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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended: September 30, 2010

Or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number: 001-34277





LOGO

(Exact name of registrant as specified in its charter)







|                                               |  |                                     
|---------------------------------------------- |  | ------------------------------------
|Pennsylvania                                   |  | 25-1445946                          
|(State or other jurisdiction of incorporation) |  | (IRS Employer Identification Number)



|                                            |  |           
|------------------------------------------- |  | ----------
|112 Market Street, Harrisburg, Pennsylvania |  | 17101     
|(Address of principal executive office)     |  | (Zip Code)

(717)
231-2700

(Registrants telephone number, including area code)





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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x









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APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:

7,183,800 shares of common stock outstanding at October 
31, 2010

TABLE OF CONTENTS



|         |  |                                                                                       |  |      |    | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  | Description                                                                           |  | Page |   
|         |  |                                                                                      
|PART I   |  | FINANCIAL INFORMATION                                                                 |  |      |    | 
|         |  |                                                                                      
|Item 1.  |  | Financial Statement                                                                   |  |      | 3  | 
|         |  | Consolidated Balance Sheets                                                           |  |      | 3  | 
|         |  | Consolidated Statements of Operations                                                 |  |      | 4  | 
|         |  | Consolidated Statements of Shareholders Equity and Comprehensive Income              |  |      | 5  | 
|         |  | Consolidated Statements of Cash Flows                                                 |  |      | 6  | 
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |      | 29 | 
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |      | 50 | 
|Item 4.  |  | Controls and Procedures                                                               |  |      | 56 | 
|         |  |                                                                                      
|PART II  |  | OTHER INFORMATION                                                                     |  |      |    | 
|         |  |                                                                                      
|Item 1.  |  | Legal Proceedings                                                                     |  |      | 57 | 
|Item 1A. |  | Risk Factors                                                                          |  |      | 57 | 
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  |      | 60 | 
|Item 3.  |  | Defaults Upon Senior Securities                                                       |  |      | 60 | 
|Item 4.  |  | (Removed and Reserved)                                                                |  |      | 60 | 
|Item 5.  |  | Other Information                                                                     |  |      | 60 | 
|Item 6.  |  | Exhibits                                                                              |  |      | 61 | 
|         |  |                                                                                      
|         |  | Signatures                                                                            |  |      | 63 | 
|         |  |                                                                                      
|         |  | Exhibit Index                                                                         |  |      | 64 | 



2



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|PART I. | FINANCIAL INFORMATION
|------- | ---------------------

Item 1. Financial Statements

Tower Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets

September 30, 2010 and December 31, 2009

(Amounts in
thousands, except share data)



|                                                                                                                                                                                                   |  |                   |           |   |                  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                   |  | September 30,2010 |           |   | December 31,2009 |  
|                                                                                                                                                                                                   |  | (unaudited)       |           |   |                  |  
|Assets                                                                                                                                                                                             |  |                   |           |   |                  |   |           |  
|Cash and due from banks                                                                                                                                                                            |  | $                 | 28,434    |   |                  | $ | 33,955    |  
|Federal funds sold                                                                                                                                                                                 |  |                   | 17,831    |   |                  |   | 16,645    |  
|                                                                                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                          |  |                   | 46,265    |   |                  |   | 50,600    |  
|Securities available for sale                                                                                                                                                                      |  |                   | 145,428   |   |                  |   | 189,853   |  
|Restricted investments                                                                                                                                                                             |  |                   | 6,254     |   |                  |   | 6,254     |  
|Loans held for sale                                                                                                                                                                                |  |                   | 12,851    |   |                  |   | 8,034     |  
|Loans, net of allowance for loan losses of $12,717, and $9,695                                                                                                                                     |  |                   | 1,308,820 |   |                  |   | 1,128,576 |  
|Premises and equipment, net of accumulated depreciation of $5,238 and $3,324                                                                                                                       |  |                   | 29,006    |   |                  |   | 29,810    |  
|Premises and equipment held for sale, net of accumulated depreciation of $27                                                                                                                       |  |                   | 549       |   |                  |   |          |  
|Accrued interest receivable                                                                                                                                                                        |  |                   | 5,220     |   |                  |   | 4,974     |  
|Deferred tax asset, net                                                                                                                                                                            |  |                   | 1,488     |   |                  |   | 1,742     |  
|Bank owned life insurance                                                                                                                                                                          |  |                   | 37,906    |   |                  |   | 24,606    |  
|Goodwill                                                                                                                                                                                           |  |                   | 11,935    |   |                  |   | 11,935    |  
|Other intangible assets, net                                                                                                                                                                       |  |                   | 2,871     |   |                  |   | 3,367     |  
|Other assets                                                                                                                                                                                       |  |                   | 10,248    |   |                  |   | 10,832    |  
|                                                                                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Total Assets                                                                                                                                                                                       |  | $                 | 1,618,841 |   |                  | $ | 1,470,583 |  
|                                                                                                                                                                                                   |  |                   |           |   |                  |   |           |  
|                                                                                                                                                                                                   |  |                  
|Liabilities and Stockholders Equity                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Liabilities                                                                                                                                                                                        |  |                   |           |   |                  |   |           |  
|Deposits:                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Non-interest bearing                                                                                                                                                                               |  | $                 | 125,174   |   |                  | $ | 119,116   |  
|Interest bearing                                                                                                                                                                                   |  |                   | 1,230,543 |   |                  |   | 1,097,353 |  
|                                                                                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Total deposits                                                                                                                                                                                     |  |                   | 1,355,717 |   |                  |   | 1,216,469 |  
|Securities sold under agreements to repurchase                                                                                                                                                     |  |                   | 7,102     |   |                  |   | 6,892     |  
|Short-term borrowings                                                                                                                                                                              |  |                   | 5,037     |   |                  |   | 5,292     |  
|Long-term debt                                                                                                                                                                                     |  |                   | 72,398    |   |                  |   | 65,689    |  
|Accrued interest payable                                                                                                                                                                           |  |                   | 1,084     |   |                  |   | 1,090     |  
|Other liabilities                                                                                                                                                                                  |  |                   | 11,709    |   |                  |   | 11,274    |  
|                                                                                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Total Liabilities                                                                                                                                                                                  |  |                   | 1,453,047 |   |                  |   | 1,306,706 |  
|                                                                                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Stockholders Equity                                                                                                                                                                               |  |                   |           |   |                  |   |           |  
|Common stock, no par value; 50,000,000 shares authorized; 7,287,158 issued and 7,183,800 outstanding at September 30, 2010,
7,226,041 shares issued and 7,122,683 outstanding at December 31, 2009 |  |                   |          |   |                  |   |          |  
|Additional paid-in capital                                                                                                                                                                         |  |                   | 173,175   |   |                  |   | 172,409   |  
|Accumulated deficit                                                                                                                                                                                |  |                   | (4,431    | ) |                  |   | (4,025    | )
|Accumulated other comprehensive income (loss)                                                                                                                                                      |  |                   | 1,143     |   |                  |   | (414      | )
|                                                                                                                                                                                                   |  |                  
|Less: cost of treasury stock, 103,358 shares at September 30, 2010 and December 31, 2009                                                                                                           |  |                   | (4,093    | ) |                  |   | (4,093    | )
|                                                                                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Total Stockholders Equity                                                                                                                                                                         |  |                   | 165,794   |   |                  |   | 163,877   |  
|                                                                                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Total Liabilities and Stockholders Equity                                                                                                                                                         |  | $                 | 1,618,841 |   |                  | $ | 1,470,583 |  
|                                                                                                                                                                                                   |  |                   |           |   |                  |   |           |  

See Notes to the Consolidated Financial Statements



3



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Tower Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

For the Three and Nine Months Ended September 30 2010 and 2009

(Amounts in thousands, except share data)



|                                                     |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|---------------------------------------------------- |  | ------------------------------- | --------- |  | ------------------------------ | - | --------- | ---- |  | - | --------- |  |  | - | --------- | 
|                                                     |  | Three Months EndedSeptember 30, |           |  | Nine Months EndedSeptember 30, |  
|                                                     |  | 2010                            |           |  | 2009                           |   |           | 2010 |  |   | 2009      | 
|                                                     |  | (unaudited)                     |           |  | (unaudited)                    |  
|Interest Income                                      |  |                                 |           |  |                                |   |           |     
|Loans, including fees                                |  | $                               | 17,852    |  |                                | $ | 15,249    |      |  | $ | 51,632    |  |  | $ | 38,789    | 
|Securities                                           |  |                                 | 1,020     |  |                                |   | 419       |      |  |   | 3,223     |  |  |   | 935       | 
|Federal funds sold and other                         |  |                                 | 24        |  |                                |   | 56        |      |  |   | 98        |  |  |   | 83        | 
|                                                     |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|Total Interest Income                                |  |                                 | 18,896    |  |                                |   | 15,724    |      |  |   | 54,953    |  |  |   | 39,807    | 
|Interest Expense                                     |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|Deposits                                             |  |                                 | 4,492     |  |                                |   | 4,725     |      |  |   | 13,645    |  |  |   | 13,382    | 
|Short-term borrowings                                |  |                                 | 177       |  |                                |   | 102       |      |  |   | 482       |  |  |   | 304       | 
|Long-term debt                                       |  |                                 | 856       |  |                                |   | 693       |      |  |   | 2,503     |  |  |   | 1,430     | 
|                                                     |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|Total Interest Expense                               |  |                                 | 5,525     |  |                                |   | 5,520     |      |  |   | 16,630    |  |  |   | 15,116    | 
|                                                     |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|Net Interest Income                                  |  |                                 | 13,371    |  |                                |   | 10,204    |      |  |   | 38,323    |  |  |   | 24,691    | 
|Provision for Loan Losses                            |  |                                 | 1,600     |  |                                |   | 800       |      |  |   | 4,950     |  |  |   | 3,816     | 
|                                                     |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|Net Interest Income after Provision for Loan Losses  |  |                                 | 11,771    |  |                                |   | 9,404     |      |  |   | 33,373    |  |  |   | 20,875    | 
|Non-Interest Income                                  |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|Service charges on deposit accounts                  |  |                                 | 832       |  |                                |   | 625       |      |  |   | 2,377     |  |  |   | 1,506     | 
|Other service charges, commissions and fees          |  |                                 | 581       |  |                                |   | 566       |      |  |   | 1,788     |  |  |   | 1,475     | 
|Gain on sale of mortgage loans originated for sale   |  |                                 | 656       |  |                                |   | 334       |      |  |   | 1,250     |  |  |   | 1,182     | 
|Gain (loss) on sale of other interest earning assets |  |                                 | 265       |  |                                |   | (113      | )    |  |   | 260       |  |  |   | 156       | 
|Income from bank owned life insurance                |  |                                 | 599       |  |                                |   | 283       |      |  |   | 1,390     |  |  |   | 725       | 
|Other income                                         |  |                                 | 148       |  |                                |   | 115       |      |  |   | 512       |  |  |   | 431       | 
|                                                     |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|Total Non-Interest Income                            |  |                                 | 3,081     |  |                                |   | 1,810     |      |  |   | 7,577     |  |  |   | 5,475     | 
|Non-Interest Expenses                                |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|Salaries and employee benefits                       |  |                                 | 5,554     |  |                                |   | 4,237     |      |  |   | 15,996    |  |  |   | 11,523    | 
|Occupancy and equipment                              |  |                                 | 1,805     |  |                                |   | 1,462     |      |  |   | 5,236     |  |  |   | 3,664     | 
|Amortization of intangible assets                    |  |                                 | 160       |  |                                |   | 177       |      |  |   | 496       |  |  |   | 354       | 
|FDIC insurance premiums                              |  |                                 | 564       |  |                                |   | 409       |      |  |   | 1,500     |  |  |   | 1,320     | 
|Advertising and promotion                            |  |                                 | 231       |  |                                |   | 204       |      |  |   | 740       |  |  |   | 422       | 
|Data processing                                      |  |                                 | 740       |  |                                |   | 627       |      |  |   | 1,894     |  |  |   | 1,414     | 
|Professional service fees                            |  |                                 | 385       |  |                                |   | 305       |      |  |   | 1,197     |  |  |   | 843       | 
|Impairment of long-lived assets                      |  |                                 |          |  |                                |   |          |      |  |   | 920       |  |  |   |          | 
|Other operating expenses                             |  |                                 | 1,519     |  |                                |   | 963       |      |  |   | 4,436     |  |  |   | 2,858     | 
|Merger related expenses                              |  |                                 | 117       |  |                                |   | 310       |      |  |   | 304       |  |  |   | 1,722     | 
|                                                     |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|Total Non-Interest Expenses                          |  |                                 | 11,075    |  |                                |   | 8,694     |      |  |   | 32,719    |  |  |   | 24,120    | 
|                                                     |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|Net Income Before Income Tax Expense                 |  |                                 | 3,777     |  |                                |   | 2,520     |      |  |   | 8,231     |  |  |   | 2,230     | 
|                                                     |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|Income Tax Expense                                   |  |                                 | 1,275     |  |                                |   | 820       |      |  |   | 2,647     |  |  |   | 577       | 
|                                                     |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|Net Income                                           |  | $                               | 2,502     |  |                                | $ | 1,700     |      |  | $ | 5,584     |  |  | $ | 1,653     | 
|                                                     |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|                                                     |  |                                 |           | 
|Net Income Per Common Share                          |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|                                                     |  |                                 |           | 
|Basic                                                |  | $                               | 0.35      |  |                                | $ | 0.30      |      |  | $ | 0.78      |  |  | $ | 0.37      | 
|Diluted                                              |  | $                               | 0.35      |  |                                | $ | 0.30      |      |  | $ | 0.78      |  |  | $ | 0.37      | 
|Dividends Declared Per Common Share                  |  | $                               | 0.28      |  |                                | $ | 0.28      |      |  | $ | 0.84      |  |  | $ | 0.56      | 
|Weighted Average Common Shares Outstanding           |  |                                 |           |  |                                |   |           |      |  |   |           |  |  |   |           | 
|Basic                                                |  |                                 | 7,144,685 |  |                                |   | 5,638,851 |      |  |   | 7,134,611 |  |  |   | 4,495,962 | 
|Diluted                                              |  |                                 | 7,144,721 |  |                                |   | 5,652,292 |      |  |   | 7,137,508 |  |  |   | 4,502,396 | 

See Notes to the
Consolidated Financial Statements



4



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Tower Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income

For the Nine Months Ended September 30, 2010 and 2009

(Amounts in thousands, except share data)



|                                                                                                       |  |             |   |  |                          |   |         |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ----------- | - |  | ------------------------ | - | ------- | ------------------ |  | - | ------------------------------------------ | - |  | ------------- | ----- | - | ----- | - | ------ | - |  | - | ------- | -
|                                                                                                       |  | CommonStock |   |  | AdditionalPaid-inCapital |   |         | AccumulatedDeficit |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | TreasuryStock |       |   | Total |  
|BalanceDecember 31, 2008                                                                              |  | $           |  |  |                          | $ | 57,547  |                    |  | $ | (2,909                                     | ) |  | $             | 147   |   |       | $ |       |   |  | $ | 54,785  |  
|Restricted common stock awards earned                                                                  |  |             |   |  |                          |   | 295     |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   | 295     |  
|Stock option expense                                                                                   |  |             |   |  |                          |   | 551     |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   | 551     |  
|Fair value of consideration exchanged in Merger                                                        |  |             |   |  |                          |   | 61,946  |                    |  |   |                                            |   |  |               |       |   |       |   | (4,093 | ) |  |   | 57,853  |  
|Dividends declared                                                                                     |  |             |   |  |                          |   |         |                    |  |   | (2,834                                     | ) |  |               |       |   |       |   |        |   |  |   | (2,834  | )
|Proceeds from stock purchase plans                                                                     |  |             |   |  |                          |   | 263     |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   | 263     |  
|Proceeds from Common Stock Offering, net of expenses                                                   |  |             |   |  |                          |   | 51,661  |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   | 51,661  |  
|Comprehensive Income:                                                                                  |  |             |   |  |                          |   |         |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   |         |  
|Net income                                                                                             |  |             |   |  |                          |   |         |                    |  |   | 1,653                                      |   |  |               |       |   |       |   |        |   |  |   | 1,653   |  
|Unrealized gain on securities available for sale, net of taxes of $169                                 |  |             |   |  |                          |   |         |                    |  |   |                                            |   |  |               | 329   |   |       |   |        |   |  |   | 329     |  
|                                                                                                       |  |             |   |  |                          |   |         |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   |         |  
|Total Comprehensive Loss                                                                               |  |             |   |  |                          |   |         |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   | 1,982   |  
|                                                                                                       |  |             |   |  |                          |   |         |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   |         |  
|BalanceSeptember 30, 2009 (unaudited)                                                                 |  | $           |  |  |                          | $ | 172,263 |                    |  | $ | (4,090                                     | ) |  | $             | 476   |   |       | $ | (4,093 | ) |  | $ | 164,556 |  
|                                                                                                       |  |             |   |  |                          |   |         |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   |         |  
|                                                                                                       |  |             |   |  |                          |  
|BalanceDecember 31, 2009                                                                              |  | $           |  |  |                          | $ | 172,409 |                    |  | $ | (4,025                                     | ) |  | $             | (414  | ) |       | $ | (4,093 | ) |  | $ | 163,877 |  
|Stock issued as investment in Dellinger, Dolan, McCurdy and Phillips Investment Advisors, LLC (DDMP) |  |             |   |  |                          |   | 51      |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   | 51      |  
|Stock option expense                                                                                   |  |             |   |  |                          |   | 84      |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   | 84      |  
|Proceeds from stock purchase plans                                                                     |  |             |   |  |                          |   | 631     |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   | 631     |  
|Dividends declared                                                                                     |  |             |   |  |                          |   |         |                    |  |   | (5,990                                     | ) |  |               |       |   |       |   |        |   |  |   | (5,990  | )
|Comprehensive Income:                                                                                  |  |             |   |  |                          |   |         |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   |         |  
|Net income                                                                                             |  |             |   |  |                          |   |         |                    |  |   | 5,584                                      |   |  |               |       |   |       |   |        |   |  |   | 5,584   |  
|Unrealized gain on securities available for sale, net of taxes of $829                                 |  |             |   |  |                          |   |         |                    |  |   |                                            |   |  |               | 1,557 |   |       |   |        |   |  |   | 1,557   |  
|                                                                                                       |  |             |   |  |                          |   |         |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   |         |  
|Total Comprehensive Income                                                                             |  |             |   |  |                          |   |         |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   | 7,141   |  
|                                                                                                       |  |             |   |  |                          |   |         |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   |         |  
|BalanceSeptember 30, 2010 (unaudited)                                                                 |  | $           |  |  |                          | $ | 173,175 |                    |  | $ | (4,431                                     | ) |  | $             | 1,143 |   |       | $ | (4,093 | ) |  | $ | 165,794 |  
|                                                                                                       |  |             |   |  |                          |   |         |                    |  |   |                                            |   |  |               |       |   |       |   |        |   |  |   |         |  

See Notes to the Consolidated Financial Statements



5



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##### Table of Contents



Tower Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2010 and 2009

(Amounts
in thousands, except share data)



|                                                                                  |  |             |          |   |             |   |          |  
|--------------------------------------------------------------------------------- |  | ----------- | -------- | - | ----------- | - | -------- | -
|                                                                                  |  | 2010        |          |   | 2009        |  
|                                                                                  |  | (unaudited) |          |   | (unaudited) |  
|Cash Flows from Operating Activities                                              |  |             |          |   |             |   |          |  
|Net income                                                                        |  | $           | 5,584    |   |             | $ | 1,653    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |             |          |   |             |   |          |  
|Provision for loan losses                                                         |  |             | 4,950    |   |             |   | 3,816    |  
|Net amortization on securities and loans                                          |  |             | 1,829    |   |             |   | 42       |  
|Depreciation and amortization                                                     |  |             | 1,981    |   |             |   | 1,232    |  
|Amortization of intangible assets                                                 |  |             | 496      |   |             |   | 354      |  
|Amortization of unearned compensation on restricted stock                         |  |             |         |   |             |   | 295      |  
|Stock option expense                                                              |  |             | 84       |   |             |   | 551      |  
|Deferred tax benefit                                                              |  |             | (575     | ) |             |   | (119     | )
|Increase in accrued interest receivable                                           |  |             | (246     | ) |             |   | (382     | )
|Decrease in accrued interest payable                                              |  |             | (6       | ) |             |   | (303     | )
|Net increase in the cash surrender value of life insurance                        |  |             | (1,300   | ) |             |   | (695     | )
|Decrease (increase) in other assets                                               |  |             | 654      |   |             |   | (1,794   | )
|Increase (decrease) in other liabilities                                          |  |             | 435      |   |             |   | (3,039   | )
|Impairment of premises and equipment                                              |  |             | 920      |   |             |   |         |  
|Gain on sale of loans originated for sale and other assets, net                   |  |             | (1,403   | ) |             |   | (1,338   | )
|Loans originated for sale                                                         |  |             | (96,052  | ) |             |   | (105,353 | )
|Sale of loans                                                                     |  |             | 92,485   |   |             |   | 109,928  |  
|                                                                                  |  |             |          |   |             |   |          |  
|Net Cash Provided by Operating Activities                                         |  |             | 9,836    |   |             |   | 4,848    |  
|                                                                                  |  |             |          |   |             |   |          |  
|                                                                                  |  |            
|Cash Flows from Investing Activities                                              |  |             |          |   |             |   |          |  
|Proceeds from maturities and sales of securities available for sale               |  |             | 119,638  |   |             |   | 61,779   |  
|Purchases of securities available for sale                                        |  |             | (73,801  | ) |             |   | (142,525 | )
|Purchases of bank owned life insurance                                            |  |             | (12,000  | ) |             |   |         |  
|Net increase in loans                                                             |  |             | (185,928 | ) |             |   | (32,650  | )
|Decrease of investment in restricted investments                                  |  |             |         |   |             |   | 1,024    |  
|Purchases of premises and equipment                                               |  |             | (2,657   | ) |             |   | (1,116   | )
|Net proceeds from the sale of premises and equipment                              |  |             | 24       |   |             |   |         |  
|Net cash received in Merger                                                       |  |             |         |   |             |   | 9,017    |  
|                                                                                  |  |             |          |   |             |   |          |  
|Net Cash Used in Investing Activities                                             |  |             | (154,724 | ) |             |   | (104,471 | )
|                                                                                  |  |             |          |   |             |   |          |  
|                                                                                  |  |            
|Cash Flows from Financing Activities                                              |  |             |          |   |             |   |          |  
|Proceeds from advances on long-term debt                                          |  |             | 6,709    |   |             |   | 2,282    |  
|Net decrease in short-term borrowings                                             |  |             | (255     | ) |             |   | (39,751  | )
|Net increase (decrease) in securities sold under agreements to repurchase         |  |             | 210      |   |             |   | (1,001   | )
|Net increase in deposits                                                          |  |             | 139,248  |   |             |   | 190,609  |  
|Proceeds from the sale of common stock                                            |  |             | 631      |   |             |   | 51,924   |  
|Dividends paid                                                                    |  |             | (5,990   | ) |             |   | (2,625   | )
|                                                                                  |  |             |          |   |             |   |          |  
|Net Cash Provided by Financing Activities                                         |  |             | 140,553  |   |             |   | 201,438  |  
|                                                                                  |  |             |          |   |             |   |          |  
|Net Increase in Cash and Cash Equivalents                                         |  |             | (4,335   | ) |             |   | 101,815  |  
|Cash and Cash Equivalents - Beginning                                             |  |             | 50,600   |   |             |   | 32,022   |  
|                                                                                  |  |             |          |   |             |   |          |  
|Cash and Cash Equivalents - Ending                                                |  | $           | 46,265   |   |             | $ | 133,837  |  
|                                                                                  |  |             |          |   |             |   |          |  
|                                                                                  |  |            
|Supplemental disclosure of information:                                           |  |             |          |   |             |   |          |  
|Interest paid                                                                     |  | $           | 16,636   |   |             | $ | 14,721   |  
|Income taxes paid                                                                 |  | $           | 3,550    |   |             | $ | 225      |  
|                                                                                  |  |            
|Supplemental schedule of noncash investing and financing activities               |  |             |          |   |             |   |          |  
|                                                                                  |  |            
|Other real estate (sold) acquired in settlement of loan                           |  | $           | (48      | ) |             | $ | 933      |  
|Unrealized gain on investments securities available for sale, net of tax          |  | $           | 1,557    |   |             | $ | 329      |  
|Reclassification of long-term debt to short-term borrowings                       |  | $           | 5,000    |   |             | $ | 5,250    |  

See Notes to the
Consolidated Financial Statements



6



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##### Table of Contents



Tower Bancorp, Inc. and
Subsidiary



Notes to
Unaudited Consolidated Financial Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)

Note 1 - Summary of Significant Accounting Policies

Organization and Nature of Operations

Tower Bancorp, Inc. (the Company) is a
registered bank holding company that was incorporated in 1983 under the Bank Holding Company Act of 1956, as amended. On March 31, 2009, the Company merged with Graystone Financial Corp. (Graystone), a privately held, non-reporting
corporation and a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the Merger). Pursuant to an Agreement and Plan of Merger between the Company and Graystone (the Merger Agreement), the
Company remains the surviving bank holding company and the First National Bank of Greencastle has merged with and into Graystone Bank, the wholly-owned subsidiary of Graystone, with Graystone Bank as the surviving institution under the name
Graystone Tower Bank (the Bank Merger). Graystone Tower Bank (the Bank) operates as the sole subsidiary of the Company through two divisions  Graystone Bank, a division of Graystone Tower Bank,
consisting of the former Graystone Bank branches, and Tower Bank, a division of Graystone Tower Bank, consisting of the former branches of The First National Bank of Greencastle. On April 22, 2010, Tower Bancorp, Inc. became a
financial holding company pursuant to the Gramm-Leach-Bliley Act of 1999.

On December 27, 2009, Tower Bancorp, Inc. and First
Chester County Corporation (First Chester) entered into an Agreement and Plan of Merger (the FCEC Acquisition Agreement) pursuant to which Tower will acquire First Chester in an all-stock transaction valued at approximately
$65 million or $10.22 per share based on the closing price of Tower common stock at the announcement of this acquisition. As described in the definitive agreement, the exchange ratio is subject to upward or downward adjustment if loan delinquencies
at First Chester increase or decrease beyond specified amounts, which would ultimately affect the total value of the acquisition.

As part of
the definitive agreement, Towers subsidiary bank, Graystone Tower Bank, agreed to increase its lending facility with First Chester to up to $26 million as well as to purchase up to $100 million of residential mortgage and commercial loans from
First National Bank of Chester County (FNB) in order for the bank to satisfy the regulatory capital requirements of the Office of the Comptroller of the Currency (the OCC). As of September 30, 2010, the Bank has loaned
$26 million to First Chester. The Bank had also purchased approximately $52 million in performing commercial loans from First National Bank of Chester County during the fourth quarter of 2009.

Following the transaction, based on the 0.453 exchange ratio announced in the FCEC Acquisition Agreement, current Tower shareholders will own
approximately 71% and First Chester shareholders will own approximately 29% of the combined companys common stock. The Company has received all necessary regulatory approvals and pending the approvals of shareholder of both entities, the
acquisition is expected to be completed before the end of 2010.

On March 4, 2010, the FCEC Acquisition Agreement was amended between
Tower and First Chester. As part of the amended agreement, First Chester shall use its best efforts to sell at or prior to the effective date of the acquisition, the American Home Bank Division of FNB (AHB Division) to one or more
purchasers on terms and conditions acceptable to both First Chester and Tower. The AHB Division engages in mortgage-banking activities on a nation-wide basis. Additionally, the Company extended a $2 million non-revolving line of credit to First
Chester, which permits draws from time to time for the sole purpose of contributing additional capital to FNB in the event that, as a result of the attempt to sell the AHB Division, the actual sale thereof, or the effects on FNB of such sale,
FNBs regulatory capital ratios, as reported in FNBs quarterly call report, fall below the minimum regulatory capital ratios applicable to FNB. Through September 30, 2010, the Company has not advanced any funds to First Chester under
this facility. As of September 30, 2010, First Chester has not sold the AHB Division.

On October 28, 2010, The FCEC Acquisition
Agreement was amended between Tower and Fitrst Chester. As part of the amended agreement, the closing deadline has been extended from November 20, 2010 to December 31, 2010 and provided increased clarity to the definition of First
Chester Delinquent Loans.

Basis of Presentation

The merger between the Company and Graystone was considered a merger of equals and was accounted for as a reverse merger using the acquisition method of accounting with Graystone as the
accounting acquirer. As a result, any historical financial information included in the Companys financial statements and related footnotes as reported in this Form 10-Q related to periods prior to March 31, 2009 is that of Graystone.



7



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





The accompanying unaudited
consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP), the instructions for Form 10-Q, and Article 10 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by U.S. GAAP for a complete presentation of consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for fair presentation
are included. The operating results for the three month and nine month periods ended September 30, 2010 are not necessarily indicative of results that may be expected for any other period or for the full year ending December 31, 2010. The
accounting policies discussed within the notes to the unaudited consolidated financial statements are followed consistently by the Company. These policies are in accordance with U.S. GAAP and conform to common practices in the banking industry.

The accompanying unaudited consolidated financial statements include the accounts of Tower Bancorp, Inc. and its wholly-owned subsidiary,
Graystone Tower Bank and the Banks 90% owned mortgage subsidiary, Graystone Mortgage, LLC. All intercompany accounts and transactions are eliminated from the unaudited consolidated financial statements.

Use of Estimates

The preparation of
financial statements in conformity with U.S. GAAP 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 in the near term relate to the
determination of the allowance for loan losses, the potential other-than-temporary impairment of investments, the valuation of long-lived assets, and the valuation of deferred tax assets.

Significant Group Concentrations of Credit Risk

Most of the Companys activities are
with customers located within Central Pennsylvania and Washington County, Maryland. Note 3 discusses the types of securities in which the Company invests. Note 4 discusses the types of lending in which the Company engages. The Company does not
have any significant concentrations to any one industry or customer.

Recent Accounting Pronouncements

In July 2010, the FASB issued Accounting Standard Codification Update No. 2010-20 concerning disclosures about the credit quality of financing
receivables and the allowance for credit losses. Update No. 2010-20 is intended to provide additional information to assist financial statement users in assessing an entitys credit risk exposures and evaluating the adequacy of its
allowance for credit losses. Update No. 2010-20 requires companies to (1) provide enhanced disclosures around the nature of credit risk inherent in the entitys portfolio of financing receivables; (2) explain how that risk is
analyzed and assessed in arriving at the allowance for credit losses; and (3) explain the changes and reasons for changes in the allowance for credit losses. The provisions of Update No. 2010-20 concerning disclosures for the end of a
period are effective for interim and annual periods ending on or after December 15, 2010, or December 31, 2010 for the Company. The provisions of Update No. 2010-20 concerning disclosures about activity that occurs during a reporting
period are applicable to the Company for interim and annual periods beginning on or after December 15, 2010, the interim period ending on March 31, 2011. The adoption of Update No. 2010-20 is expected to provide the reader of the
Companys financial statements with expanded and enhanced disclosure surrounding the allowance for credit losses.

In January 2010, the
FASB issued Accounting Standard Codification Update No. 2010-06 for improving disclosures about fair value measurements. Update No. 2010-06 requires companies to disclose, and provide the reasons for, all transfers of assets and
liabilities between the Level 1 and 2 fair value categories. It also clarifies that companies should provide fair value measurement disclosures for classes of assets and liabilities which are subsets of line items within the balance sheet, if
necessary. In addition, Update No. 2010-06 clarifies that companies provide disclosures about the fair value techniques and inputs for assets and liabilities classified within Level 2 or 3 categories. The disclosure requirements prescribed by
Update No. 2010-06 are effective for fiscal years beginning after December 15, 2009, and for interim periods within those fiscal years, or March 31, 2010 for the Company. The Company has implemented the disclosure requirements of
Update No. 2010-06 within this Form 10-Q which can be found in Note 12 of the Notes to the Unaudited Consolidated Financial Statements. Update No. 2010-06 also requires companies to reconcile changes in Level 3 assets and liabilities by
separately providing information about Level 3 purchases, sales, issuances and settlements on a gross basis. This provision of Update No. 2010-06 is effective for fiscal years beginning after December 15, 2010, and for interim periods
within those fiscal years, or March 31, 2011 for the Company. The adoption of Update No. 2010-06 is not expected to materially impact the Companys fair value measurement disclosures.



8



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





In June 2009, the FASB issued
a pronouncement that amends the derecognition guidance in U.S. GAAP and eliminates the concept of qualifying special-purpose entities (QSPEs). This pronouncement is effective for fiscal years and interim periods beginning after
November 15, 2009 and early adoption is prohibited. We have adopted this pronouncement on January 1, 2010, which did not have a material effect on the consolidated financial statements for the period ended September 30, 2010.

In June 2009, the FASB issued a pronouncement, which amends the consolidation guidance applicable to variable interest entities
(VIEs). An entity would consolidate a VIE, as the primary beneficiary, when the entity has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the entitys
economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Ongoing reassessment
of whether an enterprise is the primary beneficiary of a VIE is required. This pronouncement eliminates the quantitative approach previously required for determining the primary beneficiary of a VIE. The pronouncement is effective for fiscal years
and interim periods beginning after November 15, 2009. We have adopted this pronouncement on January 1, 2010, which did not have a material effect on the consolidated financial statements for the period ended September 30, 2010.

In December 2007, the FASB issued a pronouncement that establishes accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. The guidance became effective as of January 1, 2009. The adoption of this pronouncement did not have a material impact to our consolidated financial statements. In January 2010, the FASB
issued updated guidance relating to the decrease in ownership of a subsidiary. The updated guidance is effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009 and should be applied
retrospectively. We have adopted this pronouncement on January 1, 2010, which did not have a material effect on the consolidated financial statements for the period ended September 30, 2010.

Note 2 - Merger Accounting

On
November 13, 2008, Graystone and the Company announced the execution of an agreement of merger, providing for the merger of Graystone with and into the Company. The Merger became effective prior to the start of business on March 31, 2009.
The Merger has been accounted for as a reverse merger using the acquisition method of accounting. For accounting purposes, Graystone is considered to be acquiring Tower in this transaction with the surviving legal entity operating under Tower
Bancorp, Inc.s articles of incorporation. Immediately following the holding company merger, the Companys wholly-owned subsidiary, The First National Bank of Greencastle, merged with and into Graystone Bank, the wholly-owned subsidiary of
Graystone, under the name Graystone Tower Bank. Graystone Tower Bank is, therefore, the wholly owned subsidiary of Tower Bancorp, Inc. and operates under the prior Graystone Bank charter.

The Merger generated goodwill of $11,935, consisting of synergies and increased economies of scale such as the ability to offer more diverse and more
profitable products, added diversity to the branch system to achieve lower cost deposits, an increased legal lending limit, etc. Management expects that no goodwill recognized as a result of the Merger will be deductible for income tax purposes.
Goodwill totaled $11,935 as of both September 30, 2010 and December 31, 2009. The Company tests goodwill for impairment annually as of October 31 and intermittently as events occur that would indicate that a potential impairment of
goodwill had occurred. The Company experienced no events during the first nine months of 2010 that required the completion of a goodwill impairment test.

The following table shows the pro forma financial results for the Company and Graystone for the nine months ended September 30, 2009, assuming that the Merger occurred on January 1, 2009:



|                              |  |                             |        | 
|----------------------------- |  | --------------------------- | ------ | 
|                              |  | Pro-formaSeptember 30, 2009 |       
|Net interest income           |  | $                           | 30,004 | 
|Pre-tax net income            |  |                             | 1,823  | 
|Income tax expense            |  |                             | 363    | 
|Net income                    |  |                             | 1,460  | 
|                              | 
|Pro-forma earnings per share: |  |                             |        | 
|Basic                         |  | $                           | 0.32   | 
|Diluted                       |  | $                           | 0.32   | 



9



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





Note 3 - Securities Available
for Sale

The amortized cost of securities and their approximate fair values at September 30, 2010 and December 31, 2009 are as
follows:



|                                                            |  |                    |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|----------------------------------------------------------- |  | ------------------ | ------- |  | -------------------- | - | ----- | --------------------- |  | - | ---------- | - |  | - | ------- | 
|                                                            |  | AmortizedCost      |         |  | GrossUnrealizedGains |   |       | GrossUnrealizedLosses |  |   | Fair Value |  
|                                                            |  | September 30, 2010 |        
|Equity securities                                           |  | $                  | 120     |  |                      | $ |      |                       |  | $ |           |   |  | $ | 120     | 
|U.S. Government sponsored agency securities                 |  |                    | 27,040  |  |                      |   | 39    |                       |  |   |           |   |  |   | 27,079  | 
|U.S. Government sponsored agency mortgage-backed securities |  |                    | 11,830  |  |                      |   | 101   |                       |  |   |           |   |  |   | 11,931  | 
|Collateralized mortgage obligations                         |  |                    | 73,626  |  |                      |   | 1,057 |                       |  |   |           |   |  |   | 74,683  | 
|Municipal bonds                                             |  |                    | 10,929  |  |                      |   | 412   |                       |  |   |           |   |  |   | 11,341  | 
|Municipal bonds  taxable                                   |  |                    | 10,360  |  |                      |   | 116   |                       |  |   | (102       | ) |  |   | 10,374  | 
|SBA loan pool investments                                   |  |                    | 9,765   |  |                      |   | 135   |                       |  |   |           |   |  |   | 9,900   | 
|                                                            |  |                    |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|Total securities available for sale                         |  | $                  | 143,670 |  |                      | $ | 1,860 |                       |  | $ | (102       | ) |  | $ | 145,428 | 
|                                                            |  |                    |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|                                                            | 
|                                                            |  | December 31, 2009  |        
|Equity securities                                           |  | $                  | 1,156   |  |                      | $ | 20    |                       |  | $ | (44        | ) |  | $ | 1,132   | 
|U.S. Government sponsored agency securities                 |  |                    | 56,437  |  |                      |   | 12    |                       |  |   | (65        | ) |  |   | 56,384  | 
|U.S. Government sponsored agency mortgage-backed securities |  |                    | 9,109   |  |                      |   | 37    |                       |  |   | (30        | ) |  |   | 9,116   | 
|Collateralized mortgage obligations                         |  |                    | 93,058  |  |                      |   | 81    |                       |  |   | (654       | ) |  |   | 92,485  | 
|Municipal bonds                                             |  |                    | 7,093   |  |                      |   | 95    |                       |  |   |           |   |  |   | 7,188   | 
|Municipal bonds  taxable                                   |  |                    | 12,917  |  |                      |   | 64    |                       |  |   | (71        | ) |  |   | 12,910  | 
|SBA loan pool investments                                   |  |                    | 10,710  |  |                      |   |      |                       |  |   | (72        | ) |  |   | 10,638  | 
|                                                            |  |                    |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|Total securities available for sale                         |  | $                  | 190,480 |  |                      | $ | 309   |                       |  | $ | (936       | ) |  | $ | 189,853 | 
|                                                            |  |                    |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 

Included with the Companys securities available for sale are pledged securities with a fair market value of $50,801
and $34,999 at September 30, 2010 and December 31, 2009, respectively. The securities were pledged to secure public deposits and securities sold under agreements to repurchase.

The amortized cost and fair value of available for sale securities as of September 30, 2010 by contractual maturity are shown below. Expected maturities may differ from contractual maturities due to
the issuers rights to call or prepay the obligation without penalty.



|                                       |  |                    |         |  |            |   |         | 
|-------------------------------------- |  | ------------------ | ------- |  | ---------- | - | ------- | 
|                                       |  | September 30, 2010 |        
|                                       |  | Amortized Cost     |         |  | Fair Value |  
|                                       |  |                   
|Due in one year or less                |  | $                  | 5,684   |  |            | $ | 5,693   | 
|Due after one year through five years  |  |                    | 20,986  |  |            |   | 21,054  | 
|Due after five years through ten years |  |                    | 11,885  |  |            |   | 11,945  | 
|Due after ten years                    |  |                    | 9,774   |  |            |   | 10,102  | 
|                                       |  |                    |         |  |            |   |         | 
|                                       |  |                    | 48,329  |  |            |   | 48,794  | 
|                                       |  |                    |         |  |            |   |         | 
|                                       |  |                   
|Mortgage-backed securities (1)         |  |                    | 95,221  |  |            |   | 96,514  | 
|Equity securities                      |  |                    | 120     |  |            |   | 120     | 
|                                       |  |                    |         |  |            |   |         | 
|                                       |  | $                  | 143,670 |  |            | $ | 145,428 | 
|                                       |  |                    |         |  |            |   |         | 



|(1) | Mortgage-backed securities include agency mortgage-backed securities, Government National Mortgage Association collateralized mortgage obligations and Small Business
Agency Loan pool investments.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)



The following table presents information related to the Companys gains and losses on the sales of
equity and debt securities, and losses recognized for other-than-temporary impairment of investments for the three and nine month periods ending September 30, 2010 and 2009.



|                  |  |                                  |     |  |                      |   |      |                                      |  |   |                    |   |  |   |      |  
|----------------- |  | -------------------------------- | --- |  | -------------------- | - | ---- | ------------------------------------ |  | - | ------------------ | - |  | - | ---- | -
|                  |  | Three Months Ended September 30, |    
|                  |  | Gross RealizedGains              |     |  | Gross RealizedLosses |   |      | Other-than-temporaryImpairmentLosses |  |   | Net (Losses)/Gains |  
|2010              |  |                                  |     |  |                      |   |      |                                      |  |   |                    |   |  |   |      |  
|Equity securities |  | $                                | 10  |  |                      | $ |     |                                      |  | $ | (70                | ) |  | $ | (60  | )
|Debt securities   |  |                                  | 239 |  |                      |   | (1   | )                                    |  |   |                   |   |  |   | 238  |  
|                  |  |                                  |     |  |                      |   |      |                                      |  |   |                    |   |  |   |      |  
|Total             |  | $                                | 249 |  |                      | $ | (1   | )                                    |  | $ | (70                | ) |  | $ | 178  |  
|                  |  |                                  |     |  |                      |   |      |                                      |  |   |                    |   |  |   |      |  
|                  |  |                                  |     | 
|2009              |  |                                  |     |  |                      |   |      |                                      |  |   |                    |   |  |   |      |  
|Equity securities |  | $                                | 160 |  |                      | $ | (272 | )                                    |  | $ |                   |   |  | $ | (112 | )
|Debt securities   |  |                                  | 1   |  |                      |   | (2   | )                                    |  |   |                   |   |  |   | (1   | )
|                  |  |                                  |     |  |                      |   |      |                                      |  |   |                    |   |  |   |      |  
|Total             |  | $                                | 161 |  |                      | $ | (274 | )                                    |  | $ |                   |   |  | $ | (113 | )
|                  |  |                                  |     |  |                      |   |      |                                      |  |   |                    |   |  |   |      |  
|                  | 
|                  |  | Nine Months Ended September 30,  |    
|                  |  | Gross RealizedGains              |     |  | Gross RealizedLosses |   |      | Other-than-temporaryImpairmentLosses |  |   | Net (Losses)/Gains |  
|2010              |  |                                  |     |  |                      |   |      |                                      |  |   |                    |   |  |   |      |  
|Equity securities |  | $                                | 48  |  |                      | $ | (3   | )                                    |  | $ | (139               | ) |  | $ | (94  | )
|Debt securities   |  |                                  | 243 |  |                      |   | (1   | )                                    |  |   |                   |   |  |   | 242  |  
|                  |  |                                  |     |  |                      |   |      |                                      |  |   |                    |   |  |   |      |  
|Total             |  | $                                | 291 |  |                      | $ | (4   | )                                    |  | $ | (139               | ) |  | $ | 148  |  
|                  |  |                                  |     |  |                      |   |      |                                      |  |   |                    |   |  |   |      |  
|                  |  |                                  |     | 
|2009              |  |                                  |     |  |                      |   |      |                                      |  |   |                    |   |  |   |      |  
|Equity securities |  | $                                | 701 |  |                      | $ | (512 | )                                    |  | $ | (29                | ) |  | $ | 160  |  
|Debt securities   |  |                                  | 5   |  |                      |   | (9   | )                                    |  |   |                   |   |  |   | (4   | )
|                  |  |                                  |     |  |                      |   |      |                                      |  |   |                    |   |  |   |      |  
|Total             |  | $                                | 706 |  |                      | $ | (521 | )                                    |  | $ | (29                | ) |  | $ | 156  |  
|                  |  |                                  |     |  |                      |   |      |                                      |  |   |                    |   |  |   |      |  



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)



The following table shows gross unrealized losses and fair value, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010 and December 31, 2009:



|                                                            |  |                     |         |  |                   |   |     |            |  |   |                  |  |  |            |   |  |                  |   |         |  |  |   |     | 
|----------------------------------------------------------- |  | ------------------- | ------- |  | ----------------- | - | --- | ---------- |  | - | ---------------- |  |  | ---------- | - |  | ---------------- | - | ------- |  |  | - | --- | 
|                                                            |  | Less Than 12 Months |         |  | 12 Months or More |   |     | Total      | 
|                                                            |  | Fair Value          |         |  | UnrealizedLosses  |   |     | Fair Value |  |   | UnrealizedLosses |  |  | Fair Value |   |  | UnrealizedLosses |  
|                                                            |  | September 30, 2010  |        
|Equity securities                                           |  | $                   |        |  |                   | $ |    |            |  | $ |                 |  |  | $          |  |  |                  | $ |        |  |  | $ |    | 
|U.S. Government sponsored agency securities                 |  |                     |        |  |                   |   |    |            |  |   |                 |  |  |            |  |  |                  |   |        |  |  |   |    | 
|U.S. Government sponsored agency mortgage-backed securities |  |                     |        |  |                   |   |    |            |  |   |                 |  |  |            |  |  |                  |   |        |  |  |   |    | 
|Collateralized mortgage obligations                         |  |                     |        |  |                   |   |    |            |  |   |                 |  |  |            |  |  |                  |   |        |  |  |   |    | 
|Municipal bonds                                             |  |                     |        |  |                   |   |    |            |  |   |                 |  |  |            |  |  |                  |   |        |  |  |   |    | 
|Municipal bonds  taxable                                   |  |                     | 4,261   |  |                   |   | 102 |            |  |   |                 |  |  |            |  |  |                  |   | 4,261   |  |  |   | 102 | 
|SBA loan pool investments                                   |  |                     |        |  |                   |   |    |            |  |   |                 |  |  |            |  |  |                  |   |        |  |  |   |    | 
|                                                            |  |                     |         |  |                   |   |     |            |  |   |                  |  |  |            |   |  |                  |   |         |  |  |   |     | 
|                                                            |  | $                   | 4,261   |  |                   | $ | 102 |            |  | $ |                 |  |  | $          |  |  |                  | $ | 4,261   |  |  | $ | 102 | 
|                                                            |  |                     |         |  |                   |   |     |            |  |   |                  |  |  |            |   |  |                  |   |         |  |  |   |     | 
|                                                            | 
|                                                            |  | December 31, 2009   |        
|Equity securities                                           |  | $                   | 417     |  |                   | $ | 44  |            |  | $ |                 |  |  | $          |  |  |                  | $ | 417     |  |  | $ | 44  | 
|U.S. Government sponsored agency securities                 |  |                     | 47,101  |  |                   |   | 65  |            |  |   |                 |  |  |            |  |  |                  |   | 47,101  |  |  |   | 65  | 
|U.S. Government sponsored agency mortgage-backed securities |  |                     | 7,275   |  |                   |   | 30  |            |  |   |                 |  |  |            |  |  |                  |   | 7,275   |  |  |   | 30  | 
|Collateralized mortgage obligations                         |  |                     | 70,991  |  |                   |   | 654 |            |  |   |                 |  |  |            |  |  |                  |   | 70,991  |  |  |   | 654 | 
|Municipal bonds                                             |  |                     |        |  |                   |   |    |            |  |   |                 |  |  |            |  |  |                  |   |        |  |  |   |    | 
|Municipal bonds  taxable                                   |  |                     | 6,955   |  |                   |   | 71  |            |  |   |                 |  |  |            |  |  |                  |   | 6,955   |  |  |   | 71  | 
|SBA loan pool investments                                   |  |                     | 10,710  |  |                   |   | 72  |            |  |   |                 |  |  |            |  |  |                  |   | 10,710  |  |  |   | 72  | 
|                                                            |  |                     |         |  |                   |   |     |            |  |   |                  |  |  |            |   |  |                  |   |         |  |  |   |     | 
|                                                            |  | $                   | 143,449 |  |                   | $ | 936 |            |  | $ |                 |  |  | $          |  |  |                  | $ | 143,449 |  |  | $ | 936 | 
|                                                            |  |                     |         |  |                   |   |     |            |  |   |                  |  |  |            |   |  |                  |   |         |  |  |   |     | 

The previous table includes 5 investment securities at September 30, 2010 where the current fair value is less than the
related amortized cost. There were 36 investment securities at December 31, 2009 that had a current fair value less than the related amortized cost. Management evaluates all securities for other-than-temporary impairment on at least a quarterly
basis. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At September 30, 2010, Management identified equity securities with unrealized losses that were deemed to be
other-than-temporary in nature and resulting in an impairment charge for the three and nine months period ending September 30, 2010 of $70 and $139, respectively. The impairment charge for both the three and nine months period ending
September 30, 2009 was $29. Management does not have the intent to sell the investments available for sale carrying an unrealized loss and believes it is more likely than not, that it will not be required to sell these securities prior to the
recovery of their cost basis or maturity, with the exception of the securities for which an impairment charge was recognized this quarter. As a result, the Company has determined that, excluding the securities related to the impairment charge, no
investments trading below cost had declined on an other-than-temporary basis during the first nine months of 2010.



12



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





Note 4 - Loans

The following table presents a summary of the loan portfolio at September 30, 2010 and December 31, 2009:



|                          |  |                   |           |   |                  |   |           |  
|------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                          |  | September 30,2010 |           |   | December 31,2009 |  
|Commercial:               |  |                   |           |   |                  |   |           |  
|Industrial                |  | $                 | 707,114   |   |                  | $ | 599,708   |  
|Real estate               |  |                   | 179,064   |   |                  |   | 159,947   |  
|Construction              |  |                   | 138,863   |   |                  |   | 102,018   |  
|Consumer:                 |  |                   |           |   |                  |   |           |  
|Home equity line          |  |                   | 85,921    |   |                  |   | 49,239    |  
|Other                     |  |                   | 34,100    |   |                  |   | 36,271    |  
|Residential mortgage      |  |                   | 176,555   |   |                  |   | 191,277   |  
|                          |  |                   |           |   |                  |   |           |  
|Total Loans               |  |                   | 1,321,617 |   |                  |   | 1,138,460 |  
|Deferred costs (fees)     |  |                   | (80       | ) |                  |   | (189      | )
|Allowance for loan losses |  |                   | (12,717   | ) |                  |   | (9,695    | )
|                          |  |                   |           |   |                  |   |           |  
|Net Loans                 |  | $                 | 1,308,820 |   |                  | $ | 1,128,576 |  
|                          |  |                   |           |   |                  |   |           |  

The Company serviced $104,797 and $111,649 of participation loans for unrelated parties at September 30, 2010 and
December 31, 2009, respectively.

The Company sold $92,485 and $104,010 of residential mortgage loans into the secondary market during
the nine months ended September 30, 2010 and 2009, respectively. A gain of $656 and $334 was recognized on the sale of these loans for the three month periods ended September 30, 2010 and 2009, respectively. A gain of $1,250 and $1,182 was
recognized on the sale of these loans for the nine month periods ended September 30, 2010 and 2009, respectively.



13



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)



Changes in the allowance for loan losses were as follows for the three months and nine months ended
September 30, 2010 and 2009:



|                               |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                               |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                               |  | 2010                            |        |   | 2009                           |   |       | 2010 |  |   | 2009   |  
|Balance at beginning of period |  | $                               | 11,619 |   |                                | $ | 7,965 |      |  | $ | 9,695  |   |  | $ | 6,017  |  
|Provision for loan losses      |  |                                 | 1,600  |   |                                |   | 800   |      |  |   | 4,950  |   |  |   | 3,816  |  
|Charge-offs                    |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Commercial:                    |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Industrial                     |  |                                 | (113   | ) |                                |   | (270  | )    |  |   | (915   | ) |  |   | (1,102 | )
|Real estate                    |  |                                 |       |   |                                |   | (65   | )    |  |   | (266   | ) |  |   | (65    | )
|Construction                   |  |                                 |       |   |                                |   | (37   | )    |  |   |       |   |  |   | (150   | )
|Consumer:                      |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Home equity line               |  |                                 | (65    | ) |                                |   |      |      |  |   | (265   | ) |  |   | (7     | )
|Other                          |  |                                 | (62    | ) |                                |   | (8    | )    |  |   | (291   | ) |  |   | (148   | )
|Residential mortgage           |  |                                 | (271   | ) |                                |   | (7    | )    |  |   | (271   | ) |  |   | (7     | )
|                               |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Total charge-offs              |  |                                 | (511   | ) |                                |   | (387  | )    |  |   | (2,008 | ) |  |   | (1,479 | )
|                               |  |                                 |        |  
|Recoveries                     |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Commercial                     |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Industrial                     |  |                                 | 6      |   |                                |   | 11    |      |  |   | 75     |   |  |   | 28     |  
|Real estate                    |  |                                 |       |   |                                |   |      |      |  |   |       |   |  |   |       |  
|Construction                   |  |                                 |       |   |                                |   | 1     |      |  |   | 2      |   |  |   | 1      |  
|Consumer                       |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Home equity line               |  |                                 |       |   |                                |   |      |      |  |   |       |   |  |   | 7      |  
|Other                          |  |                                 | 1      |   |                                |   |      |      |  |   | 1      |   |  |   |       |  
|Residential mortgage           |  |                                 | 2      |   |                                |   |      |      |  |   | 2      |   |  |   |       |  
|                               |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Total recoveries               |  |                                 | 9      |   |                                |   | 12    |      |  |   | 80     |   |  |   | 36     |  
|                               |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|                               |  |                                 |        |  
|Net charge-offs                |  |                                 | (502   | ) |                                |   | (375  | )    |  |   | (1,928 | ) |  |   | (1.443 | )
|                               |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Balance at end of period       |  | $                               | 12,717 |   |                                | $ | 8,390 |      |  | $ | 12,717 |   |  | $ | 8,390  |  
|                               |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)



The following table presents non-performing assets as of September 30, 2010 and December 31,
2009:



|                                                   |  |                   |        |  |                  |   |       | 
|-------------------------------------------------- |  | ----------------- | ------ |  | ---------------- | - | ----- | 
|                                                   |  | September 30,2010 |        |  | December 31,2009 |  
|Non-accrual loans                                  |  |                   |        |  |                  |   |       | 
|Commercial:                                        |  |                   |        |  |                  |   |       | 
|Industrial                                         |  | $                 | 4,697  |  |                  | $ | 2,646 | 
|Real estate                                        |  |                   | 1,643  |  |                  |   | 464   | 
|Construction                                       |  |                   | 5,235  |  |                  |   | 298   | 
|Consumer:                                          |  |                   |        |  |                  |   |       | 
|Home equity line                                   |  |                   | 54     |  |                  |   |      | 
|Other                                              |  |                   | 70     |  |                  |   | 242   | 
|Residential mortgage                               |  |                   | 2,058  |  |                  |   | 1,068 | 
|                                                   |  |                   |        |  |                  |   |       | 
|Total non-accrual loans                            |  |                   | 13,757 |  |                  |   | 4,718 | 
|                                                   |  |                   |        |  |                  |   |       | 
|Accruing loans greater than 90 days past due       |  |                   |        |  |                  |   |       | 
|Commercial:                                        |  |                   |        |  |                  |   |       | 
|Industrial                                         |  |                   |       |  |                  |   | 356   | 
|Real estate                                        |  |                   |       |  |                  |   | 277   | 
|Construction                                       |  |                   |       |  |                  |   |      | 
|Consumer:                                          |  |                   |        |  |                  |   |       | 
|Home equity line                                   |  |                   | 293    |  |                  |   | 303   | 
|Other                                              |  |                   | 264    |  |                  |   | 51    | 
|Residential mortgage                               |  |                   | 972    |  |                  |   | 1,119 | 
|                                                   |  |                   |        |  |                  |   |       | 
|Total accruing loans greater than 90 days past due |  |                   | 1,529  |  |                  |   | 2,106 | 
|                                                   |  |                   |        |  |                  |   |       | 
|Non-performing loans                               |  |                   | 15,286 |  |                  |   | 6,824 | 
|Other real estate owned                            |  |                   | 879    |  |                  |   | 927   | 
|                                                   |  |                   |        |  |                  |   |       | 
|Non-performing assets                              |  | $                 | 16,165 |  |                  | $ | 7,751 | 
|                                                   |  |                   |        |  |                  |   |       | 

The Company had total impaired loans of $18,095 and $10,917 as of September 30, 2010 and December 31, 2009,
respectively. Management performed an evaluation of expected future cash flows, including the anticipated cash flow from the sale of collateral, and compared that to the carrying amount of the impaired loans. Impaired loans considered to be
collateral dependent totaled approximately 99.6% and 99.4% of total impaired loans as of September, 30, 2010 and December 31, 2009, respectively. As of September 30, 2010, the Company has determined that impaired loans with a carrying
principal balance of $619 require a reserve of $200 with the remaining $17,476 of impaired loans not requiring a specific reserve allocation as the future anticipated cash flow, including the collateral values, is expected to be sufficient to fully
recover all amounts due on these loans. As of December 31, 2009, the Company had determined that impaired loans with a carrying principal balance of $1,353 required a reserve of $451 with the remaining $9,564 of impaired loans not requiring a
specific reserve allocation as the future anticipated cash flow, including the collateral values, is expected to be sufficient to fully recover all amounts due on these loans. For the nine months ended September 30, 2010, the Company had loan
charge-offs of $3,038. These charges have been applied against both the allowance for loans losses as well as against the fair value credit adjustment/discount recorded on performing loans acquired through the Merger.

Acquired loans deemed to be impaired at the time of purchase in accordance with Accounting Standard Codification 310-30-30, previously known as Statement
of Position (SOP) 03-3, Accounting for Certain Loans Acquired in a Transfer are included in the balance of impaired loans. However, these purchased impaired loans have been recorded at their fair value based on anticipated future cash
flows at the time of acquisition and are considered to be performing loans as the Company expects to fully collect the new carrying value (i.e. fair value) of the loans.



15



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Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





The following table provides
activity for the accretable yield of these purchased impaired loans for the three and nine months ended September 30, 2010.



|                                                    |  |                                      |       |   |                                     |   |       |  
|--------------------------------------------------- |  | ------------------------------------ | ----- | - | ----------------------------------- | - | ----- | -
|                                                    |  | Three Months EndedSeptember 30, 2010 |       |   | Nine Months EndedSeptember 30, 2010 |  
|Accretable yield, beginning balance                 |  | $                                    | 1,159 |   |                                     | $ | 178   |  
|Accretable yield amortized to interest income       |  |                                      | (305  | ) |                                     |   | (856  | )
|Reclassification from non-accretable difference (1) |  |                                      |      |   |                                     |   | 1,532 |  
|                                                    |  |                                      |       |   |                                     |   |       |  
|Accretable yield, end of period                     |  | $                                    | 854   |   |                                     | $ | 854   |  
|                                                    |  |                                      |       |   |                                     |   |       |  



|(1) | Reclassification from non-accretable difference represents an increase to the estimated cash flows to be collected on the underlying portfolio.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

Note 5 - Premises and Equipment

The following table presents premises and equipment as of September 30, 2010 and December 31, 2009:



|                                                                      |  |                    |        |   |                   |   |        |  
|--------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | -
|                                                                      |  | September 30, 2010 |        |   | December 31, 2009 |  
|Land                                                                  |  | $                  | 4,474  |   |                   | $ | 5,394  |  
|Building                                                              |  |                    | 13,570 |   |                   |   | 13,684 |  
|Leasehold improvements                                                |  |                    | 3,827  |   |                   |   | 3,703  |  
|Furniture, fixtures and equipment                                     |  |                    | 8,208  |   |                   |   | 6,918  |  
|Other                                                                 |  |                    | 4,741  |   |                   |   | 3,435  |  
|                                                                      |  |                    |        |   |                   |   |        |  
|Total premises and equipment                                          |  |                    | 34,820 |   |                   |   | 33,134 |  
|Accumulated depreciation and amortization                             |  |                    | (5,265 | ) |                   |   | (3,324 | )
|Premises and equipment held for sale, net of accumulated depreciation |  |                    | (549   | ) |                   |   |       |  
|                                                                      |  |                    |        |   |                   |   |        |  
|Total net premises and equipment                                      |  | $                  | 29,006 |   |                   | $ | 29,810 |  
|                                                                      |  |                    |        |   |                   |   |        |  

During the second quarter of 2010, management had explored the potential sale of a parcel of undeveloped land that was
acquired as part of the Merger. As a result, management determined that the recorded cost basis of the land may not be recoverable. Accordingly, the Company determined the estimated fair value of the land to be less than its recorded value,
resulting in an impairment charge of $920. Management reviewed the property as of September 31, 2010 and determined no additional impairment had occurred.

Premise and Equipment Held for Sale

During the first quarter of 2010, the Company closed
two Tower Bank branches to consolidate banking operations in selected areas. All loans and deposit accounts related to these branches were transferred to existing Tower Bank branches. The Company is currently in the process of selling the land and
buildings related to two branches and anticipates the sale of the land and buildings by the end of the first quarter of 2011. The carrying value of the branches is based on the net value of the land and building prior to being reclassified as held
for sale. This value is currently less than the estimated fair market value at September 30, 2010. As of September 30, 2010, the carrying value of the land and buildings for these branches are $549.



16



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





Note 6 - Other Intangibles

Information concerning total amortizable other intangible assets, which consist solely of a core deposit intangible asset, at
September 30, 2010 and December 31, 2009 is as follows:



|                              |  |                     |       |  |                         |   |       |                    |  |   |       | 
|----------------------------- |  | ------------------- | ----- |  | ----------------------- | - | ----- | ------------------ |  | - | ----- | 
|                              |  | GrossCarryingAmount |       |  | AccumulatedAmortization |   |       | Net CarryingAmount | 
|Balance at December 31, 2009  |  | $                   | 3,899 |  |                         | $ | 532   |                    |  | $ | 3,367 | 
|Amortization Expense          |  |                     |      |  |                         |   | 496   |                    |  |   | 496   | 
|                              |  |                     |       |  |                         |   |       |                    |  |   |       | 
|Balance at September 30, 2010 |  | $                   | 3,899 |  |                         | $ | 1,028 |                    |  | $ | 2,871 | 
|                              |  |                     |       |  |                         |   |       |                    |  |   |       | 

The estimated amortization for the next five years and thereafter is as follows:



|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|2010 (October  December) |  | $ | 160   | 
|2011                      |  |   | 585   | 
|2012                      |  |   | 513   | 
|2013                      |  |   | 444   | 
|2014                      |  |   | 372   | 
|Thereafter                |  |   | 797   | 
|                          |  |   |       | 
|                          |  | $ | 2,871 | 
|                          |  |   |       | 

Note 7 - Deposits

The following is a summary of deposits at September 30, 2010 and December 31, 2009:



|                                          |  |                   |           |  |                  |   |           | 
|----------------------------------------- |  | ----------------- | --------- |  | ---------------- | - | --------- | 
|                                          |  | September 30,2010 |           |  | December 31,2009 |  
|Non-interest bearing transaction accounts |  | $                 | 125,174   |  |                  | $ | 119,116   | 
|Interest checking accounts                |  |                   | 124,106   |  |                  |   | 110,356   | 
|Money market accounts                     |  |                   | 604,151   |  |                  |   | 477,292   | 
|Savings accounts                          |  |                   | 70,138    |  |                  |   | 87,117    | 
|Time deposits of $100,000 or greater      |  |                   | 145,694   |  |                  |   | 130,938   | 
|Time deposits, other                      |  |                   | 286,454   |  |                  |   | 291,650   | 
|                                          |  |                   |           |  |                  |   |           | 
|Total                                     |  | $                 | 1,355,717 |  |                  | $ | 1,216,469 | 
|                                          |  |                   |           |  |                  |   |           | 

Brokered deposits totaled $148,250 and $61,114 at September 30, 2010 and December 31, 2009, respectively. Brokered
deposits, exclusive of in-market reciprocal brokered deposits, totaled $107,005 and $46,018 at September 30, 2010 and December 31, 2009, respectively.

Note 8 - Borrowings

Federal Home Loan Bank

The Bank has a maximum borrowing capacity under an agreement with the Federal Home Loan Bank (FHLB) of approximately $580,289 and $482,024 at
September 30, 2010 and December 31, 2009, respectively. The available amount of borrowing capacity for September 30, 2010 and December 31, 2009 was approximately $526,201 and $422,679, respectively. The total outstanding
borrowings at September 30, 2010 equaled $54,088, of which $5,000 has a maturity of less than one year and is classified as short-term borrowing. The remaining borrowings of $49,088 have a maturity greater than one year and are classified as
long-term debt at September 30, 2010. The average interest rate on FHLB borrowings at September 30, 2010 equaled 3.72%. At September 30, 2010, the unamortized fair value adjustment to FHLB borrowings assumed in the



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)



Merger totaled $(346). The total outstanding borrowings at December 31, 2009 equaled $59,346, of which, $54,096 have a stated maturity greater than one year and are classified as long-term
debt at December 31, 2009. The remaining $5,250 in FHLB borrowings are classified as short-term borrowings at December 31, 2009.

Other Borrowings

On
June 12, 2009, the Company issued, to private investors, $9,000 of subordinated notes bearing an annual interest rate of 9.00%. Each note may be redeemed at the Companys discretion and contains a maturity date of July 1, 2014.
Interest only payments are due on a quarterly basis with the unpaid principal balance due at maturity.

On February 5, 2010, the Company
issued to private investors an aggregate of $12,000 of subordinated notes bearing an annual interest rate of 9.00%. Each note may be redeemed at the Companys discretion and contains a maturity date of July 15, 2015. Interest only payments
are due on a quarterly basis with the unpaid principal balance due at maturity.

Federal funds are reported on a gross basis. Federal funds
sold are stated as assets and federal funds purchased are stated as liabilities. Federal funds purchased are considered short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. Generally, federal funds are
purchased or sold for one day periods and bear interest based upon the daily federal funds rate. The Company did not have any federal funds purchased at September 30, 2010 or December 31, 2009.

Capital Lease Obligations

Included in short-term borrowings and long-term debt are two capital lease agreements, which relate to the Lebanon and York branches. Total capital lease
obligations related to these leases were $2,693 and $2,729 at September 30, 2010 and December 31, 2009, respectively.

Note 9 - Net Income Per Share and Comprehensive Income

The Companys basic net income per share is calculated as net income divided by the weighted average number of shares outstanding. For diluted net income 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, calculated using the treasury stock method. The Companys common stock equivalents consist solely of
outstanding stock options and restricted stock. The effects of options to issue common stock are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive.

A reconciliation of the weighted average shares outstanding used to calculate basic net income per share and diluted net income per share follows:



|                                                                                                        |  |                                         |           |  |                                        |        |           |      |  |        |           |  |  |        |           | 
|------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | --------- |  | -------------------------------------- | ------ | --------- | ---- |  | ------ | --------- |  |  | ------ | --------- | 
|                                                                                                        |  | For the Three Months EndedSeptember 30, |           |  | For the Nine Months EndedSeptember 30, |       
|                                                                                                        |  | 2010                                    |           |  | 2009                                   |        |           | 2010 |  |        | 2009      | 
|Weighted average shares outstanding (basic)                                                             |  |                                         | 7,144,685 |  |                                        |        | 5,638,851 |      |  |        | 7,134,611 |  |  |        | 4,495,962 | 
|Impact of common stock equivalents                                                                      |  |                                         | 36        |  |                                        |        | 13,441    |      |  |        | 2,897     |  |  |        | 6,434     | 
|                                                                                                        |  |                                         |           |  |                                        |        |           |      |  |        |           |  |  |        |           | 
|Weighted average shares outstanding (diluted)                                                           |  |                                         | 7,144,721 |  |                                        |        | 5,652,292 |      |  |        | 7,137,508 |  |  |        | 4,502,396 | 
|                                                                                                        |  |                                         |           |  |                                        |        |           |      |  |        |           |  |  |        |           | 
|                                                                                                        |  |                                         |           | 
|Common stock equivalents excluded from earnings per share as their effect would have been
anti-dilutive |  |                                         |           |  |                                        |        |           |      |  |        |           |  |  |        |           | 
|                                                                                                        |  | 125,846                                 |           |  |                                        | 44,585 |           |      |  | 94,969 |           |  |  | 46,981 |          
|                                                                                                        |  |                                         |           |  |                                        |        |           |      |  |        |           |  |  |        |           | 

Comprehensive income is defined as the change in equity from transactions and other events from non-owner sources. It
includes all changes in equity except those resulting from investments by stockholders and distributions to stockholders. Comprehensive income includes net income and accounting for certain investments in debt and equity securities.

The Company has elected to report its comprehensive income in the statement of changes in stockholders equity. The only element of other
comprehensive income that the Company has is the unrealized gains or losses on available for sale securities.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





The components of the change in
net unrealized gains (losses) on securities are as follows:



|                                                                           |  |                                        |       |   |      |   |      |  
|-------------------------------------------------------------------------- |  | -------------------------------------- | ----- | - | ---- | - | ---- | -
|                                                                           |  | For the Nine Months EndedSeptember 30, |      
|                                                                           |  | 2010                                   |       |   | 2009 |  
|Gross unrealized holding gains arising during the year                     |  | $                                      | 2,534 |   |      | $ | 654  |  
|Reclassification adjustment for impairment losses recognized in net income |  |                                        | 139   |   |      |   | 29   |  
|Reclassification adjustment for losses realized in net income              |  |                                        | (287  | ) |      |   | (185 | )
|                                                                           |  |                                        |       |   |      |   |      |  
|Net unrealized holding gains before taxes                                  |  |                                        | 2,386 |   |      |   | 498  |  
|Tax effect                                                                 |  |                                        | (829  | ) |      |   | (169 | )
|                                                                           |  |                                        |       |   |      |   |      |  
|Net change                                                                 |  | $                                      | 1,557 |   |      | $ | 329  |  
|                                                                           |  |                                        |       |   |      |   |      |  

Note 10 - Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments
to extend credit and letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.

The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit
is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

The outstanding financial instruments represent credit risk in the following amounts at September 30, 2010 and December 31, 2009:



|                                           |  |                    |         |  |                   |   |         | 
|------------------------------------------ |  | ------------------ | ------- |  | ----------------- | - | ------- | 
|                                           |  | September 30, 2010 |         |  | December 31, 2009 |  
|Commitments to grant loans                 |  | $                  | 35,368  |  |                   | $ | 12,350  | 
|Unfunded commitments under lines of credit |  |                    | 320,246 |  |                   |   | 267,683 | 
|Letters of credit                          |  |                    | 30,494  |  |                   |   | 25,524  | 

Commitments to extend credit, which
include commitments to grant loans and unfunded commitments under lines of credit, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company
evaluates each customers credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on managements credit evaluation. Collateral held varies but may
include personal or commercial real estate, accounts receivable, inventory and equipment.

Outstanding letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank typically
requires collateral supporting these letters of credit. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the
corresponding guarantees. The amount of the liability as of September 30, 2010 and December 31, 2009 for guarantees under standby letters of credit issued is not material to the unaudited consolidated financial statements.



19



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





Note 11 - Stock-Based
Compensation

At September 30, 2010, the Company had five equity compensation plans, the 2010 Stock Incentive Plan (the 2010
Plan), the 2006 Restricted Stock Plan (the 2006 Plan), the 2007 Stock Incentive Plan (the 2007 Plan), the 1995 Non-Qualified Stock Option Plan (the 1995 Plan) and the Stock Option Plan for Outside Directors
(the Director Plan).

The 2010 Stock Incentive Plan

In May 2010, the shareholders of the Company approved the 2010 Stock Incentive Plan (the 2010 Plan). The 2010 Plan permits grants of stock options, stock appreciation rights, restricted stock,
deferred stock and performance awards (collectively, Awards) for up to 400,000 shares of the Companys common stock to key employees and directors.

In September 2010, awards for 1,050 shares of restricted stock were granted under the 2010 Plan. The fair value of these shares was $20.92 per share based on the closing price at September 28, 2010.
These shares have a vesting period of five years. As these shares are considered to have the same rights as common stock shareholders, including voting rights and rights to receive dividends, on the date of issuance, they are included as part of the
Companys basic weighted average shares. At September 30, 2010, 398,950 shares were available for issuance under the 2010 plan.

The
following table summarizes the restricted stock issued under the Companys 2010 Plan at September 30, 2010 and December 31, 2009:

Restricted Stock



|                   |  |              |       |  |                     |   |       |                |  |  |                   |  |  |                                  |   |  |                   |  |   |                  |  |   |    |  |  |   |   | 
|------------------ |  | ------------ | ----- |  | ------------------- | - | ----- | -------------- |  |  | ----------------- |  |  | -------------------------------- | - |  | ----------------- |  | - | ---------------- |  | - | -- |  |  | - | - | 
|                   |  |              |       |  |                     |   |       |                |  |  | Shares Vested     |  |  | Unearned Compensation (in 000s) |  
|Date of
Issuance   |  | SharesIssued |       |  | Fair ValuePer Share |   |       | ExpirationDate |  |  | September 30,2010 |  |  | December 31,2009                 |   |  | September 30,2010 |  |   | December 31,2009 | 
|September 28, 2010 |  |              | 1,050 |  |                     | $ | 20.92 |                |  |  | N/A               |  |  |                                  |  |  |                   |  |  |                  |  | $ | 22 |  |  | $ |  | 
|                   |  |              |       |  |                     |   |       |                |  |  |                   |  |  |                                  |   |  |                   |  |   |                  |  |   |    |  |  |   |   | 
|                   |  |              | 1,050 |  |                     |   |       |                |  |  |                   |  |  |                                  |  |  |                   |  |  |                  |  | $ | 22 |  |  | $ |  | 
|                   |  |              |       |  |                     |   |       |                |  |  |                   |  |  |                                  |   |  |                   |  |   |                  |  |   |    |  |  |   |   | 

The 2006 Restricted Stock Plan

During 2006, the shareholders of Graystone approved the 2006 Restricted Stock Plan (the 2006 Plan), as amended, that provides for the issuance of up to 375,000 shares of restricted stock
awards subject to a three year vesting period to key employees and directors. The recipient shall receive all dividends or other distributions and shall have the right to vote with respect to issued but unvested shares. On March 31, 2009, as a
result of the Merger, the Company had adopted the provisions of this plan. As of March 31, 2009, the Company had issued all of the available awards under the plan and all of the awards are completely vested as a result of the vesting
acceleration in association with the Merger. The Company recognized $0 and $295 of compensation expense during the nine month periods ending September 30, 2010 and 2009, respectively, related to the vesting of the restricted stock awards.

The 2007 Stock Incentive Plan

In May 2007, the shareholders of Graystone approved the 2007 Stock Incentive Plan (the 2007 Plan). Under the Plan, Graystone may grant
incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, and deferred stock for up to 600,000 shares (shares reflect the 3-for-2 stock split paid September 30, 2007) of Graystones common stock to
key employees and directors. On March 31, 2009, as a result of the Merger, the Company had adopted the provisions of this plan.

In
September 2010, awards for 30,290 shares of restricted stock were granted under the 2007 Plan. The fair value of these shares was $20.92 per share based on the closing price at September 28, 2010. These shares have a vesting period of five
years. As these shares are considered to have the same rights as common stock shareholders, including voting rights and rights to receive dividends, on the date of issuance, they are included as part of the Companys basic weighted average
shares.

Subsequent to the Merger and as a result of the conversion factor, the total number of shares authorized to be issued under the 2007
Plan equaled 252,000. At September 30, 2010, 46,365 shares were available for issuance under the 2007 plan.

The following table
summarizes the outstanding stock options and restricted stock under the Companys 2007 Plan at September 30, 2010 and December 31, 2009:



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





Stock Options



|                   |  |               |         |  |                     |   |       |                 |                   |                    |  |                  |                                  |  |                   |                   |        |                  |                  |   |     |  |  |   |     | 
|------------------ |  | ------------- | ------- |  | ------------------- | - | ----- | --------------- | ----------------- | ------------------ |  | ---------------- | -------------------------------- |  | ----------------- | ----------------- | ------ | ---------------- | ---------------- | - | --- |  |  | - | --- | 
|                   |  |               |         |  |                     |   |       | Expiration Date |                   | Options Vested     |  |                  | Unearned Compensation (in 000s) | 
|Date of
Issuance   |  | OptionsIssued |         |  | ExercisePrice       |   |       |                 | September 30,2010 |                    |  | December 31,2009 |                                  |  | September 30,2010 |                   |        | December 31,2009 |                 
|June 26, 2007      |  |               | 26,145  |  |                     | $ | 22.22 |                 |                   | June 26, 2017      |  |                  | 26,145                           |  |                   |                   | 26,145 |                  |                  | $ |    |  |  | $ |    | 
|January 22, 2008   |  |               | 1,050   |  |                     | $ | 30.96 |                 |                   | January 22, 2018   |  |                  | 1,050                            |  |                   |                   | 1,050  |                  |                  |   |    |  |  |   |    | 
|July 17, 2008      |  |               | 56,700  |  |                     | $ | 30.96 |                 |                   | July 17, 2018      |  |                  | 56,700                           |  |                   |                   | 56,700 |                  |                  |   |    |  |  |   |    | 
|September 22, 2009 |  |               | 52,400  |  |                     | $ | 26.77 |                 |                   | September 22, 2019 |  |                  | 10,480                           |  |                   |                   |       |                  |                  |   | 268 |  |  |   | 318 | 
|November 24, 2009  |  |               | 38,000  |  |                     | $ | 19.80 |                 |                   | November 24, 2019  |  |                  |                                 |  |                   |                   |       |                  |                  |   | 154 |  |  |   | 182 | 
|                   |  |               |         |  |                     |   |       |                 |                   |                    |  |                  |                                  |  |                   |                   |        |                  |                  |   |     |  |  |   |     | 
|                   |  |               | 174,295 |  |                     |   |       |                 |                   |                    |  |                  | 94,375                           |  |                   |                   | 83,895 |                  |                  | $ | 422 |  |  | $ | 500 | 
|                   |  |               |         |  |                     |   |       |                 |                   |                    |  |                  |                                  |  |                   |                   |        |                  |                  |   |     |  |  |   |     | 
|                   |  |               |         |  |                     |   |      
|Restricted Stock   |  |               |         |  |                     |   |       |                 |                   |                    |  |                  |                                  |  |                   |                   |        |                  |                  |   |     |  |  |   |     | 
|                   |  |               |         |  |                     |   |       |                 |                   | Shares Vested      |  |                  | Unearned Compensation (in 000s) | 
|Date of
Issuance   |  | SharesIssued  |         |  | Fair ValuePer Share |   |       | Expiration Date |                   | September 30,2010  |  |                  | December 31,2009                 |  |                   | September 30,2010 |        |                  | December 31,2009 |  
|September 28, 2010 |  |               | 30,290  |  |                     | $ | 20.92 |                 |                   | N/A                |  |                  |                                 |  |                   |                   |       |                  |                  | $ | 634 |  |  | $ |    | 
|                   |  |               |         |  |                     |   |       |                 |                   |                    |  |                  |                                  |  |                   |                   |        |                  |                  |   |     |  |  |   |     | 
|                   |  |               | 30,290  |  |                     |   |       |                 |                   |                    |  |                  |                                 |  |                   |                   |       |                  |                  | $ | 634 |  |  | $ |    | 
|                   |  |               |         |  |                     |   |       |                 |                   |                    |  |                  |                                  |  |                   |                   |        |                  |                  |   |     |  |  |   |     | 

The stock options normally vest over a three to five year vesting period and will be expensed over the vesting period. As a
result of the Merger, all of the outstanding options at March 30, 2009 became fully vested and exercisable. No options issued under this plan have been exercised during the first nine months of 2010. The aggregate intrinsic value of outstanding
unvested stock options at September 30, 2010 and December 31, 2009 was $18 and $116, respectively. Options granted resulted in compensation expense of $26 and $78 for the three and nine month periods ended September 30, 2010,
respectively. Compensation expense for the three and nine months periods ended September 30, 2009 were $2 and $551, respectively. As of September 30, 2010, a total of 94,375 options have vested with an intrinsic value of $0. These vested
options can be exercised at an average price of $28.07 and have an average remaining life of approximately 7.6 years. The fair values of the options awarded under the Plan are estimated on the date of grant using the Black-Scholes valuation
methodology.

Upon the closing of the Merger, all of the issued and outstanding stock options originally issued by Graystone converted to
options exercisable for Tower common stock. Additionally, all options became fully vested at the time of conversion. As a result and in accordance with U.S. GAAP, the Company revalued the converted options as of the conversion date. The re-valuation
of the converted options did not result in any incremental costs to the Company. The table below shows the assumptions utilized by Management to value all stock options:



|                   |  |               |      |   |                    |  |       |                        |  |  |                      |   |              |        |                      |           |  |   |      | 
|------------------ |  | ------------- | ---- | - | ------------------ |  | ----- | ---------------------- |  |  | -------------------- | - | ------------ | ------ | -------------------- | --------- |  | - | ---- | 
|Date of Issuance   |  | DividendYield |      |   | ExpectedVolatility |  |       | Risk FreeInterest Rate |  |  | EstimatedForfeitures |   | ExpectedLife |        | Issue-Date FairValue |          
|June 26, 2007      |  |               | 4.49 | % |                    |  | 32.17 | %                      |  |  | 2.31                 | % |              | 0.00%  |                      | 6 years   |  | $ | 5.75 | 
|January 22, 2008   |  |               | 4.49 | % |                    |  | 32.17 | %                      |  |  | 2.31                 | % |              | 0.00%  |                      | 6 years   |  | $ | 3.70 | 
|July 17, 2008      |  |               | 4.49 | % |                    |  | 32.17 | %                      |  |  | 2.31                 | % |              | 1%  3 |                      | 6.5 years |  | $ | 3.80 | 
|September 22, 2009 |  |               | 4.00 | % |                    |  | 31.84 | %                      |  |  | 3.50                 | % |              | (1)    |                      | (2)       |  | $ | 6.63 | 
|November 24, 2009  |  |               | 4.00 | % |                    |  | 32.63 | %                      |  |  | 3.39                 | % |              | 2.00%  |                      | 9 years   |  | $ | 5.00 | 



|(1) | Estimated forfeitures for stock options issued to executives are 2.00% while the estimated forfeiture for stock options issued to employees is 5.00%.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Expected life for stock options issued to executives is 9 years while estimated expected life for stock options issued to employees is 7 years.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

The dividend yield assumption is based on dividend history and the expectation of future dividend yields. The expected
volatility is based on historical volatility using the Companys own stock price. The risk-free rate is the U.S. Treasury zero-coupon rate commensurate with the expected life of the options on the date of the grant.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





The 1995 Non-Qualified Stock
Option Plan

At September 30, 2010, there were 5,700 options outstanding under the 1995 Plan and the Company recognized $2 and $6 in
compensation expense related to the 1995 Plan during the three and nine month period ended September 30, 2010, respectively. There are a total of 27,719 options available to be issued under this plan at September 30, 2010.

The following table summarizes the outstanding non-qualified stock options under the Companys 1995 Plan at September 30, 2010 and
December 31, 2009:



|                   |  |               |       |  |               |   |       |                |                   |  |                    |                  |  |                                  |                   |  |  |                  |   |  |  |   |    |  |  |   |    | 
|------------------ |  | ------------- | ----- |  | ------------- | - | ----- | -------------- | ----------------- |  | ------------------ | ---------------- |  | -------------------------------- | ----------------- |  |  | ---------------- | - |  |  | - | -- |  |  | - | -- | 
|                   |  |               |       |  |               |   |       | ExpirationDate |                   |  | Options Vested     |                  |  | Unearned Compensation (in 000s) |                  
|Date of
Issuance   |  | OptionsIssued |       |  | ExercisePrice |   |       |                | September 30,2010 |  |                    | December 31,2009 |  |                                  | September 30,2010 |  |  | December 31,2009 |  
|September 22, 2009 |  |               | 5,700 |  |               | $ | 26.77 |                |                   |  | September 22, 2019 |                  |  |                                  | 1,140             |  |  |                  |  |  |  | $ | 29 |  |  | $ | 34 | 
|                   |  |               |       |  |               |   |       |                |                   |  |                    |                  |  |                                  |                   |  |  |                  |   |  |  |   |    |  |  |   |    | 
|                   |  |               | 5,700 |  |               |   |       |                |                   |  |                    |                  |  |                                  | 1,140             |  |  |                  |  |  |  | $ | 29 |  |  | $ | 34 | 
|                   |  |               |       |  |               |   |       |                |                   |  |                    |                  |  |                                  |                   |  |  |                  |   |  |  |   |    |  |  |   |    | 

The assumptions utilized by management to calculate the issue date fair value of $6.63 are the same as the assumptions used
for shares issued under the 2007 Plan.

The Stock Option Plan for Outside Directors

At September 30, 2010, there were a total of 11,926 options outstanding under the Director Plan. The options outstanding are all fully vested, have a
weighted average exercise price of $38.06 per share, and have a weighted average life to maturity of 6.3 years. The Company recognized $0 in compensation expense related to the Director Plan during the nine month period ended September 30,
2010. There are a total of 64,158 options available to be issued under this plan at September 30, 2010.

Note 12 - Fair Value
Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants on the measurement date. The Company determines the fair value of its financial instruments based on the fair value hierarchy. The Company maximizes the use of observable inputs and minimizes the use of
unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are
inputs that reflect the Companys assumptions that the market participants would use in pricing the asset or liability based on the best information available in the circumstances. Three levels of inputs are used to measure fair value. A
financial instruments level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement.



|         |  |                                                                                                                                                                                 
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1: |  | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.                                       
|         | 
|Level 2: |  | Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or
liability.           
|         | 
|Level 3: |  | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market
activity).

An assets or liabilitys level within the fair value hierarchy is based on the lowest level of input that
is significant to the fair value measurement.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





For financial assets measured at
fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2010 and December 31, 20009 are as follows:



|                                                            |  |                   |         |  |                        |   |   |                                           |  |   |                                        |  |  |   |     | 
|----------------------------------------------------------- |  | ----------------- | ------- |  | ---------------------- | - | - | ----------------------------------------- |  | - | -------------------------------------- |  |  | - | --- | 
|                                                            |  | September 30,2010 |         |  | QuotedPrices(Level 
1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|                                                            |  |                   |         | 
|Equity securities                                           |  | $                 | 120     |  |                        | $ |  |                                           |  | $ |                                       |  |  | $ | 120 | 
|U.S Government sponsored agency securities                  |  |                   | 27,079  |  |                        |   |  |                                           |  |   | 27,079                                 |  |  |   |    | 
|U.S. Government sponsored agency mortgage-backed securities |  |                   | 11,931  |  |                        |   |  |                                           |  |   | 11,931                                 |  |  |   |    | 
|Collateralized mortgage obligations                         |  |                   | 74,683  |  |                        |   |  |                                           |  |   | 74,683                                 |  |  |   |    | 
|Municipal bonds                                             |  |                   | 11,341  |  |                        |   |  |                                           |  |   | 11,341                                 |  |  |   |    | 
|Municipal bonds  taxable                                   |  |                   | 10,374  |  |                        |   |  |                                           |  |   | 10,374                                 |  |  |   |    | 
|SBA loan pool investments                                   |  |                   | 9,900   |  |                        |   |  |                                           |  |   | 9,900                                  |  |  |   |    | 
|Commercial servicing rights                                 |  |                   | 451     |  |                        |   |  |                                           |  |   |                                       |  |  |   | 451 | 
|                                                            |  |                   |         |  |                        |   |   |                                           |  |   |                                        |  |  |   |     | 
|                                                            |  | $                 | 145,879 |  |                        | $ |  |                                           |  | $ | 145,308                                |  |  | $ | 571 | 
|                                                            |  |                   |         |  |                        |   |   |                                           |  |   |                                        |  |  |   |     | 



|                                                            |  |                  |         |  |                        |   |     |                                           |  |   |                                        |  |  |   |    | 
|----------------------------------------------------------- |  | ---------------- | ------- |  | ---------------------- | - | --- | ----------------------------------------- |  | - | -------------------------------------- |  |  | - | -- | 
|                                                            |  | December 31,2009 |         |  | QuotedPrices(Level 
1) |   |     | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|                                                            |  |                  |         | 
|Equity securities                                           |  | $                | 1,132   |  |                        | $ | 300 |                                           |  | $ | 783                                    |  |  | $ | 49 | 
|U.S Government sponsored agency securities                  |  |                  | 56,384  |  |                        |   |    |                                           |  |   | 56,384                                 |  |  |   |   | 
|U.S. Government sponsored agency mortgage-backed securities |  |                  | 9,116   |  |                        |   |    |                                           |  |   | 9,116                                  |  |  |   |   | 
|Collateralized mortgage obligations                         |  |                  | 92,485  |  |                        |   |    |                                           |  |   | 92,485                                 |  |  |   |   | 
|Municipal bonds                                             |  |                  | 7,188   |  |                        |   |    |                                           |  |   | 7,188                                  |  |  |   |   | 
|Municipal bonds  taxable                                   |  |                  | 12,910  |  |                        |   |    |                                           |  |   | 12,910                                 |  |  |   |   | 
|SBA loan pool investments                                   |  |                  | 10,638  |  |                        |   |    |                                           |  |   | 10,638                                 |  |  |   |   | 
|Commercial servicing rights                                 |  |                  | 473     |  |                        |   |    |                                           |  |   | 473                                    |  |  |   |   | 
|                                                            |  |                  |         |  |                        |   |     |                                           |  |   |                                        |  |  |   |    | 
|                                                            |  | $                | 190,326 |  |                        | $ | 300 |                                           |  | $ | 189,977                                |  |  | $ | 49 | 
|                                                            |  |                  |         |  |                        |   |     |                                           |  |   |                                        |  |  |   |    | 

The valuation technique to measure fair value for the items in the tables above are as follows:

Securities available for sale

As quoted
market prices for the investments in securities available for sale held at the Bank, such as government agency bonds, corporate bonds, municipal bonds, etc, are not readily available, a matrix pricing model is used to value these investments. The
matrix pricing model takes into consideration yields/prices of securities with similar characteristics, including credit quality, industry, and maturity to determine a fair value measure.

For equity securities held by the Company, management has determined which securities are traded in active markets versus inactive markets. For those securities traded in active markets, management has
recorded the securities at quoted market prices. In cases where the securities are deemed to trade in inactive markets, management has adjusted quoted market prices for factors such as indicative bids received from brokers.

Commercial servicing rights

The fair
value of commercial servicing rights (MSRs) was estimated using Level 3 inputs. MSRs do not trade in an active, open market with readily observable prices. As such, the Company determined the fair value of the MSRs using a projected cash
flow model that considers loan rates and maturities, discount rate assumptions, estimated servicing revenue and expenses, and estimated prepayment speeds.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





The following tables presents
reconciliations of the Companys assets measured at fair value on a recurring basis using unobservable inputs (Level 3) for the three and nine months ended September 30, 2010 and 2009:



|                            |  |                                         |     |   |                            |   |      |  
|--------------------------- |  | --------------------------------------- | --- | - | -------------------------- | - | ---- | -
|                            |  | For the Three Months September 30,      |    
|2010                        |  | Equity Securities                       |     |   | CommercialServicing Rights |  
|Balance, June 30, 2010      |  | $                                       | 154 |   |                            | $ | 514  |  
|Transfers In from Level 2   |  |                                         | 38  |   |                            |   |     |  
|Change in fair value        |  |                                         | (72 | ) |                            |   | (63  | )
|                            |  |                                         |     |   |                            |   |      |  
|Balance, September 30, 2010 |  | $                                       | 120 |   |                            | $ | 451  |  
|                            |  |                                         |     |   |                            |   |      |  
|                            |  |                                        
|2009                        |  |                                         |     |   | Equity Securities          |  
|Balance, June 30, 2009      |  |                                         |     |   |                            | $ | 257  |  
|Sale of Asset               |  |                                         |     |   |                            |   | (153 | )
|                            |  |                                         |     |   |                            |   |      |  
|Balance, September 30, 2009 |  |                                         |     |   |                            | $ | 104  |  
|                            |  |                                         |     |   |                            |   |      |  
|                            | 
|                            |  | For the Nine Months Ended September 30, |    
|2010                        |  | Equity Securities                       |     |   | CommercialServicing
Rights |  
|Balance, December 31, 2009  |  | $                                       | 49  |   |                            | $ |     |  
|Transfers In from Level 2   |  |                                         | 176 |   |                            |   | 473  |  
|Sale of Asset               |  |                                         | (33 | ) |                            |   |     |  
|Change in fair value        |  |                                         | (72 | ) |                            |   | (22  | )
|                            |  |                                         |     |   |                            |   |      |  
|Balance, September 30, 2010 |  | $                                       | 120 |   |                            | $ | 451  |  
|                            |  |                                         |     |   |                            |   |      |  
|                            |  |                                        
|2009                        |  |                                         |     |   | Equity Securities          |  
|Balance, December 31, 2008  |  |                                         |     |   |                            | $ |     |  
|Purchase through merger     |  |                                         |     |   |                            |   | 230  |  
|Transfers In from Level 2   |  |                                         |     |   |                            |   | 27   |  
|Sale of Asset               |  |                                         |     |   |                            |   | (153 | )
|                            |  |                                         |     |   |                            |   |      |  
|Balance, September 30, 2009 |  |                                         |     |   |                            | $ | 104  |  
|                            |  |                                         |     |   |                            |   |      |  

During the Companys valuation of the investment portfolio performed during the first nine months of 2010, the Company
determined one equity security was no longer actively traded on the open market. In the prior year, the fair value of the equity security was determined based on an estimate from limited activity in the open market, determined as Level 2 pricing. As
there has been no activity in the current year to determine the fair value price, the Company evaluated the entitys current financial reports for any going concern or other issues that would affect the entitys current or future position.
Based upon this review, the Company determined the entity does not have any significant issues that would affect the current and future position of the entity. The technique used to determine the price of the equity security required estimates and
judgments of management resulting in the classification of the security as a Level 3 security.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





For financial assets and
liabilities measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2010 and December 31, 2009 are as follows:



|                        |  |                   |        |  |                       |   |   |                                           |  |   |                                         |  |  |   |        | 
|----------------------- |  | ----------------- | ------ |  | --------------------- | - | - | ----------------------------------------- |  | - | --------------------------------------- |  |  | - | ------ | 
|                        |  | September 30,2010 |        |  | QuotedPrices(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
 3) | 
|Loans held for sale     |  | $                 | 12,851 |  |                       | $ |  |                                           |  | $ |                                        |  |  | $ | 12,851 | 
|Impaired loans          |  |                   | 13,757 |  |                       |   |  |                                           |  |   |                                        |  |  |   | 13,757 | 
|Other real estate owned |  |                   | 879    |  |                       |   |  |                                           |  |   |                                        |  |  |   | 879    | 
|Impaired land           |  |                   | 1,000  |  |                       |   |  |                                           |  |   |                                        |  |  |   | 1,000  | 
|                        |  |                   |        |  |                       |   |   |                                           |  |   |                                         |  |  |   |        | 
|Total assets            |  | $                 | 28,487 |  |                       | $ |  |                                           |  | $ |                                        |  |  | $ | 28,487 | 
|                        |  |                   |        |  |                       |   |   |                                           |  |   |                                         |  |  |   |        | 



|                                  |  |                  |         |  |                       |   |   |                                           |  |   |                                         |  |  |   |         | 
|--------------------------------- |  | ---------------- | ------- |  | --------------------- | - | - | ----------------------------------------- |  | - | --------------------------------------- |  |  | - | ------- | 
|                                  |  | December 31,2009 |         |  | QuotedPrices(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
 3) | 
|Loans held for sale               |  | $                | 8,034   |  |                       | $ |  |                                           |  | $ |                                        |  |  | $ | 8,034   | 
|Impaired loans                    |  |                  | 4,718   |  |                       |   |  |                                           |  |   |                                        |  |  |   | 4,718   | 
|Other real estate owned           |  |                  | 927     |  |                       |   |  |                                           |  |   |                                        |  |  |   | 927     | 
|Loans purchased (1)               |  |                  | 418,747 |  |                       |   |  |                                           |  |   |                                        |  |  |   | 418,747 | 
|Core deposit intangible asset (1) |  |                  | 3,899   |  |                       |   |  |                                           |  |   |                                        |  |  |   | 3,899   | 
|Premises and equipment (1)        |  |                  | 22,644  |  |                       |   |  |                                           |  |   |                                        |  |  |   | 22,644  | 
|                                  |  |                  |         |  |                       |   |   |                                           |  |   |                                         |  |  |   |         | 
|Total assets                      |  | $                | 458,969 |  |                       | $ |  |                                           |  | $ |                                        |  |  | $ | 458,969 | 
|                                  |  |                  |         |  |                       |   |   |                                           |  |   |                                         |  |  |   |         | 
|Time deposits (1)                 |  | $                | 160,806 |  |                       | $ |  |                                           |  | $ | 160,806                                 |  |  | $ |        | 
|Borrowings (1)                    |  |                  | 69,601  |  |                       |   |  |                                           |  |   | 69,601                                  |  |  |   |        | 
|                                  |  |                  |         |  |                       |   |   |                                           |  |   |                                         |  |  |   |         | 
|Total liabilities                 |  | $                | 230,407 |  |                       | $ |  |                                           |  | $ | 230,407                                 |  |  | $ |        | 
|                                  |  |                  |         |  |                       |   |   |                                           |  |   |                                         |  |  |   |         | 
|                                  |  |                  |         |  |                       |   |   |                                           |  |   |                                         |  |  |   |         | 

(1)  Assets and liabilities are presented at fair value as of the date of the Merger.

The valuation technique to measure fair value for the items in the tables above are as follows:

Loans held for sale

Loan held for sale include residential mortgage loans
which are measured at the lower of aggregate cost or fair value. The fair value is measured as the price that secondary market investors were offering for loans with similar characteristics.

Impaired loans

Under U.S GAAP, a loan is classified as impaired when it is
possible that the bank will be unable to collect all or part of the loan balance due based on the contractual agreement, including the interest as well as the principal. Based on this guidance, the Company considers all loans placed in non-accrual
status as being impaired and subject to an impairment analysis in accordance with ASC 310-10-35. Loans acquired through the Merger that were deemed impaired were recorded using a discounted cash flow model in accordance with ASC 310-30 at the time
of acquisition even though the Company considers these loans to be collateral dependent. The carrying amounts of these loans at September 30, 2010 and December 31, 2009 were $4,338 and $6,199, respectively. These loans are not included in
the preceding table.

Impaired loans included in the preceding table are those for which the Company has measured impairment
based on the fair value of underlying collateral. The balance of impaired loans consists of loans deemed impaired in accordance with the Companys accounting policy disclosed within its Critical Accounting Policies. Fair value is
determined primarily



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)



based upon independent third party appraisals of the properties. At September 30, 2010, $13,687 of impaired loans were measured using the fair value of underlying collateral and $70 of
impaired loans were measured using a discounted cash flow model. At December 31, 2009, $4,650 of impaired loans were measured using the fair value of underlying collateral and $68 of impaired loans were measured using a discounted cash flow
model.

Other real estate owned

Other real estate owned consists of eight properties totaling $879 thousand at September 30, 2010 and four properties totaling $927 thousand at December 31, 2009. These properties have been
through the foreclosure process and are currently in the process of being sold. These properties are recorded at their lower of cost or fair value less costs to sell.

Impaired land

During the second quarter of 2010, management had explored
the potential sale of a parcel of undeveloped land that was acquired as part of the Merger. Based upon the evaluation performed by an independent third party, the Company determined the estimated fair value of the land to be less than its recorded
value, resulting in an impairment charge. The Company is currently consulting with third party valuation experts to finalize a determination of fair value for the land.

Loans purchased

In conjunction with the Merger, the loans purchased were
recorded at their acquisition date fair value. In order to record the loans at fair value, management made three different types of fair value adjustments. A market rate adjustment was made to adjust for the movement in market interest rates,
irrespective of credit adjustments, compared to the stated rates of the acquired loans. A credit adjustment was made on pools of homogeneous loans representing the changes in credit quality of the underlying borrowers from the loan inception to the
acquisition date. The credit adjustment on distressed loans represents the portion of the loan balance that has been deemed uncollectible based on managements expectations of future cash flows for each respective loan.

Core deposit intangible assets

The fair value assigned to the core deposit intangible asset represents the future economic benefit of the potential cost savings from acquiring core deposits in the Merger compared to the cost of
obtaining alternative funding such as brokered deposits from market sources. Management utilized an income valuation approach to present value the estimated future cash savings in order to determine the fair value of the intangible asset.

Premises and equipment

Premises and equipment acquired through the Merger has been assigned an acquisition date fair value through the use of independent appraisals and internal discounted cash flow models. Both approaches
utilized an income based valuation approach to determine the fair value for the premises and equipment based on the highest and best use concept.

Time deposits

Time deposits acquired through the Merger have been recorded
at their acquisition date fair value. In order to derive the fair value, management adjusted the amortized cost basis of the deposits to reflect the current interest rates paid on time deposits at the time of acquisition. The fair value adjustment
reflects the movement in interest rates from inception of the deposit to the acquisition date.

Borrowings

Borrowings assumed through the Merger have been recorded at their acquisition date fair value. The fair value adjustment to the carrying
value of the borrowings represents the movement in interest rates from the inception of the individual borrowings to the acquisition date.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only
provided for a limited portion of the Companys assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Companys disclosures and those of
other companies may not be meaningful.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





The estimated fair values of the
Companys financial instruments were as follows as of September 30, 2010 and December 31, 2009:



|                                               |  |                    |           |  |                   |   |           |                |  |   |            |  |  |   |           | 
|---------------------------------------------- |  | ------------------ | --------- |  | ----------------- | - | --------- | -------------- |  | - | ---------- |  |  | - | --------- | 
|                                               |  | September 30, 2010 |           |  | December 31, 2009 |  
|                                               |  | CarryingAmount     |           |  | Fair Value        |   |           | CarryingAmount |  |   | Fair Value | 
|Financial assets:                              |  |                    |           |  |                   |   |           |                |  |   |            |  |  |   |           | 
|Cash, due from banks, and federal funds sold   |  | $                  | 46,265    |  |                   | $ | 46,265    |                |  | $ | 50,600     |  |  | $ | 50,600    | 
|Securities available for sale                  |  |                    | 145,428   |  |                   |   | 145,428   |                |  |   | 189,853    |  |  |   | 189,853   | 
|Restricted investment in bank stock            |  |                    | 6,254     |  |                   |   | 6,254     |                |  |   | 6,254      |  |  |   | 6,254     | 
|Loans held for sale                            |  |                    | 12,851    |  |                   |   | 12,851    |                |  |   | 8,034      |  |  |   | 8,034     | 
|Loans                                          |  |                    | 1,308,820 |  |                   |   | 1,318,397 |                |  |   | 1,128,576  |  |  |   | 1,151,368 | 
|Accrued interest receivable                    |  |                    | 5,220     |  |                   |   | 5,220     |                |  |   | 4,974      |  |  |   | 4,974     | 
|                                               |  |                    |           | 
|Financial liabilities:                         |  |                    |           |  |                   |   |           |                |  |   |            |  |  |   |           | 
|Deposits                                       |  |                    | 1,355,717 |  |                   |   | 1,327,674 |                |  |   | 1,216,469  |  |  |   | 1,191,126 | 
|Securities sold under agreements to repurchase |  |                    | 7,102     |  |                   |   | 7,102     |                |  |   | 6,892      |  |  |   | 6,892     | 
|Short-term borrowings                          |  |                    | 5,037     |  |                   |   | 5,037     |                |  |   | 5,292      |  |  |   | 5,292     | 
|Long-term debt                                 |  |                    | 72,398    |  |                   |   | 78,815    |                |  |   | 65,689     |  |  |   | 69,814    | 
|Accrued interest payable                       |  |                    | 1,084     |  |                   |   | 1,084     |                |  |   | 1,090      |  |  |   | 1,090     | 
|                                               |  |                    |           | 
|                                               |  | NominalAmount      |           |  | Fair Value        |   |           | NominalAmount  |  |   | Fair Value | 
|Off-balance sheet financial instruments:       |  |                    |           |  |                   |   |           |                |  |   |            |  |  |   |           | 
|Commitments to grant loans                     |  |                    | 35,368    |  |                   |   |          |                |  |   | 12,350     |  |  |   |          | 
|Unfunded commitments under lines of credit     |  |                    | 320,246   |  |                   |   |          |                |  |   | 267,683    |  |  |   |          | 
|Letters of credit                              |  |                    | 30,494    |  |                   |   | 179       |                |  |   | 25,524     |  |  |   |          | 

The following methods and assumptions
were used to estimate the fair values of the Companys financial instruments at September 30, 2010 and December 31, 2009.

Cash and cash equivalents (carried at cost)

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets fair values.

Restricted investment in bank stock (carried at cost)

The carrying amount
of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.

Loans held for
sale (carried at lower of cost or fair value)

The carrying amounts of loans held for sale approximate their fair value.

Loans (carried at cost)

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected
future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values
are based on carrying values. This method of estimating fair value does not incorporate the exit price concept of fair value but is a permitted methodology for purposes of this disclosure.

Accrued interest receivable and payable (carried at cost)

The carrying
amount of accrued interest receivable and accrued interest payable approximates its fair value.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial
Statements

September 30, 2010 (Unaudited)

(Amounts in thousands, except share data)





Deposits (carried at cost)

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market
accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest
rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings (carried at cost)

The carrying amounts of short-term borrowings approximate their fair values.

Long-term debt
(carried at cost)

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices
for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a
third party.

Off-balance sheet financial instruments (disclosed at cost)

Fair values for the Banks off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees
currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties credit standing.

Note 13 - Reclassifications

Certain amounts in the 2009 consolidated financial statements
and notes have been reclassified to conform to the 2010 presentation.



28



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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

Managements discussion and analysis of the changes in the consolidated results of operations, financial condition, and cash flows of Tower Bancorp,
Inc. and its subsidiary is set forth below for the periods indicated. Unless the context requires otherwise, the terms Tower, we, us, and our refer to Tower Bancorp, Inc. and its wholly-owned
subsidiary, Graystone Tower Bank. Through Graystone Tower Bank, we provide banking and banking related services to our customers within our principal market areas consisting of Centre, Cumberland, Dauphin, Franklin, Fulton, Lancaster, Lebanon, and
York Counties of Pennsylvania and Washington County, Maryland. The following discussion and analysis, the purpose of which is to provide investors and others with information that we believe to be necessary for an understanding of Towers
financial condition, changes in financial condition, and results of operations, should be read in conjunction with the consolidated financial statements, notes, and other information contained in this report.

FORWARD-LOOKING STATEMENTS

We
have made, and may continue to make, certain forward-looking statements in this Report, including information incorporated by reference in this Report. These forward-looking statements are intended to be covered by the safe harbor for
forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as
believe, expect, may, will, should, project, plan, seek, target, intend or anticipate or the negative thereof or
comparable terminology. Forward-looking statements include discussions of strategy, financial projections and estimates and their underlying assumptions, statements regarding plans, objectives, expectations or consequences of various
transactions, and statements about the future performance, operations, products and services of Tower and our subsidiaries. These forward-looking statements are subject to various assumptions, risks, uncertainties and other factors including, but
not limited to, market risk; changes or adverse developments in economic, political, or regulatory conditions; a continuation or worsening of the current disruption in credit and other markets; the effect of competition and interest rates on net
interest margin and net interest income; investment strategy and income growth; investment securities gains; declines in the value of securities which may result in charges to earnings; changes in rates of deposit and loan growth; asset quality and
the impact on assets from adverse changes in the economy and in credit or other markets and resulting effects on credit risk and asset values; balances of risk-sensitive assets to risk-sensitive liabilities; salaries and employee benefits and other
expenses; amortization of intangible assets; capital and liquidity strategies and other financial and business matters for future periods.

Because of the possibility of changes in these assumptions, actual results could differ materially from those contained in any forward-looking
statements. We encourage readers of this Report to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance. Forward-looking statements are qualified in their entirety by the risk factors
and cautionary statements contained in this Report and speak only as of the date they are made. We do not undertake any obligation to update publicly any forward-looking statements to reflect circumstances or events that occur after the date the
forward-looking statements are made or to reflect the occurrence of unanticipated events except as required by law.

Availability of
Information

Our web-site address is www.towerbancorp.com. We make available free of charge, through the Investor Relations section
of our web site, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the
Securities and Exchange Commission. We include our web-site address in this Quarterly Report on Form 10-Q as an inactive textual reference only.

Merger and Acquisitions

On March 31, 2009, Tower Bancorp, Inc. completed a merger
with Graystone Financial Corp., (Graystone) in an all stock transaction valued at approximately $57.9 million (the Merger). The Merger, while considered a merger of equals, was accounted for as a reverse acquisition by
Graystone Financial Corp. of Tower Bancorp, Inc. using the acquisition method of accounting and, accordingly, the assets and liabilities of Tower Bancorp, Inc. have been recorded at their respective fair values on the date the Merger was completed.
The Merger was effected by the issuance of shares of Tower Bancorp, Inc. common stock to Graystone shareholders. Each share of Graystone common stock was exchanged for 0.42 shares of Tower common stock, with any fractional shares as a result of the
exchange, paid to Graystone shareholders in cash based on $19.78 per share of Tower common stock.

Pursuant to the Agreement and Plan of
Merger, Tower Bancorp, Inc. is the surviving bank holding company and its wholly-owned subsidiary, The First National Bank of Greencastle, merged with and into Graystones wholly owned subsidiary, Graystone Bank, with Graystone Bank as the
surviving institution, under the name Graystone Tower Bank (the Bank). The Bank operates as the sole subsidiary of Tower Bancorp, Inc. through two divisions  Graystone Bank, a division of



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Graystone Tower Bank, consisting of the former Graystone Bank branches, and Tower Bank, a division of Graystone Tower Bank, consisting of the former branches of The First
National Bank of Greencastle.

On December 27, 2009, Tower Bancorp, Inc. and First Chester County Corporation (First
Chester) entered into an Agreement and Plan of Merger (the FCEC Acquisition Agreement) pursuant to which Tower will acquire First Chester in an all-stock transaction valued at approximately $65 million or $10.22 per share based on
the closing price of Tower common stock at the announcement of this acquisition. As described in the FCEC Acquisition Agreement, shareholders of First Chester will receive merger consideration consisting of a number of shares of Tower common stock
equal to the exchange ratio, which was 0.453 at the time of the signing of the FCEC Acquisition Agreement. The exchange ratio is subject to upward or downward adjustment based upon the amount of First Chester Delinquent Loans (as defined
in the FCEC Acquisition Agreement) as of the last business day of the month prior to the date the acquisition is completed. If the closing date of the acquisition had occurred in October 2010, the exchange ratio would have been adjusted to 0.291
based on First Chester Delinquent Loan of $76.2 million calculated as of September 30, 2010, the last business day of the prior month.

As part of the FCEC Acquisition Agreement, Towers subsidiary bank, Graystone Tower Bank, agreed to increase its lending facility with First Chester
to up to $26 million as well as to purchase up to $100 million of residential mortgage and commercial loans from First National Bank of Chester County (FNB) in order for FNB to satisfy the regulatory capital requirements of the Office of
the Comptroller of the Currency (the OCC). As of September 30, 2010, the Bank loaned $26 million to First Chester, the proceeds of which First Chester contributed to FNB as Tier 1 capital. First Chester pledged 100% of in the
capital stock of FNB to Graystone Tower Bank to secure repayment of the loan. The Bank has also purchased approximately $52 million in performing commercial loans from FNB. As of September 30, 2010, the total balance of the loans purchased from
First Chester was $49.0 million.

Following the transaction, based on a 0.453 exchange ratio, which was the ratio at the time of the signing
of the FCEC Acquisition Agreement, current Tower shareholders would own approximately 71% and First Chester shareholders would own approximately 29% of the combined companys common stock. The shareholders of both entities must approve the
combination.

On March 4, 2010, the FCEC Acquisition Agreement was amended between Tower and First Chester. As part of the amended
agreement, First Chester shall use its best efforts to sell at or prior to the effective date of the acquisition, the American Home Bank Division of FNB (AHB Division) to one or more purchasers on terms and conditions acceptable to both
First Chester and Tower. The AHB Division engages in mortgage-banking activities on a nation-wide basis. Additionally, we extended a $2 million non-revolving line of credit to First Chester, which permits draws from time to time for the sole purpose
of contributing additional capital to FNB in the event that, as a result of the attempt to sell the AHB Division, the actual sale thereof, or the effects on FNB of such sale, FNBs regulatory capital ratios, as reported in FNBs quarterly
call report, fall below the minimum regulatory capital ratios applicable to FNB. Through September 30, 2010, we have not advanced any funds to First Chester under this facility. As of September 30, 2010, First Chester has not sold the AHB
Division.

On October 28, 2010, The FCEC Acquisition Agreement was amended between Tower and First Chester. As part of the amended
agreement, the closing deadline has been extended from November 20, 2010 to December 31, 2010 and provided increased clarity to the definition of First Chester Delinquent Loans.

Results of Operations

Summary of
Financial Results

The three month period ending September 30, 2010 and 2009 represents comparable results of operations for the
combined entity of Tower Bancorp, Inc. and Graystone Financial Corp. However, for the first nine months of 2010 as compared with the first nine months of 2009, the Merger has still had a significant impact on our results of operations. The operating
results reported herein for the first nine months ended September 30, 2010 include the results for the combined entity. However, the results for the nine months ended September 30, 2009 include the historical operating results of Graystone
for the entire nine month period and the operating results of Tower only since March 30, 2009, representing the period after consummation of the Merger which was effective before the opening of business on March 31, 2009. Consequently,
comparisons of our current results of operation to the nine month ending September, 30 2009 may not be particularly meaningful.

We recognized
after-tax net income of approximately $2.5 million or $0.35 per diluted share in the third quarter of 2010, compared to $1.7 million or $0.30 per diluted share in the third quarter of 2009. Net interest income before provision for loan loss
increased $3.2 million due to a mix of growth in our loan and investment portfolios coupled with a reduction in the average rate paid on interest bearing liabilities from 2009 to 2010. This increase in net interest income was offset by increases in
the provision for loan losses and non-interest expenses of $800 thousand and $2.4 million respectively. The increase in the provision for loan losses is due to our analysis of the risk of loan losses , as well as total net loan charge-offs



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of $502 thousand during the third quarter of 2010. The increase in non-interest expense is due to increases in salary and benefit expense, occupancy expense and other operating expense, which
increased $1.3 million, $343 thousand and $556, respectively, as compared to the third quarter of 2009. These increases can be attributed to the rapid growth experienced by the Company since the Merger, which resulted in the opening of new branch
locations and the addition of personnel within the finance, operations, credit and lending departments in preparation for the pending acquisition of First Chester. Non-interest income increased $1.3 million due to increases in the service charges on
deposit accounts, gains on the sale of mortgage loans, gains on sale of other interest earning assets and income from bank owned life insurance which increased $207 thousand, $378 thousand, $322 thousand and $316 thousand, respectively, compared to
the third quarter of 2009.

For the first nine months of 2010, we recognized an after-tax net income of $5.6 million or $0.78 per diluted
share, compared to after-tax net income of $1.7 million or $0.37 per diluted share for the same period in 2009. The increase in net income included an increase of net interest income after the provision for loan losses of $12.5 million and
non-interest income of $2.1 million offset by the increase in non-interest expense of $8.6 million and income tax expense of $2.1 million. Net interest income before loan loss provision increased $13.6 million during the first nine months of 2010
compared to the same period in 2009. In addition to the net interest income contributed by the inclusion of the Tower Bank divisions operations which added $3.6 million, this growth was also driven by organic growth of loans and investments,
and the decrease in the average rate paid on interest bearing deposits of 55 basis points. Non-interest income increased by $2.1 million due to increased service charges on deposit accounts, commissions and fees as well as income generated from the
bank owned life insurance policies. Non-interest expense, excluding merger related expenses and an impairment charge related to land held for investment, increased by $9.1 million primarily due to increases in compensation costs, occupancy expenses
and other operating expenses incurred in order to support our continued growth of assets and deposits and in preparation for the pending acquisition of First Chester, offset by a FDIC special assessment of $580 thousand incurred during the second
quarter of 2009. No such assessment was imposed during the same period in 2010.

Quarter Ended September 30, 2010 compared to the
Quarter Ended September 30, 2009

Net Interest Income

Our major source of operating revenues is net interest income, which increased $3.2 million or 31.0% to approximately $13.4 million for the third quarter of 2010, as compared to approximately $10.2
million for the same period in 2009. Net interest income as a percentage of net income plus non-interest income was 81.3% for the quarter ended September 30, 2010, compared to 84.9% for the quarter ended September 30, 2009.

Net interest income is the income that remains after deducting, from total income generated by earning assets, the interest expense attributable to the
acquisition of the funds required to support earning assets. Income from earning assets includes income from loans, investment securities, and short-term investments. The amount of interest income is dependent upon many factors, including the volume
of earning assets, the general level of interest rates, the dynamics of the change in interest rates, and the levels of non-performing loans. The cost of funds varies with the amount of funds necessary to support earning assets, the rates paid to
attract and hold deposits, the rates paid on borrowed funds, and the levels of noninterest-bearing demand deposits and equity capital.

We
principally utilize in-market deposits to fund loans and investments, while strategically obtaining additional funding from short-term and long-term borrowings when advantageous rates and maturities can be obtained. We use brokered deposits on a
limited basis to fund asset growth as demonstrated by the limited use of brokered deposits, which represents approximately 10.9% of total deposits, on our consolidated balance sheet at September 30, 2010 and approximately 5.0% at
December 31, 2009. In connection with our growth plans and ongoing focus to improve our net interest spread, we may continue to supplement in-market deposits with brokered deposits and additional short-term and long-term borrowings, including
additional borrowings from the Federal Home Loan Bank and federal funds lines with correspondent banks, based upon prevailing economic conditions, deposit availability and pricing, interest rates and other factors at such time.



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The following table provides a
comparative average balance sheet and net interest income analysis for the three-month period ended September 30, 2010 as compared to the same period in 2009. Interest income and average rates are presented on a fully taxable-equivalent (FTE)
basis, using a statutory Federal tax rate of 35% for 2010 and 34% for 2009.



|                                                                                 |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|-------------------------------------------------------------------------------- |  | ---------------------------------------- | --------- | - | -------- | - | ------ | ------- |  |  | ------- | - |  | -------- | --------- | - | ------- | - | ------ | - |  |  | ---- | -
|                                                                                 |  | For the Three Months Ended September 30, |          
|                                                                                 |  | 2010                                     |           |   | 2009     |  
|                                                                                 |  | Average                                  |           |   |          |   |        | Average |  |  | Average |   |  |          |           |   | Average |  
|                                                                                 |  | Balance                                  |           |   | Interest |   |        | Rate    |  |  | Balance |   |  | Interest |           |   | Rate    |  
|                                                                                 |  | (dollars in thousands)                   |          
|Interest-earning assets:                                                         |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Federal funds sold and other                                                     |  | $                                        | 16,801    |   |          | $ | 24     |         |  |  | 0.57    | % |  | $        | 41,029    |   |         | $ | 56     |   |  |  | 0.54 | %
|Investment securities (1)                                                        |  |                                          | 175,533   |   |          |   | 1,071  |         |  |  | 2.42    | % |  |          | 81,914    |   |         |   | 502    |   |  |  | 2.43 | %
|Loans(2)                                                                         |  |                                          | 1,270,993 |   |          |   | 17,852 |         |  |  | 5.57    | % |  |          | 1,016,395 |   |         |   | 15,249 |   |  |  | 5.95 | %
|                                                                                 |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Total interest-earning assets                                                    |  |                                          | 1,463,327 |   |          |   | 18,947 |         |  |  | 5.14    | % |  |          | 1,139,338 |   |         |   | 15,807 |   |  |  | 5.50 | %
|                                                                                 |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Other assets                                                                     |  |                                          | 137,532   |   |          |   |        |         |  |  |         |   |  |          | 196,758   |   |         |   |        |   |  |  |      |  
|                                                                                 |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Total assets                                                                     |  | $                                        | 1,600,859 |   |          |   |        |         |  |  |         |   |  | $        | 1,336,096 |   |         |   |        |   |  |  |      |  
|                                                                                 |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|                                                                                 |  |                                          |           |   |          |  
|Interest-bearing liabilities:                                                    |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Interest-bearing non-maturity deposits                                           |  | $                                        | 794,970   |   |          |   | 2,138  |         |  |  | 1.07    | % |  | $        | 604,448   |   |         |   | 2,719  |   |  |  | 1.78 | %
|Time deposits                                                                    |  |                                          | 423,415   |   |          |   | 2,354  |         |  |  | 2.21    | % |  |          | 399,902   |   |         |   | 2,006  |   |  |  | 1.99 | %
|Borrowings                                                                       |  |                                          | 85,863    |   |          |   | 1,033  |         |  |  | 4.77    | % |  |          | 66,634    |   |         |   | 795    |   |  |  | 4.73 | %
|                                                                                 |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Total interest-bearing liabilities                                               |  |                                          | 1,304,248 |   |          |   | 5,525  |         |  |  | 1.68    | % |  |          | 1,070,984 |   |         |   | 5,520  |   |  |  | 2.04 | %
|                                                                                 |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Noninterest-bearing transaction accounts                                         |  |                                          | 116,974   |   |          |   |        |         |  |  |         |   |  |          | 105,046   |   |         |   |        |   |  |  |      |  
|Other liabilities                                                                |  |                                          | 13,738    |   |          |   |        |         |  |  |         |   |  |          | 30,293    |   |         |   |        |   |  |  |      |  
|Stockholders equity                                                             |  |                                          | 165,899   |   |          |   |        |         |  |  |         |   |  |          | 129,773   |   |         |   |        |   |  |  |      |  
|                                                                                 |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Total liabilities and stockholders equity                                       |  | $                                        | 1,600,859 |   |          |   |        |         |  |  |         |   |  | $        | 1,336,096 |   |         |   |        |   |  |  |      |  
|                                                                                 |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Net interest spread                                                              |  |                                          |           |   |          |   |        |         |  |  | 3.46    | % |  |          |           |   |         |   |        |   |  |  | 3.46 | %
|Net interest income and interest rate margin FTE                                 |  |                                          |           |   |          | $ | 13,422 |         |  |  | 3.64    | % |  |          |           |   |         | $ | 10,287 |   |  |  | 3.58 | %
|                                                                                 |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Tax equivalent adjustment                                                        |  |                                          |           |   |          |   | (51    | )       |  |  |         |   |  |          |           |   |         |   | (83    | ) |  |  |      |  
|                                                                                 |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Net interest income                                                              |  |                                          |           |   |          | $ | 13,371 |         |  |  |         |   |  |          |           |   |         | $ | 10,204 |   |  |  |      |  
|                                                                                 |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                                          | 112.2     | % |          |   |        |         |  |  |         |   |  |          | 106.4     | % |         |   |        |   |  |  |      |  
|                                                                                 |  |                                          |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  



|(1) | The average yields for investment securities available for sale are reported on a fully taxable-equivalent basis at a rate of 35% for 2010 and 34% for 2009.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Average loan balances include non-accrual loans.
|--- | ------------------------------------------------

The following table summarizes the changes in FTE interest income and expense due to changes in average balances (volume) and changes in rates:



|                                       |                                           |                            |        |   |      |   |         |       |  |   |       |  
|-------------------------------------- | ----------------------------------------- | -------------------------- | ------ | - | ---- | - | ------- | ----- |  | - | ----- | -
|                                       |                                           | Three Months Ended         |       
|                                       | September 30, 2010 vs. September 30, 2009 |                           
|                                       |                                           | Increase (Decrease) Due to |       
|                                       |                                           | Volume                     |        |   | Rate |   |         | Total | 
|                                       |                                           | (in thousands)             |       
|Interest income:                       |                                           |                            |        |   |      |   |         |       |  |   |       |  
|Federal funds sold and other           |                                           | $                          | (106   | ) |      | $ | 74      |       |  | $ | (32   | )
|Investment securities                  |                                           |                            | 642    |   |      |   | (73     | )     |  |   | 569   |  
|Loans                                  |                                           |                            | 26,486 |   |      |   | (23,883 | )     |  |   | 2,603 |  
|                                       |                                           |                            |        |   |      |   |         |       |  |   |       |  
|Total interest income                  |                                           | $                          | 27,022 |   |      | $ | (23,882 | )     |  | $ | 3,140 |  
|                                       |                                           |                            |        |   |      |   |         |       |  |   |       |  
|Interest expense:                      |                                           |                            |        |   |      |   |         |       |  |   |       |  
|Interest-bearing non-maturity deposits |                                           | $                          | 14,869 |   |      | $ | (15,450 | )     |  | $ | (581  | )
|Time deposits                          |                                           |                            | 122    |   |      |   | 226     |       |  |   | 348   |  
|Borrowings                             |                                           |                            | 231    |   |      |   | 7       |       |  |   | 238   |  
|                                       |                                           |                            |        |   |      |   |         |       |  |   |       |  
|Total interest expense                 |                                           |                            | 15,222 |   |      |   | (15,217 | )     |  |   | 5     |  
|                                       |                                           |                            |        |   |      |   |         |       |  |   |       |  
|Net interest income                    |                                           | $                          | 11,800 |   |      | $ | (8,665  | )     |  | $ | 3,135 |  
|                                       |                                           |                            |        |   |      |   |         |       |  |   |       |  



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Interest income increased
approximately $3.1 million, or 19.9%. This increase was caused by approximately $324.0 million or 28.4% increase in the average balance of interest-earning assets, which resulted in approximately $27.0 million increase to interest income. This
increase was partially offset by a 36 basis point reduction in average rates that resulted in a reduction of interest income of approximately $23.9 million.

Interest income on investment securities increased approximately $569 thousand, or 113.5%. The average balance of investments held by the Bank increased from $81.9 million at September 30, 2009 to
$175.5 million at September 30, 2010, which resulted in an increase of approximately $642 thousand in interest income. The increase in the average balance of investment securities relates primarily to the addition of securities acquired through
the Merger as well as additional debt security investments purchased with excess liquidity. Since March 31, 2009, the Company purchased collateralized mortgage obligation securities, government agency step-up securities, and SBA pooled loan
securitizations as well as other debt securities. These investments served as an initial way for management to deploy funds received through deposit growth and capital offerings into interest earning assets other than federal funds sold until the
proceeds could be used to fund loan growth. This increase is offset by the reduction in the interest rates earned on securities as compared to prior year resulting in a reduction of 1 basis point on the average rate and a reduction of interest
income of $73 thousand.

Average yields on loans decreased 38 basis points or 6.4%, from 5.95% during the third quarter of 2009 to 5.57%
during the third quarter of 2010. The Federal Reserve maintained the intended federal funds target rate between 0.08% and 0.25% during both quarters ended September, 30, 2010 and 2009. This rate continues to place downward pressure on the prime rate
and all other lending rates, further prolonging the reduced interest rate environment. Fixed rate loans, which represent approximately 23% of total average loans held at September 30, 2010, do not reprice when short-term rates decline.
Additionally, the total effect of downward loan repricing on variable rate loans will not coincide with the decrease in the aforementioned rates due to the fact that approximately 87% of our total average variable rate loans at September 30,
2010 contain interest rate floors. Conversely, any benefit associated with an increase in interest rates in the future might not be immediately realized due to the use of interest rate floors. Presumably, an increase in future interest rates would
cause repricing in all assets and liabilities linked to variable rate indices; however, as deposit products would experience any increase on a relatively immediate basis, loan products with floors in place would require a rate increase such that the
resulting rate earned on the loan would exceed the floor. Refer to Item 3 Quantitative and Qualitative Disclosures About Market Risk for a more detailed discussion of interest rate risk.

Interest expense increased $5 thousand, or 0.1% during the third quarter of 2010 compared to the same period in 2009. This relatively small increase was
caused by approximately $233.3 million or 21.8% increase in the average balance of interest-bearing liabilities, which resulted in approximately $15.2 million increase to interest expense. This increase, however, was predominately offset by a
36 basis point reduction in the average rate paid on interest-bearing liabilities, which resulted in a reduction of interest expense of approximately $15.2 million. This reduction in average rates paid on interest-bearing liabilities was the result
of lower rates paid on interest-bearing non-maturity deposit accounts and time deposits, which can be attributed to both the low cost deposits acquired through the Merger and managements efforts to reduce rates paid on deposits while still
remaining competitive in our markets.

In future periods, assuming a prolonged flat or declining interest rate environment, we expect an
increase in the total amount of net interest income driven by continued growth in average interest-earning assets, the continued use of floors in our variable rate commercial loan portfolio, further migration of assets from federal funds to loans
and investments and the continued repricing of a portion of our interest-bearing deposit portfolio into lower rate products. Furthermore, we continue to reduce rates paid on interest-bearing liabilities through reductions during the end of the third
quarter to rates paid on deposits. Any significant changes such as movement in interest rates set by the Federal Reserve, changes in the performance of our interest earning assets, the continued repricing of assets, and the inability to move deposit
rates in similar increments as earning asset rates may mitigate this benefit in the future. Also, our strategy to extend the duration of our time deposit portfolio during this low interest rate environment may also offset benefits to the margin.

We manage our risk associated with changes in interest rates through the techniques described in this Report under Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

Provision for Loan Losses and Allowance for Loan Losses

The provision for loan losses is the expense necessary to maintain the allowance for loan losses at a level adequate to absorb
managements estimate of probable losses in the loan portfolio. Our provision for loan loss is based upon managements continuous review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans,
analyze delinquencies, ascertain risks associated with new loans, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets we serve.



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The following table presents the
activity in the allowance for loan losses for the three months ended September 30, 2010 and 2009 (in thousands):



|                               |  |                    |        |   |      |   |       |  
|------------------------------ |  | ------------------ | ------ | - | ---- | - | ----- | -
|                               |  | Three months ended |       
|                               |  | September 30,      |       
|                               |  | 2010               |        |   | 2009 |  
|Balance at beginning of period |  | $                  | 11,619 |   |      | $ | 7,965 |  
|Provision for loan losses      |  |                    | 1,600  |   |      |   | 800   |  
|Charge-offs                    |  |                    |        |   |      |   |       |  
|Commercial:                    |  |                    |        |   |      |   | (270  | )
|Industrial                     |  |                    | (113   | ) |      |   | (65   | )
|Real estate                    |  |                    |       |   |      |   | (37   | )
|Construction                   |  |                    |       |   |      |   |       |  
|Consumer:                      |  |                    |        |   |      |   |       |  
|Home equity line               |  |                    | (65    | ) |      |   |      |  
|Other                          |  |                    | (62    | ) |      |   | (8    | )
|Residential mortgage           |  |                    | (271   | ) |      |   | (7    | )
|                               |  |                    |        |   |      |   |       |  
|Total charge-offs              |  |                    | (511   | ) |      |   | (387  | )
|                               |  |                   
|Recoveries                     |  |                    |        |   |      |   |       |  
|Commercial:                    |  |                    |        |   |      |   |       |  
|Industrial                     |  |                    | 6      |   |      |   | 11    |  
|Real estate                    |  |                    |       |   |      |   |      |  
|Construction                   |  |                    |       |   |      |   | 1     |  
|Consumer:                      |  |                    |        |   |      |   |       |  
|Home equity line               |  |                    |       |   |      |   |      |  
|Other                          |  |                    | 1      |   |      |   |      |  
|Residential mortgage           |  |                    | 2      |   |      |   |      |  
|                               |  |                    |        |   |      |   |       |  
|Total recoveries               |  |                    | 9      |   |      |   | 12    |  
|                               |  |                    |        |   |      |   |       |  
|Net charge-offs                |  |                    | (502   | ) |      |   | (375  | )
|                               |  |                    |        |   |      |   |       |  
|Balance at end of period       |  | $                  | 12,717 |   |      | $ | 8,390 |  
|                               |  |                    |        |   |      |   |       |  

We continue to operate in a challenging economic environment. We have increased our allowance for loan loss in accordance
with our assessment process, which took into consideration risks related to the overall composition of our loan portfolio, the status of the current economic environment and other qualitative factors, and the results of managements risk
assessment process over delinquent and problem loans. The provision for loan losses for the three months ended September 30, 2010 totaled $1.6 million, an increase of $800 thousand compared to the same period in 2009. The gross loan charge-offs
that were applied to the allowance for loan loss during the three months ended September 30, 2010 consisted of 7 commercial industrial loans, 2 consumer home equity lines, 2 other consumer loans and 6 mortgage loans totaling $511 thousand. Net
allowance for loan loss charge-offs were 0.16 % of average loans as of the third quarter 2010 on an annualized basis. Our allowance for loan loss as a percentage of loans was 0.96% at September 30, 2010, compared to 0.85% at
December 31, 2009.



34



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The following table presents changes
in the credit quality adjustment on loans purchased for the three months ended September 30, 2010 and 2009 (in thousands):



|                                  |  |                    |       |   |      |   |       |  
|--------------------------------- |  | ------------------ | ----- | - | ---- | - | ----- | -
|                                  |  | Three months ended |      
|                                  |  | September 30,      |      
|                                  |  | 2010               |       |   | 2009 |  
|Balance at beginning of period    |  | $                  | 1,676 |   |      | $ | 3,639 |  
|Credit fair value adjustment mark |  |                    |      |   |      |   |      |  
|Amortization                      |  |                    | (95   | ) |      |   | (249  | )
|Charge-offs                       |  |                    |       |   |      |   |       |  
|Commercial:                       |  |                    |       |   |      |   |       |  
|Industrial                        |  |                    | (50   | ) |      |   | (30   | )
|Real estate                       |  |                    |      |   |      |   |      |  
|Construction                      |  |                    |      |   |      |   |      |  
|Consumer:                         |  |                    |       |   |      |   |       |  
|Home equity line                  |  |                    | (5    | ) |      |   | (5    | )
|Other                             |  |                    | (45   | ) |      |   | (75   | )
|Residential mortgage              |  |                    |      |   |      |   | (22   | )
|                                  |  |                    |       |   |      |   |       |  
|Total charge-offs                 |  |                    | (100  | ) |      |   | (132  | )
|                                  |  |                   
|Recoveries                        |  |                    |       |   |      |   |       |  
|Commercial:                       |  |                    |       |   |      |   |       |  
|Industrial                        |  |                    | 8     |   |      |   | 4     |  
|Real estate                       |  |                    |      |   |      |   |      |  
|Construction                      |  |                    |      |   |      |   |      |  
|Consumer:                         |  |                    |       |   |      |   |       |  
|Home equity line                  |  |                    |      |   |      |   |      |  
|Other                             |  |                    | 20    |   |      |   | 7     |  
|Residential mortgage              |  |                    |      |   |      |   | 2     |  
|                                  |  |                    |       |   |      |   |       |  
|Total recoveries                  |  |                    | 28    |   |      |   | 13    |  
|                                  |  |                    |       |   |      |   |       |  
|Net charge-offs                   |  |                    | (72   | ) |      |   | (119  | )
|                                  |  |                    |       |   |      |   |       |  
|Balance at end of period          |  | $                  | 1,509 |   |      | $ | 3,271 |  
|                                  |  |                    |       |   |      |   |       |  

The gross loan charge-offs that were applied to the credit quality adjustment on purchased loans for the three months ended
September 30, 2010 consisted of 3 commercial industrial, 1 consumer home equity lines, and 10 other consumer loans totaling $100 thousand. Net credit mark charge-offs were 0.02% of average loans as of the third quarter 2010 on an annualized
basis.

The total gross loan charge-offs during the three months ended September 30, 2010 consisted of 31 loans totaling $611 thousand.
Net total loan charge-offs were 0.18% of average loans as of the third quarter of 2010 on an annualized basis. Our adjusted (Non-GAAP) allowance for loan loss, that is the allowance for loan losses adjusted to include the credit quality adjustment
on loans purchased, as a percentage of loans was 1.07% at September 30, 2010, compared to 1.11% at December 31, 2009. See an explanation of the Non-GAAP measures later in this filing on page 46 within Managements Discussion and
Analysis of our loan portfolio performance. Determining the level of the allowance for probable loan loss at any given point in time is difficult, particularly during uncertain economic periods. We must make estimates using assumptions and
information that is often subjective and changing rapidly. The review of the loan portfolio is a continuing process in light of a changing economy and the dynamics of the banking and regulatory environment. In our opinion, the allowance for loan
loss is adequate to meet probable incurred loan losses at September 30, 2010. There can be no assurance, however, that we will not sustain loan losses in future periods that could be greater than the size of the allowance at September 30,
2010. Management believes that the allowance for loan loss is appropriate based on applicable accounting standards.

Non-Interest Income

In addition to our focus on increasing net interest income through growth of interest-earning assets and expansion in our net interest
margin, we remain committed to increasing non-interest income as a way to improve profitability and diversify our sources of revenue.

Non-interest income was approximately $3.1 million and $1.8 million for the three months ended September 30, 2010 and 2009, respectively.



35



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The following table presents the
components of non-interest income (in thousands):



|                                                     |      |               |       |      |               |   |       |                     |  |   |       |  |  |  |       |  
|---------------------------------------------------- | ---- | ------------- | ----- | ---- | ------------- | - | ----- | ------------------- |  | - | ----- |  |  |  | ----- | -
|                                                     |      | September 30, |       |      | September 30, |   |       | Increase (Decrease) | 
|                                                     | 2010 |               |       | 2009 |               |   | $     |                     |  | % |      
|Service charges on deposit accounts                  |      | $             | 832   |      |               | $ | 625   |                     |  | $ | 207   |  |  |  | 33.1  | %
|Other service charges, commissions and fees          |      |               | 581   |      |               |   | 566   |                     |  |   | 15    |  |  |  | 2.7   | %
|Gain on sale of mortgage loans originated for sale   |      |               | 656   |      |               |   | 334   |                     |  |   | 322   |  |  |  | 96.4  | %
|Gain (loss) on sale of other interest earning assets |      |               | 265   |      |               |   | (113  | )                   |  |   | 378   |  |  |  | 334.5 | %
|Income from bank owned life insurance                |      |               | 599   |      |               |   | 283   |                     |  |   | 316   |  |  |  | 111.7 | %
|Other income                                         |      |               | 148   |      |               |   | 115   |                     |  |   | 33    |  |  |  | 28.7  | %
|                                                     |      |               |       |      |               |   |       |                     |  |   |       |  |  |  |       |  
|Total non-interest income                            |      | $             | 3,081 |      |               | $ | 1,810 |                     |  | $ | 1,271 |  |  |  | 70.2  | %
|                                                     |      |               |       |      |               |   |       |                     |  |   |       |  |  |  |       |  

The $1.3 million or 70.2% increase in total non-interest income is attributable primarily to the increase in
service charges on deposit accounts, gain on sale of mortgage loans originated for sale, gain on sale of other interest earning asset and income from banked owned life insurance. The increase in service charges relates to a 21.8% increase in average
deposits compared to third quarter 2009. The increase in the gain on sale of mortgage loans originated was primarily due to the increase in the volume of mortgage loans originated for sale during the third quarter of 2010 compared to the third
quarter of 2009. Gain on sale of other interest earning assets increased due to the increase in the sales and calls of debt investment securities during third quarter of 2010 as compared to the third quarter of 2009. Income from bank owned life
insurance increased as a result the appreciation in the cash surrender value of life insurance contracts, which was positively impacted by the purchase of $12.0 million in bank owned life insurance during the second quarter 2010.

Non-Interest Expense

The
following table presents the components of non-interest expenses (in thousands):



|                                  |      |               |        |      |               |   |       |                     |  |   |       |   |  |  |       |   
|--------------------------------- | ---- | ------------- | ------ | ---- | ------------- | - | ----- | ------------------- |  | - | ----- | - |  |  | ----- | --
|                                  |      | September 30, |        |      | September 30, |   |       | Increase (Decrease) | 
|                                  | 2010 |               |        | 2009 |               |   | $     |                     |  | % |      
|Salaries and employee benefits    |      | $             | 5,554  |      |               | $ | 4,237 |                     |  | $ | 1,317 |   |  |  | 31.1  | % 
|Occupancy and equipment           |      |               | 1,805  |      |               |   | 1,462 |                     |  |   | 343   |   |  |  | 23.5  | % 
|Amortization of intangible assets |      |               | 160    |      |               |   | 177   |                     |  |   | (17   | ) |  |  | (9.6  | )%
|FDIC insurance premiums           |      |               | 564    |      |               |   | 409   |                     |  |   | 155   |   |  |  | 37.9  | % 
|Advertising and promotion         |      |               | 231    |      |               |   | 204   |                     |  |   | 27    |   |  |  | 13.2  | % 
|Data processing                   |      |               | 740    |      |               |   | 627   |                     |  |   | 113   |   |  |  | 18.0  | % 
|Professional service fees         |      |               | 385    |      |               |   | 305   |                     |  |   | 80    |   |  |  | 26.2  | % 
|Other operating expenses          |      |               | 1,519  |      |               |   | 963   |                     |  |   | 556   |   |  |  | 57.7  | % 
|Merger related expenses           |      |               | 117    |      |               |   | 310   |                     |  |   | (193  | ) |  |  | (62.3 | )%
|                                  |      |               |        |      |               |   |       |                     |  |   |       |   |  |  |       |   
|Total non-interest expenses       |      | $             | 11,075 |      |               |   | 8,694 |                     |  | $ | 2,381 |   |  |  | 27.4  | % 
|                                  |      |               |        |      |               |   |       |                     |  |   |       |   |  |  |       |   

Salary and employee benefits increased $1.3 million or 31.1%. Salaries increased by $902 thousand while employee
benefits increased by $413 thousand. The increased level of salary expense was driven by personnel costs in connection with our branch expansion during 2009 and the first nine months of 2010. Additionally, we continued to add personnel to our
operations, finance, credit, and lending departments to support our balance sheet growth and in preparation for the pending acquisition of First Chester. The Company also incurred approximately $117 thousand related to the adoption of a deferred
compensation plan for certain executive officers during the previous quarter. We also incurred general merit increases for all eligible employees between September 30, 2009 and September 30, 2010. These increases were partially offset by a
reduction in the bank performance incentive bonus accrual compared to second quarter of 2009 based on the level of achievement of the relative performance metrics within the bonus plan.

Occupancy and equipment expense increased $343 thousand or 23.5%. The increase in occupancy and equipment expense related to the addition of four branch offices during 2009 and 2010 and the lease of the
corporate center office space entered into during the third quarter of 2009.

On February 27, 2009, the FDIC announced that it was
increasing federal deposit insurance premiums, beginning the second quarter of 2009, for all well managed, well capitalized banks to a range between 12 and 16 cents per $100 of insured deposits on an annual basis. At September 30, 2010, the
Bank had approximately $1.1 billion in FDIC-insured deposits compared to $874.3 million at September 30, 2009.



36



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##### Table of Contents



Professional service expenses
increased $80 thousand or 26.2% and data processing expense increased $113 thousand or 18.0%. These increases are directly related to increased audit, consulting and legal services, along with increased data processing costs given the rapid growth
in the Bank, between September 30, 2009 and September 30, 2010.

Other operating expenses increased $556 thousand or 57.7%. The
increase was primarily due to increases in Pennsylvania bank shares taxes, credit reports/appraisal expenses, telephone and postage expense, filing/recording expenses, ATM/Debit card fees, and contribution/donations of $134 thousand, $126 thousand,
$118 thousand, $48 thousand, $48 thousand and $45 thousand, respectively.

Income Tax Expense

Income tax expense was $1.3 million and $820 thousand for the three month ended September 30, 2010 and 2009, respectively. Our effective tax rate for
the third quarter of 2010 was 33.8%. The effective tax rate was positively impacted by tax free income generated by the purchase of bank owned life insurance, dividends deductions for dividends paid on ESOP shares, and earnings from tax-exempt
securities. Our effective tax rate was 32.5% for the three months ended September 30, 2009. The statutory tax rates for 2010 and 2009 were 35.0% and 34.0%, respectively.

Nine Months Ended September 30, 2010 compared to the Nine Months Ended September 30, 2009

Net Interest Income

Net interest income increased $13.6 million or 55.2% to
approximately $38.3 million for the first nine months of 2010, as compared to approximately $24.7 million for the same period in 2009. The $13.6 million increase in net interest income includes $3.6 million as a result of the net contribution from
interest-earning assets and interest-earning liabilities derived from the Tower division acquired in the Merger, which was not included in the first three months of 2009 results of operations. Excluding the effect of the Merger, net interest income,
net of corporate interest expense, increased by $10.0 million or 40.8% over the nine months ended September 30, 2009. Net interest income as a percentage of net interest income plus non-interest income was 83.5% for the nine month ended
September 30, 2010, compared to 81.9% for the same period in 2009.



37



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##### Table of Contents



The following table provides a
comparative average balance sheet and net interest income analysis for the nine month period ended September 30, 2010 as compared to the same period in 2009. Interest income and average rates are presented on a fully taxable-equivalent (FTE)
basis, using a Federal tax rate of 35% for 2010 and 34% for 2009.



|                                                                                 |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|-------------------------------------------------------------------------------- |  | --------------------------------------- | --------- | - | -------- | - | ------ | ------- |  |  | ------- | - |  | -------- | --------- | - | ------- | - | ------ | - |  |  | ---- | -
|                                                                                 |  | For the Nine Months Ended September 30, |          
|                                                                                 |  | 2010                                    |           |   | 2009     |  
|                                                                                 |  | Average                                 |           |   |          |   |        | Average |  |  | Average |   |  |          |           |   | Average |  
|                                                                                 |  | Balance                                 |           |   | Interest |   |        | Rate    |  |  | Balance |   |  | Interest |           |   | Rate    |  
|                                                                                 |  | (dollars in thousands)                  |          
|Interest-earning assets:                                                         |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Federal funds sold and other                                                     |  | $                                       | 20,010    |   |          | $ | 98     |         |  |  | 0.65    | % |  | $        | 34,766    |   |         | $ | 83     |   |  |  | 0.32 | %
|Investment securities (1)                                                        |  |                                         | 181,018   |   |          |   | 3,358  |         |  |  | 2.48    | % |  |          | 50,043    |   |         |   | 1,058  |   |  |  | 2.83 | %
|Loans(2)                                                                         |  |                                         | 1,202,259 |   |          |   | 51,632 |         |  |  | 5.74    | % |  |          | 874,933   |   |         |   | 38,789 |   |  |  | 5.93 | %
|                                                                                 |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Total interest-earning assets                                                    |  |                                         | 1,403,287 |   |          |   | 55,088 |         |  |  | 5.25    | % |  |          | 959,742   |   |         |   | 39,930 |   |  |  | 5.56 | %
|                                                                                 |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Other assets                                                                     |  |                                         | 150,828   |   |          |   |        |         |  |  |         |   |  |          | 115,709   |   |         |   |        |   |  |  |      |  
|                                                                                 |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Total assets                                                                     |  | $                                       | 1,554,115 |   |          |   |        |         |  |  |         |   |  | $        | 1,075,451 |   |         |   |        |   |  |  |      |  
|                                                                                 |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|                                                                                 |  |                                         |           |   |          |  
|Interest-bearing liabilities:                                                    |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Interest-bearing non-maturity deposits                                           |  | $                                       | 749,017   |   |          |   | 6,470  |         |  |  | 1.15    | % |  | $        | 454,106   |   |         |   | 5,560  |   |  |  | 1.64 | %
|Time deposits                                                                    |  |                                         | 425,697   |   |          |   | 7,175  |         |  |  | 2.25    | % |  |          | 353,136   |   |         |   | 7,822  |   |  |  | 2.96 | %
|Borrowings                                                                       |  |                                         | 85,691    |   |          |   | 2,985  |         |  |  | 4.66    | % |  |          | 62,363    |   |         |   | 1,734  |   |  |  | 3.72 | %
|                                                                                 |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Total interest-bearing liabilities                                               |  |                                         | 1,260,405 |   |          |   | 16,630 |         |  |  | 1.77    | % |  |          | 869,605   |   |         |   | 15,116 |   |  |  | 2.32 | %
|                                                                                 |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Noninterest-bearing transaction accounts                                         |  |                                         | 114,534   |   |          |   |        |         |  |  |         |   |  |          | 79,974    |   |         |   |        |   |  |  |      |  
|Other liabilities                                                                |  |                                         | 14,138    |   |          |   |        |         |  |  |         |   |  |          | 27,365    |   |         |   |        |   |  |  |      |  
|Stockholders equity                                                             |  |                                         | 165,038   |   |          |   |        |         |  |  |         |   |  |          | 98,507    |   |         |   |        |   |  |  |      |  
|                                                                                 |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Total liabilities and stockholders equity                                       |  | $                                       | 1,554,115 |   |          |   |        |         |  |  |         |   |  | $        | 1,075,451 |   |         |   |        |   |  |  |      |  
|                                                                                 |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Net interest spread                                                              |  |                                         |           |   |          |   |        |         |  |  | 3.48    | % |  |          |           |   |         |   |        |   |  |  | 3.24 | %
|Net interest income and interest rate margin FTE                                 |  |                                         |           |   |          | $ | 38,458 |         |  |  | 3.66    | % |  |          |           |   |         | $ | 24,814 |   |  |  | 3.46 | %
|                                                                                 |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Tax equivalent adjustment                                                        |  |                                         |           |   |          |   | (135   | )       |  |  |         |   |  |          |           |   |         |   | (123   | ) |  |  |      |  
|                                                                                 |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Net interest income                                                              |  |                                         |           |   |          | $ | 38,323 |         |  |  |         |   |  |          |           |   |         | $ | 24,691 |   |  |  |      |  
|                                                                                 |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                                         | 111.3     | % |          |   |        |         |  |  |         |   |  |          | 110.4     | % |         |   |        |   |  |  |      |  
|                                                                                 |  |                                         |           |   |          |   |        |         |  |  |         |   |  |          |           |   |         |   |        |   |  |  |      |  



|(1) | The average yields for investment securities available for sale are reported on a fully taxable-equivalent basis at a rate of 35% for 2010 and 34% for 2009.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Average loan balances include non-accrual loans.
|--- | ------------------------------------------------

The following table summarizes the changes in FTE interest income and expense due to changes in average balances (volume) and changes in rates:



|                                       |                                           |                            |        |   |      |   |        |       |  |   |        |  
|-------------------------------------- | ----------------------------------------- | -------------------------- | ------ | - | ---- | - | ------ | ----- |  | - | ------ | -
|                                       |                                           | Nine Months Ended          |       
|                                       | September 30, 2010 vs. September 30, 2009 |                           
|                                       |                                           | Increase (Decrease) Due to |       
|                                       |                                           | Volume                     |        |   | Rate |   |        | Total | 
|                                       |                                           | (in thousands)             |       
|Interest income:                       |                                           |                            |        |   |      |   |        |       |  |   |        |  
|Federal funds sold                     |                                           | $                          | (85    | ) |      | $ | 100    |       |  | $ | 15     |  
|Investment securities                  |                                           |                            | 2,640  |   |      |   | (340   | )     |  |   | 2,300  |  
|Loans                                  |                                           |                            | 15,858 |   |      |   | (3,015 | )     |  |   | 12,843 |  
|                                       |                                           |                            |        |   |      |   |        |       |  |   |        |  
|Total interest income                  |                                           | $                          | 18,413 |   |      | $ | (3,255 | )     |  | $ | 15,158 |  
|                                       |                                           |                            |        |   |      |   |        |       |  |   |        |  
|Interest expense:                      |                                           |                            |        |   |      |   |        |       |  |   |        |  
|Interest-bearing non-maturity deposits |                                           | $                          | 4,654  |   |      | $ | (3,744 | )     |  | $ | 910    |  
|Time deposits                          |                                           |                            | 2,791  |   |      |   | (3,438 | )     |  |   | (647   | )
|Borrowings                             |                                           |                            | 746    |   |      |   | 505    |       |  |   | 1,251  |  
|                                       |                                           |                            |        |   |      |   |        |       |  |   |        |  
|Total interest expense                 |                                           |                            | 8,191  |   |      |   | (6,677 | )     |  |   | 1,514  |  
|                                       |                                           |                            |        |   |      |   |        |       |  |   |        |  
|Net interest income                    |                                           | $                          | 10,222 |   |      | $ | 3,422  |       |  | $ | 13,644 |  
|                                       |                                           |                            |        |   |      |   |        |       |  |   |        |  



38



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Interest income increased
approximately $15.2 million, or 38.0%. This increase was caused by approximately $443.5 million or 46.2% increase in the average balance of interest-earning assets, which resulted in approximately $18.4 million increase to interest income. This
increase was partially offset by a 31 basis point reduction in average rates that resulted in a reduction of interest income of approximately $3.3 million.

Interest income on investment securities increased approximately $2.3 million, or 217.4%. The average balance of investments held by the Bank increased from $50.0 million at September 30, 2009 to
$181.0 million at September 30, 2010, which resulted in an increase of approximately $2.6 million in interest income. The increase in the average balance of investment securities relates primarily to the addition of securities acquired through
the Merger as well as additional investments purchased with excess liquidity. Since March 31, 2009, the Company purchased collateralized mortgage obligation securities, government agency step-up securities, and SBA pooled loan securitizations
as well as other debt securities. These investments served as an initial way for management to deploy funds received through deposit growth and capital offerings into interest earning assets other than federal funds sold until the proceeds could be
used to fund loan growth. This increase is offset by the reduction in the interest rates earned on securities as compared to prior year resulting in a reduction of 35 basis points on the average rate and a reduction of interest income of $340
thousand.

Average yields on loans decreased 19 basis points from 5.93% during the first nine months of 2009 to 5.74% during the first nine
months of 2010. The Federal Reserve maintained the intended federal funds target rate between 0.08% and 0.25% during September, 30, 2010 and 2009. This rate continues to place downward pressure on the prime rate and all other lending rates, further
prolonging the reduced interest rate environment. Fixed rate loans, which represent approximately 24% of total average loans held at September 30, 2010, and do not reprice when short-term rates decline. Additionally, the total effect of
downward loan repricing on variable rate loans will not coincide with the decrease in the aforementioned rates due to the fact that approximately 88% of our total average variable rate loans at September 30, 2010 contain interest rate floors.
Any benefit associated with an increase in interest rates in the future might not be immediately realized due to the use of interest rate floors. Presumably, an increase in future interest rates would cause repricing in all assets and liabilities
linked to variable rate indices; however, as deposit products would experience any increase on a relatively immediate basis, loan products with floors in place would require a rate increase such that the resulting rate earned on the loan would
exceed the floor. Refer to Item 3 Quantitative and Qualitative Disclosures About Market Risk for a more detailed discussion of interest rate risk.

Interest expense increased $1.5 million, or 10.0% during the nine months ended September 30, 2010 compared to the same period in 2009. This increase was caused by approximately $390.8 million or
44.9% increase in the average balance of interest-bearing liabilities, which resulted in approximately $8.2 million increase to interest expense. This increase was predominately offset by a 56 basis point reduction in the average rate paid on
interest-bearing liabilities, which resulted in a reduction of interest expense of approximately $6.7 million. This reduction in average rates paid on interest-bearing liabilities was the result of lower rates paid on interest-bearing non-maturity
deposit accounts, time deposits, and borrowings.

In future periods, we expect an increase in the total amount of net interest income driven
by continued growth in average interest-earning assets, the continued use of floors in our variable rate commercial loan portfolio, further migration of assets from federal funds to loans and investments, and the continued repricing of our
interest-bearing deposit portfolio into lower rate products. Any significant changes such as movement in interest rates set by the Federal Reserve, changes in the performance of our interest earning assets, the continued repricing of assets, and the
inability to move deposit rates in similar increments as earning asset rates may mitigate this benefit in the future.

We manage our risk
associated with changes in interest rates through the techniques described in this Report under Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Provision for Loan Losses and Allowance for Loan Losses

The provision for loan
losses is the expense necessary to maintain the allowance for loan losses at a level adequate to absorb managements estimate of probable losses in the loan portfolio. Our provision for loan loss is based upon managements continuous
review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain risks associated with new loans, evaluate potential charge-offs and recoveries, and assess general economic
conditions in the markets we serve.



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The following table presents the
activity in the allowance for loan losses for the nine months ended September 30, 2010 and 2009 (in thousands):



|                               |  |                                |        |   |      |   |        |  
|------------------------------ |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                               |  | Nine months endedSeptember 30, |       
|                               |  | 2010                           |        |   | 2009 |  
|Balance at beginning of period |  | $                              | 9,695  |   |      | $ | 6,017  |  
|Provision for loan losses      |  |                                | 4,950  |   |      |   | 3,816  |  
|Charge-offs                    |  |                                |        |   |      |   |        |  
|Commercial:                    |  |                                |        |   |      |   |        |  
|Industrial                     |  |                                | (915   | ) |      |   | (1,102 | )
|Real estate                    |  |                                | (266   | ) |      |   | (65    | )
|Construction                   |  |                                |       |   |      |   | (150   | )
|Consumer:                      |  |                                |        |   |      |   |        |  
|Home equity line               |  |                                | (265   | ) |      |   | (7     | )
|Other                          |  |                                | (291   | ) |      |   | (148   | )
|Residential mortgage           |  |                                | (271   | ) |      |   | (7     | )
|                               |  |                                |        |   |      |   |        |  
|Total charge-offs              |  |                                | (2,008 | ) |      |   | (1,479 | )
|                               |  |                               
|Recoveries                     |  |                                |        |   |      |   |        |  
|Commercial:                    |  |                                |        |   |      |   |        |  
|Industrial                     |  |                                | 75     |   |      |   | 28     |  
|Real estate                    |  |                                |       |   |      |   |       |  
|Construction                   |  |                                | 2      |   |      |   | 1      |  
|Consumer:                      |  |                                |        |   |      |   |        |  
|Home equity line               |  |                                |       |   |      |   | 7      |  
|Other                          |  |                                | 1      |   |      |   |       |  
|Residential mortgage           |  |                                | 2      |   |      |   |       |  
|                               |  |                                |        |   |      |   |        |  
|Total recoveries               |  |                                | 80     |   |      |   | 36     |  
|                               |  |                                |        |   |      |   |        |  
|Net charge-offs                |  |                                | (1,928 | ) |      |   | (1,443 | )
|                               |  |                                |        |   |      |   |        |  
|Balance at end of period       |  | $                              | 12,717 |   |      | $ | 8,390  |  
|                               |  |                                |        |   |      |   |        |  

We continue to operate in a challenging economic environment. We have increased our allowance for loan loss in accordance
with our assessment process, which took into consideration risks related to the overall composition of our loan portfolio, the status of the current economic environment and other qualitative factors, and the results of managements risk
assessment process over delinquent and problem loans. The provision for loan losses for the nine months ended September 30, 2010 totaled $5.0 million, an increase of approximately $1.1 million compared to the same period in 2009. The gross loan
charge-offs that were applied to the allowance for loan loss during the nine months ended September 30, 2010 consisted of 15 commercial industrial loans, 2 commercial real estate loans, 1 commercial construction loan, 3 consumer home equity
lines, 10 other consumer loans and 6 mortgage loan totaling $2.0 million. Net allowance for loan loss charge-offs were 0.21% of average loans for the first nine months of 2010 on an annualized basis. Our allowance for loan loss as a percentage of
loans was 0.96% at September 30, 2010, compared to 0.85% at December 31, 2009.



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The following table presents changes
in the credit quality adjustment on loans purchased for the nine months ended September 30, 2010 and 2009 (in thousands):



|                                  |  |                   |        |   |      |   |       |  
|--------------------------------- |  | ----------------- | ------ | - | ---- | - | ----- | -
|                                  |  | Nine months ended |       
|                                  |  | September 30,     |       
|                                  |  | 2010              |        |   | 2009 |  
|Balance at beginning of period    |  | $                 | 2,942  |   |      | $ |      |  
|Credit fair value adjustment Mark |  |                   |       |   |      |   | 4,044 |  
|Amortization                      |  |                   | (495   | ) |      |   | (520  | )
|Charge-offs                       |  |                   |        |   |      |   |       |  
|Commercial:                       |  |                   |        |   |      |   |       |  
|Industrial                        |  |                   | (377   | ) |      |   | (30   | )
|Real estate                       |  |                   | (160   | ) |      |   |      |  
|Construction                      |  |                   |       |   |      |   |      |  
|Consumer:                         |  |                   |        |   |      |   |       |  
|Home equity line                  |  |                   | (19    | ) |      |   | (5    | )
|Other                             |  |                   | (210   | ) |      |   | (156  | )
|Residential mortgage              |  |                   | (263   | ) |      |   | (75   | )
|                                  |  |                   |        |   |      |   |       |  
|Total charge-offs                 |  |                   | (1,029 | ) |      |   | (266  | )
|                                  |  |                  
|Recoveries                        |  |                   |        |   |      |   |       |  
|Commercial:                       |  |                   |        |   |      |   |       |  
|Industrial                        |  |                   | 27     |   |      |   | 4     |  
|Real estate                       |  |                   |       |   |      |   |      |  
|Construction                      |  |                   |       |   |      |   |      |  
|Consumer:                         |  |                   |        |   |      |   |       |  
|Home equity line                  |  |                   | 1      |   |      |   |      |  
|Other                             |  |                   | 61     |   |      |   | 7     |  
|Residential mortgage              |  |                   | 2      |   |      |   | 2     |  
|                                  |  |                   |        |   |      |   |       |  
|Total recoveries                  |  |                   | 91     |   |      |   | 13    |  
|                                  |  |                   |        |   |      |   |       |  
|Net charge-offs                   |  |                   | (938   | ) |      |   | (253  | )
|                                  |  |                   |        |   |      |   |       |  
|Balance at end of period          |  | $                 | 1,509  |   |      | $ | 3,271 |  
|                                  |  |                   |        |   |      |   |       |  

The gross loan charge-offs that were applied to the credit quality adjustment on purchased loans for the nine months ended
September 30, 2010 consisted of 11 commercial industrial loans, 1 commercial real estate loan, 4 consumer home equity lines, 33 other consumer loans and 5 residential mortgage loans totaling $1.0 million. Net credit mark charge-offs were 0.11%
of average loans for the first nine months of 2010 on an annualized basis.

The total gross loan charge-offs during the nine months ended
September 30, 2010 consisted of 91 loans totaling $3.0 million. Net total charge-offs were 0.32% of average loans for the first nine months of 2010 on an annualized basis. Our adjusted (Non-GAAP) allowance for loan losses, that is the allowance
for loan losses adjusted to include the credit quality adjustment on loans purchased, as a percentage of loans was 1.07% at September 30, 2010, compared to 1.11% at December 31, 2009. See an explanation of this Non-GAAP measure later in
this filing on page 46 within Managements Discussion and Analysis of our loan portfolio performance. Determining the level of the allowance for probable loan loss at any given point in time is difficult, particularly during uncertain economic
periods. We must make estimates using assumptions and information that is often subjective and changing rapidly. The review of the loan portfolio is a continuing process in light of a changing economy and the dynamics of the banking and regulatory
environment. In our opinion, the allowance for loan loss is adequate to meet probable incurred loan losses at September 30, 2010. There can be no assurance, however, that we will not sustain loan losses in future periods that could be greater
than the size of the allowance at September 30, 2010. Management believes that the allowance for loan loss is appropriate based on applicable accounting standards.

Non-Interest Income

In addition to our focus on increasing net interest income
through growth of interest-earning assets and expansion in our net interest spread, we remain committed to increasing non-interest income as a way to improve profitability and diversify our sources of revenue.

Non-interest income was approximately $7.6 million and $5.5 million for the nine months ended September 30, 2010 and 2010, respectively.



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The following table presents the
components of non-interest income (in thousands):



|                                                   |      |               |       |      |               |   |       |                     |  |   |       |  |  |  |      |  
|-------------------------------------------------- | ---- | ------------- | ----- | ---- | ------------- | - | ----- | ------------------- |  | - | ----- |  |  |  | ---- | -
|                                                   |      | September 30, |       |      | September 30, |   |       | Increase (Decrease) | 
|                                                   | 2010 |               |       | 2009 |               |   | $     |                     |  | % |      
|Service charges on deposit accounts                |      | $             | 2,377 |      |               | $ | 1,506 |                     |  | $ | 871   |  |  |  | 57.8 | %
|Other service charges, commissions and fees        |      |               | 1,788 |      |               |   | 1,475 |                     |  |   | 313   |  |  |  | 21.2 | %
|Gain on sale of mortgage loans originated for sale |      |               | 1,250 |      |               |   | 1,182 |                     |  |   | 68    |  |  |  | 5.8  | %
|Gain on sale of other interest earning assets      |      |               | 260   |      |               |   | 156   |                     |  |   | 104   |  |  |  | 66.7 | %
|Income from bank owned life insurance              |      |               | 1,390 |      |               |   | 725   |                     |  |   | 665   |  |  |  | 91.7 | %
|Other income                                       |      |               | 512   |      |               |   | 431   |                     |  |   | 81    |  |  |  | 18.8 | %
|                                                   |      |               |       |      |               |   |       |                     |  |   |       |  |  |  |      |  
|Total non-interest income                          |      | $             | 7,577 |      |               | $ | 5,475 |                     |  | $ | 2,102 |  |  |  | 38.4 | %
|                                                   |      |               |       |      |               |   |       |                     |  |   |       |  |  |  |      |  

The $2.1 million or 38.4% increase in total non-interest income is attributable to increases in service charges on
deposit accounts, other service charges and fees, and income recognized on the cash surrender value of bank owned life insurance. The increase in services charges on deposit accounts and other services charges is due 45.5% increase in average
deposits from third quarter 2009. Income from bank owned life insurance increased as a result of appreciation in the cash surrender value of life insurance contracts acquired through the Merger and purchased during the second quarter 2010, as that
income would not have been present in the results of operations for the same period of 2009.

Non-Interest Expense

Non-interest expense was approximately $32.7 million and $24.1 million for the nine months ended September 30, 2010 and 2009, respectively.
Excluding the effects of merger related expenses and a $920 thousand impairment charge taken on land held for investment, non-interest expense for the nine months ending September 30, 2010 would have totaled approximately $31.5 million, up
approximately $9.1 million or 40.6% from $22.4 million for the same period 2009.

The following table presents the components of non-interest
expenses (in thousands):



|                                  |  |               |        |  |               |   |        |                     |  |   |        |   |  |  |       |   
|--------------------------------- |  | ------------- | ------ |  | ------------- | - | ------ | ------------------- |  | - | ------ | - |  |  | ----- | --
|                                  |  | September 30, |        |  | September 30, |   |        | Increase (Decrease) | 
|                                  |  | 2010          |        |  | 2009          |   |        | $                   |  |   | %      |  
|Salaries and employee benefits    |  | $             | 15,996 |  |               | $ | 11,523 |                     |  | $ | 4,473  |   |  |  | 38.8  | % 
|Occupancy and equipment           |  |               | 5,236  |  |               |   | 3,664  |                     |  |   | 1,572  |   |  |  | 42.9  | % 
|Amortization of intangible assets |  |               | 496    |  |               |   | 354    |                     |  |   | 142    |   |  |  | 40.1  | % 
|FDIC insurance premiums           |  |               | 1,500  |  |               |   | 1,320  |                     |  |   | 180    |   |  |  | 13.6  | % 
|Advertising and promotion         |  |               | 740    |  |               |   | 422    |                     |  |   | 318    |   |  |  | 75.4  | % 
|Data processing                   |  |               | 1,894  |  |               |   | 1,414  |                     |  |   | 480    |   |  |  | 33.9  | % 
|Professional service fees         |  |               | 1,197  |  |               |   | 843    |                     |  |   | 354    |   |  |  | 42.0  | % 
|Impairment on fixed assets        |  |               | 920    |  |               |   |       |                     |  |   | 920    |   |  |  | n/a   |   
|Other operating expenses          |  |               | 4,436  |  |               |   | 2,858  |                     |  |   | 1,578  |   |  |  | 55.2  | % 
|Merger related expenses           |  |               | 304    |  |               |   | 1,722  |                     |  |   | (1,418 | ) |  |  | (82.3 | )%
|                                  |  |               |        |  |               |   |        |                     |  |   |        |   |  |  |       |   
|Total non-interest expenses       |  | $             | 32,719 |  |               | $ | 24,120 |                     |  | $ | 8,599  |   |  |  | 35.7  | % 
|                                  |  |               |        |  |               |   |        |                     |  |   |        |   |  |  |       |   

Salary and employee benefits increased $4.5 million or 38.8%. Salaries increased by $3.0 million while employee
benefits increased by $1.5 million. Salaries and employee benefits directly related to the Tower Bank Division branches acquired in the Merger contributed approximately $1.1 million to the increase in salary and benefit expenses for the first nine
months of 2010. Additionally, we continued to add additional personnel to our operations, finance, credit, and lending departments to support our balance sheet growth and in preparation for the pending acquisition of First Chester. The Company also
incurred $351 thousand related to the adoption of a deferred compensation plan for certain executive officers during 2010. We also incurred general merit increases for all eligible employees between September 30, 2009 and September 30,
2010. These increases were partially offset by a reduction in the bank performance incentive bonus accrual compared to third quarter of 2009 based on the level of achievement of the relative performance metrics within the bonus plan.

Occupancy and equipment expense increased $1.6 million or 42.9%. The increase was partially related to the additional expense attributable to the Tower
Bank divisions branches which contributed $579 thousand to occupancy and equipment expense. The remaining building and equipment expense increase related to the addition of four branch offices during 2009 and the first nine months of 2010 and
the lease of the corporate center office space during the third quarter of 2009.



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On February 27, 2009, the FDIC
announced that it was increasing federal deposit insurance premiums, beginning the second quarter of 2009, for all well managed, well capitalized banks to a range between 12 and 16 cents per $100 of insured deposits on an annual basis. At
September 30, 2010, we had approximately $1.1 billion in FDIC-insured deposits compared to $874.3 million at September 30, 2009. During the second quarter of 2009, the FDIC imposed a special assessment on all FDIC-insured banks based in
the total assets and Tier I capital as of June 30, 2009. At June 30, 2009, the Company recorded an estimated expense for the special assessment of $580 thousand. No special assessment fees were recognized during the first nine months of
2010.

Advertising and promotion expenses increased $318 thousand or 75.4%. The increase in advertising and promotions relates to the
Companys increased advertising costs due to branch openings since prior year, our promotion of new loan and deposit products, and increases in costs related to our checking account rewards program.

Professional service expenses increased $354 thousand or 42.0% and data processing expense increased $480 thousand or 33.9%. These increases are directly
related to increased audit, consulting and legal services, along with increased data processing costs given the rapid growth in the Bank, between September 30, 2009 and September 30, 2010.

The impairment of fixed asset expense relates to undeveloped land that was acquired as part of the Merger. The impairment charge was based on a
significant drop in the fair value of the land between the time of the Merger, March 31, 2009 and September 30, 2010. The Company owns other no undeveloped land as of September 30, 2010.

Other operating expenses increased $1.6 million or 55.2%. The portion of the increase that can be attributed directly to the Tower Bank branches equaled
$113 thousand for the nine months ended September 30, 2010. The remaining increase was primarily due to increases in Pennsylvania bank shares taxes, credit report and appraisal fees, ATM/Debit fees, filing/recording expenses,
contributions/donations, internal meeting expenses, and other than temporary impairment losses of $412 thousand, $201 thousand, $99 thousand, $65 thousand, $63 thousand, $64 thousand and $70 thousand, respectively, offset by decline in other
expenses related to the early retirement of debt of $119 thousand during the second quarter 2009.

Income Tax Expense

Income tax expense was $2.6 million for the nine months ended September 30, 2010. For the nine month ended September 30,
2009, the income tax benefit was $577 thousand. Our effective tax rate for the six months ended September 30, 2010 was 32.2%. The effective tax rate was positively impacted by tax free income generated by the purchase of bank owned life
insurance, dividend deductions for dividends paid on ESOP shares and earnings from tax-exempt securities. Our effective tax rate was 25.9% for the nine months ended September 30, 2009. The statutory tax rates for 2010 and 2009 were 35.0% and
34.0%, respectively.

Financial Condition

Total Assets

Total assets increased by $148.3 million, or 10.1%, from
December 31, 2009 to September 30, 2010. The increase is primarily due to the increase in net loans of $180.2 million, offset by the decline in cash and equivalent of $4.3 million and securities held for sale of $44.4 million.

Loans, net

Our gross loan
balance grew by $183.2 million, or 16.1%, to $1.32 billion as of September 30, 2010. During the first nine months of 2010, new loan originations totaled $268.3 million. These new loans were offset by a net decrease in existing loan
balances of $81.7 million. The net decrease in existing loan balances during the first nine months included the net decrease of approximately $14.7 million of mortgages previously held in the Companys loan portfolio. Management believes that
there continues to be opportunities to bring quality existing credits into our bank from our competitors, coupled with demand for commercial and consumer loans to credit qualified businesses and individuals within the Companys market areas,
which management anticipates will result in additional loan growth.



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See the table below for a detail of
the loan balances, net of unearned income and allowance for loan losses at September 30, 2010 and the changes from December 31, 2009:



|                          |  |                        |           |   |              |   |           |                     |  |   |         |   |  |  |       |   
|------------------------- |  | ---------------------- | --------- | - | ------------ | - | --------- | ------------------- |  | - | ------- | - |  |  | ----- | --
|                          |  | September 30,          |           |   | December 31, |   |           | Increase/(Decrease) | 
|                          |  | 2010                   |           |   | 2009         |   |           | $                   |  |   | %       |  
|                          |  | (dollars in thousands) |          
|Commercial:               |  |                        |           |   |              |   |           |                     |  |   |         |   |  |  |       |   
|Industrial                |  | $                      | 707,114   |   |              | $ | 599,708   |                     |  | $ | 107,406 |   |  |  | 17.9  | % 
|Real estate               |  |                        | 179,064   |   |              |   | 159,948   |                     |  |   | 19,116  |   |  |  | 12.0  | % 
|Construction              |  |                        | 138,863   |   |              |   | 102,017   |                     |  |   | 36,846  |   |  |  | 36.1  | % 
|Consumer & other          |  |                        |           |   |              |   |           |                     |  |   |         |   |  |  |       |   
|Home equity lines         |  |                        | 85,921    |   |              |   | 49,239    |                     |  |   | 36,682  |   |  |  | 74.5  | % 
|Other                     |  |                        | 34,100    |   |              |   | 36,271    |                     |  |   | (2,171  | ) |  |  | (6.0  | )%
|Residential mortgage      |  |                        | 176,555   |   |              |   | 191,277   |                     |  |   | (14,722 | ) |  |  | (7.7  | )%
|                          |  |                        |           |   |              |   |           |                     |  |   |         |   |  |  |       |   
|Total Loans               |  |                        | 1,321,617 |   |              |   | 1,138,460 |                     |  |   | 183,157 |   |  |  | 16.1  | % 
|Deferred costs (fees)     |  |                        | (80       | ) |              |   | (189      | )                   |  |   | 109     |   |  |  | (57.7 | )%
|Allowance for loan losses |  |                        | (12,717   | ) |              |   | (9,695    | )                   |  |   | (3,022  | ) |  |  | 31.2  | % 
|                          |  |                        |           |   |              |   |           |                     |  |   |         |   |  |  |       |   
|Net Loans                 |  | $                      | 1,308,820 |   |              | $ | 1,128,576 |                     |  | $ | 180,244 |   |  |  | 16.0  | % 
|                          |  |                        |           |   |              |   |           |                     |  |   |         |   |  |  |       |   

The commercial loan portfolio continues to be the largest component of our loan portfolio, representing 77.5% and
75.7% of total loans at September 30, 2010 and December 31, 2009, respectively. In addition, we have $104.8 million in loan participations without recourse sold to unaffiliated banks through September 30, 2010, where we maintain
the servicing rights with these relationships. Currently, the bank is participating in 33 loans purchased from unaffiliated banks. The total outstanding balance of these loans is $66.5 million. These participations include 16 loans purchased from
First National Bank of Chester County at 98.5% of par. The net purchase price of these loans was $51.7 million. The borrowers on all these loans are in-market customers and the Company has not experienced any losses due to nonperformance. During the
first nine months of 2010, one of these purchased loans was fully paid off. Currently, the carrying balance of the remaining purchased loans from First National Bank of Chester County is $49.0 million.

Additionally, we have not participated in any shared national credit programs and we do not have any shared national credits in our loan portfolio. We
expect continued loan growth in the future, as we focus on serving the credit needs of our market areas, while exercising prudent underwriting standards considering the economic uncertainties that are expected to continue.

The following is a summary of our lending activities based on our current loan portfolio

Lending Activities

Our principal lending activity has been the origination of
business and commercial real estate loans, commercial and industrial loans, and personal consumer loans to customers located within our primary market areas. We generally release the servicing rights on residential mortgage loans that we sell which
results in additional gains on sale. We also originate and retain in our lending portfolio various types of home equity and consumer loan products.

Commercial Lending

Our commercial loan portfolio includes business term loans and lines of
credit issued to small and medium size companies in our market areas, some of which are secured in part by additional owner occupied real estate. Additionally, we make secured and unsecured commercial loans and extend lines of credit for the purpose
of financing equipment purchases, inventory, business expansion, working capital, and other general business purposes. The terms of these loans generally range from less than 1 year to 7 years with a maximum term to not exceed 10 years, carrying a
fixed interest rate or a variable interest rate indexed to LIBOR or our prime rate. It is our standard practice to issue lines of credit due on demand, accruing interest at a variable interest rate indexed to either LIBOR or our prime rate.

We originate commercial real estate loans secured predominantly by first liens on apartment complexes, office buildings, lodging facilities
and industrial and warehouse properties. The maximum term that we offer for commercial real estate loans is generally not more than 10 years, with a payment schedule based on not more than a 25-year amortization schedule and a maximum
loan-to-value of 80%. Our current policy with regard to these loans is to minimize our risk by emphasizing diversification of these property types.

Additionally, we offer construction and land development financing secured by the corresponding real estate and other collateral as necessary to meet our underwriting standards. Terms for construction and
land development financing vary based on the depth of the project usually requiring a maximum loan-to-value ratio of 65% to 80% and a term typically ranging from 12 to 36 months. The construction/development loan application process includes the
same criteria which are required for our permanent commercial mortgage loans, as well as a submission of completed plans, specifications, and cost estimates related to the proposed construction. We use these items as an additional basis to determine
the appraised value of



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the subject property. The appraisal is an important component because construction loans involve additional risks related to advancing loan funds upon the security of the project under
construction, which is of uncertain value prior to the completion of construction and subsequent pro-forma lease-up. Additional underwriting considerations for these projects include but are not limited to, market analysis, the borrowers debt
service capacity during the project, environmental evaluations, and pre-sale activity.

Residential Real Estate Lending

The majority of the residential mortgage loans on our balance sheet have been acquired through the Merger. We originate mortgage loans through our
subsidiary, Graystone Mortgage, LLC, to enable our customers to finance residential real estate, both owner occupied and non-owner occupied, in our primary market areas. We generally offer traditional fixed-rate and adjustable-rate mortgage
(ARM) products, with monthly payment options, that have maturities up to 30 years, and maximum loan amounts generally up to $750 thousand.

We generally sell newly originated conventional 15 to 30 year fixed-rate loans as well as FHA and VA loans in the secondary market to wholesale lenders. Our LTV requirements for residential real
estate loans vary depending on the secondary market investor. Loans with LTVs in excess of 80% are required to carry private mortgage insurance. We generally originate loans that meet accepted secondary market underwriting standards.

Home Equity Lending

We offer
fixed-rate, fixed-term, monthly home equity loans, and prime-based home equity lines of credit (HELOCs) in our market areas. We offer both fixed-rate and floating-rate home equity products in amounts up to 85% of the appraised value of
the property (including the first mortgage) with a maximum loan amount generally up to $1 million. We offer monthly fixed-rate home equity loans and HELOCs with repayment terms generally up to 15 years. The minimum line of credit is $10
thousand and the maximum generally up to $1 million with exceptions as approved.

Consumer Loans

We offer a variety of fixed-rate installment and variable rate line-of-credit consumer loans, including direct automobile loans as well as personal
secured and unsecured loans. Terms of these loans range from 6 months to 72 months and generally do not exceed $50 thousand. Secured loans are collateralized by vehicles, savings accounts, or certificates of deposit. We only approve
unsecured loans for our more creditworthy customers.



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Loan Portfolio Performance

The table below sets forth, for the periods indicated, information with respect to our non-accrual loans, accruing loans greater than
90 days past due, total nonperforming loans, other real estate owned, total nonperforming assets, and selected asset quality ratios.



|                                                                      |  |                        |           |   |              |   |           |  
|--------------------------------------------------------------------- |  | ---------------------- | --------- | - | ------------ | - | --------- | -
|                                                                      |  | September 31,          |           |   | December 31, |  
|                                                                      |  | 2010                   |           |   | 2009         |  
|                                                                      |  | (dollars in thousands) |          
|Total loans outstanding, net of unearned income                       |  | $                      | 1,334,388 |   |              | $ | 1,146,305 |  
|Daily average balance of loans                                        |  |                        | 1,202,259 |   |              |   | 909,476   |  
|                                                                      |  |                       
|Non-accrual loans                                                     |  | $                      | 13,757    |   |              | $ | 4,718     |  
|Accruing loans greater than 90 days past due                          |  |                        | 1,529     |   |              |   | 2,106     |  
|                                                                      |  |                        |           |   |              |   |           |  
|Total non-performing loans                                            |  |                        | 15,286    |   |              |   | 6,824     |  
|                                                                      |  |                       
|Other real estate owned                                               |  |                        | 879       |   |              |   | 927       |  
|                                                                      |  |                        |           |   |              |   |           |  
|Total non-performing assets                                           |  |                        | 16,165    |   |              |   | 7,751     |  
|                                                                      |  |                       
|Allowance for loan losses                                             |  |                        | 12,717    |   |              |   | 9,695     |  
|Credit fair value adjustment on loans purchased                       |  |                        | 1,509     |   |              |   | 2,942     |  
|                                                                      |  |                        |           |   |              |   |           |  
|Adjusted (Non-GAAP) allowance for loan losses                         |  | $                      | 14,226    |   |              | $ | 12,637    |  
|                                                                      |  |                       
|Non-accrual loans to total loans(1)                                   |  |                        | 1.04      | % |              |   | 0.41      | %
|Non-performing assets to total assets                                 |  |                        | 1.00      | % |              |   | 0.53      | %
|Non-performing loans to total loans(1)                                |  |                        | 1.15      | % |              |   | 0.60      | %
|Allowance for loan losses to total loans(1)                           |  |                        | 0.96      | % |              |   | 0.85      | %
|Adjusted (Non-GAAP) allowance for loan losses to total loans(1)       |  |                        | 1.07      | % |              |   | 1.11      | %
|                                                                      |  |                       
|Allowance for loan losses to non-performing loans                     |  |                        | 83.19     | % |              |   | 142.07    | %
|Adjusted (Non-GAAP) allowance for loan losses to non-performing loans |  |                        | 93.07     | % |              |   | 185.18    | %



|(1) | Total loans balance excludes purchased impaired loans accounted for under SOP 03-3 acquired as part of the merger between Tower Bancorp Inc. and Graystone Financial
Corp. The total balance of these loans is $6,470 as of September 30, 2010, $6,200 as of December 31, 2009.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

GAAP
requires that expected credit losses associated with loans obtained in an acquisition be reflected at fair value as of each respective acquisition date and prohibits the carryover of the acquired entitys allowance for loan losses. Accordingly,
the Companys management believes that presentation of the adjusted (Non-GAAP) allowance for loan losses, consisting of the allowance for loan losses plus the credit fair value adjustment on loans purchased in merger transactions, is useful for
investors to understand the complete allowance that is recorded as a representation of future expected losses over the Companys loan portfolio

The accounting estimates for loan losses are subject to changing economic conditions. At September 30, 2010, the non-accrual loans totaled $13.8 million compared to $4.7 million at December 31,
2009. Of the $13.8 million of total non-accrual loans at September 30, 2010, $11.6 million or 84.1% related to commercial loans, $124 thousand or 0.9% to consumer loans and $2.1 million or 15.0% to residential mortgage loans. When analyzing the
non-accrual loans on an individual basis, the increase included one commercial relationship filing for Chapter 11 bankruptcy protection during the first quarter of 2010. The total loan relationship to this customer is $5.0 million as of
September 30, 2010.

As of September 30, 2010, we had total impaired loans of $18.1 million. Included in impaired loans are loans on
which management has stopped accruing interest in accordance with our loan accounting policy and impaired loans purchased as a result of the Merger. Management discontinues the accrual of interest on a loan when the contractual payment of principal
or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. The impaired loan balance includes $4.3 million of impaired loans acquired
as part of the Merger, which were recorded at their individual fair values at the time of Merger as determined based on managements estimate of future cash flows. For the remaining impaired loans, management performed an evaluation of the
anticipated cash flow from the sale of collateral to determine that the value of the collateral exceeded the carrying amount of the loan. Based



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on these evaluations, management has determined that a reserve of $200 thousand is required against the impaired loans at September 30, 2010.

Management has performed a detailed review of the non-performing loans and of their related collateral and believes the allowance for loan losses remains
adequate for the level of risk inherent in the loan portfolio. It is our policy that non-performing loans will remain classified as non-performing until such time that the loan becomes current on all principal and interest payments and remains
current for a period of six months. For loans where the original terms have been modified, we would not consider the modified loan to be performing until the borrower demonstrates their performance under the modified terms for a period of at least
six months.

During 2009 and the first nine months of 2010, the banking industry experienced increasing defaults in mortgage loans coupled
with decreasing values of real estate values as a result of an economic downturn. In addition, the prolonged economic downturn present throughout 2009 and continuing into 2010 has resulted in increased delinquencies in our loan portfolio. Through
our loan approval process and diligent loan monitoring, we have experienced a relatively low percentage of non-performing loans when compared to the total amount of loans.

Other real estate owned consists of eight properties totaling $879 thousand at September 30, 2010. These properties have been through the foreclosure process and are currently in the process of being
sold. These properties are recorded at their lower of cost or fair value less costs to sell.

Securities Available for Sale

The following table presents the amortized cost and fair value of investment securities for the September 30, 2010 and
December 31, 2009 in thousands.



|                                                            |  |                    |         |  |                   |   |         |               |  |   |            |  |  |   |         | 
|----------------------------------------------------------- |  | ------------------ | ------- |  | ----------------- | - | ------- | ------------- |  | - | ---------- |  |  | - | ------- | 
|                                                            |  | September 30, 2010 |         |  | December 31, 2009 |  
|                                                            |  | AmortizedCost      |         |  | Fair Value        |   |         | AmortizedCost |  |   | Fair Value | 
|Equity securities                                           |  | $                  | 120     |  |                   | $ | 120     |               |  | $ | 1,156      |  |  | $ | 1,132   | 
|U.S. Government sponsored agency securities                 |  |                    | 27,040  |  |                   |   | 27,079  |               |  |   | 56,437     |  |  |   | 56,384  | 
|U.S. Government sponsored agency mortgage backed securities |  |                    | 11,830  |  |                   |   | 11,931  |               |  |   | 9,109      |  |  |   | 9,116   | 
|Collateralized mortgage obligations                         |  |                    | 73,626  |  |                   |   | 74,683  |               |  |   | 93,058     |  |  |   | 92,485  | 
|Municipal bonds                                             |  |                    | 10,929  |  |                   |   | 11,341  |               |  |   | 7,093      |  |  |   | 7,188   | 
|Municipal bonds  taxable                                   |  |                    | 10,360  |  |                   |   | 10,374  |               |  |   | 12,917     |  |  |   | 12,910  | 
|SBA loan pool investments                                   |  |                    | 9,765   |  |                   |   | 9,900   |               |  |   | 10,710     |  |  |   | 10,638  | 
|                                                            |  |                    |         |  |                   |   |         |               |  |   |            |  |  |   |         | 
|Total securities available for sale                         |  | $                  | 143,670 |  |                   | $ | 145,428 |               |  | $ | 190,480    |  |  | $ | 189,853 | 
|                                                            |  |                    |         |  |                   |   |         |               |  |   |            |  |  |   |         | 

At September 30, 2010, total available for sale securities were $145.4 million, a decrease of $44.4 million from total
available for sale securities of $189.9 million at December 31, 2009. During the first nine months of 2010, the Bank purchased $73.8 million in securities, offset by the net sales, calls, pay downs and maturities of $119.6 million and a net
increase in market value of securities of $1.6 million. Proceeds from the sale and maturity of securities were used as a source of funding for new loans during the quarter. Since March 31, 2009, we have purchased debt securities and sold
various debt and equity securities to realign the holdings within the investment portfolio to our overall investment strategy.

Bank-owned Life Insurance

At
September 30, 2010, the total cash surrender value of the bank-owned life insurance (BOLI) was $37.9 million. The Company purchased $12.0 million of BOLI during the second quarter of 2010. The BOLI was purchased as a means to
offset a portion of current and future employee benefit costs. The Banks deposits and proceeds from the sale of investment securities were used to fund the BOLI. Earnings from the BOLI are recognized as other income and are treated as tax-free
earnings. The BOLI is profitable from the appreciation of the cash surrender value of the pool of insurance, and its tax advantage to the Company.

Deposits

Total deposits at September 30, 2010 were $1.36 billion, an
increase of $139.2 million from total deposits of $1.22 billion at December 31, 2009.



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The table below displays the increases
in deposits by type at September 30, 2010 as compared to December 31, 2009. All dollar amounts are in thousands.



|                                         |  |                    |           |  |                   |  |       |                   |  |   |           |  |  |        |       |   |   |   |         |   |  |  |       |   
|---------------------------------------- |  | ------------------ | --------- |  | ----------------- |  | ----- | ----------------- |  | - | --------- |  |  | ------ | ----- | - | - | - | ------- | - |  |  | ----- | --
|                                         |  | September 30, 2010 |           |  | December 31, 2009 |  |       | Increase/Decrease | 
|                                         |  | Amount             |           |  | %                 |  |       | Amount            |  |   | %         |  |  | Amount |       |   | % |  
|Noninterest-bearing transaction accounts |  | $                  | 125,174   |  |                   |  | 9.2   | %                 |  | $ | 119,116   |  |  |        | 9.8   | % |   | $ | 6,058   |   |  |  | 5.1   | % 
|Interest checking accounts               |  |                    | 124,106   |  |                   |  | 9.2   | %                 |  |   | 110,356   |  |  |        | 9.0   | % |   |   | 13,750  |   |  |  | 12.5  | % 
|Money market accounts                    |  |                    | 604,151   |  |                   |  | 44.6  | %                 |  |   | 477,292   |  |  |        | 39.2  | % |   |   | 126,859 |   |  |  | 26.6  | % 
|Savings accounts                         |  |                    | 70,138    |  |                   |  | 5.2   | %                 |  |   | 87,117    |  |  |        | 7.2   | % |   |   | (16,979 | ) |  |  | (19.5 | )%
|Time deposits of $100,000 or greater     |  |                    | 145,694   |  |                   |  | 10.7  | %                 |  |   | 130,938   |  |  |        | 10.8  | % |   |   | 14,756  |   |  |  | 11.3  | % 
|Time deposits, other                     |  |                    | 286,454   |  |                   |  | 21.1  | %                 |  |   | 291,650   |  |  |        | 24.0  | % |   |   | (5,196  | ) |  |  | (1.8  | )%
|                                         |  |                    |           |  |                   |  |       |                   |  |   |           |  |  |        |       |   |   |   |         |   |  |  |       |   
|Total deposits                           |  | $                  | 1,355,717 |  |                   |  | 100.0 | %                 |  | $ | 1,216,469 |  |  |        | 100.0 | % |   | $ | 139,248 |   |  |  | 11.4  | % 
|                                         |  |                    |           |  |                   |  |       |                   |  |   |           |  |  |        |       |   |   |   |         |   |  |  |       |   

The Company continues to manage the size, mix, and cost of the deposit portfolio with the goal of lowering current
deposit costs and positioning the cost of the portfolio in the future. In-market non-maturity deposits have increased by $129.7 million between December 31, 2009 and September 30, 2010. In-market time deposits increased $9.6 million
between December 31, 2009 and September 30, 2010. The Company realized a decrease of 19 basis points in the three-month weighted average rate of in-market deposits between December 31, 2009 and September 30, 2010.

The Company has used various brokered deposit products as tools to manage deposit costs, interest rate risk, and the mix of deposits. The money market
accounts include $68.9 million and $23.1 million of brokered money market deposits at September 30, 2010 and December 31, 2009, respectively. The brokered money market products are indexed to the one-month LIBOR and provide an effective
funding source for LIBOR-indexed lending. The time deposits include $79.4 million and $38.0 million of brokered certificates of deposit at September 30, 2010 and December 31, 2009, respectively. The total brokered time deposits include
reciprocal brokered time deposits of $41.2 million and $15.0 million at September 30, 2010 and December 31, 2009, respectively. Overall, total brokered deposits increased to $148.3 million or approximately 10.9 % of our total deposits
at September 30, 2010 as compared to $61.1 million or 5.0% of total deposits at December 31, 2009. Total brokered deposits, exclusive of reciprocal deposits, represented 7.9% and 3.8% of total deposits, respectively at September 30,
2010 and December 31, 2009. Though brokered deposits exclusive of reciprocal deposits are currently less than 10.0% of total deposit, any significant unforeseen changes to the deposit portfolio could cause the brokered deposits to exceed 10.0%,
exposing the Company to additional FDIC assessment fees.

Money market deposits at September 30, 2010 increased by $126.9 million or
26.6% from December 31, 2009 as a result of an increase in in-market growth of $81.1 million and brokered money market deposits of $45.8 million. Time deposit balances at September 30, 2010 increased by $9.7 million or 2.3% from
December 31, 2010. This net decrease reflected a decrease of $31.6 million of in-market time deposits and an increase of $41.3 million of out-of-market brokered deposits. The Company realized a decrease of 22 basis points in the three-month
weighted average rate of time deposits between December 31, 2009 and September 30, 2010. Time deposits represent 31.9% of total deposits at September 30, 2010 compared to 34.8% of total deposits at December 31, 2009.

During the third quarter of 2010, the Company reduced the interest rate paid on certain savings products to better align the pricing strategies of
non-maturity deposit products. As a result of the pricing changes, a portion of the balances in the savings product shifted to the money market products.

The average balances and weighted average rates paid on deposits for the first nine months of 2010 and 2009 are presented in the table below (dollars in thousands):



|                                         |  |                    |           |  |                    |  |      |                                       |  |   |             |  |  |   |      |   |   |   |         |   |  |  |      |   
|---------------------------------------- |  | ------------------ | --------- |  | ------------------ |  | ---- | ------------------------------------- |  | - | ----------- |  |  | - | ---- | - | - | - | ------- | - |  |  | ---- | --
|                                         |  | September 30, 2010 |           |  | September 30, 2009 |  |      | Increase/(Decrease) inaverage balance | 
|                                         |  | AverageBalance     |           |  | AverageRate        |  |      | AverageBalance                        |  |   | AverageRate |  |  | $ |      |   | % |  
|Noninterest-bearing transaction accounts |  | $                  | 114,534   |  |                    |  | N/A  |                                       |  | $ | 79,974      |  |  |   | N/A  |   |   | $ | 34,560  |   |  |  | 43.2 | % 
|Interest checking accounts               |  |                    | 114,829   |  |                    |  | 0.43 | %                                     |  |   | 57,901      |  |  |   | 0.61 | % |   |   | 56,928  |   |  |  | 98.3 | % 
|Money market accounts                    |  |                    | 551,394   |  |                    |  | 1.40 | %                                     |  |   | 308,719     |  |  |   | 1.81 | % |   |   | 242,675 |   |  |  | 78.6 | % 
|Savings accounts                         |  |                    | 82,794    |  |                    |  | 0.52 | %                                     |  |   | 87,486      |  |  |   | 1.71 | % |   |   | (4,692  | ) |  |  | (5.4 | )%
|Time deposits                            |  |                    | 425,697   |  |                    |  | 2.25 | %                                     |  |   | 353,136     |  |  |   | 2.96 | % |   |   | 72,561  |   |  |  | 20.5 | % 
|                                         |  |                    |           |  |                    |  |      |                                       |  |   |             |  |  |   |      |   |   |   |         |   |  |  |      |   
|Total                                    |  | $                  | 1,289,248 |  |                    |  | 1.42 | %                                     |  | $ | 887,216     |  |  |   | 1.97 | % |   | $ | 402,032 |   |  |  | 45.3 | % 
|                                         |  |                    |           |  |                    |  |      |                                       |  |   |             |  |  |   |      |   |   |   |         |   |  |  |      |   

As reflected above, we have decreased the average rate on our total deposits by 55 basis points between the first
nine months of 2010 and the first nine months of 2009. Although we operate in a very competitive environment for deposits, we have been able to grow our deposits from an average of $887.2 million to $1.29 billion between the nine months ended
September 30, 2009 and the nine months ended September 30, 2010 as a result of acquisition-related growth, organic growth and the strategic use of brokered deposits.



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Short-Term Borrowings and
Long-Term Debt

Short-term borrowings decreased by $255 thousand to $5.0 million at September 30, 2010 from $5.3 million at
December 31, 2009. The decrease in short-term borrowings was due to the maturity of FHLB advances of $5.3 million during the third quarter of 2010 offset by the reclassification of FHLB advances from long-term debt to short-term borrowing of
$5.0 million. At December 31, 2009 and September 30, 2010, short-term borrowings consisted of advances from the Federal Home Loan Bank of Pittsburgh and current obligations under capital leases. Advances from the Federal Home Loan Bank of
Pittsburgh totaled $5.0 million and $5.3 million as of September 30, 2010 and December 31, 2009, respectively. The current obligation under capital leases was $37 thousand and $42 thousand as of September 30, 2010 and
December 31, 2009, respectively.

Long-term debt increased by $6.7 million to $72.4 million at September 30, 2010 compared to $65.7
million at December 31, 2009. The increase in long-term debt was caused by the issuance of $12.0 million in subordinated debt during February of 2010 bearing interest at a 9.0% annual interest rate with a term of 65 months offset about the
reclassification of FHLB Advances to short-term borrowings. At September 30, 2010, long-term debt consisted of $48.8 million in advances from the FHLB that had a maturity of greater than one year, $21.0 million of subordinated debt and $2.7
million in obligations under capital leases. The total average rate incurred on borrowings and securities sold under agreement to repurchase during the first nine months of 2010 was 4.66% compared to an average rate of 3.72% during the first nine
months of 2009.

Stockholders Equity and Capital Adequacy

Total stockholders equity increased $1.9 million or 1.2%, from $163.9 million at December 31, 2009 to $165.8 million at September 30, 2010. The increase of $1.9 million was due
to equity proceeds received from the Dividend Reinvestment and Stock Purchase Plans and an increase in accumulated other comprehensive income offset by the increase in accumulated deficit. The increase in accumulated comprehensive income is
attributed to the unrealized gains on available for sale securities of $1.6 million, net of tax. The change in accumulated deficit is due to dividends declared of $6.0 million to our shareholders offset by net income of $5.6 million.

The Company is subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can
initiate certain actions by regulators that could have a material effect on our consolidated financial statements. The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to
risk weighted assets (as defined), and Tier I capital to average assets (as defined). As of September 30, 2010, the Company and the Bank met the minimum requirements. In addition, capital ratios of the Company and the Bank exceeded the amounts
required to be considered well capitalized as defined in the regulations.

On June 12, 2009, the Company issued, to private
investors, $9.0 million of subordinated notes bearing an annual interest rate of 9.00%. On February 5, 2010, the Company issued an additional $12.0 million in subordinated notes bearing annual interest of 9.00%. Each note may be redeemed at the
Companys discretion and contains a maturity date of July 1, 2014 for notes issued in June 2009 and July 1, 2015 for notes issued in February 2010. The Company has contributed $17.0 million of the net proceeds of $21.0 million from
the sale of the notes to Graystone Tower Bank, the Companys wholly-owned subsidiary, as Tier 1 capital to support the Banks continued growth, including ongoing lending activities in its local markets. The notes are intended to qualify as
Tier 2 capital at Tower Bancorp, Inc, for regulatory purposes, to the extent permitted. In accordance with applicable regulatory treatment one-fifth of the original principal amount of the notes will be excluded each year from Tier 2 capital during
the last five years prior to maturity.

The following table summarizes Graystone Tower Bank and Tower Bancorp, Inc.s regulatory capital
ratios in comparison to regulatory requirements:



|                                         |  |                   |       |   |                  |  |       |                         |  |  |      |  
|---------------------------------------- |  | ----------------- | ----- | - | ---------------- |  | ----- | ----------------------- |  |  | ---- | -
|Graystone Tower Bank                     |  | September 30,2010 |       |   | December 31,2009 |  |       | Minimum CapitalAdequacy | 
|Total Capital (to Risk Weighted Assets)  |  |                   | 13.16 | % |                  |  | 14.43 | %                       |  |  | 8.00 | %
|Tier I Capital (to Risk Weighted Assets) |  |                   | 12.22 | % |                  |  | 13.58 | %                       |  |  | 4.00 | %
|Tier I Capital (to Average Assets)       |  |                   | 10.38 | % |                  |  | 11.13 | %                       |  |  | 4.00 | %
|                                         |  |                   |      
|Tower Bancorp, Inc.                      |  | September 30,2010 |       |   | December 31,2009 |  |       | Minimum CapitalAdequacy | 
|Total Capital (to Risk Weighted Assets)  |  |                   | 13.18 | % |                  |  | 14.53 | %                       |  |  | 8.00 | %
|Tier I Capital (to Risk Weighted Assets) |  |                   | 11.12 | % |                  |  | 13.05 | %                       |  |  | 4.00 | %
|Tier I Capital (to Average Assets)       |  |                   | 9.45  | % |                  |  | 10.70 | %                       |  |  | 4.00 | %

Management believes, as of
September 30, 2010, that the Company and the Bank met all capital adequacy requirements to which it is subject.

The Bank is subject to
certain restrictions on the amount of dividends that it may declare due to regulatory considerations. The Pennsylvania Banking Code provides that cash dividends may be declared and paid only out of accumulated net earnings. As a result of the
Merger, $24.4 million of accumulated earnings related to the pre-merger retained earnings of the



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Company, were transferred and reclassified into additional paid-in capital. Based on the approval from the Pennsylvania Department of Banking, this amount is available for cash dividends and may
be declared and paid in future periods. The current balance of retained earnings available for payment of dividends equals $24.8 million at September 30, 2010. During the first nine months of 2010, the Company declared a dividend of $0.84 per
share which totaled $6.0 million.

During the second quarter of 2009, the Board of Directors approved a Dividend Reinvestment and Stock
Purchase Plan (Plan) to provide our shareholders with the opportunity to use cash dividends, as well as optional cash payments up to $50,000 per quarter, to purchase additional shares of Company common stock. The Company has reserved
1,000,000 shares of common stock, no par value, for issuance under the Plan. At the discretion of the Company, shares may be purchased under the Plan directly from the Company or in open market purchases from others by the plan agent. The
purchase price for shares purchased from the Company with reinvested dividends is 95% of the fair market value of the Companys common stock on the investment date. The purchase price for shares purchased with voluntary cash payments or any
open market purchases is 100% of the fair market value of the Companys common stock on the investment date. During the first nine months of 2010, approximately $533 thousand in capital has been raised under the Plan. As of September 30,
2010, the Plan has raised approximately $937 thousand since plan inception.

Also during the second quarter of 2009, the Companys Board
of Directors and shareholders approved an Employee Stock Purchase Plan (Employee Plan) to provide our employees with the opportunity to purchase shares of Company common stock directly from the Company. The purchase price for shares
purchased under the Employee Plan is 95% of the fair market value of the Companys common stock on the purchase date. During the first nine months of 2010, approximately $97 thousand in capital has been raised under the Employee Plan. As of
September 30, 2010, the Employee Plan has raised approximately $162 thousand since plan inception.

In connection with the Emergency
Economic Stabilization Act of 2009 and the Troubled Asset Recovery Program (TARP), the U.S. Department of the Treasury (UST) has initiated a Capital Purchase Program. Through this program, qualifying financial institutions are eligible to
participate in the sale of senior preferred stock to the UST in an amount not less than 1% of total risk-weighted assets and not more than 3% of total risk-weighted assets. The senior preferred stock will pay cumulative dividends at a rate of
5% per year for the first five years and 9% thereafter. The UST would also receive warrants to purchase a number of shares of common stock of the financial institution having an aggregate market value equal to 15% of the senior preferred stock
on the date of the investment, subject to certain reductions.

In January 2009, Graystone received preliminary approval from the U.S. Treasury
Department for the placement of up to $17.3 million in senior preferred stock. In March 2009, Graystone announced that it would not be participating in the U.S. Treasury Departments Troubled Asset Relief Program Capital Purchase Program. The
Company did not apply to participate in the Capital Purchase Program.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Our exposure to market risk principally includes liquidity risk, interest rate risk, and market price risk which are discussed below.

Liquidity Risk

We manage our liquidity position on a daily basis as part of the daily
settlement function and continuously as part of the formal asset liability management process. Our liquidity is maintained by managing several variables including, but not limited to:



| |  |  | Pricing and dollar amount of core deposit products;
| | - |  | ---------------------------------------------------



| |  |  | Pricing and dollar amount of in-market time deposits;
| | - |  | -----------------------------------------------------



| |  |  | Growth rate of the loan portfolio (including the sale of loans on a participation basis);
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Purchase and sale of federal funds;
| | - |  | -----------------------------------



| |  |  | Purchase and sale of investment securities;
| | - |  | -------------------------------------------



| |  |  | Use of wholesale funding such as brokered deposits; and
| | - |  | -------------------------------------------------------



| |  |  | Use of borrowing capacity at the FHLB.
| | - |  | --------------------------------------

Management maintains a detailed liquidity contingency plan designed to respond to an overall decline in the condition of the banking industry or a problem specific to the Company. On a quarterly basis,
the Asset Liability Committee (ALCO) of the board of directors reviews a comprehensive liquidity analysis along with any changes to the liquidity contingency plan.



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As of September 30, 2010, we had
a maximum borrowing capacity at the Federal Home Loan Bank of Pittsburgh (FHLB) of $580.3 million of which $54.1 million (exclusive of the unamortized fair value adjustment to FHLB borrowings assumed in the Merger) was used in the
form of borrowings. Accordingly, we had unused borrowing capacity of $526.2 million at the FHLB. Based on the FHLB capital stock owned by the Bank as of September 30, 2010 and the capital stock requirements of the FHLB that became effective
July 1, 2010, we can access approximately $24.4 million of funding without the need to purchase additional FHLB stock. As of September 30, 2010, we had federal funds lines availability (committed and discretionary) at five correspondent
banks totaling $55.5 million. There were no funds drawn upon these facilities as of September 30, 2010.

We participate in obtaining
wholesale funding sources in addition to core demand deposits as described above. As of September 30, 2010 and December 31, 2009, total brokered deposits, excluding CDARS, represented 7.9% and 3.8%, respectively, of total deposits.
Brokered deposits, exclusive of CDARS, are generally comprised of money market accounts that are indexed to one-month LIBOR and time deposits. We have issued brokered time deposits, exclusive of CDARS, in maturities beyond four years as a means of
extending the composite maturity structure of the time deposit portfolio.

At September 30, 2010, liquid assets (defined as cash and cash
equivalents, loans held for sale, and securities available for sale exclusive of securities pledged as collateral or used in connection with customer repurchase agreements) totaled approximately $140.8 million or 10.4% of total deposits. This
compares to $204.3 million, or 16.8%, of total deposits, at December 31, 2009.

Management is of the opinion that its liquidity
position at September 30, 2010, is adequate to respond to fluctuations on and off balance sheet. In addition, management knows of no trends, demands, commitments, events or uncertainties that may result in, or that are
reasonably likely to result in our inability to meet anticipated or unexpected liquidity needs.

Interest Rate Risk

We actively manage our interest rate sensitivity position. Interest rate sensitivity is the matching or mismatching of the repricing and rate structure of
the interest-bearing assets and liabilities. Our primary objectives of interest rate risk management are to neutralize adverse impacts to net interest income arising from interest rate movements and to attain sustainable growth in net interest
income. The Management Asset Liability Committee (MALCO) is primarily responsible for developing and implementing asset liability management strategies in accordance with the Asset and Liability Management Policy and Procedures (the
ALCO Policy) approved by the board of directors. The MALCO generally meets on a monthly basis and is comprised of members of our senior management team. The ALCO of the board of directors meets on a quarterly basis to review the
guidelines established by MALCO and the results of our interest rate risk analysis.

We manage interest rate sensitivity by changing the
volume, mix, pricing and repricing characteristics of our assets and liabilities. We have not entered into separate derivative contracts such as interest rate swaps, caps, and floors.



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The interest rate characteristics and
interest repricing characteristics of the loan portfolio at September 30, 2010 are set forth in the tables below. Adjustable-rate loans represent loans that are currently in a fixed-rate, but are subject to repricing to either a fixed or
variable rate at the related next repricing date.



|                             |  |                        |       |  
|---------------------------- |  | ---------------------- | ----- | -
|Interest Rate Characteristic |  | Percentageof Portfolio |      
|Fixed-rate loans             |  |                        | 22.9  | %
|Adjustable-rate loans        |  |                        | 32.7  | %
|Variable-rate loans          |  |                        | 44.4  | %
|                             |  |                        |       |  
|Total                        |  |                        | 100.0 | %
|                             |  |                        |       |  
|                             | 
|Repricing Structure          |  | Percentageof Portfolio |      
|One month or less            |  |                        | 41.4  | %
|Two to six months            |  |                        | 7.8   | %
|Six to twelve months         |  |                        | 6.1   | %
|One to two years             |  |                        | 6.2   | %
|Two to three years           |  |                        | 11.4  | %
|Three to five years          |  |                        | 15.7  | %
|Greater than five years      |  |                        | 11.4  | %
|                             |  |                        |       |  
|                             |  |                        | 100.0 | %
|                             |  |                        |       |  

As of September 30, 2010, the loan portfolio contained $592.5 million of loans in the variable-rate interest mode. Of
these loans, 85.8% had interest rate floors. The majority of these loans are indexed to prime, 1-Month LIBOR, and 3-Month LIBOR (i.e. the index plus a spread). While the interest rate floors provide the Company with interest rate protection given
that the prime rate and LIBOR rates, plus the applicable spread, are substantially below these floors, these loans will not generate incremental income in an upward rising environment until the floors have been surpassed. The compression on net
interest margin related to these relationships will be influenced by a number of variables including, but not limited to, the volatility of the respective indices, the speed at which rates rise, and the interest rate sensitivity of deposit costs. To
date, we have elected to manage this risk without the use of separate derivative contracts.

As of September 30, 2010, the loan portfolio
contained $168.7 million of loans that are indexed to the one-year Treasury rate (i.e. the index plus a spread). Approximately $90.0 million of these loans are scheduled to reprice over the next twelve months. The loans that will reprice over the
next twelve months have a current weighted average interest rate of approximately 4.32%. In the current rate environment, these loans will reprice to new rates that are below the current contractual rates thereby putting pressure on net interest
margin. In the event that the one-year Treasury rate rises, the loss of interest income from repricing will be lessened. We have been actively encouraging customers to refinance these loans into fixed-rate loans through our mortgage company
subsidiary as a means of locking in historically low interest rates. Since December 31, 2009, the mortgage loan portfolio that is indexed to the one-year Treasury rate has been reduced by $18.3 million. We expect to continue this strategy and
other initiatives to manage this interest rate risk. Furthermore, we expect that newly originated mortgage loan volume will principally be underwritten and sold into the secondary market through our mortgage subsidiary. To date, we have elected to
manage this risk without the use of separate derivative contracts.

During the nine months ended September 30, 2010, the Company adjusted
the composition of the loan portfolio to include a higher percentage of variable rate loans. As of September 30, 2010 and December 31, 2009, the percentage loans classified as variable rate was 44.4% and 34.6%, respectively. The shift to
more asset-sensitive loans has been intentional and is related to the Companys management of interest rate risk across time.

As of
September 30, 2010, we reported deposit liabilities of approximately $1.36 billion and securities sold under agreements to repurchase of approximately $7.1 million. Comparatively, we reported deposit liabilities of approximately $1.22 billion
and securities sold under repurchase agreements of approximately $6.9 million at December 31, 2009.



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The maturity structure of the time
deposit portfolio as of September 30, 2010, is summarized below.



|                                           |  |                   |       |  |            |  |       |  
|------------------------------------------ |  | ----------------- | ----- |  | ---------- |  | ----- | -
|Certificates of Deposit
Maturity Structure |  | Dollars(millions) |       |  | Percentage | 
|One months or less                         |  | $                 | 24.3  |  |            |  | 5.6   | %
|Over one month through one year            |  |                   | 135.1 |  |            |  | 31.3  | %
|Over one year through two years            |  |                   | 76.9  |  |            |  | 17.8  | %
|Over two years                             |  |                   | 195.8 |  |            |  | 45.3  | %
|                                           |  |                   |       |  |            |  |       |  
|Total                                      |  | $                 | 432.1 |  |            |  | 100.0 | %
|                                           |  |                   |       |  |            |  |       |  

As noted above, approximately $159.4 million of time deposits will mature over the next year. Given existing market
conditions, we expect to retain a significant portion of the maturing time deposit portfolio in the form of new time deposits or money market accounts at interest rates that are generally comparable to the current rates of the time deposits maturing
over the next year except for that portion of the time deposit portfolio that we target for longer maturities. We are actively seeking to extend the weighted average life of the time deposit portfolio which may result in renewing a portion of
the time deposit portfolio at rates that are higher than the rates of time deposits maturing over the next year.

We use several tools to
assess and measure its interest rate risk including interest rate simulation analysis that is prepared on a quarterly basis. Each analysis is largely dependent on many assumptions and variables with past behaviors that may not prove to be effective
predictors of future outcomes. These assumptions are reviewed on at least a quarterly basis.

Gap Analysis

We use gap analysis to compare the relationship of assets that are expected to reprice during a specific time frame (Rate Sensitive Assets or
RSA) as compared to liabilities that are scheduled to reprice during an identical time period (Rate Sensitive Liabilities or RSL). When the ratio is greater than one, RSA exceed RSL and potentially exposes the
bank to a risk of a decline in interest rates by virtue of a larger amount of assets repricing at lower interest rates than rate sensitive liabilities. The converse would be true of a RSA/RSL ratio less than 1.0. While gap analysis can be useful in
evaluating the relationship of RSA to RSL, it does not capture other critical interest rate risk variables such as the extent of change that will take place when a RSA or RSL reprices, prepayment considerations, and other factors. Under the ALCO
Policy, the interest rate simulation report measures the ratio of rate sensitive assets to rate sensitive liabilities at a one-year time frame. The ALCO Policy has established an acceptable relationship of RSA to RSL to a range of 80% to 120%.

We use the following methodology in computing repricing gap. This methodology is noteworthy given the current interest rate environment.
First, we classify variable-rate loans with current interest rates below loan floors as rate sensitive assets. As of September 30, 2010, we have $592.5 million of loans that are currently in the variable rate mode with interest rates indexed to
the prime rate, the one-month LIBOR, and the three-month that are subject to contractual floors. The majority of these loans have current interest rates determined by the contractual floors. To the extent that these loans will not reprice until the
floor have been pierced (approximately 175 basis points), these loans are technically not rate sensitive. However, for purposes of computing repricing gap, we have treated these loans as rate-sensitive to capture their behavior in more traditional
interest rate environments. Second, we have classified all interest-bearing non-maturity deposits as repricing immediately. We believe that this methodology is more conservative in comparison to other methodologies that assume non-maturity deposits
reprice across time. We recognize that this methodology has the potential to highlight the inherent weaknesses of repricing gap analysis. For this reason, we emphasize the metrics of net interest income at risk and economic value of equity at risk
when evaluating interest rate risk.

At September 30, 2010, our balance sheet was liability sensitive with a cumulative gap ratio at one
year of approximately 97.5%. The gap ratio is within policy guidelines. In large part, the liability sensitive position of the balance sheet is due to the increase in transaction, and money market in the deposit portfolio. This is an intentional
strategy designed to strengthen on-balance sheet liquidity, acquire lower cost in-market deposits, and address consumer demand for FDIC-insured liquid deposits. Management believes the interest rate sensitivity of the Companys non-maturity
deposit portfolio is less than that of the general market. Accordingly, the lower level of interest rate sensitivity will partially mitigate the general effects of liability sensitivity. As of September 30, 2010, 91.9% of deposits were
originated within markets we serve. The table below summarizes the repricing gap of the Company as of September 30, 2010.



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|                                                             |  |              |          |   |              |   |         |             |  |   |                |   |  |                |         |   |                |   |         |                      |  |   |                   |   |  |       |         |   |  |   |         |   |  |   |           |  
|------------------------------------------------------------ |  | ------------ | -------- | - | ------------ | - | ------- | ----------- |  | - | -------------- | - |  | -------------- | ------- | - | -------------- | - | ------- | -------------------- |  | - | ----------------- | - |  | ----- | ------- | - |  | - | ------- | - |  | - | --------- | -
|Repricing Gap Report as of
September 30, 2010 (in thousands) | 
|                                                             |  | 1 to 3Months |          |   | 3 to 6Months |   |         | 6 -12Months |  |   | 12 to 24Months |   |  | 24 to 36Months |         |   | 36 to 60Months |   |         | Greaterthan 60Months |  |   | Non-ratesensitive |   |  | Total |        
|Assets                                                       |  |              |          |   |              |   |         |             |  |   |                |   |  |                |         |   |                |   |         |                      |  |   |                   |   |  |       |         |   |  |   |         |   |  |   |           |  
|Cash, due from banks, and Federal funds sold                 |  | $            | 17,831   |   |              | $ |        |             |  | $ |               |   |  | $              |        |   |                | $ |        |                      |  | $ |                  |   |  | $     |        |   |  | $ | 28,434  |   |  | $ | 46,265    |  
|Securities available for sale                                |  |              | 28,031   |   |              |   | 28,490  |             |  |   | 29,058         |   |  |                | 27,251  |   |                |   | 9,007   |                      |  |   | 5,157             |   |  |       | 24,568  |   |  |   | 120     |   |  | $ | 151,682   |  
|Loans                                                        |  |              | 640,437  |   |              |   | 74,594  |             |  |   | 126,726        |   |  |                | 151,915 |   |                |   | 147,299 |                      |  |   | 126,941           |   |  |       | 53,759  |   |  |   |        |   |  | $ | 1,321,671 |  
|Other Assets                                                 |  |              |         |   |              |   |        |             |  |   |               |   |  |                |        |   |                |   |        |                      |  |   |                  |   |  |       |        |   |  |   | 99,225  |   |  | $ | 99,225    |  
|                                                             |  |              |          |   |              |   |         |             |  |   |                |   |  |                |         |   |                |   |         |                      |  |   |                   |   |  |       |         |   |  |   |         |   |  |   |           |  
|Total Assets                                                 |  | $            | 686,299  |   |              | $ | 103,084 |             |  | $ | 155,784        |   |  | $              | 179,166 |   |                | $ | 156,306 |                      |  | $ | 132,098           |   |  | $     | 78,327  |   |  | $ | 127,779 |   |  | $ | 1,618,843 |  
|                                                             |  |              |          |   |              |   |         |             |  |   |                |   |  |                |         |   |                |   |         |                      |  |   |                   |   |  |       |         |   |  |   |         |   |  |   |           |  
|                                                             |  |              |          |   |              |   |         |             | 
|Liabilities                                                  |  |              |          |   |              |   |         |             |  |   |                |   |  |                |         |   |                |   |         |                      |  |   |                   |   |  |       |         |   |  |   |         |   |  |   |           |  
|Non-interest bearing deposits                                |  | $            |         |   |              | $ |        |             |  | $ |               |   |  | $              |        |   |                | $ |        |                      |  | $ |                  |   |  | $     |        |   |  | $ | 125,174 |   |  | $ | 125,174   |  
|Interest-bearing transaction and savings deposits            |  |              | 798,395  |   |              |   |        |             |  |   |               |   |  |                |        |   |                |   |        |                      |  |   |                  |   |  |       |        |   |  |   |        |   |  | $ | 798,395   |  
|Time deposits                                                |  |              | 58,824   |   |              |   | 46,854  |             |  |   | 53,500         |   |  |                | 76,854  |   |                |   | 21,238  |                      |  |   | 164,607           |   |  |       | 10,271  |   |  |   |        |   |  | $ | 432,148   |  
|                                                             |  |              |          |   |              |   |         |             |  |   |                |   |  |                |         |   |                |   |         |                      |  |   |                   |   |  |       |         |   |  |   |         |   |  |   |           |  
|Total deposits                                               |  |              | 857,219  |   |              |   | 46,854  |             |  |   | 53,500         |   |  |                | 76,854  |   |                |   | 21,238  |                      |  |   | 164,607           |   |  |       | 10,271  |   |  |   | 125,174 |   |  | $ | 1,355,717 |  
|Borrowings, including repurchase agreements                  |  |              | 7,126    |   |              |   | 24      |             |  |   | 5,050          |   |  |                | 106     |   |                |   | 5,115   |                      |  |   | 31,263            |   |  |       | 35,853  |   |  |   |        |   |  | $ | 84,537    |  
|Other Liabilities                                            |  |              |         |   |              |   |        |             |  |   |               |   |  |                |        |   |                |   |        |                      |  |   |                  |   |  |       |        |   |  |   | 12,793  |   |  | $ | 12,793    |  
|                                                             |  |              |          |   |              |   |         |             |  |   |                |   |  |                |         |   |                |   |         |                      |  |   |                   |   |  |       |         |   |  |   |         |   |  |   |           |  
|Total Liabilities                                            |  | $            | 864,345  |   |              | $ | 46,878  |             |  | $ | 58,550         |   |  | $              | 76,960  |   |                | $ | 26,353  |                      |  | $ | 195,870           |   |  | $     | 46,124  |   |  | $ | 137,967 |   |  | $ | 1,453,047 |  
|                                                             |  |              |          |   |              |   |         |             |  |   |                |   |  |                |         |   |                |   |         |                      |  |   |                   |   |  |       |         |   |  |   |         |   |  |   |           |  
|                                                             |  |              |          |   |              |   |         |             | 
|Equity                                                       |  |              |         |   |              |   |        |             |  |   |               |   |  |                |        |   |                |   |        |                      |  |   |                  |   |  |       |        |   |  |   | 165,796 |   |  |   | 165,796   |  
|                                                             |  |              |          |   |              |   |         |             |  |   |                |   |  |                |         |   |                |   |         |                      |  |   |                   |   |  |       |         |   |  |   |         |   |  |   |           |  
|Total Liabilities and Equity                                 |  | $            | 864,345  |   |              | $ | 46,878  |             |  | $ | 58,550         |   |  | $              | 76,960  |   |                | $ | 26,353  |                      |  | $ | 195,870           |   |  | $     | 46,124  |   |  | $ | 303,763 |   |  | $ | 1,618,843 |  
|                                                             |  |              |          |   |              |   |         |             |  |   |                |   |  |                |         |   |                |   |         |                      |  |   |                   |   |  |       |         |   |  |   |         |   |  |   |           |  
|                                                             |  |              |          |   |              |   |         |             | 
|Period Repricing Gap                                         |  |              | (178,046 | ) |              |   | 56,206  |             |  |   | 97,234         |   |  |                | 102,206 |   |                |   | 129,953 |                      |  |   | (63,772           | ) |  |       | (32,203 | ) |  |   | (10,188 | ) |  |   | 165,796   |  
|Period Repricing Gap Percentage                              |  |              | 79.4     | % |              |   | 219.9   | %           |  |   | 266.1          | % |  |                | 232.8   | % |                |   | 593.1   | %                    |  |   | 67.4              | % |  |       | 169.8   | % |  |   | 92.6    | % |  |   | 111.4     | %
|Cumulative Repricing Gap Percentage                          |  |              | 79.4     | % |              |   | 86.6    | %           |  |   | 97.5           | % |  |                | 107.4   | % |                |   | 119.3   | %                    |  |   | 111.3             | % |  |       | 113.4   | % |  |   | 158.4   | % |  |   | 111.4     | %

Net Interest Income at Risk

We assess the percentage change in net interest income assuming interest rate shocks (upward and downward) of 100, 200, and 300 basis points.
Given the current rate environment, we limited the downward shock to 100 basis points, but included an upward shock of 400 basis points. This analysis captures the timing of the repricing of RSA and RSL as well as the degree of change
(beta) in the interest rates of particular asset and liability products that occurs as interest rates move upward or downward. Under the Asset and Liability Management Policy and Procedures, the interest rate simulation report measures
the percentage change in net interest income for one year assuming interest rate shocks of 100, 200, and 300 basis points. The ALCO Policy has established an acceptable negative percentage change in net interest income under 100, 200, and 300 basis
point shocks of 20%.

The table below summarizes the Net Interest Income at Risk modeling results as of September 30, 2010.



|                                      |  |        |       |    |        |  |      |  
|------------------------------------- |  | ------ | ----- | -- | ------ |  | ---- | -
|                                      |  | Actual |       |    | Policy | 
|Net Interest Income: Up 100 Bps (%)   |  |        | (0.30 | )% |        |  | 20.0 | %
|Net Interest Income: Up 200 Bps (%)   |  |        | 2.34  | %  |        |  | 20.0 | %
|Net Interest Income: Up 300 Bps (%)   |  |        | 6.17  | %  |        |  | 20.0 | %
|Net Interest Income: Up 400 Bps (%)   |  |        | 10.44 | %  |        |  | 20.0 | %
|                                      |  |       
|Net Interest Income: Down 100 Bps (%) |  |        | (1.52 | )% |        |  | 20.0 | %

Economic Value of Equity at Risk

We assess the present value of cash inflows of cash, investments, loans, bank-owned life insurance policies, when applicable, netted against
the present value of cash outflows from deposits, repurchase agreements, borrowings, and other interest-bearing liabilities, all discounted to a measurement date. This measure is expressed as the percentage change in the present value of such cash
flows when interest rates are shocked (upward and downward) at 100, 200, and 300 basis points. Under the Asset and Liability Management Policy and Procedures, the interest rate simulation reports measures the percentage change in economic value of
equity at risk assuming interest rate shocks of 100, 200, and 300 basis points. Given the current rate environment, we limited the downward shock to 100 basis points, but included an upward shock of 400 basis points. The ALCO Policy has established
an acceptable negative percentage change in economic value of equity at risk under 100, 200, and 300 basis point shocks of 20%.



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The table below summarizes the
Economic Value of Equity at Risk as of September 30, 2010.



|                                           |  |        |       |    |        |  |      |  
|------------------------------------------ |  | ------ | ----- | -- | ------ |  | ---- | -
|                                           |  | Actual |       |    | Policy | 
|Economic Value of Equity: Up 100 Bps (%)   |  |        | (6.32 | )% |        |  | 20.0 | %
|Economic Value of Equity: Up 200 Bps (%)   |  |        | (7.48 | )% |        |  | 20.0 | %
|Economic Value of Equity: Up 300 Bps (%)   |  |        | (4.22 | )% |        |  | 20.0 | %
|Economic Value of Equity: Up 400 Bps (%)   |  |        | 0.23  | %  |        |  | N/A  |  
|                                           |  |       
|Economic Value of Equity: Down 100 Bps (%) |  |        | 12.33 | %  |        |  | 20.0 | %

Market Price Risk

As of September 30, 2010, our investment portfolio had a market value of approximately $151.7 million. The investment portfolio is comprised of two
separate components each of which is managed pursuant to a board approved investment policy. At the holding company level, we have a portfolio of equity securities of financial institutions (the Equity Portfolio) with a market value of
approximately $120 thousand. At the bank level, the Bank has a portfolio with a market value of approximately $151.6 million comprised of debt securities summarized below and certain restricted investments related to business relationships with the
Federal Home Loan Bank of Pittsburgh and a correspondent bank. As of December 31, 2009, we had an investment portfolio with a market value of approximately $196.1 million of which $195.0 million was that was held at the bank level and $1.1
million was held at the holding company level.

The investment portfolio held by the Bank decreased $43.4 million during the first nine months
of 2010. The decrease was related to $65.9 million of U.S. Government Agency step-up bonds that were called; replacing assets that matured, prepaid, or called; a modest increase in municipal securities; and an increase in the market value of the
portfolio as a result of lower interest rates. The maturities and cash flows from these investments have been structured to coincide with the lending activities of the bank. For example, the weighted average life of the bank investment portfolio is
3.0 years. The weighted average life of the bank investment portfolio has extended 0.30 years between December 31, 2009 and September 30, 2010. This extension is largely related to the redemption of investments that were designed to return
cash flow to provide a source of funding for the Companys lending activity in 2010. We believe that the off balance sheet liquidity sources of the bank and the ability to raise in-market deposits at reasonable prices adequately mitigates the
cash flow variability of the investment portfolio.

The securities available for sale in the bank portfolio at September 30, 2010
consisted of U.S. Government agency securities, U.S. Government agency mortgage-backed securities; Government National Mortgage Association collateralized mortgage obligations, Small Business Administration loan pools, and municipal bonds. The
Government National Mortgage Association collateralized mortgage obligations and Small Business Administration loan pool securities are secured by the full, faith, credit and taxing power of the United States of America and carry a zero risk
weighting for regulatory capital purposes.



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Debt security market price risk is the
risk that changes in the values of debt security investments could have a material impact on our financial position or results of operations. The table below summarizes the effective maturity structure of the portfolio as of September 30, 2010.



|                                   |  |                        |       |  |                                |  |      |                                  |  |   |                |  |  |           |      |   |          |   |        |           |  |  |          |   |  |           |        |  |          |  |      |   |  |   |         |  |  |  |      |  
|---------------------------------- |  | ---------------------- | ----- |  | ------------------------------ |  | ---- | -------------------------------- |  | - | -------------- |  |  | --------- | ---- | - | -------- | - | ------ | --------- |  |  | -------- | - |  | --------- | ------ |  | -------- |  | ---- | - |  | - | ------- |  |  |  | ---- | -
|                                   |  | Within 1 year          |       |  | After 1 year butwithin 5 years |  |      | After 5 years butwithin 10 years |  |   | After 10 years |  |  | Total     |     
|                                   |  | (dollars in thousands) |      
|                                   |  | FairValue              |       |  | W/AYield                       |  |      | FairValue                        |  |   | W/AYield       |  |  | FairValue |      |   | W/AYield |   |        | FairValue |  |  | W/AYield |   |  | FairValue |        |  | W/AYield | 
|U.S Government agency obligations  |  | $                      | 5,000 |  |                                |  | 1.00 | %                                |  | $ | 17,073         |  |  |           | 1.48 | % |          | $ | 5,006  |           |  |  | 2.23     | % |  | $         |       |  |          |  |     |   |  | $ | 27,079  |  |  |  | 1.53 | %
|State and municipal obligations    |  |                        | 693   |  |                                |  | 3.19 | %                                |  |   | 3,981          |  |  |           | 3.66 | % |          |   | 6,939  |           |  |  | 4.31     | % |  |           | 10,102 |  |          |  | 4.92 | % |  |   | 21,715  |  |  |  | 4.45 | %
|Asset-backed securities (1)        |  |                        |      |  |                                |  |     |                                  |  |   |               |  |  |           |     |   |          |   |       |           |  |  |         |   |  |           |       |  |          |  |     |   |  |   | 96,514  |  |  |  | 2.75 | %
|Other securities (2)               |  |                        |      |  |                                |  |     |                                  |  |   |               |  |  |           |     |   |          |   |       |           |  |  |         |   |  |           |       |  |          |  |     |   |  |   | 6,254   |  |  |  | 0.00 | %
|                                   |  |                        |       |  |                                |  |      |                                  |  |   |                |  |  |           |      |   |          |   |        |           |  |  |          |   |  |           |        |  |          |  |      |   |  |   |         |  |  |  |      |  
|Graystone Tower Bank Portfolio     |  | $                      | 5,693 |  |                                |  |      |                                  |  | $ | 21,054         |  |  |           |      |   |          | $ | 11,945 |           |  |  |          |   |  | $         | 10,102 |  |          |  |      |   |  | $ | 151,562 |  |  |  | 2.77 | %
|                                   |  |                        |       |  |                                |  |      |                                  |  |   |                |  |  |           |      |   |          |   |        |           |  |  |          |   |  |           |        |  |          |  |      |   |  |   |         |  |  |  |      |  
|                                   |  |                        |       |  |                                |  |      |                                  |  |  
|Holding company equity investments |  |                        |       |  |                                |  |      |                                  |  |   |                |  |  |           |      |   |          |   |        |           |  |  |          |   |  |           |        |  |          |  |      |   |  | $ | 120     |  |  |  |      |  
|                                   |  |                        |       |  |                                |  |      |                                  |  |   |                |  |  |           |      |   |          |   |        |           |  |  |          |   |  |           |        |  |          |  |      |   |  |   |         |  |  |  |      |  
|Total investment securities        |  |                        |       |  |                                |  |      |                                  |  |   |                |  |  |           |      |   |          |   |        |           |  |  |          |   |  |           |        |  |          |  |      |   |  | $ | 151,682 |  |  |  |      |  
|                                   |  |                        |       |  |                                |  |      |                                  |  |   |                |  |  |           |      |   |          |   |        |           |  |  |          |   |  |           |        |  |          |  |      |   |  |   |         |  |  |  |      |  



|(1): | Mortgage-backed securities include agency mortgage-backed securities; Government National Mortgage Association collateralized mortgage obligations, and Small Business
Administration loan pools.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2): | Equity investments in business relationship banks such as the Federal Home Loan Bank and correspondent banks.
|---- | -------------------------------------------------------------------------------------------------------------

Equity market price risk is the risk that changes in the values of equity investments could have a material impact on our financial position or results
of operations. The Equity Portfolio was acquired as a result of the Merger. As of September 30, 2010, the equity portfolio was comprised of three different equity securities of financial institutions with a market value of $120 thousand. During
the third quarter of 2010, the investment portfolio at the holding company level decreased by $238 thousand as a result of selling one equity position and recognizing other-than-temporary-impairment charges of approximately $70 thousand. The total
asset sizes of the financial institutions remaining in the portfolio range from approximately $125 million to financial institutions with assets of approximately $485 million. The remaining three financial institutions held in our portfolio are
located in the mid-Atlantic region.



|Item 4. | Controls and Procedures.
|------- | ------------------------

We maintain a
system of controls and procedures designed to ensure that information required to be disclosed by us in reports that we file with the Securities and Exchange Commission (the Commission) is recorded, processed, summarized and reported,
within the time periods specified in the Commissions rules and forms. Towers Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2010.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting management to information required to be included in our periodic Securities
and Exchange Commission filings.

As disclosed in managements report on internal control over financial reporting, filed in Towers
Form 10-K for the year ended December 31, 2009, in connection with Towers reverse merger with Graystone Financial Corp., Towers internal control structure was converted to the former control structure of Graystone Financial Corp.
during 2009; however, because of the timing of the new internal control implementation, it was not practical for management to evaluate the effectiveness of internal control over financial reporting in a manner that would prove meaningful. Tower is
continuing to execute its internal audit program under the direction of the Audit Committee of the Board of Directors and will be in a position to report on the effectiveness of internal control over financial reporting within the annual report for
2010.

During the quarter ended September 30, 2010, in connection with the execution of the internal audit program with the support of a
third-party service provider, Tower continued implementing or changing key procedures, systems, and personnel throughout the organization. The merger with Graystone Financial Corp. also provided for the enhancement of certain management and
administrative personnel and staffing, as well as the implementation of certain credit administration, loan review, lending and other control policies and procedures throughout the entire Tower organization. Management believes that these changes
will significantly remediate the material weaknesses related to credit administration and documentation identified in Managements Report on Internal Control over Financial Reporting, as filed with Towers annual report on Form 10-K for
the year ended December 31, 2008.



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Other than the foregoing, there were
no changes in Towers internal control over financial reporting during the third quarter of 2010 that materially affected, or are reasonably likely to materially affect, Towers internal control over financial reporting.

PART II  OTHER INFORMATION



|Item 1. | 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 1A. | Risk Factors.
|-------- | -------------

There have been no
material changes from the risk factors as disclosed in Towers Annual Report on Form 10-K for the year ended December 31, 2009, except for the following risk factors, which have been amended or added since December 31, 2009.

Legislative and regulatory actions taken now or in the future may significantly affect our financial condition, results of operations,
liquidity or stock price.

Current economic conditions, particularly in the financial markets, have resulted in government regulatory
agencies and political bodies placing increased focus and scrutiny on the financial services industry. The U.S. Government has intervened on an unprecedented scale, enacting and implementing numerous programs and actions targeted at the financial
markets generally and the financial services industry in particular.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act, or the Dodd-Frank Act, was signed into law. The Dodd-Frank Act will implement significant changes to the U.S. financial system, including among others, (i) the creation of a new Bureau of Consumer Financial Protection with
supervisory authority, including the power to conduct examinations and take enforcement actions with respect to financial institutions with assets of $10 billion or more, (ii) the creation of a Financial Stability Oversight Council with
authority to identify institutions and practices that might pose a systemic risk, (iii) provisions affecting corporate governance and executive compensation of all companies subject to the reporting requirements of the Securities and Exchange
Act of 1934, as amended, (iv) a provision that would broaden the base for FDIC insurance assessments, and (v) a provision that would require bank regulators to set minimum capital levels for bank holding companies that are as strong as
those required for their insured depository subsidiaries, subject to a grandfather clause for holding companies with less than $15 billion in assets as of December 31, 2009.

The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, many of which may have an impact on our operating environment in substantial and unpredictable ways.
While some of the Dodd-Frank Acts provisions will be effective immediately, many are to be implemented by rules promulgated within six to 18 months of signing.

The Dodd-Frank Act and the regulations to be adopted thereunder are expected to subject us and other financial institutions to additional restrictions, oversight and costs that may have an adverse impact
on its business, financial condition, results of operations or the price of our common stock. The Dodd-Frank Act substantially increases regulation of the financial services industry and imposes restrictions on the operations and general ability of
firms within the industry to conduct business consistent with historical practices. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and our organization in particular, is uncertain at this time.

Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations
are applied or enforced. We cannot predict the substance or impact of the Dodd-Frank Act or other pending or future legislation, regulation or the application thereof. Compliance with such current and potential regulation and scrutiny may
significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner.



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Risks Related to the Proposed
Acquisition of First Chester County Corporation

Regulatory approvals already received may expire, be revoked or be amended to impose
conditions that are not presently anticipated or cannot be met.

Before the transactions contemplated in the acquisition agreement
with First Chester County Corporation, including the acquisition, may be completed, various approvals or consents must be obtained from various bank regulatory and other authorities, including the Federal Reserve, the FDIC and the Pennsylvania
Department of Banking. These governmental entities may impose conditions on the completion of the acquisition or require changes to the terms of the acquisition agreement. Further, such approvals are subject to expiration if the transaction is not
consummated within the time period provided in the approval.

Although all requisite bank regulatory approvals have been received, these
approvals are subject to modification or revocation by issuing authorities prior to completion of the acquisition. Although we do not currently expect that any approvals will be revoked or modified to impose conditions on the acquisition or changes
to the acquisition agreement, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the transactions contemplated in the acquisition agreement or imposing additional costs on
or limiting our revenues, any of which might have a material adverse effect on us following the acquisition. We may be required to request an extension of the expiration date for one or more approvals. There can be no assurance as to whether any
requests for an extension of any expiration date of any regulatory approval will be received, the timing of those extensions, or whether any conditions will be imposed.

First Chesters banking subsidiary, the First National Bank of Chester County (FNB) is currently subject to a Memorandum of Understanding between its board of directors and the
Office of the Comptroller of the Currency, the failure to comply with which could result in additional enforcement action.

On
October 16, 2009, the Board of Directors of FNB entered into a Memorandum of Understanding, or MOU, with the OCC, which focused, among other things, on FNBs need to: (i) develop a comprehensive three-year capital plan; (ii) take
action to protect criticized assets and adopt and implement a program to eliminate the basis of criticism of such assets; (iii) establish an effective program that provides for early problem loan identification and a formal plan to proactively
manage those assets; (iv) review the adequacy of the banks information technology activities and Bank Secrecy Act compliance and approve written programs of policies and procedures to provide for compliance; and (v) establish a
Compliance Committee of the board of directors to monitor and coordinate the banks adherence to the provisions of the MOU.

Additionally, in early November 2009, the OCC notified FNB that it had established individual minimum capital ratios, or IMCRs, requiring FNB
to achieve, by December 31, 2009, a Tier 1 leverage capital ratio of at least 8% of adjusted total assets, a Tier 1 risk-based capital ratio of at least 10% and a total risk-based capital ratio of at least 12%, each of which exceeded the
well-capitalized ratios generally applicable to banks under then-current regulations. Tower, individually and through our subsidiary Graystone Tower Bank, has taken certain actions to assist FNB in achieving and maintaining capital ratios consistent
with the IMCRs, including: (i) extending a $26 million loan to First Chester, the proceeds of which were contributed to FNB as Tier 1 capital, and which loan is secured by the stock of FNB; and (ii) purchasing from FNB $52.5 million in
participations in performing commercial loans at a 1.5% discount.

Despite these efforts, FNB subsequently reported that, as of
December 31, 2009, FNB was not in compliance with the leverage capital ratio and the total risk-based capital ratio, and as of March 31, 2010, FNB was not in compliance with the Tier 1 leverage capital ratio established by the IMCRs. As of
September 30, 2010, FNB had achieved compliance with the IMCRs.

On August 27, 2010, the board of directors of FNB entered into a
formal written agreement with the OCC, which supersedes and replaces the MOU. The formal agreement requires that the board of directors of FNB ensure that FNB takes those actions identified in the MOU (described above), and, in some cases, augments
those requirements, such as establishing a written program regarding criticized assets of $750,000 or above, rather than the $1,000,000 threshold referenced in the MOU. In addition, the formal agreement adds a number of new requirements,
requiring FNB to: (i) ensure FNB has adequate and competent senior management; (ii) develop and implement a written profit plan to improve and sustain the earnings of FNB; (iii) develop and implement a written program to improve loan
portfolio management; (iv) review the methodology for FNBs allowance for loan and lease losses and establish a program providing for the maintaining of an adequate allowance; and (v) adopt and implement a written interest rate risk
policy. Unlike the MOU, the formal agreement is a form of formal enforcement action enforceable by the OCC through several means, including injunctions and the assessment of civil money penalties against FNB, its board of directors and/or its
management.

There can be no assurance that the OCC will not take adverse action in the future. If the condition of FNB continues to
deteriorate, Tower may lose all or a portion of the funds it invested in First Chester and/or FNB in order to assist it in achieving and maintaining well-capitalized status.



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If the acquisition agreement is
terminated, the loans between First Chester and us, which were designed to alleviate regulatory pressure on FNB, may not have their intended result.

In early November 2009, the OCC imposed IMCRs on FNB requiring it to increase its regulatory capital ratios. To enable FNB to achieve and maintain capital ratios consistent with the IMCRs, we, through
Graystone Tower Bank, loaned $26 million to First Chester, the proceeds of which were contributed to FNB as Tier 1 capital. Additionally, we extended a $2 million non-revolving line of credit to First Chester, which permits draws from time to time
for the sole purpose of contributing additional capital to FNB in the event that, as a result of the attempt to sell the AHB Division, the actual sale thereof, or the effects on FNB of such sale, FNBs regulatory capital ratios, as reported in
FNBs quarterly call report, fall below the minimum regulatory capital ratios applicable to FNB as established by the IMCRs. Both loans are secured by a pledge of all of the stock of FNB. If the acquisition agreement is terminated constituting
an event of default under the loan agreements, First Chester will have to immediately repay the full amount of the loans to us. If First Chester cannot repay the loans, we could, with prior regulatory approval, foreclose on the stock of FNB under
the pledge security agreement. There can be no assurance that First Chester will be able to raise funds sufficient to repay the loans from us if the acquisition agreement is terminated or that we would receive the requisite regulatory approval in
order to foreclose on the FNB stock. If the acquisition agreement is terminated, we could lose all or a portion of the funds loaned to First Chester.

There are numerous conditions to the acquisition and the acquisition may not be completed.

The acquisition agreement is subject to a number of conditions which must be fulfilled or, to the extent permissible, waived in order to close. Those conditions include: receipt of approval from both
First Chesters and our shareholders, receipt of regulatory approval, the continued accuracy of certain representations and warranties by both parties and the performance by both parties of certain covenants and agreements. In particular, it is
a condition to our obligation to close the acquisition that: (i) First Chester delinquent loans, as defined in the acquisition agreement, not exceed $90 million as of the last day of the month prior to the closing date; and (ii) FNB shall
have received written confirmation from the OCC of the termination of the MOU, such termination to be effective as of or prior to the effective time of the acquisition. The failure of any of the foregoing conditions would allow us to refuse to
consummate the acquisition.

Additionally, either party may terminate the acquisition agreement if the acquisition has not been completed on
or before December 31, 2010.

There can be no assurance that the conditions to closing the acquisition will be fulfilled or waived or that the
acquisition will be completed.

There is substantial doubt about First Chesters ability to continue as a going concern

Due to First Chesters financial results, FNBs failure to comply with the IMCRs as of December 31, 2009 and
March 31, 2010, the substantial uncertainty throughout the U.S. banking industry and other matters, there is substantial doubt about its ability to continue as a going concern. Continued operations of First Chester depend on FNBs ability
to comply with the terms of the MOU, the IMCRs and the closing of the acquisition. As of December 31, 2009 and March 31, 2010, FNB met the IMCR threshold for Tier 1 risk-based capital, but was below the IMCR thresholds for Tier 1
leverage and total risk-based capital. As of September 30, 2010, FNB had achieved compliance with the IMCRs.

If First Chester is unable
to continue as a going concern, we could lose some, if not all, of our investment in First Chester, and the acquisition may not be consummated. In addition, First Chesters customers, employees, vendors, correspondent institutions, and others
with whom it does business may react negatively to the substantial doubt about its ability to continue as a going concern. This negative reaction may lead to heightened concerns regarding First Chesters financial condition that could result in
a significant loss in deposits and customer relationships, key employees, vendor relationships and First Chesters ability to do business with correspondent institutions upon which it relies. Any negative trends or deterioration prior to the
acquisition could have an adverse impact on us post-acquisition.

First Chesters asset quality and/or overall financial condition
may continue to deteriorate prior to completion of the acquisition.

Should the asset quality at First Chester deteriorate further,
such deterioration may have an adverse effect on First Chesters financial and capital positions and, upon completion of the acquisition, our financial and capital positions. Additionally, any further deterioration in First Chesters
overall financial condition prior to completion of the acquisition could have an adverse impact on us post-acquisition.



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First Chester may be
unsuccessful in selling its AHB Division prior to completion of the acquisition, which could result in additional costs to us associated with selling or discontinuing the AHB Divisions mortgage-banking activities, or First Chester may be
required to retain contingent liabilities in connection with a sale of the AHB Division which may be deemed material to us.

First
Chester, through the American Home Bank Division of FNB (the AHB Division), engages in mortgage-banking activities on a nationwide basis. The acquisition agreement requires that First Chester use its best efforts, and shall cause FNB to
use its best efforts, to sell, at or prior to the effective time of the acquisition, the AHB Division to one or more purchasers on terms and conditions acceptable to First Chester and us. There can be no assurance that First Chester will be
successful in selling the AHB Division prior to the acquisition, and as of the date of this document no agreement of sale has been executed. Additionally, it is possible that, in connection with a sale of the AHB Division, First Chester may be
required to retain contingent liabilities not assumed by the purchaser, which liabilities may be material to First Chester or, after the acquisition, to us. If the sale does not occur prior to the acquisition, we intend to sell or discontinue the
mortgage-banking operations associated with the AHB Division in an orderly fashion upon completing the acquisition. Selling or discontinuing such activities after the acquisition may result in significant additional, unanticipated costs to us.

The potential costs associated with selling or discontinuing the mortgage-banking operations associated with the AHB Division, as well as the
realization of any material contingent liabilities required to be retained by First Chester and, after the acquisition, by us in connection with a sale of the AHB Division, could have a material impact on our results of operations. In addition, we
may not be able to maintain or retain licenses, permits, authorizations or approvals currently held by First Chester or FNB related to the AHB Division, which could further increase costs of discontinuing the mortgage-banking operations.

First Chester holds certain intangible assets that could be classified as impaired in the future. If these assets are considered to be either
partially or fully impaired in the future, First Chesters earnings and the book value of these assets, which would be acquired by us if the acquisition is consummated, would decrease.

Pursuant to FASB ASC Topic 350, Intangibles-Goodwill and Other, First Chester is required to test its goodwill and core deposit intangible
assets for impairment on a periodic basis. The impairment testing process considers a variety of factors, including the current market price of its common shares, the estimated net present value of its assets and liabilities, and information
concerning the terminal valuation of similarly situated depository institutions. The market price of First Chester common shares was below their book value as of December 31, 2009. If the duration of this decline in the market value of First
Chester common shares and the decline in the market prices of the common shares of similarly situated insured depository institutions persists during future reporting periods, or if the severity of the decline increases, it is possible that future
impairment testing could result in a partial or full impairment of the value of First Chesters goodwill or core deposit intangibles, or both. If an impairment determination is made in a future reporting period, First Chesters earnings
and the book value of these intangible assets, which would be acquired by us if the acquisition is consummated, will be reduced by the amount of the impairment.

The pending acquisition of First Chester may distract our management from their other responsibilities.

The pending acquisition of First Chester could cause our management to focus their time and energies on matters related to the acquisition that otherwise would be directed to our business and operations.
Any such distraction on the part of management, if significant, could affect managements ability to service existing business and develop new business and otherwise adversely affect us following the acquisition.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

None.



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

None.



|Item 4. | (Removed and Reserved).
|------- | -----------------------

None



|Item 5. | Other Information.
|------- | ------------------

None



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|Item 6. | Exhibits.
|------- | ---------



|            |  |                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                    
|            | 
|2.1         |  | Agreement and Plan of Merger by and between First Chester County Corporation and Tower Bancorp, Inc., dated as of December 27, 2009 (Incorporated by reference to Exhibit 2.1 to
Registrants Current Report on Form 8-K filed December 28, 2009)                                              
|            | 
|2.2         |  | First Amendment to Agreement and Plan of Merger by and between Tower Bancorp, Inc. and First Chester County Corporation, dated March 4, 2010 (Incorporated by reference to Exhibit
10.1 to Registrants Current Report on Form 8-K filed on March 9, 2010)                                     
|            | 
|2.3         |  | Form of Bank Plan of Merger by and between Graystone Tower Bank and First National Bank of Chester County (Included as Exhibit F to the First Amendment to Agreement and Plan of
Merger filed herewith as Exhibit 2.2)                                                                         
|            | 
|2.4         |  | Second Amendment to Agreement and Plan of Merger by and between Tower Bancorp, Inc. and First Chester County Corporation dated as of August 25, 2010 (Incorporated by reference to
Exhibit 2.1 to Registrants Current Report on Form 8-K filed on August 26, 2010)                            
|            | 
|2.5         |  | Third Amendment to Agreement and Plan of Merger by and between Tower Bancorp, Inc. and First Chester County Corporation dated as of October 28, 2010 (Incorporated by reference
to Exhibit 2.1 to Registrants Current Report on Form 8-K filed on November 2, 2010)                           
|            | 
|3.1         |  | Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Registrants Current Report on Form 8-K filed on September 24,
2009)                                                                                                                               
|            | 
|3.2         |  | Bylaws of Tower Bancorp, Inc. (Incorporated by reference to Exhibit 3.1 to Registrants Current Report on Form 8-K filed on July 27, 2010)                                                                                                                                                     
|            | 
|4.1         |  | Form of Subordinated Note due July 1, 2014 (Incorporated by reference to Exhibit 4.1 to Registrants Current Report on Form 8-K filed on June 12, 2009)                                                                                                                                        
|            | 
|4.2         |  | Form of Subordinated Note Due July 1, 2015 (Incorporated by reference to Exhibit 4.1 to Registrants Current Report on Form 8-K filed on February 8, 2010)                                                                                                                                     
|            | 
|10.1        |  | Amendment to Limited Waiver dated July 26, 2010, relating to Loan Agreement between First Chester County Corporation and Graystone Tower Bank dated November 20, 2010, as amended
(Incorporated by reference to Exhibit 10.1 to Registrants Current Report on Form 8-K filed on July 27, 2010)
|            | 
|10.2        |  | Form of Restricted Stock Agreement under the 2007 Stock Incentive Plan                                                                                                                                                                                                                         
|            | 
|10.3        |  | Form of Restricted Stock Agreement under the Tower Bancorp, Inc. 2010 Stock Incentive Plan                                                                                                                                                                                                     
|            | 
|10.4        |  | Letter Agreement between Graystone Tower Bank and First Chester County Corporation dated October 28, 2010 (Incorporated by reference to Exhibit 10.1 to Registrants Current
Report on Form 8-K filed November 2, 2010)                                                                        
|            | 
|10.5        |  | Letter Agreement between Tower Bancorp, Inc. and First Chester County Corporation dated October 28, 2010 (Incorporated by reference to Exhibit 10.2 to Registrants Current
Report on Form 8-K filed November 2, 2010)                                                                         
|            | 
|31.1        |  | Certification of President and Chief Executive Officer of Tower Bancorp, Inc. Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a)                                                                                                                                        
|            | 
|31.2        |  | Certification of Chief Financial Officer of Tower Bancorp, Inc. Pursuant to Securities and Exchange Commission Rule 13a-14(a) /
15d-14(a)                                                                                                                                                      



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|     |  |                                                                                                                                                               
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|32.1 |  | Certification of President and Chief Executive Officer of Tower Bancorp, Inc. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed)
|     | 
|32.2 |  | Certification of Chief Financial Officer of Tower Bancorp, Inc. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed)              



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                       |  |                                                      |  |                     
|---------------------- |  | ---------------------------------------------------- |  | --------------------
|                       |  | TOWER BANCORP, INC.                                 
|                       |  | (Registrant)                                        
|                       |  |                                                     
|Date: November 9, 2010 |  | By:                                                  |  | /s/ Andrew S. Samuel
|                       |  | Andrew S. Samuel                                    
|                       |  | President and Chief Executive Officer               
|                       |  |                                                     
|Date: November 9, 2010 |  | By:                                                  |  | /s/ Mark S. Merrill 
|                       |  | Mark S. Merrill                                     
|                       |  | Executive Vice President and Chief Financial Officer



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                    
|            | 
|2.1         |  | Agreement and Plan of Merger by and between First Chester County Corporation and Tower Bancorp, Inc., dated as of December 27, 2009 (Incorporated by reference to Exhibit 2.1 to
Registrants Current Report on Form 8-K filed December 28, 2009)                                              
|            | 
|2.2         |  | First Amendment to Agreement and Plan of Merger by and between Tower Bancorp, Inc. and First Chester County Corporation, dated March 4, 2010 (Incorporated by reference to Exhibit
10.1 to Registrants Current Report on Form 8-K filed on March 9, 2010)                                     
|            | 
|2.3         |  | Form of Bank Plan of Merger by and between Graystone Tower Bank and First National Bank of Chester County (Included as Exhibit F to the First Amendment to Agreement and Plan of
Merger filed herewith as Exhibit 2.2)                                                                         
|            | 
|2.4         |  | Second Amendment to Agreement and Plan of Merger by and between Tower Bancorp, Inc. and First Chester County Corporation dated as of August 25, 2010 (Incorporated by reference to
Exhibit 2.1 to Registrants Current Report on Form 8-K filed on August 26, 2010)                            
|            | 
|2.5         |  | Third Amendment to Agreement and Plan of Merger by and between Tower Bancorp, Inc. and First Chester County Corporation dated as of October 28, 2010 (Incorporated by reference
to Exhibit 2.1 to Registrants Current Report on Form 8-K filed on November 2, 2010)                           
|            | 
|3.1         |  | Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Registrants Current Report on Form 8-K filed on September 24,
2009)                                                                                                                               
|            | 
|3.2         |  | Bylaws of Tower Bancorp, Inc. (Incorporated by reference to Exhibit 3.1 to Registrants Current Report on Form 8-K filed on July 27, 2010)                                                                                                                                                     
|            | 
|4.1         |  | Form of Subordinated Note due July 1, 2014 (Incorporated by reference to Exhibit 4.1 to Registrants Current Report on Form 8-K filed on June 12, 2009)                                                                                                                                        
|            | 
|4.2         |  | Form of Subordinated Note Due July 1, 2015 (Incorporated by reference to Exhibit 4.1 to Registrants Current Report on Form 8-K filed on February 8, 2010)                                                                                                                                     
|            | 
|10.1        |  | Amendment to Limited Waiver dated July 26, 2010, relating to Loan Agreement between First Chester County Corporation and Graystone Tower Bank dated November 20, 2010, as amended
(Incorporated by reference to Exhibit 10.1 to Registrants Current Report on Form 8-K filed on July 27, 2010)
|            | 
|10.2        |  | Form of Restricted Stock Agreement under the 2007 Stock Incentive Plan                                                                                                                                                                                                                         
|            | 
|10.3        |  | Form of Restricted Stock Agreement under the Tower Bancorp, Inc. 2010 Stock Incentive Plan                                                                                                                                                                                                     
|            | 
|10.4        |  | Letter Agreement between Graystone Tower Bank and First Chester County Corporation dated October 28, 2010 (Incorporated by reference to Exhibit 10.1 to Registrants Current
Report on Form 8-K filed November 2, 2010)                                                                        
|            | 
|10.5        |  | Letter Agreement between Tower Bancorp, Inc. and First Chester County Corporation dated October 28, 2010 (Incorporated by reference to Exhibit 10.2 to Registrants Current
Report on Form 8-K filed November 2, 2010)                                                                         
|            | 
|31.1        |  | Certification of President and Chief Executive Officer of Tower Bancorp, Inc. Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a)                                                                                                                                        
|            | 
|31.2        |  | Certification of Chief Financial Officer of Tower Bancorp, Inc. Pursuant to Securities and Exchange Commission Rule 13a-14(a) /
15d-14(a)                                                                                                                                                      



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|     |  |                                                                                                                                                               
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|32.1 |  | Certification of President and Chief Executive Officer of Tower Bancorp, Inc. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed)
|     | 
|32.2 |  | Certification of Chief Financial Officer of Tower Bancorp, Inc. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed)              



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