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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, 2003
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, 2003, 1,734,505 shares of the registrant's common stock were
outstanding. The aggregate market value of such shares held by nonaffiliates on
that date was $ 67,212,069.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31, 2003
are incorporated by reference into Parts I and II. Portions of the Proxy
Statement for 2004 Annual Meeting of Security Holders are incorporated by
reference in Part III of this Form 10-K.
TOWER BANCORP,INC.
FORM 10-K
INDEX
Part I
Item 1. Business 2
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 3a.Executive Officers of the Registrant 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Registrant's Common Stock and Related
Security Holder Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7a.Quantitative and Qualitative Disclosures about
Market Risk 12
Item 8. Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 20
Item 9a.Controls and Procedures 20
Part III
Item 10.Directors and Executive Officers of the Registrant 21
Item 11.Executive Compensation 21
Item 12.Security Ownership of Certain Beneficial Owners and
Management 21
Item 13.Certain Relationships and Related Transactions 21
Item 14.Principal Accountant Fees and Services 21
Part IV
Item 15.Exhibits, Financial Statement Schedules and Reports on
Form 8-K 22
Signatures 25
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, and 2,108 shares to First directors as part of a stock
option plan.
During 2003 Tower acquired 14,833 shares of its own common stock and
sold 10,470 shares of treasury stock to First's ESOP plan, 1,623 shares to First
executive officers, and 4,435 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 nine branches are located in Quincy,
Shady Grove, Waynesboro, Mercersburg, Chambersburg (2), and Laurich,
Pennsylvania, and
Hagerstown, Maryland, as well as its main office in Greencastle, Pennsylvania.
During the third quarter of 2003 the ninth branch office was opened in Franklin
County, Pennsylvania. The day-to-day management of First is conducted by the
subsidiary's officers. Tower derives the majority of its current income from
First.
Tower has no employees other than its four officers who are also
employees of First, its subsidiary. On December 31, 2003, First had 89 full-
time and 19 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.
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, 2003, First had total assets of approximately
$ 300.7 million, total shareholders' equity of approximately $ 40 million and
total deposits of approximately $ 207 million.
Regulation and Supervision
Tower Bancorp, Inc. (Tower) is a bank holding company within the
meaning of the Bank Holding Company Act of 1956 (BHC Act), and is registered as
such with the Board of Governors of the Federal Reserve System (FRB). As a
registered bank holding company, the parent company is required to file with the
FRB certain reports and information. Tower is also subject to examination by
the FRB and is restricted in its acquisitions, certain of which are subject to
approval by the FRB. In addition, the parent company would be required to
obtain the approval of the Pennsylvania State Banking Department in order for it
to acquire certain bank and nonbank subsidiaries.
Under the BHC Act, a bank holding company is, with limited exceptions,
prohibited from (i) acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any company which is not a bank or (ii) engaging
in any activity other than managing or controlling banks. With the prior
approval of the FRB, however, a bank holding company may own shares of a company
engaged in activities which the FRB determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. In
addition, federal law imposes certain restrictions on transactions between Tower
and its subsidiary, First National Bank of Greencastle (First). As an affiliate
of First, Tower is subject, with certain exceptions, to provisions of federal
law imposing limitations on, and requiring collateral for, extensions of credit
by First to its affiliates.
The operations of First are subject to federal and state statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System and to banks whose deposits are insured by
the Federal Deposit Insurance Corporation. Bank operations are also subject to
regulations of the Office of the Comptroller of the Currency, the Federal
Reserve Board and the Federal Deposit Insurance Corporation.
The primary supervisory authority of First is the Office of the
Comptroller of the Currency (OCC), who regularly examines such areas as
reserves, loans, investments, management practices and other aspects of bank
operations. These examinations are designed primarily for the protection of the
Bank depositors.
Federal and state banking laws and regulations govern, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, the loans a bank makes and
collateral it takes, the maximum interest rates a bank may pay on deposits, the
activities of a bank with respect to mergers and consolidations, and the
establishment of branches, and management practices and other aspects of banking
operations. See Note 20 of the Notes to Financial Statements for a discussion
of the limitations on the availability of Tower's subsidiary's undistributed
earnings for the payment of dividends due to such regulation and other reasons.
The Financial Institutions Reform, Recovery and Enforcement Act of
1989(FIRREA) provides among other things that a financial institution insured by
the Federal Deposit Insurance Corporation(FDIC) sharing common ownership with a
failed institution can be required to indemnify the FDIC for its losses
resulting from the insolvency of the failed institution, even if such
indemnification causes the affiliated institution also to become insolvent.
Tower currently has only one subsidiary and as a result has not been
significantly affected by the aforementioned provisions of FIRREA.
The OCC issued guidelines which, effective December 31, 1990, imposed
upon national banks risk-based capital and leverage standards. These capital
requirements of bank regulators, are discussed in Note 20 of the notes to
financial statements. Failure to meet applicable capital guidelines could
subject a national bank to a variety of enforcement remedies available to the
federal regulatory authorities. Depending upon circumstances, the regulatory
agencies may require an institution to surpass minimum capital ratios
established by the OCC and the FRB.
In December 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted. FDICIA contains provisions
limiting activities and business methods of depository institutions. FDICIA
requires the primary federal banking regulators to promulgate regulations
setting forth standards relating to, among other things, internal controls and
audit systems; 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
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,
2003, 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.
Other Federal Laws and Regulations
Our operations are subject to additional federal laws and regulations
applicable to financial institutions, including, without limitation:
* Privacy provisions of the Gramm-Leach-Bliley Act and related
regulations, which require us to maintain privacy policies intended
to safeguard customer financial information, to disclose the
policies to our customers and to allow customers to "opt out" of
having their financial service providers disclose their
confidential financial information to non-affiliated third parties,
subject to certain exceptions;
* Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of financial
records;
* Consumer protection rules for the sale of insurance products by
depository institutions, adopted pursuant to the requirements of
the Gramm-Leach-Bliley Act; and
* USA Patriot Act, which requires financial institutions to take
certain actions to help prevent, detect and prosecute international
money laundering and the financing of terrorism.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley
Act of 2002. The Sarbanes-Oxley Act represents a comprehensive revision of laws
affecting corporate governance, accounting obligations and corporate reporting.
The Sarbanes-Oxley Act is applicable to all companies with equity securities
registered or that file reports under the Securities Exchange Act of 1934. In
particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit
committees, including independence, expertise, and responsibilities; (ii)
additional responsibilities regarding financial statements for the Chief
Executive Officer and Chief Financial Officer of the reporting company; (iii)
new standards for auditors and regulation of audits; (iv) increased disclosure
and reporting obligations for the reporting company and its directors and
executive officers; and (v) new and increased civil and criminal penalties for
violations of the securities laws. Many of the provisions were effective
immediately while other provisions become effective over a period of time and
are subject to rulemaking by the SEC. Because the Corporation's common stock is
registered with the SEC, it is currently subject to this Act.
The earnings of First, and therefore the earnings of Tower, are
affected by general economic conditions, management policies, and the
legislative and governmental actions of various regulatory authorities including
the FRB, the OCC and the FDIC.
In addition to banking and securities laws, regulations and regulatory
agencies, the Corporation also is subject to various other laws, regulations and
regulatory agencies throughout the United States. Furthermore, various
proposals, bills and regulations have been and are being considered in the
United States Congress, and various other governmental regulatory and
legislative bodies, which could result in changes in the profitability and
governance of the Corporation. It cannot be predicted whether new legislation
or regulations will be adopted and, if so, how they would affect the
Corporation.
References under the caption "Supervision and Regulation" to
applicable statutes, regulations and orders are brief summaries of portions
thereof which do not purport to be complete and which are qualified in their
entirety by reference thereto.
Important Factors Relating to Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in such statements. In
connection with certain statements made in this report and those that may be
made in the future by or on behalf of the Corporation which are identified as
forward-looking statements, the Corporation notes that the following important
factors, among others, could cause actual results to differ materially from
those set forth in any such forward-looking statements. Further, such forward-
looking statements speak only as of the date on which such statement or
statements are made, and the Corporation undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events.
The business and profitability of a financial services organization
such as the Corporation is influenced by prevailing economic conditions and
governmental policies. The actions and policy directives of the Federal Reserve
Board determine to a significant degree the cost and the availability of funds
obtained from money market sources for lending and investing. Federal Reserve
Board policies and regulations also influence, directly and indirectly, the
rates of interest paid by commercial banks on their interest-bearing deposits
and may also impact the value of financial instruments held by the Corporation.
The nature and impact on the Corporation of future changes in economic and
market conditions and monetary and fiscal policies, both foreign and domestic,
are not predictable, and are beyond the Corporation's control. In addition,
these conditions and policies can impact the Corporation's customers and
counterparties which may increase the risk of default on their obligations to
the Corporation and its affiliates. They can also affect the competitive
conditions in the markets and products within which the Corporation operates,
which can have an adverse impact on the Corporation's ability to maintain its
revenue streams.
As part of its ongoing business, the Corporation assumes financial
exposures to interest rates, currencies, equities and other financial products.
In doing so, the Corporation is subject to unforeseen events which may not have
been anticipated or which may have effects which exceed those assumed within its
risk management processes. This risk can be accentuated by volatility and
reduction in liquidity in those markets which in turn can impact the
Corporation's ability to hedge and trade the positions concerned. In addition,
the Corporation is dependent on its ability to access the financial markets for
its funding needs.
As noted in "Supervision and Regulation", the Corporation is regulated
by and subject to various regulators. The actions of these regulators can have
an impact on the profitability and governance of the Corporation. Increases by
regulatory authorities of minimum 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 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.
The Corporation files periodic reports with the Securities and
Exchange Commission (SEC) in the form of 10-Q's - quarterly reports; 10-K -
annual report; annual proxy statements and Form 8-K for any significant events
that may arise during the year. Copies of the Coporation's filings may be
obtained through the SEC's internet site at www.sec.gov or may be obtained free
of charge upon written request furnished to: Mr. Franklin T. Klink, III, CFO,
Tower Bancorp, Inc., P. O. Box 8, Center Square, Greencastle, Pennsylvania
17225.
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; Waynesboro, Pennsylvania; 18233 Maugans
Avenue, Hagerstown, Maryland; and Lincoln Way East, Chambersburg, Pennsylvania.
In addition, First leases approximately 1,500 square feet in a building located
at 11906 Buchanan Trail West, Mercersburg, Pennsylvania and 565 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 3a. Executive Officers of the Registrant
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.
Held Employee Age as
Name/Office Held Since Since of 12/31/03
Kermit G. Hicks, Chairman
of the Board 1983 (1) 68
Jeff B. Shank, President
and Chief Executive
Officer 1991 1976 48
Robert L. Pensinger,
Vice Chairman of
the Board 2002 (1) 70
John H. McDowell,
Executive Vice President/
Secretary 1986 1977 54
Don Kunkle, Vice President 1990 1987 54
Franklin T. Klink, III, Vice
President/Treasurer 2001 2001 48
(1) These directors are not employees of the Bank.
Item 4. Submission of Matters to Vote of Security Holders.
None
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 under the
symbol TOBC. At December 31, 2003, the approximate number of shareholders of
record was 1,045. 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
2003 1st Quarter $ .68 $ 29.50 - $ 34.90
2nd Quarter .18 33.80 - 36.50
3rd Quarter .20 35.10 - 36.50
4th Quarter .20 35.40 - 40.00
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
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, 2003 is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Contractural obligations of the Corporation as of December 31, 2003
are as follows:
Payments due by period
(in thousands) Total Less 1 - 3 3 - 5 More
than 1 years years than 5
Contractual obligations year years
Long-term debt obligations $ 43,236 $ 13,236 $ 0 $ 15,000 $ 15,000
Operating lease obligations 152 46 85 21 0
-------- -------- ------- -------- --------
Total $ 43,388 $ 13,282 $ 85 $ 18,021 $ 15,000
======== ======== ======= ======== ========
All other information required by Item 7 is included in Management's
Discussion and Analysis of Financial Condition and Results of Operations, on
pages 30 through 36 of the annual shareholders report which is incorporated
herein by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information set forth on pages 34 and 35 of the annual
shareholders' report regarding quantitative and qualitative disclosures about
market risk is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data, some of which is
required under Guide 3 (statistical disclosures by bank holding companies) are
shown on pages 2 through 29 of the annual shareholders report for the year ended
December 31, 2003 and are incorporated herein by reference. Certain statistical
information required in addition to those included in the annual shareholders'
report are submitted herewith as follows.
Description of Statistical Information Page
Loan portfolio 13
Summary of loan loss experience 14
Nonaccrual, delinquent and impaired loans 15
Allocation of allowances for loan losses 16-17
Deposits and return on equity and assets 18
Consolidated summary of operations 19
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:
2003 2002 2001 2000 1999
(000 omitted)
Commercial,
financial &
agricultural $ 38,703 $ 32,422 $ 33,606 $ 20,903 $ 15,047
Real estate -
Construction 7,156 7,246 6,029 4,827 4,146
Real estate -
Mortgage 155,649 135,104 111,709 104,838 93,340
Installment
& other
personal
loans (net
of unearned
income) 12,559 12,765 16,333 17,002 19,227
-------- -------- --------- -------- --------
Total loans $214,067 $ 187,537 $ 167,677 $147,570 $131,760
======== ========= ========= ======== ========
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
2003 2002 2001 2000 1999
(000 omitted)
Average total loans
outstanding (net
of unearned income) $ 198,599 $ 183,805 $ 158,570 $ 140,788 $ 127,202
--------- --------- --------- --------- ---------
Allowance for loan
losses, beginning
of period 1,632 1,577 1,586 1,719 1,890
Additions to
provision for
loan losses
charged to
operations 360 310 120 0 0
Loans charged off
during the year
Commercial 29 101 0 4 8
Real estate
mortgage 0 0 0 0 29
Installment 162 205 192 149 179
--------- --------- --------- --------- ---------
Total charge-
off's 191 306 192 153 216
--------- --------- --------- --------- ---------
Recoveries of loans
previously charged
off:
Commercial 5 3 4 4 4
Installment 58 34 39 16 35
Mortgage 0 14 20 0 6
--------- --------- --------- --------- ---------
Total recoveries 63 51 63 20 45
--------- --------- --------- --------- ---------
Net loans charged
off (recovered) 128 255 129 133 171
--------- --------- --------- --------- ---------
Allowance for loan
losses, end of
period 1,864 1,632 1,577 1,586 1,719
Ratio of net loans
charged off
(recovered)
to average loans
outstanding .06% .14% .08% .09% .13%
======== ========= ========= ========= =======
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.
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.
2003 2002 2001 2000 1999
(000 omitted)
Nonaccrual loans $ 540 $ 781 $ 64 $ 63 $ 460
===== ===== ======= ===== =====
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
60 - 89 days
past due 432 386 802 800 379
90 days or
more past due 178 188 734 25 27
----- ------- ------- ----- -----
Total
accrual
loans $ 610 $ 574 $ 1,536 $ 825 $ 406
===== ===== ======= ===== =====
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.
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
2003 2002
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 $ 694 18.1% $ 718 17.3%
Real estate -
Construction 0 3.3 0 3.9
Real estate -
Mortgage 664 72.7 664 72.1
Installment 0 5.9 0 6.7
Unallocated 506 N/A 250 N/A
------- ----- ------- -----
Total $ 1,864 100.0% $ 1,632 100.0%
======= ===== ======= =====
Years Ended December 31
2001 2000
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 $ 816 20.0% $ 812 14.2%
Real estate -
Construction 0 3.6 0 3.3
Real estate -
Mortgage 650 66.6 630 71.0
Installment 0 9.7 0 11.5
Unallocated 111 N/A 144 N/A
------- ----- ------- -----
Total $ 1,577 100.0% $ 1,586 100.0%
======= ===== ======= =====
Years Ended December 31
1999
Percentage
of Loans
in Each
Category
Allowance to Total
Amount Loans
(000 omitted)
Commercial, financial
and agricultural $ 812 11.2%
Real estate - Construction 0 3.1
Real estate - Mortgage 630 70.8
Installment 0 14.9
Unallocated 277 N/A
------- -----
Total $ 1,719 100.0%
======= =====
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized below:
Years Ended December 31
2003 2002 2001
(000 omitted)
Demand deposits $ 15,144 $ 12,470 $ 12,840
Interest bearing
demand deposits 84,107 76,373 63,422
Savings deposits 25,702 22,792 24,828
Time deposits 72,307 71,631 77,054
--------- --------- ---------
Total deposits $ 197,260 $ 183,266 $ 178,144
========= ========= =========
RETURN ON EQUITY AND ASSETS
(APPLYING DAILY AVERAGE BALANCES)
The following table presents a summary of significant earnings and
capital ratios:
2003 2002 2001
(000 omitted)
Assets $ 300,738 $ 262,589 $ 245,574
Net income $ 4,951 $ 4,853 $ 4,001
Equity $ 40,438 $ 32,866 $ 28,518
Cash dividends $ 2,185 $ 1,458 $ 1,965
Return on assets 1.80% 1.91% 1.72%
Return on equity 14.46% 15.81% 14.40%
Dividend payout ratio 44.13% 30.04% 49.11%
Equity to asset ratio 13.01% 12.52% 11.96%
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
2003 2002 2001 2000 1999
(000 omitted)
Interest income $ 14,434 $ 15,857 $ 16,510 $ 15,523 $ 13,648
Interest expense 4,267 5,252 6,988 7,295 6,079
-------- -------- -------- --------- ---------
Net interest income 10,167 10,605 9,522 8,228 7,569
Provision for loan
Losses 360 310 120 0 0
-------- -------- -------- -------- ---------
Net interest income
after provision
for loan losses 9,807 10,295 9,402 8,228 7,569
Other income:
Investment services
income 31 0 191 577 492
Service charges -
Deposits 864 621 519 335 291
Other service charges,
collection and
exchange, charges,
commission fees 347 313 305 1,630 388
Other operating
income 3,199 2,046 1,922 1,073 1,651
-------- -------- -------- -------- ---------
Total other
income 4,441 2,980 2,937 3,615 2,822
-------- -------- -------- --------- --------
Income before
operating expense 14,248 13,275 12,339 11,843 10,391
Operating expenses:
Salaries and
employees
benefits 3,901 3,558 3,211 3,026 2,922
Occupancy and
equipment
expense 1,594 1,575 1,627 1,393 1,252
Other operating
expenses 1,981 1,526 1,864 1,842 1,767
-------- -------- -------- -------- ---------
Total operating
Expenses 7,476 6,659 6,702 6,261 5,941
-------- -------- -------- --------- --------
Income before
income taxes 6,772 6,616 5,637 5,582 4,450
Income tax 1,821 1,763 1,636 1,489 1,247
-------- -------- -------- -------- ---------
Net income
applicable to
common stock $ 4,951 $ 4,853 $ 4,001 $ 4,093 $ 3,203
======== ======== ======== ========= ========
Per share data:
Earnings per
common share $ 2.86 $ 2.79 $ 2.29 $ 2.32 $ 1.82
Cash dividend -
common $ 1.26 $ .84 $ 1.12 $ .56 $ .97
Average number of
common shares 1,733,477 1,737,298 1,745,847 1,761,699 1,763,548
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
Not applicable.
Item 9a. 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 December 31, 2003.
Based on such evaluation, such officers have concluded that, as of December 31,
2003, 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 subsidiary) required to be included in
the Corporation's periodic filings under the Exchange Act.
CHANGES IN INTERNAL CONTROLS
There have not been any significant changes in the Corporation's
internal control over financial reporting or in other factors that could
significantly affect such control during the fourth quarter of 2003.
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 2004 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 2004 Annual Meeting of
Shareholders filed pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by Item 12 is incorporated by reference from
Tower Bancorp, Inc.'s definitive proxy statement for the 2004 Annual Meeting of
Shareholders filed pursuant to Regulation 14A.
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 2004 Annual Meeting of
Shareholders filed pursuant to Regulation 14A.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is incorporated by reference from
Tower Bancorp's definitive proxy statement for the 2004 Annual Meeting of
Shareholders filed pursuant to Regulation 14A.
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, 2003,
are incorporated by reference in Item 8:
Consolidated balance sheets - December 31,
2003 and 2002
Consolidated statements of income - Years
ended December 31, 2003, 2002, and 2001
Consolidated statements of stockholders'
equity - Years ended December 31, 2003, 2002,
and 2001
Consolidated statements of cash flows - Years
ended December 31, 2003, 2002, and 2001
Notes to consolidated financial statements -
December 31, 2003
(2) List of Financial Statement Schedules
All financial statement schedules for which provision is
made in the applicable accounting regulation of the
Securities and Exchange Commission are not
required under the related instructions or are
inapplicable and therefore have been omitted.
(3) Listing of Exhibits
Exhibit (3) (i) Articles of incorporation
Exhibit (3) (ii) Bylaws
Exhibit (4) Instruments defining the rights
of security holders including indentures
Exhibit (10) Material contracts
Exhibit (13) Annual report to security
Holders
Exhibit (14) Code of Ethics
Exhibit (21) Subsidiaries of the registrant
Exhibit (23) Consent of independent auditors
Exhibit (31) Rule 13a - 14(a)/15d-14(a) Certifications
Exhibit (32) Section 1350 Certifications
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 December 11, 2003 for news release
declaring dividend for fourth quarter.
* Report filed January 13, 2004 for news release
announcing financial results for quarter ended
December 31, 2003.
(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).
(10.1) Change of control agreements,
Incorporated by reference to the
registrant's Form 10Q filing dated
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.
(10.2) 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).
(10.3) 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
(14) Code of Ethics Policy for Directors and Senior
Management - filed herewith
(21) Subsidiaries of the registrant - filed
herewith
(23.1) Consent of independent auditors - filed
herewith
(31.1) Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 -
filed herewith
(31.2) Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 -
filed herewith
(32.1) 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.
(32.2) 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.
(d) Financial statement schedules
None
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, 2004
--------------
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 &
- ----------------------- Director March 15, 2004
Jeff B. Shank
/s/ Kermit G. Hicks Chairman of the
- ----------------------- Board & Director March 15, 2004
Kermit G. Hicks
/s/Robert L. Pensinger Vice Chairman of the
- ----------------------- Board & Director March 15, 2004
Robert L. Pensinger
/s/Frederic M. Frederick Director March 15, 2004
- -----------------------
Frederic M. Frederick
/s/James H. Craig, Jr. Director March 15, 2004
- -----------------------
James H. Craig, Jr.
/s/ Lois Easton Director March 15, 2004
- -----------------------
Lois Easton
/s/ Mark E. Gayman Director March 15, 2004
- -----------------------
Mark E. Gayman
Exhibit Index
Exhibit No.
13 Annual report to security holders
14 Code of Ethics Policy for Directors and Senior Management
21 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 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
32.1 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
Exhibit 13
Tower Bancorp, Inc.
2003 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 - 36
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, 2003 and 2002,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2003. 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, 2003 and 2002,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2003 in conformity with U. S. generally
accepted accounting principles.
/S/ Smith Elliott Kearns & Company, LLC
---------------------------------------
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
January 21, 2004
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
(000 omitted)
ASSETS
Cash and due from banks $ 8,929 $ 8,943
Interest bearing deposits with banks 675 1,644
Investment Securities
Available for sale 63,076 50,838
Restricted Bank stock; at cost which 3,219 3,162
approximates
fair value
Loans
Commercial, financial and agricultural 38,703 32,422
Real estate - Mortgages (net of deferred loan
origination fees; $ 998 - 2003;
$ 903 - 2002) 155,649 135,104
Real estate - Construction and land development 7,156 7,246
Consumer 12,559 12,765
------------ ------------
214,067 187,537
Less: Allowance for loan losses 1,864 1,632
------------ ------------
Total loans 212,203 185,905
Premises, equipment, furniture and fixtures 4,158 3,876
Real estate owned other than premises 476 350
Prepaid federal taxes 241 183
Accrued interest receivable 962 1,013
Cash surrender value of life insurance 6,659 6,306
Other assets 140 369
------------ ------------
Total assets $ 300,738 $ 262,589
============ ============
2003 2002
(000 omitted)
LIABILITIES
Deposits in domestic offices
Demand, noninterest bearing $ 18,412 $ 13,297
Savings 116,484 104,186
Time 72,069 70,074
----------- -----------
Total deposits 206,965 187,557
Liabilities for other borrowed funds 47,373 39,052
Accrued interest payable 204 287
Deferred income tax charges 3,274 804
Other liabilities 2,484 2,023
----------- -----------
Total liabilities 260,300 229,723
----------- -----------
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 6,763 6,713
Retained earnings 25,765 22,999
Accumulated other comprehensive income 7,006 2,195
----------- -----------
41,759 34,132
Less: Cost of treasury stock, 45,595
shares - 2003; 47,290 shares - 2002 ( 1,321) ( 1,266)
----------- -----------
Total stockholders' equity 40,438 32,866
----------- -----------
Total liabilities and stockholders' equity $ 300,738 $ 262,589
=========== ===========
The Notes to 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, 2003, 2002, and 2001
2003 2002 2001
(000 omitted)
Interest and Dividend Income
Interest and fees on loans $ 12,157 $ 13,207 $ 13,380
Interest and dividends on investment securities
Taxable 1,091 1,352 1,852
Federal tax exempt 1,117 1,153 1,034
Interest on federal funds sold 1 0 27
Interest on deposits with banks 68 145 217
---------- ---------- ----------
Total interest income 14,434 15,857 16,510
---------- ---------- ----------
Interest Expense
Interest on time certificates of deposit of
$ 100,000 or more 442 709 1,192
Interest on other deposits 2,200 3,088 4,647
Interest on federal funds purchased and other
borrowed funds 1,625 1,455 1,149
---------- ---------- ----------
Total interest expense 4,267 5,252 6,988
---------- ---------- ----------
Net interest income 10,167 10,605 9,522
Provision for loan losses 360 310 120
Net interest income after provision ---------- ---------- ----------
for loan losses 9,807 10,295 9,402
---------- ---------- ----------
Other Income
Investment services income 31 0 191
Service charges on deposit accounts 864 621 519
Other service charges, collection and exchange
charges, commissions and fees 347 313 305
Investment securities gains 3,143 1,720 1,761
Other income 56 326 161
---------- ---------- ----------
4,441 2,980 2,937
Other Expenses ---------- ---------- ----------
Salaries, wages and other employee benefits 3,901 3,558 3,211
Occupancy expense 397 353 354
Furniture and equipment expenses 1,197 1,222 1,273
Other operating expenses 1,981 1,526 1,864
---------- ---------- ----------
7,476 6,659 6,702
---------- ---------- ----------
Income before income taxes 6,772 6,616 5,637
Applicable income tax expense 1,821 1,763 1,636
---------- ---------- ----------
Net income $ 4,951 $ 4,853 $ 4,001
========== ========== ==========
Earnings per share:
Basic earnings per share $ 2.86 $ 2.79 $ 2.29
Weighted average shares outstanding 1,733,477 1,737,298 1,745,847
Diluted earnings per share $ 2.81 $ 2.76 $ 2.26
Weighted average shares outstanding 1,760,563 1,760,989 1,770,949
The Notes to 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, 2003, 2002 and 2001
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Treasury Stockholders'
Stock Capital Earnings Income (Loss) Stock Equity
(000 omitted)
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
-------- -------- -------- ------------- -------- ------------
Comprehensive income:
Net income 0 0 4,951 0 0 4,951
Net unrealized gain on available
for sale securities (net of tax $ 0 0 0 4,811 0 4,811
2,478)
------------
Total comprehensive income 9,762
------------
Cash dividends declared on common
stock ($ 1.26 per share) 0 0 ( 2,185) 0 0 ( 2,185)
Purchase of treasury stock
(14,833 shares) 0 0 0 0 ( 513) ( 513)
Sale of treasury stock (16,528 shares) 0 50 0 0 458 508
-------- -------- -------- ------------- -------- ------------
Balance at December 31, 2003 $ 2,225 $ 6,763 $ 25,765 $ 7,006 ($ 1,321) $ 40,438
============
The Notes to 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, 2003, 2002 and 2001
2003 2002 2001
(000 omitted)
Cash flows from operating activities:
Net income $ 4,951 $ 4,853 $ 4,001
Adjustments to reconcile net income to net
cash
provided by operating activities:
Depreciation and amortization 386 429 438
(Gain) on sale of investment securities ( 3,143) ( 1,720) ( 1,761)
Provision for deferred taxes ( 8) 8 111
(Increase) decrease in:
Other assets 229 412 ( 38)
Interest receivable 51 183 148
Prepaid income taxes ( 58) ( 132) 159
Cash surrender value of life insurance ( 353) ( 409) ( 166)
Increase (decrease) in:
Interest payable ( 83) ( 142) ( 86)
Other liabilities 425 135 117
------------ ------------ ------------
Net cash provided by operating activities 2,397 3,617 2,923
------------ ------------ ------------
Cash flows from investing activities:
Net (increase) in loans ( 26,298) ( 19,806) ( 20,116)
Purchases of property and equipment ( 794) ( 1,058) ( 528)
Net decrease in interest bearing deposits 969 1,073 1,733
with banks
Maturity/sales of available for sale 12,800 15,820 22,880
securities
Purchases of available for sale securities ( 13,754) ( 6,136) ( 19,468)
Purchase of Federal Home Loan Bank stock ( 909) ( 940) ( 588)
Purchase of life insurance policies 0 ( 1,850) ( 760)
------------ ------------ ------------
Net cash (used) by investing activities ($ 27,986) ($ 12,897) ($ 16,847)
------------ ------------ ------------
The Notes to 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, 2003, 2002, and 2001
2003 2002 2001
(000 omitted)
Cash flows from financing activities:
Net increase in deposits $ 19,408 $ 9,958 $ 602
Net increase in borrowings 8,321 1,711 18,475
Purchase of treasury stock ( 513) ( 546) ( 423)
Proceeds from sale of treasury stock 508 167 200
Cash dividends paid ( 2,149) ( 1,147) ( 1,965)
------------- ------------- -------------
Net cash provided by financing activities 25,575 10,143 16,889
------------- ------------- -------------
Net increase (decrease) in cash and cash ( 14) 863 2,965
equivalents
Cash and cash equivalents at beginning of 8,943 8,080 5,115
year
------------- ------------- -------------
Cash and cash equivalents at end of year $ 8,929 $ 8,943 $ 8,080
============ ============ ============
Supplemental disclosure of cash flows
information:
Cash paid during the year for:
Interest $ 4,350 $ 5,393 $ 7,074
Income taxes 1,755 1,861 1,576
Supplemental schedule of noncash investing
and financing activities:
Unrealized gain (loss) on securities
available
for sale (net of tax effects) $ 4,811 $ 1,332 $ 29
The Notes to 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 (the Bank), which is
engaged in providing banking and bank related services in South Central
Pennsylvania, principally Franklin County. Its nine offices are located
in Greencastle, Quincy, Shady Grove, Laurich, Waynesboro, Chambersburg
(2), 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 2003 or
2002.
Restricted Bank Stock
The Corporation is required to maintain minimum investment balances in The
Federal Reserve Bank, Federal Home Loan Bank and Atlantic Central
Banker's Bank. These investments are carried at cost because they are
not actively traded and have no readily determinable market value.
Premises, Equipment, Furniture and Fixtures and Depreciation
Premises, equipment, and furniture and fixtures are carried at cost less
accumulated depreciation. Depreciation has been provided generally on
the straight-line method and is computed over the estimated useful lives
of the various assets as follows:
Years
Premises 15-40
Equipment, furniture and fixtures 3-15
Repairs and maintenance are charged to operations as incurred.
Foreclosed Property
Includes foreclosed properties for which the institution has taken
physical possession in connection with loan foreclosure proceedings.
At the time of foreclosure, the real estate is recorded at the lower
of the Corporation's cost (loan balance) or the asset's fair value, less
estimated costs to sell, which becomes the property's new basis. Any
write-downs based on the asset's fair value at date of acquisition are
charged to the allowance for loan losses. Costs incurred in maintaining
foreclosed real estate and subsequent write-downs to reflect declines in
the fair value of the property are included in operations.
Retirement Plan
The Corporation has a money purchase pension plan which covers all full-
time employees who have attained the age of twenty (20) and have
completed a minimum of one year of continuous service with the
Corporation. The Corporation's policy is to fund pension costs accrued.
-8-
Note 1. Summary of Significant Accounting Policies (Continued)
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned
discount, deferred loan origination fees, and an allowance for loan
losses. Unearned discount on installment loans is recognized as income
over the terms of the loans by the interest method. Interest on other
loans is calculated by using the simple interest method on daily balances
of the principal amount outstanding.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that management
believes will be adequate to absorb possible losses on existing loans that
may become uncollectible, based on evaluations of the collectibility of
loans and prior loan loss experience. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans,
and current economic conditions that may affect the borrowers' ability to
pay.
Loan origination fees and certain direct loan origination costs are
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.
2003 2002 2001
Weighted average shares outstanding (basic) $ 1,733,477 $ 1,737,298 $ 1,745,847
Impact of common stock equivalents
27,086 23,691 25,102
Weighted average shares outstanding (diluted) $ 1,760,563 $ 1,760,989 $ 1,770,949
-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
Generally Accepted Accounting Principles (GAAP) 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.
GAAP 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, 2003, 2002, and 2001
was $ 199,968, $ 210,196, and $ 250,101, 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.
During 2003, the Corporation revised estimated calculations for unrealized
holding gains (losses) on certain equity securities in its available-for-
sale portfolio due to the continuing development of reliable sources for
market values of securities traded in the over-the-counter market.
Consequently, investments that were not marked to market in the past are
recorded at market value in 2003.
The components of the change in net unrealized gains (losses) on
securities are as follows:
2003 2002 2001
(000 Omitted)
Gross unrealized holding gains $ 10,432 $ 3,738 $ 1,805
(losses) arising during the year
Reclassification adjustment for gains ( 3,143) ( 1,720) ( 1,761)
realized in net Income
--------- -------- --------
Net unrealized holding gains (losses) 7,289 2,018 44
before taxes
Tax effect ( 2,478) ( 686) ( 15)
--------- -------- --------
Net change $ 4,811 $ 1,332 $ 29
========= ======== ========
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:
2003 2002 2001
Net income (000 omitted) As reported $ 4,951 $ 4,853 $ 4,001
Pro forma 4,942 4,842 3,986
Earnings per share As reported 2.86 2.79 2.29
Pro forma 2.85 2.78 2.28
Earnings per share assuming As reported 2.81 2.76 2.26
dilution
Pro forma 2.80 2.75 2.25
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, 2003 and 2002, 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)
2003
Obligations of other U.S. government $ 4,605 $ 31 $ 0 $ 4,636
agencies
Mortgage-backed securities 3,994 46 17 4,023
Corporate bonds 4,159 157 42 4,274
Equities 18,430 9,408 185 27,653
Obligations of state and political 21,272 1,221 3 22,490
subdivisions
-------- -------- ----- --------
$ 52,460 $ 10,863 $ 247 $ 63,076
======== ======== ===== ========
2002
Obligations of other U.S. government $ 3,112 $ 129 $ 0 $ 3,241
agencies
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 22,160 1,030 4 23,186
subdivisions
-------- -------- ----- --------
$ 47,511 $ 3,528 $ 201 $ 50,838
======== ======== ===== ========
Note 2. Investment Securities (Continued)
The fair values of investment securities available for sale at December
31, 2003, 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 $ 608 $ 623
Due after one year through five years 5,924 6,162
Due after five years through ten years 6,588 6,854
Due after ten years 16,916 17,761
-------- ---------
30,036 31,400
Mortgage-backed securities 3,994 4,023
Equity securities 18,430 27,653
-------- --------
$ 52,460 $ 63,076
======== ========
Proceeds from sales and maturities of investment securities available for
sale during 2003, 2002, and 2001, were $ 12,800,000, $ 15,820,000, and
$ 22,880,000, respectively. Gross realized gains and losses on those
sales and maturities were $ 3,143,000 and $ 0 for 2003, $ 1,720,000 and
$ 0 for 2002, and $ 1,762,000 and $ 1,000 for 2001, respectively.
Securities carried at $ 19,589,285 and $ 22,634,739 at December 31, 2003
and 2002, respectively, were pledged to secure public funds and for other
purposes as required or permitted by law.
Restricted bank stock includes:
2003 2002
(000 omitted)
Federal Reserve Bank stock $ 81 $ 81
Federal Home Loan Bank stock 2,838 2,286
Federal Home Loan Mortgage Corporation 250 250
preferred stock
Atlantic Central Bankers Bank 50 45
Citigroup Capital preferred stock 500
0
------- -------
$ 3,219 $ 3,162
======= =======
Note 3. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
2003 2002 2001
(000 omitted)
Balance at beginning of period $ 1,632 $ 1,577 $ 1,586
Recoveries 63 51 63
Provision for possible loan losses 360 310 120
charged to income
-------- -------- ---------
Total 2,055 1,938 1,769
Losses 191 306 192
-------- -------- ---------
Balance at end of period $ 1,864 $ 1,632 $ 1,577
======== ======== =========
Note 4. Premises, Equipment, Furniture and Fixtures
Cost Accumulated Depreciated
Depreciatio Cost
n
(000 omitted)
- - - - - - - - - - 2003 - - - - - -
Premises (including land $ 442) $ 5,477 $ 1,971 $ 3,506
Equipment, furniture and fixtures 3,191 2,539 652
------- ------- -------
Totals, December 31, 2003 $ 8,668 $ 4,510 $ 4,158
======= ======= =======
- - - - - - - - - - 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
======= ======= =======
Depreciation expense amounted to $ 385,580 in 2003, $ 429,480 in 2002, and
$ 438,920 in 2001.
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 $ 476,136 and $ 350,447 at December 31, 2003 and
2002, 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
$ 3,289,663 and $ 2,578,347 at December 31, 2003 and 2002, respectively.
During 2003, $ 1,280,783 of new loans were made and repayments totaled
$ 569,467.
Outstanding loans to bank employees totaled $ 2,467,001 and $ 1,873,655
at December 31, 2003 and 2002, respectively.
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, 2003.
Due over
Due within 1 but Due over Nonaccruing
one year within 5 years loans Total
5 years
(000 omitted)
Loans at $ 19,690 $ 35,484 $ 53,116 $ 540 $ 108,830
predeter-
mined
interest
rates
Loans at 15,844 17,617 71,776 0 105,237
floating or
adjustable
interest
rates
---------- -------- --------- ----- ---------
Total (1) $ 35,534 $ 53,101 $ 124,892 $ 540 $ 214,067
========== ======== ========= ===== =========
(1) These amounts have not been reduced by the allowance for possible loan
losses.
Note 7. Financial Instruments With Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financial needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheets. The contract amounts of those
instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.
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
2003 2002
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 25,918,584 $ 26,466,626
------------ ------------
Standby letters of credit and financial 670,629 732,938
guarantees written
------------ ------------
$ 26,589,213 $ 27,199,564
============ ============
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:
2003 2002 2001
Nonaccrual loans $ 540,211 $ 781,878 $ 64,170
========== ========== =========
Interest income that would have $ 12,120 $ 84,587 $ 7,183
been accrued at original contract
rates
Amount recognized as interest 3,745 5,821 762
income
---------- ---------- ---------
Foregone revenue $ 8,375 $ 78,766 $ 6,421
========== ========== =========
The Corporation had no impairment of loans in 2003, 2002, and 2001.
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 $ 82,000 for 2003, $ 47,000 for 2002, and $ 70,000 for 2001.
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 $ 120,000, $ 110,000, and $ 94,000, for 2003,
2002, and 2001, 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 $ 781,039 and $ 791,652 at December 31, 2003 and
2002, respectively. Annual expense of $ 84,146, $ 82,680, and $ 110,000
was charged to operations for 2003, 2002, and 2001, 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 $ 140,287, $ 162,108, and $ 182,219, as of December 31,
2003, 2002, and 2001, respectively.
The Corporation has a supplemental group term retirement plan which covers
certain 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 $ 52,925
and $ 18,566 at December 31, 2003 and 2002, respectively. Total annual
expense for this plan was $ 59,841, $ 23,989, and $ 20,165, for 2003,
2002, and 2001, 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 $ 120,000, $ 110,000, and $ 94,000 for
2003, 2002, and 2001, respectively. 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
81,586 and 75,476 at December 31, 2003 and 2002, respectively.
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 $ 104,819, $ 51,353, and $ 29,555 for
2003, 2002, and 2001, respectively.
The first plan is for select key employees. This plan granted options for
up to 1,623 shares at a purchase price of $ 1.00 per share. These options
can be exercised only by the key employees during his/her lifetime.
The second plan is for outside directors. This plan granted options of
4,060, 3,600, and 5,154 shares for each director at $ 30.00, $ 24.250, and
$ 20.125 per share for the years ended December 31, 2003, 2002, and 2001,
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, 2003 the range of exercise
prices was from $ 11.91 to $ 32.13 per share. At December 31, 2003, there
were 114,155 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:
- - - - - - 2003 - - - - - - - - - - 2002 - - - - - - - - - 2001 - - - -
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 23,691 $ 21 25,102 $ 21 19,948 $ 22
beginning of
year
Granted 5,683 22 5,040 18 6,528 16
Exercised 6,058 21 3,548 10 1,374 1
Forfeited/expired 0 0 2,903 21 0 0
------- ---- ------- ---- ------- ----
Outstanding at
end of year 23,316 $ 22 23,691 $ 21 25,102 $ 21
====== ==== ====== ==== ====== ====
Options
exercisable
at
year end 20,068 20,091 19,948
Weighted average
fair value of
options per
share granted
during the
year $ 4.40 $ 3.33 $ 4.53
Outstanding options at December 31, 2003 consist of the following:
Remaining
Shares Shares Contractual Exercise
Outstanding Exercisable Life Price
3,623 3,623 2 years $ 21.49
2,720 2,720 3 years 11.91
2,856 2,856 4 years 16.19
2,142 2,142 5 years 22.25
2,040 2,040 6 years 32.13
1,950 1,950 7 years 24.37
2,577 2,577 8 years 20.13
2,160 2,160 9 years 24.25
3,248 0 10 years 30.00
------ ------ -------- -------
Total/Aver 23,316 20,068 8 years $ 22.26
age
====== ====== ======== =======
Note 11. Stock Option Plans (Continued)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions.
2003 2002 2001
Dividend yield 2.8% 2.8% 3%
Expected life 8 8 8
Expected volatility 14.26 13.50 20.06
Risk-free interest 3.50 3.50 5.33
rate
Note 12. Deposits
Included in savings deposits at December 31 are NOW and Money Market
Account balances totaling $ 90,089,000 and $ 80,839,000 for 2003 and 2002,
respectively.
Time deposits of $ 100,000 and over aggregated $ 14,509,480 and
$ 15,119,446 at December 31, 2003 and 2002, respectively. At December 31,
2003 and 2002 the scheduled maturities of time deposits of $ 100,000 and
over are as follows:
2003 2002
(000 omitted)
Maturity
Three months or less $ 1,965 $ 2,912
Over three months 5,036 8,591
through twelve
months
Over twelve months 7,508 3,616
-------- --------
$ 14,509 $ 15,119
======== ========
At December 31, 2003 scheduled maturities of all time deposits are as
follows:
2004 $ 31,655,519
2005 17,739,153
2006 10,193,313
2007 4,347,651
2008 8,132,991
------------
$ 72,068,627
============
The aggregate amount of demand deposits reclassified as loan balances were
$ 506,904 and $ 184,588 at December 31, 2003 and 2002, 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
$ 2,422,286 and $ 1,627,189 at December 31, 2003 and 2002, respectively.
Note 13. Liabilities for Other Borrowed Funds
At December 31, 2003 and 2002, $ 3,935,000 and $ 2,800,000, 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,
2003 and 2002 was $ 5,800,000. Interest on these lines ranged from 3.00%
to 5.25% for 2003 and 2002.
Note 13. Liabilities for Other Borrowed Funds (Continued)
In addition, $ 202,595 and $ 307,647 of the balance of liabilities for
other borrowed funds at December 31, 2003 and 2002, 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 $ 439,915 and
$ 656,950 at December 31, 2003 and 2002, respectively.
The Corporation also had the following borrowings from the Federal Home
Loan Bank:
2003 2002
Interest Balance Interest Balance Maturity
Loan Type Rate Rate
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)1.03 13,236,000 1.31 10,943,900 02/27/04
Convertible 3.99 5,000,000 3.99 5,000,000 11/27/12
Convertible 4.13 5,000,000 0 05/07/18
------------ -----------
$ 43,236,000 $ 35,943,900
============ ===========
(1) Total amount available under this line is $ 11,764,000 at
December 31, 2003.
Total maximum borrowing capacity from Federal Home Loan Bank at December
31, 2003 was $ 136,241,000. Collateral for borrowings consists of certain
securities and the Corporation's 1-4 family mortgage loans totaling
approximately $ 136 million at December 31, 2003.
Note 14. Income Taxes
The components of income tax expense are summarized as follows:
2003 2002 2001
(000 omitted)
Current year provision:
Federal $ 1,535 $ 1,604 $ 1,378
State 294 151 147
Deferred income taxes (benefit) ( 8) 8 111
------- ------- --------
$ 1,821 $ 1,763 $ 1,636
======= ======= ========
Federal income taxes were computed after reducing pretax accounting income
for non-taxable income in the amount of $ 1,810,195, $ 1,741,545, and
$ 1,321,372 for 2003, 2002, and 2001, respectively.
Note 14. Income Taxes (Continued)
A reconciliation of the effective applicable income tax rate to the
federal statutory rate is as follows:
2003 2002 2001
Federal income tax rate 34.0% 34.0% 34.0%
Increase resulting from:
State taxes, net of federal tax benefit 4.2 2.3 2.6
Reduction resulting from:
Nontaxable interest income 11.3 9.7 7.6
------ ----- -----
Effective income tax rate 26.9% 26.6% 29.0%
====== ===== =====
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:
2003 2002
Deferred Tax Assets
Bad debts $ 483 $ 404
Deferred compensation 266 276
Non-accrual loan income 4 27
-------- --------
753 707
-------- --------
Deferred Tax Liabilities
Depreciation ( 50) ( 13)
Unrealized gain on investment securities ( 3,977) ( 1,498)
-------- --------
( 4,027) ( 1,511)
-------- --------
Net deferred tax (liability) ($ 3,274) ($ 804)
======== ========
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.
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 2003 2002
(000 omitted)
Cash $ 3 $ 6
Securities available for sale 27,653 16,754
Investment in The First National Bank of 24,333 23,252
Greencastle
--------- --------
Total assets $ 51,989 $ 40,012
========= =========
Liabilities
Other liabilities $ 5,416 $ 2,146
Notes payable - subsidiary 2,200 2,200
Notes payable - other 3,935 2,800
--------- ---------
Total liabilities 11,551 7,146
--------- ---------
Stockholders' Equity
Common stock, no par value; authorized 5,000,000 2,225 2,225
shares, issued 1,780,100 shares
Additional paid-in capital 6,763 6,713
Retained earnings 25,765 22,999
Accumulated other comprehensive income 7,006 2,195
--------- ---------
41,759 34,132
Less: Cost of Treasury stock, 45,595 shares -
2003; 47,290 shares - 2002 ( 1,321) ( 1,266)
-------- --------
Total stockholders' equity 40,438 32,866
-------- --------
Total liabilities and stockholders' equity $ 51,989 $ 40,012
======== ========
Statements of Income
Years Ended December 31
2003 2002 2001
(000 omitted)
Income
Dividends $ 409 $ 334 $ 305
Net gain on sale of securities 3,130 1,720 1,756
Cash dividends from wholly-owned subsidiary 2,149 1,147 1,965
Miscellaneous 0 0 19
-------- --------- ---------
5,688 3,201 4,045
-------- --------- ---------
Expenses
Interest 197 185 193
Taxes 1,057 573 478
Postage and printing 39 36 33
Management fees 102 102 102
Professional fees 286 152 212
Other expenses 36 0 9
-------- --------- ---------
1,717 1,048 1027
-------- --------- ---------
Income before equity in undistributed income 3,971 2,153 3,018
Equity in undistributed income of subsidiary 980 2,700 983
-------- --------- ---------
Net Income $ 4,951 $ 4,853 $ 4,001
======== ========= =========
Note 15. Tower Bancorp Inc. (Parent Company Only) Financial Information
(Continued)
Statements of Cash Flows
Years Ended December 31
2003 2002 2001
(000 omitted)
Cash flows operating activities:
Net income $ 4,951 $ 4,853 $ 4,001
Adjustments to reconcile net income to cash
provided by operating activities:
Net gain on sale of investment securities ( 3,130) ( 1,720) ( 1,756)
Equity in undistributed income of subsidiary ( 980) ( 2,700) ( 983)
Increase in accrued expenses 808 304 ( 965)
------- ------- -------
Net cash provided by operating activities 1,649 737 297
------- ------- -------
Cash flows from investing activities:
Purchase of investment securities ( 6,644) ( 6,145) ( 2,769)
Sales of investment securities 6,011 5,416 4,154
------- ------- -------
Net cash provided (used) by investing
activities ( 633) ( 729) 1,385
------- ------- -------
Cash flows from financing activities:
Purchase of treasury stock ( 513) ( 545) ( 423)
Proceeds from sale of treasury stock 508 167 200
Dividends paid ( 2,149) ( 1,147) ( 1,965)
Net proceeds (payments) on/from borrowing 1,135 1,521 508
------- ------- -------
Net cash (used) by financing activities ( 1,019) ( 4) ( 1,680)
------- ------- -------
Net increase (decrease) in cash ( 3) 4 2
Cash, beginning 6 2 0
------- ------- -------
Cash, ending $ 3 $ 6 $ 2
======= ======= =======
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, 2003 and 2002 and required
deposit balances at Equifax of $ 39,391 and $ 36,641 at December 31, 2003
and 2002, 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.
Note 18. Commitments and Contingencies
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 2003, 2002, and 2001.
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 $ 10,800,
$ 9,600, and $ 3,200 for 2003, 2002, and 2001, respectively.
The Corporation also leases a site for an Automatic Teller Machine under a
noncancellable operating lease that expires in 2013 with the right to
negotiate an extended lease of two additional five year terms. Total rent
expense charged to operations was $ 10,200 for 2003 and $ 9,000 for 2002
and 2001. The lease rental for the second five years of the initial term
is subject to negotiation.
Following is a schedule, by years, of future minimum rentals under the
lease agreements as of December 31, 2003:
Year Ending
2004 $ 46,200
2005 42,600
2006 42,600
2007 17,200
2008 3,600
---------
$ 152,200
=========
The Corporation is a defendant in a lawsuit that involves allegations that
the Bank improperly deposited and cashed a check. Management believes it
has a valid defense against this allegation. However, it is possible that
the suit could result in an unfavorable outcome and management has accrued
a $ 90,000 liability for this contingency.
Note 19. Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial instruments were
as follows at December 31:
- - - - - - 2003 - - - - - - - - - - 2002 - - - -
- - - -
Carrying Fair Carrying Fair
Amount Value Amount Value
FINANCIAL ASSETS
Cash and due from banks $ $ $ 8,943 $ 8,943
8,929 8,929
Interest bearing deposits with banks 675 675 1,644 1,644
Securities available for sale 63,076 63,076 50,838 50,838
Loans receivable 214,067 214,048 187,537 189,121
Accrued interest receivable 962 962 1,013 1,013
Other bank stock 3,219 3,219 3,162 3,162
FINANCIAL LIABILITIES
Time certificates 72,069 72,988 70,074 70,877
Other deposits 134,896 134,896 117,483 117,483
Other borrowed funds 47,373 47,314 39,052 39,233
Accrued interest payable 204 204 287 287
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
Note 20. Regulatory Matters (Continued)
bank, is subject to the dividend restrictions set forth by the Comptroller
of the Currency. Under such restrictions, the Bank may not, without prior
approval of the Comptroller of the Currency, declare dividends in excess
of the sum of the current year's earnings (as defined) plus retained
earnings (as defined) from the prior two years. Dividends that the Bank
could declare without approval of the Comptroller of the Currency,
amounted to approximately $ 6,777,799 and $ 7,381,375 for 2003 and 2002,
respectively.
The Corporation is also subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the corporation's financial statements. Under
capital adequacy guidelines, the corporation is required to maintain
minimum capital ratios. The "leverage ratio", compares capital to
adjusted total balance sheet assets while risk-based ratios compare
capital to risk-weighted assets and off-balance sheet activity in order to
make capital levels more sensitive to risk profiles of individual banks.
A comparison of Tower Bancorp's capital ratios to regulatory minimums at
December 31 is as follows:
Tower Bancorp Regulatory
Minimum
Requirements
2003 2002
Leverage ratio 11.74% 11.72% 4%
Risk-based capital ratio
Tier I (core capital) 17.03% 17.48% 4%
Combined Tier I and Tier II
(core capital plus
allowance for loan losses) 20.06% 18.95% 8%
As of December 31, 2003 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.
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
SELECTED FIVE-YEAR FINANCIAL DATA
2003 2002 2001 2000 1999
Income (000 omitted)
Interest income $ 14,434 $ 15,857 $ 16,510 $ 15,523 $ 13,648
Interest expense 4,267 5,252 6,988 7,295 6,079
Provision for loan losses 360 310 120 0 0
-------- -------- -------- -------- --------
Net interest income after 9,807 10,295 9,402 8,228 7,569
provision for loan losses
Other operating income 4,441 2,980 2,937 3,615 2,822
Other operating expenses 7,476 6,659 6,702 6,261 5,941
-------- -------- -------- -------- --------
Income before income taxes 6,772 6,616 5,637 5,582 4,450
Applicable income tax 1,821 1,763 1,636 1,489 1,247
-------- -------- -------- -------- --------
Net income $ 4,951 $ 4,853 $ 4,001 $ 4,093 $ 3,203
======== ======== ======== ======== ========
Per share amounts are based on the following weighted average shares
outstanding.
2003 - 1,733,477 2001 - 1,745,847 1999 - 1,763,548
2002 - 1,737,298 2000 - 1,761,699
Net income $ 2.86 $ 2.79 $ 2.29 $ 2.32 $ 1.82
Cash dividend 1.26 .84 1.12 .56 .97
Book value 23.33 18.92 16.33 15.14 12.56
Year-End Balance Sheet Figures
(000 omitted) 2003 2002 2001 2000 1999
Total assets $ 300,738 $ 262,589 $ 245,574 $ 224,512 $ 206,874
Net loans 212,203 185,905 166,100 145,984 130,041
Total investment securities 66,295 54,000 59,005 60,022 55,846
Deposits - noninterest bearing 18,412 13,297 13,328 16,359 13,746
Deposits - interest bearing 188,553 174,260 164,271 160,638 145,978
Total deposits 206,965 187,557 177,599 176,997 159,724
Total stockholders' equity 40,438 32,866 28,518 26,676 22,136
Ratios
Average equity/average assets 13.01 12.10 11.96 10.96 11.42
Return on average equity 14.46 15.81 14.40 17.17 14.09
Return on average assets 1.80 1.91 1.72 1.88 1.63
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, 2003 and 2002 are as follows:
2003 2002
($ 000 omitted except per share) - - - - - - - - - Quarter Ended - - - - - - - - - - - - - Quarter Ended - - - -
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
Interest income $ 3,670 $ 3,663 $ 3,604 $ 3,497 $ 4,113 $ 4,008 $ 3,971 $ 3,765
Interest expense 1,111 1,103 1,060 993 1,444 1,399 1,313 1,096
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 2,559 2,560 2,544 2,504 2,669 2,609 2,658 2,669
Provision for loan losses 90 90 90 90 60 70 90 90
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after 2,469 2,470 2,454 2,414 2,609 2,539 2,568 2,579
provision for loan losses
Other income 1,365 1,063 1,114 899 1,212 799 720 249
Other expenses 1,896 1,994 1,962 1,624 1,820 1,774 1,739 1,326
------- ------- ------- ------- ------- ------- ------- -------
Operating income before income 1,938 1,539 1,606 1,689 2,001 1,564 1,549 1,502
taxes
Applicable income taxes 532 419 438 432 553 420 409 381
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 1,406 $ 1,120 $ 1,168 $ 1,257 $ 1,448 $ 1,144 $ 1,140 $ 1,121
Net income applicable to common
stock
Per share data:
Net income $ .81 $ .65 $ .67 $ .73 $ .83 $ .66 $ .66 $ .64
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
- - - - - - 2003 - - - - - - - - - - - - - 2002 - - - - - -- - - - - - - 2001 - - - - - -
(000 omitted) (000 omitted) (000 omitted)
Assets
Investment Securities:
Taxable interest income $ 34,041 $ 1,091 3.20% $ 30,551 $ 1,352 4.40% $ 35,732 $ 1,852 5.20%
Nontaxable interest income 20,559 1,117 5.40% 21,222 1,153 5.40% 20,060 1,034 5.20%
--------- -------- ----- --------- -------- ----- -------- -------- -----
Total investment securities 54,600 2,208 4.00% 51,773 2,505 4.84% 55,792 2,886 5.17%
Loans (net of unearned
discounts) 198,599 12,157 6.10% 183,805 13,207 7.20% 158,570 13,380 8.40%
Other short-term investments 4,428 69 1.60% 5,666 145 2.60% 7,198 244 3.45%
--------- -------- ----- --------- -------- ----- -------- -------- -----
Total interest earning
Assets 257,627 $ 14,434 5.60% 241,244 $ 15,857 6.60% 221,560 $ 16,510 7.50%
======== ===== ======== ===== ======== =====
Allowance for loan losses ( 1,722) ( 1,606) ( 1,581)
Cash and due from banks 6,869 8,511 6,598
Bank premises and equipment 4,126 3,416 3,020
Other assets 8,072 2,517 2,683
--------- --------- ---------
Total assets $ 274,972 $ 254,082 $ 232,280
========= ========= =========
Liabilities and Stockholders' Equity
Interest bearing demand
Deposits $ 84,107 $ 539 0.60% $ 76,373 $ 932 1.20% $ 63,422 $ 1,254 2.00%
Savings deposits 25,702 110 0.40% 22,792 200 0.90% 24,828 541 2.20%
Time deposits 72,307 1,993 2.80% 71,631 2,665 3.70% 77,054 4,044 5.20%
Short-term borrowings 40,252 1,625 4.00% 41,487 1,455 3.50% 24,990 1,149 4.6%
--------- -------- ----- --------- -------- ----- -------- -------- -----
Total interest bearing
Liabilities 222,368 $ 4,267 1.90% 212,283 $ 5,252 2.50% 190,294 $ 6,988 3.70%
======== ===== ======== ===== ======== =====
Demand deposits 15,144 12,470 12,840
Other liabilities 3,216 1,367 1,365
--------- --------- ---------
Total liabilities 240,728 223,390 204,499
Stockholders' equity 34,244 30,692 27,781
--------- --------- ---------
Total liabilities &
stockholders' equity $ 274,972 $ 254,082 $ 232,280
========= ========= =========
Net interest income/net
yield on average earning
assets $ 10,167 3.9% $ 10,605 4.4% $ 9,522 4.3%
======== ===== ======== ===== ======== =====
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
CHANGES IN NET INTEREST INCOME
TAX EQUIVALENT YIELDS
2003 Versus 2002
Increase (Decrease)
Due to Change in
Average Average Total
Volume Rate Increase
(Decrease)
(000 omitted)
Interest Income
Loans (net of unearned discounts) $ 1,065 ($ 2,115) ($ 1,050)
Taxable investment securities 154 ( 415) ( 261)
Nontaxable investment securities ( 36) 0 ( 36)
Other short-term investments ( 32) ( 44) ( 76)
------- ------- -------
Total interest income 1,151 ( 2,574) ( 1,423)
------- ------- -------
Interest Expense
Interest bearing demand 93 ( 486) ( 393)
Savings deposits 26 ( 116) ( 90)
Time deposits 25 ( 697) ( 672)
Other short-term borrowings ( 43) 213 170
------- ------- -------
Total interest expense 101 ( 1,086) ( 985)
------- ------- -------
Net interest income ($ 438)
=======
2002 Versus 2001
Increase (Decrease)
Due to Change in
Average Average Total
Volume Rate Increase
(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
=======
Changes which are attributed in part to volume and in part to rate are
allocated in proportion to their relationships to the amounts of changes.
TOWER BANCORP INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
MATURITIES OF INVESTMENT SECURITIES
December 31, 2003
The following table shows the maturities of investment securities at
amortized cost as of December 31, 2003, and weighted average yields of such
securities. Yields are shown on a taxable equivalent basis, assuming a 34%
federal income tax rate.
After After
1 year 5 years
but but
Within within within After
1 year 5 years 10 years 10 years Total
(000 omitted)
Bonds:
U.S. Government agencies/mortgage-
backed securities
Book value $ 406 $ 2,583 $ 4,965 $ 645 $ 8,599
Yield 4.48% 4.05% 4.76% 5.01% 4.42%
State and municipal
Book value $ 0 $ 1,409 $ 4,388 $ 15,475 $ 21,272
Yield 0.00% 5.81% 7.03% 7.44% 7.25%
Other
Book value $ 203 $ 2,516 $ 0 $ 1,440 $ 4,159
------- ------- ------- -------- --------
Yield 5.60% 5.91% 0.00% 1.91% 4.51%
------- ------- ------- -------- --------
Total book value $ 609 $ 6,508 $ 9,353 $ 17,560 $ 34,030
======= ======= ======= ======== ========
Yield 4.85% 5.15% 5.83% 6.90% 6.20%
======= ======= ======= ======== ========
Equity Securities:
Total Equity Securities $ 18,430
========
Yield 2.47%
========
Total Investment Securities $ 52,460
========
Yield 4.89%
========
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 $ 4,951,000 in 2003 compared to $ 4,853,000 in 2002 and
$ 4,001,000 in 2001. Net income on an adjusted per share basis for 2003 was
$ 2.86, up $ .07 from $ 2.79, realized during 2002.
Total interest income decreased $ 1,423,000 from 2002 to 2003 and
$ 653,000 from 2001 to 2002. Decreases in 2003 and 2002 were due to reductions
in rates. Average loans outstanding in 2003 increased 8.0% over 2002. However,
the continuing decline in rates resulted in a 8.0% decrease in interest income
from loans in 2003 as compared to a 1.3% decrease realized in 2002. Earnings on
investments (excluding gains from sales) decreased 14.0% in 2003 compared to a
15.3% decrease in 2002. This decrease was primarily the result of decreased
average rates of investment securities which dropped to 3.86% in 2003 from 4.6%
in 2002. Total average earning assets increased 6.8% in 2003 compared to 8.9%
in 2002. Increases in earning assets during 2003 and 2002 were proportionately
higher in loans, which typically produce higher yields than investments.
Interest from loans accounted for 84% of total interest income for
2003, as compared to 83% and 81% for 2002 and 2001, respectively. Interest and
dividends on investments amounted to $ 2,277,000 or 16.0% of interest income for
2003, as compared to $ 2,650,000 or 17% in 2002 and $ 3,130,000 or 19% in 2001.
Total interest expense was $ 4,267,000 for 2003, a decrease of
$ 985,000 over the $ 5,252,000 for 2002. The increase in total average interest
bearing deposits was 6.6% in 2003 compared to 3.3% in 2002. Overall growth was
moderate during 2003 and 2002 with interest bearing demand deposits increasing
10.1% and time deposits and savings increasing 1.0% and 12.8%, respectively.
Although overall growth was moderate during 2003, rates decreased 60 basis
points which caused a decrease in interest expense on deposits of 30.4%. There
were some significant changes in the level of borrowed funds resulting in an
overall increase in interest expense on borrowed funds by 11.7%. This change in
volume along with the decreased level of rates paid for deposits and on borrowed
funds was offset somewhat by increases in average volumes in earning assets.
The decrease in rates on earning assets caused the overall net interest margin
to decrease by 50 basis points for 2003 compared to 2002.
The Corporation's net charge-offs have been lower than peer group
performance for the past five years. Net charge-offs were $ 128,000, $ 255,000,
and $ 129,000 for 2003, 2002, and 2001, respectively. Previous years' net
recoveries, as well as an improving loan portfolio, have allowed the bank to
have a current year provision of $ 360,000, $ 310,000, and $ 120,000 for 2003,
2002, and 2001, 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.
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 $ 1,461,000 or 49.0% for 2003 over 2002, and increased
$ 43,000 or 1.5% for 2002 over 2001. The increase in 2003 was due to income
derived from increases in service fees charged and increased gains on investment
security sales.
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 $ 343,000 or 9.6% in 2003 over
2002, compared to an increase of $ 347,000 or 10.8% in 2002 over 2001.
Occupancy and equipment expense increased by 1.2% from 2003 to 2002 compared to
a decrease of 3.2% from 2002 to 2001. Management expected noninterest expenses
to increase in 2003 and 2002 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 increased 12.3% in 2003, compared to a
decrease of .6% in 2002.
Applicable income taxes changed between 2001, 2002, and 2003 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 2003 and 2002 is 34%. At December 31, 2003 and 2002,
deferred taxes amounted to ($ 3,247,000) and ($ 804,000), respectively. This
increase is due mainly to a change in the estimate of unrealized gains and
losses on investment securities since information pertaining to market values of
stocks traded in the over-the-counter market is now more readily available than
it had been in the past. If all timing differences reversed in 2003, 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.
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 Statement 150 - Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity, was issued May of 2003 and is effective for financial instruments
entered into or modified after May 31, 2003. This statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Provisions of this statement are consistent
with the Board's proposal to revise the definition of liabilities to encompass
certain obligations that a reporting entity can or must settle by issuing its
own equity shares, depending on the nature of the relationship established
between the holder and the issuer. Management does not expect there to be a
significant impact from this statement since the Corporation currently does not
have any obligations requiring settlement by the issuance of its own shares of
stock.
In December 2003, the Financial Accounting Standards Board released
Financial Interpretation No. 46, Consolidation of Variable Interest Entities.
This Interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business enterprises of
variable interest entities, which have one or more of the following
characteristics:
1. The equity investment at risk is not sufficient to permit the
entity to finance its activities without additional subordinated
financial support provided by any parties, including the equity
holders.
2. The equity investors lack one or more of the following essential
characteristics of a controlling financial interest:
a. The direct or indirect ability to make decisions about the
entity's
activities through voting rights or similar rights;
b. The obligation to absorb the expected losses of the entity;
c. The right to receive the expected residual returns of the
entity.
3. The equity investors have voting rights that are not
proportionate to their economic interests, and the activities
of the entity involve or are conducted on behalf of an investor
with a disproportionately small voting interest.
Management does not expect this interpretation to have a significant
impact since the Corporation does not have any investment in any entity with the
aforementioned characteristics.
Financial Accounting Standards Board (FASB) Statement 148, Accounting
for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
123, 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, 2003, the Corporation had off-balance sheet liabilities in the form
of commitments to extend credit and letters of credit in the amount of
$ 26,589,213. The Corporation also has available additional borrowing capacity
of up to $ 94,870,000.
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 net interest income. At December 31, 2003, based on
the results of the simulation model, the Corporation would expect a change in
net interest income of $ 249,844 over a 12-month period if interest rates
increased from current rates by 300 basis points. If interest rates decreased
from current rates by 100 basis points, the Corporation would expect a change in
the net interest income of $ 57,253 over a 12-month period.
The matching of assets and liabilities may be analyzed by examining
the extent to which such assets and liabilities are "interest rate sensitive"
and by monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that same
time period. A gap is considered positive when the amount of interest-earning
assets maturing or repricing exceeds the amount of interest-bearing liabilities
maturing or repricing within the same period. A gap is considered negative when
the amount of interest-bearing liabilities maturing or repricing exceeds the
amount of interest-earning assets maturing or repricing within the same period.
Accordingly, in a rising interest rate environment, an institution with a
positive gap would be in a better position to invest in higher yielding assets
which would result in the yield on its assets increasing at a pace closer to the
cost of its interest-bearing liabilities, than would be the case if it had a
negative gap. During a period of falling interest rates, an institution with a
positive gap would tend to have its assets repricing at a faster rate than one
with a negative gap, which would tend to restrain the growth of its net interest
income.
The 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, 2003 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.
LIQUIDITY RISK MANAGEMENT (Continued)
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 Total
Days Days 1 Year
(000 omitted)
Rate sensitive assets
Interest bearing deposits with $ 2,500 $ 4,507 $ 27,698 $ 34,705
banks and investment securities
Real estate, commercial and 44,035 69,413 102,307 215,755
consumer loans
$ 46,535 $ 73,920 $ 130,005 $ 250,460
Rate sensitive liabilities
Certificates of deposit over $ 1,991 $ 5,072 $ 7,549 $ 14,612
$ 100,000
Other certificates of deposit 7,397 17,756 31,030 56,183
Money market deposit accounts 40,076 0 0 40,076
NOW accounts and other savings 76,408 0 0 76,408
deposits
Federal funds and other liabilities 17,373 0 30,000 47,373
$ 143,245 $ 22,828 $ 68,579 $ 234,652
Cumulative interest sensitive
GAP/total assets from financial
statements ( 96,710) ( 45,618) 15,808 15,808
Cumulative interest sensitive GAP
ratio ( 32.16%) ( 15.17%) 5.26% 5.26%
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 Corporation has not experienced a significant rewriting of
loans. Investments are based on maturity date. The Corporation has
historically experienced very little deposit runoff and has in fact had net
gains in deposits over the past
MARKET RISK MANAGEMENT (Continued)
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: - - - -
- - - - -
Rate sensitive 2004 2005 2006 2007 2008 Thereafter Total Fair
assets Value
Fixed interest 19,690 11,819 8,883 7,693 7,089 53,656 108,830 108,811
rate loans
Average interest 6.08 7.07 6.55 6.27 6.19 5.81 6.11
rate
Variable interest 15,844 4,263 4,312 4,548 4,494 71,776 105,237 105,237
rate loans
Average interest 4.87 4.02 4.01 4.06 4.03 4.25 4.30
rate
Fixed interest 1,731 2,801 4,263 1,506 2,425 23,372 36,098 39,317
rate securities
Average interest 5.47 5.55 4.55 5.65 4.20 5.01 4.99
rate
Noninterest bearing 3,069 920 920 920 308 12,275 18,412 18,412
checking
Savings and 3,495 2,330 2,330 2,330 1,165 104,834 116,484 116,484
interest bearing
checking
Average interest 0.41 0.41 0.41 0.41 0.41 0.41 0.41
rates
Time deposits 31,656 17,739 10,193 4,348 8,133 0 72,069 72,988
Average interest 1.77 2.78 2.65 3.94 3.05 0 2.40
rates
Fixed interest 0 0 0 0 15,000 15,000 30,000 29,941
rate borrowings
Variable interest 17,373 0 0 0 0 0 17,373 17,373
rate barrowings
Borrowings average 1.69 0 0 0 5.01 4.46 4.74
interest rate
CAPITAL FUNDS
Internal capital generation has been the primary method utilized by
Tower Bancorp Inc. to increase its capital. Stockholders' equity, which
exceeded $ 40.4 million at December 31, 2003 has steadily increased. Regulatory
authorities have established capital guidelines in the form of the "leverage
ratio" and "risk-based capital ratios." The leverage ratio compares capital to
total balance sheet assets, while the risk-based ratios compare capital to risk-
weighted assets and off-balance-sheet activity in order to make capital levels
more sensitive to risk profiles of individual banks. A comparison of Tower
Bancorp's capital ratios to regulatory minimums at December 31 is as follows:
Tower Bancorp Regulatory
Minimum
Requirements
2003 2002
Leverage ratio 11.74% 11.72% 4%
Risk-based capital ratio Tier I 17.03% 17.48% 4%
(core capital)
Combined Tier I and Tier II (core 20.06% 18.95% 8%
capital plus allowance for
loan losses)
CAPITAL FUNDS (Continued)
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.
2003 2002 2001
Equity capital at December 31
(000 omitted) $ 40,438 $ 32,866 $ 28,518
Equity capital as a percent of 13.45% 12.52% 11.61%
assets at December 31
Return on average assets 1.80% 1.91% 1.72%
Return on average equity 14.46% 15.81% 14.40%
Cash dividend payout ratio 44.13% 30.04% 49.11%
STOCK MARKET ANALYSIS AND DIVIDENDS
The Corporation's common stock is traded in the over-the-counter
market. As of December 31, 2003 the approximate number of shareholders of
record was 1,045.
2003 Market Price Cash
Dividend
First Quarter $ 29.50 - 34.90 $ .68
Second Quarter 33.80 - 36.50 .18
Third Quarter 35.10 - 36.50 .20
Fourth Quarter 35.40 - 40.00 .20
2002 Market Price Cash
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
EXHIBIT 14
TOWER BANCORP, INC.
DIRECTORS AND SENIOR MANAGEMENT
CODE OF ETHICS
Directors and senior management, including senior financial officers,
hold an important and elevated role in corporate governance at Tower Bancorp,
Inc. They are vested with both the responsibility and authority to protect and
preserve the interests of all of our constituents, including shareholders,
employees, customers and citizens of the communities in which we conduct
business. The maintenance of extremely high standards of honest, ethical and
impartial conduct is essential to assure the proper performance of the company's
business and the maintenance of the public's trust. This Code of Ethics
prescribes the policies and procedures to be employed and enforced in the
operations of Tower Bancorp, Inc. (the "Company").
* It is your responsibility to comply with the law and behave in an ethical
manner. This responsibility cannot be delegated or assumed by the company.
* This code cannot anticipate every possible situation or cover every topic
in detail. From time-to-time, the company may establish compliance
programs to address specific subjects or you may find certain topics also
covered by the First National Bank of Greencastle Code of Ethics or
Employee Handbook. If you are unclear about a situation, seek guidance
before taking action.
* The standards in this code do not necessarily take into account all legal
requirements. Where more restrictive local laws or requirements exist,
those take precedence.
* Comply with all applicable governmental rules and regulations. Failure to
obey laws and regulations violates this code and may expose both you and
the Company to criminal or civil prosecution. Any violation of this code
or other compliance programs may result in corrective action, up to and
including termination. The Company may also seek civil remedies from you
and even refer criminal misconduct to law enforcement agencies.
* You are responsible for reporting suspected violations of this code,
immediately to John H. McDowell Sr., our Corporate Compliance Officer.
* If you have a question about a topic covered in this code, please review
the First National Bank of Greencastle Code of Ethics or Employee Handbook.
If you still have a concern regarding any possible unethical or illegal
conduct please contact John H. McDowell Sr., our Corporate Compliance
Officer.
Conflicts of Interest
A "conflict of interest" exists any time one faces a choice between
what is in his/her personal interest (financial or otherwise) and the interest
of our Company. These situations are not always easy to avoid. When a conflict
of interest arises, it is important to act with great care to avoid even the
appearance that your actions are not in the best interest of the Company. If
you find yourself in a position where your objectivity may be questioned because
of individual interest or family or personal relationships, notify John H.
McDowell Sr., our Corporate Compliance Officer, immediately.
Ownership Interests
Board of Directors approval is required for our Company to do business
with a company in which a senior officer or family member owns - directly or
indirectly - an interest. If you or a family member own or acquire an interest
that is greater than 5% in any company, Board approval is needed for purchases
of more than $50,000 per year.
If your ownership interest does not meet any of the above criteria,
Board approval is not needed, but you remain obligated to keep our Company's
interests first in mind.
Gifts, Meals, Services and Entertainment
One should not request or accept anything that might be used as a
means to influence, or even appear to influence, you against the Company's best
interests. Personal gifts should not be accepted other than those considered
common business courtesies and for which one would reasonably expect to give
something similar in return in the normal course of business. One must not
accept or give any gift in excess of $100 in value without the prior approval of
John H. McDowell Sr., our Compliance Officer.
Safeguarding Company Assets/Accuracy of Books and Records
We maintain internal controls to provide direction on protecting
Company assets and financial accountability. The controls are based upon the
following principles.
Do not:
* Make personal use of Company assets that creates additional cost for the
Company, interferes with work duties or violates any Company policy;
* Allow Company property to be used to help carry out illegal acts;
* Manipulate financial accounts, records or reports for personal gain;
* Maintain off-the-book accounts to facilitate questionable or illegal
payments; or
* Violate any law or regulation.
Do:
* Prepare project financial proposals with accurate information;
* Maintain books, accounts and records according to generally accepted
accounting principles, using enough detail to reflect accurately and
fairly Company transactions;
* Record transactions in a timely manner, so that no misleading financial
information is created. (These transactions include, but are not
limited to, income, expense, indebtedness, obligation, reserves and
acquisition or disposition of assets, etc);
* Retain Company records in accordance with established policies and
applicable legal and regulatory requirements; and
* Give full, fair, accurate, timely, and understandable disclosure in any
and all periodic reports filed with the United States Securities and
Exchange Commission.
Insider Trading
Insider trading is a crime that can carry severe penalties. If you
know material, confidential information about our Company or any company with
whom we have a business relationship and you trade company securities, such as
stocks or bonds, while in possession of that information or tell others about it
before it is made public, you may have violated the insider trading laws.
Please review the Company's Insider Trading and Material Non-Public Information
Policy for details on our insider trading policy.
Material information is the type of news that would affect a
reasonable investor's decision on whether or not to invest in the Company's
stock. Examples include plans to issue securities, sharp changes in earnings
patterns, changes in dividend rates, changes in key management personnel,
mergers, acquisitions, and important regulatory actions affecting the Company.
This policy forbids you from trading not only in our stock, but also in those of
our suppliers, customers or other companies with whom we have a business
relationship while in possession of material inside information learned in the
course of your employment at our Company.
We encourage you to invest in our stock. However, if you have access
to any information not readily available to the public, you must be sure you do
not trade while in possession of material non-public information. When you have
such information:
* Do not tell anyone not authorized to have the information. A casual
remark to a friend may find its way to a broker and eventually to the
entire financial community thereby requiring the Company to make a
premature or unplanned public announcement. This "tipping" may be illegal
and damaging to the Company.
* Do not trade in our Company's stock (or that of an applicable outside
company) until the next day after the news has been made public.
Circumstances suggesting the possibility of insider trading may result in
an investigation by governmental authorities of Company and stockbroker
records of stock trading transactions. This investigation could damage the
Company's reputation and result in liability or penalties, including
criminal charges and fines against you.
* This policy against insider trading also covers transfers into and out of
Company stock or savings plans and changes in patterns involving purchases
of our stock within the plans. However, generally, regular scheduled
monthly purchases of our stock within plans are not prohibited.
If you are planning to effect a transaction in our securities, you
must contact John H. McDowell Sr., our Corporate Compliance Officer, in advance.
Bribery, Kickbacks And Other Improper Payments
Our Company and its officers must maintain high ethical and
professional standards in all dealings.
* Do not directly or indirectly promise, offer or make payment in money or
anything of value to anyone, including a government official, agent or
employee of a government, political party, labor organization or business
entity or a candidate of a political party, with the intent to induce
favorable business treatment or to improperly affect business or
governmental decisions.
* Our code does not necessarily take into account all local legal
requirements. Where more restrictive local laws exist, those take
precedence. In general, we do not consider ordinary and reasonable
business entertainment or gifts of insubstantial value that are customary
and legal in the local market to be improper.
* Document any entertainment of and gifts to customers, vendors, suppliers
and potential customers, vendors and suppliers.
* Loans are not made by our Company to its senior officers. Loans are made
by our banking subsidiaries and comply with all federal and state laws,
statutes and regulations.
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 21, 2004, with respect to the consolidated balance sheets of Tower
Bancorp, Inc. and subsidiary as of December 31, 2003 and 2002 and the related
consolidated statements of income, stockholders' equity and cash flows for the
three year period ended December 31, 2003, which report is incorporated by
reference in the December 31, 2003 annual report to stockholders on Form 10-K of
Tower Bancorp, Inc.
/s/SMITH ELLIOTT KEARNS & COMPANY, LLC
--------------------------------------
Chambersburg, PA
March 15, 2004
Exhibit 31.1
CERTIFICATION
I, Jeffery B. Shank, President and 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-15(e) and 15d-15(e)) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision 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 and presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this annual report based on such evaluation; and
(c) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of the internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
By: /s/ Jeffery B. Shank
------------------------------
Jeffery B. Shank
President and CEO
(Principal Executive Officer)
March 15, 2004
Exhibit 31.2
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-15(e) and 15d-15(e)) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision 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 and presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this annual report based on such evaluation; and
(c) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of the internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
By: /s/ Franklin T. Klink, III
------------------------------
Franklin T. Klink, III
Treasurer
(Principal Financial Officer)
March 15, 2004
Exhibit 32.1
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
Corporation) on Form 10-K for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date therein specified (the
"Report"), I, Jeffery B. Shank, President and Chief Executive Officer of the
Corporation, 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 financial condition and results of operations of the
Corporation as of and for the period covered by the report.
/s/ Jeffery B. Shank
----------------------------------
Jeffery B. Shank
President and Chief Executive Officer
Dated: March 15, 2004
Exhibit 32.2
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
Corporation) on Form 10-K for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date therein specified (the
"Report"), I, Franklin T. Klink, III, Chief Financial Officer of the
Corporation, 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 financial condition and results of operations of the
Corporation as of and for the period covered by the report.
/s/ Franklin T. Klink, III
----------------------------------
Franklin T. Klink, III
Chief Financial Officer
Dated: March 15, 2004