FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: June 30, 2002
Commission file number: 2-89573
TOWER BANCORP INC.
(Exact name of registrant as specified in its charter)
Commonwealth of 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
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 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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
1,736,317 shares of common stock
TOWER BANCORP, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets - June 30, 2002
and December 31, 2001 3
Condensed consolidated statements of income - three months
ended June 30, 2002 and 2001 4
Condensed consolidated statements of income - six months
ended June 30, 2002 and 2001 5
Condensed consolidated statements of comprehensive income -
six months ended June 30, 2002 and 2001 6
Condensed consolidated statements of cash flows - six
months ended June 30, 2002 and 2001 7
Notes to condensed consolidated financial statements 8
Management's discussion and analysis of financial
condition and results of operations 9 and 10
PART II - OTHER INFORMATION 11
Item 6 - Index to Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibits 15 - 17
PART I - FINANCIAL INFORMATION
TOWER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001*
(Unaudited) (Audited)
ASSETS (000 omitted)
Cash and due from banks $ 6,265 $ 8,080
Interest bearing balances with banks 2,227 2,717
Investment securities available for sale 55,114 55,601
Restricted bank stock 3,852 3,404
Loans 184,361 167,677
Less: reserve for possible loan losses ( 1,562) ( 1,577)
Bank premises, equipment, furniture
and fixtures 3,539 2,973
Accrued interest receivable 1,179 1,196
Cash surrender value of life insurance 4,144 4,047
Other assets 1,605 1,687
Total assets $ 260,724 $ 245,574
LIABILITIES AND CAPITAL
Deposits in domestic offices:
Demand $ 13,894 $ 13,328
Savings 102,906 87,204
Time 65,300 77,067
Liabilities for borrowed money 44,618 37,341
Accrued interest payable 297 429
Other liabilities 2,809 1,456
Total liabilities 229,824 217,056
EQUITY CAPITAL
Capital stock, common, authorized
5,000,000 shares; 1,780,100 shares
issued 2,225 2,225
Additional paid-in capital 6,712 6,707
Retained earnings 21,362 19,604
Accumulated other comprehensive income 1,770 863
Less: cost of treasury stock ( 1,169) ( 881)
Total equity capital 30,900 28,518
Total liabilities and capital $ 260,724 $ 245,574
* Condensed from audited financial statements
The accompanying notes are an integral part of these
condensed financial statements.
TOWER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
2002 2001
(000 Omitted)
Interest Income
Interest & fees on loans $ 3,340 $ 3,402
Interest on investment securities
available for sale 631 763
Interest on federal funds sold 0 3
Interest on deposits with banks 37 51
Total interest & dividend income 4,008 4,219
Interest Expense
Interest on deposits 995 1,518
Interest on borrowed money 404 321
Total interest expense 1,399 1,839
Net interest income 2,609 2,380
Provision for loan losses 30 30
Net interest income after provision for
loan losses 2,539 2,350
Other Income
Investment service income 12 17
Service charges on deposit accounts 149 155
Other service charges 18 29
Other operating income 134 68
Investment securities gains (losses) 486 355
Total other income 799 624
Other Expense
Salaries, wages and other benefits 873 810
Occupancy expense of bank premises 96 85
Furniture and fixture expense 142 135
Other operating expenses 663 733
Total other expenses 1,774 1,763
Income before taxes 1,564 1,211
Applicable income taxes 420 307
Net income $ 1,144 $ 904
Earnings per share:
Basic Earnings per share $ .66 $ .51
Weighted average shares outstanding 1,737,078 1,755,561
Diluted Earnings per share $ .65 $ .51
Weighted Average Shares Outstanding 1,761,836 1,775,711
The accompanying notes are an integral part of these
condensed financial statements.
TOWER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
2002 2001
(000 Omitted)
Interest Income
Interest & fees on loans $ 6,688 $ 6,696
Interest on investment securities
available for sale 1,353 1,497
Interest on federal funds sold 0 3
Interest on deposits with banks 80 120
Total interest & dividend income 8,121 8,316
Interest Expense
Interest on deposits 2,049 3,117
Interest on borrowed money 794 624
Total interest expense 2,843 3,741
Net interest income 5,278 4,575
Provision for loan losses 130 60
Net interest income after provision for
loan losses 5,148 4,515
Other Income
Investment Service income 15 163
Service charges on deposit accounts 298 289
Other service charges 38 49
Other operating income 265 237
Investment securities gains (losses) 1,395 898
Total other income 2,011 1,636
Other Expense
Salaries, wages and other benefits 1,755 1,614
Occupancy expense of bank premises 196 171
Furniture and fixture expense 271 267
Other operating expenses 1,372 1,411
Total other expenses 3,594 3,463
Income before taxes 3,565 2,688
Applicable income taxes 973 676
Net income 2,592 2,012
Earnings per share:
Basic Earnings per share $ 1.49 $ 1.15
Weighted average shares outstanding 1,741,311 1,755,763
Diluted Earnings per share $ 1.47 $ 1.13
Weighted Average Shares Outstanding 1,768,450 1,775,711
The accompanying notes are an integral part of these
condensed financial statements.
TOWER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2002 and 2001
(UNAUDITED)
2002 2001
(000 Omitted)
Net income $ 2,592 $ 2,012
Other comprehensive income:
Unrealized holding gains (losses) ( 21) ( 427)
Reclassification adjustment for gains
realized in net income 1,395 898
1,374 471
Tax effect ( 467) ( 160)
Other comprehensive income (loss) 907 311
Comprehensive income $ 3,499 $ 2,323
The accompanying notes are an integral part of these
condensed financial statements.
TOWER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2002 and 2001
(UNAUDITED)
2002 2001
(000 Omitted)
Cash flows from operating activities:
Net income $ 2,592 $ 2,012
Adjustments to reconcile net income to net
cash:
Depreciation and amortization 228 198
Provision for loan losses 130 60
(Gain) on sale of investment securities ( 1,395) ( 898)
(Increase) in cash surrender value of
life insurance ( 97) 0
(Increase)Decrease in other assets ( 616) ( 442)
(Increase)Decrease in interest receivable 17 92
Increase (decrease) in interest payable ( 132) ( 42)
Increase (decrease) in other liabilities 1,122 711
Net cash provided by operating activities 1,849 1,691
Cash flows from investing activities:
Loans (net) ( 16,829) ( 11,661)
Purchases of bank premises, equipment,
furniture and fixtures ( 794) ( 589)
Interest bearing balances with banks 490 1,316
Purchases of available for sale securities ( 3,791) ( 10,482)
Maturities/sales of available for sale
securities 7,047 11,208
Purchase of restricted bank stock ( 448) 0
Net cash (used) by investing activities ( 14,325) ( 10,208)
Cash flows from financing activities:
Net increase in deposits 4,501 7,188
Debt (net) 7,277 4,562
Cash dividends paid ( 835) ( 386)
Purchase of Treasury Stock ( 371) ( 106)
Proceeds from sale of capital stock 89 41
Net cash provided by financing activities 10,661 11,299
Net increase (decrease) in cash and cash
equivalents ( 1,815) 2,782
Cash and cash equivalents at beginning of year 8,080 5,115
Cash and cash equivalents at end of quarter $ 6,265 $ 7,897
The accompanying notes are an integral part of these
condensed financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
Review of Interim Financial Statements
The condensed consolidated financial statements as of and
for the three and six month periods ended June 30, 2002
and 2001 have been reviewed by independent certified
public accountants. Their report on their review is
attached as Exhibit 99 to this 10-Q filing.
Note 1. Basis of Presentation
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments necessary to present fairly Tower Bancorp,
Inc.'s consolidated financial position as of June 30, 2002
and the results of its operations for the three and six
month periods ended June 30, 2002 and 2001.
The results of operations for the six month period ended
June 30, 2002 and 2001 are not necessarily indicative of
the results to be expected for the full year.
Note 2. Income Taxes
Income tax expense is less than the amount calculated
using the statutory tax rate primarily as a result of tax
exempt income earned from state and municipal securities
and loans.
Note 3. Commitments
In the normal course of business, the bank makes various
commitments and incurs certain contingent liabilities
which are not reflected in the accompanying financial
statements. These commitments include various guarantees
and commitments to extend credit and the bank does not
anticipate any losses as a result of these transactions.
TOWER BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net income for the first six months of 2002 was $ 2,592,000
compared to $ 2,012,000 for the first half of 2001. Net income on a
per share basis for 2002 was $ 1.49, up $ .34 from the $ 1.15
realized during the first six months of 2001.
Total interest income for the first six months of 2002 was
$ 8,121,000 compared to $ 8,316,000 for the first six months of
2001. Increases occurred primarily in loan income resulting from a
volume increase as rates continue to decline. Average rates on
loans decreased approximately one hundred thirty basis points from
those at the end of the first half of 2001. Average loan balances
at June 30, 2002 have increased 17.1% over those at June 30, 2001.
Increases were primarily in mortgage and commercial loans, which
increased 9.8% and 63.6%, respectively since June 30, 2001.
Earnings on investments for the first half decreased 9.6% from
totals for the corresponding period in 2001. Decreases were
attributable to volume decreases of 3.5% and a thirty-five basis
point drop in average rates earned from June 30, 2001 to 2002.
Total interest expense was $ 2,843,000 for the first half of
2002, a decrease of $ 898,000 from the $ 3,741,000 reported for the
first half of 2001. Increases in average total deposits has been
3% since June 30, 2001. Most of this growth has occurred in the
interest bearing demand deposit accounts. Average rates on
deposits decreased one hundred thirty-nine basis points from those
paid during the first six months of 2001. This coupled with the
fact that deposit growth has been concentrated in transaction
accounts has caused the bank's cost of funds to decrease. With the
increases in earning assets occurring in mortgage and commercial
loans, the Bank has been able to produce higher net interest
earnings over 2001. The loan to deposit ratio was over 100% at
June 30, 2002 compared to 86% at June 30, 2001. Interest expense
on borrowed money increased $ 170,000 over 2001 totals as the Bank
increased its borrowings as a supplemental source of funds to
maintain liquidity goals. Management intends to continue to
competitively price its deposits while maintaining desired net
interest spreads.
The Bank made a $ 130,000 provision for loan losses during the
first half of 2002. Net charge-offs were $ 140,000 during the
first half of 2002 compared to $ 69,000 during the first half of
2001, which are well below peer group averages. Management has
significantly expanded its detailed review of the loan portfolio,
which is performed quarterly, in an effort to identify and more
readily act on loans with deteriorating trends. Anticipated losses
are well below the current allowance amount and management is not
aware of any 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
allowance to meet the constant risks associated with a growing loan
portfolio and an expanding customer base and intends to continue to
maintain the allowance at appropriate levels based on ongoing
evaluations of the loan portfolio.
Non-interest income was $ 2,011,000 for the first half of 2002
representing a 22.9% increase over the first half of 2001.
Increases were primarily in services charges on deposit accounts
and Securities Gains. Investment Services income is down
significantly as expected due to the transfer of its Trust
Department Administration to Sentry Trust. Management expects to
regain some of this decrease by expanding its brokerage services.
Non-interest expenses were $ 3,594,000 for the first half of
2002 compared to $ 3,463,000 for 2001. Increases were primarily in
personnel and technology costs as the bank prepares to establish a
new full service branch office in Hagerstown, Maryland.
The bank's effective income tax rate was 27.3% and 25.1% for
the first six months of 2002 and 2001, respectively. The statutory
marginal tax bracket remains at 34%. The primary differences
between the statutory and effective rates are due to nontaxable
income from municipal investments and tax-free loans.
Total assets were $ 260,724,000 at June 30, 2002 compared to
$ 238,962,000 at June 30, 2001. This represents a growth rate of
approximately 9%. Internal capital generation has been the primary
method utilized to increase capital. Total stockholders' equity
was $ 30,900,000 at June 30, 2002, representing 11.8% of total
assets compared to $ 26,676,000 at June 30, 2001, which represented
11.2% of total assets. Risk-based capital ratios continue to
exceed regulatory minimums.
PART II - OTHER INFORMATION
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not applicable
Item 2 - Changes in Securities
Not applicable
Item 3 - Defaults Upon Senior Securities
Not applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not applicable
Item 5 - Other Information
Not applicable
Item 6 - Index to Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Referred to Description
Item 601 of Regulation S-K of Exhibit
99 Report of Independent
Accountant's on Interim
Financial Statements
99.1 Certification of Chief Executive
Officer pursuant to 18 U.S.C.
Section 1350
99.2 Certification of Chief Financial
Officer pursuant to 18 U.S.C.
Section 1350
(b) Reports on Form 8-K:
Current report on Form 8-K filed with the Commission on
June 14, 2002.
Current report on Form 8K filed with the Commission on
July 8, 2002
SIGNATURES
Pursuant to the requirements 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)
/s/ Jeff B. Shank
Jeff B. Shank, President, CEO
(Principal Executive Officer
and Principal Financial
Officer)
Date: August 7, 2002
/s/Franklin T. Klink, III
Franklin T. Klink, III
Treasurer
(Principal Accounting Officer)
Date: August 7, 2002
EXHIBIT 99
INDEPENDENT ACCOUNTANT'S REPORT
Board of Directors
Tower Bancorp, Inc.
Greencastle, Pennsylvania
We have reviewed the accompanying consolidated balance sheet
of Tower Bancorp, Inc. and Subsidiary as of June 30, 2002 and the
related consolidated statements of income for the three and six
month periods ended June 30, 2002 and 2001 and consolidated
statements of comprehensive income for the six months ended
June 30, 2002 and 2001 and consolidated statements of cash flows
for the six months ended June 30, 2002 and 2001. These financial
statements are the responsibility of the corporation's management.
We conducted our reviews in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information consists
principally of applying analytical procedures to financial data and
making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the consolidated financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying consolidated
financial statements for them to be in conformity with generally
accepted accounting principles.
/s/ Smith Elliott Kearns & Company, LLC
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
July 31, 2002
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OR THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Tower Bancorp, Inc.
(the "Company") on Form 10-Q for the period ending June 30, 2002 as
filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Jeff B. Shank, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents,
in all material respects, the final condition and results of
operations of the Company.
/s/ Jeff B. Shank
Chief Executive Officer
August 7, 2002
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OR THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Tower Bancorp, Inc.
(the "Company") on Form 10-Q for the period ending June 30, 2002 as
filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Franklin T. Klink, III, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents,
in all material respects, the final condition and results of
operations of the Company.
/s/ Franklin T. Klink, III
Chief Financial Officer
August 7, 2002