**FORM10-Q**

**SECURITIESAND EXCHANGE COMMISSION****Washington, D.C.  20549**

**QUARTERLYREPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For thequarter ended June 30, 2006**

**Commissionfile number:  0-12826**

**TOWER BANCORP INC.**(Exactname of registrant as specified in its charter)

| **Commonwealth of Pennsylvania**          | ** ** | **25-1445946**       |
|-------------------------------------------|------------|----------------------|
| (State or other  jurisdiction of          |       | (I.R.S. Employer     |
|  incorporation or organization)      |       | Identification  No.) |
|                                      |       |                 |
| **Center  Square**                        |       |                 |
| **Greencastle,  Pennsylvania**            |       | **17225**            |
| (Address of  principal executive offices) |       | (Zip Code)           |

 

Registrant’stelephone number, including area code:          **(717)597-2137**

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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  o

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Large accelerated filer o     Acceleratedfiler x     Non-acceleratedfiler o

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).

Yes  o     No x

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

2,371,400 shares of common stock outstanding at June 30,2006

 

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TOWER BANCORP, INC.

INDEX
| ** **                                                                                                               | **Page**  |
|--------------------------------------------------------------------------------------------------------------------------|-----------|
|                                                                                                                     |      |
| PART  I - FINANCIAL INFORMATION                                                                                          |      |
|                                                                                                                     |      |
| Item 1 - Financial Statements                                                                                            |      |
| Condensed consolidated balance sheets - June 30, 2006  and December 31, 2005                                             | 4         |
| Condensed consolidated statements of income - three  months ended June 30, 2006 and 2005                                 | 5         |
| Condensed consolidated statements of income - six  months ended June 30, 2006 and 2005                                   | 6         |
| Condensed consolidated statements of comprehensive  income three months and six months ended June 30, 2006 and 2005 | 7         |
| Condensed consolidated statements of cash flows - six  months ended June 30, 2006 and 2005                          | 8         |
| Notes to condensed consolidated financial statements                                                                     | 9 - 13    |
| Item 2 - Management’s discussion and analysis of  financial condition and results of operations                     | 14 - 27   |
| Item 3 - Quantitative and qualitative disclosures  about market risk                                                     | 27        |
| Item 4 - Controls and procedures                                                                                         | 27        |
|                                                                                                                     |      |
| PART  II - OTHER INFORMATION                                                                                             | 28        |
|                                                                                                                     |      |
| Item 1 - Legal proceedings                                                                                               | 29        |
| Item 1A - Risk Factors                                                                                                   | 29        |
| Item 2 - Unregistered sales of equity securities and  use of proceeds                                                    | 29        |
| Item 3 - Defaults upon senior securities                                                                                 | 29        |
| Item 4 - Submission of matters to a vote of security  holders                                                            | 30        |
| Item 5 - Other information                                                                                               | 30        |
| Item 6 - Index to Exhibits                                                                                               | 30        |
|                                                                                                                     |      |
| Signatures                                                                                                               | 33        |
|                                                                                                                     |      |
| Exhibits                                                                                                                 | 31.1-32.2 |

 

2

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PART I - FINANCIAL INFORMATION

3

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TOWERBANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS
| ** **                                                                                 | ** ** | **June 30,**      | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                 | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                 | ** ** | **(Unaudited)**        | ** ** | **(Audited)***        | ** ** |
| ** **                                                                                 | ** ** | **(000 Omitted)** | ** ** | ** **            | ** ** |
| ASSETS                                                                                     |       |                   |       |                  |       |
| Cash and due  from banks                                                                   |       | $                      | 15,379     |                  | $          | 11,744 |   |
| Federal funds  sold                                                                        |       | 10,113                 |       | 10,093                |       |
| Interest bearing  balances with banks                                                      |       | 197                    |       | 3,083                 |       |
| Investment  securities available for sale                                                  |       | 71,853                 |       | 60,180                |       |
| Investment  securities held-to-maturity                                                    |       | 147                    |       | 0                     |       |
| Equity  securities available for sale                                                      |       | 25,103                 |       | 22,977                |       |
| Restricted bank  stock                                                                     |       | 4,048                  |       | 2,177                 |       |
| Loans:                                                                                     |       |                   |       |                  |       |
| Real estate  mortgages                                                                     |       | 244,908                |       | 176,479               |       |
| Commercial                                                                                 |       | 102,771                |       | 41,619                |       |
| Consumer                                                                                   |       | 29,854                 |       | 11,210                |       |
| Gross loans                                                                                |       | 377,533                |       | 229,308               |       |
| Less: reserve  for possible loan losses                                                    |       | (3,447                 | )          | (2,129                | )          |
| Loans, net                                                                                 |       | 374,086                |       | 227,179               |       |
| Bank premises,  equipment, furniture and fixtures                                          |       | 11,067                 |       | 5,855                 |       |
| Accrued interest  receivable                                                               |       | 1,794                  |       | 1,103                 |       |
| Cash surrender  value of life insurance                                                    |       | 10,466                 |       | 7,387                 |       |
| Intangibles                                                                                |       | 18,144                 |       | 0                     |       |
| Other assets                                                                               |       | 1,503                  |       | 445                   |       |
| Total assets                                                                               |       | $                      | 543,900    |                  | $          | 352,223 |   |
|                                                                                       |       |                   |       |                  |       |
| LIABILITIES AND CAPITAL                                                                    |       |                   |       |                  |       |
| Deposits in  domestic offices:                                                             |       |                   |       |                  |       |
| Demand                                                                                     |       | $                      | 53,694     |                  | $          | 29,162 |   |
| Savings                                                                                    |       | 176,051                |       | 144,952               |       |
| Time                                                                                       |       | 163,283                |       | 87,064                |       |
| Federal funds  purchased                                                                   |       | 23,171                 |       | 0                     |       |
| Liabilities for  borrowed money                                                            |       | 40,107                 |       | 35,516                |       |
| Accrued interest  payable                                                                  |       | 854                    |       | 364                   |       |
| Other  liabilities                                                                         |       | 7,651                  |       | 6,776                 |       |
| Total  liabilities                                                                         |       | 464,811                |       | 303,834               |       |
|                                                                                       |       |                   |       |                  |       |
| EQUITY CAPITAL                                                                             |       |                   |       |                  |       |
| Capital stock,  common, authorized 5,000,000 shares; 2,420,481 and 1,780,100 shares issued |       | 2,225                  |       | 2,225                 |       |
| Additional  paid-in capital                                                                |       | 34,830                 |       | 6,760                 |       |
| Retained  earnings                                                                         |       | 33,622                 |       | 31,618                |       |
| Accumulated  other comprehensive income                                                    |       | 10,113                 |       | 9,557                 |       |
| Less: cost of  treasury stock; 2006 - 49,081 shares; 2005 - 52,008 shares                  |       | (1,701                 | )          | (1,771                | )          |
| Total equity  capital                                                                      |       | 79,089                 |       | 48,389                |       |
|                                                                                       |       |                   |       |                  |       |
| Total liabilities and  capital                                                             |       | $                      | 543,900    |                  | $          | 352,223 |   |

 

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*   Condensed from audited financial statements.

Theaccompanying notes are an integral part of these condensed financialstatements.

4

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TOWERBANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

THREEMONTHS ENDED JUNE 30, 2006 AND 2005

(UNAUDITED)
| ** **                                           | ** ** | **2006**               | ** ** | **2005**  | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------|------------|
| ** **                                           | ** ** | **(000 Omitted)** | ** ** |
| Interest Income                                      |       |                   |       |      |       |
| Interest & fees on loans                         |       | $                      | 4,814      |      | $          | 3,428 |   |
| Interest on investment securities available for sale |       | 727                    |       | 516       |       |
| Interest on deposits with banks                      |       | 95                     |       | 51        |       |
| Total interest & dividend income                 |       | 5,636                  |       | 3,995     |       |
| Interest Expense                                     |       |                   |       |      |       |
| Interest on deposits                                 |       | 1,409                  |       | 802       |       |
| Interest on borrowed money                           |       | 588                    |       | 438       |       |
| Total interest expense                               |       | 1,997                  |       | 1,240     |       |
|                                                 |       |                   |       |      |       |
| Net interest income                                  |       | 3,639                  |       | 2,755     |       |
|                                                 |       |                   |       |      |       |
| Provision for  loan losses                           |       | 70                     |       | 60        |       |
|                                                 |       |                   |       |      |       |
| Net interest  income after provision for loan losses |       | 3,569                  |       | 2,695     |       |
|                                                 |       |                   |       |      |       |
| Other Income                                         |       |                   |       |      |       |
| Investment service income                            |       | 68                     |       | 45        |       |
| Service charges on deposit accounts                  |       | 344                    |       | 282       |       |
| Other service charges                                |       | 228                    |       | 147       |       |
| Other operating income                               |       | 100                    |       | 84        |       |
| Investment securities gains (losses)                 |       | 1,070                  |       | 603       |       |
| Total other income                                   |       | 1,810                  |       | 1,161     |       |
|                                                 |       |                   |       |      |       |
| Other Expense                                        |       |                   |       |      |       |
| Salaries, wages and other benefits                   |       | 1,441                  |       | 1,061     |       |
| Occupancy and equipment expense                      |       | 597                    |       | 472       |       |
| Other operating expenses                             |       | 883                    |       | 615       |       |
| Total other expenses                                 |       | 2,921                  |       | 2,148     |       |
|                                                 |       |                   |       |      |       |
| Income before taxes                                  |       | 2,458                  |       | 1,708     |       |
| Applicable  income taxes                             |       | 678                    |       | 484       |       |
| Net income                                           |       | $                      | 1,780      |      | $          | 1,224 |   |
|                                                 |       |                   |       |      |       |
| Earnings per  share:                                 |       |                   |       |      |       |
| Basic earnings per share                             |       | $                      | 0.92       |      | $          | 0.71 |   |
| Weighted average shares outstanding                  |       | 1,943,176              |       | 1,726,748 |       |
| Diluted earnings per share                           |       | $                      | 0.90       |      | $          | 0.70 |   |
| Weighted average  shares outstanding                 |       | 1,977,002              |       | 1,758,559 |       |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

5

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TOWERBANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(UNAUDITED)
| ** **                                           | ** ** | **2006**               | ** ** | **2005**  | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------|------------|
| ** **                                           | ** ** | **(000 Omitted)** | ** ** |
| Interest Income                                      |       |                   |       |      |       |
| Interest & fees on loans                         |       | $                      | 8,626      |      | $          | 6,636 |   |
| Interest on investment securities                    |       | 1,415                  |       | 1,019     |       |
| Interest on deposits with banks                      |       | 237                    |       | 65        |       |
| Total interest & dividend income                 |       | 10,278                 |       | 7,720     |       |
| Interest Expense                                     |       |                   |       |      |       |
| Interest on deposits                                 |       | 2,501                  |       | 1,458     |       |
| Interest on borrowed money                           |       | 1,069                  |       | 855       |       |
| Total interest expense                               |       | 3,570                  |       | 2,313     |       |
|                                                 |       |                   |       |      |       |
| Net interest income                                  |       | 6,708                  |       | 5,407     |       |
|                                                 |       |                   |       |      |       |
| Provision for  loan losses                           |       | 130                    |       | 150       |       |
|                                                 |       |                   |       |      |       |
| Net interest  income after provision for loan losses |       | 6,578                  |       | 5,257     |       |
|                                                 |       |                   |       |      |       |
| Other Income                                         |       |                   |       |      |       |
| Investment service income                            |       | 176                    |       | 107       |       |
| Service charges on deposit accounts                  |       | 624                    |       | 514       |       |
| Other service charges                                |       | 425                    |       | 280       |       |
| Other operating income                               |       | 175                    |       | 160       |       |
| Investment securities gains (losses)                 |       | 1,484                  |       | 801       |       |
| Total other income                                   |       | 2,884                  |       | 1,862     |       |
|                                                 |       |                   |       |      |       |
| Other Expense                                        |       |                   |       |      |       |
| Salaries, wages and other benefits                   |       | 2,777                  |       | 2,168     |       |
| Occupancy and equipment expense                      |       | 1,146                  |       | 932       |       |
| Other operating expenses                             |       | 1,459                  |       | 1,086     |       |
| Total other expenses                                 |       | 5,382                  |       | 4,186     |       |
|                                                 |       |                   |       |      |       |
| Income before taxes                                  |       | 4,080                  |       | 2,933     |       |
| Applicable  income taxes                             |       | 1,090                  |       | 792       |       |
| Net income                                           |       | $                      | 2,990      |      | $          | 2,141 |   |
|                                                 |       |                   |       |      |       |
| Earnings per  share:                                 |       |                   |       |      |       |
| Basic earnings per share                             |       | $                      | 1.62       |      | $          | 1.24 |   |
| Weighted average shares outstanding                  |       | 1,836,538              |       | 1,726,199 |       |
| Diluted earnings per share                           |       | $                      | 1.59       |      | $          | 1.22 |   |
| Weighted average  shares outstanding                 |       | 1,870,399              |       | 1,758,114 |       |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

6

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TOWERBANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREEMONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(UNAUDITED)

|                                               | ** ** | **Three Months Ended June 30** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **(000 Omitted)**                             | ** ** |
| Net income                                    |       | $                                                  | 1,780      |   | $ | 1,224 |   |
|                                          |       |                                               |       |   |   |
| Other  comprehensive income:                  |       |                                               |       |   |   |
| Unrealized holding gains (losses), net of tax |       | (376                                               | )          | (188 | ) |
|                                          |       |                                               |       |   |   |
| Comprehensive income                          |       | $                                                  | 1,404      |   | $ | 1,036 |   |

 
| ** **                                    | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **2006**                     | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **(000 Omitted)**       | ** ** |
| Net income                                    |       | $                            | 2,990      |   | $ | 2,141 |   |
|                                          |       |                         |       |   |   |
| Other  comprehensive income:                  |       |                         |       |   |   |
| Unrealized holding gains (losses), net of tax |       | 556                          |       | (16 | ) |
|                                          |       |                         |       |   |   |
| Comprehensive income                          |       | $                            | 3,546      |   | $ | 2,125 |   |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

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TOWERBANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SixMonths Ended June 30, 2006 and 2005
| ** **                                                                         | ** ** | **2006**               | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                                                         | ** ** | **(000 omitted)** | ** ** |
| Cash flows from  operating activities:                                             |       |                   |       |     |       |
| Net income                                                                         |       | $                      | 2,990      |     | $          | 2,141 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                   |       |     |       |
| Depreciation and amortization                                                      |       | 293                    |       | 198      |       |
| Provision for loan losses                                                          |       | 130                    |       | 150      |       |
| Granting of stock options                                                          |       | 108                    |       | 0        |       |
| (Gain) on sale of investment securities                                            |       | (1,484                 | )          | (801     | )          |
| Other (net)                                                                        |       | (2,121                 | )          | (766     | )          |
| Net cash  provided by operating activities                                         |       | (84                    | )          | 922      |       |
|                                                                               |       |                   |       |     |       |
| Cash flows from  investing activities:                                             |       |                   |       |     |       |
| Loans (net)                                                                        |       | (6,975                 | )          | (236     | )          |
| Purchases of bank premises, equipment, furniture and  fixtures                     |       | (1,468                 | )          | (304     | )          |
| Interest bearing balances with banks                                               |       | 2,986                  |       | (2,835   | )          |
| Purchases of available for sale securities                                         |       | (7,626                 | )          | (14,424  | )          |
| Maturities/sales of available for sale securities                                  |       | 23,638                 |       | 3,492    |       |
| Redemption (purchase) of restricted bank stock                                     |       | (164                   | )          | (332     | )          |
| Cash acquired in acquisition                                                       |       | 4,596                  |       | 0        |       |
| Purchase price of shares exchanged for  cash/transaction costs                     |       | (2,935                 | )          | 0        |       |
| Net cash  provided(used) by investing activities                                   |       | 12,052                 |       | (14,639  | )          |
|                                                                               |       |                   |       |     |       |
| Cash flows from  financing activities:                                             |       |                   |       |     |       |
| Federal funds purchased                                                            |       | 1,700                  |       | 0        |       |
| Net increase (decrease) in deposits                                                |       | (7,208                 | )          | 28,737   |       |
| Cash dividends paid                                                                |       | (830                   | )          | (1,621   | )          |
| Purchase of treasury stock                                                         |       | (180                   | )          | (146     | )          |
| Debt (net)                                                                         |       | (2,159                 | )          | 1,147    |       |
| Proceeds from sale of capital stock                                                |       | 364                    |       | 295      |       |
| Net cash  provided (used) by financing activities                                  |       | (8,313                 | )          | 28,412   |       |
|                                                                               |       |                   |       |     |       |
| Net increase  (decrease) in cash and cash equivalents                              |       | 3,655                  |       | 14,695   |       |
|                                                                               |       |                   |       |     |       |
| Cash and cash  equivalents at beginning of year                                    |       | 21,837                 |       | 10,045   |       |
|                                                                               |       |                   |       |     |       |
| Cash and cash  equivalents at end of period                                        |       | $                      | 25,492     |     | $          | 24,740 |   |
|                                                                               |       |                   |       |     |       |
| Cash and cash  equivalents consists of:                                            |       |                   |       |     |       |
| Cash and due from banks                                                            |       | $                      | 15,379     |     | $          | 13,630 |   |
| Federal funds sold                                                                 |       | 10,113                 |       | 11,110   |       |
| Total cash and cash  equivalents                                                   |       | $                      | 25,492     |     | $          | 24,740 |   |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

8

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE30, 2006

(UNAUDITED)

Note 1.       Basis of Presentation

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles in the United States for interim financial information,and accordingly do not include all of the information and footnotes required bygenerally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements contain all adjustments (consisting solely of normal recurringadjustments) necessary to present fairly Tower Bancorp, Inc.’s consolidatedfinancial position as of June 30, 2006 and the results of its operations forthe three month and six month periods ended June 30, 2006 and 2005.  Information presented at December 31, 2005 iscondensed from audited year-end financial statements included in the AnnualReport on Form 10-K for the year ended December 31, 2005.

The condensed consolidated financial statements includethe accounts of Tower Bancorp, Inc. (the “Company” or “Tower”) and its whollyowned subsidiaries, the First National Bank of Greencastle and the FirstNational Bank of McConnellsburg (collectively, the “Bank”).  All significant intercompany accounts andtransactions have been eliminated.

The results of operations for the three and six monthperiods ended June 30, 2006 and 2005 are not necessarily indicative of theresults to be expected for the full year.

Note 2.       Income Taxes

Income tax expense is less than the amount calculatedusing the statutory tax rate primarily as a result of tax exempt income earnedfrom state and municipal securities and loans.

Note 3.       Commitments

In the normal course of business, the Company makesvarious commitments and incurs certain contingent liabilities which are notreflected in the accompanying financial statements.  These commitments include various guaranteesand commitments to extend credit and the bank does not anticipate any losses asa result of these transactions.

On June 28, 2006, the Company entered into an agreementwith a local contractor to build a branch office.  As of June 30, 2006, work had not yet begunon the branch, which has a contract price of $ 441,000.

9

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Note 4.       Acquisition

OnJune 1, 2006, Tower completed the merger of FNB Financial Corporation (“FNB”)pursuant to the Agreement and Plan of Merger dated as of September 21, 2005, asamended December 14, 2005 and May 9, 2006 (the “Merger Agreement”)between Tower and FNB.  Prior tocompletion of the Merger, The First National Bank of McConnellsburg, FNB’s solebanking subsidiary, was a federally-chartered bank.  Immediately after the Merger, The FirstNational Bank of McConnellsburg became the wholly-owned subsidiary ofTower.  Tower has received approval fromthe Comptroller of the Currency to merge The First National Bank ofMcConnellsburg with and into its wholly-owned banking subsidiary, The FirstNational Bank of Greencastle, and expects to complete this merger during thethird quarter of 2006.

Inthe merger, FNB shareholders received either 0.8663 shares of Tower commonstock for each share of FNB common stock or $ 39.00 in cash for each shareheld, depending on shareholder elections and subject to the allocationprovisions of the Merger Agreement. Under the terms of the Merger Agreement, nomore than 15%******of the outstandingFNB common stock was to be exchanged for cash and at least 85% of theoutstanding FNB common stock was to be exchanged for Tower common stock.  In connection with the Merger, based on FNBshareholder elections, Tower paid to the former shareholders of FNB, in theaggregate, $ 2.363 million in cash and issued to the former shareholdersof FNB, in the aggregate, 640,381 shares of Tower’s common stock.

Thefollowing table summarizes the preliminary purchase price allocation based onthe estimated fair value of the assets acquired and liabilities assumed at thedate of the acquisition (in thousands).
| Assets:                   |   |    |    |
|---------------------------|--------|---------|---------|
| Cash and due from banks   |   | $       | 4,596   |   |
| Investment Securities     |   | 29,396  |    |
| Net Loans                 |   | 140,089 |    |
| Core Deposit Intangible   |   | 2,343   |    |
| Other Assets              |   | 8,545   |    |
| Total identifiable assets |   | $       | 184,969 |   |
|                      |   |    |    |
| Liabilities:              |   |    |    |
| Total Deposits            |   | $       | 139,058 |   |
| Borrowings                |   | 29,271  |    |
| Other Liabilities         |   | 1,556   |    |
| Total  liabilities        |   | $       | 169,885 |   |

 

10

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In accordance with FAS 141,Tower used the purchase method of accounting to record this transaction.  The $ l5.9 million of goodwill recordedin connection with the acquisition of FNB is calculated below.  The goodwill recorded was primarily allocatedto the First National Bank of McConnellsburg in accordance with FAS 142.

| Purchase Price:                                                       |   |   |    |   |   |
|-----------------------------------------------------------------------|--------|--------|---------|--------|--------|
| Purchase Price Assigned to Stock:                                     |   |   |    |   |   |
| Tower common stock to be issued                                       |   | $      | 640,381 |   |   |   |
| Average purchase price per Tower common share                         |   | 43.74  |    |   |   |
| Purchase price  assigned to shares exchanged for stock                |   |   |    | $      | 28,009 |   |
|                                                                  |   |   |    |   |   |
| Purchase Price  Assigned to Cash:                                     |   |   |    |   |   |
| Shares exchanged for cash                                             |   | $      | 60,599  |   |   |   |
| Cash purchase price per FNB common share                              |   | 39.00  |    |   |   |
| Purchase price assigned to shares exchanged for cash                  |   |   |    | $      | 2,363  |   |
| Purchase price assigned to fractional shares  exchanged for cash      |   |   |    | 7      |   |
| Transaction costs                                                     |   |   |    | 565    |   |
|                                                                  |   |   |    |   |   |
| Total Purchase  Price                                                 |   |   |    | $      | 30,944 |   |
|                                                                  |   |   |    |   |   |
| Net Assets  Acquired:                                                 |   |   |    |   |   |
|                                                                  |   |   |    |   |   |
| FNB shareholders’ equity                                         |   | 15,747 |    |   |   |
| FNB goodwill and intangibles                                          |   | (2,066 | )       |   |   |
|                                                                  |   |   |    |   |   |
| Estimated adjustments to reflect assets acquired at  fair value:      |   |   |    |   |   |
| Investments                                                           |   | (0     | )       |   |   |
| Loans                                                                 |   | (1,577 | )       |   |   |
| Core deposit intangible                                               |   | 2,343  |    |   |   |
| Bank premises & furniture, fixtures and  equipment                |   | 895    |    |   |   |
| Deferred tax asset                                                    |   | (718   | )       |   |   |
| Estimated adjustments to reflect liabilities  acquired at fair value: |   |   |    |   |   |
| Time deposits                                                         |   | 335    |    |   |   |
| Borrowings                                                            |   | 125    |    |   |   |
|                                                                  |   |   |    | 15,084 |   |
| Consolidated Tower  goodwill resulting from merger                    |   |   |    | $      | 15,860 |   |

 

The following pro formacombined results of operations for the six months ended June 30, 2006 and June30, 2005 gives effect to the merger as if the merger had been completed onJanuary 1, 2006 and January 1, 2005, respectively.  The pro forma information shows thecombination of FNB McConnellsburg’s historical results into Tower’s results ofoperations under the purchase method of accounting.  While certain adjustments have been made forthe estimated impact of purchase accounting adjustments, the pro forma resultsof operations is presented for illustrative purposes only and does not indicatethe financial results of the combined company had the companies actually beencombined at the beginning of the period presented.

11

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|                                                                                 | ** ** | **Pro forma**                | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                      | ** ** | **Six Months Ended**    | ** ** |
| **(Dollars in Thousands, except per share data)** | ** ** | **June  30, 2006** | ** ** | **June 30, 2005** | ** ** |
| Net interest  income                                                            |       | $                                 | 9,419      |   | $ | 8,409 |   |
| Other income                                                                    |       | 3,220                             |       | 2,288 |   |
| Net income                                                                      |       | 3,567                             |       | 2,816 |   |
|                                                                            |       |                              |       |   |   |
| Earnings per share                                                              |       | $                                 | 1.50       |   | $ | 1.19 |   |

 

Note 5.       Stock Option Plans

Stock-Based Compensation

The Company maintains twostock-based compensation plans.  Theseplans provide for the granting of stock options to the Company’s employees anddirectors.  The Company has historicallyaccounted for the plans using the intrinsic-value method under the recognition andmeasurement principles of APB Opinion No. 25**and relatedInterpretations.  In December 2004, theFASB issued a final FAS Statement No 123R, “Share-Based Payment”, whichrequires financial statement recognition of compensation cost for stock optionsand other stock-based awards.

As a result of adoptingStatement 123R on January 1, 2006, the Company’s income before taxes andnet income for the six months ended June 30, 2006, are $ 108,000 and$ 72,000 lower, respectively, than if it had continued to account forshare-based compensation under Opinion 25*. *Basicand diluted earnings per share for the six months ended June 30, 2006 are$ .04 and $ .04 lower, respectively, than if the company hadcontinued to account for share-based compensation under Opinion 25*.*  The fair value of each option grant wasestimated on the date of grant using the Black-Scholes option-pricing model.

12

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Duringthe 6 months ended June 30, 2005 the Corporation applied APB Opinion 25 andrelated interpretations in accounting for its stock option plans.  Accordingly, only compensation cost for theintrinsic value of options has been recognized. Had compensation cost for the Corporation’s stock option plans beendetermined based on the fair value at the grant dates for awards under the plansconsistent with the method prescribed by FASB Statement No. 123R, theCorporation’s net income and earnings per share would have been adjusted to thepro forma amounts indicated below:
|                                       | ** ** | ** **  | ** ** | **2005  Six Months Ended  June 30** | ** ** |
|---------------------------------------|------------|-------------|------------|----------------------------------------------------|------------|
| Net income (000)  omitted             |       | As reported |       | $                                                  | 2,141      |   |
|                                  |       | Pro forma   |       | 2,107                                              |       |
|                                  |       |        |       |                                               |       |
| Basic earnings  per share             |       | As reported |       | 1.24                                               |       |
|                                  |       | Pro forma   |       | 1.22                                               |       |
|                                  |       |        |       |                                               |       |
| Earnings per  share assuming dilution |       | As reported |       | 1.22                                               |       |
|                                  |       | Pro forma   |       | 1.20                                               |       |
|                                       |            |             |            |                                                    |            |  |

 

13

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION

AND RESULTS OF OPERATIONS

June 30, 2006

The following is management’s discussion andanalysis of the significant changes in the consolidated results of operations,capital resources and liquidity presented in the accompanying unauditedconsolidated financial statements for the Company. This discussion should beread in conjunction with the preceding condensed consolidated financialstatements and related footnotes, as well as the Company’s December 31, 2005Annual Report on Form 10-K. Current performance does not guarantee and may notbe indicative of similar performance in the future.

In addition to historical information, thisquarterly report on Form 10-Q contains forward-looking statements. Theforward-looking statements contained in this report are subject to certainrisks, assumptions and uncertainties. Because of the possibility of change inthe underlying assumptions, actual results could differ materially from thoseprojected in the forward-looking statements. Additional factors that mightcause actual results to differ materially from those expressed in theforward-looking statements include, but are not limited to:

·                  operating,legal and regulatory risks,

·                  economic,political and competitive forces affecting the Company’s services, and

·                  therisk that management’s analyses of these risks could be incorrect and/or thatthe strategies developed to address them could be unsuccessful.

The Company’s forward-looking statements arerelevant only as of the date on which the statements are made. By makingforward-looking statements, the Company assumes no duty to update them toreflect new, changing or unanticipated events or circumstances. Readers shouldcarefully review the risk factors described in other periodic reports andpublic documents that the Company files from time to time with the Securitiesand Exchange Commission.

CRITICAL ACCOUNTING POLICIES

Disclosure of the Company’s significantaccounting policies is included in Note 1 to the consolidated financialstatements of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005. Some of these policies are particularly sensitive requiringsignificant judgments, estimates and assumptions to be made by management.Additional information is contained on pages 16 and 22 of this report for theprovision and allowance for loan losses.

14

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OVERVIEW

The merger with FNB Financial Corporation, whichoccurred on June 1, 2006, represents a significant expansion of the TowerBancshares, Inc. franchise. Because of the timing of the merger, the focus ofthis presentation will be on comparisons of quarterly performance, withparticular emphasis on the second quarter of 2006.  As required under the reporting rules of theSecurities and Exchange Commission, consideration will also be given toyear-to-date comparisons, which are inherently less meaningful in evaluatingfuture performance.  In accordance withgenerally accepted accounting principles (GAAP) comparisons of year-to-date resultshave not been restated for the impact of the FNB Financial Corporationoperations for the first five months of 2006 or for the six months of 2005,rendering these comparative analyses less useful than the quarterly comparison.

Net income for the six months ended June 30,2006 and 2005 was $2,990,000 and $2,141,000, respectively. The increase of$849,000, or 39.7%, is attributable to the Company’s core banking business andthe acquisition of FNB Financial Corporation (“FNB”).  Net interest income increased 24.1%, otherincome increased 54.9%, the provision for loan losses decreased 13.3% and otherexpenses increased 28.6%. On a basic and diluted per share basis, net incomefor the six months ended June 30, 2006 was $1.62 and $1.59, respectively, ascompared with $1.24 and $1.22 for the six months ended June 30, 2005. Netincome as a percentage of total average stockholders’ equity on an annualizedbasis, also known as return on average equity, was 10.70% and 9.56% for thefirst six months of 2006 and 2005, respectively. The increase in this ratio isalso attributable to an increased level of net income.

During the first six months of 2006, the Company’sassets increased $ 191,677,000, or 54.4%, to $ 543,900,000 as of June30, 2006 from $ 352,223,000 as of December 31, 2005. This increase isprimarily attributable acquiring the assets of FNB which totaled$ 185,397,000.  Total loansincreased 64.6% to $ 377,533,000. Total deposits increased by $ 131,850,000, or 50.5%, during thefirst six months of 2006 to $ 393,028,000 as of June 30, 2006 from$ 261,178,000 as of December 31, 2005.  As a result of competition in the market,and, to a certain degree, customers’ continued uncertainty as to how to bestinvest their monies, deposit growth may not be assumed at the current rates.

RESULTS OF OPERATIONS

Net Interest Income

For the three months ended June 30, 2006, totalinterest income increased by $ 1,641,000, or 41.1%, to $ 5,636,000 ascompared with $ 3,995,000 for the three months ended June 30, 2005.  This increase is primarily due to acquiring FNBand increases in the one year Treasury rate and the prime rate. During thethree months ending June 30, 2006 earning assets increased 52.2% to$ 488,994,000. In addition, management targeted efforts to attractmortgage and small commercial loans. Further impacting interest income were two25-basis point increases in the prime rate, increases in the Federal funds rateand increases in the one year Treasury rate during the three months endingJune 30, 2006 that resulted in higher yields on interest earning assets.

15

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Total interest expense increased by$ 757,000, or 61.0% to $ 1,997,000 for the three months ended June30, 2006 from $ 1,240,000 for the three months ended June 30, 2005.This increase is primarily due to acquiring FNB, to the increased deposit balancesand the increased costs associated with attracting deposits at a time whenshort-term interest rates are rising, and to the higher rates associated withovernight fed funds borrowings. Increases in rates were needed to attractdeposits, particularly money market accounts. A new money market product was introduced during the three months endingJune 30, 2006 with a yield of 4.00%.

Net interest income increased by $884,000, or32.1%, to $3,639,000 for the three months ending June 30, 2006 from $2,755,000for the three months ending June 30, 2005. This increase is primarily due to acquiring FNB and is also attributableto the repricing of mortgages and, to a lesser extent, commercial loans tied tothe one year treasury and prime rates plus the increased earning assets fundedby deposit growth.

For the six months ended June 30, 2006, totalinterest income increased by $2,558,000, or 33.1%, to $10,278,000 as comparedwith $7,720,000 for the six months ended June 30, 2005. This increase isprimarily due to acquiring FNB and increases in the one year Treasury rate andthe prime rate.  During the six monthsending June 30, 2006 earning assets increased 49.2%.  In addition, management targeted efforts toattract mortgage and small commercial loans. Further impacting interest incomewere four 25-basis point increases in the prime rate, increases in the Federalfunds rate and increases in the one year Treasury during the six months endingJune 30, 2006 that resulted in higher yields on interest earning assets.

Total interest expense increased by$ 1,257,000, or 54.3%, to $ 3,570,000 for the six months ended June30, 2006 from $ 2,313,000 for the six months ended June 30, 2005.This increase is primarily due to acquiring FNB, to the increased depositbalances and the increased costs associated with attracting deposits at a timewhen short-term interest rates are rising, and to the higher rates associatedwith overnight fed funds borrowings. Increases in rates were needed to attract deposits, particularly moneymarket accounts.  Higher rates paid toattract time deposits and a new money market product that was introduced duringthe six months ending June 30, 2006 with a yield of 4.00% have contributed tothe increased interest expense.

Net interest income increased by$ 1,301,000, or 24.1%, to $ 6,708,000 for the six months ending June30, 2006 from $ 5,407,000 for the six months ending June 30, 2005.  This increase is primarily due to acquiringFNB and also attributable to the repricing of mortgages and, to a lesserextent, commercial loans tied to the one year treasury and prime rates plus theincreased earning assets funded by deposit growth.

Provision for Loan Losses

The provision for loan losses was $70,000 forthe three months ending June 30 2006 compared with $60,000 for the threemonths ending June 30, 2005, an increase of 16.7%.  The provision for loan losses was$ 130,000 for the six months ending June 30, 2006 compared with$ 150,000 for the six months ending June 30, 2005, a decrease of 15.4%.The decrease in the provision is attributable to the consistency in the highquality of the loan portfolio.

16

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The allowance for loan losses represented 0.91%of total loans at June 30, 2006, compared with 0.93% as of December 31, 2005and 0.89% as of June 30, 2005. Management performs ongoing assessments of theloan loss reserve in relation to loan portfolio growth, credit exposure toindividual borrowers, overall trends in the loan portfolio and other relevantfactors. Based upon these factors, management believes that as of June 30,2006, the reserve is reasonable and sufficient to support the increased loangrowth in light of the strong asset quality as supported by the ratiosreflected in Table 2 on page 22.

Other Income

For the three months ended June 30, 2006, otherincome was $ 1,810,000, an increase of $ 649,000, or 55.9%, comparedwith other income of $ 1,161,000 for the three months ended June 30, 2005.The increase was primarily due to an increase of $ 467,000 in gains fromthe sale of equity securities, which were $ 1,070,000 for the three monthsended June 30, 2006 and $ 603,000 for the three months ended June 30,2005.  Other income was positivelyimpacted by increases of $ 55,000 in NSF fees, $ 25,000 in investmentservices, $ 21,000 in mortgage banking activities, which was a newoffering as of June 2005, and $ 29,000 in ATM fees.

For the six months ended June 30, 2006, otherincome was $ 2,884,000, an increase of $ 1,022,000, or 54.9%,compared with other income of $ 1,862,000 for the six months ended June 30,2005. The increase was primarily due to an increase of $ 683,000 in gainsfrom the sale of equity securities, which were $ 1,484,000 for the sixmonths ended June 30, 2006 and $ 801,000 for the six months ended June 30,2005.  Other income was positivelyimpacted by increases of $ 104,000 in NSF fees, $ 61,000 ininvestment services, $ 45,000 in mortgage banking activities, which was anew offering as of June 2005, and $ 57,000 in ATM fees.

Other Expenses

Other expenses, which include salary, occupancy,equipment and all other expenses incidental to the operation of the Company,increased to $ 2,921,000 for the three months ended June 30 2006 from$ 2,148,000 for the three months ended June 30, 2005.  The $ 773,000, or 36.0% increase wasprimarily due to increases in salary and benefits, occupancy costs and holdingcompany costs.

Salaries and employee benefit expenses, whichmake up the largest component of other expenses, increased $ 380,000, or35.8%, to $ 1,441,000 for the three months ended June 30, 2006 from$ 1,061,000 for the three months ended June 30, 2005. The increase isprimarily attributable to the increase in salary expenses of $ 300,000 andthe associated benefit costs.

Occupancy and equipment expenses increased$ 125,000, or 26.5%, to $ 597,000 for the three months ended June 30,2006 from $ 472,000 for the three months ended June 30, 2005. The increaseis primarily due to acquiring FNB, increasing costs by $ 55,000, higherequipment costs of $ 21,000 and rent expense associated with a lease agreemententered into in June 2005 for a new office located on Eastern Boulevard,Hagerstown.

17

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Other operating expenses during the threemonths ended June 30, 2006 increased $ 268,000, or 43.6% to $ 883,000from $ 615,000 during the three months ended June 30, 2005.  This increase was primarily due to acquiringFNB, increasing costs by $ 165,000 and increases of $ 94,000 inholding company expenses.

Other expenses, which include salary, occupancy,equipment and all other expenses incidental to the operation of the Company,increased to $5,382,000 for the six months ended June 30, 2006 from$ 4,186,000 for the six months ended June 30, 2005.  The $ 1,196,000, or 28.6% increase wasprimarily due to increases in salary and benefits, occupancy costs and costs associatedwith data processing.

Salaries and employee benefit expenses, whichmake up the largest component of other expenses, increased $ 609,000, or28.1%, to $ 2,777,000 for the six months ended June 30, 2006 from$ 2,168,000 for the six months ended June 30, 2005. The increase isprimarily attributable to the increase in salary expenses of $ 458,000 andthe associated benefit costs.

Occupancy and equipment expenses increased$ 214,000, or 22.9%, to $ 1,146,000 for the six months ended June 30,2006 from $ 932,000 for the six months ended June 30, 2005.  The increase is primarily due to increaseddepreciation and computer services and rent expense associated with a leaseagreement entered into in June 2005 for a new office located on EasternBoulevard, Hagerstown.

Other operating expenses during the six monthsended June 30, 2006 increased $ 373,000, or 34.3% to $ 1,459,000 from$ 1,086,000 during the six months ended June 30, 2005.  This increase was primarily due to acquiringFNB, increasing costs by $ 165,000 and increases of $ 133,000 inholding company expenses.

Income Taxes

Income tax expense was $ 678,000 for thethree months ended June 30, 2006, an increase of $ 194,000, or 40.1%,compared with $ 484,000 for the three months ended June 30, 2005.  The increased tax expense is consistent withthe higher level of net income.

Income tax expense was $ 1,090,000 for thesix months ended June 30, 2006, an increase of $ 298,000, or 37.6%,compared with $ 792,000 for the six months ended June 30, 2005.  The increased tax expense is consistent withthe higher level of net income.

Net Income

Net income for the three months ended June 30,2006 was $ 1,780,000, an increase of $ 556,000, or 45.4%, comparedwith $ 1,224,000 for the three months ended June 30, 2005.  The increase in net income is the result ofincreases of $ 757,000 in net interest income, $ 649,000 in otherincome, offset by an increase of $ 10,000 in the provision for loanlosses, increases of $ 773,000 in other expenses and $ 194,000 intaxes.  Basic and diluted earnings pershare for the three months ended June 30, 2006 were $ 0.92 and $ 0.90as compared with $ 0.71 and $ 0.70 for the three months endedJune 30, 2005.

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Net income for the six months ended June 30,2006 was $ 2,990,000, an increase of $ 849,000, or 39.7%, comparedwith $ 2,141,000 for the three months ended June 30, 2005. The increase innet income is the result of increases of $ 1,301,000 in net interestincome, $ 1,022,000 in other income, and a decrease of $ 20,000 inthe provision for loan losses, offset by increases of $ 1,196,000 in otherexpenses and $ 298,000 in taxes. Basic and diluted earnings per share forthe six months ended June 30, 2006 were $ 1.62 and $ 1.59 as comparedwith $ 1.24 and $ 1.22 for the six months ended June 30, 2005.

FINANCIAL CONDITION

Changes in the statement of condition during thesecond quarter were influenced by the acquisition of the net identifiableassets of FNB Financial Corporation.  Inorder to isolate the impact of the acquisition of these assets and liabilitieson the post-merger financial position of Tower Bancorp, Inc., a presentation isprepared to isolate the pre-merger opening balances of FNB FinancialCorporation.

| (in thousands)       | ** ** | **Carrying Value  of  Net Assets  Acquired in  Merger** | ** ** | **Fair Value  Adjustments** | ** ** | **Pro Forma  Opening FNB  Financial Corp.  Balances** | ** ** |
|---------------------------|------------|------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------------------------------------------|------------|
| Cash and due from banks   |       | $                                                                      | 4,596      |                             | $          | 0                                                                    |       | $ | 4,596 |   |
|                      |       |                                                                   |       |                             |       |                                                                 |       |
| Investment Securities     |       | 29,396                                                                 |       | 0                                |       | 29,396                                                               |       |
|                      |       |                                                                   |       |                             |       |                                                                 |       |
| Net Loans                 |       | 141,666                                                                |       | -1577                            |       | 140,089                                                              |       |
|                      |       |                                                                   |       |                             |       |                                                                 |       |
| Core Deposit Intangible   |       | 1,221                                                                  |       | 1122                             |       | 2,343                                                                |       |
|                      |       |                                                                   |       |                             |       |                                                                 |       |
| Other Assets              |       | 8,369                                                                  |       | 176                              |       | 8,545                                                                |       |
|                      |       |                                                                   |       |                             |       |                                                                 |       |
| Total Assets Acquired     |       | 185,248                                                                |       | (279                             | )          | 184,969                                                              |       |
|                      |       |                                                                   |       |                             |       |                                                                 |       |
| Deposits                  |       | 139,393                                                                |       | (335                             | )          | 139,058                                                              |       |
|                      |       |                                                                   |       |                             |       |                                                                 |       |
| Borrowings                |       | 29,396                                                                 |       | (125                             | )          | 29,271                                                               |       |
|                      |       |                                                                   |       |                             |       |                                                                 |       |
| Other Liabilities         |       | 1,556                                                                  |       | 0                                |       | 1,556                                                                |       |
|                      |       |                                                                   |       |                             |       |                                                                 |       |
| Total Liabilities Assumed |       | 170,345                                                                |       | (460                             | )          | 169,885                                                              |       |
|                      |       |                                                                   |       |                             |       |                                                                 |       |
| Net Assets Acquired       |       | 14,903                                                                 |       | 181                              |       | 15,084                                                               |       |
|                           |            |                                                                        |            |                                  |            |                                                                      |            |  |  |  |

 

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Securities

The Company’s securities portfolio is comprisedof securities that not only provide interest and dividend income, includingtax-exempt income, but also provide a source of liquidity, diversify theearning assets portfolio, allow for the management of risk and tax liability,and provide collateral for repurchase agreements and public fund deposits.Policies are in place to address various aspects of managing the portfolio,including but not limited to, concentrations, liquidity, credit quality,interest rate sensitivity and regulatory guidelines.

Although the Company generally intends to holdits investment securities to maturity, a significant portion of the securitiesportfolio is classified as available for sale, with new purchases generallycategorized as such. Securities in the available for sale category are accountedfor at fair value with unrealized appreciation or depreciation, net of tax,reported as a separate component of stockholders’ equity. Securities in theheld to maturity category are accounted for at amortized cost.  Most securities held as of June 30, 2006 areclassified as available for sale.  TheCompany holds no trading securities in its portfolio.  The securities portfolio includes equitiesowned by the holding company, most of which are investments in banks, bankholding companies and financial institutions. Equity investments are accounted for at fair market value.  The remaining securities, primarily debtinstruments, are owned by the bank.

The consolidated securities portfolio at June30, 2006 was $ 97,103,000, compared to $ 83,157,000 at December 31,2005, an increase of $ 13,946,000, or 16.8%.  The increase is due primarily to acquiringFNB, increasing securities by $ 26,471,000 and the decrease of$ 15,758,000 securities held by First National Bank of Greencastle.  The maturing securities held by FirstNational Bank of Greencastle matched the closing of a large money marketdeposit account opened in June 2005 for an estate.

Bank Owned Securities (held at First NationalBank of Greencastle and First National Bank of McConnellsburg)

The bank owned securities portfolio at June 30,2006 was $ 57,115,000, compared to $ 46,422,000 at December 31, 2005,an increase of $ 10,693,000, or 23.0%. The increase is due primarily to acquiring FNB, increasing securities by$ 26,471,000 and a decrease of $ 15,758,000 securities held by First NationalBank of Greencastle.  The maturingsecurities held by First National Bank of Greencastle matched the closing of alarge money market deposit account open in June 2005 for an estate.

The carrying value of the available for saleportion of the portfolio at June 30, 2006 includes an unrealized gain of$ 437,000 (reflected as accumulated other comprehensive income of$ 288,000 in stockholders’ equity, net of a deferred income tax liabilityof $ 149,000). This compares with an unrealized gain at December 31, 2005of $ 723,000 (reflected as accumulated other comprehensive income of$ 477,000 in stockholders’ equity, net of a deferred income tax liabilityof $ 246,000).

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Holding Company Owned Securities

The securities portfolio at June 30, 2006 was$ 39,988,000, compared to $ 36,735,000 at December 31, 2005, anincrease of $ 3,253,000, or 8.9%. The increase is attributable to the purchase of $ 7,633,000 equitysecurities plus $ 1,126,000 increase of unrealized gains plus$ 186,000 from acquisition of FNB less the sale of $ 5,692,000 equitysecurities.  Gain on sale of equitysecurities was $ 1,484,000.

The carrying value of the available for saleportion of the portfolio at June 30, 2006 includes an unrealized gain of$ 14,885,000 (reflected as accumulated other comprehensive income of$ 9,824,000 in stockholders’ equity, net of a deferred income taxliability of $ 5,061,000). This compares with an unrealized gain at December31, 2005 of $ 13,758,000 (reflected as accumulated other comprehensiveincome of $ 9,080,000 in stockholders’ equity, net of a deferred incometax liability of $ 4,678,000).

Loans

The loan portfolio comprises the major componentof the Company’s earning assets and generally is the highest yielding assetcategory.  Gross loans receivable, net ofunearned fees and origination costs, increased $ 148,225,000, or 64.6%, to$ 377,533,000 at June 30, 2006 from $ 229,308,000 at December 31,2005.  This increase is primarily due toacquiring FNB, which as of June 30, 2006 had $ 140,737,000 in loans.  Gross loans represented 96.1% of totaldeposits at June 30, 2006 as compared with 87.8% at December 31,2005.  This increase is primarily due toacquiring FNB, which as of June 30, 2006 had a 102.2% loan to deposit ratio.

Credit Risk and Loan Quality

The Company continues to be prudent in itsefforts to minimize credit risk. The Bank’s written lending policy requiresunderwriting, loan documentation and credit analysis standards to be met priorto the approval and funding of any loan. In accordance with that policy, the loan review process monitors theloan portfolio on an ongoing basis.  TheCredit Administration area and the accounting department then prepares an analysisof the allowance for loan losses which is then submitted to the Board ofDirectors for its assessment as to the adequacy of the allowance.  The allowance for loan losses is anaccumulation of expenses that has been charged against past and present earningsin anticipation of potential losses in the loan portfolio.

The allowance for loan losses at June 30, 2006and December 31, 2005 was $ 3,447,000 and $ 2,129,000, respectively,compared to $ 2,050,000 at June 30, 2005. This increase is primarilydue to acquiring FNB, which as of June 30, 2006 had an allowance for loanlosses of $ 1,179,000.  AtJune 30, 2006, the allowance for loan losses represented 0.91% of thegross loan portfolio, compared with 0.93% at December 31, 2005. This comparesto 0.89% at June 30, 2005.  At June 30,2006, in consideration of the strong asset quality, management believes theallowance for loan losses to be reasonable and adequate to support the loangrowth and to address any potential losses.

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Table 1 -“Analysis of Allowance for Loan Loss”-details the activity, which occurred in the allowance over the first sixmonths of 2006 and 2005.

**Table 1 -Analysis of Allowancefor Loan Loss (1)**
| (in thousands)                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Balance, January  1                     |       | $        | 2,129      |     | $          | 1,902 |   |
| Provision  charged to operating expense |       | 130      |       | 150      |       |
| Charge-offs:                            |       |     |       |     |       |
| Commercial                              |       | 0        |       | 0        |       |
| Real Estate                             |       | 0        |       | 0        |       |
| Consumer                                |       | (10      | )          | (27      | )          |
| Total charge-offs                       |       | (10      | )          | (27      | )          |
|                                    |       |     |       |     |       |
| Recoveries:                             |       |     |       |     |       |
| Commercial                              |       | 2        |       | 11       |       |
| Real Estate                             |       | 0        |       | 0        |       |
| Consumer                                |       | 27       |       | 14       |       |
| Total Recoveries                        |       | 29       |       | 25       |       |
|                                    |       |     |       |     |       |
| Net  charge-offs(recoveries)            |       | (19      | )          | 2        |       |
|                                    |       |     |       |     |       |
| Additions due to  acquisition of FNB    |       | 1,169    |       | 0        |       |
|                                    |       |     |       |     |       |
| Balance, June 30                        |       | $        | 3,447      |     | $          | 2,050 |   |

 

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(1) Bank’s loan portfolio is entirely domestic

The Bank’s lending policy is executed throughthe assignment of tiered loan limit authorities to individual officers of theBank, the Officer’s Loan Committee and the Board of Directors. Although theBank maintains sound credit policies, certain loans may deteriorate for avariety of reasons. The Bank’s policy is to place all loans on a non-accrualstatus upon becoming 90 days delinquent in their payments, unless there is adocumented and reasonable expectation of the collection of the delinquentamount. Loans are reviewed monthly as to their status, and on a quarterly basispresented to the Board of Directors. Management is not aware of any materialpotential loan credit problems that have not been disclosed in this report.

Table 2 — “Assets Quality Ratios” — summarizespertinent asset quality ratios at June 30, 2006 and December 31, 2005.

**Table 2 – Asset Quality Ratios**

|                                             | ** ** | **6/30/06** | ** ** | **12/31/05** | ** ** |
|---------------------------------------------|------------|-------------|------------|--------------|------------|
| Non-accrual  loans/total loans              |       | 0.04        | %          | 0.02         | %          |
| Non-performing  assets (1)/total loans      |       | 0.08        | %          | 0.05         | %          |
| Net charge offs  (recoveries)/average loans |       | (0.01       | )%         | 0.00         | %          |
| Allowance/total  loans                      |       | 0.91        | %          | 0.93         | %          |
| Allowance/non-accrual  loans                |       | 20.77       | %          | 47.31        | %          |
| Allowance/non-performing  loans (1)         |       | 11.23       | %          | 20.47        | %          |

 

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(1) – Includes non-accrual loans

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At June 30, 2006, the Company had other realestate owned (not used in operations) in the amount of $ 1,635,000, whichwas the same amount as of December 31, 2005. At June 30, 2006 and December 31, 2005, the Company had non-accrualloans in the amount of $ 166,000 and $ 45,000, respectively.  This increase is primarily due to acquiringFNB, which as of June 30, 2006 had $ 139,000 in non-accrual loans.

Loan concentrations are considered to exist whenthe total amount of loans to any one or a multiple number of borrowers engagedin similar activities or having similar characteristics exceeds 10% of loansoutstanding in any one category. The Company maintains a diversified loanportfolio, granting agribusiness, commercial and residential loans tocustomers.  The majority of the Bank’slending is made within its primary market area, which includes Fulton Countyand southern Franklin County, Pennsylvania and northern Washington County,Maryland.

Bank Owned Life Insurance

The Company has Bank Owned Life Insurance (“BOLI”)for a chosen group of employees, namely officers and directors, where the Bankis the owner and beneficiary of the policies. The Bank’s deposits and proceedsfrom the sale of investment securities funded the BOLI. Earnings from the BOLIare recognized as other income. The BOLI is profitable from the appreciation ofthe cash surrender values of the pool of insurance, and its tax advantage tothe Company. This profitability is used to offset a portion of current andfuture employee benefit costs and a Nonqualified Supplemental ExecutiveRetirement Plan for the Company’s Chief Executive Officer.

The Company had $ 10,466,000 and$ 7,387,000 in BOLI as of June 30, 2006 and December 31, 2005,respectively.  This increase is primarilydue to acquiring FNB, which as of June 30, 2006 had $ 2,922,000 in BOLI.  Although the BOLI is an asset that may beliquidated, it is the Company’s intention to hold this pool of insurancebecause it provides tax-exempt income that lowers the Company’s tax liability,while enhancing its overall capital position.

Deposits

Deposits are the major source of the Company’sfunds for lending and investment purposes. Total deposits at June 30, 2006 were$ 393,028,000, an increase of $ 131,850,000, or 50.5%, from totaldeposits of $ 261,178,000 at December 31, 2005. This increase is primarilydue to acquiring FNB, which as of June 30, 2006 had deposits of $ 137,645offset by a decrease in deposits due to a money market account opened June 2005for an estate with a $ 12,800,000 balance on December 31, 2005 that wasdisbursed prior to June 30, 2006.

Short-Term Borrowings

Short term borrowings at June 30, 2006 were$ 31,526,000, compared to $ 5,516,000 at December 31, 2005, anincrease of $ 26,010,000, or 471.5%. This increase is primarily due to acquiring FNB, which as of June 30,2006 had $ 23,171,000 of overnight borrowings with the Federal Home LoanBank of Pittsburgh.  Federal fundspurchased, Treasury Tax and Loan demand note, lines of credits with banks andovernight borrowings with the Federal Home Loan Bank of Pittsburgh are consideredto be short term borrowings.  Short termborrowings fluctuate daily to meet the liquidity needs of the Company.

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Long-Term Borrowings

Long term borrowings at June 30, 2006 were$ 31,752,000, compared to $ 30,000,000 at December 31, 2005, an increaseof $ 1,752,000, or 5.8%.  Thisincrease is primarily due to acquiring FNB, which as of June 30, 2006 had$ 6,752,000 of long term borrowings with the Federal Home Loan Bank ofPittsburgh.  The First National Bank ofGreencastle reduced by $ 5,000,000 the long term debt with the FederalHome Loan Bank of Pittsburgh.

Asset/Liability Management

The management of interest rate risk involvesmeasuring and analyzing the maturity and repricing of interest-earning assetsand interest bearing liabilities at specific points in time. The imbalancebetween interest-earning assets and interest bearing liabilities is commonlyreferred to as the interest rate gap. The interest rate gap is one measure ofthe risk inherent in the existing balance sheet as it relates to potentialchanges in net interest income. Maintaining an appropriate balance betweeninterest-earning assets and interest bearing liabilities is a means ofmonitoring and possibly avoiding material fluctuations in the net interestmargin during periods of changing interest rates.

The Company’s overall sensitivity to interestrate risk is low due to its non-complex balance sheet. The Company manages itsbalance sheet with the intent of stabilizing net interest income and neteconomic value under a broad range of interest rate environments. The Companyhas the ability to effect various strategies to manage interest rate risk,which include, but are not limited to, selling newly originated residentialmortgage loans, controlling the volume mix of fixed/variable rate commercialloans, mortgage loans and securities, increasing/ decreasing deposits viainterest rate changes, borrowing from the Federal Home Loan Bank of Pittsburgh,and buying/selling securities. Adjustments to the mix of assets and liabilitiesare made periodically in an effort to give the Company dependable and steadygrowth in net interest income, while at the same time, managing the relatedrisks.

Liquidity

Liquidity represents the Company’s ability toefficiently manage cash flows at reasonable rates to support possiblecommitments to borrowers or the demands of depositors. Liquidity is essentialto compensate for fluctuations in the balance sheet and provide funds forgrowth and normal operating expenditures. Liquidity needs may be met by convertingassets into cash or obtaining sources of additional funding.

Liquidity from asset categories is providedthrough cash, amounts due from banks, interest-bearing deposits with banks andfederal funds sold, which were $ 25,689,000 at June 30, 2006, compared to$ 24,920,000 at December 31, 2005, an increase of $ 769,000 or3.1%.  This increase is primarily due toacquiring FNB, which as of June 30, 2006 had $ 5,996,000 of cash, amountsdue from banks, and interest-bearing deposits with bank.  First National Bank of Greencastle decreasedinterest-bearing deposits with banks by $ 2,987,000. Additional assetliquidity sources include principal and interest payments from securities inthe Company’s investment portfolio and cash flow from its amortizing loan portfolio.Longer-term liquidity needs may be met by selling securities available forsale, selling loans or raising additional capital.

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At June 30, 2006, there were$ 75,968,000 in liquid securities as compared to $ 67,601,000 atDecember 31, 2005. Liquid securities increased by $ 8,367,000 since yearend primarily due to acquiring FNB, which as of June 30, 2006 had$ 20,282,000 in liquid securities. First National Bank of Greencastle decreased liquid securities by$ 15,169,000 due to sales, calls and maturity of investment securitiesexceeding purchases.  Liquid securitiesheld at Tower Bancorp increased $ 3,254,000 due to purchases exceedingsales, calls and maturity of investment securities.

Liability liquidity sources include attractingdeposits at competitive rates. Deposits at June 30, 2006 were$ 393,028,000, compared to $ 261,178,000 at December 31, 2005.In addition, the Company has borrowing capacity and lines of credit with theFederal Home Loan Bank of Pittsburgh, Atlantic Central Bankers Bank and severallocal banks.

The Company’s financial statements do notreflect various off-balance sheet commitments that are made in the normalcourse of business, which may involve some liquidity risk. Off-balance sheetarrangements are discussed in detail below.

Management is of the opinion that its liquidityposition, at June 30, 2006, is adequate to respond to fluctuations “on” and “off”the balance sheet. In addition, management knows of no trends, demands,commitments, events or uncertainties that may result in, or that are reasonablylikely to result in the Company’s inability to meet anticipated or unexpectedliquidity needs.

Off-Balance Sheet Arrangements

The Company’s financial statements do notreflect various off-balance sheet arrangements that are made in the normalcourse of business. These commitments consist mainly of loans approved but notyet funded, unused lines of credit and letters of credit made in accordancewith the same standards as on-balance sheet instruments. Unused commitments atJune 30, 2006 were $ 93,897,000, which consisted of $ 90,345,000 inunfunded commitments to existing loans and unfunded new loans and$ 3,552,000 in letters of credit. Because these instruments have fixedmaturity dates, and because many of them will expire without being drawn upon,they do not generally present a significant liquidity risk to the Company.Management believes that any amounts actually drawn upon can be funded in thenormal course of operations. The Company has no investment in or financial relationshipwith any unconsolidated entities that are reasonably likely to have a materialeffect on liquidity or the availability of capital resources.

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Capital

The following Table 3 presents the risk-basedand leverage capital amounts and ratios at June 30, 2006 for the Company andFNB of Greencastle, its largest subsidiary.

**Table 3 – Capital Ratios**
| ** **                                      | ** ** | **Actual**                           | ** ** | **Minimum for  Capital Adequacy  Purposes** | ** ** | **To be Well  Capitalized under  Prompt Corrective  Action Provisions** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Amount**                           | ** ** | **Ratio**                                             | ** ** | **Amount**                                                                                       | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Total risk based  capital/risk weighted assets: |       |                                 |       |                                                  |       |                                                                                             |       |   |   |   |   |   |   |
| Company                                         |       | $                                    | 60,977     |                                                  | 17.0       | %                                                                                                | >28,631 |   | >8.0 | % | N/A |   | N/A |   |
| FNB of Greencastle                              |       | 27,995                               |       | 13.6                                                  | %          | >16,471                                                                                       |       | >8.0 | % | >20,589 |   | >10.0 | % |
|                                            |       |                                 |       |                                                  |       |                                                                                             |       |   |   |   |   |   |   |
| Tier 1  capital/risk weighted assets:           |       |                                 |       |                                                  |       |                                                                                             |       |   |   |   |   |   |   |
| Company                                         |       | 50,832                               |       | 14.2                                                  | %          | >14,316                                                                                       |       | >4.0 | % | N/A |   | N/A |   |
| FNB of Greencastle                              |       | 25,727                               |       | 12.5                                                  | %          | >8,236                                                                                        |       | >4.0 | % | >12,353 |   | >6.0 | % |
|                                            |       |                                 |       |                                                  |       |                                                                                             |       |   |   |   |   |   |   |
| Tier 1  capital/average assets                  |       |                                 |       |                                                  |       |                                                                                             |       |   |   |   |   |   |   |
| Company                                         |       | 50,832                               |       | 13.1                                                  | %          | >15,521                                                                                       |       | >4.0 | % | N/A |   | N/A |   |
| FNB of Greencastle                              |       | 25,727                               |       | 8.5                                                   | %          | >12,159                                                                                       |       | >4.0 | % | >15,199 |   | >5.0 | % |
|                                                 |            |                                      |            |                                                       |            |                                                                                                  |            |  |  |  |  |  |  |  |

 

These capital ratios continue to remain atlevels, which are considered to be “well-capitalized” as defined by regulatoryguidelines.

Banking laws and regulations limit the amount ofcash dividends that may be paid without prior approval from the Company’sregulatory agencies.  In abidance withsuch requirements, on June 14, 2006, the Board of Directors authorized anddeclared a quarterly cash dividend in the amount of $ 0.24 per share,payable on July 21, 2006 to all shareholders of record as of July 3, 2006.The declaration of this quarterly cash dividend decreased retained earnings by$ 570,000.

RECENT ACCOUNTINGPRONOUNCEMENTS

In November 2005, theFinancial Accounting Standards Board (“FASB”) Staff Position (“FSP”) 115-1 “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments” was issued.  The FSPaddresses the determination as to when an investment is considered impaired,whether that impairment is other than temporary, and the measurement of animpairment loss.  This FSP also includesaccounting considerations subsequent to the recognition of other-than-temporaryimpairment and requires certain disclosures about unrealized losses that havenot been recognized as other-than-temporary impairments.  The guidance in this FSP amends SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities” and APBOpinion No. 18, “The Equity Method of Accounting for Investments in CommonStock”.  The FSP applies to investmentsin debt and equity securities and cost-method investments.  The application guidance within the FSPincludes items to consider in determining whether an investment is impaired, inevaluating if an impairment is other than temporary and recognizing impairmentlosses equal to the difference between the investment’s cost and its fair valuewhen an impairment is determined.  TheFSP is required for

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all reporting periodsbeginning after December 15, 2005. Earlier application is permitted. The Company does not anticipate thatapplication of the FSP will have a material effect on its financial statements.

In May 2005, the FASB issuedSFAS No. 154 “Accounting Changes and Error Corrections — A Replacement of APBOpinion No. 20 and FASB Statement No. 3.” The new standard changes therequirements for the accounting for and reporting of a change in accountingprinciple.  Among other changes, SFAS No.154 requires that a voluntary change in accounting principle be appliedretrospectively with all prior period financial statements presented using thenew accounting principle, unless it is impracticable to do so. SFAS No. 154also provides that (1) a change in method of depreciating or amortizing along-lived nonfinancial asset should be accounted for as a change in estimate(prospectively) that was effected by a change in accounting principle, and (2)correction of errors in previously issued financial statements should be termeda “restatement.”  The new standard iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005.  TheCompany does not anticipate this new standard will have a material effect onits financial statements.

**ITEM3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

There have been no material changes tothe quantitative and qualitative disclosures made in Tower Bancorp’s annualreport on Form 10-K for the year ended December 31, 2005.

**ITEM4 - CONTROLS AND PROCEDURES**

**CONTROLS AND PROCEDURES**

The Corporation’sChief Executive Officer and Chief Financial Officer have evaluated theeffectiveness of the Corporation’s disclosure controls and procedures (as suchterm is defined in the Rules 13a-15(e) under the Securities Exchange Act of1934, as amended (the “Exchange Act”))as of June 30, 2006.  Based on such evaluation, such officers haveconcluded that, as of June 30, 2006, the Corporation’s disclosure controls andprocedures are effective in alerting them on a timely basis to materialinformation relating to the Corporation (including its consolidated subsidiary)required to be included in the Corporation’s periodic filings under theExchange Act.

**CHANGES IN INTERNAL CONTROLS**

There have notbeen any significant changes in the Corporation’s internal control overfinancial reporting or in other factors that materially affected or arereasonably likely to materially affect such control during the second quarterof 2006.

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PART II – OTHER INFORMATION

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Item 1 –Legal Proceedings

The nature of the Company’s business generatessome litigation involving matters arising in the ordinary course ofbusiness.  However, in the opinion of theCompany, after consulting with legal counsel, no legal proceedings are pendingwhich would have a material effect.  Nolegal proceedings are pending other than ordinary routine litigation incidentalto the business of the Company and the Bank. In addition, to Management’s knowledge, no governmental authorities haveinitiated or contemplated any material legal actions against the Company or theBank.

Item 1A– Risk Factors

There have been no material changes to the Company’srisk factors since these factors were previously disclosed in the Company’sAnnual Report on Form 10-K for the period ended December 31, 2005.

Item 2 –Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES
| **Period**    | ** ** | **(a)  Total Number  of shares  purchased** | ** ** | **(b)  Average price  paid per  share** | ** ** | **(c)  Total number  of shares  purchased as  part of  publicly  announced  plan** | ** ** | **(d)  Maximum  number of shares  that may yet  be purchased  under the  plan** | ** ** |
|---------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
|          |       |                                                  |       |                                              |       |                                                                                                   |       |                                                                                                          |       |
| January 2006  |       | None                                                  |       | N/A                                               |       | None                                                                                                   |       | 9,585                                                                                                         |       |
|          |       |                                                  |       |                                              |       |                                                                                                   |       |                                                                                                          |       |
| February 2006 |       | 1,500                                                 |       | 45.25                                             |       | 1,500                                                                                                  |       | 8,085                                                                                                         |       |
|          |       |                                                  |       |                                              |       |                                                                                                   |       |                                                                                                          |       |
| March 2006    |       | None                                                  |       | N/A                                               |       | None                                                                                                   |       | 8,085                                                                                                         |       |
|          |       |                                                  |       |                                              |       |                                                                                                   |       |                                                                                                          |       |
| April 2006    |       | None                                                  |       | N/A                                               |       | None                                                                                                   |       | 8,085                                                                                                         |       |
|          |       |                                                  |       |                                              |       |                                                                                                   |       |                                                                                                          |       |
| May 2006      |       | None                                                  |       | N/A                                               |       | None                                                                                                   |       | 8,085                                                                                                         |       |
|          |       |                                                  |       |                                              |       |                                                                                                   |       |                                                                                                          |       |
| June 2006     |       | None                                                  |       | N/A                                               |       | None                                                                                                   |       | 8,085                                                                                                         |       |
|          |       |                                                  |       |                                              |       |                                                                                                   |       |                                                                                                          |       |
| Total         |       | 1,500                                                 |       | 45.25                                             |       | 1,500                                                                                                  |       | 8,085                                                                                                         |       |

 

Item 3 –Defaults Upon Senior Securities

Not applicable

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Item 4 –Submission of Matters to a Vote of Security Holders

The annual meeting of Tower Bancorp, Inc. was heldon May 31, 2006.  Matters that were votedon by security holders were:

1.                   Elect two Class ADirectors for three year terms expiring in 2007.

2.                   Ratify the selection ofSmith Elliott Kearns & Company, LLC as the independent accountants for theCorporation for the year ending December 31, 2007.

3.      Transact anyother business that may properly come before the meeting.

Directors that were re-elected at the annual meetingwere:

Mark E. Gayman

James H. Craig, Jr.

Each director received affirmative votes representing amajority of the shares outstanding.

Kermit G. Hicks

Robert L. Pennsinger

Jeff B. Shank

Frederick M Frederick

Lois E. Easton

Ratification of Smith Elliott Kearns & Company, LLCas the independent accountants for the Corporation for the year ending December31, 2006 occurred, with affirmative votes representing a majority of the sharesoutstanding.

No other matters were voted upon at the annual meeting.

Item 5 –Other Information

Not applicable

Item 6 –Index to Exhibits

| Exhibit | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                    |
|---------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                                                                                                                                                                                                                          |
| 2.1     |       | Agreement and Plan of Merger, dated as of September  21, 2005, by and between Tower Bancorp, Inc. and FNB Financial Corporation  (incorporated by reference to Annex A to Tower Bancorp, Inc.’s Proxy  Statement/ Prospectus to the Registration Statement on Form S-4 (File No.  333-130485 filed on January 25, 2006). |

 

30

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| **Exhibits** | ** ** | **Description of Exhibit**                                                                                                                                                                                       |
|--------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1          |       | Articles of Incorporation of Tower Bancorp, Inc.  (incorporated by reference to Exhibit 3.1 of Tower Bancorp, Inc.’s Form 10-Q  for the quarter ended September 30, 2005).                                  |
|         |       |                                                                                                                                                                                                             |
| 3.2          |       | Bylaws of Tower Bancorp, Inc. (incorporated by  reference to Exhibit 3.2 of Tower Bancorp, Inc.’s Form 10-Q for the quarter  ended September 30, 2005).                                                     |
|         |       |                                                                                                                                                                                                             |
| 10.1         |       | Change of Control Agreement of Jeffrey B. Shank  dated as of September 25, 2002  (incorporated by referenced to Exhibit 99.4 of Tower Bancorp, Inc.’s Form  10-Q for the quarter ended September 30, 2002). |
|         |       | * *                                                                                                                                                                                                         |
| 10.2         |       | Change of Control Agreement of Franklin T. Klink,  III dated as of November 26, 2001 (incorporated by reference to Exhibit 10.1  of Tower Bancorp, Inc.’s Form 10-K for the year ended December 31, 2001).  |
|         |       |                                                                                                                                                                                                             |
| 10.3         |       | Change of Control Agreement of Donald G. Kunkle  dated as of January 4, 2002  (incorporated by reference to Exhibit 10.2 of Tower Bancorp, Inc.’s Form 10-K  for the year ended December 31, 2001).         |
|         |       | * *                                                                                                                                                                                                         |
| 10.4         |       | Change of Control Agreement of John H. McDowell, Sr.  dated as of December 23, 1998 (incorporated by reference to Exhibit 10.2 of  Tower Bancorp, Inc.’s Form 10-K for the year ended December 31, 1998).   |
|         |       |                                                                                                                                                                                                             |
| 10.5         |       | Tower Bancorp, Inc.’s 1995 Non-Qualified Stock  Option Plan (incorporated by reference to Exhibit 99.1 to Tower Bancorp,  Inc.’s Registration Statement on Form S-8 (File No. 333-4066 1)).            |
|         |       |                                                                                                                                                                                                             |
| 10.6         |       | Tower Bancorp, Inc. Stock Option Plan for Outside  Directors (incorporated by reference to Exhibit 99.2 to Tower Bancorp, Inc.’s  Registration Statement on Form S-8 (File No. 333-40661)).                 |

 

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| **Exhibits** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                       |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.7         |       | Supplemental Executive Retirement Agreement of  Jeffrey B. Shank dated as of September 25,  2002 (incorporated by reference to Exhibit 99.3 of Tower Bancorp,  Inc.’s Form 10-Q for the quarter ended September 30, 2002).                  |
|         |       |                                                                                                                                                                                                                                             |
| 10.8         |       | Form of Amendment and Restatement of the First  National Bank of Greencastle Group Term Replacement Plan A (incorporated by  reference to Exhibit 10.8 of Tower Bancorp, Inc.’s Registration Statement on  Form S-4 (File No. 333-130485)). |
|         |       |                                                                                                                                                                                                                                             |
| 10.9         |       | Form of Amendment and Restatement of the First  National Bank of Greencastle Group Term Replacement Plan B (incorporated by  reference to Exhibit 10.8 of Tower Bancorp, Inc.’s Registration Statement on  Form S-4 (File No. 333-130485)). |
|         |       |                                                                                                                                                                                                                                             |
| 10.10        |       | Form of Amendment an Restatement of the First  National Bank of Greencastle Executive Bonus Agreement (incorporated by  reference to Exhibit 10.8 of Tower Bancorp, Inc.’s Registration Statement on  Form S-4 (File No. 333-130485)).      |
|         |       |                                                                                                                                                                                                                                             |
| 31.1         |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                             |
|         |       |                                                                                                                                                                                                                                             |
| 31.2         |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                             |
|         |       |                                                                                                                                                                                                                                             |
| 32.1         |       | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350                                                                                                                                                                     |
|         |       |                                                                                                                                                                                                                                             |
| 32.2         |       | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350                                                                                                                                                                     |

 

32

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SIGNATURES

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
|   | TOWER BANCORP, INC.            |
|--------|--------------------------------|
|   | (REGISTRANT)                   |
|   |                           |
|   |                           |
|   | /s/ Jeff B.  Shank             |   |
|   | Jeff B. Shank,  President, CEO |
|   | (Principal  Executive Officer) |
| Date:  | August 9, 2006                 |   |   |
|   |                           |
|   |                           |
|   | /s/Franklin T.  Klink, III     |   |
|   | Franklin T.  Klink, III,       |
|   | Treasurer                      |
|   | (Principal  Financial Officer) |
| Date:  | August 9, 2006                 |   |   |

 

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