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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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
---- ----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of December 31, 2002, 1,732,810 shares of the
registrant's common stock were outstanding. The aggregate
market value of such shares held by nonaffiliates on that
date was $ 51,984,300.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year
ended December 31, 2002 are incorporated by reference into
Parts I and II. Portions of the Proxy Statement for 2003
Annual Meeting of Security Holders are incorporated by
reference in Part III of this Form 10-K.
1
Item 1. Business.
History and Business
Tower Bancorp, Inc. ("Tower") is a bank holding
company registered under the Bank Holding Company Act of
1956, as amended. Tower was organized on October 12, 1983,
under the laws of the Commonwealth of Pennsylvania for the
purpose of acquiring The First National Bank of Greencastle,
Greencastle, Pennsylvania ("First") and such other banks and
bank related activities as are permitted by law and
desirable. On June 1, 1984, Tower acquired 100% ownership
of The First National Bank of Greencastle, issuing 159,753
shares of Tower's common stock to the former First
shareholders.
During 1998 Tower acquired 9,807 shares of its own
common stock and sold 5,005 shares of treasury stock to
First's ESOP plan, and 1,504 shares to First executive
officers and directors as part of a stock option plan. On
July 1, 1998 Tower issued a 2 for 1 stock split of 885,600
shares, increasing the total number of shares outstanding at
December 31, 1998 to 1,765,400.
During 1999 Tower acquired 9,691 shares of its own
common stock and sold 5,872 shares of treasury stock to
First's ESOP plan, and 1,020 shares to First executive
officers as part of a stock option plan.
During 2000 Tower acquired 7,750 shares of its own
common stock and sold 1,655 shares of treasury stock to
First executive officers and directors as part of a stock
option plan.
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.
During 2002 Tower acquired 21,127 shares of its
own common stock and sold 3,080 shares of treasury stock to
First's ESOP plan, 1,440 shares to First executive officers,
2
and 2,108 shares to First directors as part of a stock
option plan.
Tower's primary activity consists of owning and
supervising its subsidiary, The First National Bank of
Greencastle, which is engaged in providing banking and bank
related services in South Central Pennsylvania, principally
Franklin County, where its seven branches are located in
Quincy, Shady Grove, Waynesboro, Mercersburg, Chambersburg,
and Laurich, Pennsylvania, and Hagerstown, Maryland, as well
as its main office in Greencastle, Pennsylvania. During the
third quarter of 2002 the seventh branch office was opened
in Washington County, Maryland. 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, 2002, First had 84 full-time and 20 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.
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.
3
First is engaged in commercial banking 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.
First grants agribusiness, commercial, and
residential loans to customers throughout the Cumberland
Valley area. It 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 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 concentrations of credit by type of loan are
set forth on the face of the balance sheet (page 2 of the
Annual Report to Shareholders).
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, 2002, First had total assets of
approximately $ 262.5 million, total shareholders' equity of
approximately $ 33 million and total deposits of
approximately $ 187.5 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
4
information. Tower is also subject to examination by the
FRB and is restricted in its acquisitions, certain of which
are subject to approval by the FRB. In addition, the parent
company would be required to obtain the approval of the
Pennsylvania State Banking Department in order for it to
acquire certain bank and nonbank subsidiaries.
Under the BHC Act, a bank holding company is, with
limited exceptions, prohibited from (i) acquiring direct or
indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or (ii) engaging
in any activity other than managing or controlling banks.
With the prior approval of the FRB, however, a bank holding
company may own shares of a company engaged in activities
which the FRB determines to be so closely related to banking
or managing or controlling banks as to be a proper incident
thereto. In addition, federal law imposes certain
restrictions on transactions between Tower and its
subsidiary, First National Bank of Greencastle (First). As
an affiliate of First, Tower is subject, with certain
exceptions, to provisions of federal law imposing
limitations on, and requiring collateral for, extensions of
credit by First to its affiliates.
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
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
6
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.
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
7
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, 2002, the Bank is considered well
capitalized, based on the definitions in the regulations
issued by the Federal Reserve Board and the other federal
bank regulatory agencies setting forth the general capital
requirements mandated by FDICIA. See "Capital Funds" in
management's discussion and analysis in the corporation's
annual report as shown in Exhibit 13.
A federal depositor preference statute was enacted
in 1993 providing that deposits and certain claims for
administrative expenses and employee compensation against an
insured depository institution would be afforded a priority
over other general claims against such an institution,
including federal funds and letters of credit, in the
"liquidation or other resolution" of such an institution by
any receiver.
In 1999, Federal regulators issued regulations to
implement the privacy provisions of the Gramm-Leach-Bliley
Act (Financial Services Modernization Act). This 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.
8
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
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
9
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
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.
10
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
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
11
commercial banks, many of which are larger than First.
First is generally competitive with all competing financial
institutions in its service area with respect to interest
rates paid on time and savings deposits, service charges on
deposit accounts and interest rates charged on loans.
Item 2. Properties.
The First National Bank of Greencastle owns
buildings at Center Square, Greencastle, Pennsylvania (its
corporate headquarters); Shady Grove, Pennsylvania; 4136
Lincoln Way West, (Laurich Branch), Chambersburg,
Pennsylvania; Quincy, Pennsylvania and Waynesboro,
Pennsylvania, and 18233 Maugans Avenue, Hagerstown,
Maryland. In addition, First leases approximately 1,500
square feet in a building located at 11906 Buchanan Trail
West, Mercersburg, Pennsylvania and 365 square feet located
at 785 Fifth Avenue, Chambersburg, Pennsylvania. Offices of
the bank are located in each of these buildings.
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 Corporation, each of
whom is elected by the Board of Directors and each of whom
holds office at the discretion of the Board.
12
Held Employee Age as
Name/Office Held Since Since of 12/31/02
Kermit G. Hicks, Chairman
of the Board 1983 (1) 67
Jeff B. Shank, President
and Chief Executive
Officer 1991 1976 47
Robert L. Pensinger,
Vice Chairman of
the Board 1987 (1) 69
John H. McDowell,
Executive Vice President/
Secretary 1986 1977 53
Don Kunkle, Vice President 1990 1987 53
Franklin T. Klink, III, Vice
President/Treasurer 2001 2001 47
(1) These directors are not employees of the Bank.
13
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, 2002, the
approximate number of shareholders of record was 1,035. The
price ranges for Tower common stock set forth below are the
approximate bid prices obtained from brokers who make a
market in the stock and don't reflect prices in actual
transactions.
Period Dividends Market Price
2002 1st Quarter $ .32 $ 23.50 - $ 25.20
2nd Quarter .16 24.30 - 26.25
3rd Quarter .18 25.75 - 27.25
4th Quarter .18 26.10 - 30.00
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
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, 2002 is incorporated herein by reference.
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.
14
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, 2002 and are incorporated herein by
reference. Additional schedules required in addition to
those included in the annual shareholders report are
submitted herewith.
15
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:
2002 2001 2000 1999 1998
(000 omitted)
Commercial,
financial &
agricultural $ 32,422 $ 33,606 $ 20,903 $ 15,047 $ 15,164
Real estate -
Construction 7,246 6,029 4,827 4,146 2,378
Real estate -
Mortgage 135,104 111,709 104,838 93,340 87,350
Installment
& other
personal
loans (net
of unearned
income) 12,765 16,333 17,002 19,227 18,798
--------- --------- --------- --------- ---------
Total loans $ 187,537 $ 167,677 $ 147,570 $ 131,760 $ 123,690
========= ========= ========= ========= =========
16
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
2002 2001 2000 1999 1998
(000 omitted)
Average total loans
outstanding (net
of unearned income) $ 183,805 $ 158,570 $ 140,788 $ 127,202 $ 111,952
--------- --------- --------- --------- ---------
Allowance for loan
losses, beginning
of period 1,577 1,586 1,719 1,890 1,850
Additions to
provision for
loan losses
charged to
operations 310 120 0 0 0
Loans charged off
during the year
Commercial 101 0 4 8 0
Real estate
mortgage 0 0 0 29 1
Installment 205 192 149 179 46
--------- --------- --------- --------- ---------
Total charge-
Off's 306 192 153 216 47
--------- --------- --------- --------- ---------
Recoveries of loans
previously charged
off:
Commercial 3 4 4 4 43
Installment 34 39 16 35 20
Mortgage 14 20 0 6 24
--------- --------- --------- --------- ---------
Total recoveries 51 63 20 45 87
--------- --------- --------- --------- ---------
Net loans charged
off (recovered) 255 129 133 171 ( 40)
--------- --------- --------- --------- ---------
Allowance for loan
losses, end of
period 1,632 1,577 1,586 1,719 1,890
Ratio of net loans
charged off
(recovered)
to average loans
outstanding .14% .08% .09% .13% ( .04%)
======== ========= ========= ========= =======
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.
17
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.
2002 2001 2000 1999 1998
(000 omitted)
Nonaccrual loans $ 781 $ 64 $ 63 $ 460 $ 488
===== ======= ===== ===== =====
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
60 - 89 days
past due 386 802 800 379 417
90 days or
more past due 188 734 25 27 0
----- ------- ----- ----- -----
Total
accrual
loans $ 574 $ 1,536 $ 825 $ 406 $ 417
===== ======= ===== ===== =====
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 any impaired loans.
Management has not identified any significant
problem loans in the accrual loan categories shown above.
18
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
2002 2001
Percentage Percentage
of Loans of Loans
in Each in Each
Category Category
Allowance to Total Allowance to Total
Amount Loans Amount Loans
(000 omitted)
Commercial,
financial and
agricultural $ 718 17.3% $ 816 20.0%
Real estate -
Construction 0 3.9 0 3.6
Real estate -
Mortgage 664 72.1 650 66.6
Installment 0 6.7 0 9.7
Unallocated 250 N/A 111 N/A
------- ----- ------- -----
Total $ 1,632 100.0% $ 1,577 100.0%
======= ===== ======= =====
Years Ended December 31
2000 1999
Percentage Percentage
of Loans of Loans
in Each in Each
Category Category
Allowance to Total Allowance to Total
Amount Loans Amount Loans
(000 omitted)
Commercial,
financial and
agricultural $ 812 14.2% $ 812 11.2%
Real estate -
Construction 0 3.3 0 3.1
Real estate -
Mortgage 630 71.0 630 70.8
Installment 0 11.5 0 14.9
Unallocated 144 N/A 277 N/A
------- ----- ------- -----
Total $ 1,586 100.0% $ 1,719 100.0%
======= ===== ======= =====
19
Years Ended December 31
1998
Percentage
of Loans
in Each
Category
Allowance to Total
Amount Loans
(000 omitted)
Commercial, financial
and agricultural $ 815 12.5%
Real estate - Construction 0 2.0
Real estate - Mortgage 653 70.2
Installment 0 15.3
Unallocated 422 N/A
------- -----
Total $ 1,890 100.0%
======= =====
20
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized
below:
Years Ended December 31
2002 2001 2000
(000 omitted)
Demand deposits $ 12,470 $ 12,840 $ 13,857
Interest bearing
demand deposits 76,373 63,422 52,740
Savings deposits 22,792 24,828 30,139
Time deposits 71,631 77,054 69,006
--------- --------- ---------
Total deposits $ 183,266 $ 178,144 $ 165,742
========= ========= =========
RETURN ON EQUITY AND ASSETS
(APPLYING DAILY AVERAGE BALANCES)
The following table presents a summary of
significant earnings and capital ratios:
2002 2001 2000
(000 omitted)
Assets $ 262,589 $ 245,574 $ 224,512
Net income $ 4,853 $ 4,001 $ 4,093
Equity $ 32,866 $ 28,518 $ 26,676
Cash dividends $ 1,458 $ 1,965 $ 986
Return on assets 1.91% 1.72% 1.88%
Return on equity 15.81% 14.40% 17.17%
Dividend payout ratio 30.04% 49.11% 24.09%
Equity to asset ratio 12.52% 11.96% 10.96%
21
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
2002 2001 2000 1999 1998
(000 omitted)
Interest income $ 15,857 $ 16,510 $ 15,523 $ 13,648 $ 12,548
Interest expense 5,252 6,988 7,295 6,079 5,342
-------- -------- -------- --------- --------
Net interest income 10,605 9,522 8,228 7,569 7,206
Provision for loan
Losses 310 120 0 0 0
-------- -------- -------- --------- --------
Net interest income
after provision
for loan losses 10,295 9,402 8,228 7,569 7,206
Other income:
Investment services
income 0 191 577 492 391
Service charges -
Deposits 621 519 335 291 281
Other service charges,
collection and
exchange, charges,
commission fees 313 305 1,630 388 212
Other operating
income 2,046 1,922 1,073 1,651 1,198
-------- -------- -------- -------- --------
Total other
income 2,980 2,937 3,615 2,822 2,082
-------- -------- -------- -------- --------
Income before
operating expense 13,275 12,339 11,843 10,391 9,288
Operating expenses:
Salaries and
employees
benefits 3,558 3,211 3,026 2,922 2,483
Occupancy and
equipment
expense 1,575 1,627 1,393 1,252 1,220
Other operating
expenses 1,526 1,864 1,842 1,767 1,430
-------- -------- -------- -------- --------
Total operating
Expenses 6,659 6,702 6,261 5,941 5,133
-------- -------- -------- -------- --------
Income before
income taxes 6,616 5,637 5,582 4,450 4,155
Income tax 1,763 1,636 1,489 1,247 1,246
-------- -------- -------- -------- --------
Net income
applicable to
common stock $ 4,853 $ 4,001 $ 4,093 $ 3,203 $ 2,909
======== ======== ======== ======== ========
Per share data:
Earnings per
common share $ 2.79 $ 2.29 $ 2.32 $ 1.82 $ 1.68
Cash dividend -
common $ .84 $ 1.12 $ .56 $ .97 $ .43
Average number of
common shares 1,737,298 1,745,847 1,761,699 1,763,548 1,732,479
22
Item 9. Disagreements on Accounting and Financial
Disclosures.
Not applicable.
23
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is incorporated by
reference from Tower Bancorp's definitive proxy statement for the
2003 Annual Meeting of Shareholders filed pursuant to Regulation
14A.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by
reference from Tower Bancorp's definitive proxy statement for the
2003 Annual Meeting of Shareholders filed pursuant to Regulation
14A.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Equity Compensation Plan Information
Plan Category Number of Weighted- Number of
securities to average securities
be issued upon exercise remaining available
exercise of price of for future issuance
outstanding outstanding under equity
options options compensation plans
(excluding
securities
reflected in column
(a))
(a) (b) (c)
Equity
compensation
plan approved
by security
holders 0 N/A 0
Equity
compensation
plan not
approved by
security
holders (1) 23,691 $ 21.49 23,691
------ ------- ------
Total 23,691 $ 21.49 23,691
====== ======= ======
The Corporation has two non-qualified Stock Option Plans, one
for select key employees and one for outside directors.
24
The Outside Directors Plan provides for granting, at the
discretion of the Board of Directors, non-statutory stock
options to purchase shares of common stock lf the Corporation
to eligible outside directors. The purchase price per share
of common stock deliverable upon exercise of such options is
equal to the fair market value of the common stock on the date
the option is granted. Options are vested on 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.
The stock option plan for select key employees is a non-
qualified stock option plan administered by a committee of
three outside directors of the Corporation (the Committee).
The Committee is vested with full authority to grant options
under the plan, to adopt, amend, and rescind such rules,
regulations, and procedures as it deems necessary or desirable
to administer the plan.
The shares of stock that may be issued pursuant to options
granted under the plan are determined annually by the Board of
Directors of the Corporation (the Board).
The option price per share of stock that may be granted
pursuant to each option is determined by the committee and
subject to approval by the Board. Each option granted under
the plan is vested on the date of the grant and shall expire
on the date determined by the committee.
All other information required by Item 12 is incorporated by
reference from Tower Bancorp, Inc.'s definitive proxy
statement for the 2003 Annual Meeting of Shareholders filed
pursuant to Regulation 14A.
25
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by
reference from Tower Bancorp's definitive proxy statement for the
2003 Annual Meeting of Shareholders filed pursuant to Regulation
14A.
Item 14. Controls and Procedures
The Corporation's Chief Executive Officer and Chief
Financial Officer have evaluated the effectiveness of the
Corporation's disclosure controls and procedures (as such term is
defined in Rules 13a-14(c) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation
Date"). Based on such evaluation, such officers have concluded
that, as of the Evaluation Date, the Corporation's disclosure
controls and procedures are effective in alerting them on a timely
basis to material information relating to the Corporation
(including its consolidated subsidiaries) required to be included
in the Corporation's periodic filings under the Exchange Act.
CHANGES IN INTERNAL CONTROLS
Since the Evaluation Date, there have not been any
significant changes in the Corporation's internal controls or in
other factors that could significantly affect such controls.
26
PART IV
Item 15. 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, 2002,
are incorporated by reference in Item 8:
Consolidated balance sheets - December 31,
2002 and 2001
Consolidated statements of income - Years
ended December 31, 2002, 2001, and 2000
Consolidated statements of stockholders'
equity - Years ended December 31, 2002,
2001, and 2000
Consolidated statements of cash flows - Years
ended December 31, 2002, 2001, and 2000
Notes to consolidated financial statements -
December 31, 2002
(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
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.
27
(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 (99.1) Certification pursuant to 18
U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
Exhibit (99.2) Certification pursuant to 18
U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
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 January 15, 2002 for news
release announcing financial results for
the quarter ended December 31, 2001.
* Report filed March 1, 2002 for news
release announcing amended dividend
policy.
* Report filed April 5, 2002 for news
release announcing financial results for
quarter ended March 31, 2002.
* Report filed June 14, 2002 for news
release declaring dividend for third
quarter.
28
* Report filed July 8, 2002 for news release
announcing financial results for quarter
ended June 30, 2002.
* Report filed September 19, 2002 for news
release declaring dividend for fourth
quarter.
* Report filed September 25, 2002 for news
release announcing Frederic M. Fredrick
joining the Board as Director.
* Report filed October 4, 2002 for news
release announcing financial results for
quarter ended September 30, 2002.
* Report filed December 19, 2002 for news
release announcing quarterly dividend.
(c) Exhibits
(3)(i) Articles of incorporation.
Incorporated by reference to Form 8-K
dated May 26, 1998.
(ii) By-laws. Incorporated by reference
to Exhibit D to the Registrant's
Registration Statement on Form S-14,
Registration No. 2-89573.
(4) Instruments defining the rights of
security holders including indentures.
The rights of the holders of Registrant's
common stock are contained in:
(i) Articles of Incorporation of Tower
Bancorp, Inc., incorporated by
reference to Form 8-K dated May 26,
1998.
(ii) By-laws of Tower Bancorp, Inc., filed
as Exhibit D to the Registrant's
Registration Statement on Form S-14
(Registration No. 2-89573).
(10)(i) Change of control agreements,
Incorporated by reference to the
registrant's Form 10Q filing dated
29
November 12, 2002 Exhibit 99.4, and
Form 10K filing dated March 15, 2002
for the year ended December 31, 2001
Exhibits 10-1 and 10-2 and Form 10-K
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).
(iii) Supplemental Executive Retirement
Plan Agreement incorporated by
reference to the registrant's Form
10-Q filing dated November 10, 2002
Exhibit 99.3.
(13) Annual report to security holders - filed
herewith
(21) Subsidiaries of the registrant - filed
herewith
(23.1) Consent of independent auditors - filed
herewith
(99.1) Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 - filed
herewith.
(99.2) Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 - filed
herewith.
30
(d) Financial statement schedules
The following financial statement schedules
required under Article 9 Industry Guide 3 have
been included on pages 16 to 22 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
31
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/CEO
(Principal Executive
Officer)
By /s/Franklin T. Klink, III
--------------------------
Franklin T. Klink, III
Treasurer (Principal Financial
and Accounting Officer)
Dated: March 15, 2003
--------------
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 &
- -----------------------
Jeff B. Shank Director March 15, 2003
/s/ Kermit G. Hicks Chairman of the
- -----------------------
Kermit G. Hicks Board & Director March 15, 2003
/s/Robert L. Pensinger Vice Chairman of the
- -----------------------
Robert L. Pensinger Board & Director March 15, 2003
/s/Frederic M. Frederick Director March 15, 2003
- -----------------------
Frederic M. Frederick
/s/James H. Craig, Jr. Director March 15, 2003
- -----------------------
James H. Craig, Jr.
/s/ Lois Easton Director March 15, 2003
- -----------------------
Lois Easton
32
CERTIFICATION
I, Jeffrey B. Shank, President/CEO, certify, that:
1. I have reviewed this annual report on Form 10-K of Tower
Bancorp, Inc.
2. Based on my knowledge, the annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements
were made, not misleading with respect to the period
covered by this annual report.
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
annual report.
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or
operation of the internal controls which could
33
adversely affect the registrant's ability to record,
process, summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls.
6. The registrant's other certifying officer and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other
factors that could significantly affect the internal
controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: March 15, 2003 By: /s/Jeffrey B. Shank
----------------------- ------------------------
Jeffrey B. Shank,
President/CEO
(Principal Executive
Officer)
34
CERTIFICATION
I, Franklin T. Klink, III, Treasurer, certify, that:
1. I have reviewed this annual report on Form 10-K of Tower
Bancorp, Inc.
2. Based on my knowledge, the annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements
were made, not misleading with respect to the period
covered by this annual report.
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
annual report.
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or
operation of the internal controls which could
35
adversely affect the registrant's ability to record,
process, summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls.
6. The registrant's other certifying officer and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other
factors that could significantly affect the internal
controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: March 15, 2003 By: /s/Franklin T. Klink, III
-------------------- ------------------------
Franklin T. Klink, III
Treasurer
(Principal Financial &
Accounting Officer)
36
Exhibit Index
Exhibit No.
13 Annual report to security holders
21 Subsidiaries of the Registrant
23.1 Consent of independent auditors
99.1 Certification of Chief Executive
Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification of Chief Financial
Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002.
37
Exhibit 13
Tower Bancorp, Inc.
2002 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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years
ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
Smith Elliott Kearns & Company, LLC
--------------------------------------
/s/Smith Elliott Kearns & Company, LLC
Chambersburg, Pennsylvania
January 16, 2003
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
2002 2001
(000 omitted)
ASSETS
Cash and due from banks $ 8,943 $ 8,080
Interest bearing deposits with banks 1,644 2,717
Investment Securities
Available for sale 50,838 55,601
Restricted Bank stock; at cost which
approximates fair value 3,162 3,404
Loans
Commercial, financial and
Agricultural 32,422 33,606
Real estate - Mortgages (net of deferred
loan origination fees; $ 903 - 2002;
$ 411 - 2001) 135,104 111,709
Real estate - Construction and land
Development 7,246 6,029
Consumer 12,765 16,333
--------- ---------
187,537 167,677
Less: Allowance for loan losses 1,632 1,577
--------- ---------
Total loans 185,905 166,100
Premises, equipment, furniture and
Fixtures 3,876 2,973
Real estate owned other than premises 350 624
Prepaid federal taxes 183 51
Accrued interest receivable 1,013 1,196
Cash surrender value of life insurance 6,306 4,047
Other assets 369 781
--------- ---------
Total assets $ 262,589 $ 245,574
========= =========
2002 2001
(000 omitted)
LIABILITIES
Deposits in domestic offices
Demand, noninterest bearing $ 13,297 $ 13,328
Savings 104,186 87,204
Time 70,074 77,067
---------- ----------
Total deposits 187,557 177,599
Liabilities for other borrowed funds 39,052 37,341
Accrued interest payable 287 429
Deferred income tax charges 804 110
Other liabilities 2,023 1,577
---------- -----------
Total liabilities 229,723 217,056
---------- -----------
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 6,713 6,707
Retained earnings 22,999 19,604
Accumulated other comprehensive
income 2,195 863
---------- -----------
34,132 29,399
Less: Cost of treasury stock,
47,290 shares-2002;
32,790 shares-2001 ( 1,266)( 881)
---------- -----------
Total stockholders' equity 32,866 28,518
---------- -----------
Total liabilities and
stockholders' equity $ 262,589 $ 245,574
========== ==========
The Notes to Consolidated Financial Statements are
an integral part of these statements.
- 2 -
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
(000 omitted)
Interest and Dividend Income
Interest and fees on loans $ 13,207 $ 13,380 $ 11,945
Interest and dividends on
investment securities
Taxable 1,352 1,852 2,398
Federal tax exempt 1,153 1,034 793
Interest on federal funds sold 0 27 0
Interest on deposits with banks 145 217 387
-------- ------- --------
Total interest income 15,857 16,510 15,523
-------- ------- --------
Interest Expense
Interest on time
certificates of deposit
of $ 100,000 or more 709 1,192 962
Interest on other deposits 3,088 4,647 4,941
Interest on federal funds
purchased and other
borrowed funds 1,455 1,149 1,392
-------- ------- --------
Total interest expense 5,252 6,988 7,295
-------- ------- --------
Net interest income 10,605 9,522 8,228
Provision for loan losses 310 120 0
-------- ------- --------
Net interest income
after provision
for loan losses 10,295 9,402 8,228
-------- ------- --------
Other Income
Investment services income 0 191 671
Service charges on deposit accounts 621 519 335
Other service charges,
collection and exchange
charges, commissions and fees 313 305 316
Investment securities gains 1,720 1,761 974
Gain on trust services
affiliation 0 0 1,078
Gain on sale of property
and equipment 0 0 5
Other income 326 161 236
-------- ------- --------
2,980 2,937 3,615
-------- ------- --------
Other Expenses
Salaries, wages and other
employee benefits 3,558 3,211 3,026
Occupancy expense 353 354 356
Furniture and equipment expenses 1,222 1,273 1,037
Other operating expenses 1,526 1,864 1,842
-------- ------- --------
6,659 6,702 6,261
-------- ------- --------
Income before income taxes 6,616 5,637 5,582
Applicable income tax expense 1,763 1,636 1,489
-------- ------- --------
Net income $ 4,853 $ 4,001 $ 4,093
======== ======= ========
Earnings per share:
Basic earnings per share $ 2.79 $ 2.29 $ 2.32
Weighted average shares outstanding 1,737,298 1,745,847 1,761,699
Diluted earnings per share $ 2.76 $ 2.26 $ 2.30
Weighted average shares outstanding 1,760,989 1,770,949 1,781,647
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, 2002, 2001 and 2000
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Treasury Stockholders'
Stock Capital Earnings Income (Loss) Stock Equity
(000 omitted)
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
Comprehensive income:
Net income 0 0 4,853 0 0 4,853
Net unrealized gain on
available for sale
securities (net of tax
$ 686) 0 0 0 1,332 0 1,332
-------
Total comprehensive income 6,185
-------
Cash dividends declared on
common stock ($ .84 per
share) 0 0 ( 1,458) 0 0 ( 1,458)
Purchase of treasury stock
(21,127 shares) 0 0 0 0 ( 546) ( 546)
Sale of treasury stock (
6,637 shares) 0 6 0 0 161 167
------ ------ -------- ------- ------- --------
Balance at December 31, 2002 $ 2,225 $ 6,713 $ 22,999 $ 2,195 ($ 1,266) $ 32,866
======= ======= ======== ======= ======= =======
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, 2002, 2001 and 2000
2002 2001 2000
(000 omitted)
Cash flows from operating activities:
Net income $ 4,853 $ 4,001 $ 4,093
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 429 438 413
(Gain) on sale of investment
securities ( 1,720) ( 1,761) ( 974)
(Gain) on trust services
affiliation 0 0 ( 1,078)
Provision for deferred taxes 8 111 274
(Increase) decrease in:
Other assets 412 ( 38) ( 33)
Interest receivable 183 148 ( 207)
Prepaid income taxes ( 132) 159 5
Cash surrender value of
life insurance ( 409) ( 166) ( 160)
Increase (decrease) in:
Interest payable ( 142) ( 86) 130
Other liabilities 135 117 ( 147)
-------- ------- ------
Net cash provided by operating
activities 3,617 2,923 2,316
-------- ------- ------
Cash flows from investing activities:
Net (increase) in loans ( 19,806) ( 20,116) ( 5,943)
Purchases of property and
Equipment ( 1,058) ( 528) ( 261)
Net decrease in interest
bearing deposits with
banks 1,073 1,733 1,765
Maturity/sales of available
for sale securities 15,820 22,880 11,763
Purchases of available for
sale securities ( 6,136) ( 19,468) (11,207)
Purchase of Federal Home
Loan Bank stock ( 940) ( 588) ( 316)
Purchase of life insurance
Policies ( 1,850) ( 760) ( 66)
-------- ------- ------
Net cash (used) by investing
Activities ( 12,897) ( 16,847) (14,265)
-------- ------- ------
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, 2002, 2001 and 2000
2002 2001 2000
(000 omitted)
Cash flows from financing activities:
Net increase in deposits $ 9,958 $ 602 $ 17,275
Net (decrease) increase in
borrowings 1,711 18,475 ( 4,161)
Purchase of treasury stock ( 546) ( 423) ( 162)
Proceeds from sale of treasury
stock 167 200 36
Cash dividends paid ( 1,147) ( 1,965) ( 986)
-------- --------- --------
Net cash provided by financing
activities 10,143 16,889 12,002
-------- --------- --------
Net increase in cash and cash
equivalents 863 2,965 53
Cash and cash equivalents at
beginning of year 8,080 5,115 5,062
-------- --------- --------
Cash and cash equivalents at
end of year $ 8,943 $ 8,080 $ 5,115
========= ========= ========
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 5,393 $ 7,074 $ 7,165
Income taxes 1,861 1,576 1,418
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on
securities available for
sale (net of tax effects) $ 1,332 $ 29 $ 1,559
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 eight
offices are located in Greencastle, Quincy, Shady Grove, Laurich,
Waynesboro, Chambersburg and Mercersburg, Pennsylvania; and
Hagerstown, Maryland.
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
2002 or 2001.
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.
Note 1. Summary of Significant Accounting Policies (Continued)
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. Interest income generally is not recognized on
specific impaired loans unless the likelihood of further loss is
remote. Interest income on such loans is recognized only to the
extent of interest payments received.
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.
A reconciliation of the weighted average shares outstanding used to
calculate basic net income per share and diluted net income per
share follows. There is no adjustment to net income to arrive at
diluted net income per share.
2002 2001 2000
Weighted average shares
outstanding (basic) $ 1,737,298 $ 1,745,847 $ 1,761,699
Impact of common stock
equivalents 23,691 25,102 19,948
----------- ----------- -----------
Weighted average shares
outstanding (diluted) $ 1,760,989 $ 1,770,949 $ 1,781,647
=========== =========== ===========
- 9 -
Note 1. Summary of Significant Accounting Policies (Continued)
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.
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
generally accepted accounting principles, 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.
- 10 -
Note 1. Summary of Significant Accounting Policies (Continued)
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.
Federal Funds Purchased and Other Borrowed Funds. 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 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, 2002, 2001 and
2000 was $ 210,196, $ 250,101, and $ 235,621, respectively.
Comprehensive Income
The Corporation follows generally accepted accounting principles
when reporting comprehensive income. 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:
2002 2001 2000
Gross unrealized holding
gains (losses) arising
during the year $ 3,738 $ 1,805 $ 3,336
Reclassification adjustment
for gains realized in net
Income ( 1,720) ( 1,761) ( 974)
-------- -------- --------
Net unrealized holding gains
(losses) before taxes 2,018 44 2,362
Tax effect ( 686) ( 15) ( 803)
-------- -------- --------
Net change $ 1,332 $ 29 $ 1,559
======== ======== ========
- 11 -
Note 1. Summary of Significant Accounting Policies (Continued)
Stock Option Plans
The Corporation applies APB Opinion 25 and related Interpretations
in accounting for its stock option plans. Accordingly, only
compensation cost for the intrinsic value of options has been
recognized. Had compensation cost for the Corporation's stock
option plans been determined based on the fair value at the grant
dates for awards under the plans 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:
2002 2001 2000
Net income (000 omitted) As reported $ 4,853 $ 4,001 $ 4,093
Pro forma 4,842 3,986 4,077
Earnings per share As reported 2.79 2.29 2.32
Pro forma 2.78 2.28 2.31
Earnings per share
assuming dilution As reported 2.76 2.26 2.30
Pro forma 2.75 2.25 2.29
See Note 11 for further details concerning the Corporation's Stock
Options Plans.
Note 2. Investment Securities
The investment securities portfolio is comprised of securities
classified as available for sale at December 31, 2002 and 2001,
resulting in investment securities available for sale being carried
at fair value.
The amortized cost and fair value of investment securities
available for sale at December 31 were:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(000 omitted)
2002
Obligations of other
U.S. government agencies $ 3,112 $ 129 $ 0 $ 3,241
Mortgage-backed securities 5,040 162 0 5,202
Corporate bonds 2,532 69 146 2,455
Equities 14,667 2,138 51 16,754
Obligations of state and
political subdivisions 22,160 1,030 4 23,186
--------- ------- ------- ---------
$ 47,511 $ 3,528 $ 201 $ 50,838
========= ======= ======= =========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses 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
========= ======= ======= =========
- 12 -
Note 2. Investment Securities (Continued)
The fair values of investment securities available for sale at
December 31, 2002, 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 $ 1,000 $ 1,024
Due after one year through
five years 2,316 2,432
Due after five years
through ten years 5,871 6,183
Due after ten years 18,617 19,243
--------- ---------
27,804 28,882
Mortgage-backed securities 5,040 5,202
Equity securities 14,667 16,754
--------- ---------
$ 47,511 $ 50,838
========= =========
Proceeds from sales and maturities of investment securities
available for sale during 2002, 2001, and 2000 were $ 15,820,000,
$ 22,880,000, and $ 11,763,000, respectively. Gross realized gains
and losses on those sales and maturities were $ 1,720,000 and $ 0
for 2002, $ 1,762,000 and $ 1,000 for 2001, $ 1,003,000 and
$ 29,000 for 2000, respectively.
Securities carried at $ 22,634,739 and $ 24,977,000 at December 31,
2002 and 2001, respectively, were pledged to secure public funds
and for other purposes as required or permitted by law.
Note 2. Investment Securities (Continued)
Restricted bank stock includes:
2002 2001
(000 omitted)
Federal Reserve Bank stock $ 81 $ 81
Federal Home Loan Bank stock 2,286 1,778
Federal Home Mortgage Bank stock 0 750
Federal Home Loan Mortgage Corporation
preferred stock 250 250
Atlantic Central Bankers Bank 45 45
Citigroup Capital preferred stock 500 500
--------- --------
$ 3,162 $ 3,404
========= ========
Note 3. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
2002 2001 2000
(000 omitted)
Balance at beginning of period $ 1,577 $ 1,586 $ 1,719
Recoveries 51 63 20
Provision for possible loan losses
charged to income 310 120 0
------- -------- --------
Total 1,938 1,769 1,739
Losses 306 192 153
------- -------- --------
Balance at end of period $ 1,632 $ 1,577 $ 1,586
======= ======== ========
- 13 -
Note 4. Premises, Equipment, Furniture and Fixtures
Accumulated Depreciated
Cost Depreciation Cost
(000 omitted)
- - - - - - - - - 2002 - - - - - - -
Premises (including land
$ 442) $ 5,167 $ 1,974 $ 3,193
Equipment, furniture and
fixtures 2,971 2,288 683
------- ------- -------
Totals, December 31, 2002 $ 8,138 $ 4,262 $ 3,876
======= ======= =======
- - - - - - - - - 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
======= ======= =======
Depreciation expense amounted to $ 429,480 in 2002, $ 438,920 in
2001, and $ 413,000 in 2000.
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. 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 $ 350,447 and
$ 623,399 at December 31, 2002 and 2001, 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 $ 2,578,347 and
$ 2,546,044 at December 31, 2002 and 2001, respectively. During
2002, $ 858,126 of new loans were made and repayments totaled
$ 825,823.
Outstanding loans to bank employees totaled $ 1,873,655 and
$ 1,958,283 at December 31, 2002 and 2001, respectively. During
2002, $ 752,126 of new loans were made and repayments totaled
$ 836,754.
Note 6. Loans (Continued)
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, 2002.
Due over 1
Due within but within Due over Nonaccruing
One year 5 years 5 years Loans Total
(000 omitted)
Loans at predeter-
mined interest
rates $ 30,762 $ 42,452 $ 40,439 $ 782 $ 114,435
Loans at floating
or adjustable
interest rates 12,865 11,860 48,377 0 73,102
--------- -------- -------- ----- ---------
Total (1) $ 43,627 $ 54,312 $ 88,816 $ 782 $ 187,537
========= ======== ======== ===== =========
(1) These amounts have not been reduced by the allowance for
possible loan losses.
- 14 -
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.
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
2002 2001
Financial instruments whose
contract amounts represent
credit risk at December 31:
Commitments to extend credit $ 26,466,626 $ 19,801,447
Standby letters of credit and
financial guarantees written 732,938 1,693,602
------------ ------------
$ 27,199,564 $ 21,495,049
============ ============
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:
2002 2001 1999
Nonaccrual loans $ 781,878 $ 64,170 $ 63,187
========= ======== ========
Interest income that would have
been accrued at original
contract rates $ 84,587 $ 7,183 $ 1,861
Amount recognized as interest
income 5,821 762 82
--------- -------- --------
Foregone revenue $ 78,766 $ 6,421 $ 1,779
========= ======== ========
The Corporation had no impairment of loans in 2002, 2001, and 2000.
- 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 $ 47,000 for 2002,
$ 70,000 for 2001, and $ 45,000 for 2000.
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 $ 110,000,
$ 94,000, and $ 90,000 for 2002, 2001 and 2000, 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
$ 791,652 and $ 828,000 at December 31, 2002 and 2001,
respectively. Annual expense of $ 82,680, $ 110,000, and $ 118,000
was charged to operations for 2002, 2001, and 2000, 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 $ 162,108, $ 182,219, and $ 200,755 as
of December 31, 2002, 2001 and 2000, respectively.
The Corporation has 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 $ 18,566 and $ 8,283 at December 31, 2002 and 2001,
respectively. Total annual expense for this plan was $ 23,989,
$ 20,165, and $ 4,941 for 2002, 2001, and 2000, 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 $ 110,000, $ 94,000, and $ 90,000 for 2002,
2001 and 2000, 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 75,476 and 73,506 at December 31,
2002 and 2001, 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 $ 51,353, $ 29,555,
and $ 29,201 for 2002, 2001 and 2000, respectively.
The first plan is for select key employees. This plan granted
options for up to 1,440 shares at a purchase price of $ 1.00 per
share. These options can be exercised only by the key employees
during his/her lifetime.
The second plan is for outside directors. This plan granted
options of 3,600, 5,154, and 3,900 shares for each director at
$ 24.250, $ 20.125, and $ 24.375 per share for the years ended
December 31, 2002, 2001 and 2000, 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, 2002 the range of
exercise prices was from $ 11.91 to $ 32.13 per share. At December
31, 2002, there were 65,054 shares that can still be granted under
these plans.
A summary of the status of the Corporation's two fixed stock option
plans as of December 31 is as follows:
- - - - 2002 - - - - - - - - 2001 - - - - - - - - - - 2000 - - - -
Fixed Options Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Per Price Per Price Per
Shares Share Shares Share Shares Share
Outstanding at
beginning of
year 25,102 $ 21 19,948 $ 22 16,728 $ 21
Granted 5,040 18 6,528 16 4,875 20
Exercised 3,548 10 1,374 1 1,655 6
Forfeited/expired 2,903 21 0 0 0 0
------ ---- ------ ---- ------ ----
Outstanding at
end of year 23,691 $ 21 25,102 $ 21 19,948 $ 22
====== ==== ====== ==== ====== ====
Options exercisable
at year end 20,091 19,948 16,048
Weighted average
fair value of
options per
share granted
during the year $ 3.33 $ 4.53 $ 6.12
Outstanding options at December 31, 2002 consist of the following:
Remaining
Shares Shares Contractual Exercise
Outstanding Exercisable Life Price
3,623 2,903 1 year $ 21.49
2,720 2,720 4 years 11.91
2,856 2,856 5 years 16.19
2,856 2,856 6 years 22.25
2,720 2,720 7 years 32.13
2,600 2,600 8 years 24.37
3,436 3,436 9 years 20.13
2,880 0 10 years 24.25
------ ------ -------- -------
Total/Average 23,691 20,091 8 years $ 21.49
====== ====== ======== =======
- 17 -
Note 11. Stock Option Plans (Continued)
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.
2002 2001 2000
Dividend yield 2.8% 3% 2.3%
Expected life 8 8 8
Expected volatility 14.26 20.06 13.97
Risk-free interest rate 3.50 5.33 5.60
Note 12. Deposits
Included in savings deposits at December 31 are NOW and Money
Market Account balances totaling $ 62,834,000 and $ 51,979,000 for
2002 and 2001, respectively.
Time deposits of $ 100,000 and over aggregated $ 15,119,446 and
$ 21,975,890 at December 31, 2002 and 2001, respectively. At
December 31, 2002 and 2001 the scheduled maturities of time
deposits of $ 100,000 and over are as follows:
2002 2001
(000 omitted)
Maturity
Three months or less $ 2,912 $ 5,090
Over three months
through twelve months 8,591 13,666
Over twelve months 3,616 3,220
--------- ---------
$ 15,119 $ 21,976
========= =========
At December 31, 2002 scheduled maturities of all time deposits are
as follows:
2003 $ 42,583,109
2004 7,199,440
2005 11,364,892
2006 1,497,170
2007 7,429,392
------------
$ 70,074,003
============
The aggregate amount of demand deposits reclassified as loan
balances were $ 184,588 and $ 651,740 at December 31, 2002 and
2001, 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 $ 1,627,189 and $ 1,638,199 at
December 31, 2002 and 2001, respectively.
Note 13. Liabilities for Other Borrowed Funds
At December 31, 2002 and 2001, $ 2,800,000 and $ 1,479,000,
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, 2002 and 2001 was $ 5,800,000 and
$ 2,800,000, respectively. Interest on these lines ranged from
4.00% to 5.25% for 2002 and 2001.
- 18 -
Note 13. Liabilities for Other Borrowed Funds (Continued)
In addition, $ 307,647 and $ 299,680 of the balance of liabilities
for other borrowed funds at December 31, 2002 and 2001,
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 $ 656,950 and
$ 1,256,950 at December 31, 2002 and 2001, respectively.
The Corporation also had the following borrowings from the Federal
Home Loan Bank:
2002 2001
Interest Interest
Loan Type Rate Balance Rate Balance Maturity
Convertible 5.25 $ 5,000,000 5.25 $ 5,000,000 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 11/20/08
Convertible 5.395 5,000,000 5.395 5,000,000 09/15/08
Line of credit (1)1.31 10,943,900 1.88 15,561,600 02/27/03
Convertible 3.99 5,000,000 0 0 11/27/12
------------ ------------
$ 35,943,900 $ 35,561,600
============ ============
(1) Total amount available under this line is $ 14,056,100 and
$ 4,438,400 at December 31, 2002 and 2001.
Total maximum borrowing capacity from Federal Home Loan Bank at
December 31, 2002 was $ 110,288,000.
Collateral for borrowings consists of certain securities and the
Corporation's 1-4 family mortgage loans totaling approximately
$ 110 million at December 31, 2002.
Note 14. Income Taxes
The components of federal income tax expense are summarized as
follows:
2002 2001 2000
(000 omitted)
Current year provision:
Federal $ 1,604 $ 1,378 $ 1,149
State 151 147 66
Deferred income taxes (benefit) 8 111 274
------- -------- --------
$ 1,763 $ 1,636 $ 1,489
======= ======== ========
- 19 -
Note 14. Income Taxes (Continued)
Federal income taxes were computed after reducing pretax accounting
income for non-taxable income in the amount of $ 1,741,545,
$ 1,321,372, and $ 1,018,310 for 2002, 2001 and 2000, respectively.
A reconciliation of the effective applicable income tax rate to the
federal statutory rate is as follows:
2002 2001 1999
Federal income tax rate 34.0% 34.0% 34.0%
Increase resulting from:
State taxes, net of federal
tax benefit 2.3 2.6 1.2
Reduction resulting from:
Nontaxable interest income 9.7 7.6 8.5
---- ---- ----
Effective income tax rate 26.6% 29.0% 26.7%
==== ==== ====
Deferred tax assets have been provided for deductible temporary
differences related to the allowance for loan loss, deferred
compensation, and interest on nonaccrual loans. Deferred tax
liabilities have been provided for taxable temporary differences
related to depreciation and unrealized gains on securities
available for sale. The net deferred taxes included in the
accompanying balance sheets at December 31 are as follows:
2002 2001
Deferred Tax Assets
Bad debts $ 404 $ 386
Deferred compensation 276 282
Non-accrual loan income 27 20
Depreciation 0 14
-------- -------
$ 707 $ 702
-------- -------
Deferred Tax Liabilities
Depreciation ($ 13) 0
Unrealized gain on
investment securities ( 1,498) ( 812)
-------- -------
( 1,511) ( 812)
-------- -------
Net deferred tax (liability) ($ 804) ($ 110)
======== =======
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 Sheets
December 31
Assets 2002 2001
(000 omitted)
Cash $ 6 $ 2
Securities available for sale 16,754 13,366
Investment in The First National
Bank of Greencastle 23,252 19,840
-------- --------
Total assets $ 40,012 $ 33,208
======== ========
Liabilities
Other liabilities $ 2,146 $ 1,211
Notes payable - subsidiary 2,200 2,000
Notes payable - other 2,800 1,479
-------- --------
Total liabilities 7,146 4,690
-------- --------
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 6,713 6,707
Retained earnings 22,999 19,604
Accumulated other comprehensive income 2,195 863
-------- --------
34,132 29,399
Less: Cost of Treasury stock,
47,290 shares - 2002; 32,790
shares - 2001 ( 1,266) ( 881)
-------- --------
Total stockholders' equity 32,866 28,518
-------- --------
Total liabilities and stockholders'
equity $ 40,012 $ 33,208
======== ========
Statements of Income
Years Ended December 31
2002 2001 2000
(000 omitted)
Income
Dividends $ 334 $ 305 $ 285
Net gain on sale of
Securities 1,720 1,756 980
Cash dividends from
wholly-owned subsidiary 1,147 1,965 1,905
Miscellaneous 0 19 0
--------- ---------- ----------
3,201 4,045 3,170
--------- ---------- ----------
Expenses
Interest 185 193 288
Taxes 573 478 262
Postage and printing 36 33 20
Management fees 102 102 100
Professional fees 152 212 104
Other expenses 0 9 23
--------- ---------- ----------
1,048 1027 797
--------- ---------- ----------
Income before equity in
undistributed income 2,153 3,018 2,373
Equity in undistributed
income of subsidiary 2,700 983 1,720
--------- ---------- ----------
Net Income $ 4,853 $ 4,001 $ 4,093
========= ========== =========
- 21 -
Note 15. Tower Bancorp Inc. (Parent Company Only) Financial
Information (Continued)
Statements of Cash Flows
Years Ended December 31
2002 2001 2000
(000 omitted)
Cash flows operating activities:
Net income $ 4,853 $ 4,001 $ 4,093
Adjustments to reconcile
net income to cash
provided by operating
activities:
Net gain on sale of
investment
securities ( 1,720) ( 1,756) ( 980)
(Gain) on trust
services
affiliation 0 0 ( 1,078)
Equity in
undistributed
income of
subsidiary ( 2,700) ( 983) ( 1,720)
Increase in accrued expenses 304 ( 965) 385
------- ------- ------
Net cash provided by operating
activities 737 297 700
------- ------- ------
Cash flows from investing activities:
Purchase of investment
securities ( 6,145) ( 2,769) ( 1,759)
Sales of investment
Securities 5,416 4,154 2,813
------- ------- ------
Net cash provided (used)
by investing activities ( 729) 1,385 1,054
------- ------- ------
Cash flows from financing activities:
Purchase of treasury stock ( 545) ( 423) ( 162)
Proceeds from sale of
treasury stock 167 200 36
Dividends paid ( 1,147) ( 1,965) ( 986)
Net proceeds (payments)
on/from borrowing 1,521 508 ( 642)
------- ------- ------
Net cash (used) by financing
Activities ( 4) ( 1,680) ( 1,754)
------- ------- ------
Net increase (decrease) in cash 4 2 0
Cash, beginning 2 0 0
------- ------- ------
Cash, ending $ 6 $ 2 $ 0
======= ======= =======
Note 16. Compensating Balance Arrangements
Included in cash and due from banks are required deposit balances
at the Federal Reserve of $ 615,000 at December 31, 2002 and 2001,
required deposit balances at Atlantic Central Banker's Bank of $
515,000 at December 31, 2001 and required deposit balances at
Equifax of $ 36,641 and $ 28,124 at December 31, 2002 and 2001,
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.
- 23 -
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 $ 22,200 for 2002, 2001 and 2000.
The Corporation leases its facilities in Chambersburg under a
noncancellable lease that expires in September 2007, with a year-
to-year basis thereafter. Total rent expense charged to operations
was $ 9,600 and $ 3,200 for 2002 and 2001, respectively.
The Corporation also leases a site for an Automatic Teller Machine
under a noncancellable operating lease that expires in 2003 with
the right to negotiate an extended lease of two additional five
year terms. Total rent expense charged to operations was $ 9,000
for 2002, 2001 and 2000. The lease rental for the second five
years of the initial term is subject to negotiation.
Note 18. Commitments (Continued)
Following is a schedule, by years, of future minimum rentals under
the lease agreements as of December 31, 2002:
Year Ending
2003 $ 34,800
2004 31,800
2005 31,800
2006 31,800
2007 7,200
---------
$ 137,400
=========
Note 19. Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial
instruments were as follows at December 31:
- - - - - - 2002 - - - - - - - - - - - - 2001 - - - - - -
Carrying Fair Carrying Fair
Amount Value Amount Value
FINANCIAL ASSETS
Cash and due from banks $ 8,943 $ 8,943 $ 8,080 $ 8,080
Interest bearing deposits
with banks 1,644 1,644 2,717 2,717
Securities available for sale 50,838 50,838 55,601 55,601
Loans receivable 187,537 189,121 167,677 170,549
Accrued interest receivable 1,013 1,013 1,196 1,196
Other bank stock 3,162 3,162 3,404 3,404
FINANCIAL LIABILITIES
Time certificates 70,074 70,877 77,067 77,580
Other deposits 117,483 117,483 100,532 100,532
Other borrowed funds 39,052 39,233 37,341 37,399
Accrued interest payable 287 287 429 429
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 $ 7,381,375, and $ 5,945,243 for 2002 and 2001,
respectively.
- 23 -
Note 20. Regulatory Matters (Continued)
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", 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
2002 2001 Requirements
Leverage ratio 11.72% 11.61% 3%
Risk-based capital ratio
Tier I (core capital) 17.48% 16.96% 4%
Combined Tier I and Tier II
(core capital plus
allowance for loan
losses) 18.95% 18.24% 8%
As of December 31, 2002 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
2002 2001 2000 1999 1998
Income (000 omitted)
Interest income $ 15,857 $ 16,510 $ 15,523 $ 13,648 $ 12,548
Interest expense 5,252 6,988 7,295 6,079 5,342
Provision for loan losses 310 120 0 0 0
-------- -------- -------- -------- --------
Net interest income
after provision for
loan losses 10,295 9,402 8,228 7,569 7,206
Other operating income 2,980 2,937 3,615 2,822 2,082
Other operating expenses 6,659 6,702 6,261 5,941 5,133
-------- -------- -------- -------- --------
Income before income
Taxes 6,616 5,637 5,582 4,450 4,155
Applicable income tax 1,763 1,636 1,489 1,247 1,246
-------- -------- -------- -------- --------
Net income $ 4,853 $ 4,001 $ 4,093 $ 3,203 $ 2,909
======== ======== ======== ======== ========
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.
2002 - 1,737,298 2000 - 1,761,699 1998 - 1,732,479
2001 - 1,745,847 1999 - 1,763,548
Net income $ 2.79 $ 2.29 $ 2.32 $ 1.82 $ 1.68
Cash dividend .84 1.12 .56 .97 .43
Book value 18.92 16.33 15.14 12.56 13.02
Year-End Balance Sheet Figures
(000 omitted) 2002 2001 2000 1999 1998
Total assets $ 262,589 $ 245,574 $ 224,512 $ 206,874 $ 187,335
Net loans 185,905 166,100 145,984 130,041 121,800
Total investment
Securities 54,000 59,005 60,022 55,846 48,517
Deposits - noninterest
Bearing 13,297 13,328 16,359 13,746 11,346
Deposits - interest
Bearing 174,260 164,271 160,638 145,978 131,120
Total deposits 187,557 177,599 176,997 159,724 142,466
Total stockholders'
Equity 32,866 28,518 26,676 22,136 22,552
Ratios
Average equity/average
assets 12.10 11.96 10.96 11.42 12.72
Return on average
equity 15.81 14.40 17.17 14.09 13.54
Return on average
assets 1.91 1.72 1.88 1.63 1.72
- 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, 2002 and 2001 are as follows:
2002 2001
($ 000 omitted except - - - - - Quarter Ended - - - - - - - - - - - - Quarter Ended - - - - -
per share
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
Interest income $ 4,113 $ 4,008 $ 3,971 $ 3,765 $ 4,097 $ 4,219 $ 4,225 $ 3,969
Interest expense 1,444 1,399 1,313 1,096 1,902 1,839 1,785 1,462
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 2,669 2,609 2,658 2,669 2,195 2,380 2,440 2,507
Provision for loan
Losses 60 70 90 90 30 30 30 30
------- ------- ------- ------- ------- ------- ------- -------
Net interest income
after provision
for loan losses 2,609 2,539 2,568 2,579 2,165 2,350 2,410 2,477
Other income 1,212 799 720 249 1,012 624 1,059 242
Other expenses 1,820 1,774 1,739 1,326 1,700 1,763 1,821 1,418
------- ------- ------- ------- ------- ------- ------- -------
Operating income
before income
taxes 2,001 1,564 1,549 1,502 1,477 1,211 1,648 1,301
Applicable income taxes 553 420 409 381 369 307 435 525
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 1,448 $ 1,144 $ 1,140 $ 1,121 $ 1,108 $ 904 $ 1,213 $ 776
======= ======= ======= ======= ======= ======= ======= =======
Net income applicable
to common stock
Per share data:
Net income $ .83 $ .66 $ .66 $ .64 $ .63 $ .51 $ .69 $ .46
- 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 Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- - - - - - - 2002 - - - - - - - - - - - - 2001 - - - - - - - - - - - - 2000 - - - - - -
(000 omitted) (000 omitted) (000 omitted)
Assets
Investment Securities:
Taxable interest income $ 15,491 $ 1,352 8.7% $ 21,973 $ 1,852 8.4% $ 25,767 $ 2,101 8.2%
Nontaxable interest
Income 21,222 1,153 5.4% 20,060 1,034 5.2% 15,673 793 5.1%
---------- --------- ---- ---------- --------- ---- ---------- --------- ----
Total investment
securities 36,713 2,505 6.8% 42,033 2,886 6.9% 41,440 2,894 7.0%
Loans (net of unearned
discounts) 183,805 13,207 7.2% 158,570 13,380 8.4% 140,788 11,945 8.5%
Other short-term
investments 20,726 145 0.7% 20,957 244 1.3% 22,700 684 3.0%
---------- --------- ---- ---------- --------- ---- ---------- --------- ----
Total interest
earning assets 241,244 $ 15,857 6.6% 221,560 $ 16,510 7.5% 204,928 $ 15,523 7.6%
========= ==== ======== ==== ======== ====
Allowance for loan
losses ( 1,606) ( 1,581) ( 1,652)
Cash and due from
banks 8,511 6,598 5,088
Bank premises and
equipment 3,416 3,020 3,140
Other assets 2,517 2,683 5,946
--------- --------- ---------
Total assets $ 254,082 $ 232,280 $ 217,450
Liabilities and Stockholders' Equity
Interest bearing
demand deposits $ 76,373 $ 932 1.2% $ 63,422 $ 1,254 2.0% $ 52,740 $ 1,230 2.3%
Savings deposits 22,792 200 0.9% 24,828 541 2.2% 30,139 1,004 3.3%
Time deposits 71,631 2,665 3.7% 77,054 4,044 5.2% 69,006 3,669 5.3%
Short-term borrowings 41,487 1,455 3.5% 24,990 1,149 4.6% 26,077 1,392 5.3%
---------- --------- ---- ---------- --------- ---- ---------- --------- ----
Total interest
bearing liabilities 212,283 $ 5,252 2.5% 190,294 $ 6,988 3.7% 177,962 $ 7,295 4.1%
========= ==== ======== ==== ======== ====
Demand deposits 12,470 12,840 13,857
Other liabilities 1,367 1,365 1,225
---------- ---------- ----------
Total liabilities 223,390 204,499 193,044
Stockholders' equity 30,692 27,781 24,406
Total liabilities
& stockholders'
equity $ 254,082 $ 232,280 $ 217,450
Net interest income/net
yield on average earning
assets $ 10,605 4.4% $ 9,522 4.3% $ 8,228 4.0%
========= ==== ======== ==== ======== ====
- 27 -
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
CHANGES IN NET INTEREST INCOME
TAX EQUIVALENT YIELDS
2002 Versus 2001
Increase (Decrease)
Due to Change in
Total
Average Average Increase
Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned
discounts) $ 2,120 ($ 2,293) ($ 173)
Taxable investment securities ( 544) 44 ( 500)
Nontaxable investment securities 60 59 119
Other short-term investments ( 3) ( 96) ( 99)
------- ------- --------
Total interest income 1,633 ( 2,286) ( 653)
------- ------- --------
Interest Expense
Interest bearing demand 259 ( 581) ( 322)
Savings deposits ( 45) ( 296) ( 341)
Time deposits ( 282) ( 1,097) ( 1,379)
Other short-term borrowings 759 ( 453) 306
------- ------- --------
Total interest expense 691 ( 2,427) ( 1,736)
------- ------- --------
Net interest income $ 1,083
========
2002 Versus 2001
Increase (Decrease)
Due to Change in
Total
Average Average Increase
Volume Rate (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
=========
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, 2002
The following table shows the maturities of investment
securities at amortized cost as of December 31, 2002, and weighted
average yields of such securities. Yields are shown on a taxable
equivalent basis, assuming a 34% federal income tax rate.
After 5
After 1 years
year but but
Within within 5 within After 10
1 year years 10 years years Total
(000 omitted)
Bonds:
U.S. Government agencies/
mortgage-backed securities
Book value $ 526 $ 1,816 $ 2,824 $ 2,986 $ 8,152
Yield 5.31% 4.57% 5.45% 5.71% 5.34%
State and municipal
Book value $ 100 $ 1,433 $ 3,448 $ 17,179 $ 22,160
Yield 5.82% 5.88% 7.18% 7.35% 7.22%
Other
Book value $ 400 $ 471 $ 222 $ 1,439 $ 2,532
Yield 6.54% 5.59% 8.12% 2.39% 4.13%
Total book value $ 1,026 $ 3,720 $ 6,495 $ 21,607 $ 32,844
========= ======= ======= ======== ========
Yield 5.84% 5.20% 6.46% 6.79% 6.52%
========= ======= ======= ======== ========
Equity Securities:
Total Equity Securities $ 14,667
========
Yield 2.49%
========
Total Investment Securities $ 47,511
========
Yield 5.28%
========
- 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 $ 4,853,000 in 2002 compared to $ 4,001,000
in 2001 and $ 4,093,000 in 2000. Net income on an adjusted per share
basis for 2002 was $ 2.79 up $ .50 from $ 2.29, realized during 2001.
Total interest income decreased $ 653,000 from 2001 to 2002
and increased $ 987,000 from 2000 to 2001. Decreases in 2002 were due
to reduction in rates while increases in 2001 were primarily due to
volume increases in average earning assets. Average loans outstanding
in 2002 increased 11.8% over 2001. This coupled with lower rates
resulted in a 1.3% decrease in interest income from loans in 2002 as
compared to a 12.0% increase realized in 2001. Earnings on
investments (excluding gains from sales) decreased 15.3% in 2002
compared to a 12.5% decrease in 2001. This decrease was primarily the
result of decreased average rates of investment securities which
decreased to 4.6% in 2002 from 5.0% in 2001. Total average earning
assets increased 8.9% in 2002 compared to 8.1% in 2001. Increases in
earning assets during 2002 and 2001 were proportionately higher in
loans, which typically produce higher yields than investments thus
producing the higher earnings during 2002 and 2001.
Interest from loans accounted for 83% of total interest
income for 2002, as compared to 81% and 77% for 2001 and 2000,
respectively. Interest and dividends on investments amounted to
$ 2,650,000 or 17% of interest income for 2002, as compared to
$ 3,130,000 or 19% in 2001, and $ 3,578,000 or 23% in 2000.
Total interest expense was $ 5,252,000 for 2002, a decrease
of $ 1,736,000 over the $ 6,988,000 for 2001. The increase in total
average deposits was 2.9% in 2002 compared to 7.5% in 2001. Overall
growth was moderate during 2002 and 2001 with interest bearing demand
deposits increasing 20.4% and time deposits and savings decreasing
7.1% and 8.2%, respectively. Although overall growth was moderate
during 2002, rates decreased 1.20% which caused a decrease in interest
expense on deposits of 35%. There were some significant changes in
the level of borrowed funds resulting in an overall increase in
interest expense on borrowed funds by 26.6%. 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
net interest margin to stay relatively constant for 2002 and 2001 at
4.4% and 4.3%, respectively.
The Corporation's net charge-offs have been lower than peer
group performance for the past five years. Net charge-offs were
$ 255,000, $ 129,000, and $ 125,000 for 2002, 2001 and 2000,
respectively. Previous years' net recoveries, as well as an improving
loan portfolio, have allowed the bank to have a current year provision
of $ 310,000, $ 120,000, and $ 0 for 2002, 2001 and 2000,
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 -
OPERATING RESULTS (Continued)
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 and were less than 1%
of total loans over the past several years.
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 reserve
to meet the constant risks associated with a growing loan portfolio
and an expanding customer base and intends to continue to maintain
the reserve at appropriate levels based on ongoing evaluations of
the loan portfolio.
Other income represents service charges on deposit
accounts, commissions and fees received for the sale of travelers'
checks, money orders and savings bonds, fees for trust services,
fees for investment services, securities gains and losses and other
income, such as safe deposit box rents. Other income increased
$ 43,000 or 1.5% for 2002 over 2001, and decreased $ 678,000 or
18.8% for 2001 over 2000. The increase in 2002 was due to income
derived from increases in service fees charged. 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 four 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 $ 347,000 or 10.8%
in 2002 over 2001, compared to an increase of $ 185,000 or 6.1% in
2001 over 2000. Occupancy and equipment expense decreased by 3.2%
from 2002 to 2001 compared to 16.8% from 2001 to 2000. Management
expected noninterest expenses to increase in 2002 and 2001 with the
opening of their new branches and they expect noninterest expense
to continue increasing as their plans to expand take place. Total
noninterest expenses decreased .5% in 2002, compared to an increase
of 7.0% and 5.4% in 2001 and 2000, respectively.
Applicable income taxes changed between 2000, 2001 and
2002 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 2002 and 2001 is 34%. At
December 31, 2002 and 2001, deferred taxes amounted to ($ 804,000)
and ($ 110,000), respectively. If all timing differences reversed
in 2002, 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.
CRITICAL ACCOUNTING POLICIES
The Bank policy related to the allowance for loan losses
is considered to be a critical accounting policy because the
allowance for loan losses represents a particularly sensitive
accounting estimate. The amount of the allowance is based on
management's evaluation of the collectibility of the loan
portfolio, including the nature of the loan portfolio, credit
concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions.
- 31 -
CRITICAL ACCOUNTING POLICIES (Continued)
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.
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board (FASB) Standard 142,
which was effective for years beginning after December 15, 2001,
addressed 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 has evaluated the impact of this statement
on the consolidated financial statements and has determined it is
not material.
Financial Accounting Standards Board (FASB) Standard 148,
Accounting for Stock-Based Compensation-Transition and Disclosure,
an amendment of FASB 123. This statement amends FASB Statement No.
123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-
based employee compensation. It also amends the disclosure
provisions of Statement 123 to require prominent disclosure about
the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation.
Finally, this Statement amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about those effects in
interim financial information. Management does not expect there to
be a significant impact from this statement, since they have
elected not to expense options under the fair value based method.
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. At December 31, 2002, the Corporation had off-balance
sheet liabilities in the form of commitments to extend credit and
letters of credit in the amount of $ 27,199,564. The Corporation
also has available additional borrowing capacity of up to
$ 74,056,100.
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, 2002, based on the results of the
simulation model, the Corporation would expect a change in net
interest income of $ 378,774 if interest rates gradually decreased
or increased, respectively, from current rates by 300 basis points
over a 12-month period.
- 32 -
LIQUIDITY RISK MANAGEMENT (Continued)
The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution's interest
rate sensitivity "gap". An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning
assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within
that same time period. A gap is considered positive when the amount
of interest-earning assets maturing or repricing exceeds the amount of
interest-bearing liabilities maturing or repricing within the same
period. A gap is considered negative when the amount of interest-
bearing liabilities maturing or repricing exceeds the amount of
interest-earning assets maturing or repricing within the same period.
Accordingly, in a rising interest rate environment, an institution
with a positive gap would be in a better position to invest in higher
yielding assets which would result in the yield on its assets
increasing at a pace closer to the cost of its interest-bearing
liabilities, than would be the case if it had a negative gap. During
a period of falling interest rates, an institution with a positive gap
would tend to have its assets repricing at a faster rate than one with
a negative gap, which would tend to restrain the growth of its net
interest income.
The 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, 2002 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
rate sensitive liabilities of "Zero - 90 days" due to these funds
being subject to immediate withdrawal.
Due 0 - 90 Due 91 - 360 Due After 1
Days Days Year Total
(000 omitted)
Rate sensitive assets
Interest bearing
Deposits with banks
and investment
securities $ 1,101 $ 2,973 $ 48,408 $ 52,482
Real estate, commercial
and consumer loans 36,808 58,475 92,254 187,537
----------- --------- ---------- ----------
$ 37,909 $ 61,448 $ 140,662 $ 240,019
----------- --------- ---------- ----------
Rate sensitive liabilities
Certificates of
deposit over
$ 100,000 $ 2,738 $ 8,665 $ 3,716 $ 15,119
Other certificates of
deposit 9,318 23,113 22,524 54,955
Money market deposit
accounts 79,463 0 0 79,463
NOW accounts and other
savings deposits 24,723 0 0 24,723
Federal funds and other
Liabilities 14,052 0 25,000 39,052
----------- --------- ---------- ----------
$ 130,294 $ 31,778 $ 51,240 $ 213,312
Cumulative interest
sensitive GAP ( 92,385) ( 62,715) 26,707 26,707
Cumulative interest
sensitive GAP ratio ( 35.18%) ( 23.88%) 10.17% 10.17%
- 33 -
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.
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 Thousands) - - - - - - - Principal/Notional Amount Maturing In: - - - - - - - Fair
Rate sensitive
assets 2003 2004 2005 2006 2007 Thereafter Total Value
Fixed interest
rate loans 23,345 11,182 10,616 7,552 6,870 54,870 114,435 116,019
Average interest
rate 7.18 8.06 7.80 7.44 7.31 6.84 7.21
Variable interest
rate loans 12,865 2,845 2,966 2,993 3,056 48,377 73,102 73,102
Average interest
rate 5.64 5.11 5.05 5.06 5.07 5.23 5.27
Fixed interest
rate securities 2,271 1,155 808 1,729 1,141 28,628 35,732 39,059
Average interest
rate 5.61 5.42 5.30 4.55 5.34 5.10 5.13
Noninterest bearing
checking 2,185 656 656 656 218 8,926 13,297 13,297
Savings and
interest bearing
checking 3,126 2,084 2,084 2,084 1,042 93,766 104,186 104,186
Average interest
rates .77 .77 .77 .77 .77 .77 .77
Time deposits 44,084 7,682 11,927 1,755 4,626 0 70,074 70,877
Average interest
rates 3.08 3.20 3.52 4.41 4.10 0 3.27
Fixed interest rate
borrowings 0 0 0 0 0 25,000 25,000 25,181
Variable interest
rate barrowings 14,052 0 0 0 0 0 14,052 14,052
Borrowings average
interest rate 1.85 0 0 0 0 4.86 3.78
- 34 -
CAPITAL FUNDS
Internal capital generation has been the primary method
utilized by Tower Bancorp Inc. to increase its capital.
Stockholders' equity, which exceeded $ 32.8 million at December
31, 2002 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
2002 2001 Requirements
Leverage ratio 11.72% 11.61% 3%
Risk-based capital
ratio Tier I
(core capital) 17.48% 16.96% 4%
Combined Tier I
and Tier II
(core capital
plus allowance
for loan losses) 18.95% 18.24% 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.
2002 2001 1999
Equity capital at December 31
($ 000 omitted) $ 32,866 $ 28,518 $ 26,676
Equity capital as a percent
of assets at December 31 12.52% 11.61% 11.88%
Return on average assets 1.91% 1.72% 1.88%
Return on average equity 15.81% 14.40% 17.17%
Cash dividend payout ratio 30.04% 49.11% 24.09%
STOCK MARKET ANALYSIS AND DIVIDENDS
The corporation's common stock is traded in the over-
the-counter market. As of December 31, 2002 the approximate
number of shareholders of record was 1,035.
Cash
2002 Market Price Dividend
First Quarter $ 23.50 - 25.20 $ .32
Second Quarter 24.30 - 26.25 .16
Third Quarter 25.75 - 27.25 .18
Fourth Quarter 26.10 - 30.00 .18
Cash
2001 Market Price 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
- 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 16, 2003, with respect to
the consolidated balance sheets of Tower Bancorp, Inc. and
subsidiary as of December 31, 2002 and 2001 and the related
consolidated statements of income, stockholders' equity and cash
flows for the three year period ended December 31, 2002, which
report is incorporated by reference in the December 31, 2002
annual report to stockholders on Form 10-K of Tower Bancorp, Inc.
/s/SMITH ELLIOTT KEARNS & COMPANY, LLC
--------------------------------------
Chambersburg, PA
March 15, 2003
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 Annual Report of Tower Bancorp, Inc.
(the "Company") on Form 10-K for the period ending December 31,
2002 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Jeffrey 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/ Jeffrey B. Shank
-----------------------------
Chief Executive Officer
March 15, 2003
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 Annual Report of Tower Bancorp, Inc.
(the "Company") on Form 10-K for the period ending December 31,
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
March 15, 2003