##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549





FORM 10-Q







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

For the quarterly period ended: June 30, 2009

Or



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

For the transition period from  to

Commission File Number: 001-34277





TOWER BANCORP, INC.

(Exact name of registrant as specified in its charter)







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



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

(717) 231-2700

(Registrants telephone number, including area code)





Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

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

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



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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 5,058,836 shares of common stock outstanding at July 30, 2009









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##### Table of Contents

TOWER BANCORP, INC.

TABLE OF CONTENTS



|                                                                                                                 |  |                                                                                       |  |   
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                                    |  |                                                                                      
|                                                                                                                 |  |                                                                                      
|Item 1.                                                                                                          |  | Financial Statements                                                                  |  |   
|Consolidated Balance Sheets  June 30, 2009 (unaudited) and December 31, 2008                                    |  | 1                                                                                    
|Consolidated Statements of Operations  Three and Six Months Ended June 30, 2009 and 2008 (unaudited)            |  | 2                                                                                    
|Consolidated Statements of Changes in Stockholders Equity  Six Months Ended June 30, 2009 and 2008 (unaudited) |  | 3                                                                                    
|Consolidated Statements of Cash Flows  Six Months Ended June 30, 2009 and 2008 (unaudited)                      |  | 4                                                                                    
|Notes to the Consolidated Financial Statements (unaudited)                                                       |  | 5                                                                                    
|                                                                                                                 |  |                                                                                      
|Item 2.                                                                                                          |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 32
|                                                                                                                 |  |                                                                                      
|Item 3.                                                                                                          |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 49
|                                                                                                                 |  |                                                                                      
|Item 4.                                                                                                          |  | Controls and Procedures                                                               |  | 53
|                                                                                                                 | 
|PART II. OTHER INFORMATION                                                                                       |  |                                                                                      
|                                                                                                                 |  |                                                                                      
|Item 1.                                                                                                          |  | Legal Proceedings                                                                     |  | 53
|                                                                                                                 |  |                                                                                      
|Item 1A.                                                                                                         |  | Risk Factors                                                                          |  | 53
|                                                                                                                 |  |                                                                                      
|Item 2.                                                                                                          |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 54
|                                                                                                                 |  |                                                                                      
|Item 3.                                                                                                          |  | Defaults Upon Senior Securities                                                       |  | 55
|                                                                                                                 |  |                                                                                      
|Item 4.                                                                                                          |  | Submission of Matters to a Vote of Security Holders                                   |  | 55
|                                                                                                                 |  |                                                                                      
|Item 5.                                                                                                          |  | Other Information                                                                     |  | 56
|                                                                                                                 |  |                                                                                      
|Item 6.                                                                                                          |  | Exhibits                                                                              |  | 56
|                                                                                                                 | 
|SIGNATURES                                                                                                       |  | 57                                                                                   
|                                                                                                                 | 
|EXHIBIT INDEX                                                                                                    |  | 58                                                                                   



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

Tower Bancorp, Inc.
and Subsidiary

Consolidated Balance Sheets

June 30, 2009 and December 31, 2008

(Amounts in thousands, except share data)



|                                                                                                                                                                                               |  |              |           |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                               |  | June 30,2009 |           |   | December 31,2008 |  
|                                                                                                                                                                                               |  | (unaudited)  |           |   |                  |  
|Assets                                                                                                                                                                                         |  |              |           |   |                  |   |         |  
|Cash and due from banks                                                                                                                                                                        |  | $            | 50,791    |   |                  | $ | 24,765  |  
|Federal funds sold                                                                                                                                                                             |  |              | 73,676    |   |                  |   | 7,257   |  
|                                                                                                                                                                                               |  |              |           |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                      |  |              | 124,467   |   |                  |   | 32,022  |  
|Securities available for sale                                                                                                                                                                  |  |              | 50,946    |   |                  |   | 19,904  |  
|Restricted investments                                                                                                                                                                         |  |              | 6,254     |   |                  |   | 2,068   |  
|Loans held for sale                                                                                                                                                                            |  |              | 7,490     |   |                  |   | 3,324   |  
|Loans, net of allowance for loan losses of $7,823 and $6,017                                                                                                                                   |  |              | 1,006,249 |   |                  |   | 561,705 |  
|Premises and equipment, net                                                                                                                                                                    |  |              | 26,961    |   |                  |   | 4,546   |  
|Accrued interest receivable                                                                                                                                                                    |  |              | 4,160     |   |                  |   | 2,402   |  
|Deferred tax asset, net                                                                                                                                                                        |  |              | 1,893     |   |                  |   | 1,764   |  
|Bank owned life insurance                                                                                                                                                                      |  |              | 24,067    |   |                  |   | 12,305  |  
|Goodwill                                                                                                                                                                                       |  |              | 12,119    |   |                  |   |        |  
|Other intangible assets, net                                                                                                                                                                   |  |              | 3,722     |   |                  |   |        |  
|Other assets                                                                                                                                                                                   |  |              | 4,539     |   |                  |   | 1,278   |  
|                                                                                                                                                                                               |  |              |           |   |                  |   |         |  
|Total Assets                                                                                                                                                                                   |  | $            | 1,272,867 |   |                  | $ | 641,318 |  
|                                                                                                                                                                                               |  |              |           |   |                  |   |         |  
|                                                                                                                                                                                               |  |             
|Liabilities and Stockholders Equity                                                                                                                                                           |  |              |           |   |                  |   |         |  
|Liabilities                                                                                                                                                                                    |  |              |           |   |                  |   |         |  
|Deposits:                                                                                                                                                                                      |  |              |           |   |                  |   |         |  
|Non-interest bearing                                                                                                                                                                           |  | $            | 96,513    |   |                  | $ | 42,466  |  
|Interest bearing                                                                                                                                                                               |  |              | 966,521   |   |                  |   | 483,004 |  
|                                                                                                                                                                                               |  |              |           |   |                  |   |         |  
|Total Deposits                                                                                                                                                                                 |  |              | 1,063,034 |   |                  |   | 525,470 |  
|Securities sold under agreements to repurchase                                                                                                                                                 |  |              | 8,516     |   |                  |   | 8,384   |  
|Short-term borrowings                                                                                                                                                                          |  |              | 7,164     |   |                  |   | 14,614  |  
|Long-term debt                                                                                                                                                                                 |  |              | 68,441    |   |                  |   | 29,000  |  
|Accrued interest payable                                                                                                                                                                       |  |              | 1,364     |   |                  |   | 888     |  
|Other liabilities                                                                                                                                                                              |  |              | 12,497    |   |                  |   | 8,177   |  
|                                                                                                                                                                                               |  |              |           |   |                  |   |         |  
|Total Liabilities                                                                                                                                                                              |  |              | 1,161,016 |   |                  |   | 586,533 |  
|                                                                                                                                                                                               |  |              |           |   |                  |   |         |  
|Stockholders Equity                                                                                                                                                                           |  |              |           |   |                  |   |         |  
|Common stock, no par value; 50,000,000 shares authorized; 5,162,194 shares issued and 5,058,836 outstanding at June 30, 2009, and
2,740,325 shares issued and outstanding at December 31, 2008 |  |              |          |   |                  |   |        |  
|Additional paid-in capital                                                                                                                                                                     |  |              | 116,244   |   |                  |   | 57,547  |  
|Accumulated deficit                                                                                                                                                                            |  |              | (4,372    | ) |                  |   | (2,909  | )
|Accumulated other comprehensive (loss) income                                                                                                                                                  |  |              | (21       | ) |                  |   | 147     |  
|                                                                                                                                                                                               |  |              |           |   |                  |   |         |  
|Total Stockholders Equity                                                                                                                                                                     |  |              | 111,851   |   |                  |   | 54,785  |  
|                                                                                                                                                                                               |  |              |           |   |                  |   |         |  
|Total Liabilities and Stockholders Equity                                                                                                                                                     |  | $            | 1,272,867 |   |                  | $ | 641,318 |  
|                                                                                                                                                                                               |  |              |           |   |                  |   |         |  

See Notes to the Consolidated Financial Statements



1



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

Three and Six Months Ended June 30, 2009 and 2008 (unaudited)

(Amounts in thousands, except share data)



|                                                    |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|--------------------------------------------------- |  | -------------------------- | --------- | ------------------------ | - | --------- |  | - | --------- | - |  | - | --------- | -
|                                                    |  | Three Months EndedJune 30, |           | Six Months EndedJune 30, |  
|                                                    |  | 2009                       |           | 2008                     |   | 2009      |  |   | 2008      |  
|Interest Income                                     |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Loans, including fees                               |  | $                          | 15,252    |                          | $ | 7,411     |  | $ | 23,540    |   |  | $ | 14,412    |  
|Securities                                          |  |                            | 387       |                          |   | 227       |  |   | 516       |   |  |   | 546       |  
|Federal funds sold and other                        |  |                            | 21        |                          |   | 87        |  |   | 27        |   |  |   | 174       |  
|                                                    |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Total Interest Income                               |  |                            | 15,660    |                          |   | 7,725     |  |   | 24,083    |   |  |   | 15,132    |  
|Interest Expense                                    |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Deposits                                            |  |                            | 4,894     |                          |   | 3,661     |  |   | 8,657     |   |  |   | 7,301     |  
|Short-term borrowings                               |  |                            | 170       |                          |   | 193       |  |   | 202       |   |  |   | 364       |  
|Long-term debt                                      |  |                            | 483       |                          |   | 185       |  |   | 737       |   |  |   | 342       |  
|                                                    |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Total Interest Expense                              |  |                            | 5,547     |                          |   | 4,039     |  |   | 9,596     |   |  |   | 8,007     |  
|                                                    |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Net Interest Income                                 |  |                            | 10,113    |                          |   | 3,686     |  |   | 14,487    |   |  |   | 7,125     |  
|Provision for Loan Losses                           |  |                            | 650       |                          |   | 475       |  |   | 3,016     |   |  |   | 1,225     |  
|                                                    |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Net Interest Income after Provision for Loan Losses |  |                            | 9,463     |                          |   | 3,211     |  |   | 11,471    |   |  |   | 5,900     |  
|Non-Interest Income                                 |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Service charges on deposit accounts                 |  |                            | 664       |                          |   | 188       |  |   | 881       |   |  |   | 368       |  
|Other service charges, commissions and fees         |  |                            | 739       |                          |   | 235       |  |   | 896       |   |  |   | 384       |  
|Gain on sale of mortgage loans originated for sale  |  |                            | 581       |                          |   | 141       |  |   | 848       |   |  |   | 257       |  
|Gain on sale of other interest earnings assets      |  |                            | 311       |                          |   | 43        |  |   | 311       |   |  |   | 163       |  
|Income from bank owned life insurance               |  |                            | 283       |                          |   |          |  |   | 442       |   |  |   |          |  
|Other income                                        |  |                            | 168       |                          |   | 2         |  |   | 316       |   |  |   | 77        |  
|                                                    |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Total Non-Interest Income                           |  |                            | 2,746     |                          |   | 609       |  |   | 3,694     |   |  |   | 1,249     |  
|Non-Interest Expenses                               |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Salaries and employee benefits                      |  |                            | 4,769     |                          |   | 2,000     |  |   | 7,286     |   |  |   | 3,948     |  
|Occupancy and equipment                             |  |                            | 1,470     |                          |   | 544       |  |   | 2,202     |   |  |   | 1,050     |  
|FDIC insurance premiums                             |  |                            | 731       |                          |   | 66        |  |   | 911       |   |  |   | 126       |  
|Advertising and promotion                           |  |                            | 141       |                          |   | 72        |  |   | 218       |   |  |   | 139       |  
|Data processing                                     |  |                            | 592       |                          |   | 163       |  |   | 787       |   |  |   | 305       |  
|Professional service fees                           |  |                            | 284       |                          |   | 151       |  |   | 538       |   |  |   | 304       |  
|Other operating expenses                            |  |                            | 1,588     |                          |   | 366       |  |   | 2,101     |   |  |   | 687       |  
|Merger related expenses                             |  |                            | 106       |                          |   |          |  |   | 1,412     |   |  |   |          |  
|                                                    |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Total Non-Interest Expenses                         |  |                            | 9,681     |                          |   | 3,362     |  |   | 15,455    |   |  |   | 6,559     |  
|                                                    |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Net Income (Loss) Before Income Tax Benefit         |  |                            | 2,528     |                          |   | 458       |  |   | (290      | ) |  |   | 590       |  
|                                                    |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Income Tax Expense (Benefit)                        |  |                            | 690       |                          |   | 155       |  |   | (243      | ) |  |   | (236      | )
|                                                    |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Net Income (Loss)                                   |  | $                          | 1,838     |                          | $ | 303       |  | $ | (47       | ) |  | $ | 826       |  
|                                                    |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Net Income (Loss) Per Common Share                  |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Basic                                               |  | $                          | 0.36      |                          | $ | 0.11      |  | $ | (0.01     | ) |  | $ | 0.30      |  
|Diluted                                             |  | $                          | 0.36      |                          | $ | 0.11      |  | $ | (0.01     | ) |  | $ | 0.30      |  
|Dividends declared per share                        |  | $                          | 0.28      |                          | $ | 0.00      |  | $ | 0.28      |   |  | $ | 0.00      |  
|Weighted Average Common Shares Outstanding          |  |                            |           |                          |   |           |  |   |           |   |  |   |           |  
|Basic                                               |  |                            | 5,058,119 |                          |   | 2,734,984 |  |   | 3,918,250 |   |  |   | 2,734,236 |  
|Diluted                                             |  |                            | 5,065,180 |                          |   | 2,734,984 |  |   | 3,918,250 |   |  |   | 2,734,236 |  

See Notes to the Consolidated Financial Statements



2



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##### Table of Contents

Consolidated Statement of Changes in Stockholders Equity

Six Months Ended June 30, 2009 and 2008

(Amounts in thousands, except share data)



|                                                 |  |             |   |                           |   |                    |  |   |                                     |   |  |       |      |   |  |   |         |  
|------------------------------------------------ |  | ----------- | - | ------------------------- | - | ------------------ |  | - | ----------------------------------- | - |  | ----- | ---- | - |  | - | ------- | -
|                                                 |  | CommonStock |   | Additional Paidin Capital |   | AccumulatedDeficit |  |   | Accumulated OtherComprehensive Loss |   |  | Total |     
|Balance - December 31, 2008                      |  | $           |  |                           | $ | 57,547             |  | $ | (2,909                              | ) |  | $     | 147  |   |  | $ | 54,785  |  
|Restricted common stock awards earned            |  |             |  |                           |   | 295                |  |   |                                     |   |  |       |      |   |  |   | 295     |  
|Stock Option Expense                             |  |             |  |                           |   | 549                |  |   |                                     |   |  |       |      |   |  |   | 549     |  
|Fair Value of Consideration Exchanged in Merger  |  |             |  |                           |   | 57,853             |  |   |                                     |   |  |       |      |   |  |   | 57,853  |  
|Dividends declared                               |  |             |   |                           |   |                    |  |   | (1,416                              | ) |  |       |      |   |  |   | (1,416  | )
|Comprehensive loss:                              |  |             |   |                           |   |                    |  |   |                                     |   |  |       |      |   |  |   |         |  
|Net loss                                         |  |             |  |                           |   |                    |  |   | (47                                 | ) |  |       |      |   |  |   | (47     | )
|Unrealized loss on securities available for sale |  |             |  |                           |   |                    |  |   |                                     |   |  |       | (168 | ) |  |   | (168    | )
|Total Comprehensive Loss                         |  |             |  |                           |   |                    |  |   |                                     |   |  |       |      |   |  |   | (215    | )
|                                                 |  |             |   |                           |   |                    |  |   |                                     |   |  |       |      |   |  |   |         |  
|Balance - June 30, 2009 (unaudited)              |  | $           |  |                           | $ | 116,244            |  | $ | (4,372                              | ) |  | $     | (21  | ) |  | $ | 111,851 |  
|                                                 |  |             |   |                           |   |                    |  |   |                                     |   |  |       |      |   |  |   |         |  
|                                                 |  |             |   |                           |  
|Balance - December 31, 2007                      |  | $           |  |                           | $ | 57,037             |  | $ | (4,991                              | ) |  | $     | 39   |   |  | $ | 52,085  |  
|Restricted common stock awards earned            |  |             |  |                           |   | 183                |  |   |                                     |   |  |       |      |   |  |   | 183     |  
|Stock Option Expense                             |  |             |  |                           |   | 54                 |  |   |                                     |   |  |       |      |   |  |   | 54      |  
|Comprehensive income:                            |  |             |   |                           |   |                    |  |   |                                     |   |  |       |      |   |  |   |         |  
|Net Income                                       |  |             |  |                           |   |                    |  |   | 826                                 |   |  |       |      |   |  |   | 826     |  
|Unrealized loss on securities available for sale |  |             |  |                           |   |                    |  |   |                                     |   |  |       | (73  | ) |  |   | (73     | )
|Total Comprehensive Income                       |  |             |  |                           |   |                    |  |   |                                     |   |  |       |      |   |  |   | 753     |  
|                                                 |  |             |   |                           |   |                    |  |   |                                     |   |  |       |      |   |  |   |         |  
|Balance - June 30, 2008 (unaudited)              |  | $           |  |                           | $ | 57,274             |  | $ | (4,165                              | ) |  | $     | (34  | ) |  | $ | 53,075  |  
|                                                 |  |             |   |                           |   |                    |  |   |                                     |   |  |       |      |   |  |   |         |  

See Notes to the Consolidated Financial Statements



3



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##### Table of Contents

Consolidated Statement of Cash Flows

Six Months Ended June 30, 2009 and 2008

(Amounts in thousands, except share data)



|                                                                                          |  |      |         |   |      |   |          |  
|----------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | -
|                                                                                          |  | 2009 |         |   | 2008 |  
|Cash Flows from Operating Activities                                                      |  |      |         |   |      |   |          |  
|Net (loss) income                                                                         |  | $    | (47     | ) |      | $ | 826      |  
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |  |      |         |   |      |   |          |  
|Provision for loan losses                                                                 |  |      | 3,016   |   |      |   | 1,225    |  
|Net accretion of discounts on securities                                                  |  |      | (177    | ) |      |   | (71      | )
|Depreciation and amortization                                                             |  |      | 1,178   |   |      |   | 372      |  
|Amortization of unearned compensation on restricted stock                                 |  |      | 295     |   |      |   | 183      |  
|Stock option expense                                                                      |  |      | 549     |   |      |   | 54       |  
|Deferred tax benefit                                                                      |  |      | (186    | ) |      |   | (416     | )
|Decrease in accrued interest receivable                                                   |  |      | 28      |   |      |   | 114      |  
|(Decrease)/increase in accrued interest payable                                           |  |      | (222    | ) |      |   | 116      |  
|Net increase in the cash surrender value of life insurance                                |  |      | (442    | ) |      |   |         |  
|Increase in other assets                                                                  |  |      | (1,628  | ) |      |   | (338     | )
|(Decrease)/increase in other liabilities                                                  |  |      | (1,314  | ) |      |   | 319      |  
|Gain on sale of interest earning assets                                                   |  |      | (1,159  | ) |      |   | (420     | )
|Loans originated for sale                                                                 |  |      | (76,339 | ) |      |   | (21,996  | )
|Sale of loans                                                                             |  |      | 73,021  |   |      |   | 41,552   |  
|                                                                                          |  |      |         |   |      |   |          |  
|Net Cash (Used in) Provided by Operating Activities                                       |  |      | (3,427  | ) |      |   | 21,520   |  
|                                                                                          |  |      |         |   |      |   |          |  
|                                                                                          |  |     
|Cash Flows from Investing Activities                                                      |  |      |         |   |      |   |          |  
|Proceeds from maturities of securities available for sale                                 |  |      | 37,073  |   |      |   | 41,539   |  
|Purchases of securities available for sale                                                |  |      | (9,641  | ) |      |   | (32,464  | )
|Net increase in loans                                                                     |  |      | (36,436 | ) |      |   | (128,642 | )
|Decrease (increase) of investment in restricted investments                               |  |      | 1,025   |   |      |   | (1,464   | )
|Purchases of premises and equipment                                                       |  |      | (1,033  | ) |      |   | (678     | )
|Net cash received in merger                                                               |  |      | 9,017   |   |      |   |         |  
|                                                                                          |  |      |         |   |      |   |          |  
|Net Cash Provided by (Used in) Investing Activities                                       |  |      | 5       |   |      |   | (121,709 | )
|                                                                                          |  |      |         |   |      |   |          |  
|                                                                                          |  |     
|Cash Flows from Financing Activities                                                      |  |      |         |   |      |   |          |  
|Proceeds from advances on long-term debt                                                  |  |      | 7,627   |   |      |   | 36,250   |  
|Net decrease in short-term borrowings                                                     |  |      | (37,837 | ) |      |   |         |  
|Net increase (decrease) in securities sold under agreements to repurchase                 |  |      | 132     |   |      |   | (9,242   | )
|Net increase in deposits                                                                  |  |      | 127,361 |   |      |   | 90,451   |  
|Dividends paid                                                                            |  |      | (1,416  | ) |      |   |         |  
|                                                                                          |  |      |         |   |      |   |          |  
|Net Cash Provided by Financing Activities                                                 |  |      | 95,867  |   |      |   | 117,459  |  
|                                                                                          |  |      |         |   |      |   |          |  
|Net Increase in Cash and Cash Equivalents                                                 |  |      | 92,445  |   |      |   | 17,270   |  
|Cash and Cash Equivalents - Beginning                                                     |  |      | 32,022  |   |      |   | 23,140   |  
|                                                                                          |  |      |         |   |      |   |          |  
|Cash and Cash Equivalents - Ending                                                        |  | $    | 124,467 |   |      | $ | 40,410   |  
|                                                                                          |  |      |         |   |      |   |          |  
|Interest paid                                                                             |  | $    | 9,120   |   |      | $ | 7,891    |  
|Income taxes paid                                                                         |  | $    | 125     |   |      | $ | 653      |  

See Notes to the Consolidated Financial Statements



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##### Table of Contents

Note 1  Summary of Significant Accounting Policies

Organization and Nature of Operations

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

The Companys activities consists of owning and supervising the Bank, which is engaged in providing banking and banking related services through its
twenty-five full service offices in Centre, Cumberland, Dauphin, York, Fulton, Franklin and Lancaster Counties of Pennsylvania and Washington County of Maryland. The Bank was originally incorporated on September 2, 2005, as a
Pennsylvania-chartered bank and commenced operations on November 10, 2005. As a state chartered bank, the Bank is subject to regulations by the FDIC and the Pennsylvania Department of Banking. The Bank undergoes periodic examinations by those
regulatory authorities. The Company, as a holding company, is subject to regulations of the Federal Reserve Board.

In January 2007,
Graystone Mortgage, LLC commenced business as a mortgage banking subsidiary of the Bank, which holds a 90% interest in the mortgage subsidiary. Graystone Mortgage, LLC offers residential mortgage banking services within the Banks market areas.

In February 2007, the Bank entered into a purchase agreement with Dellinger, Dolan, McCurdy and Phillips Investment Advisors, LLP
(DDMP). DDMP is a limited liability company that provides investment advisory and asset management services to individuals, businesses and nonprofit entities. In connection with the purchase agreement, the Bank purchased an aggregate of
twenty percent (20%) of the issued and outstanding units of membership interests in DDMP. The investment is being accounted for in accordance with Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock.

Basis of Presentation

The aforementioned merger between the Company and Graystone is considered a merger of equals and has been accounted for as a reverse merger using the acquisition method of accounting, in accordance with
the provisions of Statement of Financial Accounting Standard No. 141 (Revised) Business Combinations, which has been adopted by the Company and Graystone effective January 1, 2009, with Graystone as the accounting acquirer. As a
result, the historical financial information included in the Companys financial statements and related footnotes as reported in this Form 10-Q is that of Graystone.

The accompanying unaudited consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP), the instructions for Form 10-Q, and Article
10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by U.S. GAAP for a complete presentation of consolidated financial statements. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for fair presentation have been included. The operating results for the three and six month periods ended June 30, 2009 are not necessarily indicative of results that may be expected for any other
period or for the full year ending December 31, 2009. The accounting policies discussed within the notes to the unaudited consolidated financial statements are followed consistently by the Company. These policies are in accordance with U.S.
GAAP and conform to common practices in the banking industry.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in
thousands, except share data)

The balance sheet at December 31, 2008 has been derived from the audited financial statements of
Graystone at that date. The unaudited statements of operations, changes in stockholders equity, and cash flows for the periods ending June 30, 2008 have been derived from the consolidated financial records of Graystone for that period as
a result of the Merger being accounted for as a reverse merger. The Graystone audited financial statements and footnotes for the year ended December 31, 2008 have been filed with the Securities and Exchange Commission (SEC) within
Form 8-K/A on June 1, 2009.

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

Use of Estimates

The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the potential other-than-temporary impairment of investments, the valuation of deferred tax assets, and the allocation of the purchase price in connection with the Merger.

Significant Group Concentrations of Credit Risk

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

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold, all of which mature
within 90 days. Federal funds are purchased and sold for one-day periods.

The Company is required under Federal Reserve Board regulations
to maintain reserves against its transaction accounts. These reserves are generally held in the form of cash or noninterest earning accounts at the Companys correspondent bank. Based on the nature of the Companys transaction account
deposits and the amount of vault cash on hand, the Company was not required to maintain a reserve balance with the Federal Reserve Board at June 30, 2009 or December 31, 2008.

Securities Available for Sale

Management determines the appropriate classification of debt and
equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Purchases and sales of investment securities are accounted for on a trade date basis.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



All investment securities are classified as available for sale as the Company intends to hold such
securities for an indefinite period of time but not necessarily to maturity. Securities available for sale are carried at fair value. Any decision to sell a security classified as available for sale would be based on various factors, including
significant movement in interest rates, changes in maturity mix of the Companys assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Unrealized gains and losses are excluded from earnings and
reported as increases or decreases in other comprehensive income or loss. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest
income using the interest method over the terms of the securities.

Declines in the fair value of available for sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less
than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in
fair value.

In regard to debt securities, if the Company does not intend to sell the securities and it is more likely than not that we will
not be required to sell the debt security prior to recovery, we then evaluate whether a credit loss has occurred. To determine whether a credit loss has occurred, we compare the amortized cost of the debt security to the present value of the cash
flows we expect to be collected. If we expect a cash flow shortfall, we consider a credit loss to have occurred and will then consider the impairment to be other than temporary. We recognize the amount of the impairment loss related to the credit
loss in our results of operation, with the remaining portion of the loss recorded through comprehensive income, net of applicable taxes.

Restricted
Investment in Bank Stocks

Restricted investment in bank stocks includes Atlantic Central Bankers Bank, and Federal Home Loan Bank
(FHLB) stocks. The stock is carried at cost as these stocks are not actively traded and have no readily determinable market value.

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined
by aggregate outstanding commitments from investors or current investor yield requirements. Net unrealized losses are recognized through a valuation allowance by charges to income.

Mortgage loans held for sale are sold with the mortgage servicing rights released to another financial institution through a correspondent relationship.
The correspondent financial institution absorbs all of the risk related to rate lock commitments. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related
mortgage loans sold.

Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees
or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is
generally amortizing these amounts over the contractual life of the loan.

The accrual of interest is discontinued when the contractual
payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan
is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either
applied against principal or reported as interest income, according to managements judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan
losses charged against income as losses are estimated to have occurred. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably estimated. Managements
periodic evaluation of the adequacy of the allowance is based on known and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay, the estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard, or
special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The
general component covers non-classified loans that have been segmented into groups with similar characteristics and is based on historical loss experience adjusted for qualitative factors.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record and the amount of the shortfall in
relation to the principal and interest owed. Impairment is evaluated on a loan by loan basis for commercial and construction loans and is measured as the difference between a loans carried value on the balance sheet and its fair market value.
Based on the nature of the loan, its fair value reflects one of the following three measures: (i) the fair market value of collateral; (ii) the present value of the expected future cash flows; or (iii) the loans value as
observable in the secondary market.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual consumer and home equity loans for impairment disclosures.

Other Real Estate Owned

Foreclosed properties are those properties for which the Company has taken physical possession in connection with loan foreclosure
proceedings.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



Merrill Lynch

At the time of foreclosure, foreclosed real estate is recorded at fair value less cost to sell, which becomes the propertys new basis. Any write-downs based on the assets fair value at date of acquisition are charged to the
allowance for loan losses. After foreclosure, these assets are carried as other assets at the new basis. Improvements to the property are added to the basis of the assets. Costs incurred in maintaining foreclosed real
estate and subsequent adjustments to the carrying amount of the property are classified as other expenses.

Goodwill

Goodwill represents the excess of the purchase price over the underlying fair value of merged entities. The Company accounts for goodwill in accordance
with SFAS No. 142, Goodwill and Other Intangible Assets, and is assessed for impairment at least annually and as triggering events occur. In making this assessment, management considers a number of factors including operating
results, business plans, economic projections, anticipated futures cash flows, current market data, etc. There are inherent uncertainties related to these factors and managements judgment in applying them to the analysis of goodwill
impairment. Changes in economic and operating conditions could result in goodwill impairment in future periods.

Other Intangible Assets

Intangible assets include premiums from purchases of core deposit relationships acquired in the Merger. The core deposit intangible is being amortized
over ten years on a sum-of-the-years-digits basis.

Transfers of Financial Assets

The Company sells interests in loans receivable through loan participation sales. The Company accounts for these transactions as sales, when control over
the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Premises and Equipment

Premises and equipment are
stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the shorter of the remaining lease term, if applicable, or the economic life which is reflected in the following average lives:



|                                    |  |        
|----------------------------------- |  | -------
|                                    |  | Years  
|Automobiles                         |  | 3 - 5  
|Building and leasehold improvements |  | 10 - 30
|Furniture, fixtures, and equipment  |  | 3 - 10 
|Software and computer equipment     |  | 2 - 5  

Bank Owned Life Insurance

The Company has purchased bank owned life insurance (BOLI) policies on certain employees as a means to generate tax-free income which is used to offset a portion of current and future employee benefit costs. The BOLI
profits from the appreciation of the cash surrender value of the pool of insurance is recorded as part of Non-interest Income.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



Stock-Based Compensation

The Company recognizes all share-based payments to employees in the consolidated statement of operations based on their fair values in accordance with SFAS No. 123(R), which requires that the fair value of such
equity instruments be recognized as an expense in the historical financial statements as services are performed.

Advertising Costs

The Company charges advertising costs to expense as incurred.

Income Taxes

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and the net operating loss carryforwards and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Fair Value of Financial Instruments

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements for all financial assets and liabilities and all nonfinancial assets and
liabilities required to be measured at fair value on a recurring basis. SFAS No. 157 prescribes the meaning of fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosure requirements for fair value
measurements. Accordingly, the Company measures the fair value of all financial assets and liabilities within the scope of SFAS No. 157 at the price that would be received to sell the asset or paid to transfer the liability in an orderly
transaction between market participants.

On January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which gives entities the option to measure eligible financial assets, financial liabilities and Company commitments at fair value (i.e., the fair value option), on an instrument-by-instrument basis,
that are otherwise not permitted to be accounted for at fair value under other accounting standards. The Company has elected to not measure any additional financial instruments at fair value under this Statement.

Comprehensive Income

Accounting principles generally
accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Although changes in certain assets and liabilities, such as unrealized gains and losses on securities available for sale,
are reported as a separate component of the equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income.

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Company has entered
into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the consolidated balance sheet when they are funded.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 Revised 2007 Business Combinations. This
Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The
Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of
the business combination. The guidance impacts business combinations which occur after January 1, 2009. The Company has accounted for its merger with Graystone Financial Corp. in accordance with this pronouncement.

FASB statement No. 160 Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 was issued in
December of 2007. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a companys
fiscal year beginning after December 15, 2008. The adoption of this pronouncement did not have a material impact to the Companys consolidated financial statements.

In June 2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities. This FSP clarifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are
considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. This FSP is effective for fiscal years beginning after December 15, 2008. The adoption of this pronouncement did not
have a material impact on the Companys consolidated financial statements.

On April 1, 2009, the FASB issued FSP FAS 141(R)-1,
Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. This FSP clarifies assets acquired and liabilities assumed in a business combination arising from contingencies be initially
measured and recognized at its acquisition date fair value so long as the fair value can be determined during the measurement period. For any asset or liability whose acquisition date fair value cannot be determined, asset or liability shall be
recognized provided that there is both evidence that either the asset or liability existed as of the acquisition date and the amount can be reasonably estimated. This FSP is effective for assets or liabilities arising from contingencies in business
combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company has adopted this FSP effective for the interim period ending March 31, 2009
and utilized the FSPs guidance to recognize liabilities assumed in relation to the merger with Graystone Financial Corp.

On
April 9, 2009, the Financial Accounting Standards Board (FASB) issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly. This FSP provides guidance to assist in determining the fair value of financial instruments when the volume of market based transactions has significantly decreased. Additionally, the FSP provides guidance in
determining whether or not current market transactions of financial instruments were conducted in an orderly fashion. This FSP does not change the objective of FAS No. 157, Fair Value Measurements in which fair value is the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied
prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Company has adopted this FSP effective April 1, 2009 and the adoption expanded certain disclosure requirements, however, it did not have an impact on
the Companys financial condition, results of operation or liquidity.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



On April 9, 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments. This FSP amends the other-than-temporary impairment guidance in U.S. GAAP for debt, but does not amend the existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities. The Company has adopted this FSP effective April 1, 2009. There was no cumulative effect adjustment as there were no securitites that were previously determined to be other than temporarily impaired. Beginning
on April 1, 2009, the Company analyzed the debt securities for other-than-temporary-impairment adjustments using guidance in FSP FAS 115-2 and FAS 124-2.

On April 9, 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair
Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion
No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The Company has adopted this FSP effective for the interim period ending June 30, 2009. Footnote 12 includes the disclosures required by FSP FAS 107-1 and APB 28-1.

In May 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent Events. This Statement
establishes accounting principles for to be applied to the accounting for and disclosure of subsequent events not addressed in other U.S. GAAP. This Statement is effective for interim or annual financial periods ending after June 15, 2009 and
shall be applied prospectively. The Company has adopted this Statement effective for the interim period ending June 30, 2009. We have evaluated subsequent events for potential recognition or disclosure through August 10, 2009, the date we
issued the consolidated financial statements included in this Quarterly Report on Form 10-Q.

In June 2009, the FASB
issued SFAS No. 168, The FASB Accounting Standards CodificationTMand the Hierarchy of Generally Accepted Accounting Principles; a replacement of FASB Statement No. 162. The Statement will replace SFAS No. 162 and establish the FASB Accounting
Standards CodificationTMas the source of
authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The Statement shall be effective for the Companys consolidated financial
statements for the interim financial period ending September 30, 2009. The Company is currently evaluating the impact, if any, that this Statement will have on the consolidated financial statements.

Note 2  Merger Accounting

On November 13, 2008 Graystone
and the Company announced their decision to enter into an agreement of merger which has become effective prior to the start of business on March 31, 2009. The merger has been accounted for as a reverse merger using the acquisition method of
accounting, in accordance with the provisions of Statement of Financial Accounting Standard No. 141 (Revised) Business Combinations, which has been adopted by Tower and Graystone effective January 1, 2009. For accounting
purposes, Graystone is considered to be acquiring Tower in this transaction with the surviving legal entity operating under Tower Bancorp, Inc.s articles of incorporation. Immediately following the holding company merger, the Companys
wholly-owned subsidiary, The First National Bank of Greencastle, merged with and into Graystone Bank, the wholly-owned subsidiary of Graystone, under the name Graystone Tower Bank. Graystone Tower Bank is, therefore, the wholly owned
subsidiary of Tower Bancorp, Inc. and operates under the prior Graystone Bank charter.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



To determine the accounting treatment of the merger, management considered the guidance of paragraph A12 of FAS
No. 141R and utilized the following facts in concluding that the transaction would be treated as a reverse merger, with Graystone as the accounting acquirer:



| |  |  | The roles of Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Credit Officer, and General Counsel of the post-combination entity
will be assumed by current executives of Graystone.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Upon the effective date of the Merger, the Tower Board of Directors will consist of twenty members, of which half of the members will be appointed from the
historical Tower Board of Directors with the remaining ten directors being appointed from the Graystone Board of Directors.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | After the closing of the Merger and as a result of the fixed share exchange ratio of .42 shares of Tower common stock for each Graystone common share, the former
Graystone shareholders, as a group, will hold approximately fifty-four percent of the outstanding shares of Tower stock.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Graystone will contribute greater than fifty percent of the total assets and tangible equity to the combined entity, while Tower will contribute greater than fifty
percent of the net income to the combined entity.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The acquisition-date fair value of the consideration transferred by the accounting
acquirer (Graystone) for its interest in Tower is based on the number of equity interests Graystone would have to issue (measured on the transaction closing date) to give the owners of Tower the same percentage equity interest in the combined Tower
entity that results from the reverse acquisition. The Company has utilized the closing price of Towers common stock on March 30, 2009 (since the merger was effective prior to the open of business on March 31, 2009) to determine the
fair value of Tower stock to be utilized in the purchase price calculation which was determined to be $24.97. The table below illustrates the calculation of the consideration effectively transferred.

Purchase Price Calculation



|                                                                           |  |   |            |  
|-------------------------------------------------------------------------- |  | - | ---------- | -
|Graystone shares outstanding at March 30, 2009                             |  |   | 6,523,584  |  
|Exchange ratio                                                             |  |   | 0.42       |  
|                                                                           |  |   |            |  
|Tower shares issued to Graystone owners (excludes fractional shares)       |  |   | 2,739,811  |  
|Tower shares outstanding at March 30, 2009                                 |  |   | 2,316,823  |  
|                                                                           |  |   |            |  
|Total Tower shares at March 30, 2009                                       |  |   | 5,056,634  |  
|Ownership % held by Graystone stockholders                                 |  |   | 54.18      | %
|Ownership % held by legacy Tower stockholders                              |  |   | 45.82      | %
|                                                                           | 
|Theoretical Graystone Share to be Issued as Consideration                  |  |   |            |  
|Graystone shares outstanding at March 30, 2009                             |  |   | 6,523,584  |  
|Ownership % held by Graystone stockholders                                 |  |   | 54.18      | %
|                                                                           |  |   |            |  
|Theoretical total Graystone shares after consideration paid                |  |   | 12,040,019 |  
|Ownership % held by legacy Tower stockholders                              |  |   | 45.82      | %
|                                                                           |  |   |            |  
|Theoretical Graystone shares to be issued to Tower as consideration        |  |   | 5,516,435  |  
|Fair value of Graystone shares at March 30, 2009 (Tower share price * .42) |  | $ | 10.49      |  
|                                                                           |  |   |            |  
|Fair value of theoretical Graystone shares issued as consideration         |  |   | 57,853     |  
|Cash paid for fractional shares                                            |  |   | 2          |  
|Total consideration paid                                                   |  | $ | 57,855     |  
|                                                                           |  |   |            |  



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



As a result of the Merger, the Company recognized assets acquired and liabilities assumed at their acquisition date
fair value as presented below.



|                               |  |   |          |   |  |   |       
|------------------------------ |  | - | -------- | - |  | - | ------
|Total Purchase Price           |  |   |          |   |  | $ | 57,855
|                               |  |  
|Net Assets Acquired:           |  |   |          |   |  |   |       
|Cash                           |  | $ | 9,017    |   |  |   |       
|Securities available for sale  |  |   | 58,256   |   |  |   |       
|Restricted Investments         |  |   | 5,210    |   |  |   |       
|Loans                          |  |   | 418,747  |   |  |   |       
|Accrued interest receivable    |  |   | 1,786    |   |  |   |       
|Premises and equipment         |  |   | 22,644   |   |  |   |       
|Core deposit intangible        |  |   | 3,899    |   |  |   |       
|Deferred tax liability         |  |   | (144     | ) |  |   |       
|Other assets                   |  |   | 12,457   |   |  |   |       
|Deposits                       |  |   | (410,203 | ) |  |   |       
|Borrowings                     |  |   | (69,601  | ) |  |   |       
|Accrued interest payable       |  |   | (698     | ) |  |   |       
|Other liabilities              |  |   | (5,634   | ) |  |   |       
|                               |  |   |          |   |  |   |       
|                               |  |   |          |   |  |   | 45,736
|                               |  |   |          |   |  |   |       
|Goodwill resulting from merger |  |   |          |   |  | $ | 12,119
|                               |  |   |          |   |  |   |       

The following table explains the changes in the fair value of the net assets acquired and goodwill recognized from
the original reported amounts in the Form 10-Q for the period ended March 31, 2009. Note that the fair value adjustments made to the balances of loans, deferred taxes and other liabilities are preliminary in nature and are subject to change as
the Company obtains further data to complete valuations based on information present at the closing date.



|                                   |  |   |        |  
|---------------------------------- |  | - | ------ | -
|Goodwill balance at March 31, 2009 |  | $ | 8,689  |  
|Effect of adjustments to:          |  |   |        |  
|Loans                              |  |   | (120   | )
|Premises and equipment             |  |   | 2,191  |  
|Deferred tax asset                 |  |   | 534    |  
|Other asset                        |  |   | 737    |  
|Other liabilities                  |  |   | 88     |  
|                                   |  |   |        |  
|Goodwill balance at June 30, 2009  |  | $ | 12,119 |  
|                                   |  |   |        |  

The goodwill generated by the Merger consists of synergies and increased economies of scale such as the ability to
offer more diverse and more profitable products, added diversity to the branch system to achieve lower cost deposits, an increased legal lending limit, etc. Management expects that no goodwill recognized as a result of the Merger will be deductible
for income tax purposes. Since the combined entity will operate as a single business unit, there is no segment impact of the Merger.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of
$426,177. The table below illustrates the fair value adjustments made to the amortized costs basis in order to present a fair value of the loans acquired.



|                                                           |  |   |         |  
|---------------------------------------------------------- |  | - | ------- | -
|Gross amortized costs basis at March 30, 2009              |  | $ | 426,177 |  
|Market rate adjustment                                     |  |   | 1,323   |  
|Credit fair value adjustment on pools of homogeneous loans |  |   | (4,044  | )
|Credit fair value adjustment on distressed loans           |  |   | (4,709  | )
|                                                           |  |   |         |  
|Fair value of purchased loans at March 30, 2009            |  | $ | 418,747 |  
|                                                           |  |   |         |  

The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments,
compared to the stated rates of the acquired loans. The credit adjustment made on pools of homogeneous loans represents the changes in credit quality of the underlying borrowers from the loan inception to the acquisition date. The credit adjustment
on distressed loans was derived in accordance with Statement of Position (SOP) 03-3, Accounting for Certain Loans Acquired in a Transfer and represents the portion of the loan balance that has been deemed uncollectible based on the
managements expectations of future cash flows for each respective loan.

The following table shows the pro forma financial results for the Company
and Graystone for the six months ended June 30, 2009 and 2008, assuming that the merger occurred on January 1, 2009 and 2008, respectively:



|                                     |  |                        |        |   |                        |   |       
|------------------------------------ |  | ---------------------- | ------ | - | ---------------------- | - | ------
|                                     |  | Pro-formaJune 30, 2009 |        |   | Pro-formaJune 30, 2008
|Net interest income                  |  | $                      | 19,800 |   |                        | $ | 18,052
|Pre-tax net (loss) income            |  |                        | (697   | ) |                        |   | 3,586 
|Income tax (benefit) expense         |  |                        | (457   | ) |                        |   | 467   
|Net (loss) income                    |  |                        | (240   | ) |                        |   | 3,120 
|                                     |  |                       
|Pro-forma (loss) earnings per share: |  |                        |        |   |                        |   |       
|Basic                                |  | $                      | (0.06  | ) |                        | $ | 0.90  
|Diluted                              |  | $                      | (0.06  | ) |                        | $ | 0.90  



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Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



Note 3  Securities Available for Sale

The amortized cost of securities and their approximate fair values at June 30, 2009 and December 31, 2008 are as follows:



|                                         |  |                   |        |                      |   |                       |  |   |            |   |  |   |       
|---------------------------------------- |  | ----------------- | ------ | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | ------
|                                         |  | June 30, 2009    
|                                         |  | AmortizedCost     |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Equity securities - bank stocks          |  | $                 | 4,150  |                      | $ | 236                   |  | $ | (271       | ) |  | $ | 4,115 
|U.S. Government agencies                 |  |                   | 11,908 |                      |   | 31                    |  |   |           |   |  |   | 11,939
|Municipal bonds                          |  |                   | 9,303  |                      |   | 44                    |  |   | (25        | ) |  |   | 9,322 
|Municipal bonds - taxable                |  |                   | 13,201 |                      |   | 24                    |  |   | (164       | ) |  |   | 13,061
|Mortgage-backed securities - residential |  |                   | 12,445 |                      |   | 64                    |  |   |           |   |  |   | 12,509
|                                         |  |                   |        |                      |   |                       |  |   |            |   |  |   |       
|                                         |  | $                 | 51,007 |                      | $ | 399                   |  | $ | (460       | ) |  | $ | 50,946
|                                         |  |                   |        |                      |   |                       |  |   |            |   |  |   |       
|                                         | 
|                                         |  | December 31, 2008
|Municipal bonds                          |  | $                 | 1,279  |                      | $ | 20                    |  | $ |           |   |  | $ | 1,299 
|U.S. Government agencies                 |  |                   | 18,402 |                      |   | 203                   |  |   |           |   |  |   | 18,605
|                                         |  |                   |        |                      |   |                       |  |   |            |   |  |   |       
|                                         |  | $                 | 19,681 |                      | $ | 223                   |  | $ |           |   |  | $ | 19,904
|                                         |  |                   |        |                      |   |                       |  |   |            |   |  |   |       

The amortized cost and fair value of debt securities as of June 30, 2009 and December 31, 2008 by
contractual maturity are shown below. Expected maturities may differ from contractual maturities due to the issuers rights to call or prepay the obligation without penalty.



|                                       |  |               |        |                   |   |               |  |            |        |  |   |       
|-------------------------------------- |  | ------------- | ------ | ----------------- | - | ------------- |  | ---------- | ------ |  | - | ------
|                                       |  | June 30, 2009 |        | December 31, 2008
|                                       |  | AmortizedCost |        | Fair Value        |   | AmortizedCost |  | Fair Value
|Due in one year or less                |  | $             | 12,316 |                   | $ | 12,349        |  | $          | 14,097 |  | $ | 14,258
|Due after one year through five years  |  |               | 7,519  |                   |   | 7,586         |  |            | 5,459  |  |   | 5,520 
|Due after five years through ten years |  |               | 9,381  |                   |   | 9,267         |  |            |       |  |   |      
|Due after ten years                    |  |               | 17,641 |                   |   | 17,629        |  |            | 125    |  |   | 126   
|                                       |  |               |        |                   |   |               |  |            |        |  |   |       
|                                       |  | $             | 46,857 |                   | $ | 46,831        |  | $          | 19,681 |  | $ | 19,904
|                                       |  |               |        |                   |   |               |  |            |        |  |   |       

Included with the Companys securities available for sale are pledged securities with a fair market value of
$34,322 and $19,904 at June 30, 2009 and December 30, 2008, respectively. The securities were pledged to secure public deposits and securities sold under agreements to repurchase.

At June 30, 2009 and December 31, 2008, the Company held securities with net unrealized losses totaling $61 and net unrealized gains of $223, respectively. At
June 30, 2009 management had identified equity securities with unrealized losses that were deemed to be other than temporary in nature and, as a result recognized an impairment charge of $29. Excluding the identified investment impairment
equity securities, at June 30, 2009 and



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Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



December 31, 2008, management had not identified any securities with an unrealized loss that it intends to sell. At June 30, 2009 and
December 31, 2008, no securities were in an unrealized loss position for twelve months or longer. Management has the intent to hold the securities and will not be required to sell the securities prior to recovery or maturity. As a result, we
have determined that, excluding the securities related to the $29 impairment charge, no investments trading below cost had declined on an other-than-temporary basis during the first six months of 2009.

The following table presents information related to the Corporations gains and losses on the sales of equity and debt securities, and losses recognized for
other-than-temporary impairment of investments. Gross realized losses on equity and debt securities are net of other-than-temporary impairment charges:



|                  |  |                             |     |                     |   |      |                                      |  |   |                   |   |  |   |     |  
|----------------- |  | --------------------------- | --- | ------------------- | - | ---- | ------------------------------------ |  | - | ----------------- | - |  | - | --- | -
|                  |  | Three Months Ended June 30, |    
|                  |  | GrossRealizedGains          |     | GrossRealizedLosses |   |      | Other-than-temporaryImpairmentLosses |  |   | Net (Losses)Gains |  
|2009              |  |                             |     |                     |   |      |                                      |  |   |                   |   |  |   |     |  
|Equity securities |  | $                           | 535 |                     | $ | (237 | )                                    |  | $ | (29               | ) |  | $ | 269 |  
|Debt securities   |  |                             | 4   |                     |   | (7   | )                                    |  |   |                  |   |  |   | (3  | )
|                  |  |                             |     |                     |   |      |                                      |  |   |                   |   |  |   |     |  
|Total             |  | $                           | 539 |                     | $ | (244 | )                                    |  | $ | (29               | ) |  | $ | 266 |  
|                  |  |                             |     |                     |   |      |                                      |  |   |                   |   |  |   |     |  
|                  |  |                             |     |                    
|2008              |  |                             |     |                     |   |      |                                      |  |   |                   |   |  |   |     |  
|Equity securities |  | $                           |    |                     | $ |     |                                      |  | $ |                  |   |  | $ |    |  
|Debt securities   |  |                             |    |                     |   | (15  | )                                    |  |   |                  |   |  |   | (15 | )
|                  |  |                             |     |                     |   |      |                                      |  |   |                   |   |  |   |     |  
|Total             |  | $                           |    |                     | $ | (15  | )                                    |  | $ |                  |   |  | $ | (15 | )
|                  |  |                             |     |                     |   |      |                                      |  |   |                   |   |  |   |     |  
|                  | 
|                  |  | Six Months Ended June 30,   |    
|                  |  | GrossRealizedGains          |     | GrossRealizedLosses |   |      | Other-than-temporaryImpairmentLosses |  |   | Net (Losses)Gains |  
|2009              |  |                             |     |                     |   |      |                                      |  |   |                   |   |  |   |     |  
|Equity securities |  | $                           | 541 |                     | $ | (240 | )                                    |  | $ | (29               | ) |  | $ | 272 |  
|Debt securities   |  |                             | 4   |                     |   | (7   | )                                    |  |   |                  |   |  |   | (3  | )
|                  |  |                             |     |                     |   |      |                                      |  |   |                   |   |  |   |     |  
|Total             |  | $                           | 545 |                     | $ | (247 | )                                    |  | $ | (29               | ) |  | $ | 269 |  
|                  |  |                             |     |                     |   |      |                                      |  |   |                   |   |  |   |     |  
|                  |  |                             |     |                    
|2008              |  |                             |     |                     |   |      |                                      |  |   |                   |   |  |   |     |  
|Equity securities |  | $                           |    |                     | $ |     |                                      |  | $ |                  |   |  | $ |    |  
|Debt securities   |  |                             |    |                     |   | (15  | )                                    |  |   |                  |   |  |   | (15 | )
|                  |  |                             |     |                     |   |      |                                      |  |   |                   |   |  |   |     |  
|Total             |  | $                           |    |                     | $ | (15  | )                                    |  | $ |                  |   |  | $ | (15 | )
|                  |  |                             |     |                     |   |      |                                      |  |   |                   |   |  |   |     |  



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Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



Note 4  Loans

The following table presents a summary of the loan portfolio at June 30, 2009 and December 31, 2008:



|                          |  |              |           |   |                  |   |         |  
|------------------------- |  | ------------ | --------- | - | ---------------- | - | ------- | -
|                          |  | June 30,2009 |           |   | December 31,2008 |  
|Commercial                |  | $            | 714,483   |   |                  | $ | 508,744 |  
|Consumer & other          |  |              | 86,979    |   |                  |   | 54,084  |  
|Mortgage                  |  |              | 212,791   |   |                  |   | 5,123   |  
|                          |  |              |           |   |                  |   |         |  
|Total Loans               |  |              | 1,014,253 |   |                  |   | 567,951 |  
|Deferred costs (fees)     |  |              | (181      | ) |                  |   | (229    | )
|Allowance for loan losses |  |              | (7,823    | ) |                  |   | (6,017  | )
|                          |  |              |           |   |                  |   |         |  
|Net Loans                 |  | $            | 1,006,249 |   |                  | $ | 561,705 |  
|                          |  |              |           |   |                  |   |         |  

The following table presents the components of the allowance for credit losses as of June 30, 2009 and
December 31, 2008:



|                                             |  |              |        |                  |   |      
|-------------------------------------------- |  | ------------ | ------ | ---------------- | - | -----
|                                             |  | June 30,2009 |        | December 31,2008
|Allowance for loan losses                    |  | $            | 7,823  |                  | $ | 6,017
|Credit quality adjustment on loans purchased |  |              | 8,211  |                  |   |     
|                                             |  |              |        |                  |   |      
|Allowance for credit losses                  |  | $            | 16,034 |                  | $ | 6,017
|                                             |  |              |        |                  |   |      

Changes in the allowance for loan losses were as follows for the three and six months ended June 30, 2009 and
2008:



|                               |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |       |  
|------------------------------ |  | -------------------------- | ----- | - | ------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                               |  | Three Months EndedJune 30, |       |   | Six Months EndedJune 30, |  
|                               |  | 2009                       |       |   | 2008                     |   |       | 2009 |  |   | 2008   |  
|Balance at beginning of period |  | $                          | 7,761 |   |                          | $ | 4,898 |      |  | $ | 6,017  |   |  | $ | 4,148 |  
|Provision for loan losses      |  |                            | 650   |   |                          |   | 475   |      |  |   | 3,016  |   |  |   | 1,225 |  
|Charge-offs                    |  |                            | (612  | ) |                          |   | (183  | )    |  |   | (1,234 | ) |  |   | (183  | )
|Recoveries                     |  |                            | 24    |   |                          |   |      |      |  |   | 24     |   |  |   |      |  
|Net charge-offs                |  |                            | (588  | ) |                          |   | (183  | )    |  |   | (1,210 | ) |  |   | (183  | )
|                               |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |       |  
|Balance at end of period       |  | $                          | 7,823 |   |                          | $ | 5,190 |      |  | $ | 7,823  |   |  | $ | 5,190 |  
|                               |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |       |  



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Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



Changes in the credit quality adjustment on loans purchased were as follows for the three and six months ended
June 30, 2009 and 2008:



|                               |  |                            |       |                          |      |   |      |  |   |       |   |  |   |  
|------------------------------ |  | -------------------------- | ----- | ------------------------ | ---- | - | ---- |  | - | ----- | - |  | - | -
|                               |  | Three Months EndedJune 30, |       | Six Months EndedJune 30,
|                               |  | 2009                       |       |                          | 2008 |   | 2009 |  |   | 2008 
|Balance at beginning of period |  | $                          | 8,753 |                          |      | $ |     |  | $ | 8,753 |   |  | $ | 
|Amortization                   |  |                            | (316  | )                        |      |   |     |  |   | (316  | ) |  |   | 
|Charge-offs                    |  |                            | (226  | )                        |      |   |     |  |   | (226  | ) |  |   | 
|Recoveries                     |  |                            |      |                          |      |   |     |  |   |      |   |  |   | 
|Net charge-offs                |  |                            | (226  | )                        |      |   |     |  |   | (226  | ) |  |   | 
|                               |  |                            |       |                          |      |   |      |  |   |       |   |  |   |  
|Balance at end of period       |  | $                          | 8,211 |                          |      | $ |     |  | $ | 8,211 |   |  | $ | 
|                               |  |                            |       |                          |      |   |      |  |   |       |   |  |   |  

The following table presents non-performing assets as of June 30, 2009 and December 31, 2008:



|                                             |  |              |       |                  |   |      
|-------------------------------------------- |  | ------------ | ----- | ---------------- | - | -----
|                                             |  | June 30,2009 |       | December 31,2008
|Non-accrual loans                            |  | $            | 4,959 |                  | $ | 1,366
|Accruing loans greater than 90 days past due |  |              | 1,299 |                  | $ | 104  
|Other real estate owned                      |  |              | 484   |                  |   |     
|                                             |  |              |       |                  |   |      
|                                             |  | $            | 6,742 |                  | $ | 1,470
|                                             |  |              |       |                  |   |      

The Bank grants the majority of its loans to borrowers throughout central Pennsylvania and northern Maryland.
Although the Bank has a diversified loan portfolio, a significant portion of its borrowers ability to honor their contracts is influenced by the regions economy.

The Company serviced $122,585 and $112,871 of participation loans for unrelated parties at June 30, 2009 and December 31, 2008, respectively.

The Company sold $72,173 and $20,864 of residential mortgage loans into the secondary market during the six months ended June 30, 2009 and 2008, respectively. A gain of $581 and $141 was recognized on the sale of
these loans for the three month periods ended June 30, 2009 and 2008, respectively. A gain of $848 and $257 was recognized on the sale of these loans for the six month periods ended June 30, 2009 and 2008, respectively.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



Note 5  Premises and Equipment



|                                          |  |              |        |   |                  |   |        |  
|----------------------------------------- |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                                          |  | June 30,2009 |        |   | December 31,2008 |  
|Land                                      |  | $            | 5,394  |   |                  | $ |       |  
|Building                                  |  |              | 9,129  |   |                  |   |       |  
|Leasehold improvements                    |  |              | 3,319  |   |                  |   | 3,028  |  
|Furniture, fixtures and equipment         |  |              | 10,743 |   |                  |   | 2,492  |  
|Other                                     |  |              | 624    |   |                  |   | 495    |  
|                                          |  |              |        |   |                  |   |        |  
|                                          |  |              | 29,209 |   |                  |   | 6,015  |  
|Accumulated depreciation and amortization |  |              | (2,248 | ) |                  |   | (1,469 | )
|                                          |  |              |        |   |                  |   |        |  
|                                          |  | $            | 26,961 |   |                  | $ | 4,546  |  
|                                          |  |              |        |   |                  |   |        |  

Note 6  Deposits

The following is a summary of deposits at June 30, 2009 and December 31, 2008:



|                                          |  |              |           |                  |   |        
|----------------------------------------- |  | ------------ | --------- | ---------------- | - | -------
|                                          |  | June 30,2009 |           | December 31,2008
|Non-interest bearing transaction accounts |  | $            | 96,513    |                  | $ | 42,466 
|Interest checking accounts                |  |              | 109,145   |                  |   | 19,060 
|Money market accounts                     |  |              | 355,506   |                  |   | 120,625
|Savings accounts                          |  |              | 109,582   |                  |   | 49,310 
|Time deposits of $100,000 or greater      |  |              | 122,269   |                  |   | 207,935
|Time deposits, other                      |  |              | 270,019   |                  |   | 86,074 
|                                          |  |              |           |                  |   |        
|Total                                     |  | $            | 1,063,034 |                  | $ | 525,470
|                                          |  |              |           |                  |   |        

Brokered deposits totaled $35,121 and $63,603 at June 30, 2009 and December 31, 2008, respectively.
Brokered deposits, exclusive of in-market reciprocal brokered deposits, totaled $10,201 at June 30, 2009. There were no in-market reciprocal brokered deposits at December 31, 2008.

Note 7  Debt

The Bank has a maximum borrowing capacity under
an agreement with the Federal Home Loan Bank (FHLB) of approximately $326,691 at June 30, 2009. The available amount of borrowing capacity was approximately $267,341. The total outstanding borrowings equaled $59,350, which have a
maturity greater than one year and are, therefore, classified as long-term debt at June 30, 2009. The average interest rate on FHLB borrowings at June 30, 2009 equaled 3.89%. At June 30, 2009, the unamortized fair value adjustment to
FHLB borrowings assumed in the merger totaled $91. The total outstanding borrowings at December 31, 2008 equaled $39,000, of which, $29,000 have a stated maturity greater than one year and are, therefore, classified as long-term debt at
December 31, 2008. The remaining $10,000 in FHLB borrowings are classified as short-term borrowings at December 31, 2008 as they matured within one year.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



The Company has three lines of credit with other financial institutions with the following terms:



|                       |       |                            |   |                 |  |               |       |          |                                 |  |          
|---------------------- | ----- | -------------------------- | - | --------------- |  | ------------- | ----- | -------- | ------------------------------- |  | ---------
|Balance atJune 30,2009 |       | Balance atDecember 31,2008 |   | MaximumCapacity |  | Interest Rate |       | Maturity
|$                      | 3,314 |                            | $ | 4,614           |  | $             | 3,314 |          | LIBOR plus 275bps               |  | On Demand
|                       | 850   |                            |   |                |  |               | 1,900 |          | Prime minus 100bps; Floor of 4% |  | On Demand
|                       | 3,000 |                            |   |                |  |               | 3,000 |          | Prime minus 50bps               |  | On Demand
|                       |       |                            |   |                 |  |               |       |          |                                 |  |          
|$                      | 7,164 |                            | $ | 4,614           |  | $             | 8,214 |          |                                 |  |          

On June 12, 2009, the Company issued, to private investors, $9,000 of subordinated notes bearing an annual
interest rate of 9.00%. Each notes may be redeemed at the Companys discretion and contains a maturity date of July 1, 2014.

Federal funds are
reported on a gross basis. Federal funds sold are stated as assets and federal funds purchased are stated as liabilities. Federal funds purchased are considered short-term borrowings and are subject to restrictions limiting the frequency and terms
of advances. Generally, federal funds are purchased or sold for one day periods and bear interest based upon the daily federal funds rate. The Company did not have any federal funds purchased at June 30, 2009 or December 31, 2008.

Note 8  Net Income (Loss) Per Share

The
Companys basic net income (loss) per share is calculated as net income (loss) divided by the weighted average number of shares outstanding. For diluted net income (loss) per share, net income (loss) is divided by the weighted average number of
shares outstanding plus the incremental number of shares added as a result of converting common stock equivalents, calculated using the treasury stock method. The Companys common stock equivalents consist solely of outstanding stock options
and restricted stock.

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



|                                                                                                        |        |                            |        |                          |        |              |        |             
|------------------------------------------------------------------------------------------------------- | ------ | -------------------------- | ------ | ------------------------ | ------ | ------------ | ------ | ------------
|                                                                                                        |        | For the Three Months Ended |        | For the Six Months Ended
|                                                                                                        |        | June 30,2009               |        | June 30,2008             |        | June 30,2009 |        | June 30,2008
|                                                                                                        |        |                            |        |                         
|Weighted average shares outstanding (basic)                                                             |        | 5,058,119                  |        | 2,734,984                |        | 3,918,250    |        | 2,734,236   
|Impact of common stock equivalents                                                                      |        | 7,062                      |        |                         |        |             |        |            
|                                                                                                        |        |                            |        |                          |        |              |        |             
|Weighted average shares outstanding (diluted)                                                           |        | 5,065,180                  |        | 2,734,984                |        | 3,918,250    |        | 2,734,236   
|                                                                                                        |        |                            |        |                          |        |              |        |             
|                                                                                                        |        |                            |        |                         
|Common stock equivalents excluded from earnings per share as their effect would have been anti-dilutive |        |                            |        |                          |        |              |        |             
|                                                                                                        | 22,831 |                            | 27,195 |                          | 60,103 |              | 27,195
|                                                                                                        |        |                            |        |                          |        |              |        |             



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



Note 9  Related Party Transactions

The Company has had, and may be expected to have in the future, transactions in the ordinary course of business with executive officers and directors and their immediate families and affiliated companies (commonly
referred to as related parties), on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. All loans to executive officers and directors or their related interests are
submitted to the Board of Directors for approval. The aggregate dollar amount of these loans was $48,023 at June 30, 2009 and $37,129 at December 31, 2008.

On June 12, 2009, the Company issued, to private investors, $9,000 of subordinated notes bearing an annual interest rate of 9.00%. The investors included a director of the Company who invested $500 in principal
amount of the notes. This transaction has been reviewed and approved by the Audit Committee of the Company.

The Company has entered into employment or
change of control agreements with several executive officers. The agreements include minimum annual salary commitments and/or change of control provisions. Upon termination, resignation or change in control of the Company, these individuals may
receive monetary compensation as set forth in the agreements.

Note 10  Financial Instruments with Off-Balance Sheet Risk

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

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

The outstanding financial instruments represent credit risk in the following amounts at June 30, 2009 and December 31, 2008:



|                                           |  |              |         |                  |   |        
|------------------------------------------ |  | ------------ | ------- | ---------------- | - | -------
|                                           |  | June 30,2009 |         | December 31,2008
|Commitments to grant loans                 |  | $            | 13,686  |                  | $ | 13,274 
|Unfunded commitments under lines of credit |  |              | 246,489 |                  |   | 163,288
|Letters of credit                          |  |              | 17,221  |                  |   | 17,577 

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



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



Outstanding letters of credit are conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank typically requires collateral supporting these letters of credit.
Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The amount of the liability as of
June 30, 2009 and December 31, 2008 for guarantees under standby letters of credit issued is not material to the unaudited consolidated financial statements.

Note 11  Stock-Based Compensation

At June 30, 2009, the Company had four equity compensation plans, the
2006 Restricted Stock Plan (the 2006 Plan), the 2007 Stock Incentive Plan (the 2007 Plan), the 1995 Non-Qualified Stock Option Plan (the 1995 Plan) and the Stock Option Plan for Outside Directors (the
Director Plan).

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

The Company recognized $295 and $183 of
compensation expense during the six month periods ended June 30, 2009 and 2008, respectively, related to the vesting of the restricted stock awards in accordance with SFAS No. 123(R).

In May 2007, the shareholders of the Graystone approved the 2007 Stock Incentive Plan (the 2007 Plan). Under the Plan, Graystone may grant incentive stock
options, nonqualified stock options, stock appreciation rights, restricted stock, and deferred stock for up to 600,000 shares (shares reflect the 3-for-2 stock split paid September 30, 2007) of Graystones common stock. On March 31,
2009, as a result of the Merger, the Company has adopted the provisions of this plan. Subsequent to the Merger and as a result of the conversion factor, the total options authorized to be issued under the 2007 Plan equaled 252,000. At June 30,
2009, the Company had 168,105 options available for issuance. The accounting for the Plan is in accordance with Statement of Financial Accounting Standards No. 123(R).

The following table summarizes the outstanding incentive stock options under the Companys 2007 Plan at June 30, 2009 and December 31, 2008:



|                 |  |               |  |               |       |                 |                  |                |        |                                 |       |              |   |                  |  |   |    
|---------------- |  | ------------- |  | ------------- | ----- | --------------- | ---------------- | -------------- | ------ | ------------------------------- | ----- | ------------ | - | ---------------- |  | - | ---
|                 |  |               |  |               |       |                 |                  | Options Vested |        | Unearned Compensation(in 000s)
|Date of Issuance |  | OptionsIssued |  | ExercisePrice |       | Expiration Date |                  | June 30,2009   |        | December 31,2008                |       | June 30,2009 |   | December 31,2008
|June 26, 2007    |  | 26,145        |  | $             | 22.22 |                 | June 26, 2017    |                | 26,145 |                                 | 8,715 |              | $ |                 |  | $ | 42 
|January 22, 2008 |  | 1,050         |  | $             | 30.96 |                 | January 22, 2018 |                | 1,050  |                                 | 350   |              |   |                 |  |   | 3  
|July 17, 2008    |  | 56,700        |  | $             | 30.96 |                 | July 17, 2018    |                | 56,700 |                                 |      |              |   |                 |  |   | 416
|                 |  |               |  |               |       |                 |                  |                |        |                                 |       |              |   |                  |  |   |    
|                 |  |               |  |               |       |                 |                 
|                 |  | 83,895        |  |               |       |                 |                  |                | 83,895 |                                 | 9,065 |              | $ |                 |  | $ | 461
|                 |  |               |  |               |       |                 |                  |                |        |                                 |       |              |   |                  |  |   |    



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



The stock options normally vest over a three year vesting period and will be expensed over the vesting period. As a
result of the Merger, all of the outstanding options at March 30, 2009 became fully vested and exercisable. No options issued under this plan have been exercised during the first six months of 2009. The aggregate intrinsic value of outstanding
unvested stock options at December 31, 2008 was $0. Options granted resulted in compensation expense of $0 and $549 for the three and six month periods ended June 30, 2009, respectively. Options granted resulted in compensation expense of
$27 and $54 for the three and six month periods ended June 30, 2008, respectively. As of June 30, 2009 and in conjunction with the vesting acceleration due to the Merger, a total of 83,895 options have vested with an intrinsic value of
$352. These vested options can be exercised at an average price of $28.24 and have an average remaining life of approximately 9 years. The fair values of the options awarded under the Plan are estimated on the date of grant using the Black-Scholes
valuation methodology. The following table shows the assumptions utilized by Management to value the stock options awarded:



|                 |  |               |   |  |                    |   |  |                       |   |  |                      |   |  |              |  |                      |     
|---------------- |  | ------------- | - |  | ------------------ | - |  | --------------------- | - |  | -------------------- | - |  | ------------ |  | -------------------- | ----
|Date of Issuance |  | DividendYield |   |  | ExpectedVolatility |   |  | Risk FreeInterestRate |   |  | EstimatedForfeitures |   |  | ExpectedLife |  | Issue-DateFair Value
|                 |  |               |   |  |                    |  
|June 26, 2007    |  | 0.00          | % |  | 22.78              | % |  | 4.63                  | % |  | 5.00                 | % |  | 6 years      |  | $                    | 3.13
|                 |  |               |   |  |                    |  
|January 22, 2008 |  | 0.00          | % |  | 25.89              | % |  | 2.77                  | % |  | 5.00                 | % |  | 6 years      |  | $                    | 4.07
|                 |  |               |   |  |                    |  
|July 17, 2008    |  | 0.00          | % |  | 23.64              | % |  | 3.43                  | % |  | 3.00                 | % |  | 6.5 years    |  | $                    | 4.24
|                 |  |               |   |  |                    |  
|July 17, 2008    |  | 0.00          | % |  | 23.64              | % |  | 3.43                  | % |  | 1.00                 | % |  | 6.5 years    |  | $                    | 4.24

The dividend yield assumption is based on Graystones history and expectation of dividend payouts. The
expected volatility is based on Graystones historical volatility using Graystones own stock price. The risk-free rate is the U.S. Treasury rate commensurate with the expected life of the options on the date of the grant. The expected
life is based on the SEC shortcut approach in Staff Accounting Bulletin (SAB) 107.

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



|                 |  |               |   |  |                    |   |  |                       |   |  |                      |   |  |              |  |                      |     
|---------------- |  | ------------- | - |  | ------------------ | - |  | --------------------- | - |  | -------------------- | - |  | ------------ |  | -------------------- | ----
|Date of Issuance |  | DividendYield |   |  | ExpectedVolatility |   |  | Risk FreeInterestRate |   |  | EstimatedForfeitures |   |  | ExpectedLife |  | Issue-DateFair Value
|                 |  |               |   |  |                    |  
|June 26, 2007    |  | 4.49          | % |  | 32.17              | % |  | 2.31                  | % |  | 0.00                 | % |  | 6 years      |  | $                    | 5.75
|                 |  |               |   |  |                    |  
|January 22, 2008 |  | 4.49          | % |  | 32.17              | % |  | 2.31                  | % |  | 0.00                 | % |  | 6 years      |  | $                    | 3.70
|                 |  |               |   |  |                    |  
|July 17, 2008    |  | 4.49          | % |  | 32.17              | % |  | 2.31                  | % |  | 0.00                 | % |  | 6.5 years    |  | $                    | 3.80

At June 30, 2009, there were no options outstanding under the 1995 Plan and the Company recognized $0 in
compensation expense related to the 1995 Plan during the three and six month periods ended June 30, 2009. There are a total of 33,419 options available to be issued under this plan at June 30, 2009.

At June 30, 2009, there were a total of 32,908 options outstanding under the Director Plan. The options outstanding are all fully vested, have a weighted average
exercise price of $35.12 per share, and have a weighted average life to maturity of 5.8 years. The Company recognized $0 in compensation expense related to the Director Plan during the three and six month periods ended June 30, 2009. There are
a total of 50,170 options available to be issued under this plan at June 30, 2009.



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



Note 12  Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework
for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements. The Bank adopted SFAS 157 effective for its
fiscal year beginning January 1, 2008.

SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy under SFAS 157 are as follows:



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

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

For financial assets measured at fair value on a recurring basis, the fair value measurements by level
within the fair value hierarchy used at June 30, 2009 are as follows:



|                              |  |               |        |                       |   |                                           |  |                                        |        |  |   |    
|----------------------------- |  | ------------- | ------ | --------------------- | - | ----------------------------------------- |  | -------------------------------------- | ------ |  | - | ---
|                              |  | June 30, 2009 |        | QuotedPrices(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level
3)
|Securities available for sale |  | $             | 50,946 |                       | $ | 1,397                                     |  | $                                      | 49,292 |  | $ | 257
|                              |  |               |        |                       |   |                                           |  |                                        |        |  |   |    

Securities available for sale (carried at fair value)

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



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



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

The following table presents reconciliations of
the Companys assets measured at fair value on a recurring basis using unobservable inputs (Level 3) for the six months ended June 30, 2009:



|                             |  |                   |    
|---------------------------- |  | ----------------- | ---
|                             |  | Equity Securities
|Balance, December 31, 2008   |  | $                 |   
|Purchased through the merger |  |                   | 230
|                             |  |                   |    
|Balance, March 31, 2009      |  |                   | 230
|Transfers In from Level 2    |  |                   | 27 
|                             |  |                   |    
|Balance June 30, 2009        |  | $                 | 257
|                             |  |                   |    

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within
the fair value hierarchy used at June 30, 2009 are as follows:



|                              |  |               |         |                       |   |                                           |  |                                        |         |  |   |        
|----------------------------- |  | ------------- | ------- | --------------------- | - | ----------------------------------------- |  | -------------------------------------- | ------- |  | - | -------
|                              |  | June 30, 2009 |         | QuotedPrices(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level
3)
|Loans held for sale           |  | $             | 7,490   |                       | $ |                                          |  | $                                      |        |  | $ | 7,490  
|Loans purchased               |  |               | 418,747 |                       |   |                                          |  |                                        |        |  |   | 418,747
|Core deposit intangible asset |  |               | 3,899   |                       |   |                                          |  |                                        |        |  |   | 3,899  
|Premises and equipment        |  |               | 22,644  |                       |   |                                          |  |                                        |        |  |   | 22,644 
|Time deposits                 |  |               | 160,806 |                       |   |                                          |  |                                        | 160,806 |  |   |       
|Borrowings                    |  |               | 69,601  |                       |   |                                          |  |                                        | 69,601  |  |   |       
|                              |  |               |         |                       |   |                                           |  |                                        |         |  |   |        
|                              |  | $             | 683,187 |                       | $ |                                          |  | $                                      | 230,407 |  | $ | 452,780
|                              |  |               |         |                       |   |                                           |  |                                        |         |  |   |        

Impaired loans

Impaired loans included in the preceding table are those that are accounted for under SFAS 114, Accounting by Creditors for Impairment of a Loan, in which the Company has measured impairment generally based on the fair value of
the loans collateral. Fair value is generally determined based upon independent third party appraisals of the properties. A portion of the allowance for loan losses is allocated to impaired loans if the value of the collateral supporting such
loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the
allowance when management believes that the uncollectability of a



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



loan is confirmed. These loans are included as Level 3 fair values, based on the lowest level of input that is significant to the fair value measurements.
The fair value consists of loan balances less valuation allowances as determined under SFAS 114. The Company has no impaired loans at June 30, 2009 During 2009, the Company wrote off $1,234 of loans.

Loans purchased

In conjunction with the Merger, the loans purchased
were recorded their acquisition date fair value. In order to record the loans at fair value, management made three different types of fair value adjustments. A market rate adjustment was made to adjusts for the movement in market interest rates,
irrespective of credit adjustments, compared to the stated rates of the acquired loans. A credit adjustment was made on pools of homogeneous loans representing the changes in credit quality of the underlying borrowers from the loan inception to the
acquisition date. A credit adjustment on distressed loans was derived in accordance with Statement of Position (SOP) 03-3, Accounting for Certain Loans Acquired in a Transfer and represents the portion of the loan balance that has been
deemed uncollectible based on the managements expectations of future cash flows for each respective loan.

Core deposit intangible

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

Premises and equipment

Premises
(i.e. land and building) acquired through the Merger has been assigned an acquisition date fair value through the use of independent appraisals and internal discounted cash flow models. Both approaches utilized an income based valuation approach to
determine the fair value for the premises based on the highest and best use concept within SFAS 157.

Time deposits

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

Borrowings

Borrowings assumed through the Merger represent debt
instruments of the acquiree. The fair value adjustment to the carrying value of the borrowings at the date of acquisition represents the movement in interest rates from the inception of the individual borrowings to the acquisition date.

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



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##### Table of Contents

Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



The estimated fair values of the Companys financial instruments were as follows as of June 30, 2009 and
December 31, 2008:



|                                               |  |                |           |                   |   |                |  |            |         |  |   |        
|---------------------------------------------- |  | -------------- | --------- | ----------------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                               |  | June 30, 2009  |           | December 31, 2008
|                                               |  | CarryingAmount |           | Fair Value        |   | CarryingAmount |  | Fair Value
|Financial assets:                              |  |                |           |                   |   |                |  |            |         |  |   |        
|Cash, due from banks, and federal funds sold   |  | $              | 124,467   |                   | $ | 124,467        |  | $          | 32,022  |  | $ | 32,022 
|Securities available for sale                  |  |                | 50,946    |                   |   | 50,946         |  |            | 19,904  |  |   | 19,904 
|Restricted investment in bank stock            |  |                | 6,254     |                   |   | 6,254          |  |            | 2,068   |  |   | 2,068  
|Loans held for sale                            |  |                | 7,490     |                   |   | 7,490          |  |            | 3,324   |  |   | 3,324  
|Loans, net of allowance for loan losses        |  |                | 1,006,249 |                   |   | 1,014,304      |  |            | 561,705 |  |   | 551,987
|Accrued interest receivable                    |  |                | 4,160     |                   |   | 4,160          |  |            | 2,402   |  |   | 2,402  
|                                               |  |                |           |                  
|Financial liabilities:                         |  |                |           |                   |   |                |  |            |         |  |   |        
|Deposits                                       |  |                | 1,063,034 |                   |   | 1,068,015      |  |            | 525,470 |  |   | 527,571
|Securities sold under agreements to repurchase |  |                | 8,516     |                   |   | 8,516          |  |            | 8,384   |  |   | 8,384  
|Short-term borrowings                          |  |                | 7,164     |                   |   | 16,164         |  |            | 14,614  |  |   | 14,614 
|Long-term debt                                 |  |                | 68,441    |                   |   | 71,632         |  |            | 29,000  |  |   | 29,013 
|Accrued interest payable                       |  |                | 1,364     |                   |   | 1,364          |  |            | 888     |  |   | 888    
|                                               |  |                |           |                  
|                                               |  | NotionalAmount |           | Fair Value        |   | NotionalAmount |  | Fair Value
|Off-balance sheet financial instruments:       |  |                |           |                   |   |                |  |            |         |  |   |        
|Commitments to grant loans                     |  | $              | 13,686    |                   | $ |               |  | $          | 13,274  |  | $ |       
|Unfunded commitments under lines of credit     |  |                | 246,489   |                   |   |               |  |            | 163,288 |  |   |       
|Letters of credit                              |  |                | 17,221    |                   |   |               |  |            | 17,577  |  |   |       

The following methods and assumptions were used to estimate the fair values of the Companys financial
instruments at June 30, 2009 and December 31, 2008.

Cash and cash equivalents (carried at cost)

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

Restricted investment in bank stock (carried at cost)

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



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Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



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

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

Loans receivable (carried at cost)

The fair values of loans are estimated using discounted cash flow
analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and
prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Accrued interest receivable and payable (carried at cost)

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

Deposit liabilities (carried at cost)

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

Short-term borrowings (carried at cost)

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

Long-term debt (carried at cost)

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

Off-balance sheet financial instruments (disclosed at cost)

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



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Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



Note 13  Goodwill and Other Intangibles

Information concerning total amortizable other intangible assets at June 30, 2009 is as follows:



|                             |  |                      |       |                         |   |    
|---------------------------- |  | -------------------- | ----- | ----------------------- | - | ---
|                             |  | Gross CarryingAmount |       | AccumulatedAmortization
|Balance at December 31, 2008 |  | $                    |      |                         | $ |   
|2009 Activity:               |  |                      |       |                         |   |    
|Core deposit intangibles     |  |                      | 3,899 |                         |   | 177
|                             |  |                      |       |                         |   |    
|Balance at June 30, 2009     |  | $                    | 3,899 |                         | $ | 177
|                             |  |                      |       |                         |   |    

The aggregate amortization expense equaled $177 for both the three and six month periods ended June 30, 2009.
The Company did not recognize any amortization expense related to intangible assets during 2008.

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



|                       |  |   |      
|---------------------- |  | - | -----
|2009 (July - December) |  | $ | 355  
|2010                   |  |   | 656  
|2011                   |  |   | 585  
|2012                   |  |   | 513  
|2013                   |  |   | 444  
|2014 and thereafter    |  |   | 1,169

The carrying amount of goodwill at June 30, 2009 is as follows:



|                                                             |  |       |       
|------------------------------------------------------------ |  | ----- | ------
|                                                             |  | Total
|Balance at December 31, 2008                                 |  | $     |      
|2009 first quarter activity:                                 |  |       |       
|Goodwill resulting from the Merger - preliminary measurement |  |       | 8,689 
|                                                             |  |       |       
|Balance at March 31, 2009                                    |  |       | 8,689 
|2009 second quarter activity:                                |  |       |       
|Adjustments to goodwill resulting from the Merger            |  |       | 3,430 
|                                                             |  |       |       
|Balance at June 30, 2009                                     |  | $     | 12,119
|                                                             |  |       |       

Goodwill is tested for impairment by the Company on an annual basis or more frequently if events or circumstances
indicate that goodwill could have become impaired. The Company has not encountered any events or circumstances since the Merger to indicate that goodwill might have become impaired as of June 30, 2009.

Note 14  Federal Home Loan Bank Stock

As of June 30, 2009
and December 31, 2008, the Company had a restricted investment in the Federal Home Loan Bank of Pittsburgh (FHLB) of $6,204 and $2,018, respectively. In December 2008, the FHLB notified member banks that it was suspending dividend
payments and the repurchase of capital stock.



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Tower Bancorp, Inc. and Subsidiary



Notes to Unaudited Consolidated Financial Statements

June 30, 2009 (Unaudited)

(Amounts in thousands,
except share data)



Management evaluates its restricted investments for impairment in accordance with Statement of Position (SOP) 01-6,
Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others. Managements determination of whether these investments are impaired is based on their assessment of the
ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the
decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such
payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

Management believes no impairment charge is necessary related to the FHLB as of June 30, 2009.



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##### Table of Contents

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

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

FORWARD-LOOKING STATEMENTS

We have made, and may continue to make, certain forward-looking statements in this Report, including
information incorporated by reference in this Report. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of
1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as believe, expect, may, will, should,
project, plan, seek, target, intend or anticipate or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial
projections and estimates and their underlying assumptions, statements regarding plans, objectives, expectations or consequences of various transactions, and statements about the future performance, operations, products and services of Tower and our
subsidiaries. These forward-looking statements are subject to various assumptions, risks, uncertainties and other factors including, but not limited to, the risk factors discussed in this Report under Item 1A. Risk Factors, as
well as the following: market risk; changes or adverse developments in economic, political, or regulatory conditions; a continuation or worsening of the current disruption in credit and other markets; the effect of competition and interest rates on
net interest margin and net interest income; investment strategy and income growth; investment securities gains; declines in the value of securities which may result in charges to earnings; changes in rates of deposit and loan growth; asset quality
and the impact on assets from adverse changes in the economy and in credit or other markets and resulting effects on credit risk and asset values; balances of risk-sensitive assets to risk-sensitive liabilities; salaries and employee benefits and
other expenses; amortization of intangible assets; capital and liquidity strategies and other financial and business matters for future periods.

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

Availability of Information

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

Merger and Acquisitions

Merger of
Tower Bancorp, Inc. and Graystone Financial Corp.

On March 31, 2009, Tower Bancorp, Inc. completed the merger with Graystone Financial Corp.,
(Graystone) in an all stock transaction valued at approximately $57.9 million. The merger, while considered a merger of equals, is accounted for as a reverse acquisition by Graystone Financial Corp. of Tower Bancorp, Inc. using the
acquisition method of accounting and, accordingly, the assets and liabilities of Tower Bancorp, Inc. have been recorded at their respective fair values on the date the merger was completed. Furthermore, the historical financial information included
in Towers consolidated financial statements and related



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footnotes as reported in this Form 10-Q is that of Graystone Financial Corp. The merger was effected by the issuance of shares of Tower Bancorp, Inc. common
stock to Graystone shareholders. Each share of Graystone common stock was exchanged for 0.42 shares of Tower common stock, with any fractional shares as a result of the exchange, paid to Graystone shareholders in cash based on $19.78 per share of
Tower common stock.

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

The merger deepened Towers
foundation in central Pennsylvania with expansion into Cumberland, Centre, Dauphin, Lancaster, Lebanon, and York Counties of Pennsylvania. As a result, the Bank now serves nine counties in Central Pennsylvania and one county in Maryland. Our
operating philosophy will continue to be a community-oriented financial services company with a strong customer focus. We believe the merger will enhance our business opportunities due to the Bank having a greater market share, market presence and
the ability to offer more diverse and more profitable products, as well as a broader based and geographically diversified branch system to enhance deposit collection and the funding costs, and a higher legal lending limit to originate larger and
more profitable commercial loans. We also believe that the merger of the two banks into one surviving bank, Graystone Tower Bank, will provide greater efficiency, customer service, and product delivery than what would be achieved operating under a
multi-bank holding company structure.

Results of Operations

Summary of Financial Results

The merger of Tower Bancorp, Inc. and Graystone Financial Corp. on March 31, 2009 has had a
significant impact on our results of operations for the second quarter of 2009. The operating results reported herein for the three months ended June 30, 2009 include the results for the combined entity. However, the results for the six months
ended June 30, 2009 include the operating results of the historic Graystone for the entire six month period and only the operating results since March 30, 2009 for the historical Tower, representing the period after consummation of the
Merger which was effective before the opening of business on March 31, 2009. The year-to-date second quarter results for 2009 also include pre-tax merger expenses of approximately $1.4 million incurred by Graystone as the accounting acquirer in
the merger. Under FAS 141R, these merger expenses are reflected in the statement of operations in the period in which the expenses are incurred. In addition, the prior year period and all historical information provided herein represents the results
of Graystone as the accounting acquirer in the merger. Consequently, comparisons to the same period in 2008 may not be particularly meaningful. The Graystone audited financial statements and footnotes for the year ended December 31, 2008 have
been filed with the Securities and Exchange Commission (SEC) within Form 8-K/A on June 1, 2009.

We recognized after-tax net income of
approximately $1.8 million or $0.36 per diluted share in the second quarter of 2009, compared to $303 thousand or $0.11 per diluted share in the second quarter of 2008. The increase in net income of $1.5 million was driven by increases in net
interest income of $6.4 million and non-interest income of $2.1 million, which were partially offset by increases in non-interest expense of $6.3 million and income tax expense of $535 thousand. For the quarter, our growth in net interest income was
the result of organic growth of $1.9 million coupled with the addition of the Tower Bank divisions net interest earning assets as a result of the merger that contributed $4.5 million to the growth. The increase in non-interest income was
partially the result of the merger, which directly contributed $468 thousand to the growth of service charges on deposit accounts. Additionally we saw combined growth of other service charges and fees of $504 thousand mostly due to the addition of
income from our trust services department and increased card interchange fees. The other primary contributions to the growth for the second quarter 2009 when compared to the same period of 2008 were gains on sale of mortgage loans, gains on the
sales of equity securities and income earned on the cash surrender value of bank owned life insurance policies which increased $440 thousand, $301 thousand, and $283 thousand, respectively.

For the first half of 2009, we recognized an after-tax net loss of $47 thousand or ($.01) per diluted share, compared to net income of $826 thousand or $0.30 per diluted
share for the same period in 2008. The decrease in net income was primarily the result of the FDIC special assessment of $580 thousand and the recognition of pre-tax merger related expenses of approximately $1.4 million. When excluding these two
items from earnings on an after-tax basis, net income would have been $1.4 million or $0.36 per diluted share representing an increase in net income per diluted share of $0.06. Net interest income before loan loss provision increased $7.4 million
during the first six months of 2009 compared to the same period in 2008. In addition to the net interest



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income contributed by the inclusion of the Tower Bank divisions operations which added $6.0 million, this growth was also driven by organic growth of
net interest-earning assets. Non-interest income increased by $2.4 million due to increased commissions and fees as well as income generated from the bank owned life insurance policies. Non-interest expense, excluding merger related expenses,
increased by $7.5 million primarily due to increases in compensation costs, occupancy expenses and other operating expenses incurred in order to support our continued growth of assets and deposits.

We experienced continued asset growth during the first half of 2009. At June 30, 2009, our assets totaled approximately $1.3 billion compared to $641.3 million at
December 31, 2008. The increase includes $532.0 million of assets received in connection with the merger on March 31, 2009. The purchased assets were recorded at fair value on the merger date in accordance with relevant U.S. GAAP (GAAP).
Excluding the assets received in the merger, our total assets grew by approximately $110.4 million or 34.4% on an annualized basis between December 31, 2008 and June 30, 2009.

Quarter Ended June 30, 2009 compared to the Quarter Ended June 30, 2008

Net Interest Income

Our major source of operating revenues is net interest income, which increased $6.4 million or 174.4% to approximately $10.1 million for the second
quarter of 2009, as compared to approximately $3.7 million for the same period in 2008. The $6.4 million increase in net interest income includes $4.5 million as a result of the net contribution from interest-earning assets and interest-earning
liabilities acquired in the merger on March 31, 2009. Excluding the effect of the merger, net interest income increased by $1.9 million or 51.9% over second quarter of 2008.

In addition to our focus on increasing net interest income through growth of interest-earning assets and expansion in our net interest spread, we remain committed to increasing non-interest income as a way to improve
profitability and diversify our sources of revenue. Net interest income as a percentage of net interest income plus non-interest income was 78.7% for the quarter ended June 30, 2009, compared to 85.8% for the quarter ended June 30, 2008.

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

We principally
utilize in-market deposits to fund loans and investments, while strategically obtaining additional funding from short-term and long-term borrowings when advantageous rates and maturities can be obtained. We do not rely on brokered deposits to fund
asset growth as demonstrated by the limited use of brokered deposits, which represent less than 4% of total deposits, on our consolidated balance sheet at June 30, 2009. In connection with our continued growth plans and ongoing focus to improve
our net interest spread, we may continue to supplement in-market deposits with brokered deposits and additional short-term and long-term borrowings, including additional borrowings from the Federal Home Loan Bank and federal funds lines with
correspondent banks, based upon prevailing economic conditions, deposit availability and pricing, interest rates and other factors at such time.



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The following table provides a comparative average balance sheet and net interest income analysis for the three-month
period ended June 30, 2009 as compared to the same period in 2008. Interest income and average rates are presented on a fully taxable-equivalent (FTE) basis, using a 34% Federal tax rate. All dollar amounts are in thousands.



|                                                                                 |  |                                     |           |   |          |   |        |             |  |      |                |  |   |          |   |  |             |       |   |  |      |  
|-------------------------------------------------------------------------------- |  | ----------------------------------- | --------- | - | -------- | - | ------ | ----------- |  | ---- | -------------- |  | - | -------- | - |  | ----------- | ----- | - |  | ---- | -
|                                                                                 |  | For the Three Months Ended June 30, |          
|                                                                                 |  | 2009                                |           |   | 2008     |  
|                                                                                 |  | AverageBalance                      |           |   | Interest |   |        | AverageRate |  |      | AverageBalance |  |   | Interest |   |  | AverageRate |      
|                                                                                 |  | (in thousands)                      |          
|Interest-earning assets:                                                         |  |                                     |           |   |          |   |        |             |  |      |                |  |   |          |   |  |             |       |   |  |      |  
|Federal funds sold                                                               |  | $                                   | 49,590    |   |          | $ | 21     |             |  | 0.17 | %              |  | $ | 10,588   |   |  | $           | 87    |   |  | 3.26 | %
|Securities available for sale (1)                                                |  |                                     | 48,396    |   |          |   | 421    |             |  | 3.49 | %              |  |   | 33,216   |   |  |             | 234   |   |  | 2.79 | %
|Loans                                                                            |  |                                     | 1,022,627 |   |          |   | 15,252 |             |  | 5.98 | %              |  |   | 471,433  |   |  |             | 7,411 |   |  | 6.24 | %
|                                                                                 |  |                                     |           |   |          |   |        |             |  |      |                |  |   |          |   |  |             |       |   |  |      |  
|Total interest-earning assets                                                    |  |                                     | 1,120,614 |   |          |   | 15,694 |             |  | 5.62 | %              |  |   | 515,238  |   |  |             | 7,732 |   |  | 5.95 | %
|                                                                                 |  |                                     |           |   |          |   |        |             |  |      |                |  |   |          |   |  |             |       |   |  |      |  
|Other assets                                                                     |  |                                     | 120,611   |   |          |   |        |             |  |      |                |  |   | 22,997   |   |  |             |       |   |  |      |  
|Total assets                                                                     |  | $                                   | 1,241,224 |   |          |   |        |             |  |      |                |  | $ | 538,234  |   |  |             |       |   |  |      |  
|                                                                                 |  |                                     |           |   |          |   |        |             |  |      |                |  |   |          |   |  |             |       |   |  |      |  
|                                                                                 |  |                                     |           |   |          |  
|Interest-bearing liabilities:                                                    |  |                                     |           |   |          |   |        |             |  |      |                |  |   |          |   |  |             |       |   |  |      |  
|Interest-bearing non-maturity deposits                                           |  | $                                   | 527,468   |   |          |   | 2,128  |             |  | 1.62 | %              |  | $ | 103,262  |   |  |             | 541   |   |  | 2.08 | %
|Time deposits                                                                    |  |                                     | 391,826   |   |          |   | 2,766  |             |  | 2.83 | %              |  |   | 278,434  |   |  |             | 3,120 |   |  | 4.45 | %
|Borrowings                                                                       |  |                                     | 73,975    |   |          |   | 653    |             |  | 3.54 | %              |  |   | 57,754   |   |  |             | 378   |   |  | 2.60 | %
|                                                                                 |  |                                     |           |   |          |   |        |             |  |      |                |  |   |          |   |  |             |       |   |  |      |  
|Total interest-bearing liabilities                                               |  |                                     | 993,269   |   |          |   | 5,547  |             |  | 2.24 | %              |  |   | 439,450  |   |  |             | 4,039 |   |  | 3.65 | %
|                                                                                 |  |                                     |           |   |          |   |        |             |  |      |                |  |   |          |   |  |             |       |   |  |      |  
|Demand deposits                                                                  |  |                                     | 85,803    |   |          |   |        |             |  |      |                |  |   | 31,633   |   |  |             |       |   |  |      |  
|Other liabilities                                                                |  |                                     | 50,906    |   |          |   |        |             |  |      |                |  |   | 14,227   |   |  |             |       |   |  |      |  
|Stockholders equity                                                             |  |                                     | 111,246   |   |          |   |        |             |  |      |                |  |   | 52,924   |   |  |             |       |   |  |      |  
|                                                                                 |  |                                     |           |   |          |   |        |             |  |      |                |  |   |          |   |  |             |       |   |  |      |  
|Total liabilities and stockholders equity                                       |  | $                                   | 1,241,224 |   |          |   |        |             |  |      |                |  | $ | 538,234  |   |  |             |       |   |  |      |  
|                                                                                 |  |                                     |           |   |          |   |        |             |  |      |                |  |   |          |   |  |             |       |   |  |      |  
|Net interest spread                                                              |  |                                     |           |   |          |   |        |             |  | 3.38 | %              |  |   |          |   |  |             |       |   |  | 2.31 | %
|Net interest income and interest rate margin FTE                                 |  |                                     |           |   |          |   | 10,147 |             |  | 3.63 | %              |  |   |          |   |  |             | 3,693 |   |  | 2.85 | %
|                                                                                 |  |                                     |           |   |          |   |        |             |  |      |                |  |   |          |   |  |             |       |   |  |      |  
|Tax equivalent adjustment                                                        |  |                                     |           |   |          |   | (34    | )           |  |      |                |  |   |          |   |  |             | (7    | ) |  |      |  
|                                                                                 |  |                                     |           |   |          |   |        |             |  |      |                |  |   |          |   |  |             |       |   |  |      |  
|Net interest income                                                              |  |                                     |           |   |          |   | 10,113 |             |  |      |                |  |   |          |   |  |             | 3,686 |   |  |      |  
|                                                                                 |  |                                     |           |   |          |   |        |             |  |      |                |  |   |          |   |  |             |       |   |  |      |  
|                                                                                 |  |                                     |           |   |          |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                                     | 112.8     | % |          |   |        |             |  |      |                |  |   | 117.2    | % |  |             |       |   |  |      |  
|                                                                                 |  |                                     |           |   |          |   |        |             |  |      |                |  |   |          |   |  |             |       |   |  |      |  



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

Additional information

Average loan balances include
non-accrual loans.

Balances include amortized historical cost for available for sale securities. The related unrealized holding gains (losses) are
included in other assets.



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



|                                       |                                 |                            |        |      |   |        |       |  |   |       |  
|-------------------------------------- | ------------------------------- | -------------------------- | ------ | ---- | - | ------ | ----- |  | - | ----- | -
|                                       |                                 | Three Months Ended         |       
|                                       | June 30, 2009 vs. June 30, 2008 |                           
|                                       |                                 | Increase (Decrease) Due to |       
|                                       |                                 | Volume                     |        | Rate |   |        | Total | 
|                                       |                                 | (in thousands)             |       
|Interest income:                       |                                 |                            |        |      |   |        |       |  |   |       |  
|Federal funds sold                     |                                 | $                          | 641    |      | $ | (707   | )     |  | $ | (66   | )
|Investment securities                  |                                 |                            | 121    |      |   | 66     |       |  |   | 187   |  
|Loans                                  |                                 |                            | 10,666 |      |   | (2,825 | )     |  |   | 7,841 |  
|                                       |                                 |                            |        |      |   |        |       |  |   |       |  
|Total interest income                  |                                 |                            | 11,428 |      |   | (3,466 | )     |  |   | 7,962 |  
|                                       |                                 |                            |        |      |   |        |       |  |   |       |  
|Interest expense:                      |                                 |                            |        |      |   |        |       |  |   |       |  
|Interest-bearing non-maturity deposits |                                 |                            | 2,707  |      |   | (1,120 | )     |  |   | 1,587 |  
|Time deposits                          |                                 |                            | 6,140  |      |   | (6,494 | )     |  |   | (354  | )
|Borrowings                             |                                 |                            | 120    |      |   | 155    |       |  |   | 275   |  
|                                       |                                 |                            |        |      |   |        |       |  |   |       |  
|Total interest expense                 |                                 |                            | 8,967  |      |   | (7,459 | )     |  |   | 1,508 |  
|                                       |                                 |                            |        |      |   |        |       |  |   |       |  
|Net interest income                    |                                 | $                          | 2,461  |      | $ | 3,993  |       |  | $ | 6,454 |  
|                                       |                                 |                            |        |      |   |        |       |  |   |       |  

Interest income increased approximately $7.9 million, or 102.7%. This increase was caused by approximately
$605.4 million or 117.5% increase in the average balance of interest-earning assets, which resulted in approximately $11.4 million increase to interest income. This increase was partially offset by a 34 basis point reduction in average rates
that resulted in a reduction of interest income of approximately $3.5 million. Currently, we are committed to improving the average rate on loans through the use of interest rate floors, where possible, in our existing and new variable rate
commercial loan portfolios.

Average yields on loans decreased 26 basis points or 4.0%, from 6.24% during the second quarter of 2008 to 5.98% during the
second quarter of 2009. The decrease is reflective of the reduced interest rate environment from June 30, 2008 to June 30, 2009. During this period, the Federal Reserve reduced the intended federal funds rate by 225 basis points from 2.47%
at June 30, 2008 to 0.22% at June 30, 2009. This rate decrease, resultantly, placed downward pressure on the prime rate and all other lending rates, further adding to the reduced interest rate environment. Average yields did not decrease
as severely as the reduction in the aforementioned rates since fixed rate loans, which represent approximately 21% of total loans held at June 30, 2009, do not reprice when short-term rates declined. Additionally, the total effect of downward
loan repricing on variable rate loans will not coincide with the decrease in the aforementioned rates due to the fact that approximately 83% of our variable rate loans at June 30, 2009 contain interest rate floors.

Interest expense increased $1.5 million, or 37.3% during the second quarter of 2009 compared to the same period in 2008. This increase was caused by approximately
$553.8 million or 126.0% increase in the average balance of interest-bearing liabilities, which resulted in approximately $9.0 million increase to interest expense. This increase was predominately offset by a 141 basis point reduction in the
average rate paid on interest-bearing liabilities, which resulted in a reduction of interest expense of approximately $7.5 million. This reduction in average rates paid on interest-bearing liabilities was the result of lower rates paid on
interest-bearing non-maturity deposit accounts, time deposits, and borrowings.

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

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



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##### Table of Contents

Provision for Loan Losses and Allowance for Loan Losses

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

The following table presents the
activity in the allowance for loan losses:



|                               |  |                            |       |   |      |   |       |  
|------------------------------ |  | -------------------------- | ----- | - | ---- | - | ----- | -
|                               |  | Three MonthsEnded June 30, |      
|                               |  | 2009                       |       |   | 2008 |  
|                               |  | (in thousands)             |      
|Balance at beginning of period |  | $                          | 7,761 |   |      | $ | 4,898 |  
|Provision for loan losses      |  |                            | 650   |   |      |   | 475   |  
|Charge-offs                    |  |                            | (612  | ) |      |   | (183  | )
|Recoveries                     |  |                            | 24    |   |      |   |      |  
|Net charge-offs                |  |                            | (588  | ) |      |   | (183  | )
|                               |  |                            |       |   |      |   |       |  
|Balance at end of period       |  | $                          | 7,823 |   |      | $ | 5,190 |  
|                               |  |                            |       |   |      |   |       |  

We continue to operate in a challenging economic environment. Given the economic pressures that impact some of our
borrowers, we have increased our allowance for loan loss in accordance with our assessment process, which took into consideration the growth of our loan portfolio, the status of the current economic environment and the results of managements
risk assessment process over loans. The provision for loan losses for the three months ended June 30, 2009 totaled approximately $650 thousand, an increase of approximately $175 thousand compared to the same period in 2008. The loan charge-offs
during the three months ended June 30, 2009 consisted of 15 loans totaling $612 thousand or 0.06% of average loans for the second quarter of 2009. These charge-offs, net of recoveries, included $389 thousand of commercial loans, $166 thousand
of residential loans and $33 thousand of consumer loans. Our allowance for loan loss as a percentage of loans was 0.77% at June 30, 2009, compared to 1.06% at December 31, 2008. The decrease is a result of eliminating the allowance for
loan loss on purchased loans and incorporating a credit fair value adjustment to these loans. As a result, our allowance for credit losses, which included our allowance for loan loss and the credit fair value adjustment on loans purchased, provides
an allowance for credit loss as a percentage of period end loans of 1.58% at June 30, 2009 compared to 1.06% at December 31, 2008. The evaluation of credit fair value adjustment on purchased loans was made in accordance accounting
standards as described below.

An adjustment was made to reflect the elimination of the acquired companys allowance for loan loss required by
applying purchase accounting under FAS 141R As a result, the purchased loan portfolio was evaluated based on risk characteristics and other credit and market data by loan type to determine a credit risk component to the fair value of loans
purchased. The purchased loan balance was reduced by the aggregate amount of the credit component in determining the fair market value of loans purchased. The credit component does not account for purchased loans that are deemed to be impaired under
Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 addresses the accounting for the differences between contractual cash flows and cash flows expected to be collected
from an investors initial investment in loans, including those acquired in a business combination, if those differences are attributable, at least in part, to credit quality considerations and a credit quality fair value adjustment. We
evaluated the purchased loan portfolio and identified 36 loans that met the criteria under SOP 03-3. Accordingly, these loans were written down at the date of the merger to the amount of cash flows that are expected to be collected on each of these
loans. As a result of amortizing these loan fair value adjustments, the Company recognized $316 thousand in interest income during the quarter ended June 30, 2009.

Determining the level of the allowance for probable loan loss at any given point in time is difficult, particularly during uncertain economic periods. We must make estimates using assumptions and information that is
often subjective and changing rapidly. The review of the loan portfolio is a continuing process in light of a changing economy and the dynamics of the banking and regulatory environment. In our opinion, the allowance for loan loss is adequate to
meet probable incurred loan losses at June 30, 2009. There can be no assurance, however, that we will not sustain loan losses in future periods that could be greater than the size of the allowance at June 30, 2009. Management believes that
the allowance for loan loss is appropriate based on applicable accounting standards.



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##### Table of Contents

Non-Interest Income

Non-interest income was approximately $2.7 million and $609 thousand for the three-months ended June 30, 2009 and 2008, respectively.

The
following table presents the components of non-interest income:



|                                                   |  |          |       |          |   |                     |  |   |       |  |          |  
|-------------------------------------------------- |  | -------- | ----- | -------- | - | ------------------- |  | - | ----- |  | -------- | -
|                                                   |  | June 30, |       | June 30, |   | Increase (Decrease) | 
|                                                   |  | 2009     |       | 2008     |   | $                   |  | % |      
|Service charges on deposit accounts                |  | $        | 664   |          | $ | 188                 |  | $ | 476   |  | 253.19   | %
|Other service charges, commissions and fees        |  |          | 739   |          |   | 235                 |  |   | 504   |  | 214.47   | %
|Gain on sale of mortgage loans originated for sale |  |          | 581   |          |   | 141                 |  |   | 440   |  | 312.06   | %
|Gain on sale of other interest earnings assets     |  |          | 311   |          |   | 43                  |  |   | 268   |  | 623.26   | %
|Income from bank owned life insurance              |  |          | 283   |          |   |                    |  |   | 283   |  | N/A      |  
|Other income                                       |  |          | 168   |          |   | 2                   |  |   | 166   |  | 8,300.00 | %
|                                                   |  |          |       |          |   |                     |  |   |       |  |          |  
|Total non-interest income                          |  | $        | 2,746 |          | $ | 609                 |  | $ | 2,137 |  | 350.90   | %
|                                                   |  |          |       |          |   |                     |  |   |       |  |          |  

The $2.1 million or 350.9% increase in total non-interest income is mostly attributable to increases in other
service charges and fees, gains on sales of mortgage loans originated for sale, gains on the sales of equity securities, and income recognized on the cash surrender value of bank owned life insurance, which increased $504 thousand, $440 thousand,
$301 thousand and $283 thousand, respectively. As a result of the merger, service charges on deposit accounts directly related to the Tower Bank divisions branches contributed $446 thousand to the overall change in service charges on deposit
accounts. The majority of the increase in the other service charges and fees relates to debit card fees and trust services income which grew by $235 thousand and $152 thousand for the second quarter 2009 when compared to the same period in 2008. The
gains on sale of the equity securities relates to the results of managements focus to realign the holdings within equity investment portfolio obtained through the merger with our overall investment strategy by shifting the investments in
higher-risk equity securities to more stable investments with less exposure to market volatility.

Non-Interest Expense

Non-interest expense was approximately $9.7 million and $3.4 million for the three-months ended June 30, 2009 and 2008, respectively. Excluding the effects
of merger expenses of approximately $106 thousand associated with the consummation of the merger, non-interest expense for the second quarter would have amounted to approximately $9.6 million, up approximately $6.2 million or 184.8% from $3.4
million for the same period in 2008. The $6.2 million increase is mostly attributable to increases in salary and employee benefits, occupancy and equipment expense, FDIC insurance premiums, data processing expenses, and other operating
expenses.

The following table presents the components of non-interest expenses:



|                               |  |          |       |          |   |                     |  |   |       |  |          |  
|------------------------------ |  | -------- | ----- | -------- | - | ------------------- |  | - | ----- |  | -------- | -
|                               |  | June 30, |       | June 30, |   | Increase (Decrease) | 
|                               |  | 2009     |       | 2008     |   | $                   |  | % |      
|Salaries and employee benefits |  | $        | 4,769 |          | $ | 2,000               |  | $ | 2,769 |  | 138.45   | %
|Occupancy and equipment        |  |          | 1,470 |          |   | 544                 |  |   | 926   |  | 170.22   | %
|FDIC insurance premiums        |  |          | 731   |          |   | 66                  |  |   | 665   |  | 1,007.58 | %
|Advertising and promotion      |  |          | 141   |          |   | 72                  |  |   | 69    |  | 95.83    | %
|Data processing                |  |          | 592   |          |   | 163                 |  |   | 429   |  | 263.19   | %
|Professional service fees      |  |          | 284   |          |   | 151                 |  |   | 133   |  | 88.08    | %
|Other operating expenses       |  |          | 1,588 |          |   | 366                 |  |   | 1,222 |  | 333.88   | %
|Merger related expenses        |  |          | 106   |          |   |                    |  |   | 106   |  | n/a      |  
|                               |  |          |       |          |   |                     |  |   |       |  |          |  
|Total non-interest expenses    |  | $        | 9,681 |          | $ | 3,362               |  | $ | 6,319 |  | 187.95   | %
|                               |  |          |       |          |   |                     |  |   |       |  |          |  

Salary and employee benefits increased $2.8 million or 138.5%. Salaries increased by $2.3 million while employee
benefits increased by $480 thousand. As a result of the merger, salaries and employee benefits directly related to Tower Bank branches for the second quarter contributed approximately $978 thousand to the increase in salary and benefit expenses for
the quarter ended June 30, 2009. The remaining increased level of salary expense was driven by personnel costs in connection with our branch



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##### Table of Contents

expansion into York, Pennsylvania in May 2008, Ephrata, Pennsylvania in July 2008, and State College, Pennsylvania in October 2008. In addition, we added a
commercial lending team in Lebanon, Pennsylvania during 2008, deepened the back office operations staffing to support growth, and incurred general merit increases for all eligible employees between June 30, 2008 and June 30, 2009.

Occupancy and equipment expense increased $926 thousand or 170.2%. The increase was predominately related to the additional expense attributable to the
Tower Bank divisions branches which contributed $716 thousand in building and lease expense. The remaining building and lease expense increase related to the addition of three branch offices during 2008.

Professional service expenses increased $133 thousand or 88.1% and data processing expense increased $429 thousand or 263.2%. These increases are directly related to
increased audit, consulting and legal services, along with increased data processing costs given the rapid growth in the Bank, including the Merger, between June 30, 2008 and June 30, 2009.

Other operating expenses increased $1.2 million or 333.9%. The portion of the increase that can be attributed directly to the Tower Bank branches equaled $234 thousand
for the quarter ended June 30, 2009. The remaining increase was primarily due to increases in telephone and postage expense, directors fees, the amortization of intangible assets and debt extinguishment charges of $179 thousand, $94
thousand, $177 thousand, and $119 thousand, respectively. The amortization of intangible assets relates to the amortization of the core deposit intangible asset recognized as a result of the Merger. The debt extinguishment charge relates to the debt
fair value discount recognized on the FHLB borrowings obtained through the Merger that had subsequently been paid-off during the second quarter of 2009.

On February 27, 2009, the FDIC announced that it was increasing federal deposit insurance premiums, beginning the second quarter of 2009, for all well managed, well capitalized banks to a range between 12 and 16 cents per $100 of
insured deposits on an annual basis. At June 30, 2009, we had approximately $830.5 million in FDIC-insured deposits.

The FDIC has also imposed a
special assessment on all FDIC-insured banks based on total assets and Tier 1 capital as of June 30, 2009. As such, FDIC-insured institutions subject to the special assessment accrued the liability in their second quarter results (i.e. the
quarter ending June 30, 2009 for calendar year end companies). Furthermore, the FDIC has the authority, after June 30, 2009, to impose additional emergency assessments on all FDIC-insured banks if it estimates the reserve ratio of the
Deposit Insurance Fund will fall to a level that is believes would adversely affect public confidence or a level which would be close to zero or negative at the end of a calendar quarter. At this time we cannot estimate the probability of this
event; however, any additional FDIC assessment and/or premium would be adverse to our future earnings. At June 30, 2009 the Company estimated the special FDIC assessment to be $580 thousand and has accrued that expense in the statement of
operations for the second quarter ended June 30, 2009. This special assessment accounts for the majority of the change in the FDIC insurance premiums expense for the second quarter 2009 compared to the same period of 2008.

In connection with the merger, we have identified certain operating cost savings where we will be able eliminate redundancies in various operational functions including
system and personnel costs. During June 2009, we converted the existing systems of the former separate bank subsidiaries to one core operating system which will result in future savings relating to data processing, salary and benefit costs, and
other operational costs. As a result of the timing of the system conversion, the second quarter of 2009 does not reflect the full amount of anticipated cost savings associated with the Merger. Management expects the third quarter of 2009 to reflect
further cost savings related to the combination of the operating systems of the two bank divisions.

Income Tax Expense

Income tax expense was $690 thousand and $155 thousand for the three months ended June 30, 2009 and 2008, respectively. Our effective tax rate for the second quarter
of 2009 was 27.3%. The effective tax rate was negatively impacted by the non-deductibility of certain merger expenses, but slightly more positively impacted by tax free income generated by the purchase of bank owned life insurance and earnings from
tax-exempt securities. Our effective tax rate was 33.8% for the three months ended June 30, 2008. The statutory tax rate for both periods was 34.0%.



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##### Table of Contents

Six Months Ended June 30, 2009 compared to the Ended June 30, 2008

Net Interest Income

Net interest income increased $7.4 million
or 103.3% to approximately $14.5 million for the first half of 2009, as compared to approximately $7.1 million for the same period in 2008. The $7.4 million increase in net interest income includes $4.5 million as a result of the net contribution
from interest-earning assets and interest-earning liabilities acquired in the Merger on March 31, 2009. Excluding the effect of the merger, net interest income increased by $2.8 million or 39.7% over the six months ended June 30, 2008.

In addition to our focus on increasing net interest income through growth of interest-earning assets and expansion in our net interest spread, we remain
committed to increasing non-interest income as a way to improve profitability and diversify our sources of revenue. Net interest income as a percentage of net interest income plus noninterest income was 79.7% for the six month period ended
June 30, 2009, compared to 85.1% for the same period of 2008.

The following table provides a comparative average balance sheet and net interest
income analysis for the three-month period ended June 30, 2009 as compared to the same period in 2008. Interest income and average rates are presented on a fully taxable-equivalent (FTE) basis, using a 34% Federal tax rate. All dollar amounts
are in thousands.



|                                                                                 |  |                                   |         |   |          |        |   |             |      |   |                |   |         |          |  |        |             |  |      |  
|-------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | -------- | ------ | - | ----------- | ---- | - | -------------- | - | ------- | -------- |  | ------ | ----------- |  | ---- | -
|                                                                                 |  | For the Six Months Ended June 30, |        
|                                                                                 |  | 2009                              |         |   | 2008     |       
|                                                                                 |  | AverageBalance                    |         |   | Interest |        |   | AverageRate |      |   | AverageBalance |   |         | Interest |  |        | AverageRate | 
|                                                                                 |  | (in thousands)                    |        
|Interest-earning assets:                                                         |  |                                   |         |   |          |        |   |             |      |   |                |   |         |          |  |        |             |  |      |  
|Federal funds sold                                                               |  | $                                 | 31,634  |   |          | 27     |   |             | 0.17 | % |                | $ | 11,387  |          |  | 174    |             |  | 3.06 | %
|Securities available for sale (1)                                                |  |                                   | 34,108  |   |          | 556    |   |             | 3.29 | % |                |   | 31,742  |          |  | 559    |             |  | 3.53 | %
|Loans                                                                            |  |                                   | 804,203 |   |          | 23,540 |   |             | 5.90 | % |                |   | 441,106 |          |  | 14,412 |             |  | 6.55 | %
|                                                                                 |  |                                   |         |   |          |        |   |             |      |   |                |   |         |          |  |        |             |  |      |  
|Total interest-earning assets                                                    |  |                                   | 869,944 |   |          | 24,123 |   |             | 5.59 | % |                |   | 484,235 |          |  | 15,145 |             |  | 6.29 | %
|                                                                                 |  |                                   |         |   |          |        |   |             |      |   |                |   |         |          |  |        |             |  |      |  
|Other assets                                                                     |  |                                   | 75,188  |   |          |        |   |             |      |   |                |   | 15,657  |          |  |        |             |  |      |  
|Total assets                                                                     |  | $                                 | 945,133 |   |          |        |   |             |      |   |                | $ | 499,892 |          |  |        |             |  |      |  
|                                                                                 |  |                                   |         |   |          |        |   |             |      |   |                |   |         |          |  |        |             |  |      |  
|                                                                                 |  |                                   |         |   |          |       
|Interest-bearing liabilities:                                                    |  |                                   |         |   |          |        |   |             |      |   |                |   |         |          |  |        |             |  |      |  
|Interest-bearing non-maturity deposits                                           |  | $                                 | 378,935 |   |          | 3,475  |   |             | 1.85 | % |                | $ | 100,929 |          |  | 1,213  |             |  | 2.41 | %
|Time deposits                                                                    |  |                                   | 329,753 |   |          | 5,182  |   |             | 3.17 | % |                |   | 260,351 |          |  | 6,088  |             |  | 4.69 | %
|Borrowings                                                                       |  |                                   | 60,227  |   |          | 939    |   |             | 3.14 | % |                |   | 50,888  |          |  | 706    |             |  | 2.78 | %
|                                                                                 |  |                                   |         |   |          |        |   |             |      |   |                |   |         |          |  |        |             |  |      |  
|Total interest-bearing liabilities                                               |  |                                   | 768,915 |   |          | 9,596  |   |             | 2.52 | % |                |   | 412,168 |          |  | 8,007  |             |  | 3.91 | %
|                                                                                 |  |                                   |         |   |          |        |   |             |      |   |                |   |         |          |  |        |             |  |      |  
|Demand deposits                                                                  |  |                                   | 64,926  |   |          |        |   |             |      |   |                |   | 29,121  |          |  |        |             |  |      |  
|Other liabilities                                                                |  |                                   | 32,430  |   |          |        |   |             |      |   |                |   | 5,470   |          |  |        |             |  |      |  
|Stockholders equity                                                             |  |                                   | 78,862  |   |          |        |   |             |      |   |                |   | 53,133  |          |  |        |             |  |      |  
|                                                                                 |  |                                   |         |   |          |        |   |             |      |   |                |   |         |          |  |        |             |  |      |  
|Total liabilities and stockholders equity                                       |  | $                                 | 945,133 |   |          |        |   |             |      |   |                | $ | 499,892 |          |  |        |             |  |      |  
|                                                                                 |  |                                   |         |   |          |        |   |             |      |   |                |   |         |          |  |        |             |  |      |  
|Net interest spread                                                              |  |                                   |         |   |          |        |   |             | 3.08 | % |                |   |         |          |  |        |             |  | 2.38 | %
|Net interest income and interest rate margin FTE                                 |  |                                   |         |   |          | 14,527 |   |             | 3.37 | % |                |   |         |          |  | 7,138  |             |  | 2.96 | %
|                                                                                 |  |                                   |         |   |          |        |   |             |      |   |                |   |         |          |  |        |             |  |      |  
|Tax equivalent adjustment                                                        |  |                                   |         |   |          | (40    | ) |             |      |   |                |   |         |          |  | (13    | )           |  |      |  
|                                                                                 |  |                                   |         |   |          |        |   |             |      |   |                |   |         |          |  |        |             |  |      |  
|Net interest income                                                              |  |                                   |         |   |          | 14,487 |   |             |      |   |                |   |         |          |  | 7,125  |             |  |      |  
|                                                                                 |  |                                   |         |   |          |        |   |             |      |   |                |   |         |          |  |        |             |  |      |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                                   | 113.1   | % |          |        |   |             |      |   |                |   | 117.5   | %        |  |        |             |  |      |  
|                                                                                 |  |                                   |         |   |          |        |   |             |      |   |                |   |         |          |  |        |             |  |      |  

Additional information

Average loan balances include non-accrual loans.

Balances include amortized historical cost for available for sale
securities. The related unrealized holding gains (losses) are included in other assets.



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##### Table of Contents

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



|                                       |                                 |                            |        |      |   |        |       |  |   |       |  
|-------------------------------------- | ------------------------------- | -------------------------- | ------ | ---- | - | ------ | ----- |  | - | ----- | -
|                                       |                                 | Six Months Ended           |       
|                                       | June 30, 2009 vs. June 30, 2008 |                           
|                                       |                                 | Increase (Decrease) Due to |       
|                                       |                                 | Volume                     |        | Rate |   |        | Total | 
|                                       |                                 | (in thousands)             |       
|Interest income:                       |                                 |                            |        |      |   |        |       |  |   |       |  
|Federal funds sold                     |                                 | $                          | 477    |      | $ | (624   | )     |  | $ | (147  | )
|Investment securities                  |                                 |                            | 105    |      |   | (108   | )     |  |   | (3    | )
|Loans                                  |                                 |                            | 14,960 |      |   | (5,832 | )     |  |   | 9,128 |  
|                                       |                                 |                            |        |      |   |        |       |  |   |       |  
|Total interest income                  |                                 |                            | 15,543 |      |   | (6,565 | )     |  |   | 8,978 |  
|Interest expense:                      |                                 |                            |        |      |   |        |       |  |   |       |  
|Interest-bearing non-maturity deposits |                                 |                            | 3,476  |      |   | (1,214 | )     |  |   | 2,262 |  
|Time deposits                          |                                 |                            | 4,348  |      |   | (5,254 | )     |  |   | (906  | )
|Borrowings                             |                                 |                            | 136    |      |   | 97     |       |  |   | 233   |  
|                                       |                                 |                            |        |      |   |        |       |  |   |       |  
|Total interest expense                 |                                 |                            | 7,961  |      |   | (6,372 | )     |  |   | 1,589 |  
|                                       |                                 |                            |        |      |   |        |       |  |   |       |  
|Net interest income                    |                                 | $                          | 7,582  |      | $ | (193   | )     |  | $ | 7,389 |  
|                                       |                                 |                            |        |      |   |        |       |  |   |       |  

Interest income increased approximately $9.0 million, or 59.2%. This increase was caused by approximately
$385.7 million or 79.7% increase in the average balance of interest-earning assets, which resulted in approximately $15.5 million increase to interest income. This increase was partially offset by a 70 basis point reduction in average rates
that resulted in a reduction of interest income of approximately $6.6 million. Currently, we are committed to improving the average rate on loans through the use of interest rate floors, where possible, in our existing and new variable rate
commercial loan portfolios.

Average yields on loans decreased 65 basis points or 9.9%, from 6.55% during the first half of 2008 to 5.90% during the first
half of 2009. As mentioned above, the decrease is reflective of the reduced interest rate environment from June 30, 2008 to June 30, 2009. During this period, the Federal Reserve reduced the intended federal funds rate by 225 basis points
from 2.47% at June 30, 2008 to 0.22% at June 30, 2009. This rate decrease, resultantly, placed downward pressure on the prime rate and all other lending rates, further adding to the reduced interest rate environment. Average yields did not
decrease as severely as the reduction in the aforementioned rates since fixed rate loans, which represent approximately 21% of total loans held at June 30, 2009, do not reprice when short-term rates declined. Additionally, the total effect of
downward loan repricing on variable rate loans will not coincide with the decrease in the aforementioned rates due to the fact that approximately 83% of our variable rate loans at June 30, 2009 contain interest rate floors.

Interest expense increased $1.6 million, or 19.9% during the six months ended June 30, 2009 compared to the same period in 2008. This increase was caused by
approximately $356.7 million or 86.6% increase in the average balance of interest-bearing liabilities, which resulted in approximately $8.0 million increase to interest expense. This increase was predominately offset by a 139 basis point
reduction in the average rate paid on interest-bearing liabilities, which resulted in a reduction of interest expense of approximately $6.4 million. This reduction in average rates paid on interest-bearing liabilities was the result of lower rates
paid on interest-bearing non-maturity deposit accounts, time deposits, and borrowings.

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

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

Provision for Loan Losses and Allowance for Loan
Losses

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



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The following table presents the activity in the allowance for loan losses:



|                               |  |                          |        |   |      |   |       |  
|------------------------------ |  | ------------------------ | ------ | - | ---- | - | ----- | -
|                               |  | Six Months EndedJune 30, |       
|                               |  | 2009                     |        |   | 2008 |  
|                               |  | (in thousands)           |       
|Balance at beginning of period |  | $                        | 6,017  |   |      | $ | 4,148 |  
|Provision for loan losses      |  |                          | 3,016  |   |      |   | 1,225 |  
|Charge-offs                    |  |                          | (1,234 | ) |      |   | (183  | )
|Recoveries                     |  |                          | 24     |   |      |   |      |  
|Net charge-offs                |  |                          | (1,210 | ) |      |   | (183  | )
|                               |  |                          |        |   |      |   |       |  
|Balance at end of period       |  | $                        | 7,823  |   |      | $ | 5,190 |  
|                               |  |                          |        |   |      |   |       |  

Given the economic pressures that impact some of our borrowers, we have increased our allowance for loan loss in
accordance with our assessment process, which took into consideration the growth of our loan portfolio, the status of the current economic environment and the results of managements risk assessment process over loans. The provision for loan
losses for the six months ended June 30, 2009 totaled approximately $3.0 million, an increase of approximately $1.8 million compared to the same period in 2008. The loan charge-offs during the six months ended June 30, 2009 consisted of 22
loans totaling $1.2 million. These charge-offs, net of recoveries, included $838 thousand of commercial loans, $310 thousand of residential loans and $86 thousand of consumer loans. Our allowance for loan loss as a percentage of loans was 0.77% at
June 30, 2009, compared to 1.06% at December 31, 2008. The decrease is a result of eliminating the allowance for loan loss on purchased loans and incorporating a credit fair value adjustment to these loans. As a result, our allowance for
credit losses, which included our allowance for loan loss and the credit fair value adjustment on loans purchased, provides an allowance for credit loss as a percentage of period end loans of 1.58% at June 30, 2009 compared to 1.06% at
December 31, 2008. The evaluation of credit fair value adjustment on purchased loans was made in accordance accounting standards as described below.

An adjustment was made to reflect the elimination of the acquired companys allowance for loan loss required by applying purchase accounting under FAS 141R As a result, the purchased loan portfolio was evaluated based on risk
characteristics and other credit and market data by loan type to determine a credit risk component to the fair value of loans purchased. The purchased loan balance was reduced by the aggregate amount of the credit component in determining the fair
market value of loans purchased. The credit component does not account for purchased loans that are deemed to be impaired under Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP
03-3). SOP 03-3 addresses the accounting for the differences between contractual cash flows and cash flows expected to be collected from an investors initial investment in loans, including those acquired in a business combination, if those
differences are attributable, at least in part, to credit quality considerations and a credit quality fair value adjustment. We evaluated the purchased loan portfolio and identified 36 loans that met the criteria under SOP 03-3. Accordingly, these
loans were written down at the date of the merger to the amount of cash flows that are expected to be collected on each of these loans. As a result of amortizing these loan fair value adjustments, the Company recognized $316 thousand in interest
income during the six months ended June 30, 2009.

Determining the level of the allowance for probable loan loss at any given point in time is
difficult, particularly during uncertain economic periods. We must make estimates using assumptions and information that is often subjective and changing rapidly. The review of the loan portfolio is a continuing process in light of a changing
economy and the dynamics of the banking and regulatory environment. In our opinion, the allowance for loan loss is adequate to meet probable incurred loan losses at June 30, 2009. There can be no assurance, however, that we will not sustain
loan losses in future periods that could be greater than the size of the allowance at June 30, 2009. Management believes that the allowance for loan loss is appropriate based on applicable accounting standards.

Non-Interest Income

Non-interest income was approximately
$3.7 million and $1.2 million for the six months ended June 30, 2009 and 2008, respectively.



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##### Table of Contents

The following table presents the components of non-interest income:



|                                                   |  |          |       |          |   |                     |  |   |       |  |        |  
|-------------------------------------------------- |  | -------- | ----- | -------- | - | ------------------- |  | - | ----- |  | ------ | -
|                                                   |  | June 30, |       | June 30, |   | Increase (Decrease) | 
|                                                   |  | 2009     |       | 2008     |   | $                   |  | % |      
|Service charges on deposit accounts                |  | $        | 881   |          | $ | 368                 |  | $ | 513   |  | 139.40 | %
|Other service charges, commissions and fees        |  |          | 896   |          |   | 384                 |  |   | 512   |  | 133.33 | %
|Gain on sale of mortgage loans originated for sale |  |          | 848   |          |   | 257                 |  |   | 591   |  | 229.96 | %
|Gain on sale of other interest earnings assets     |  |          | 311   |          |   | 163                 |  |   | 148   |  | 90.80  | %
|Income from bank owned life insurance              |  |          | 442   |          |   |                    |  |   | 442   |  | N/A    |  
|Other income                                       |  |          | 316   |          |   | 77                  |  |   | 239   |  | 310.39 | %
|                                                   |  |          |       |          |   |                     |  |   |       |  |        |  
|Total non-interest income                          |  | $        | 3,694 |          | $ | 1,249               |  | $ | 2,445 |  | 195.76 | %
|                                                   |  |          |       |          |   |                     |  |   |       |  |        |  

The $2.4 million or 195.8% increase in total non-interest income is mostly attributable to increases in service
charges on deposit accounts, other service charges and fees, gains on sales of mortgage loans originated for sale, and income recognized on the cash surrender value of bank owned life insurance, which increased $513 thousand, $512 thousand, $591
thousand and $442 thousand, respectively. As a result of the merger, service charges on deposit accounts directly related to the Tower Bank divisions branches contributed $461 thousand to the overall change in service charges on deposit
accounts. The majority of the increase in the other service charges and fees relates to debit card fees and trust services income which grew by $254 thousand and $152 thousand for the first half of 2009 when compared to the same period in 2008. The
increase in gains on sale of mortgage loans is the direct result of increased volume of loans sold into the secondary market and sales at our Graystone Mortgage, LLC subsidiary, which has benefited from the recent residential refinancing boom,
however, we have also experienced increases in residential mortgages for new home purchases during the first six months of 2009 compared to the same year ago period. The majority of the change in other income relates to the income generated from the
increase in the cash surrender value of the bank owned life insurance policies.

Non-Interest Expense

Non-interest expense was approximately $15.5 million and $6.6 million for the six-months ended June 30, 2009 and 2008, respectively. Excluding the effects
of merger expenses of approximately $1.4 million associated with the consummation of the merger of equals transaction, non-interest expense for the second quarter would have amounted to approximately $14.0 million, up approximately $7.5 million or
114.1% from $6.6 million for the same period in 2008. The $7.5 million increase is mostly attributable to increases in salary and employee benefits, occupancy and equipment expense, FDIC insurance premiums, data processing expenses, and other
operating expenses.

The following table presents the components of non-interest expenses:



|                               |  |          |        |          |   |                     |  |   |       |  |        |  
|------------------------------ |  | -------- | ------ | -------- | - | ------------------- |  | - | ----- |  | ------ | -
|                               |  | June 30, |        | June 30, |   | Increase (Decrease) | 
|                               |  | 2009     |        | 2008     |   | $                   |  | % |      
|Salaries and employee benefits |  | $        | 7,286  |          | $ | 3,948               |  | $ | 3,338 |  | 84.55  | %
|Occupancy and equipment        |  |          | 2,202  |          |   | 1,050               |  |   | 1,152 |  | 109.71 | %
|FDIC insurance premiums        |  |          | 911    |          |   | 126                 |  |   | 785   |  | 623.02 | %
|Advertising and promotion      |  |          | 218    |          |   | 139                 |  |   | 79    |  | 56.83  |  
|Data processing                |  |          | 787    |          |   | 305                 |  |   | 482   |  | 158.03 | %
|Professional service fees      |  |          | 538    |          |   | 304                 |  |   | 234   |  | 76.97  | %
|Other operating expenses       |  |          | 2,101  |          |   | 687                 |  |   | 1,414 |  | 205.82 | %
|Merger related expenses        |  |          | 1,412  |          |   |                    |  |   | 1,412 |  | n/a    |  
|                               |  |          |        |          |   |                     |  |   |       |  |        |  
|Total non-interest expenses    |  | $        | 15,455 |          | $ | 6,559               |  | $ | 8,896 |  | 135.63 | %
|                               |  |          |        |          |   |                     |  |   |       |  |        |  

Salary and employee benefits increased $3.3 million or 84.6%. Salaries increased by $2.9 million while employee
benefits increased by $481 thousand. As a result of the merger, salaries and employee benefits directly related to Tower Bank branches for the first half of 2009 contributed approximately $978 thousand to the increase in salary and benefit expenses.
The remaining increased level of salary expense was driven by personnel costs in connection with our branch expansion into York, Pennsylvania in May 2008, Ephrata, Pennsylvania in July 2008, and State College, Pennsylvania in October 2008. In
addition, we added a commercial lending team in Lebanon, Pennsylvania during 2008, deepened the back office operations staffing to support growth, and incurred general merit increases for all eligible employees between June 30, 2008 and
June 30, 2009.



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##### Table of Contents

Occupancy and equipment expense increased $1.2 million or 109.7%. The increase was predominately related to the
additional expense attributable to the Tower Bank divisions branches which contributed $716 thousand to building and lease expense. The remaining building and lease expense increase related to the addition of three branch offices during 2008.

Data processing expense increased $482 thousand or 158.0%. These increases are directly related to increased data processing costs given the rapid growth
in the Bank, including the Merger, between June 30, 2008 and June 30, 2009.

Other operating expenses increased $1.4 million or 205.8%. The
portion of the increase that can be attributed directly to the Tower Bank branches equaled $234 thousand for the six months ended June 30, 2009. The remaining increase was primarily due to increases in telephone and postage expense,
directors fees, the amortization of intangible assets and debt extinguishment charges of $236 thousand, $122 thousand, $177 thousand, and $119 thousand, respectively. The amortization of intangible assets relates to the amortization of the
core deposit intangible asset recognized as a result of the Merger. The debt extinguishment charge relates to the debt fair value discount recognized on the FHLB borrowings obtained through the Merger that had subsequently been paid-off during the
second quarter of 2009.

On February 27, 2009, the FDIC announced that it was increasing federal deposit insurance premiums, beginning the second
quarter of 2009, for all well managed, well capitalized banks to a range between 12 and 16 cents per $100 of insured deposits on an annual basis. At June 30, 2009, we had approximately $830.5 million in FDIC-insured deposits.

The FDIC has also imposed a special assessment on all FDIC-insured banks based on total assets and Tier 1 capital as of June 30, 2009. As such, FDIC-insured
institutions subject to the special assessment accrued the liability in their second quarter results (i.e. the quarter ending June 30, 2009 for calendar year end companies). Furthermore, the FDIC has the authority, after June 30, 2009, to
impose additional emergency assessments on all FDIC-insured banks if it estimates the reserve ratio of the Deposit Insurance Fund will fall to a level that is believes would adversely affect public confidence or a level which would be close to zero
or negative at the end of a calendar quarter. At this time we cannot estimate the probability of this event; however, any additional FDIC assessment and/or premium would be adverse to our future earnings. At June 30, 2009 the Company estimated
the special FDIC assessment to be $580 thousand and has accrued that expense in the statement of operations for the second quarter ended June 30, 2009. This special assessment accounts for the majority of the change in the FDIC insurance
premiums expense for the second quarter 2009 compared to the same period of 2008.

In connection with the merger, we have identified certain operating cost
savings where we will be able eliminate redundancies in various operational functions including system and personnel costs. During June 2009, we converted the existing systems of the former separate bank subsidiaries to one core operating system
which will result in future savings relating to data processing, salary and benefit costs, and other operational costs. As a result of the timing of the system conversion, the second quarter of 2009 does not reflect the full amount of anticipated
cost savings associated with the Merger. Management expects the third quarter of 2009 to reflect further cost savings related to the combination of the operating systems of the two bank divisions.

Income Tax Benefit

Income tax benefit was $243 thousand and
$236 thousand for the six months ended June 30, 2009 and 2008, respectively. Our effective tax rate for the second quarter of 2009 was a benefit of 83.8%. The effective tax rate was positively impacted by tax free income generated by the
purchase of bank owned life insurance and earnings from tax-exempt securities as well as a partial release of $92 thousand related to a previously established valuation allowance associated with deferred tax assets for losses on equity securities,
for which the tax benefits were realized during the period. Our effective tax rate was a benefit of 40.0% for the six months ended June 30, 2008 as a result of the release of a valuation allowance of $434 thousand established during 2007
related to the estimated ability of the Company to recover net operating loss benefits in future periods. The statutory tax rate for both periods was 34.0%.



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##### Table of Contents

Financial Condition

Total Assets

Total assets increased by $631.5 million, or 98.5%, to $1.3 billion at June 30, 2009 as compared to
$641.3 million at December 31, 2008. The increase includes $532.0 million of assets received in connection with the merger on March 31, 2009. Excluding the assets received in the merger, our total assets grew by approximately $110.4
million or 34.4% on an annualized basis between December 31, 2008 and June 30, 2009.

Loans, net

Our gross loan balance grew by $446.4 million, or 78.6%, to $1.0 billion during the first half of 2009. The increase includes $418.7 million of loans purchased in
the merger on March 31, 2009. Excluding the fair value of loans purchased in the merger, our total gross loans grew by approximately $27.6 million or 9.7% on an annualized basis between December 31, 2008 and June 30, 2009.

This growth was represented across all loan categories, reflecting a continuing commitment to the credit needs of our primary market areas. See the table below for a
detail of the loan balances, net of unearned income and allowance for loan losses at June 30, 2009 and the changes from December 31, 2008:



|                          |  |          |           |   |              |   |         |                     |  |   |         |   |  |        |  
|------------------------- |  | -------- | --------- | - | ------------ | - | ------- | ------------------- |  | - | ------- | - |  | ------ | -
|                          |  | June 30, |           |   | December 31, |   |         | Increase/(Decrease) | 
|                          |  | 2009     |           |   | 2008         |   |         | $                   |  |   | %       |  
|Commercial                |  | $        | 714,483   |   |              | $ | 508,744 |                     |  | $ | 205,739 |   |  | 40.4   | %
|Consumer & other          |  |          | 86,979    |   |              |   | 54,084  |                     |  |   | 32,895  |   |  | 60.8   | %
|Mortgage                  |  |          | 212,791   |   |              |   | 5,123   |                     |  |   | 207,668 |   |  | 4053.6 | %
|                          |  |          |           |   |              |   |         |                     |  |   |         |   |  |        |  
|Total Loans               |  |          | 1,014,253 |   |              |   | 567,951 |                     |  |   | 446,302 |   |  | 78.6   | %
|Deferred costs (fees)     |  |          | (181      | ) |              |   | (229    | )                   |  |   | 48      |   |  | -21.0  | %
|Allowance for loan losses |  |          | (7,823    | ) |              |   | (6,017  | )                   |  |   | (1,806  | ) |  | 30.0   | %
|                          |  |          |           |   |              |   |         |                     |  |   |         |   |  |        |  
|Net Loans                 |  | $        | 1,006,249 |   |              | $ | 561,705 |                     |  | $ | 444,544 |   |  | 79.1   | %
|                          |  |          |           |   |              |   |         |                     |  |   |         |   |  |        |  

The increase in mortgage loans of $207.7 million between December 31, 2008 and June 30, 2009 is
predominately mortgage loans acquired in the merger. The commercial loan portfolio continues to be the largest component of our loan portfolio, representing 70.4% and 89.6% of total loans at June 30, 2009 and December 31, 2008,
respectively. In addition, we have $92.6 million in loan participations without recourse to unaffiliated banks through June 30, 2009, where we maintain the servicing rights with these relationships. We have not purchased any loans from
other banks during the periods presented. We expect continued loan growth during the remainder of 2009, as we focus on serving the credit needs of our market areas, while exercising prudent underwriting standards considering the economic
uncertainties that are expected to continue. However, due to uncertain economic conditions and the continued recession resulting in lower levels of loan demand, we expect that loan growth may be slower than historically experienced.



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



|                                                    |  |                |        |   |                  |   |        |  
|--------------------------------------------------- |  | -------------- | ------ | - | ---------------- | - | ------ | -
|                                                    |  | June 30,2009   |        |   | December 31,2008 |  
|                                                    |  | (in thousands) |       
|Non-accrual loans                                   |  | $              | 4,959  |   |                  | $ | 1,366  |  
|Accruing loans greater than 90 days past due        |  |                | 1,299  |   |                  |   | 104    |  
|                                                    |  |                |        |   |                  |   |        |  
|Total non-performing loans                          |  |                | 6,258  |   |                  |   | 1,470  |  
|                                                    |  |               
|Other real estate owned                             |  |                | 484    |   |                  |   |       |  
|                                                    |  |                |        |   |                  |   |        |  
|Total non-performing assets                         |  |                | 6,722  |   |                  |   | 1,470  |  
|Allowance for Loan Losses                           |  |                | 7,823  |   |                  |   | 6,017  |  
|Credit fair value adjustment on loans purchased     |  |                | 8,211  |   |                  |   |       |  
|                                                    |  |                |        |   |                  |   |        |  
|Allowance for credit losses                         |  | $              | 16,034 |   |                  | $ | 6,017  |  
|                                                    |  |               
|Non-performing assets to total assets               |  |                | 0.53   | % |                  |   | 0.23   | %
|Non-performing loans to period end loans            |  |                | 0.62   | % |                  |   | 0.26   | %
|Allowance for loan losses to period end loans       |  |                | 0.77   | % |                  |   | 1.06   | %
|Allowance for credit losses to period end loans     |  |                | 1.58   | % |                  |   | 1.06   | %
|                                                    |  |               
|Allowance for loan losses to non-performing loans   |  |                | 125.01 | % |                  |   | 409.32 | %
|Allowance for credit losses to non-performing loans |  |                | 256.22 | % |                  |   | 409.32 | %

The accounting estimates for loan losses are subject to changing economic conditions. At June 30, 2009, the
non-accrual loans totaled $4.9 million compared to $1.4 million at December 31, 2008. Excluding the non-accrual loans purchased through the Merger of $3.1 million, non-accrual loans equaled $1.8 million at June 30, 2009 compared to $1.4
million at December 31, 2008. When analyzing the non-accrual loans on an individual basis, there are no individual non-accrual loans with an outstanding balance of greater than $1.0 million. Of the $4.9 million of non-accrual loans at
June 30, 2009, $2.9 million or 59.2% related to commercial real estate loans, $742 thousand or 15.0% to commercial and industrial loans, $519 thousand or 9.6% to consumer loans and $803 million or 16.2% to mortgage loans. Of these
non-performing loans, management has determined no loans to be impaired at June 30, 2009. The Loan Committee and Management have performed a detailed review of the non-performing loans and of their related collateral and believe the allowance
for loan losses remains adequate for the level of risk inherent in the loan portfolio. During the first half of 2009, the banking industry experienced increasing defaults in mortgage loans coupled with decreasing values of residential real estate
values as a result of an economic downturn. A majority of the credit defaults experienced throughout the industry have been related to subprime loans, and loans with low introductory rates that reset to market or above-market rates after
a set introductory period. Since we have avoided these types of loan products, we have experienced a relatively low percentage of non-performing loans when compared to the total amount of loans.

Securities Available for Sale

At June 30, 2009, total
available for sale securities were $50.9 million, an increase of $31.0 million from total available for sale securities of $19.9 million at December 31, 2008. The securities available for sale portfolio at December 31, 2008 consisted
entirely of U.S. Government agency securities and municipal bonds of $19.9 million, of which $6.5 million matured or was called during the first six months of 2009. As a result of the merger, we acquired available for sale securities with a fair
value balance of $49.4 million. These securities included $38.1 million of primarily debt securities and $11.3 million of equities, most of which are investments in banks, bank holding companies and financial institutions. Since March 31, 2009,
we have purchased debt securities and sold various debt and equity securities to realign the holdings within equity investment portfolio obtained through the merger with our overall investment strategy by shifting the investments in higher-risk
equity securities to more stable investments with less exposure to market volatility.



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Subsequent to the merger, we sold a portion of the equity portfolio held at the holding company, which resulted in a net
gain on sale of securities of $301 thousand. As of June 30, 2009, the fair value of our equity portfolio has decreased by $7.1 million. Many of the equity securities held in the portfolio are financial institutions that are highly illiquid due
to the nature of the institution and the manner in which shares are offered into the market. The portfolio was marked to fair value on June 30, 2009 under FASB Statement 157 Fair Value Measurements (FAS 157) resulting in a fair value of $4.1
million; We do hold certain equity securities where the shares owned are in excess of the average daily trading volume. These securities, if determined to be traded in an active market under FAS 157, shall be measured within Level 1 as the product
of the quoted price for the individual instrument times the quantity held. The quoted price shall not be adjusted because of the size of the position relative to trading volume (blockage factor). The use of a blockage factor is prohibited, even if a
markets normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. We plan to liquidate the portfolio in an orderly, but timely,
fashion in an attempt to minimize volatility to future earnings. Considering the current volatility in the financial services industry and the fair value determinations made in accordance with FAS 157, we continue to expect to recognize gains and
losses through the statement of operations as a result of the difference between the fair value of these securities and the proceeds recognized upon the sale of these securities.

Bank-owned Life Insurance

In July 2008, we purchased a bank-owned life insurance (BOLI) policy
for $12 million as a means to generate tax-free income and reduce our effective tax rate. The Banks deposits and proceeds from the sale of investment securities funded the BOLI. Earnings from the BOLI are recognized as other income. The
BOLI is profitable from the appreciation of the cash surrender value of the pool of insurance, and its tax advantage to the Company. In connection with the merger, we acquired an additional $12.4 million in cash surrender value of BOLI. At
June 30, 2009, the total cash surrender value of the BOLI was $24.0 million. The proceeds are used to offset a portion of current and future employee benefit costs.

Deposits

Total deposits at June 30, 2009 were $1.1 billion, an increase of $537.6 million from
total deposits of $525.5 million at December 31, 2008. The increase includes $410.2 million of deposits assumed in connection with the merger on March 31, 2009. Excluding the deposits assumed in the merger, our total deposits grew by
approximately $127.4 million or 48.5% on an annualized basis between December 31, 2008 and June 30, 2009.

The table below displays the increases
in deposits by type at June 30, 2009 as compared to December 31, 2008.



|                                          |  |               |           |   |                   |   |        |                     |         |  |      |   |  |         |   |  |        |   
|----------------------------------------- |  | ------------- | --------- | - | ----------------- | - | ------ | ------------------- | ------- |  | ---- | - |  | ------- | - |  | ------ | --
|                                          |  | June 30, 2009 |           |   | December 31, 2008 |   |        | Increase/(Decrease) |        
|                                          |  | Amount        |           | % |                   |   | Amount |                     | %       |  |      | $ |  |         | % | 
|Non-interest bearing transaction accounts |  | $             | 96,514    |   | 9.1               | % |        | $                   | 42,466  |  | 8.1  | % |  | 54,048  |   |  | 127.27 | % 
|Interest checking accounts                |  |               | 109,144   |   | 10.3              | % |        |                     | 19,060  |  | 3.6  | % |  | 90,084  |   |  | 472.63 | % 
|Money market accounts                     |  |               | 355,506   |   | 33.4              | % |        |                     | 120,625 |  | 23.0 | % |  | 234,881 |   |  | 194.72 | % 
|Savings accounts                          |  |               | 109,582   |   | 10.3              | % |        |                     | 49,310  |  | 9.4  | % |  | 60,272  |   |  | 122.23 | % 
|Time deposits of $100,000 or greater      |  |               | 122,269   |   | 11.5              | % |        |                     | 207,935 |  | 39.6 | % |  | (85,666 | ) |  | (41.20 | %)
|Time deposits, other                      |  |               | 270,019   |   | 25.4              | % |        |                     | 86,074  |  | 16.4 | % |  | 183,945 |   |  | 213.71 | % 
|                                          |  |               |           |   |                   |   |        |                     |         |  |      |   |  |         |   |  |        |   
|Total deposits                            |  | $             | 1,063,034 |   | 100               | % |        | $                   | 525,470 |  | 100  | % |  |         |   |  |        |   

The most significant increase in deposit type was in money market accounts, which represented 33.4% of total
deposits at June 30, 2009 compared to 23.0% of total deposits at December 31, 2008. This increase is the result of management efforts to grow more stable deposits at a lower cost than higher-cost time deposits. The money market accounts
include $10.2 million and $11.4 million of brokered money market deposits at June 30, 2009 and December 31, 2008, respectively. Time deposits represent 36.9% of total deposits at June 30, 2009 compared to 56% of total deposits at
December 31, 2008. The time deposits include $24.1 and $52.2 million of brokered certificates of deposit at June 30, 2009 and December 31, 2008, respectively. Overall, total brokered deposits were $35.1 million or approximately
3.3 % of our total deposits at June 30, 2009.



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The average balances and weighted average rates paid on deposits for the first six months of 2009 and 2008 are presented
in the table below:



|                                          |  |                |         |             |               |   |                |                                        |             |  |      |   |  |         |  |       |  
|----------------------------------------- |  | -------------- | ------- | ----------- | ------------- | - | -------------- | -------------------------------------- | ----------- |  | ---- | - |  | ------- |  | ----- | -
|                                          |  | June 30, 2009  |         |             | June 30, 2008 |   |                | Increase (Decrease) inaverage balances |            
|                                          |  | AverageBalance |         | AverageRate |               |   | AverageBalance |                                        | AverageRate |  |      | $ |  | %       | 
|Non-interest bearing transaction accounts |  | $              | 64,926  |             | N/A           |   |                | $                                      | 29,121      |  | N/A  |   |  | 35,805  |  | 123.0 | %
|Interest checking accounts                |  |                | 32,729  |             | 0.93          | % |                |                                        | 28,377      |  | 1.70 | % |  | 4,352   |  | 15.3  | %
|Money market accounts                     |  |                | 273,131 |             | 1.88          | % |                |                                        | 53,754      |  | 2.72 | % |  | 219,377 |  | 408.1 | %
|Savings accounts                          |  |                | 75,910  |             | 2.07          | % |                |                                        | 18,799      |  | 2.60 | % |  | 57,111  |  | 303.8 | %
|Time deposits, other                      |  |                | 329,920 |             | 3.17          | % |                |                                        | 260,351     |  | 4.69 | % |  | 69,569  |  | 26.7  | %
|                                          |  |                |         |             |               |   |                |                                        |             |  |      |   |  |         |  |       |  
|Total                                     |  | $              | 776,616 |             | 2.25          | % |                | $                                      | 390,402     |  | 3.75 | % |  | 386,214 |  | 98.9  | %

As reflected above, we have decreased the average rate on our total deposits by 150 basis points between the first
half of 2008 and the first half of 2009. Although we operate in a very competitive environment for deposits, we have been able to grow our deposits from an average of $390.4 million to $776.6 million between the six months ended June 30, 2008
and the six months ended June 30, 2009 as a result of acquisition-related growth and organic growth.

Short-Term Borrowings and Long-Term Debt

Short-term borrowings decreased $7.5 million from December 31, 2008 to June 30, 2009. At December 31, 2008, short-term borrowings
also included a $10 million advance from the Federal Home Loan Bank of Pittsburgh that was retired in the first quarter of 2009. At June 30, 2009, short-term borrowings consist of three lines of credit with unaffiliated banks of $8.2 million,
which had an aggregate outstanding balance of $7.2 million. As a result of the merger, we assumed $6.4 million of short-term outstanding borrowings, of which $2.5 million was retired as of June 30, 2009. An additional $1.3 million of short-term
borrowings were retired during the first six months of 2009. The lines of credit with unaffiliated banks are payable on demand or have short-term maturities. We are using the proceeds from the sale of equity securities to retire a portion of the
short-term debt.

Long-term debt increased by $39.4 million from December 31, 2008 to June 30, 2009. At June 30, 2009, long-term debt
consisted of $59.4 million in advances from the FHLB that had a maturity of greater than one year and $9.0 million of subordinated debt issued in June 2009. As a result of the merger, we assumed $31.9 million of long-term debt of which $1.5 million
has been retired. The total average rate incurred on borrowings for the second quarter of 2009 was 3.54% compared to an average rate of 2.52% for the fiscal year ending December 31, 2008.

Stockholders Equity and Capital Adequacy

Total
stockholders equity increased $56.9 million or 103.8%, from $54.8 million at December 31, 2008 to $111.7 million at June 30, 2009. The increase was due to $57.9 million of equity received in the merger on
March 31, 2009, offset by a decrease in our total stockholders equity of $1.0 million. The increase of $56.9 million was the addition of approximately $45.8 million in net assets and $12.1 million of goodwill generated as a result of the
merger on March 31, 2009. The decrease can be primarily attributed to the declaration of a $1.4 million dividend to our stockholders which increased our accumulated deficit, offset by an increase in additional paid-in capital of approximately
$800 thousand. The increase in additional paid-in capital is the direct result of recognizing compensation expense associated with the vesting of stock compensation.

The Company is subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material
effect on the our consolidated financial statements. The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and Tier I capital to
average assets (as defined). As of June 30, 2009, the Company and the Bank met the minimum requirements. In addition, capital ratios of the Company and the Bank exceeded the amounts required to be considered well capitalized as
defined in the regulations.



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On June 12, 2009, the Company issued, to private investors, $9,000 of subordinated notes bearing an annual interest
rate of 9.00%. The Company has contributed the net proceeds from the sale of the notes to the Companys wholly-owned subsidiary, Graystone Tower Bank, as equity capital to support the Banks continued growth, including ongoing lending
activities in its local markets. The Notes are intended to qualify as Tier 2 capital for regulatory purposes, to the extent permitted. It is expected that in accordance with applicable regulatory treatment one-fifth of the original principal amount
of the Notes will be excluded each year from Tier 2 capital during the last five years prior to maturity.

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



|                                         |  |               |   |  |                  |   |  |                         |  
|---------------------------------------- |  | ------------- | - |  | ---------------- | - |  | ----------------------- | -
|Graystone Tower Bank                     |  | June 30,2009  |   |  | December 31,2008 |   |  | Minimum CapitalAdequacy |  
|Total Capital (to Risk Weighted Assets)  |  | 11.34         | % |  | 10.80            | % |  | 8.00                    | %
|Tier I Capital (to Risk Weighted Assets) |  | 10.59         | % |  | 9.80             | % |  | 4.00                    | %
|Tier I Capital (to Average Assets)       |  | 9.01          | % |  | 9.20             | % |  | 4.00                    | %
|                                         |  |               |  
|Tower Bancorp, Inc.                      |  | March 31,2009 |   |  | December 31,2008 |   |  | Minimum CapitalAdequacy |  
|Total Capital (to Risk Weighted Assets)  |  | 10.87         | % |  | 10.10            | % |  | 8.00                    | %
|Tier I Capital (to Risk Weighted Assets) |  | 9.25          | % |  | 9.10             | % |  | 4.00                    | %
|Tier I Capital (to Average Assets)       |  | 7.84          | % |  | 8.50             | % |  | 4.00                    | %

Management believes, as of June 30, 2009, that Tower Bancorp, Inc. and Graystone Tower Bank met all capital
adequacy requirements to which it is subject.

Our subsidiary bank, Graystone Tower Bank, is subject to certain restrictions on the amount of dividends
that it may declare due to regulatory considerations. The Pennsylvania Banking Code provides that cash dividends may be declared and paid only out of accumulated net earnings. As a result of the merger, $24.4 million of accumulated earnings related
to the pre-merger retained earnings of Tower Bancorp, Inc., were transferred and reclassified into additional paid-in capital. Based on the approval from the Pennsylvania Department of Banking, this amount is available for cash dividends and may be
declared and paid in future periods. During the second quarter of 2009, the Company declared a dividend of $0.28 per share which totaled $1.4 million.

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

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



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

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

Liquidity Risk

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



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



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



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



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



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



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



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

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

As of June 30, 2009, we had a maximum
borrowing capacity at the Federal Home Loan Bank of Pittsburgh of approximately $327 million of which approximately $59.4 million was used in the form of borrowings. As of June 30, 2009, we had federal funds lines availability at three
correspondent banks totaling $27.5 million. There were no funds drawn upon these facilities as of June 30, 2009.

We participate in obtaining
wholesale funding sources in addition to core demand deposits. As of June 30, 2009, we had Certificate of Deposit Account Registry Service (CDARS) reciprocal deposits as an alternative source of funds in the amount of $24.9 million.
We also participate in a brokerage sweep program that provides for the deposit of funds with the benefit of insurance from the FDIC. The balance of this funding as of June 30, 2009 was approximately $10.2 million. Brokered deposits, exclusive
of CDARS reciprocal deposits accounted for approximately 1.0% and 8.5% of total deposits as of June 30, 2009 and December 31, 2008, respectively. Time deposits comprise approximately $392.3 million or 36.9% of our deposit liabilities.
At June 30, 2009, liquid assets (defined as cash and cash equivalents, loans held for sale, and securities available for sale exclusive of securities pledged as collateral or used in connection with customer repurchase agreements) totaled
approximately $137.0 million or 12.9% of total deposits. This compares to $42.5 million, or 8.1%, of total deposits, at December 31, 2008.

We
maintained borrowings of approximately $7.2 million from unaffiliated banks at June 30, 2009. These borrowings are demand lines of credit and, therefore, future availability under these lines is subject to the policies of the unaffiliated banks
and may be withdrawn at anytime.

Management is of the opinion that its liquidity position at June 30, 2009, is adequate to respond to fluctuations
on and off balance sheet. In addition, management knows of no trends, demands, commitments, events or uncertainties that may result in, or that are reasonably likely to result in our inability to meet anticipated or
unexpected liquidity needs.

Interest Rate Risk

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

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

The interest rate characteristics and maturity structure compositions of the loan portfolio at
June 30, 2009 are set forth in the tables below. Adjustable-rate loans represent loans that are currently in a fixed-rate, but are subject to repricing to either a fixed or variable rate at the related next repricing date.



|                             |  |                        |  
|---------------------------- |  | ---------------------- | -
|Interest Rate Characteristic |  | Percentage ofPortfolio |  
|Fixed-rate loans             |  | 21.4                   | %
|Adjustable-rate loans        |  | 42.3                   | %
|Variable-rate loans          |  | 36.3                   | %
|                             | 
|Total                        |  | 100.0                  | %



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|                        |  |                        |  
|----------------------- |  | ---------------------- | -
|Maturity Structure      |  | Percentage ofPortfolio |  
|One month or less       |  | 35.2                   | %
|Two to six months       |  | 6.0                    | %
|Six to twelve months    |  | 6.6                    | %
|One to two Years        |  | 10.7                   | %
|Two to three years      |  | 8.0                    | %
|Three to five years     |  | 23.6                   | %
|Greater than five years |  | 9.9                    | %
|                        | 
|                        |  | 100.0                  | %

As of June 30, 2009, we reported deposit liabilities of approximately $1.0 billion and securities sold under
agreements to repurchase of approximately $8.5 million. Comparatively, we reported deposit liabilities of approximately $525.5 million and securities sold under repurchase agreements of approximately $8.4 million at December 31, 2008.
Approximately $410.4 million of deposit growth during the first six months of 2009 was attributed to the merger. The remaining $127.5 million of growth was attributed to in-market deposit gathering.

The maturity structure of the time deposit portfolio as of June 30, 2009, is summarized below.



|                                           |  |                   |       |            |       |  
|------------------------------------------ |  | ----------------- | ----- | ---------- | ----- | -
|Certificates of Deposit Maturity Structure |  | Dollars(millions) |       | Percentage |      
|One months or less                         |  | $                 | 46.2  |            | 11.8  | %
|Over one month through one year            |  |                   | 250.4 |            | 63.8  | %
|Over one year through two years            |  |                   | 40.9  |            | 9.5   | %
|Over two years                             |  |                   | 54.8  |            | 14.9  | %
|                                           |  |                  
|Total                                      |  | $                 | 392.3 |            | 100.0 | %

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

Gap Analysis.We use gap analysis to compare the relationship of assets that are expected to reprice during a specific time frame
(Rate Sensitive Assets or RSA) as compared to liabilities that are scheduled to reprice during an identical time period (Rate Sensitive Liabilities or RSL). When the ratio is greater than one, RSA
exceed RSL and potentially exposes the bank to a risk of a decline in interest rates by virtue of a larger amount of assets repricing at lower interest rates than rate sensitive liabilities. The converse would be true of a RSA/RSL ratio less than
1.0. While gap analysis can be useful in evaluating the relationship of RSA to RSL, it does not capture other critical interest rate risk variables such as the extent of change that will take place when a RSA or RSL reprices, prepayment
considerations, and other factors. Additionally, many asset liability models, including that used by Tower, will treat loans with current rates below contractual floors as non-rate sensitive assets until such time as an interest rate shock is
applied that raises loan rates to levels above the contractual floor. Management reports the ratio of Rate Sensitive Assets to Rate Sensitive Liabilities assuming the floor is in place and assuming that the floor has been pierced by rising rates.
For purposes of assessing compliance with ALCO Policy, Management compares the ratio of Rate Sensitive Assets to Rate Sensitive Liabilities assuming floors have been exceeded and assets are repricing exclusive of the constraints of loan floors.
Under the ALCO Policy, the interest rate simulation report measures the ratio of rate sensitive assets to rate sensitive liabilities at a one-year time frame. The ALCO Policy has established an acceptable relationship of RSA to RSL to a rage of 80%
to 120%.

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

Economic Value of Equity at Risk.We assess the present value of cash inflows of cash, investments, loans, bank-owned life insurance policies, when applicable, netted against the present value of cash outflows from deposits,
repurchase agreements,



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borrowings, and other interest-bearing liabilities, all discounted to a measurement date. This measure is expressed as the percentage change in the present
value of such cash flows when interest rates are shocked (upward and downward) at 100, 200, and 300 basis points. Under the Asset and Liability Management Policy and Procedures, the interest rate simulation reports measures the percentage change in
economic value of equity at risk assuming interest rate shocks of 100, 200, and 300 basis points. The ALCO Policy has established an acceptable negative percentage change in economic value of equity at risk under 100, 200, and 300 basis point shocks
of 20%.

At June 30, 2009, the balance sheet of the Company was liability sensitive with a gap ratio of approximately 82%. In large part, the liability
sensitivity position of the Company was due to two factors. First, the Company increased the percentage of variable rate loans that are subject to interest rate floors. In the current interest rate environment, the variable rate loans that are
subject to interest rate floors will not reprice upwards until such time as the indexed-rate of the loan plus its related spread exceeds the floor. Accordingly, this portion of the loan portfolio is not assumed to reprice immediately. Second, the
Company has increased the money market component of its deposit portfolio as a means of strengthening on-balance sheet liquidity, acquiring lower cost in-market deposits, and addressing consumer demand for FDIC-insured liquid deposits. Many asset
liability models, including that of Tower, assume that non-maturity deposits, including money market deposit accounts, disproportionately reprice within the one-year time period when computing periodic gap. Except for the degree of liability
sensitivity as measured by gap analysis noted above, no material changes in our market risk or market strategy occurred during the quarter ended June 30, 2009. Further detail of market risk is provided under Part I, Item 3 of our
Quarterly Report on Form 10-Q for the period ended March 31, 2009.

Market Price Risk

As of June 30, 2009, our investment portfolio had a market value of approximately $57.2 million. The investment portfolio is comprised of two separate components
each of which is managed pursuant to a board approved investment policy. At the holding company level, we had a portfolio of equity securities of financial institutions (the Equity Portfolio) with a market value of approximately $4.1
million. At the bank level, Graystone Tower Bank had a portfolio with a market value of approximately $53.1 comprised of debt securities summarized below and certain restricted short-term investments related to business relationships with the
Federal Home Loan Bank of Pittsburgh and a correspondent bank. As of December 31, 2008, we had a portfolio with a market value of approximately $22.0 that was held at the bank level. This portfolio was comprised of government agency
obligations, municipal obligations and certain restricted short-term investments related to business relationships with the Federal Home Loan Bank of Pittsburgh and a correspondent bank. The significant growth in the investment portfolio of the bank
and holding company are a result of the merger.

Debt security market price risk is the risk that changes in the values of debt security investments could
have a material impact on our financial position or results of operations. The table below summarizes the portfolio as of June 30, 2009.



|                                                                  |  |                              |        |                               |       |                                 |       |                |        |       |   |       
|----------------------------------------------------------------- |  | ---------------------------- | ------ | ----------------------------- | ----- | ------------------------------- | ----- | -------------- | ------ | ----- | - | ------
|                                                                  |  | Market Values (in thousands)
|                                                                  |  | Within 1 year                |        | After 1 yearbut within 5years |       | After 5 yearsbut within10 years |       | After 10 years |        | Total
|Investment Portfolio of Graystone Tower Bank                      |  |                              |        |                               |       |                                 |       |                |        |       |   |       
|                                                                  |  |                              |        |                               |      
|U.S. Government Agency Obligations                                |  | $                            | 10,031 |                               | 1,909 |                                 |      |                |       |       |   | 11,940
|                                                                  |  |                              |        |                               |      
|Mortgage-backed securities                                        |  |                              | 503    |                               | 2,038 |                                 |       |                | 9,968  |       |   | 12,509
|                                                                  |  |                              |        |                               |      
|State and Municipal Obligations                                   |  |                              | 1,816  |                               | 3,639 |                                 | 9,267 |                | 7,660  |       |   | 22,383
|                                                                  |  |                              |        |                               |      
|Other Securities: Note 1                                          |  |                              |        |                               |       |                                 |       |                |        |       |   | 6,254 
|                                                                  |  |                              |        |                               |       |                                 |       |                |        |       |   |       
|                                                                  |  |                              |        |                               |      
|Graystone Tower Bank Portfolio                                    |  | $                            | 12,349 |                               | 7,586 |                                 | 9,267 |                | 17,628 |       |   | 53,085
|                                                                  |  |                              |        |                               |       |                                 |       |                |        |       |   |       
|                                                                  |  |                              |        |                               |      
|Investment Portfolio of Equity Securities held at holding company |  |                              |        |                               |       |                                 |       |                |        |       | $ | 4,115 
|                                                                  |  |                              |        |                               |      
|Total Investment Securities                                       |  |                              |        |                               |       |                                 |       |                |        |       | $ | 57,200
|                                                                  |  |                              |        |                               |       |                                 |       |                |        |       |   |       



Note 1: Equity investments in business relationship banks such as the Federal Home Loan Bank and correspondent banks.

Equity market price risk is
the risk that changes in the values of equity investments could have a material impact on our financial position or results of operations. The Equity Portfolio was acquired as a result of the merger. As of June 30, 2009, the equity portfolio
was comprised of 62 different equity securities of financial institutions. The total asset sizes of the financial institutions ranged from less than $250 million to financial institutions with assets of approximately $2.8 billion. The financial
institutions are geographically diverse with concentrations in the mid-Atlantic and western states.

Management notes that Statement 157 precludes the
consideration of the relationship of shares owned to the average daily trading volume. Under Statement 157, if the reporting entity holds a position in a single financial instrument (including a block) and the instrument is traded in an active
market, the fair value of the position shall be measured within Level 1 as the product of the quoted price for the individual instrument times the quantity held. The quoted price shall not be adjusted because of the size of the position relative to
trading volume (blockage factor). The use of a blockage factor is prohibited, even if a markets normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might



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affect the quoted price. Statement 157 also places heavy reliance on quoted prices and places a burden of proof on management to demonstrate that a market is
not active. It is our understanding that Statement 157 is generally interpreted to deem a quoted price as a Level 1 input even if the stock is thinly traded as is the case for many of the positions in the Equity Portfolio.

The Equity Portfolio is comprised of several positions for which the number of shares held significantly exceeds the average daily trading volume. Management further
believes that the liquidation of the portfolio, even in an orderly fashion, exposes the portfolio to market discounts given the relationship of the number of shares held to the average daily volume. By prohibiting the application of a discount to
the per share price to reflect market realities, Management believes the application of Statement 157 valuation methodology along with the volatility of the financial institutions market may result in gains or losses over time as management seeks to
liquidate the portfolio.



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

We maintain a system of controls and
procedures designed to ensure that information required to be disclosed by us in reports that we file with the Securities and Exchange Commission (the Commission) is recorded, processed, summarized and reported, within the time periods
specified in the Commissions rules and forms. Towers Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2009. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting management to information required to be included in our periodic Securities and Exchange Commission filings.

Towers management is responsible for establishing and maintaining adequate internal control over financial reporting. During the quarter ended
June 30, 2009, in conjunction with the integration of Tower and Graystone Financial Corp. (Graystone) following the merger that was effective March 31, 2009, Tower continued implementing or changing key procedures, systems, and
personnel throughout the organization. The integration also provided for the enhancement of certain management and administrative personnel and staffing, as well as the implementation of certain credit administration, loan review, lending and other
control policies and procedures throughout the entire Tower organization. Management believes that these changes will significantly remediate the material weaknesses identified in Managements Report on Internal Control over Financial
Reporting, as filed with Towers annual report on Form 10-K for the year ended December 31, 2008. Additionally, in connection with the reverse merger, Tower adopted the internal control structure of Graystone. Nonetheless, the Graystone
Bank and Tower Bank divisions, representing the pre-merger entities, generally continued operating under their pre-existing control structures until the conversion of Towers core processing system and information technology system, which was
completed in early June 2009. To bridge the gap between the legal closing of the merger and the systems conversion, temporary controls such as additional general ledger reconciliations and system access reviews were put in place prior to the systems
conversion. Other than the foregoing, there were no changes in Towers internal control over financial reporting during the second quarter of 2009 that materially affected, or are reasonably likely to materially affect, Towers internal
control over financial reporting.

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

Tower is an occasional party to legal actions
arising in the ordinary course of its business. In the opinion of Towers management, Tower has adequate legal defenses and/or insurance coverage respecting any and each of these actions and does not believe that they will materially
affect Towers operations or financial position.



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

Information responsive to this item as of
June 30, 2009 appears under the heading, Risk Factors within Towers Form 10-Q for the quarter ended March 31, 2009, filed on May 11, 2009 and is incorporated herein by reference thereto, except for the following risk
factors, which have been amended or added since March 31, 2009:

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

Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies and political bodies placing increased focus and scrutiny on the financial services industry. The
U.S. Government has intervened on an unprecedented scale, enacting and implementing numerous programs and actions targeted at the financial markets generally and the financial services industry in particular. Most recently, on June 17, 2009,
the U.S. Department of the Treasury released a financial regulatory reform plan that would, if enacted, represent the most sweeping reform of financial regulation and financial services in decades.



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These programs and proposals subject us and other financial institutions to additional restrictions, oversight and costs
that may have an adverse impact on our business, financial condition, results of operations or the price of our common stock. If enacted, the Treasury Departments financial reform plan would substantially increase regulation of the financial
services industry and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices. Federal and state regulatory agencies also frequently adopt changes to their
regulations or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending or future legislation, regulation or the application thereof. Compliance with such current and potential regulation and
scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner.

A substantial decline in the value of our Federal Home Loan Bank of Pittsburgh common stock may adversely affect our financial condition.

We own common stock of the Federal Home Loan Bank of Pittsburgh (FHLB) in order to qualify for membership in the Federal Home Loan Bank system, which enables
us to borrow funds under the Federal Home Loan Bank advance program. The carrying value and fair market value of our FHLB common stock was $6.2 million as of June 30, 2009.

Published reports indicate that certain member banks of the Federal Home Loan Bank system may be subject to asset quality risks that could result in materially lower regulatory capital levels. In December 2008, the
FHLB had notified its member banks that it had suspended dividend payments and the repurchase of capital stock until further notice is provided. In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including
the FHLB, could be substantially diminished or reduced to zero. Consequently, given that there is no market for our FHLB common stock, we believe that there is a risk that our investment could be deemed other than temporarily impaired at some time
in the future. If this occurs, it may adversely affect our results of operations and financial condition.

Increases in FDIC insurance premiums may
have a material adverse effect on our results of operations.

During 2008 and continuing in 2009, higher levels of bank failures have dramatically
increased resolution costs of the Federal Deposit Insurance Corporation (FDIC) and depleted the deposit insurance fund. In addition, the FDIC and the U.S. Congress have taken action to increase federal deposit insurance coverage, placing
additional stress on the deposit insurance fund.

In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund,
the FDIC increased assessment rates of insured institutions uniformly by seven cents for every $100 of deposits beginning with the first quarter of 2009, with additional changes beginning April 1, 2009, which require riskier institutions to pay
a larger share of premiums by factoring in rate adjustments based on secured liabilities and unsecured debt levels.

To further support the rebuilding of
the deposit insurance fund, the FDIC imposed a special assessment on each insured institution, equal to five basis points of the institutions total assets minus Tier 1 capital as of June 30, 2009. For the Bank, this represents a
charge of approximately $580 thousand, which was recorded as a pre-tax charge during the second quarter of 2009. The FDIC has indicated that future special assessments are possible, although it has not determined the magnitude or timing of any
future assessments.

We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank
or financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels. Our expenses for the quarter ending June 30, 2009 have been significantly and adversely affected by these increased
premiums and the special assessment. These increases and assessment and any future increases in insurance premiums or additional special assessments may materially adversely affect our results of operations.



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

On
April 30, 2009, Tower issued 1,902 shares of its common stock, no par value, to DDMP Investment Advisors, Inc. (DDMP) as partial payment of certain contingent consideration then due and payable under a certain LLC Membership
Interest Purchase Agreement (the Purchase Agreement) relating to the purchase of units of membership interest of Dellinger, Dolan, McCurdy and Phillips Investment Advisors, LLC. Pursuant to the terms of the Purchase Agreement, for
purposes of determining the number of shares of Tower common stock issued to DDMP, the shares were valued at $24.36 per share, representing an aggregate value of $46,330. Exemption of the transaction from registration under the Securities Act of
1933



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(the Act) was claimed under Section 4(2) of the Act for transactions not involving a public offering, in reliance on the private nature of
the transaction as well as certain representations and certifications made by DDMP and each of its shareholders concerning their respective financial condition, financial and investment experience and investment intent.



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

None.



|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

The 2009
annual meeting of the shareholders of Tower Bancorp, Inc. was held on May 27, 2009. Notice of the meeting was mailed to shareholders of record on or about April 22, 2009 together with proxy solicitation materials prepared in
accordance with Section 14(a) of the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder.

The annual meeting was
held (a) to elect seven Class A Directors to serve for a 3-year term and until their successors are elected and qualified and (b) to consider the approval of the Tower Bancorp, Inc. Employee Stock Purchase Plan.

Election of Directors

There was no solicitation in opposition to the
nominees of the Board of Directors for election to the Board of Directors and all such nominees were elected. The number of votes cast for or withheld, as well as the number of abstentions, for each of the nominees for election to the Board of
Directors as Class A Directors, were as follows:



|                     |  |           |  |          |  |            
|-------------------- |  | --------- |  | -------- |  | -----------
|Nominee              |  | For       |  | Withheld |  | Abstentions
|James H. Craig, Jr.  |  | 3,720,171 |  | 62,876   |  | 0          
|Marcus Faust         |  | 3,723,569 |  | 59,478   |  | 0          
|Mark E. Gayman       |  | 3,726,318 |  | 56,729   |  | 0          
|Harry D. Johnston    |  | 3,701,705 |  | 81,342   |  | 0          
|Michael A. Peck      |  | 3,726,846 |  | 56,201   |  | 0          
|Robert E. Poole, Jr. |  | 3,736,811 |  | 46,236   |  | 0          
|Klare S. Sunderland  |  | 3,722,873 |  | 60,174   |  | 0          

The term of office of each of the following other directors continued after the meeting:

Class B Directors  Term expiring 2010

John M. DiSanto

Frederic M. Frederick

Kenneth R. Lehman

Terry L. Randall

Hasu P. Shah

Jeff B. Shank

Class C Directors  Term expiring 2011

Stephen E. Beck

Patricia A. Carbaugh

Kermit G. Hicks

Jeffrey F. Lehman

Charles C. Pearson, Jr.

Andrew Samuel

Approval of Tower Bancorp, Inc. Employee Stock Purchase Plan

The proposal to approve the Tower Bancorp, Inc. Employee Stock Purchase Plan was approved by the required vote  a majority of the votes cast on the matter. The number of votes cast for and against, as well as
the number of abstentions and broker nonvotes on this proposal, were as follows:



|          |  |         |  |             |  |                
|--------- |  | ------- |  | ----------- |  | ---------------
|For       |  | Against |  | Abstentions |  | Broker Nonvotes
|3,213,735 |  | 54,328  |  | 66,692      |  | 448,292        



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

None.



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



|            |  |                                                                                                                                                                                                     
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                         
|            | 
|3.1         |  | Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Towers Report on Form 8-K dated March 18, 2009 as filed on March 20, 2009)                             
|            | 
|3.2         |  | Bylaws of Tower Bancorp, Inc. (Incorporated by reference to Exhibit 3.1 to Towers Report on Form 8-K dated March 31, 2009, as filed on March 31, 2009)                                             
|            | 
|4.1         |  | Form of Subordinated Note due July 1, 2014 (Incorporated by reference to Exhibit 4.1 to Towers Report on Form 8-K dated June 12, 2009 as filed on June 12, 2009)                                   
|            | 
|10.1        |  | Tower Bancorp, Inc. Dividend Reinvestment and Stock Purchase Plan (Incorporated by reference to Exhibit 99.1 to Towers Registration Statement No. 333-159647 on Form S-3, as filed on
June 1, 2009)
|            | 
|10.2        |  | Tower Bancorp, Inc. Employee Stock Purchase Plan (Incorporated by reference to Appendix A of Towers definitive proxy statement as filed on April 22, 2009)                                         
|            | 
|10.3        |  | Summary Schedule of Tower Bancorp, Inc./Graystone Tower Bank 2009 Director Fees                                                                                                                     
|            | 
|31.1        |  | Certification of President and Chief Executive Officer of Tower Bancorp, Inc. Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a).                                            
|            | 
|31.2        |  | Certification of Chief Financial Officer of Tower Bancorp, Inc. Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a)                                                           
|            | 
|32.1        |  | Certification of President and Chief Executive Officer of Tower Bancorp, Inc. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed)                                      
|            | 
|32.2        |  | Certification of Chief Financial Officer of Tower Bancorp, Inc. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed)                                                    



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SIGNATURES

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



|                             |  |  |  |                     |  |                                                     
|---------------------------- |  |  |  | ------------------- |  | ----------------------------------------------------
|                             |  |  |  | TOWER BANCORP, INC.
|                             |  |  |  | (Registrant)       
|                             |  |  | 
|Date:        August 10, 2009 |  |  |  | By:                 |  | /s/ Andrew S. Samuel                                
|                             |  |  |  |                     |  | Andrew S. Samuel                                    
|                             |  |  |  |                     |  | President and Chief Executive Officer               
|                             |  |  | 
|Date:        August 10, 2009 |  |  |  | By:                 |  | /s/ Mark S. Merrill                                 
|                             |  |  |  |                     |  | Mark S. Merrill                                     
|                             |  |  |  |                     |  | Executive Vice President and Chief Financial Officer



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|            |  |                                                                                                                                                                                                     
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                         
|            | 
|3.1         |  | Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Towers Report on Form 8-K dated March 18, 2009 as filed on March 20, 2009)                             
|            | 
|3.2         |  | Bylaws of Tower Bancorp, Inc. (Incorporated by reference to Exhibit 3.1 to Towers Report on Form 8-K dated March 31, 2009, as filed on March 31, 2009)                                             
|            | 
|4.1         |  | Form of Subordinated Note due July 1, 2014 (Incorporated by reference to Exhibit 4.1 to Towers Report on Form 8-K dated June 12, 2009 as filed on June 12, 2009)                                   
|            | 
|10.1        |  | Tower Bancorp, Inc. Dividend Reinvestment and Stock Purchase Plan (Incorporated by reference to Exhibit 99.1 to Towers Registration Statement No. 333-159647 on Form S-3, as filed on
June 1, 2009)
|            | 
|10.2        |  | Tower Bancorp, Inc. Employee Stock Purchase Plan (Incorporated by reference to Appendix A of Towers definitive proxy statement as filed on April 22, 2009)                                         
|            | 
|10.3        |  | Summary Schedule of Tower Bancorp, Inc./Graystone Tower Bank 2009 Director Fees                                                                                                                     
|            | 
|31.1        |  | Certification of President and Chief Executive Officer of Tower Bancorp, Inc. Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a).                                            
|            | 
|31.2        |  | Certification of Chief Financial Officer of Tower Bancorp, Inc. Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a)                                                           
|            | 
|32.1        |  | Certification of President and Chief Executive Officer of Tower Bancorp, Inc. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed)                                      
|            | 
|32.2        |  | Certification of Chief Financial Officer of Tower Bancorp, Inc. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed)                                                    



58