updated 10/27/2010 8:16:01 AM ET 2010-10-27T12:16:01

* 3Q 2010 Diluted Operating Income Per Share of $0.37

* 3Q 2010 Diluted GAAP Net Income Per Share of $0.35

* Board of Directors Declares Cash Dividend Payable November 30, 2010

3Q 2010 HIGHLIGHTS

  • Net Income Up 47% Over 3Q 2009: GAAP net income for the third quarter of 2010 grew by $802 thousand or 47.2% to $2.5 million as compared to $1.7 million for the third quarter of 2009. Operating (Non-GAAP) income grew by $714 thousand or 37.5% to $2.6 million for the third quarter of 2010 from $1.9 million for the third quarter of 2009.
  • Net Interest Income and Margin Growth:  Third quarter 2010 net interest income increased $3.2 million or 31.0% over the third quarter of 2009 and $468 thousand or 3.6% over the second quarter of 2010, to $13.4 million. The net interest margin totaled 3.64% for the third quarter of 2010 compared to 3.58% for the third quarter of 2009 and 3.73% for the second quarter of 2010.
  • Increase in Non-Interest Income:  Non-interest income for the third quarter 2010 increased by $1.3 million or 70.2% to $3.1 million from $1.8 million for the third quarter of 2009.
  • Asset Quality:  Non-performing assets represented 1.00% of total assets at September 30, 2010 compared to 0.83% at June 30, 2010. The allowance for loan losses as a percentage of non-performing loans equaled 83.2% at September 30, 2010. The adjusted (Non-GAAP) allowance for loan losses, that is the allowance for loan losses adjusted to include the credit quality adjustment on loans purchased, as a percentage of non-performing loans equaled 93.07% at September 30, 2010.

Note Reconciliations of GAAP to Non-GAAP measures can be found in the tables located at the end of this release.

HARRISBURG, Pa., Oct. 27, 2010 (GLOBE NEWSWIRE) -- Tower Bancorp, Inc. (Nasdaq:TOBC) (the "Company"), the parent company of Graystone Tower Bank (the "Bank"), reported net income available to shareholders of $2.5 million or $0.35 per diluted share for the third quarter of 2010, an increase of $802 thousand or 47.2% compared to net income of $1.7 million or $0.30 per diluted share for the third quarter of 2009. When compared to the second quarter of 2010, net income increased $1.3 million or 112.6% from $1.2 million or $0.17 per diluted share.

Operating (Non-GAAP) income, that is GAAP net income adjusted for merger-related expenses and nonrecurring transactions, totaled $2.6 million or $0.37 per diluted share for the third quarter of 2010, an increase of $714 thousand or $0.04 per diluted share when compared to the third quarter of 2009. When compared to the second quarter of 2010, operating (Non-GAAP) income increased $722 thousand or $0.10 per diluted share.

"Our third quarter results demonstrate continued positive momentum resulting from our organic growth strategy, with an emphasis on growing core deposits and quality loans by building strong customer relationships, both in retail and commercial banking," said Andrew Samuel, chairman and CEO.  "We continue to experience a very positive response to our brand of relationship-based community banking and we see great opportunity in our current markets and as we fill in our branch presence in the fourth quarter with new offices in Hanover, York County and Chambersburg, Franklin County."

Mr. Samuel added, "We continue to make progress toward completing the acquisition of First Chester County Corporation, with the filing of our Form S-4 registration statement with the Securities and Exchange Commission last month.  We look forward to submitting the transaction to First Chester and Tower shareholders promptly upon the effectiveness of the registration statement and hope to announce the dates for Tower and First Chester shareholder meetings in the near future."

Board of Directors Declares $0.28 per Share Dividend, Payable on November 30, 2010

Mr. Samuel also reported that the Board of Directors declared a quarterly cash dividend of $0.28 per share, payable on November 30, 2010 to shareholders of record at the close of business on November 15, 2010.

Income Statement Review

Net income increased by $802 thousand from $1.7 million for the third quarter of 2009 to $2.5 million for the third quarter of 2010. Operating (Non-GAAP) income, representing net income adjusted for merger expenses and nonrecurring transactions, increased $714 thousand or $0.04 per diluted share for the third quarter 2010 as compared to the third quarter of 2009.

Net income for the nine-months ended September 30, 2010 totaled $5.6 million, an increase of $3.9 million or $0.41 per diluted share when compared to the same period in 2009. Operating (Non-GAAP) income increased $3.4 million or $0.20 per share to $6.5 million for the nine-months ended September 30, 2010 compared to $3.2 million for the same period in 2009.

When comparing linked quarters, net income available to common shareholders for the third quarter of 2010 equaled $2.5 million or $0.35 per diluted share compared to $1.2 million or $0.17 per diluted share for the second quarter of 2010. Operating (Non-GAAP) income totaled $2.6 million or $0.37 per diluted share for third quarter of 2010 compared to $1.9 million or $0.27 per diluted share for second quarter of 2010.

Net interest income for the third quarter of 2010 was favorably impacted by growth in average earning assets and a rising tax effected net interest margin due to reduced rates on interest-bearing non-maturity deposits. When compared to the third quarter of 2009, the net interest margin increased 6 basis points from 3.58% to 3.64%. This increase results primarily from increased volume of interest-earning assets offset by a reduction in average rate received on these assets. Average investments and loans increased $93.6 million and $254.6 million, respectively, compared to the third quarter of 2009, while the average rate received on interest earning assets decreased by 36 basis points. The average balance of interest-bearing liabilities for the third quarter of 2010 increased by $233.3 million but the effect on interest expense was offset by the reduction in the average rate paid by 36 basis point compared to the third quarter of 2009.

When compared to the second quarter of 2010, net interest income grew $468 thousand due to the increase of the average interest-earning assets of $70.7 million for the third quarter of 2010. The net interest margin decreased from 3.73% for the second quarter of 2010 to 3.64% for the third quarter of 2010, resulting primarily from decreased yields on new loans originated during the third quarter of 2010. Approximately 72.5% of the increase in net loans was in the form of variable rate loans. This was an intentional focus of the bank as part of an overall asset liability management strategy. The average rate received on loans decreased by 28 basis points to 5.57%, which was accompanied by a decrease of 15 basis points in the average rate received on investment securities. During the third quarter, the U.S. Government Agency portfolio decreased by $35.8 million. The decrease in these holdings was attributable to the maturity or call of certain agency step-up bonds. The agency step-up bonds were purchased with the intent of providing funding for loan growth during calendar year 2010. The average balance of interest-bearing deposits for the third quarter of 2010 increased by $47.2 million; however, the average rate paid on these deposits decreased by 9 basis points compared to the second quarter of 2010.

The Company recorded a $1.6 million provision for loan losses for the third quarter of 2010, compared to $1.9 million for the second quarter of 2010 and $800 thousand for the third quarter of 2009. The recorded provision for loan losses is based upon management's evaluation of risk of losses over the entire loan portfolio.

Non-interest income was $3.1 million for the third quarter of 2010, which represents 0.76% of average assets on an annualized basis. When compared to the third quarter of 2009, non-interest income for the third quarter of 2010 increased by $1.3 million or 70.2%, primarily due to increases in service charges on deposit accounts of $207 thousand, gains on sale of mortgage loans held for sale of $322 thousand, gains on sales of other interest earning assets of $378 thousand and income from bank owned life insurance of $316 thousand.

Non-interest income for the third quarter of 2010 increased $589 thousand over the second quarter of 2010. As a percentage of average assets, non-interest income grew 12 basis points during the third quarter of 2010 to 0.76%. This non-interest income growth was driven by increased gains on sale of mortgage loans originated for sale of $335 thousand, gain on the sale of other interest-earning assets of $294 thousand, and income earned on bank owned life insurance of $129 thousand, offset by the decline in other service charges, commissions and fees of $101 thousand.

Non-interest expense increased $2.4 million or 27.4% to $11.1 million for the third quarter of 2010 from $8.7 million for the third quarter of 2009. The Company experienced increases in almost all categories of non-interest expense.  The largest increases in non-interest expenses have occurred in salaries and benefits expense, occupancy expenses, FDIC insurance premiums, and data processing costs. The rising costs in these areas can be attributed to costs incurred to support branch network expansion, balance sheet growth, and advanced hiring in preparation for the acquisition of First Chester County Corporation.

In comparison to the second quarter of 2010, non-interest expense decreased $735 thousand. Included in second quarter of 2010 non-interest expenses is an impairment charge of land held for investment of $920 thousand. Excluding merger-related expenses and impairment of land, non-interest expense during the third quarter increased $144 thousand compared to the second quarter of 2010. The majority of the increase can be attributed to increases in salaries and benefits.

Income tax expense was $1.3 million for the third quarter of 2010, which resulted in an effective tax rate of 33.8%, an increase in the effective tax rate from 32.5% for the third quarter 2009.

Review of Balance Sheet, Credit Quality and Capital Position

Total assets at September 30, 2010 reached $1.6 billion, representing an increase of $148.3 million or 13.5% annualized from December 31, 2009. Total gross loans held for investment were $1.3 billion at September 30, 2010, an increase of $183.2 million or 21.5% annualized compared to December 31, 2009. Commercial loans showed continued strong growth as the balance at September 30, 2010 increased by $163.4 million from December 31, 2009, or 25.4% on an annualized basis. On a quarterly basis, gross loans have increased $105.2 million or 34.3% on an annualized basis, from $1.2 billion at June 30, 2010 to $1.3 billion at September 30, 2010. The largest increases related to commercial industrial and agricultural loans and home equity loans, which increased $77.6 million and $24.9 million, respectively. As previously mentioned, the majority of these loans were originated with variable interest rates which placed some downward pressure on the interest rate margin for the quarter.

Total deposits at September 30, 2010 were $1.4 billion, representing an increase of $139.2 million, or 15.3% annualized, from December 31, 2009. Total deposits, excluding time deposits, totaled $923.6 million at September 30, 2010, an increase of $129.7 million from December 31, 2009, or 21.8% on an annualized basis. The Company's deposit mix continued to be weighted heavily in lower cost demand, savings and money market accounts, which comprised 68.1% of total deposits at September 30, 2010, compared with 65.3% at December 31, 2009 and 64.1% at September 30, 2009. During the third quarter of 2010, the Company experienced a combined net increase in non-interest bearing transaction accounts and interest bearing checking accounts of 517 accounts.

Asset quality continues to be a primary focus of the Company as evidenced by the asset quality metrics at September 30, 2010.  Non-performing assets were 1.00% of total assets and annualized net loan charge-offs during the third quarter of 2010 totaled 0.16% of average loans in the quarter, an increase of 5 basis points when compared to the same calculation at December 31, 2009. The adjusted (Non-GAAP) allowance for loan losses, that is the allowance for loan losses adjusted to include the credit quality adjustment on loans purchased, as of September 30, 2010 was $14.2 million, which consisted of the allowance for loan losses of $12.7 million and the credit fair value adjustment on purchased loans acquired in the 2009 merger of $1.5 million. The adjusted (Non-GAAP) allowance for loan losses excludes the fair value adjustment made to impaired loans purchased in the merger, which has a balance of $3.0 million at September 30, 2010. The adjusted (Non-GAAP) allowance for loan losses at September 30, 2010 represented 1.07% of total loans outstanding of $1.322 billion, compared to 1.11% at December 31, 2009 and 1.16% at September 30, 2009. The Company's coverage ratio, calculated as the ratio of the adjusted (Non-GAAP) allowance for loan losses to non-performing loans, was 93.07% at September 30, 2010.

During the third quarter of 2010, non-performing assets increased $2.9 million or 22.23% over the second quarter of 2010. This increase is the result of a $3.7 million increase in non-accrual loans, partially offset by a decrease in loans that are ninety days past due and still accruing interest of $859 thousand. The increase in both non-performing assets and non-accrual loans resulted from increases in non-performing commercial real estate loans and commercial industrial and agricultural loans. Acquired loans deemed to be impaired at the time of purchase in accordance with Accounting Standard Codification 310-30-30, previously known as Statement of Position (SOP) 03-3, "Accounting for Certain Loans Acquired in a Transfer" have been recorded at their fair value based on anticipated future cash flows at the time of acquisition and are considered to be performing loans as the Company expects to fully collect the new carrying value (i.e. fair value) of the loans. As such, these loans have been excluded from non-performing assets for all periods discussed. While the Company experienced an increase in non-performing assets during the third quarter of 2010, total delinquencies, including non-accrual loans remained relatively flat, increasing $138 thousand or 0.5% when compared to the second quarter of 2010.

GAAP requires that expected credit losses associated with loans obtained in an acquisition be reflected at fair value as of each respective acquisition date and prohibits the carryover of the acquired entity's allowance for loan losses. Accordingly, the Company's management believes that presentation of the adjusted (Non-GAAP) allowance for loan losses, consisting of the allowance for loan losses plus the credit fair value adjustment on loans purchased in merger transactions, is useful for investors to understand the complete allowance that is recorded as a representation of future expected losses over the Company's loan portfolio. The details of this calculation and reconciliation of GAAP and Non-GAAP measures are provided in the Selected Financial Data tables found later in this release.

The Company's Non-GAAP ratio of tangible common equity to tangible assets was 9.41% at September 30, 2010, compared to 10.21% and 10.90% at December 31, 2009 and September 30, 2009, respectively. The Company's Tier 1 Risk-Based Capital and Total Risk-Based Capital Ratios at September 30, 2010 were 11.14% and 13.20%, respectively and exceed the "well capitalized" minimum regulatory requirements of 6.00% and 10.00%, respectively. Cash dividends paid to shareholders during the third quarter 2010 were $0.28 per share.

Due to the merger of Tower Bancorp, Inc. and Graystone Financial Corp., on March 30, 2009, all periods prior to March 30, 2009 represent the results of Graystone Financial Corp. as the accounting acquirer in the merger.

The financial information contained on the following pages provides more detail on the Company's performance for the quarter-ended September 30, 2010, as compared to quarter-ended June 30, 2010 and the quarter-ended September 30, 2009 and for the nine months period-ended September 30, 2010 compared to September 30, 2009. Additionally, the following pages provide detail on the Company's financial condition as of September 30, 2010 as compared to June 30, 2010, December 31, 2009 and September 30, 2009. Persons seeking additional information should refer to the Company's periodic reports as filed with the Securities and Exchange Commission (SEC).

Conference Call

A conference call will be held at 10 a.m. (ET) on Wednesday, October 27, 2010 to discuss the Company's financial results.The conference call will be broadcast live through the Company's website at www.towerbancorp.com, by clicking on the link to the webcast, Confirmation Code: 20587155.  Participants using the webcast option are encouraged to log on 10 minutes ahead of the scheduled starting time for the call.  There will also be a call in option available by dialing 877-878-1863. A password is not necessary.  A webcast replay will be available on the Company's website for 30 days following the call. A call-in replay option will also be available beginning October 27, 2010 at 1:00 p.m. (ET), through November 10, 2010, 11:59 p.m. (ET) at 800-642-1687, Passcode: 20587155.

Supplemental Information – Explanation of Non-GAAP Financial Measures

This press release contains financial information determined by methods other than in accordance with GAAP. These measures include tangible assets, tangible common equity, operating income and performance and capital ratios derived from the foregoing. Tangible assets and tangible common equity are derived by reducing the balance of assets and equity, respectively, by the amount of GAAP reported goodwill and other intangible assets. Operating income is calculated by adjusting net income available to common shareholders for merger-related expenses and other nonrecurring transactions that occurred during the period presented, since such expenses are considered by management to be "non-operating" in nature. The Company calculates the return on average tangible equity by excluding the balance of intangible assets and their related amortization expense from the calculation of return on average equity. The Company believes the presentation of these non-GAAP financial measures provide useful supplemental information that is essential to an investor's proper understanding of the operating results of the Company's core businesses. The Company's management uses these non-GAAP financial measures in their analysis of the Company's performance.  These non-GAAP disclosures should not be viewed as a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of GAAP to non-GAAP measures are included as tables at the end of this release.

About Tower Bancorp, Inc.

Tower Bancorp, Inc. is the parent company of Graystone Tower Bank, a full-service community bank operating 27 branch offices in central Pennsylvania and Maryland through two divisions, Graystone Bank and Tower Bank. With total assets of approximately $1.6 billion, Tower Bancorp's unparalleled competitive advantage is its more than 300 employees and a strong corporate culture paired with a clear vision that provides customers with uncompromising service and individualized solutions to every financial need. Tower Bancorp's common stock is listed on the NASDAQ Global Market under the symbol "TOBC." More information about Tower Bancorp and its divisions can be found on the internet at www.yourtowerbank.com, www.graystonebank.com and www.towerbancorp.com .

The Tower Bancorp, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=7686

Safe Harbor for Forward-Looking Statements

This document may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results and trends could differ materially from those set forth in such statements due to various risks, uncertainties and other factors. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following: ineffectiveness of the company's business strategy due to changes in current or future market conditions; the effects of competition, and of changes in laws and regulations, including industry consolidation and development of competing financial products and services; interest rate movements; changes in credit quality; inability to achieve merger-related synergies; difficulties in integrating distinct business operations, including information technology difficulties; volatilities in the securities markets; and deteriorating economic conditions, and other risks and uncertainties, including those detailed in Tower Bancorp, Inc.'s filings with the Securities and Exchange Commission (SEC). The statements included herein are valid only as of the date hereof and Tower Bancorp, Inc. disclaims any obligation to update this information.

Selected Financial Highlights

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