$ 31,200
2003
31,200
2004
22,200
2005
22,200
2006
22,200
$ 129,000
Note 19. Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial instruments were as follows at
December 31:
- - - - - - - 2001 - - - - - -
- - - - - - - 2000 - - - - - -
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
FINANCIAL ASSETS
Cash and due from banks
$ 8,080
$ 8,080
$ 5,115
$ 5,115
Interest bearing deposits with banks
2,717
2,717
4,450
4,450
Securities available for sale
55,601
55,601
56,927
56,927
Loans receivable
167,677
170,549
147,570
146,658
Accrued interest receivable
1,196
1,196
1,344
1,344
Other bank stock
3,404
3,404
3,095
3,095
FINANCIAL LIABILITIES
Time certificates
77,067
77,580
74,194
73,964
Other deposits
100,532
100,532
102,803
102,803
Short-term borrowed funds
37,041
37,399
18,864
18,959
Accrued interest payable
429
429
515
515
Note 20. Regulatory Matters
Dividends paid by Tower Bancorp Inc. are generally provided from the subsidiary 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 $ 8,050,411 and
$ 6,813,873 for 2001 and 2000, respectively.
- -23-
Note 20. Regulatory Matters
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
Requirements
2001
2000
Leverage ratio
11.61%
11.88%
3%
Risk-based capital ratio
Tier I (core capital)
16.96%
21.90%
4%
Combined Tier I and Tier II (core capital
plus allowance for loan losses)
18.24%
23.18%
8%
As of December 31, 2001 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.
- -24-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA
2001
2000
1999
1998
1997
Income (000 omitted)
Interest income
$ 16,510
$ 15,523
$ 13,648
$ 12,548
$ 11,977
Interest expense
6,988
7,295
6,079
5,342
5,167
Provision for loan losses
120
0
0
0
0
Net interest income after provision
for loan losses
9,522
8,228
7,569
7,206
6,810
Other operating income
2,937
3,615
2,822
2,082
1,390
Other operating expenses
6,702
6,261
5,941
5,133
4,396
Income before income taxes
5,637
5,582
4,450
4,155
3,804
Applicable income tax
1,636
1,489
1,247
1,246
1,110
Net income
$ 4,001
$ 4,093
$ 3,203
$ 2,909
$ 2,694
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.
2001 - 1,745,847
1999 - 1,763,548
1997 - 1,765,056
2000 - 1,761,699
1998 - 1,732,479
Net income
$ 2.29
$ 2.32
$ 1.82
$ 1.68
$ 1.53
Cash dividend paid
1.12
.56
.97
.43
.38
Book value
16.33
15.14
12.56
13.02
11.58
Year-End Balance Sheet Figures
(000 omitted)
2001
2000
1999
1998
1997
Total assets
$ 245,574
$ 224,512
$ 206,874
$ 187,335
$ 159,935
Net loans
166,100
145,984
130,041
121,800
102,388
Total investment securities
59,005
60,022
55,846
48,517
42,217
Deposits - noninterest bearing
13,328
16,359
13,746
11,346
9,651
Deposits - interest bearing
164,271
160,638
145,978
131,120
123,133
Total deposits
177,599
176,997
159,724
142,466
132,784
Total stockholders' equity
28,518
26,676
22,136
22,552
20,433
Ratios
Average equity/average assets
11.96
10.96
11.42
12.72
12.25
Return on average equity
14.40
17.17
14.09
13.54
14.17
Return on average assets
1.72
1.88
1.63
1.72
1.74
- -25-
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, 2001 and 2000 are as
follows:
2001
2000
($ 000 omitted except
per share)
- - - - - - - - - - Quarter Ended - - - - - - - - -
- - - - - - - - - - - Quarter Ended - - - - - - - -
- - -
Mar. 31
June 30
Sept. 30
Dec. 31
Mar. 31
June 30
Sept. 30
Dec. 31
Interest income
$ 4,097
$ 4,219
$ 4,225
$ 3,969
$ 3,699
$ 3,824
$ 4,035
$ 3,965
Interest expense
1,902
1,839
1,785
1,462
1,703
1,790
1,934
1,868
Net interest income
2,195
2,380
2,440
2,507
1,996
2,034
2,101
2,097
Provision for loan losses
30
30
30
30
0
0
0
0
Net interest income
after provision
for loan losses
2,165
2,350
2,410
2,477
1,996
2,034
2,101
2,097
Other income
1,012
624
1,059
242
767
669
698
1,481
Other expenses
1,700
1,763
1,821
1,418
1,603
1,548
1,636
1,474
Operating income
before income
taxes
1,477
1,211
1,648
1,301
1,160
1,155
1,163
2,104
Applicable income taxes
369
307
435
525
303
282
297
607
Net income
$ 1,108
$ 904
$ 1,213
$ 776
$ 857
$ 873
$ 866
$ 1,497
Net income applicable to
common stock
Per share data:
Net income
$ .63
$ .51
$ .69
$ .46
$ .49
$ .50
$ .49
$ .84
- -26-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Rates and Interest Differential Tax Equivalent Yields
Years Ended December 31
Average
Balance
Interest
Rate
Average
Balance
Interest
Rate
Average
Balance
Interest
Rate
- - - - - - - - - - - - 2001 - - - - - - - - - - -
- - - - - - - - - - - - 2000 - - - - - - - - - -
- - - - - - - - - - - 1999 - - - - - - - - -
(000 omitted)
(000 omitted)
(000 omitted)
Assets
Investment Securities:
Taxable interest income
$ 21,973
$ 1,852
8.4%
$ 25,767
$ 2,101
8.2%
$ 24,679
$ 1,924
6.5%
Nontaxable interest
income
20,060
1,034
5.2%
15,673
793
5.1%
12,860
667
5.2%
Total investment
securities
42,033
2,886
6.9%
41,440
2,894
7.0%
37,539
2,591
5.9%
Loans (net of unearned
discounts)
158,570
13,380
8.4%
140,788
11,945
8.5%
127,202
10,374
8.2%
Other short-term
investments
20,957
244
1.3%
22,700
684
3.0%
24,098
683
6.2%
Total interest earning
assets
221,560
$ 16,510
7.5%
204,928
$ 15,523
7.6%
188,839
$ 13,648
7.6%
Allowance for loan losses
( 1,581)
( 1,652)
( 1,804)
Cash and due from banks
6,598
5,088
5,088
Bank premises and
equipment
3,020
3,140
3,061
Other assets
2,683
5,946
3,885
Total assets
$ 232,280
$ 217,450
$ 199,069
Liabilities and Stockholders' Equity
Interest bearing demand
deposits
$ 63,422
$ 1,254
2.0%
$ 52,740
$ 1,230
2.3%
$ 47,140
$ 975
2.1%
Savings deposits
24,828
541
2.2%
30,139
1,004
3.3%
32,965
1,040
3.2%
Time deposits
77,054
4,044
5.2%
69,006
3,669
5.3%
63,410
3,111
4.9%
Short-term borrowings
24,990
1,149
4,6%
26,077
1,392
5.3%
18,923
953
5.1%
Total interest bearing
liabilities
190,294
$ 6,988
3.7%
177,962
$ 7,295
4.1%
162,438
$ 6,079
3.6%
Demand deposits
12,840
13,857
11,206
Other liabilities
1,365
1,225
3,081
Total liabilities
204,499
193,044
176,725
Stockholders' equity
27,781
24,406
22,344
Total liabilities &
stockholders' equity
$ 232,280
$ 217,450
$ 199,069
Net interest income/net
yield on average
earning assets
$ 9,522
4.3%
$ 8,228
4.0%
$ 7,569
4.0%
- -27-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
CHANGES IN NET INTEREST INCOME
TAX EQUIVALENT YIELDS
2001 Versus 2000
Increase (Decrease)
Due to Change in
Average
Volume
Average
Rate
Total
Increase
(Decrease)
(000 omitted)
Interest Income
Loans (net of unearned discounts)
$ 1,511
($ 76)
$ 1,435
Taxable investment securities
( 311)
62
( 249)
Nontaxable investment securities
224
17
241
Other short-term investments
( 52)
( 388)
( 440)
Total interest income
1,372
( 385)
987
Interest Expense
Interest bearing demand
246
( 222)
24
Savings deposits
( 175)
( 288)
( 463)
Time deposits
427
( 52)
375
Other short-term borrowings
( 58)
( 185)
( 243)
Total interest expense
440
( 747)
( 307)
Net interest income
$ 1,294
2000 Versus 1999
Increase (Decrease)
Due to Change in
Average
Volume
Average
Rate
Total
Increase
(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.
- -28-
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
MATURITIES OF INVESTMENT SECURITIES
December 31, 2001
The following table shows the maturities of investment securities at amortized cost as of
December 31, 2001, and weighted average yields of such securities. Yields are shown on a taxable
equivalent basis, assuming a 34% federal income tax rate.
Within 1
year
After 1
year but
within 5
years
After 5
years
but
within
10 years
After 10
years
Total
(000 omitted)
Bonds:
U.S. Treasury
Book value
$ 100
$ 0
$ 0
$ 0
$ 100
Yield
6.52%
6.52%
U.S. Government agencies/mortgage-
backed securities
Book value
$ 1
$ 3,937
$ 4,892
$ 6,988
$ 15,818
Yield
7.05%
5.35%
5.98%
5.95%
5.77%
State and municipal
Book value
$ 360
$ 1,013
$ 3,128
$ 18,772
$ 23,273
Yield
7.05%
6.34%
6.72%
7.37%
7.23%
Other
Book value
$ 250
$ 611
$ 486
$ 1,537
$ 2,884
Yield
7.14%
6.30%
6.85%
3.27%
4.82%
Total book value
$ 711
$ 5,561
$ 8,506
$ 27,297
$ 42,075
Yield
7.00%
5.63%
6.30%
6.75%
6.51%
Equity Securities:
Total Equity Securities
$ 12,218
Yield
2.32%
Total Investment Securities
$ 54,293
Yield
5.57%
- -29-
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 $ 4,001,000 in 2001 compared to $ 4,093,000 in 2000 and $ 3,203,000 in 1999.
Net income on an adjusted per share basis for 2001 was $ 2.29 down $ .03 from $ 2.32, realized during 2000.
Total interest income increased $ 987,000 from 2000 to 2001 and $ 1,875,000 from 1999 to
2000. Increases in 2001 and 2000 were primarily due to volume increases in average earning assets. Average
loans outstanding in 2001 increased 12.6% over 2000. This coupled with marginally lower rates resulted in a
12.0% increase in interest income from loans in 2001 as compared to a 15.0% increase realized in 2000.
Earnings on investments (excluding gains from sales) decreased 12.5% in 2001 compared to a 11.9% increase in
2000. This decrease was primarily the result of decreased average rates of investment securities which decreased
to 5.0% in 2001 from 5.7% in 2000. Total average earning assets increased 8.1% in 2001 compared to 8.5% in
2000. Increases in earning assets during 2001 and 2000 were proportionately higher in loans, which typically
produce higher yields than investments thus producing the higher earnings during 2001 and 2000.
Interest from loans accounted for 81% of total interest income for 2001, as compared to 77% and
76% for 2000 and 1999, respectively. Interest and dividends on investments amounted to $ 3,130,000 or 19% of
interest income for 2001, as compared to $ 3,578,000 or 23% in 2000 and $ 3,274,000 or 24% in 1999.
Total interest expense was $ 6,988,000 for 2001, a decrease of $ 307,000 over the $ 7,295,000
for 2000. The increase in total average deposits was 7.5% in 2001 compared to 7.1% in 2000. Overall growth
was moderate during 2001 and 2000 with interest bearing demand and time deposits increasing 20.3% and
11.6%, and savings decreasing 17.6%, respectively. Although overall growth was moderate during 2001, rates
decreased .35% which caused a decrease in interest expense on deposits of 4.2%. There were some significant
changes in the level of borrowed funds but the volume affect was offset by a decrease in rates, thus an overall
decrease in interest expense on borrowed funds by 17%. This change in volume along with the decreased level
of rates paid for deposits and on borrowed funds was offset by proportional increases in average volumes and
decreases in rates for earning assets, which caused the overall interest spread to stay relatively constant for 2001
and 2000.
The Corporation's net charge-offs have been lower than peer group performance for the past five
years. Net charge-offs were $ 129,000, $ 125,000 and $ 171,000 for 2001, 2000 and 1999, respectively.
Previous years' net recoveries, as well as an improving loan portfolio, have allowed the bank to have a current
year provision of $ 120,000, $ 0, and $ 0 for 2001, 2000 and 1999, respectively. 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.
- -30-
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 $ 64,000 and $ 63,000 at December 31, 2001 and 2000, respectively.
Management is not aware of any other problem loans that are indicative of trends, events, or
uncertainties that would significantly impact future operations, liquidity or capital. Management also recognizes the
need to maintain an adequate reserve to meet the constant risks associated with a growing loan portfolio and an
expanding customer base and intends to continue to maintain the reserve at appropriate levels based on ongoing
evaluations of the loan portfolio.
Other income represents service charges on deposit accounts, commissions and fees received for the
sale of travelers' checks, money orders and savings bonds, fees for trust services, fees for investment services,
securities gains and losses and other income, such as safe deposit box rents. Other income decreased $ 678,000 or
18.8% for 2001 over 2000, and increased $ 793,000 or 28.1% for 2000 over 1999. The increase in 2001 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. Excluding the one time gains reported in 2000, other income for
2001 increased 27% over 2000, mostly related to investment gains.
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; and other operating expenses, which include all other expenses
incurred in operating the Corporation.
Personnel related expenses increased $ 185,000 or 6.1% in 2001 over 2000, compared to an increase
of $ 104,000 or 3.6% in 2000 over 1999. Occupancy and equipment expense increased by 16.8% from 2001 to 2000
compared to 15.0% from 2000 to 1999. Management expected noninterest expenses to increase in 2001 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 7.0% in 2001, compared to 5.4% and 15.7% in 2000 and 1999,
respectively.
Applicable income taxes changed between 1999, 2000 and 2001 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 2001 and 2000 is 34%. At December 31, 2001 and 2000, deferred
taxes amounted to ($ 110,000) and $ 16,000, respectively. If all timing differences reversed in 2001, 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 Corporation 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 of 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
- -31-
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
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 a 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 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 has evaluated the impact of adopting this
Statement on the consolidated financial statements, but does not anticipate that it will have a material impact.
Financial Accounting Standards Board (FASB) Standard 142, which is effective for years
beginning after December 15, 2001, addresses the financial accounting and reporting for acquired goodwill and
other intangible assets. It does not address intangibles acquired as part of business combinations which is
addressed by FASB 141. This statement also addresses how goodwill and intangibles are accounted for after
they have been initially recognized. Management is currently evaluating the impact this statement would have on
the consolidated financial statements when adopted, 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 Corporation'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 Corporation's policy objective is to limit the change in annual
earnings to 20% of projected earnings. At December 31, 2001, based on the results of the simulation model, the
Corporation would expect a decrease in net interest income of $ 8,000 and a decrease in net interest income of
$ 473,000 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
- -32-
LIQUIDITY RISK MANAGEMENT (Continued)
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 Corporation closely monitors its interest rate risk as such risk relates to its operational
strategies. The Corporation'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.
The following table sets forth the amounts of interest-earning assets and interest-bearing
liabilities outstanding at December 31, 2001 which are anticipated by the Corporation, 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
Days
Due 91 - 360
Days
Due After 1
Year
Total
(000 omitted)
Rate sensitive assets
Interest bearing deposits with banks and
investment securities
$ 6,753
$ 6,001
$ 45,564
$ 58,318
Real estate, commercial and consumer
loans
37,167
45,830
84,393
167,390
$ 43,920
$ 51,831
$ 129,957
$ 225,708
Rate sensitive liabilities
Certificates of deposit over $ 100,000
$ 5,054
$ 13,625
$ 3,297
$ 21,976
Other certificates of deposit
14,109
25,344
15,638
55,091
Money market deposit accounts
0
15,727
15,727
31,454
NOW accounts and other savings
deposits
0
16,784
38,986
55,770
Federal funds and other liabilities
17,341
0
20,000
37,341
$ 36,504
$ 71,480
$ 93,648
$ 201,632
Cumulative interest sensitive GAP
7,416
( 12,233)
24,076
24,076
Cumulative interest sensitive GAP ratio
3.02%
( 4.98%)
9.79%
9.79%
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 structural interest rate
risk.
- -33-
MARKET RISK MANAGEMENT (Continued)
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
2002
2003
2004
2005
2006
Thereafte
r
Total
Value
Fixed interest rate
loans
$ 23,109
$ 12,081
$ 10,487
$ 9,308
$ 6,256
$ 40,636
$ 101,877
$ 104,749
Average interest
rate
8.46
8.76
8.57
8.47
8.16
7.93
8.24
Variable interest
rate loans
13,489
4,606
2,632
2,303
2,632
40,138
65,800
65,800
Average interest
rate
7.30
7.40
6.80
6.50
6.60
6.70
6.69
Fixed interest rate
securities
3,038
3,397
3,181
1,212
2,934
30,189
43,951
42,235
Average interest
rate
5.82
6.09
5.65
5.70
5.30
6.80
6.45
Noninterest bearing
checking
2,199
660
660
660
219
0
4,398
4,398
Savings and interest
bearing checking
2,616
1,744
1,744
1,744
872
0
8,720
8,720
Average interest
rates
1.33
1.33
1.33
1.33
1.33
0
1.33
Time deposits
56,819
15,045
2,949
1,028
1,226
0
77,067
77,580
Average interest
rates
4.36
5.11
4.50
5.65
4.69
0
4.53
Fixed interest rate
borrowings
0
0
0
0
15,000
5,000
20,000
20,358
Variable interest
rate barrowings
17,041
0
0
0
0
0
17,041
17,041
Borrowings average
interest rate
2.27
0
0
0
4.96
5.40
2.27
- -34-
CAPITAL FUNDS
Internal capital generation has been the primary method utilized by Tower Bancorp Inc.
to increase its capital. Stockholders' equity, which exceeded $ 28.5 million at December 31, 2001 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:
Tower Bancorp
Regulatory
Minimum
Requirements
2001
2000
Leverage ratio
11.61%
11.88%
3%
Risk-based capital ratio Tier I (core capital)
16.96%
21.90%
4%
Combined Tier I and Tier II (core capital
plus allowance for loan losses)
18.24%
23.18%
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.
2001
2000
1999
Equity capital at December 31 ($ 000 omitted)
$ 28,518
$ 26,676
$ 22,136
Equity capital as a percent of assets at December 31
11.61%
11.88%
10.70%
Return on average assets
1.72%
1.88%
1.63%
Return on average equity
14.40%
17.17%
14.09%
Cash dividend payout ratio
49.11%
24.09%
53.42%
STOCK MARKET ANALYSIS AND DIVIDENDS
The corporation's common stock is traded in the over-the-counter market. As of
December 31, 2001 the approximate number of shareholders of record was 1,035.
2001
Market Price
Cash
Dividend
First Quarter
$ 18.68 - 19.51
$ 0
Second Quarter
18.44 - 20.97
.22
Third Quarter
19.48 - 23.60
.50
Fourth Quarter
21.53 - 24.75
.40
2000
Market Price
Cash
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
- -35-
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 23, 2002, with respect to
the consolidated balance sheets of Tower Bancorp, Inc. and
subsidiary as of December 31, 2001 and 2000 and the related
consolidated statements of income, stockholders' equity and cash
flows for the three year period ended December 31, 2001, which
report is incorporated by reference in the December 31, 2001
annual report to stockholders on Form 10-K of Tower Bancorp, Inc.
/s/SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, PA
March 15, 2002
12-MOS
DEC-31-2001
DEC-31-2001
8,080
2,717
0
0
55,601
0
0
167,677
1,577
245,574
177,599
37,341
2,116
0
0
0
2,225
26,293
245,574
13,380
2,913
217
16,510
5,839
6,988
9,402
120
1,761
6,702
5,637
5,637
0
0
4,001
2.29
2.26
4.3
64
734
0
0
1,586
192
63
1,577
1,577
0
111