**FORM10-Q**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

**QUARTERLYREPORT UNDER SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarter ended March 31,2007**

**Commissionfile number:  0-12826**

**TOWERBANCORP INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Commonwealth of Pennsylvania**                          |   | **25-1445946**       |
|-----------------------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of                          |   | (I.R.S. Employer     |
| incorporation or  organization)                           |   | Identification  No.) |
|                                                      |   |                 |
| **Center  Square**                                        |   | ** **           |
| **Greencastle,  Pennsylvania**                            |   | **17225**            |
| (Address of  principal executive offices)                 |   | (Zip Code)           |
|                                                      |   |                 |
| Registrant’s  telephone number, including area code: |   | **(717)  597-2137**  |

Indicate by check mark whether the registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes x  No o

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

 

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

Yes o  No x

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

2,355,030 shares ofcommon stock outstanding at March 31, 2007

 

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TOWER BANCORP, INC.

INDEX
| PART I - FINANCIAL  INFORMATION                                                                               |   |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                          |   |   |
| Item 1 - Financial Statements                                                                                 |   |   |
| Condensed  consolidated balance sheets – March 31, 2007 and December 31, 2006                            |   | 4      |
| Condensed  consolidated statements of income – three months ended March 31, 2007 and 2006                |   | 5      |
| Condensed  consolidated statements of comprehensive income – three months ended March  31, 2007 and 2006 |   | 6      |
| Condensed  consolidated statements of cash flows – three months ended March 31, 2007 and  2006           |   | 7      |
| Notes to  condensed consolidated financial statements                                                         |   | 10     |
| Item 2 – Management’s discussion and  analysis of financial condition and results of operations     |   | 21     |
| Item 3 –  Quantitative and qualitative disclosures about market risk                                     |   | 22     |
| Item 4 – Controls and  procedures                                                                        |   | 23     |
|                                                                                                          |   |   |
| PART II - OTHER  INFORMATION                                                                                  |   |   |
|                                                                                                          |   |   |
| Item  1 – Legal proceedings                                                                              |   | 23     |
| Item  1A – Risk Factors                                                                                  |   | 24     |
| Item 2 –  Unregistered sales of equity securities and use of proceeds                                    |   | 24     |
|                                                                                                          |   |   |
| Item 3 –  Defaults upon senior securities                                                                |   | 24     |
| Item 4 –  Submission of matters to a vote of security holders                                            |   | 24     |
| Item  5 – Other information                                                                              |   | 25     |
| Item  6 – Index to Exhibits                                                                              |   | 25     |
|                                                                                                          |   |   |
| Signatures                                                                                                    |   |   |
|                                                                                                          |   |   |
| Exhibits                                                                                                      |   |   |

 

2

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PART I – FINANCIAL INFORMATION

3

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TOWERBANCORP, INC. AND ITS WHOLLY – OWNED SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS
| ** **                                                                                          | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                          | ** ** | **(Unaudited)**          | ** ** | **(Audited)***              | ** ** |
| ** **                                                                                          | ** ** | **(000 Omitted)**   | ** ** | ** **                  | ** ** |
| ASSETS                                                                                              |       |                     |       |                        |       |
| Cash and due  from banks                                                                            |       | $                        | 11,322     |                        | $          | 14,128 |   |
| Federal funds  sold                                                                                 |       | 40,561                   |       | 6,530                       |       |
| Interest bearing  balances with banks                                                               |       | 97                       |       | 97                          |       |
| Investment  securities available for sale                                                           |       | 43,893                   |       | 44,478                      |       |
| Equity  securities available for sale                                                               |       | 41,531                   |       | 43,153                      |       |
| Restricted bank  stock                                                                              |       | 2,938                    |       | 3,123                       |       |
| Loans:                                                                                              |       |                     |       |                        |       |
| Real estate  mortgages                                                                              |       | 318,277                  |       | 318,209                     |       |
| Commercial                                                                                          |       | 53,611                   |       | 54,313                      |       |
| Consumer                                                                                            |       | 18,462                   |       | 17,897                      |       |
| Gross loans                                                                                         |       | 390,350                  |       | 390,419                     |       |
| Less: reserve  for possible loan losses                                                             |       | (3,715                   | )          | (3,610                      | )          |
| Loans, net                                                                                          |       | 386,635                  |       | 386,809                     |       |
| Bank premises,  equipment, furniture and fixtures                                                   |       | 11,397                   |       | 11,579                      |       |
| Accrued interest  receivable                                                                        |       | 1,883                    |       | 1,841                       |       |
| Cash surrender  value of life insurance                                                             |       | 10,567                   |       | 10,683                      |       |
| Goodwill                                                                                            |       | 16,537                   |       | 16,535                      |       |
| Core deposit  intangible                                                                            |       | 1,988                    |       | 2,095                       |       |
| Other assets                                                                                        |       | 887                      |       | 1,116                       |       |
| Total assets                                                                                        |       | $                        | 570,236    |                        | $          | 542,167 |   |
|                                                                                                |       |                     |       |                        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                          |       |                     |       |                        |       |
| LIABILITIES                                                                                         |       |                     |       |                        |       |
| Deposits in  domestic offices:                                                                      |       |                     |       |                        |       |
| Demand                                                                                              |       | $                        | 42,290     |                        | $          | 47,548 |   |
| Savings                                                                                             |       | 227,044                  |       | 188,147                     |       |
| Time                                                                                                |       | 174,243                  |       | 174,140                     |       |
| Liabilities for  borrowed money                                                                     |       | 36,410                   |       | 41,643                      |       |
| Accrued interest  payable                                                                           |       | 1,200                    |       | 994                         |       |
| Other  liabilities                                                                                  |       | 7,134                    |       | 8,142                       |       |
| Total  liabilities                                                                                  |       | 488,321                  |       | 460,614                     |       |
|                                                                                                |       |                     |       |                        |       |
| STOCKHOLDERS’ EQUITY                                                                           |       |                     |       |                        |       |
| Capital stock,  common, no par, authorized 5,000,000 shares; 2,420,481 and 1,780,100 shares  issued |       | 2,225                    |       | 2,225                       |       |
| Additional  paid-in capital                                                                         |       | 34,868                   |       | 34,810                      |       |
| Retained  earnings                                                                                  |       | 37,504                   |       | 36,148                      |       |
| Accumulated  other comprehensive income                                                             |       | 9,794                    |       | 10,731                      |       |
| Less: cost of  treasury stock; 2007 - 65,451 shares; 2006 - 63,278 shares                           |       | (2,476                   | )          | (2,361                      | )          |
| Total  stockholders’ equity                                                                    |       | 81,915                   |       | 81,553                      |       |
|                                                                                                |       |                     |       |                        |       |
| Total  liabilities and stockholders’ equity                                                    |       | $                        | 570,236    |                        | $          | 542,167 |   |

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* Condensed from audited financial statements.

Theaccompanying notes are an integral part of these condensed financialstatements.

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TOWERBANCORP, INC. AND ITS WHOLLY – OWNED SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

THREEMONTHS ENDED MARCH 31, 2007 and 2006

(UNAUDITED)
| ** **                                           | ** ** | **2007**               | ** ** | **2006**  | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------|------------|
| ** **                                           | ** ** | **(000 Omitted)** | ** ** |
| Interest Income                                      |       |                   |       |      |       |
| Interest & fees on loans                         |       | $                      | 6,930      |      | $          | 3,812 |   |
| Interest on investment securities available for sale |       | 773                    |       | 688       |       |
| Interest on federal funds sold                       |       | 479                    |       | 142       |       |
| Total interest & dividend income                 |       | 8,182                  |       | 4,642     |       |
| Interest Expense                                     |       |                   |       |      |       |
| Interest on deposits                                 |       | 2,931                  |       | 1,092     |       |
| Interest on borrowed money                           |       | 514                    |       | 481       |       |
| Total interest expense                               |       | 3,445                  |       | 1,573     |       |
|                                                 |       |                   |       |      |       |
| Net interest income                                  |       | 4,737                  |       | 3,069     |       |
|                                                 |       |                   |       |      |       |
| Provision for  loan losses                           |       | 150                    |       | 60        |       |
|                                                 |       |                   |       |      |       |
| Net interest  income after provision for loan losses |       | 4,587                  |       | 3,009     |       |
|                                                 |       |                   |       |      |       |
| Other Income                                         |       |                   |       |      |       |
| Investment service income                            |       | 223                    |       | 108       |       |
| Service charges on deposit accounts                  |       | 398                    |       | 280       |       |
| Other service charges                                |       | 286                    |       | 197       |       |
| Other operating income                               |       | 155                    |       | 75        |       |
| Investment securities gains (losses)                 |       | 1,213                  |       | 414       |       |
| Total other income                                   |       | 2,275                  |       | 1,074     |       |
|                                                 |       |                   |       |      |       |
| Other Expense                                        |       |                   |       |      |       |
| Salaries, wages and other benefits                   |       | 2,135                  |       | 1,336     |       |
| Occupancy and equipment expense                      |       | 934                    |       | 549       |       |
| Other operating expenses                             |       | 1,130                  |       | 576       |       |
| Total other expenses                                 |       | 4,200                  |       | 2,461     |       |
|                                                 |       |                   |       |      |       |
| Income before taxes                                  |       | 2,662                  |       | 1,622     |       |
| Applicable  income taxes                             |       | 693                    |       | 412       |       |
| Net income                                           |       | $                      | 1,969      |      | $          | 1,210 |   |
|                                                 |       |                   |       |      |       |
| Earnings per  share:                                 |       |                   |       |      |       |
| Basic earnings per share                             |       | $                      | 0.84       |      | $          | 0.70 |   |
| Weighted average shares outstanding                  |       | 2,357,802              |       | 1,728,715 |       |
| Diluted earnings per share                           |       | $                      | 0.82       |      | $          | 0.69 |   |
| Weighted average shares outstanding                  |       | 2,393,352              |       | 1,762,611 |       |
|                                                 |       |                   |       |      |       |
| Dividends declared  per share                        |       | $                      | 0.26       |      | $          | 0.24 |   |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

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TOWERBANCORP, INC. AND ITS WHOLLY – OWNED SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREEMONTHS ENDED MARCH 31, 2007 AND 2006

(UNAUDITED)
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **March 31**                | ** ** |
| ** **                                    | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **(000 Omitted)**           | ** ** |
|                                          |       |                             |       |   |   |
| Net income                                    |       | $                                | 1,969      |   | $ | 1,210 |   |
|                                          |       |                             |       |   |   |
| Other  comprehensive income:                  |       |                             |       |   |   |
| Unrealized holding gains (losses), net of tax |       | (937                             | )          | 932 |   |
|                                          |       |                             |       |   |   |
| Comprehensive  income                         |       | $                                | 1,032      |   | $ | 2,142 |   |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

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TOWER BANCORP, INC. AND ITS WHOLLY – OWNED SUBSIDIARY

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2007and 2006

(UNAUDITED)
| ** **                                                                         | ** ** | **2007**               | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                                                         | ** ** | **(000 omitted)** | ** ** |
| Cash flows from  operating activities:                                             |       |                   |       |     |       |
| Net income                                                                         |       | $                      | 1,969      |     | $          | 1,210 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                   |       |     |       |
| Depreciation and amortization                                                      |       | 322                    |       | 104      |       |
| Provision for loan losses                                                          |       | 150                    |       | 60       |       |
| Granting of stock options                                                          |       | 108                    |       | 108      |       |
| (Gain) on sale of investment securities                                            |       | (1,213                 | )          | (414     | )          |
| Other (net)                                                                        |       | (18                    | )          | (410     | )          |
| Net cash  provided (used) by operating activities                                  |       | 1,318                  |       | 658      |       |
|                                                                               |       |                   |       |     |       |
| Cash flows from  investing activities:                                             |       |                   |       |     |       |
| Loans (net)                                                                        |       | 24                     |       | 1,056    |       |
| Purchases of bank premises, equipment, furniture and  fixtures                     |       | (32                    | )          | (1,105   | )          |
| Interest bearing balances with banks                                               |       | 0                      |       | 2,986    |       |
| Purchases of available for sale securities                                         |       | (1,593                 | )          | (6,069   | )          |
| Maturities/sales of available for sale securities                                  |       | 3,896                  |       | 11,756   |       |
| Redemption (purchase) of restricted bank stock                                     |       | (119                   | )          | 11       |       |
| Net cash  provided (used) by investing activities                                  |       | 2,176                  |       | 8,635    |       |
|                                                                               |       |                   |       |     |       |
| Cash flows from  financing activities:                                             |       |                   |       |     |       |
| Federal funds purchased                                                            |       | (34,031                | )          | (1,312   | )          |
| Net increase in deposits                                                           |       | 33,742                 |       | (10,410  | )          |
| Net increase (decrease) in borrowings                                              |       | (5,233                 | )          | 561      |       |
| Purchase of treasury stock                                                         |       | (220                   | )          | (68      | )          |
| Proceeds from sale of treasury stock                                               |       | 55                     |       | 203      |       |
| Cash dividends paid                                                                |       | (613                   | )          | (415     | )          |
| Net cash provided (used) by financing activities                                   |       | (6,300                 | )          | (11,441  | )          |
|                                                                               |       |                   |       |     |       |
| Net increase (decrease) in cash and cash equivalents                               |       | (2,806                 | )          | (2,148   | )          |
|                                                                               |       |                   |       |     |       |
| Cash and cash equivalents at beginning of period                                   |       | 14,128                 |       | 11,744   |       |
|                                                                               |       |                   |       |     |       |
| Cash and cash equivalents at end of period                                         |       | $                      | 11,322     |     | $          | 9,596 |   |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH31, 2007

(UNAUDITED)

Note 1.                                                          Basis of Presentation

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles in the United States for interim financial information,and accordingly do not include all of the information and footnotes required bygenerally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements contain all adjustments (consisting solely of normal recurringadjustments) necessary to present fairly Tower Bancorp, Inc.’s consolidatedfinancial position as of March 31, 2007 and the results of its operations forthe three month periods ended March 31, 2007 and 2006.  Information presented at December 31, 2006 iscondensed from audited year-end financial statements included in the AnnualReport on Form 10-K for the year ended December 31, 2006.

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

The results of operations for the three month periodsended March 31, 2007 and 2006 are not necessarily indicative of theresults to be expected for the full year.

Note 2.                                                          Income Taxes

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

Note 3.                                                          Commitments

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

Note 4.                                                          Merger with FNB FinancialCorporation

During the second quarter of 2006, the Company mergedwith FNB Financial Corporation (“FNB”), parent company of the First NationalBank of McConnellsburg, located in McConnellsburg, Pennsylvania.  The Company acquired all of FNB’s outstandingshares of common stock.  The net assetsof FNB were recorded at fair value. Portions of the cost of acquisition, including certain expenses relatedto the merger, were allocated as intangible assets.  All results of operations subsequent to themerger are included in consolidated income totals.

8

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Note 5.                                                          Stock Option Plans

During the quarters endedMarch 31, 2007 and 2006, the Company recognized compensation costs for theCompany’s stock option plans as determined based on the fair value at the grantdates for awards under the plans consistent with the method prescribed by FASBStatement No. 123R.

9

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ITEM 2.

MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION

ANDRESULTS OF OPERATIONS

March31, 2007

Thefollowing is management’s discussion and analysis of the significant changes inthe consolidated results of operations, capital resources and liquiditypresented in the accompanying unaudited consolidated financial statements forthe Company.  This discussion should beread in conjunction with the preceding condensed consolidated financialstatements and related footnotes, as well as the Company’s December 31, 2006Annual Report on Form 10-K.  Currentperformance does not guarantee and may not be indicative of similar performancein the future.

Inaddition to historical information, this quarterly report on Form 10-Q containsforward-looking statements.  Theforward-looking statements contained in this report are subject to certainrisks, assumptions and uncertainties. Because of the possibility of change in the underlying assumptions,actual results could differ materially from those projected in theforward-looking statements.  Additionalfactors that might cause actual results to differ materially from thoseexpressed in the forward-looking statements include, but are not limited to:

·                  operating, legal and regulatory risks,

·                  economic, political and competitive forcesaffecting the Company’s services, and

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

TheCompany’s forward-looking statements are relevant only as of the date on whichthe statements are made. By making forward-looking statements, the Companyassumes no duty to update them to reflect new, changing or unanticipated eventsor circumstances.  Readers shouldcarefully review the risk factors described in other periodic reports andpublic documents that the Company files from time to time with the Securitiesand Exchange Commission.

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CRITICALACCOUNTING POLICIES

Disclosureof the Company’s significant accounting policies is included in Note 1 to theconsolidated financial statements of the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2006. Some of these policies are particularly sensitive requiring significantjudgments, estimates and assumptions to be made by management.  Additional information is contained on pages12 and 17 of this report for the provision and allowance for loan losses.

OVERVIEW

Themerger with FNB Financial Corporation, which occurred on June 1, 2006,represents a significant expansion of the Tower Bancorp, Inc. franchise.  Because of the timing of the merger, thefocus of this presentation will be on comparisons of quarterly performance,with particular emphasis on the first quarter of 2007 compared to the firstquarter of 2006 (pre-merger) and to the last quarter of 2006(post-merger).  In accordance withgenerally accepted accounting principles (GAAP), comparisons of year-to-dateresults have not been restated for the impact of the FNB Financial Corporationoperations for the first five months of 2006 or for the three months of 2007,rendering these comparative analyses less useful than the quarterlycomparison.  Also, on February 28, 2007,the Corporation dissolved FNB Mortgage Brokers, Inc., a subsidiary of the bankacquired in the merger.

Netincome for the three months ended March 31, 2007 and 2006 was $1,969,000 and$1,210,000, respectively. The increase of $759,000, or 62.7%, is attributable tothe Company’s core banking business and the acquisition of FNB FinancialCorporation (“FNB”).  Net interest incomeincreased 54.3%, other income increased 111.8%, the provision for loan lossesincreased 150.0% and other expenses increased 70.7%. On a basic and diluted pershare basis, net income for the three months ended March 31, 2007 was $0.84 and$0.82, respectively, as compared with $0.70 and $0.69 for the three monthsended March 31, 2006.  Net income as apercentage of total average stockholders’ equity on an annualized basis, alsoknown as return on average equity, was 9.67% and 9.92% for the first threemonths of 2007 and 2006, respectively. Tangible return on average equity was 12.27% and 9.92% for the firstthree months of 2007 and 2006 respectively, an increase of 23.7%. The increasein this ratio is also attributable to an increased level of net income.

Duringthe first three months of 2007, the Company’s assets increased $28,069,000, or5.2%, to $570,236,000 as of March 31, 2007 from $542,167,000 as ofDecember 31, 2006.  This increase isprimarily attributable to an increase in Money Market accounts (MMDA.)  Total loans were relatively unchanged at$390,350,000.  Total deposits increasedby $33,742,000, or 8.2%, during the first three months of 2007 to $443,577,000as of March 31, 2007 from $409,835,000 as of December 31, 2006.  As a result of competition in the market,and, to a certain degree, customers’ continued uncertainty as to how to bestinvest their monies, deposit growth may not be assumed at the current rates.

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RESULTSOF OPERATIONS

NetInterest Income

Forthe three months ended March 31, 2007, total interest income increased by$3,540,000, or 76.3%, to $8,182,000 as compared with $4,642,000 for the threemonths ended March 31, 2006. This increase is primarily due to acquiring FNBand increases in the one year Treasury rate and the prime rate. For the threemonths ended March 31, 2007, total interest income increased by $385,000, or4.9%, to $8,182,000 as compared with $7,797,000 for the three months endedDecember 31, 2006. During the three months ending March 31, 2007 earning assetsincreased 6.5% to $519,370,000.  Loanswere flat at $390,350,000 while investment securities decreased $2,207,000 andovernight Fed Funds sold increased $34,031,000. Management continued to target efforts to attract mortgage and smallcommercial loans. During the first quarter 2007, there was no change to the NewYork Prime Rate and a 10 basis point decrease in the one year treasury rate.

Totalinterest expense increased by $1,872,000, or 119.0% to $3,445,000 for the threemonths ended March 31, 2007 from $1,573,000 for the three months endedMarch 31, 2006. This increase is primarily due to acquiring FNB, to theincreased deposit balances and the increased costs associated with attractingdeposits at a time when short-term interest rates are rising, and to the higherrates associated with overnight fed funds borrowings. Increases in rates wereneeded to attract deposits, particularly money market accounts.  A new money market product was introducedduring the three months ending June 30, 2006 with a yield of 4.00% and issignificantly higher than the 2.43% cost of money market accounts during thequarter ended March 31, 2006.  Totalinterest expense increased by $266,000, or 8.4% to $3,445,000 for the threemonths ended March 31, 2007 from $3,179,000 for the three months endedDecember 31, 2006.  This increase isprimarily due to the increase in Money Market deposit accounts.

Netinterest income increased by $1,668,000, or 54.3%, to $4,737,000 for the threemonths ending March 31, 2007 from $3,069,000 for the three months ending March31, 2006.  This increase is primarily dueto acquiring FNB and also attributable to the repricing of mortgages and, to alesser extent, commercial loans tied to the one year treasury and primerates.  Net interest income increased by$119,000, or 2.6%, to $4,737,000 for the three months ending March 31, 2007from $4,618,000 for the three months ending December 31, 2006.

Provisionfor Loan Losses

Theprovision for loan losses was $150,000 for the three months endingMarch 31, 2007 compared with $60,000 for the three months endingMarch 31, 2006, an increase of 150.0%. The increase in the provision isprimarily due to acquiring FNB.  Thelevel of provision is attributable to the consistency of the high quality ofthe loan portfolio.

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Theallowance for loan losses represented 0.95% of total loans at March 31,2007, compared with 0.92% as of December 31, 2006 and 0.96% as ofMarch 31, 2006.  Management performsongoing assessments of the loan loss reserve in relation to loan portfoliogrowth, credit exposure to individual borrowers, overall trends in the loanportfolio and other relevant factors. Based upon these factors, management believes that as of March 31, 2007,the reserve is reasonable and sufficient to support the increased loan growthin light of the strong asset quality as supported by the ratios reflected inTable 2 on page 17.

OtherIncome

Forthe three months ended March 31, 2007, other income was $2,275,000, an increaseof $1,201,000, or 111.8%, compared with other income of $1,074,000 for thethree months ended March 31, 2006.  Theincrease was primarily due to an increase of $799,000 in net gains from thesale of securities, which were $1,213,000 for the three months ended March 31,2007 and $414,000 for the three months ended March 31, 2006.  Other income was positively impacted byincreases of $107,000 in trust revenues (the Bank re-established its TrustDepartment in the third quarter of 2006), $96,000 in NSF fees, $67,000 in BOLI(of which $45,000 was proceeds from a death benefit), $52,000 in ATM fees,$23,000 in mortgage banking activities and $21,000 in service charges ondeposit accounts.

Forthe three months ended March 31, 2007, other income was $2,275,000, an increaseof $20,000, or 0.9%, compared with other income of $2,255,000 for the threemonths ended December 31, 2006.  Netgains from the sale of securities increased from $1,166,000 for the threemonths ending December 31, 2006 to $1,213,000 for thee months ended March31, 2007.  Other income was positivelyimpacted by increases of $33,000 income from sale of investment services,$17,000 in BOLI and $16,000 in trust revenues. Other income was negatively impacted from a $57,000 decrease in NSFfees, an $18,000 decrease of safe deposit box rental fees and a $12,000decrease in mortgage banking activities.

OtherExpenses

Otherexpenses, which include salary, occupancy, equipment and all other expensesincidental to the operation of the Company, increased to $4,200,000 for thethree months ended March 31, 2007 from 2,461,000 for the three months endedMarch 31, 2006.  The $1,739,000, or 70.7%increase was primarily due to acquiring FNB, resulting in increased salary andbenefits, increased occupancy costs and increased other operating expenses.

Salariesand employee benefit expenses, which make up the largest component of otherexpenses, increased $799,000, or 59.8%, to $2,135,000 for the three monthsended March 31, 2007 from $1,336,000 for the three months ended March 31,2006.  The increase is primarilyattributable to the increase in salary expenses of $515,000 and the associatedbenefit costs.

Occupancyand equipment expenses increased $386,000, or 70.3%, to $935,000 for the threemonths ended March 31, 2007 from $549,000 for the three months ended March 31,2006.  The increase is primarily due toacquiring FNB, increasing computer costs by $159,000, depreciation expense by$105,000 and equipment expense by $46,000.

13

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Otheroperating expenses during the three months ended March 31, 2007 increased$554,000, or 96.2% to $1,130,000 from $576,000 during the three months endedMarch 31, 2006.  This increase wasprimarily due to acquiring FNB, increasing Core Deposit Intangible amortizationexpense of $107,000, state taxes of $89,000, audit and examination fees of$46,000 and $42,000 in supply costs.

Otherexpenses, which include salary, occupancy, equipment and all other expensesincidental to the operation of the Company, increased to $4,200,000 for thethree months ended March 31, 2007 from 4,195,000 for the three months endedDecember 31, 2006.  The $5,000, or 0.1%increase was primarily due to increased salary and benefits, offset bydecreased occupancy costs and decreased other operating expenses.

Salariesand employee benefit expenses, which make up the largest component of otherexpenses, increased $215,000, or 11.2%, to $2,135,000 for the three monthsended March 31, 2007 from $1,920,000 for the three months endedDecember 31, 2006. The increase is primarily attributable to the increasein salary expenses of $167,000 and the associated benefit costs. The increasedsalary expense included severance payout of $90,000 associated with thedissolution of the Bank’s FNB Mortgage Brokers subsidiary.

Occupancyand equipment expenses decreased $65,000, or 6.5%, to $935,000 for the threemonths ended March 31, 2007 from $1,000,000 for the three months ended December31, 2006.  The decrease is primarily dueto a decrease of  $42,000 in depreciationexpense and a $39,000 decrease in computer expenses. Utility expenses increased$16,000.

Otheroperating expenses during the three months ended March 31, 2007 decreased$145,000, or 11.4% to $1,130,000 from $1,275,000 during the three months endedDecember 31, 2006.  This decrease wasprimarily due to decreasing legal expenses of $65,000, marketing of $44,000,postage expense of $36,000 and audit/examination fees of $35,000.  State tax expenses increased $65,000.

IncomeTaxes

Incometax expense was $693,000 for the three months ended March 31, 2007, an increaseof $281,000, or 68.1%, compared with $412,000 for the three months ended March31, 2006.  The increased tax expense isconsistent with the higher level of net income.

NetIncome

Netincome for the three months ended March 31, 2007 was $1,969,000, an increase of$759,000, or 62.7%, compared with $1,210,000 for the three months ended March31, 2006.  The increase in net income isthe result of increases of $1,668,000 in net interest income, $1,201,000 inother income, offset by an increase of $90,000 in the provision for loanlosses, and increases of $1,739,000 in other expenses and $281,000 intaxes.  Basic and diluted earnings pershare for the three months ended March 31, 2007 were $0.84 and $0.82 ascompared with $0.70 and $0.69 for the three months ended March 31, 2006.

14

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Netincome for the three months ended March 31, 2007 was $1,969,000, an increase of$337,000, or 20.6%, compared with $1,632,000 for the three months ended December31, 2006. The increase in net income is the result of increases of $119,000 innet interest income, $20,000 in other income, and a decrease of $223,000 intaxes offset by a $20,000 increase in the provision for loan losses and a$5,000 increase in other expenses.  Basicand diluted earnings per share for the three months ended March 31, 2007 were$0.84 and $0.82 as compared with $0.69 and $0.67 for the three months endedDecember 31, 2006.

Securities

TheCompany’s securities portfolio is comprised of securities that not only provideinterest and dividend income, including tax-exempt income, but also provide asource of liquidity, diversify the earning assets portfolio, allow for themanagement of risk and tax liability, and provide collateral for repurchaseagreements and public fund deposits. Policies are in place to address various aspects of managing theportfolio, including but not limited to, concentrations, liquidity, creditquality, interest rate sensitivity and regulatory guidelines.

Althoughthe Company generally intends to hold its investment securities to maturity, asignificant portion of the securities portfolio is classified as available forsale, with new purchases generally categorized as such. Securities in theavailable for sale category are accounted for at fair value with unrealizedappreciation or depreciation, net of tax, reported as a separate component ofstockholders’ equity.  Securities in theheld to maturity category are accounted for at amortized cost.  All securities held as of March 31, 2007 areclassified as available for sale.  TheCompany holds no trading securities in its portfolio.  The securities portfolio includes equitiesowned by the holding company, most of which are investments in banks, bankholding companies and financial institutions. Equity investments are accounted for at fair market value.  The remaining securities, primarily debtinstruments, are owned by the bank.

Theconsolidated securities portfolio at March 31, 2007 was $85,424,000, comparedto $87,631,000 at December 31, 2006, a decrease of $2,207,000, or 2.5%.  The decrease is due primarily to a $1,622,000decrease in equity securities available for sale caused by sales, calls andmaturities of holding company owned securities exceeding purchases and marketvalue fluctuations.

BankOwned Securities

Thebank owned securities portfolio at March 31, 2007 was $43,893,000, compared to$44,478,000 at December 31, 2006, a decrease of $585,000, or 1.3%.  The decrease is due primarily to principalpayments received on mortgage backed securities.

Thecarrying value of the available for sale portion of the portfolio at March 31,2007 includes an unrealized gain of $834,000 (reflected as accumulated othercomprehensive income of $550,000 in stockholders’ equity, net of a deferredincome tax liability of $284,000).  Thiscompares with an unrealized gain at December 31, 2006 of $791,000 (reflected asaccumulated other comprehensive income of $522,000 in stockholders’ equity, netof a deferred income tax liability of $269,000).

15

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HoldingCompany Owned Securities

Thesecurities portfolio at March 31, 2007 was $41,531,000, compared to $43,153,000at December 31, 2006, a decrease of $1,622,000, or 3.7%.  The decrease includes a $1,463,000 decreaseof unrealized gains.  Realized gains onsale of equity securities available for sale were $1,227,000 for the threemonths ended March 31, 2007.

Thecarrying value of the available for sale portion of the portfolio at March 31,2007 includes an unrealized gain of $14,006,000 (reflected as accumulated othercomprehensive income of $9,244,000 in stockholders’ equity, net of a deferredincome tax liability of $4,762,000). This compares with an unrealized gain at December 31, 2006 of$15,469,000 (reflected as accumulated other comprehensive income of $10,209,000in stockholders’ equity, net of a deferred income tax liability of $5,260,000).

Loans

Theloan portfolio comprises the major component of the Company’s earning assetsand generally is the highest yielding asset category. Gross loans receivable,net of unearned fees and origination costs, decreased $69,000, or less than0.1%, to $390,350,000 at March 31, 2007 from $390,419,000 at December 31, 2006.Gross loans represented 88.0% of total deposits at March 31, 2007 ascompared with 95.3% at December 31, 2006. This decrease is primarily due an increase in total deposits of$33,742,000.

CreditRisk and Loan Quality

TheCompany continues to be prudent in its efforts to minimize credit risk. TheBank’s written lending policy requires underwriting, loan documentation andcredit analysis standards to be met prior to the approval and funding of anyloan.  In accordance with that policy,the loan review process monitors the loan portfolio on an ongoing basis.  The Credit Administration area and theaccounting department then prepares an analysis of the allowance for loanlosses which is then submitted to the Board of Directors for its assessment asto the adequacy of the allowance.  Theallowance for loan losses is an accumulation of expenses that has been chargedagainst past and present earnings in anticipation of potential losses in theloan portfolio.

Theallowance for loan losses at March 31, 2007 and December 31, 2006 was$3,715,000 and $3,610,000, respectively. At March 31, 2007, the allowance for loan losses represented 0.95% ofthe gross loan portfolio, compared with 0.92% at December 31, 2006.  At March 31, 2007, in consideration of thestrong asset quality, management believes the allowance for loan loss reserveto be reasonable and adequate to support the loan growth and to address anypotential losses.

16

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Table1 –”Analysis of Allowance for Loan Loss” –details the activity, which occurredin the allowance over the first three months of 2007 and 2006.

**Table 1 – Analysis of Allowance for Loan Loss (1)**

| (in thousands)                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance, January  1                                   |       | $        | 3,610      |     | $          | 2,129 |   |
| Provision  charged to operating expense               |       | 150      |       | 60       |       |
| Charge-offs:                                          |       |     |       |     |       |
| Commercial                                            |       | 0        |       | 0        |       |
| Real Estate                                           |       | 0        |       | 0        |       |
| Consumer                                              |       | (82      | )          | (2       | )          |
| Total charge-offs                                     |       | (82      | )          | (2       | )          |
|                                                  |       |     |       |     |       |
| Recoveries:                                           |       |     |       |     |       |
| Commercial                                            |       | 1        |       | 1        |       |
| Real Estate                                           |       | 0        |       | 0        |       |
| Consumer                                              |       | 36       |       | 14       |       |
| Total Recoveries                                      |       | 37       |       | 15       |       |
|                                                  |       |     |       |     |       |
| Net  (charge-offs) recoveries                         |       | (45      | )          | 13       |       |
|                                                  |       |     |       |     |       |
| Balance, March  31                                    |       | $        | 3,715      |     | $          | 2,202 |   |
|                                                  |       |     |       |     |       |
| Net (charge-offs) or  recoveries to average net loans |       | (0.01    | )          | 0.01     |       |

 

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(1) Bank’s loan portfoliois entirely domestic

The Bank’s lending policyis executed through the assignment of tiered loan limit authorities toindividual officers of the Bank, the Officer’s Loan Committee and the Board ofDirectors.  Although the Bank maintainssound credit policies, certain loans may deteriorate for a variety ofreasons.  The Bank’s policy is to placeall loans on a non-accrual status upon becoming 90 days delinquent in theirpayments, unless there is a documented and reasonable expectation of thecollection of the delinquent amount. Loans are reviewed monthly as to their status, and on a quarterly basispresented to the Board of Directors. Management is not aware of any material potential loan credit problemsthat have not been disclosed in this report.

Table2 – “Asset Quality Ratios” – summarizes pertinent asset quality ratios at March31, 2007 and December 31, 2006.

**Table 2 – Asset Quality Ratios**
| ** **                                  | ** ** | **3/31/07** | ** ** | **12/31/06** | ** ** |
|---------------------------------------------|------------|-------------|------------|--------------|------------|
| Non-accrual  loans/total loans              |       | 0.66        | %          | 0.18         | %          |
| Non-performing  assets (1)/total loans      |       | 0.71        | %          | 0.28         | %          |
| Net charge offs  (recoveries)/average loans |       | (0.01       | )%         | 0.01         | %          |
| Allowance/total  loans                      |       | 0.95        | %          | 0.92         | %          |
| Allowance/non-accrual  loans                |       | 1.45        | %          | 5.25         | %          |
| Allowance/non-performing  loans (1)         |       | 1.34        | %          | 3.34         | %          |

 

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(1) – Includes non-accrual loans

17

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AtMarch 31, 2007, the Company had other real estate owned (not used inoperations) in the amount of $1,901,000. At March 31, 2007 and December 31, 2006, the Company hadnon-accrual loans in the amount of $2,569,000 and $688,000, respectively.  This increase is primarily due to a largecommercial loan and several loans secured by real estate.

Loanconcentrations are considered to exist when the total amount of loans to anyone or a multiple number of borrowers engaged in similar activities or havingsimilar characteristics exceeds 10% of loans outstanding in any onecategory.  The Company maintains adiversified loan portfolio, granting agribusiness, commercial and residentialloans to customers.  The majority of theBank’s lending is made within its primary market area, which includes FultonCounty and southern Franklin County, Pennsylvania and northern WashingtonCounty, Maryland. Although no concentrations exist to one borrower or relatedgroup of borrowers, the Bank’s commercial lending is primarily secured by realestate.

BankOwned Life Insurance

TheCompany has Bank Owned Life Insurance (“BOLI”) for a chosen group of employees,namely officers and directors, whereby the Bank is the owner and beneficiary ofthe policies.  The Bank’s deposits andproceeds from the sale of investment securities funded the BOLI. Earnings fromthe BOLI are recognized as other income. The BOLI is profitable from the appreciation of the cash surrendervalues of the pool of insurance, and its tax advantage to the Company.  This profitability is used to offset aportion of current and future employee benefit costs and a NonqualifiedSupplemental Executive Retirement Plan for the Company’s Chief ExecutiveOfficer.

TheCompany had $10,567,000 and $10,683,000 in BOLI as of March 31, 2007 andDecember 31, 2006, respectively. This decrease is primarily due to the redemption, upon the death of aparticipant, of a life insurance policy in the amount of $183,000.  Although the BOLI is an asset that may beliquidated, it is the Company’s intention to hold this pool of insurancebecause it provides tax-exempt income that lowers the Company’s tax liability,while enhancing its overall capital position.

Deposits

Depositsare the major source of the Company’s funds for lending and investmentpurposes.  Total deposits at March 31,2007 were $443,577,000, an increase of $33,742,000, or 8.2%, from totaldeposits of $409,835,000 at December 31, 2006. This increase is primarily due to a large money market account opened inJanuary 2007.

Short-TermBorrowings

Short term borrowings at March 31, 2007 were $9,649,000, compared to$9,875,000 at December 31, 2006, a decrease of $226,000, or 2.3%.  Federal funds purchased, Treasury Tax andLoan demand note, lines of credits with banks and overnight borrowings with theFederal Home Loan Bank of Pittsburgh are considered to be short termborrowings.  Short term borrowingsfluctuate daily to meet the liquidity needs of the Company.

18

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Long-TermDebt Borrowings

Long term borrowings atMarch 31, 2007 were $26,761,000, compared to $31,768,000 at December 31, 2006,a decrease of $5,007,000, or 15.8%.  Thisdecrease is primarily due to The Federal Home Loan Bank calling a $5,000,000loan in February 2007.

Asset/LiabilityManagement

Themanagement of interest rate risk involves measuring and analyzing the maturityand repricing of interest-earning assets and interest bearing liabilities atspecific points in time.  The imbalancebetween interest-earning assets and interest bearing liabilities is commonlyreferred to as the interest rate gap. The interest rate gap is one measure ofthe risk inherent in the existing balance sheet as it relates to potentialchanges in net interest income.  Maintainingan appropriate balance between interest-earning assets and interest bearingliabilities is a means of monitoring and possibly avoiding materialfluctuations in the net interest margin during periods of changing interestrates.

TheCompany’s overall sensitivity to interest rate risk is low due to itsnon-complex balance sheet.  The Companymanages its balance sheet with the intent of stabilizing net interest incomeand net economic value under a broad range of interest rate environments.  The Company has the ability to effect variousstrategies to manage interest rate risk, which include, but are not limited to,selling newly originated residential mortgage loans, controlling the volume mixof fixed/variable rate commercial loans, mortgage loans and securities,increasing/ decreasing deposits via interest rate changes, borrowing from theFederal Home Loan Bank of Pittsburgh, and buying/selling securities.  Adjustments to the mix of assets andliabilities are made periodically in an effort to give the Company dependableand steady growth in net interest income, while at the same time, managing therelated risks.

Liquidity

Liquidityrepresents the Company’s ability to efficiently manage cash flows at reasonablerates to support possible commitments to borrowers or the demands ofdepositors.  Liquidity is essential tocompensate for fluctuations in the balance sheet and provide funds for growthand normal operating expenditures. Liquidity needs may be met by converting assetsinto cash or obtaining sources of additional funding.

Liquidity from asset categories is providedthrough cash, amounts due from banks, interest-bearing deposits with banks andfederal funds sold, which were $51,980,000 at March 31, 2007, compared to$20,755,000 at December 31, 2006, an increase of $31,225,000 or150.4%.  This increase is primarily dueto a new money market deposit account opened in January 2007.  Additional asset liquidity sources includeprincipal and interest payments from securities in the Company’s investmentportfolio and cash flow from its amortizing loan portfolio. Longer-termliquidity needs may be met by selling securities available for sale, sellingloans or raising additional capital. At March 31, 2007, there was $69,317,000in liquid securities as compared to $71,337,000 at December 31, 2006.  Liquid securities decreased by $2,020,000since year end primarily due to principal payments received on mortgage backedsecurities held by the bank.  Liquidsecurities held at Tower Bancorp decreased $1,622,000 due to sales, calls andmaturity of investment securities exceeding purchases and market valuefluctuations.

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Liabilityliquidity sources include attracting deposits at competitive rates. Deposits atMarch 31, 2007 were $443,577,000, compared to $409,835,000 at December 31,2006.  In addition, the Company hasborrowing capacity and lines of credit with the Federal Home Loan Bank ofPittsburgh, Atlantic Central Bankers Bank and several local banks.

TheCompany’s financial statements do not reflect various off-balance sheetcommitments that are made in the normal course of business, which may involvesome liquidity risk.  Off-balance sheetarrangements are discussed in detail below.

Managementis of the opinion that its liquidity position, at March 31, 2007, is adequate torespond to fluctuations “on” and “off” the balance sheet.  In addition, management knows of no trends,demands, commitments, events or uncertainties that may result in, or that arereasonably likely to result in the Company’s inability to meet anticipated orunexpected liquidity needs.

Off-BalanceSheet Arrangements

TheCompany’s financial statements do not reflect various off-balance sheetarrangements that are made in the normal course of business.  These commitments consist mainly of loansapproved but not yet funded, unused lines of credit and letters of credit madein accordance with the same standards as on-balance sheet instruments.  Unused commitments at March 31, 2007were $131,922,000, which consisted of $128,663,000 in unfunded commitments to existingloans and unfunded new loans and $3,259,000 in letters of credit. Because theseinstruments have fixed maturity dates, and because many of them will expirewithout being drawn upon, they do not generally present a significant liquidityrisk to the Company.  Management believesthat any amounts actually drawn upon can be funded in the normal course ofoperations.  The Company has noinvestment in or financial relationship with any unconsolidated entities thatare reasonably likely to have a material effect on liquidity or theavailability of capital resources.

Capital

Thefollowing Table 3 presents the risk-based and leverage capital amounts andratios at March 31, 2007 for the Company and the Bank.

**Table 3 – Capital Ratios**

 
| ** **                                      | ** ** | **Actual**                           | ** ** | **Minimum for  Capital Adequacy  Purposes** | ** ** | **To be Well  Capitalized under  Prompt Corrective  Action Provisions** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Amount**                           | ** ** | **Ratio**                                             | ** ** | **Amount**                                                                                       | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Total risk based  capital/risk weighted assets: |       |                                 |       |                                                  |       |                                                                                             |       |   |   |   |   |   |   |   |   |   |
| Company                                         |       | $                                    | 74,846     |                                                  | 20.1       | %                                                                                                | >  | $ | 29,737 |   | >  | 8.0% |   | N/A |   |   | N/A |   |
| Bank                                            |       | 46,057                               |       | 12.9                                                  | %          | >                                                                                        | 28,555     |   | >  | 8.0% |   | 35,694 |   | >  | 10.0% |   |
|                                            |       |                                 |       |                                                  |       |                                                                                             |       |   |   |   |   |   |   |   |   |   |
| Tier 1  capital/risk weighted assets:           |       |                                 |       |                                                  |       |                                                                                             |       |   |   |   |   |   |   |   |   |   |
| Company                                         |       | 64,828                               |       | 17.4                                                  | %          | >                                                                                        | 14,868     |   | >  | 4.0% |   | N/A |   |   | N/A |   |
| Bank                                            |       | 42,342                               |       | 11.9                                                  | %          | >                                                                                        | 14,278     |   | >  | 4.0% |   | 21,416 |   | >  | 6.0% |   |
|                                            |       |                                 |       |                                                  |       |                                                                                             |       |   |   |   |   |   |   |   |   |   |
| Tier 1  capital/average assets                  |       |                                 |       |                                                  |       |                                                                                             |       |   |   |   |   |   |   |   |   |   |
| Company                                         |       | 64,828                               |       | 11.3                                                  | %          | >                                                                                        | 22,876     |   | >  | 4.0% |   | N/A |   |   | N/A |   |
| Bank                                            |       | 42,342                               |       | 8.0                                                   | %          | >                                                                                        | 21,149     |   | >  | 4.0% |   | 26,437 |   | >  | 5.0% |   |
|                                                 |            |                                      |            |                                                       |            |                                                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

20

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Thesecapital ratios continue to remain at levels which are considered to be “well-capitalized”as defined by regulatory guidelines.

Bankinglaws and regulations limit the amount of cash dividends that may be paidwithout prior approval from the Company’s regulatory agencies.  In abidance with such requirements, on January10, 2007, the Board of Directors authorized and declared a quarterly cashdividend in the amount of $0.26 per share, payable on February 16, 2007 to allshareholders of record as of February 1, 2007. The payment of this quarterly cash dividend decreased retained earningsby $613,000.

RECENT ACCOUNTING PRONOUNCEMENTS

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards No.157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles, and expands disclosuresabout fair value measurements.  SFAS 157does not require any new fair value measurements but may change currentpractice for some entities.  ThisStatement is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and interim periods within thoseyears.  The Company does not expect theimplementation of SFAS 157 to have a material impact on its consolidatedfinancial statements.

InFebruary 2007, The FASB issued Statement of Financial Accounting Standards No.159, “The Fair Value Option for Financial Assets and Financial Liabilities”(SFAS 159).  This statement permitsentities to choose to measure many financial instruments and certain otheritems at fair value. The objective is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions.  The fair value option established by thisStatement permits all entities to choose to measure eligible items at fairvalue at specified election dates.  Abusiness entity shall report unrealized gains and losses on items for which thefair value option has been elected in earnings at each subsequent reportingdate.  The fair value option may beapplied instrument by instrument and is irrevocable.  SFAS 159 is effective as of the beginning ofan entity’s first fiscal year that begins after November 15, 2007.  Early adoption is permitted as of thebeginning of a fiscal year that begins on or before November 15, 2007, providedthe entity also elects to apply the provisions of SFAS 157, “Fair ValueMeasurements”.  The Company is in theprocess of evaluating the impact this statement may have on its consolidatedfinancial statements but does not intend to adopt early.

**ITEM 3 – QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

There have been no material changes to the quantitative and qualitativedisclosures made in Tower Bancorp’s annual report on Form 10-K for the yearended December 31, 2006.

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**ITEM 4 – CONTROLS AND PROCEDURES**

**CONTROLS AND PROCEDURES**

The Company’s Chief Executive Officer andChief Financial Officer have evaluated the effectiveness of the Company’sdisclosure controls and procedures (as such term is defined in the Rules13a-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) as of March 31, 2007.  Basedon such evaluation, such officers have concluded that, as of March 31, 2007,the Company’s disclosure controls and procedures are effective in alerting themon a timely basis to material information relating to the Company (includingits consolidated subsidiary) required to be included in the Company’s periodicfilings under the Exchange Act.

**CHANGES IN INTERNAL CONTROLS**

There have not been any changes in theCompany’s internal control over financial reporting or in other factors thatmaterially affected or are reasonably likely to materially affect such controlduring the first quarter of 2007.

22

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PART II– OTHER INFORMATION

23

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PART II – OTHER INFORMATION

Item 1 –Legal Proceedings

The nature of the Company’s business generatessome litigation involving matters arising in the ordinary course ofbusiness.  However, in the opinion of theCompany, after consulting with legal counsel, no legal proceedings are pending,which would have a material effect on the Company or subsidiary.  No legal proceedings are pending other thanordinary routine litigation incidental to the business of the Company and theBank.  In addition, to Management’sknowledge, no governmental authorities have initiated or contemplated anymaterial legal actions against the Company or the Bank.

Item 1A– Risk Factors

There have been no material changes to the Company’srisk factors since these factors were previously disclosed in the Company’sAnnual Report on Form 10-K for the period ended December 31, 2006.

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

ISSUER PURCHASES OF EQUITY SECURITIES
| ** **    | ** ** | ** **                                            | ** ** | ** **                                        | ** ** | **(c)**                                                                                           | ** ** | **(d)**                                                                                              | ** ** |
|---------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| **Period**    | ** ** | **(a)  Total Number  of shares  purchased** | ** ** | **(b)  Average price  paid per  share** | ** ** | **Total number  of shares  purchased as  part of  publicly  announced  plan** | ** ** | **Maximum  number of  shares  that may yet  be purchased  under the  plan** | ** ** |
|          |       |                                                  |       |                                              |       |                                                                                              |       |                                                                                                 |       |
| January 2007  |       | 0                                                     |       | N/A                                               |       | 0                                                                                                 |       | 91,396                                                                                               |       |
|          |       |                                                  |       |                                              |       |                                                                                              |       |                                                                                                 |       |
| February 2007 |       | 1,484                                                 |       | 44.22                                             |       | 1,484                                                                                             |       | 89,912                                                                                               |       |
|          |       |                                                  |       |                                              |       |                                                                                              |       |                                                                                                 |       |
| March 2007    |       | 3,500                                                 |       | 44.26                                             |       | 3,500                                                                                             |       | 86,412                                                                                               |       |
|          |       |                                                  |       |                                              |       |                                                                                              |       |                                                                                                 |       |
| Total         |       | 4,984                                                 |       | 44.25                                             |       | 4,984                                                                                             |       | 86,412                                                                                               |       |

 

Item 3 –Defaults Upon Senior Securities

Notapplicable

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

None

24

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Item 5 –Other Information

Notapplicable

Item 6 –Index to Exhibits
| Exhibit    | ** ** | **Description  of Exhibit**                                                                                                                                                                                      |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                       |
| 3.1        |       | Articles of  Incorporation of Tower Bancorp, Inc. (incorporated by reference to Exhibit  3.1 of Tower Bancorp, Inc.’s Form 10-Q for the quarter ended September 30,  2005).                                 |
|       |       |                                                                                                                                                                                                             |
| 3.2        |       | Bylaws of Tower  Bancorp, Inc. (incorporated by reference to Exhibit 3.2 of Tower Bancorp,  Inc.’s Form 10-Q for the quarter ended September 30, 2005).                                                     |
|       |       |                                                                                                                                                                                                             |
| 10.1       |       | Change of  Control Agreement of Jeffrey B. Shank dated as of September 25, 2002 (incorporated by  referenced to Exhibit 99.4 of Tower Bancorp, Inc.’s Form 10-Q for the quarter  ended September 30, 2002). |
|       |       | * *                                                                                                                                                                                                         |
| 10.2       |       | Change of  Control Agreement of Franklin T. Klink, III dated as of November 26, 2001  (incorporated by reference to Exhibit 10.1 of Tower Bancorp, Inc.’s Form 10-K  for the year ended December 31, 2001). |
|       |       |                                                                                                                                                                                                             |
| 10.3       |       | Change of  Control Agreement of Donald G. Kunkle dated as of January 4, 2002 (incorporated by reference  to Exhibit 10.2 of Tower Bancorp, Inc.’s Form 10-K for the year ended  December 31, 2001).         |
|       |       | * *                                                                                                                                                                                                         |
| 10.4       |       | Change of  Control Agreement of John H. McDowell, Sr. dated as of December 23, 1998  (incorporated by reference to Exhibit 10.2 of Tower Bancorp, Inc.’s Form 10-K  for the year ended December 31, 1998).  |
|       |       |                                                                                                                                                                                                             |
| 10.5       |       | Tower Bancorp,  Inc.’s 1995 Non-Qualified Stock Option Plan (incorporated by reference to  Exhibit 99.1 to Tower Bancorp, Inc.’s Registration Statement on Form S-8  (File No. 333-40661)).            |

 

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| Exhibit    | ** ** | **Description  of Exhibit**                                                                                                                                                                                                                      |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                       |
| 10.6       |       | Tower Bancorp,  Inc. Stock Option Plan for Outside Directors (incorporated by reference to  Exhibit 99.2 to Tower Bancorp, Inc.’s Registration Statement on Form S-8  (File No. 333-40661)).                                                |
|       |       | * *                                                                                                                                                                                                                                         |
| 10.7       |       | Supplemental  Executive Retirement Agreement of Jeffrey B. Shank dated as of September 25, 2002 (incorporated by reference  to Exhibit 99.3 of Tower Bancorp, Inc.’s Form 10-Q for the quarter ended  September 30, 2002).                  |
|       |       | * *                                                                                                                                                                                                                                         |
| 10.8       |       | Form of  Amendment and Restatement of the First National Bank of Greencastle Group  Term Replacement Plan A (incorporated by reference to Exhibit 10.8 of Tower  Bancorp, Inc.’s Registration Statement on Form S-4 (File No. 333-130485)). |
|       |       |                                                                                                                                                                                                                                             |
| 10.9       |       | Form of  Amendment and Restatement of the First National Bank of Greencastle Group  Term Replacement Plan B (incorporated by reference to Exhibit 10.9 of Tower  Bancorp, Inc.’s Registration Statement on Form S-4 (File No. 333-130485)). |
|       |       |                                                                                                                                                                                                                                             |
| 10.10      |       | Form of  Amendment an Restatement of the First National Bank of Greencastle Executive  Bonus Agreement (incorporated by reference to Exhibit 10.10 of Tower Bancorp,  Inc.’s Registration Statement on Form S-4 (File No. 333-130485)).     |
|       |       |                                                                                                                                                                                                                                             |
| 10.11      |       | First National  Bank of Greencastle Employees’ Stock Ownership Plan Incorporated by reference  to Exhibit 99.3 to Tower Bancorp, Inc.’s Registration Statement on Form S-8  (File No. 333-40661).                                      |

 

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| Exhibit    | ** ** | **Description  of Exhibit**                                                                           |
|------------|------------|-------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                            |
| 31.1       |       | Certification of  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|       |       |                                                                                                  |
| 31.2       |       | Certification of  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|       |       |                                                                                                  |
| 32.1       |       | Certification of  Chief Executive Officer pursuant to 18 U.S.C. Section 1350                          |
|       |       |                                                                                                  |
| 32.2       |       | Certification of  Chief Financial Officer pursuant to 18 U.S.C. Section 1350                          |

 

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SIGNATURES

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
|        | TOWER BANCORP,  INC.                             |
|--------|--------------------------------------------------|
|   | (REGISTRANT)                                     |
|   |
|   |
|   | /s/      Jeff  B. Shank |   |
|   | Jeff B. Shank,  President, CEO                   |
|   | (Principal  Executive Officer)                   |
| Date:  | May 8, 2007                                      |   |   |
|   |                                             |
|   |                                             |
|   | /s/ Franklin T.  Klink, III                      |   |
|   | Franklin T.  Klink, III,                         |
|   | Treasurer                                        |
|   | (Principal  Financial Officer)                   |
| Date:  | May 8, 2007                                      |   |   |

 

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