FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2008

Commission file number: 0-12826

TOWER BANCORP INC.

(Exact name of registrant as specified in its charter)

Commonwealth of Pennsylvania		25-1445946
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Center Square
Greencastle, Pennsylvania		17225
(Address of principal executive offices)		(Zip Code)

Registrant’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 the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

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

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

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

Yes o No x

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

2,314,843 shares of common stock outstanding at July 23, 2008

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TOWER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2008			2007
	(Unaudited)			(Audited)*
	(000 Omitted)
ASSETS
Cash and due from banks	$	13,376		$	16,770
Federal funds sold	7,175			20,081
Interest bearing balances with banks	800			0
Investment securities available for sale	61,362			49,985
Equity securities available for sale	25,692			33,861
Restricted bank stock	4,342			2,914
Loans:
Real estate mortgages	356,103			350,976
Commercial	26,625			30,444
Consumer	16,136			17,059
Gross loans	398,864			398,479
Less: reserve for possible loan losses	(4,055		)	(3,854		)
Loans, net	394,809			394,625
Bank premises, equipment, furniture and fixtures, net	11,446			9,861
Real estate owned other than premises	2,172			2,313
Accrued interest receivable	1,972			1,861
Cash surrender value of life insurance	10,989			10,768
Goodwill	16,558			16,558
Core deposit intangible	1,505			1,693
Other assets	1,694			346
Total assets	$	553,892		$	561,636

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits in domestic offices:
Demand	$	40,723		$	46,860
Savings	226,291			223,904
Time	162,396			169,166
Liabilities for borrowed money	46,637			37,735
Accrued interest payable	728			999
Other liabilities	3,507			4,558
Total liabilities	480,282			483,222

STOCKHOLDERS’ EQUITY
Capital stock, common, no par, authorized 5,000,000 shares; 2,420,481 and 2,420,481 shares issued	2,225			2,225
Additional paid-in capital	34,821			34,831
Retained earnings	41,478			40,696
Accumulated other comprehensive income (loss)	(766		)	4,558
Less: cost of treasury stock; 2008 - 104,688 shares; 2007 - 98,055 shares	(4,148		)	(3,896		)
Total stockholders’ equity	73,610			78,414

Total liabilities and stockholders’ equity	$	553,892		$	561,636

Condensed from audited financial statements.

The accompanying notes are an integral part of these condensed financial statements.

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TOWER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED JUNE 30, 2008 and 2007

(UNAUDITED)

	2008		2007
	(000 Omitted)
Interest Income
Interest & fees on loans	$	6,831	$	7,053
Interest on investment securities available for sale	944		695
Interest on federal funds sold	77		546
Total interest income	7,852		8,294
Interest Expense
Interest on deposits	2,096		3,029
Interest on borrowed money	529		508
Total interest expense	2,625		3,537

Net interest income	5,227		4,757

Provision for loan losses	150		150

Net interest income after provision for loan losses	5,077		4,607

Other Income
Investment service income	171		240
Service charges on deposit accounts	466		455
Other service charges	291		292
Other operating income	105		184
Investment securities gains	327		476
Total other income	1,360		1,647

Other Expense
Salaries, wages and other benefits	2,029		2,022
Occupancy and equipment expense	1,030		890
Professional fees	249		280
Amortization of core deposit intangible	92		103
Marketing	156		121
Taxes not based on income	170		154
Other operating expenses	551		399
Total other expenses	4,277		3,969

Income before taxes	2,160		2,285
Applicable income taxes	562		572
Net income	$	1,598	$	1,713

Earnings per share:
Basic earnings per share	$	0.69	$	0.72
Weighted average shares outstanding	2,317,971		2,353,926
Diluted earnings per share	$	0.69	$	0.72
Weighted average shares outstanding	2,322,447		2,362,399

Dividends declared per share	$	0.28	$	0.26

The accompanying notes are an integral part of these condensed financial statements.

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TOWER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

SIX MONTHS ENDED JUNE 30, 2008 and 2007

(UNAUDITED)

	2008		2007
	(000 Omitted)
Interest Income
Interest & fees on loans	$	13,923	$	13,983
Interest on investment securities available for sale	1,856		1,468
Interest on federal funds sold	245		1,025
Total interest income	16,024		16,476
Interest Expense
Interest on deposits	4,588		5,960
Interest on borrowed money	1,053		1,022
Total interest expense	5,641		6,982

Net interest income	10,383		9,494

Provision for loan losses	550		300

Net interest income after provision for loan losses	9,833		9,194

Other Income
Investment service income	409		463
Service charges on deposit accounts	907		853
Other service charges	611		578
Other operating income	216		339
Investment securities gains (losses)	724		1,689
Total other income	2,867		3,922

Other Expense
Salaries, wages and other benefits	4,293		4,158
Occupancy and equipment expense	2,012		1,824
Professional fees	500		537
Amortization of core deposit intangible	188		210
Marketing	235		202
Taxes not based on income	342		338
Other operating expenses	1,038		900
Total other expenses	8,608		8,169

Income before taxes	4,092		4,947
Applicable income taxes	1,010		1,265
Net income	$	3,082	$	3,682

Earnings per share:
Basic earnings per share	$	1.33	$	1.56
Weighted average shares outstanding	2,318,236		2,355,853
Diluted earnings per share	$	1.33	$	1.56
Weighted average shares outstanding	2,323,568		2,364,532

Dividends declared per share	$	0.56	$	0.52

The accompanying notes are an integral part of these condensed financial statements.

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TOWER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

(UNAUDITED)

	Three Months Ended
	June 30
	2008			2007
	(000 Omitted)

Net income	$	1,598		$	1,713

Other comprehensive income:
Net (gains) realized, net of tax	(215		)	(314		)
Change in fair value, net of tax	(4,157		)	(1,211		)

Unrealized holding gains (losses), net of tax	(4,372		)	(1,525		)

Comprehensive income (loss)	$	(2,774	)	$	188

	Six Months Ended
	June 30
	2008			2007
	(000 Omitted)

Net income	$	3,082		$	3,682

Other comprehensive income:
Net (gains) realized, net of tax	(478		)	(1,115		)
Change in fair value, net of tax	(4,846		)	(1,347		)

Unrealized holding gains (losses), net of tax	(5,324		)	(2,462		)

Comprehensive income (loss)	$	(2,242	)	$	1,220

The accompanying notes are an integral part of these condensed financial statements.

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TOWER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2008 and 2007

(UNAUDITED)

	2008			2007
	(000 omitted)
Cash flows from operating activities:
Net income	$	3,082		$	3,682
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	539			647
Provision for loan losses	550			300
Stock-based compensation	78			108
(Gain) on sale of investment securities	(724		)	(1,689		)
Other (net)	(1,364		)	(246		)
Net cash provided by operating activities	2,161			2,802

Cash flows from investing activities:
Loans (net)	(598		)	2,972
Purchases of bank premises, equipment, furniture and fixtures	(2,746		)	(492		)
Interest bearing balances with banks	(800		)	0
Purchases of available for sale securities	(14,488		)	(2,782		)
Maturities/sales of available for sale securities	3,988			6,362
Redemption (purchase) of restricted bank stock	(1,428		)	(121		)
Proceeds from sale of other real estate owned	826			0
Net cash provided (used) by investing activities	(15,246		)	5,939

Cash flows from financing activities:
(Increase) decrease in federal funds sold	12,906			(35,826		)
Net increase (decrease) in deposits	(10,576		)	32,251
Long term borrowings	10,580			0
Payments on long term borrowings	(1,605		)	(5,000		)
Net increase (decrease) in short term borrowings	(63		)	(36		)
Purchase of treasury stock	(520		)	(940		)
Proceeds from sale of treasury stock	268			183
Cash dividends paid	(1,299		)	(1,226
Net cash provided (used) by financing activities	9,691			(10,594		)

Net decrease in cash and cash equivalents	(3,394		)	(1,853		)

Cash and cash equivalents at beginning of period	16,770			14,128

Cash and cash equivalents at end of period	$	13,376		$	12,275

The accompanying notes are an integral part of these condensed financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

(UNAUDITED)

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information, and accordingly do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly Tower Bancorp, Inc.’s consolidated financial position as of June 30, 2008 and the results of its operations for the three and six month periods ended June 30, 2008 and 2007. Information presented at December 31, 2007 is condensed from audited year-end financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2007.

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

The results of operations for the three and six month periods ended June 30, 2008 and 2007 are not necessarily indicative of the results to be expected for the full year.

CRITICAL ACCOUNTING POLICIES

Disclosure of the Company’s significant accounting policies is included in Note 1 to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions to be made by management. Additional information is contained on pages 18, 23, and 24 of this report for the provision and allowance for loan losses.

CHANGE IN ACCOUNTING PRINCIPLE

In September 2006, the Emerging Issues Task Force of the FASB (EITF) issued EITF 06-04. This pronouncement affects the recording of post retirement costs of insurance of bank owned life insurance policies in instances where the Company has promised a continuation of life insurance coverage to persons post retirement. EITF 06-04 requires that a liability equal to the present value of the cost of post retirement insurance be recorded during the insured employees’ term of service. The terms of this pronouncement require the initial recording of this liability with a corresponding adjustment to retained earnings to reflect the implementation of the pronouncement. This EITF becomes effective for fiscal years beginning after December 15, 2007. The effect of this change on January 1, 2008 was a reduction in retained earnings and an increase in accrued benefit liabilities of $ 1,001,000.

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Note 1. Basis of Presentation (Continued)

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)). The Standard will change the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes the criteria for how an acquiring entity in a business combination recognizes the assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Acquisition related costs including finder’s fees, advisory, legal, accounting, valuation and other professional and consulting fees are required to be expensed as incurred. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 and early implementation is not permitted. The company does not expect the implementation to have a material impact on its financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No.160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160). SFAS 160 requires the Company to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The company does not expect the implementation of SFAS 160 to have a material impact on its financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The company does not expect the implementation of SFAS 161 to have a material impact on its financial statements.

RECLASSIFICATION

Certain reclassifications have been made to the loan balances in the 2007 financial statements to conform to reporting for 2008.

Note 2. Income Taxes

Income tax expense is less than the amount calculated using the statutory tax rate primarily as a result of tax exempt income earned from state and municipal securities and loans.

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Note 3. Commitments

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

Note 4. Stock Compensation Plans

At June 30, 2008, the Company had two stock-based compensation plans. On January 1, 2006, the Company adopted FASB Statement No. 123 (R) using the modified prospective method. The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model.

Included in salaries and employee benefits expense for the six months ended June 30, 2008 and 2007 is $ 58,000 and $ 70,000, respectively, of stock-based compensation expense. Also included in other operating expense for the six months ended June 30, 2008 and 2007 is $ 20,000 and $ 38,000, respectively, of stock-based compensation expense.

Stock option plan activity for the six months ended June 30, 2008 is summarized below:

	Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life (in years)	Value of Unexercised In-The-Money Options (in thousands)
Outstanding at January 1, 2008	34,858	34.34	6	289,000
Granted	6,500	31.85	7.75	41,000
Exercised	6,788	22.36	N/A	N/A
Forfeited	3,187	40.79	N/A	N/A
Outstanding at June 30, 2008	31,383	35.76	6	155,000
Exercisable at June 30, 2008	26,383	34.75	5	155,000

The total value of in-the-money options exercised during the first six months ended June 30, 2008 was $109,000.

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Note 5. Earnings Per Share

The following shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of diluted potential common stock. Options on 26,907 shares were excluded from the calculation at June 30, 2008 because the effects were anti-dilutive. Potential dilutive common stock had no effect on income available to common stockholders.

	Three Months Ended
	June 30, 2008			June 30, 2007
		Per			Per
		Share			Share
	Shares	Amount		Shares	Amount
Basic earnings per share	2,317,971	$	0.69	2,353,926	$	0.72
Effect of dilutive securities:
Stock options	4,476			8,473
Diluted earnings per share	2,322,447	$	0.69	2,362,399	$	0.72

	Six Months Ended
	June 30, 2008			June 30, 2007
		Per			Per
		Share			Share
	Shares	Amount		Shares	Amount
Basic earnings per share	2,318,236	$	1.33	2,355,853	$	1.56
Effect of dilutive securities:
Stock options	5,332			8,679
Diluted earnings per share	2,323,568	$	1.33	2,364,532	$	1.56

Note 6. Investment Securities in a Loss Position

The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2008 and December 31, 2007:

	June 30, 2008
	(000 omitted)
	Less than 12 Months				12 Months or Greater				Total
Description	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of other U. S. government agencies	$	0	$	0	$	0	$	0	$	0	$	0
Mortgage-backed securities	4,473		11		10		0		4,483		11
Corporate bonds	1,943		171		392		99		2,335		270
Equities	8,743		3,960		3,920		1,417		12,663		5,377
Obligations of state and political subdivisions	9,263		193		0		0		9,263		193
Total	$	24,422	$	4,335	$	4,322	$	1,516	$	28,744	$	5,851

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Note 6. Investment Securities in a Loss Position (Continued)

	December 31, 2007
	(000 omitted)
	Less than 12 Months				12 Months or Greater				Total
Description	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of other U. S. government agencies	$	0	$	0	$	0	$	0	$	0	$	0
Mortgage-backed securities	190		1		941		11		1,131		12
Corporate bonds	854		108		458		32		1,312		140
Equities	7,988		1,647		2,215		443		10,203		2,090
Obligations of state and political subdivisions	1,236		0		6,041		22		7,277		22
Total	$	10,268	$	1,756	$	9,655	$	508	$	19,923	$	2,264

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, but management’s intent is to hold all investments until maturity unless market, economic or specific investment concerns warrant a sale of securities. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At June 30, 2008, six (6) mortgage-backed securities, five (5) corporate bonds, eighty-three (83) equities, and nineteen (19) obligations of state and political subdivisions had unrealized losses. Management has determined that no declines are deemed to be other than temporary.

At December 31, 2007, five (5) mortgage-backed securities, three (3) corporate bonds, sixty (60) equities, and fifteen (15) obligations of state and political subdivisions had unrealized losses. Management has determined that no declines are deemed to be other than temporary.

Note 7. Fair Value Measurements

SFAS No. 157, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1

inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

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Note 7. Fair Value Measurements (Continued)

·	Level 2	inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

·	Level 3	inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities

Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. Currently, all equity securities held by the holding company with a total fair value of $ 26,000,000 are considered to be Level 1 Securities. All others are considered to be Level 2.

Loans held for sale

Loans held for sale are required to be measured at lower of cost or fair value. Under SFAS No. 157, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At June 30, 2008, the entire balance of loans held for sale was recorded at its cost.

Impaired loans

SFAS No. 157 applies to loans measured for impairment using the practical expedients permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 30, 2008

The following is management’s discussion and analysis of the significant changes in the consolidated results of operations, capital resources and liquidity presented in the accompanying unaudited consolidated financial statements for the Company. This discussion should be read in conjunction with the preceding condensed consolidated financial statements and related footnotes, as well as the Company’s December 31, 2007 Annual Report on Form 10-K. Current performance does not guarantee and may not be indicative of similar performance in the future.

In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements. The forward-looking statements contained in this report are subject to certain risks, assumptions and uncertainties. Because of the possibility of change in the underlying assumptions, actual results could differ materially from those projected in the forward-looking statements. Additional factors that might cause actual results to differ materially from those expressed in the forward-looking statements include, but are not limited to:

· operating, legal and regulatory risks;

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

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

The Company’s forward-looking statements are relevant only as of the date on which the statements are made. By making forward-looking statements, the Company assumes no duty to update them to reflect new, changing or unanticipated events or circumstances. Readers should carefully review the risk factors described in other periodic reports and public documents that the Company files from time to time with the Securities and Exchange Commission.

OVERVIEW

Net income for the three months ended June 30, 2008 and 2007 was $1,598,000 and $1,713,000, respectively. The decrease of $115,000, or 6.7%, is attributable to a decrease of investment security gains and increased occupancy and equipment expense. Net interest income increased 9.9%, other income decreased 17.4%, the provision for loan losses remained the same and other expenses increased 7.8%. On a basic and diluted per share basis, net income for the three months ended June 30, 2008 was $0.69 and $0.69, respectively, as compared with $0.72 and $0.72 for the three months ended June 30, 2007.

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Net income for the six months ended June 30, 2008 and 2007 was $3,082,000 and $3,682,000, respectively. The decrease of $600,000, or 16.3%, is attributable to a decrease of investment security gains and an increased provision expense for the allowance for loan losses. Net interest income increased 9.4%, other income decreased 26.9%, the provision for loan losses increased 83.3% and other expenses increased 5.4%. On a basic and diluted per share basis, net income for the six months ended June 30, 2008 was $1.33 and $1.33, respectively, as compared with $1.56 and $1.56 for the six months ended June 30, 2007. Net income as a percentage of total average stockholders’ equity on an annualized basis, also known as return on average equity, was 7.87% and 9.10% for the first six months of 2008 and 2007, respectively. Return on average tangible equity was 10.28% and 11.69% for the first six months of 2008 and 2007 respectively, a decrease of 12.1%. The decrease in this ratio is attributable to a decreased level of net income.

During the first six months of 2008, the Company’s assets decreased $ 7,744,000, or 1.4%, to $553,892,000 as of June 30, 2008 from $ 561,636,000 as of December 31, 2007. This decrease is primarily attributable to a decrease in Federal funds sold. Federal funds sold decreased 64.3% to $ 7,175,000 due primarily to a decrease in deposits and increases in investments and loans. Total loans remained the same at $ 399,000,000. Total deposits decreased by $ 10,520,000, or 2.4%, during the first six months of 2008 to $ 429,410,000 as of June 30, 2008 from $ 439,930,000 as of December 31, 2007. As a result of competition in the market, and, to a certain degree, customers’ continued uncertainty as to how to best invest their monies, deposit increases may not be assumed to continue at historical levels.

RESULTS OF OPERATIONS

Net Interest Income

For the three months ended June 30, 2008, total interest income decreased by $ 442,000, or 5.3%, to $ 7,852,000 as compared with $8,294,000 for the three months ended June 30, 2007. This decrease is primarily due to decreased yields on overnight federal funds sold. Earning assets decreased 2.6% to $ 498,235,000, loans increased $ 9,851,000 or 2.5% to $ 398,864,000, investment securities decreased $ 4,884,000 and overnight federal funds sold decreased $ 17,835,000. Management continued to target efforts to attract mortgage and small commercial loans. During the first quarter of 2008, there was a 25 basis point decrease in the New York Prime Rate and an 88 basis point increase in the One Year Constant Maturity Treasury Rate.

Total interest expense decreased by $912,000, or 25.8% to $2,625,000 for the three months ended June 30, 2008 from $3,537,000 for the three months ended June 30, 2007. This decrease is primarily due to lower deposit rates and lower rates on bank borrowings. The cost of interest bearing funds at the bank decreased to 2.36% for the second quarter of 2008 compared to 3.13% for the second quarter of 2007.

Net interest income increased by $470,000, or 9.9%, to $5,227,000 for the three months ending June 30, 2008 from $4,757,000 for the three months ending June 30, 2007. This increase is primarily due to the lower cost of interest bearing funds at the bank.

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For the six months ended June 30, 2008, total interest income decreased by $ 452,000, or 2.7%, to $ 16,024,000 as compared with $16,476,000 for the six months ended June 30, 2007. This decrease is primarily due to decreased yields on overnight federal funds sold. Earning assets decreased from December 31, 2007 by 1.4% to $ 498,235,000, loans increased by $ 385,000 or 0.1% to $ 398,864,000, investment securities increased $ 4,636,000 and overnight federal funds sold decreased $12,906,000. Management continued to target efforts to attract mortgage and small commercial loans. During the first six months of 2008, there was a 225 basis point decrease in the New York Prime Rate and an 84 basis point decrease in the One Year Constant Maturity Treasury Rate.

Total interest expense decreased by $ 1,341,000, or 19.2% to $ 5,641,000 for the six months ended June 30, 2008 from $ 6,982,000 for the six months ended June 30, 2007. This decrease is primarily due to lower deposit rates and lower rates on bank borrowings. The cost of interest bearing funds at the bank decreased to 2.54% for the first six months of 2008 compared to 3.12% for the first six months of 2007.

Net interest income increased by $ 889,000, or 9.4%, to $ 10,383,000 for the six months ended June 30, 2008 from $9,494,000 for the six months ended June 30, 2007. This increase is primarily due to the lower cost of interest bearing funds at the bank.

Provision for Loan Losses

The provision for loan losses was $ 150,000 for the three months ended June 30, 2008 compared with $ 150,000 for the three months ended June 30, 2007. The level of provision is commensurate with the risk identified in the loan portfolio.

The provision for loan losses was $ 550,000 for the six months ended June 30, 2008 compared with $ 300,000 for the six months ended June 30, 2007, an increase of 83.3%. The increase in the provision is in response to a slower housing market, declining prices of real estate, and increased delinquencies. The level of provision is commensurate with the risk identified in the loan portfolio.

The allowance for loan losses represented 1.02% of total loans at June 30, 2008, compared with 0.97% as of December 31, 2007 and 0.99% as of June 30, 2007. Management performs ongoing assessments of the loan loss reserve in relation to loan portfolio growth, credit exposure to individual borrowers, overall trends in the loan portfolio, including delinquencies, and other relevant factors. Based upon these factors, management believes that as of June 30, 2008, the reserve is reasonable and sufficient to support the current level of loans in light of the strong asset quality as supported by the ratios reflected in Table 2 on page 24.

Other Income

For the three months ended June 30, 2008, other income was $ 1,360,000, a decrease of $ 287,000, or 17.4%, compared with other income of $ 1,647,000 for the three months ended June 30, 2007. The decrease was primarily due to a decrease of $ 149,000 in net gains from the sale of securities, which were $ 327,000 for the three months ended June 30, 2008 and $ 476,000 for the three months ended June 30, 2007. Other income was positively impacted by an increase of $ 22,000 in trust revenues. Other income was negatively

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impacted by a $ 92,000 decrease in revenues from investment service fees, $ 72,000 decrease of BOLI income and $ 16,000 increase in mortgage servicing rights valuation expense. During the second quarter of 2007, BOLI income included $ 85,000 which were proceeds from a death benefit. The bank began recognizing mortgage servicing rights valuation in the third quarter of 2007.

For the six months ended June 30, 2008, other income was $ 2,867,000, a decrease of $ 1,055,000, or 26.9%, compared with other income of $ 3,922,000 for the six months ended June 30, 2007. The decrease was primarily due to a decrease of $ 965,000 in net gains from the sale of securities, which were $ 724,000 for the six months ended June 30, 2008 and $ 1,689,000 for the six months ended June 30, 2007. Other income was positively impacted by an increase of $ 46,000 in NSF fees and an increase of $ 42,000 in trust revenues. Other income was negatively impacted by a $ 107,000 decrease in BOLI income, a $ 96,000 decrease in revenues from investment service fees, and $ 32,000 increase in mortgage servicing rights valuation expense. During the first six months of 2007, BOLI income included $ 132,000 which were death benefits proceeds. The bank began recognizing mortgage servicing rights valuation in the third quarter of 2007. In February 2008, the bank initiated a cash rewards program for debit cards. The Bank re-established and reactivated its Trust Department in the third quarter of 2006.

Other Expenses

Other expenses, which include salary, occupancy, equipment and all other expenses incidental to the operation of the Company, increased to $4,277,000 for the three months ended June 30, 2008 from $3,969,000 for the three months ended June 30, 2007. The $308,000, or 7.8% increase was primarily due to a $90,000 increase in data processing expenses, a $78,000 increase of employee benefits and health insurance expenses, and $56,000 increase in FDIC insurance premium expense.

Salaries and employee benefit expenses, which make up the largest component of other expenses, increased $ 7,000, or less than 1%, to $ 2,029,000 for the three months ended June 30, 2008 from $ 2,022,000 for the three months ended June 30, 2007. Health insurance expense increased $ 78,000 or 31.3% while salary expense was down $ 69,000 due to deferral of FASB91 costs to originate loans.

Occupancy and equipment expenses increased $ 140,000, or 15.7%, to $ 1,030,000 for the three months ended June 30, 2008 from $ 890,000 for the three months ended June 30, 2007. The increase is primarily due to a $ 90,000, or 25.2%, increase of data processing expense, and a $ 34,000, or 24.2%, increase of equipment depreciation expense. The bank has updated security systems at a number of branches and continues to invest in computer network initiatives.

Other operating expenses during the three months ended June 30, 2008 increased $ 161,000, or 15.2% to $ 1,218,000 from $ 1,057,000 during the three months ended June 30, 2007. The increase is primarily due to an increase of $ 56,000 in FDIC insurance premium expense, a $ 32,000 increase in meeting and travel expense and a $ 28,000 increase in supply expenses.

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Other expenses, which include salary, occupancy, equipment and all other expenses incidental to the operation of the Company, increased to $8,608,000 for the six months ended June 30, 2008 from $ 8,169,000 for the six months ended June 30, 2007. The $ 439,000, or 5.4% increase was primarily due to a $ 218,000 increase of employee benefits and health insurance expenses, $ 90,000 increase in data processing expenses, and an $ 82,000 increase in FDIC insurance premium expense.

Salaries and employee benefit expenses, which make up the largest component of other expenses, increased $ 135,000, or 3.3%, to $ 4,293,000 for the six months ended June 30, 2008 from $ 4,158,000 for the six months ended June 30, 2007. The increase is primarily attributable to a $ 147,000 increase of health insurance premium expense and a $ 70,000 increase of employee benefit expense. The employee benefit expense included a one-time charge of $ 98,000 to make the final 2007 contributions to the profit sharing and employee stock ownership plans. Health insurance premiums increased 32.2%.

Occupancy and equipment expenses increased $ 188,000, or 10.3%, to $ 2,012,000 for the six months ended June 30, 2008 from $ 1,824,000 for the six months ended June 30, 2007. The increase is primarily due to $90,000 or 12.0% increase of data processing expense and $ 47,000 or 17.2% increase of equipment depreciation expense. The bank has updated security systems at a number of branches and continues to invest in computer network initiatives.

Other operating expenses during the six months ended June 30, 2008 increased $ 116,000, or 5.3% to $ 2,303,000 from $ 2,187,000 during the six months ended June 30, 2007. The increase is primarily due to an increase of $ 82,000 of FDIC insurance premium expense.

Income Taxes

Income tax expense was $ 562,000 for the three months ended June 30, 2008, a decrease of $ 10,000, or 1.7%, compared with $572,000 for the three months ended June 30, 2007. The lower income tax expense is due to lower pre-tax income.

Income tax expense was $1,010,000 for the six months ended June 30, 2008, a decrease of $ 255,000, or 20.2%, compared with $1,265,000 for the six months ended June 30, 2007. The lower income tax expense is due to lower pre-tax income.

Net Income

Net income for the three months ended June 30, 2008 was $ 1,598,000, a decrease of $ 115,000, or 6.7%, compared with $ 1,713,000 for the three months ended June 30, 2007. The decrease in net income is the result of a decrease of $ 287,000 in other income and a $ 308,000 increase in other operating expenses. Offsetting the above decreases in net income were a $ 470,000 increase in net interest income and a $ 10,000 decrease in federal income tax expense. Basic and diluted earnings per share for the three months ended June 30, 2008 were $ 0.69 and $ 0.69 as compared with $ 0.72 and $ 0.72 for the three months ended June 30, 2007.

Net income for the six months ended June 30, 2008 was $ 3,082,000, a decrease of $ 600,000, or 16.3%, compared with $ 3,682,000 for the six months ended June 30, 2007. The decrease in net income is the result of a decrease of $ 965,000 in security gains, a $ 439,000 increase in other

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expenses, a $ 250,000 increase in the allowance for loan loss provision expense and a $ 90,000 decrease in other income, excluding security gains. Offsetting the above decreases in net income were a $ 889,000 increase in net interest income and a $ 255,000 decrease in federal income tax expense. Basic and diluted earnings per share for the six months ended June 30, 2008 were $ 1.33 and $ 1.33, respectively, as compared with $ 1.56 and $ 1.56, respectively, for the six months ended June 30, 2007.

Securities

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

Although the Company generally intends to hold its investment securities to maturity, all of the securities portfolio is classified as available for sale, with new purchases generally categorized as such. Securities in the available for sale category are accounted for at fair value with unrealized appreciation or depreciation, net of tax, reported as a separate component of stockholders’ equity. Securities in the held to maturity category, of which the Company has none, would be accounted for at amortized cost. The Company holds no trading securities in its portfolio. The securities portfolio includes equities owned by the holding company, most of which are investments in banks, bank holding companies and financial institutions. Equity investments are accounted for at fair market value. The remaining securities, primarily debt instruments, are owned by the bank.

The consolidated securities portfolio at June 30, 2008 was $ 87,054,000, compared to $ 83,846,000 at December 31, 2007, an increase of $ 3,208,000, or 3.8%. The increase is due primarily to the net purchase of $ 13,505,000 investment securities by the bank, offset by $ 7,801,000 decrease in unrealized gains on investments held by the holding company.

Bank Owned Securities

The bank owned securities portfolio at June 30, 2008 was $ 61,362,000, compared to $ 49,985,000 at December 31, 2007, an increase of $ 11,377,000, or 22.8%. The increase is due primarily to the purchase of $ 15,085,000 security investments, the maturity or calling of $ 1,580,000 and a $ 266,000 decrease in unrealized gains, less principal payments on mortgage backed securities.

The carrying value of the available for sale portion of the portfolio at June 30, 2008 includes an unrealized gain of $ 563,000 (reflected as accumulated other comprehensive income of $ 372,000 in stockholders’ equity, net of a deferred income tax liability of $ 191,000). This compares with an unrealized gain at December 31, 2007 of $ 829,000 (reflected as accumulated other comprehensive income of $ 547,000 in stockholders’ equity, net of a deferred income tax liability of $ 282,000).

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Holding Company Owned Securities

The securities portfolio at June 30, 2008 was $ 25,692,000, compared to $ 33,861,000 at December 31, 2007, a decrease of $ 8,169,000, or 24.1%. The decrease includes a decrease of $ 7,801,000 in unrealized gains. The securities portfolio is exclusively invested in financial institutions and bank holding companies. This sector has underperformed the broader stock indexes in recent quarters. Realized gains on sale of equity securities were $ 722,000 for the six months ended June 30, 2008.

The carrying value of the available for sale portion of the portfolio at June 30, 2008 includes an unrealized loss of $ 1,724,000 (reflected as accumulated other comprehensive - loss of $ 1,138,000 in stockholders’ equity, net of a deferred income tax asset of $ 586,000). This compares with an unrealized gain at December 31, 2007 of $ 6,077,000 (reflected as accumulated other comprehensive income of $ 4,011,000 in stockholders’ equity, net of a deferred income tax liability of $ 2,066,000).

Loans

The loan portfolio comprises the major component of the Company’s earning assets and generally is the highest yielding asset category. Gross loans receivable, net of unearned fees and origination costs, increased $ 385,000, or less than 1% to $ 398,864,000 at June 30, 2008 from $ 398,479,000 at December 31, 2007. Gross loans represented 92.9% of total deposits at June 31, 2008 as compared with 90.6% at December 31, 2007. This increase is primarily due a decrease in deposits, particularly time deposits.

Credit Risk and Loan Quality

The Company continues to be prudent in its efforts to minimize credit risk. The Bank’s written lending policy requires underwriting, loan documentation and credit analysis standards to be met prior to the approval and funding of any loan. In accordance with that policy, the loan review process monitors the loan portfolio on an ongoing basis. The Loan Review area then prepares an analysis of the allowance for loan losses which is then submitted to the Board of Directors for its assessment as to the adequacy of the allowance. The allowance for loan losses is an accumulation of expenses that has been charged against past and present earnings in anticipation of potential losses in the loan portfolio.

The allowance for loan losses at June 30, 2008 and December 31, 2007 was $ 4,055,000 and $ 3,854,000, respectively. At June 30, 2008, the allowance for loan losses represented 1.02% of the gross loan portfolio, compared with 0.97% at December 31, 2007. This increase is due to an increased provision for loan losses in response to a slower housing market, declining prices of real estate, and increased delinquencies and no significant change in gross loan volumes. At June 30, 2008, in consideration of the bank’s assessment of asset quality, management believes the allowance for loan loss reserve to be reasonable and adequate to support the loan growth and to address any potential losses.

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Table 1 –“Analysis of Allowance for Loan Loss” -details the activity which occurred in the allowance over the first six months of 2008 and 2007.

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

(in thousands)	2008			2007
Balance, January 1	$	3,854		$	3,610
Provision charged to operating expense	550			300
Charge-offs:
Commercial	(268		)	0
Real Estate	0			0
Consumer	(134		)	(129		)
Total charge-offs	(402		)	(129		)

Recoveries:
Commercial	21			2
Real Estate	0			0
Consumer	32			52
Total Recoveries	53			54

Net (charge-offs) recoveries	(349		)	(75		)

Balance, June 30	$	4,055		$	3,835

Net (charge-offs) or recoveries to average net loans	(0.09		)	(0.02		)

(1) Bank’s loan portfolio is entirely domestic

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

A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The larger commercial loans are evaluated for impairment. Impairment is measured on a loan-by-loan basis by comparing the contractual principal and interest payments to the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Consumer loans such as residential mortgages and installments, comprised of smaller balance homogeneous loans, are collectively evaluated for impairment. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest income on such loans is recognized only to the extent of interest payments received.

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A summary of the loans that the Company has identified as impaired follows:

	6/30/08		12/31/07
	(in thousands)
Balance	$	7,199	$	7,059
Related allowance	842		940

Table 2 – “Assets Quality Ratios” – summarizes pertinent asset quality ratios at June 30, 2008 and December 31, 2007.

Table 2 – Asset Quality Ratios

	6/30/08		12/31/07
Non-accrual loans/total loans	1.23	%	1.10	%
Non-performing assets (1)/total loans	1.37	%	1.36	%
Net (charge offs) recoveries/average loans	(0.09	)%	(0.09	)%
Allowance/total loans	1.02	%	0.97	%
Allowance/non-accrual loans	82.3	%	87.7	%
Allowance/non-performing loans (1)	76.9	%	71.1	%

(1) – Includes non-accrual loans

At June 30, 2008 and December 31, 2007, the Company had other real estate owned (not used in operations) in the amount of $2,172,000 and $2,313,000 respectively of which $ 175,000 and $ 25,000, respectively, represents foreclosed property. At June 30, 2008 and December 31, 2007, the Company had non-accrual loans in the amount of $ 4,925,000 and $4,397,000, respectively. The Company also had loans 90 days or more past due (still accruing interest) of $ 350,000 and $ 1,001,000 at June 30, 2008 and December 31, 2007, respectively.

Loan concentrations are considered to exist when the total amount of loans to any one or a multiple number of borrowers engaged in similar activities or having similar characteristics exceeds 10% of loans outstanding in any one category. The Company maintains a diversified loan portfolio, granting agribusiness, commercial and residential loans to customers. The majority of the Bank’s lending is made within its primary market area, which includes Fulton County and southern Franklin County, Pennsylvania and northern Washington County, Maryland. Although no concentrations exist to one borrower or related group of borrowers or industry sector, the Bank’s commercial lending is primarily secured by real estate.

Bank Owned Life Insurance

The Company has Bank Owned Life Insurance (“BOLI”) for certain officers and directors, in which the Bank is the owner and beneficiary of the policies. The Bank’s deposits and proceeds from the sale of investment securities funded the BOLI. Earnings from the BOLI are recognized as other income. The BOLI is profitable from the appreciation of the cash surrender values of the pool of insurance, and its tax advantage to the Company. This profitability is used to offset a portion of current and future employee and director benefit costs.

The Company had $10,989,000 and $10,768,000 in BOLI as of June 30, 2008 and December 31, 2007, respectively. This increase is primarily due to the cash value appreciation. Although the BOLI is an asset that may be liquidated, it is the Company’s intention to hold this pool of insurance because it provides tax-exempt income that lowers the Company’s tax liability, while enhancing its overall capital position.

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Deposits

Deposits are the major source of the Company’s funds for lending and investment purposes. Total deposits at June 30, 2008 were $ 429,410,000, a decrease of $ 10,520,000, or 2.4%, from total deposits of $ 439,930,000 at December 31, 2007. This decrease is primarily due to a $ 6,770,000 decrease in time deposits, which have declined due to lower rates being offered by the bank and a $ 6,137,000 decrease in demand deposits, which management considers to be normal fluctuations in these types of accounts.

Short-Term Borrowings

Short term borrowings at June 30, 2008 were $ 9,913,000, compared to $ 10,996,000 at December 31, 2007, a decrease of $ 1,083,000, or 9.8%. Federal funds purchased, Treasury Tax and Loan demand note, lines of credits with banks and overnight borrowings with the Federal Home Loan Bank of Pittsburgh are considered to be short term borrowings. Short term borrowings fluctuate daily to meet the liquidity needs of the Company.

Long-Term Debt Borrowings

Long term borrowings at June 30, 2008 were $36,724,000, compared to $26,740,000 at December 31, 2007, an increase of $9,984,000, or 37.3%. This increase is primarily due to a $ 10,000,000 borrowing with the Federal Home Loan Bank for a term of 10 years commencing February 2008.

Asset/Liability Management

The management of interest rate risk involves measuring and analyzing the maturity and repricing of interest-earning assets and interest-bearing liabilities at specific points in time. The imbalance between interest-earning assets and interest-bearing liabilities is commonly referred to as the interest rate gap. The interest rate gap is one measure of the risk inherent in the existing balance sheet as it relates to potential changes in net interest income. Maintaining an appropriate balance between interest-earning assets and interest-bearing liabilities is a means of monitoring and possibly avoiding material fluctuations in the net interest margin during periods of changing interest rates.

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

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Liquidity

Liquidity represents the Company’s ability to efficiently manage cash flows at reasonable rates to support possible commitments to borrowers or the demands of depositors. Liquidity is essential to compensate for fluctuations in the balance sheet and provide funds for growth and normal operating expenditures. Liquidity needs may be met by converting assets into cash or obtaining sources of additional funding.

Liquidity from asset categories is provided through cash, amounts due from banks, interest-bearing deposits with banks and federal funds sold, which were $ 21,351,000 at June 30, 2008, compared to $36,851,000 at December 31, 2007, a decrease of $ 15,500,000 or 42.1%. This decrease is primarily due to a decrease of $ 12,906,000 in federal funds sold. Additional asset liquidity sources include principal and interest payments from securities in the Company’s investment portfolio and cash flow from its amortizing loan portfolio. Longer-term liquidity needs may be met by selling securities available for sale, selling loans or raising additional capital. At June 30, 2008, there was $ 72,933,000 in liquid securities as compared to $ 68,573,000 at December 31, 2007. Liquid securities increased by $ 4,360,000 since the end of 2007, primarily due to the purchase of investment securities available for sale at the bank. Liquid securities held at Tower Bancorp decreased $ 8,169,000 due to sales, calls and maturity of investment securities exceeding purchases and market value fluctuations.

Liability liquidity sources include attracting deposits at competitive rates. Deposits at June 30, 2008 were $ 429,410,000, compared to $ 439,930,000 at December 31, 2007. In addition, the Company has borrowing capacity and lines of credit with the Federal Home Loan Bank of Pittsburgh, Atlantic Central Bankers Bank and several local banks.

The Company’s financial statements do not reflect various off-balance sheet commitments that are made in the normal course of business, which may involve some liquidity risk. Off-balance sheet arrangements are discussed in detail below.

Management is of the opinion that its liquidity position at June 30, 2008 is adequate to respond to fluctuations “on” and “off” the balance sheet. In addition, management knows of no trends, demands, commitments, events or uncertainties that may result in, or that are reasonably likely to result in the Company’s inability to meet anticipated or unexpected liquidity needs.

Off-Balance Sheet Arrangements

The Company’s financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business. These commitments consist mainly of loans approved but not yet funded, unused lines of credit and letters of credit made in accordance with the same standards as on-balance sheet instruments. Unused commitments at June 30, 2008 were $ 106,462,000, which consisted of $ 104,023,000 in unfunded commitments to existing loans and unfunded new loans and $ 2,439,000 in letters of credit. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present a significant liquidity risk to the Company. Management believes that any amounts actually drawn upon can be funded in the normal course of operations. The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources.

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Capital

The following Table 3 presents the risk-based and leverage capital amounts and ratios at June 30, 2008 for the Company and the Bank.

Table 3 – Capital Ratios

											To be Well
						Minimum for					Capitalized under
						Capital Adequacy					Prompt Corrective
	Actual					Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
Total risk based capital/risk weighted assets:
Company	$	59,203	16.1	%	>	29,483	>	8.0	%		N/A		N/A
Bank	48,499		13.2	%	>	29,336	>	8.0	%		36,670	>	10.0	%

Tier 1 capital/risk weighted assets:
Company	55,148		15.0	%	>	14,742	>	4.0	%		N/A		N/A
Bank	44,444		12.1	%	>	14,668	>	4.0	%		22,002	>	6.0	%

Tier 1 capital/average assets
Company	55,148		10.1	%	>	21,907	>	4.0	%		N/A		N/A
Bank	44,444		8.6	%	>	20,648	>	4.0	%	>	25,810	>	5.0	%

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

Banking laws and regulations limit the amount of cash dividends that may be paid without prior approval from the Company’s regulatory agencies. In abidance with such requirements, on April 9, 2008, the Board of Directors authorized and declared a quarterly cash dividend in the amount of $0.28 per share, payable on May 16, 2008 to all shareholders of record as of May 1, 2008. The payment of this quarterly cash dividend decreased retained earnings by $649,000.

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the quantitative and qualitative disclosures made in Tower Bancorp’s annual report on Form 10-K for the year ended December 31, 2007.

ITEM 4 – CONTROLS AND PROCEDURES

CONTROLS AND PROCEDURES

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in the Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))as of June 30, 2008. Based on such evaluation, such officers have concluded that, as of June 30, 2008, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company’s periodic filings under the Exchange Act.

CHANGES IN INTERNAL CONTROLS

During the quarter ended June 30, 2008, management made a number of changes to remediate material weaknesses noted in our December 31, 2007 10-K filing. Our full time Loan Review Officer conducted independent loan reviews throughout the second quarter. The reviews included an assessment of management risk identification for loans. An outside accounting firm will test the Loan Review Officer’s work periodically. The same firm will also review the methodology surrounding the allowance for loan loss calculation.

In order to improve our management information system in the lending area, we have included some additional coding of assets, and are in the process of a system-wide review of the loan portfolio to assure completeness of this coding. We also are risk-rating the commercial portfolio to aid management of the bank in determining quarterly allowance requirements. All loan policy exceptions are being noted and more detailed coding has been implemented to determine risk exposure in the various business sectors. Trend analysis will be used in the future to note any concentrations in any of the sectors.

Credit administration is doing a completely independent credit analysis of borrowers over a defined threshold and obtaining current financial information from the borrowers in order to do the analysis. We now have a procedure in place to assure receipt of current financial information for all commercial loans in this defined threshold on an on-going basis.

A consulting firm has been engaged to review the bank’s management systems, loan administration and operations. Their work began during the second quarter.

The bank’s loan policy continues to be developed and some of the procedures that accompany sections of the policy have already been completed.

Management believes the above steps show substantial progress has been made to remediate the material weaknesses noted in our December 31, 2007 10-K filing. Management expects further steps to be taken in subsequent periods to continue to strengthen controls.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

The nature of the Company’s business generates some litigation involving matters arising in the ordinary course of business. In the opinion of Tower’s management, Tower has adequate legal defenses and/or insurance coverage respecting any and each of these actions and does not believe that they will materially affect Tower’s operations or financial position. However, in the opinion of the Company, after consulting with legal counsel, no legal proceedings are pending which are expected to have a material adverse effect on the company or subsidiary. No legal proceedings are pending other than ordinary routine litigation incidental to the business of the Company and the Bank. In addition, to Management’s knowledge, no governmental authorities have initiated or contemplated any material legal actions against the Company or the Bank.

Item 1A – Risk Factors

There have been no material changes to the Company’s risk factors since these factors were previously disclosed in the Company’s Annual Report on Form 10-K for the period ended December 31, 2007.

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

On September 13, 2006, the Board of Directors authorized the Company to redeem or repurchase 100,000 shares of the Company’s common stock from specific shareholders or in the open market. The stock repurchase plan does not expire.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of shares purchased	(b) Average price paid per share	(c) Total number of shares purchased as part of publicly announced plan	(d) Maximum number of shares that may yet be purchased under the plan

April 2008	48	39.25	48	38,833

May 2008	0	N/A	0	38,833

June 2008	3,980	38.41	3,980	34,853

Total	4,028	38.42	4,028	34,853

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Item 3 – Defaults Upon Senior Securities

Not applicable

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

The annual meeting of Tower Bancorp, Inc. was held on April 9, 2008. Matters that were voted on by security holders were:

1. Elect two Class C Directors for three year terms expiring in 2011.

2. Ratify the selection of Smith Elliott Kearns & Company, LLC as the independent accountants for the Company for the year ending December 31, 2008.

3. Transact any other business that may properly come before the meeting.

Directors that were re-elected at the annual meeting were:

Kermit G. Hicks
Patricia A. Carbaugh

Each director received affirmative votes representing a majority of the shares outstanding.

Directors continuing to serve and their term expirations are as follows:

Class A Directors		Class B Directors
(to serve until 2009)		(to serve until 2010)

Mark E. Gayman		Jeff B. Shank
James H. Craig, Jr.		Frederic M. Frederick
Harry D. Johnston		Lois E. Easton
		Terry L. Randall

Ratification of Smith Elliott Kearns & Company, LLC as the independent accountants for the Company for the year ending December 31, 2008 occurred, with affirmative votes representing a majority of the shares outstanding.

No other matters were voted upon at the annual meeting.

Item 5 – Other Information

There have been no material changes to the procedures for which a shareholder may recommend nominees to the Company’s Board of Directors.

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).

Table of Contents

Exhibit		Description of Exhibit
10.1		Change of Control Agreement of Jeffrey B. Shank dated as of September 25, 2002 (incorporated by referenced to Exhibit 99.4 of Tower Bancorp, Inc.’s Form 10-Q for the quarter ended September 30, 2002).

10.2		Change of Control Agreement of Franklin T. Klink, III dated as of November 26, 2001 (incorporated by reference to Exhibit 10.1 of Tower Bancorp, Inc.’s Form 10-K for the year ended December 31, 2001).

10.3		Change of Control Agreement of Donald G. Kunkle dated as of January 4, 2002 (incorporated by reference to Exhibit 10.2 of Tower Bancorp, Inc.’s Form 10-K for the year ended December 31, 2001).

10.4		Change of Control Agreement of John H. McDowell, Sr. dated as of December 23, 1998 (incorporated by reference to Exhibit 10.2 of Tower Bancorp, Inc.’s Form 10-K for the year ended December 31, 1998).

10.5		Tower Bancorp, Inc.’s 1995 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 99.1 to Tower Bancorp, Inc.’s Registration Statement on Form S-8 (File No. 333-4066 1)).

10.6		Tower Bancorp, Inc. Stock Option Plan for Outside Directors (incorporated by reference to Exhibit 99.2 to Tower Bancorp, Inc.’s Registration Statement on Form S-8 (File No. 333-40661)).

10.7		Supplemental Executive Retirement Agreement of Jeffrey B. Shank dated as of September 25, 2002 (incorporated by reference to Exhibit 99.3 of Tower Bancorp, Inc.’s Form 10-Q for the quarter ended September 30, 2002).

10.8		Form of Amendment and Restatement of the First National Bank of Greencastle Group Term Replacement Plan A (incorporated by reference to Exhibit 10.8 of Tower Bancorp, Inc.’s Registration Statement on Form S-4 (File No. 333-130485)).

10.9		Form of Amendment and Restatement of the First National Bank of Greencastle Group Term Replacement Plan B (incorporated by reference to Exhibit 10.8 of Tower Bancorp, Inc.’s Registration Statement on Form S-4 (File No. 333-130485)).

10.10		Form of Amendment an Restatement of the First National Bank of Greencastle Executive Bonus Agreement (incorporated by reference to Exhibit 10.8 of Tower Bancorp, Inc.’s Registration Statement on Form S-4 (File No. 333-130485)).

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).

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.

	Page
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
Condensed consolidated balance sheets – June 30, 2008 and December 31, 2007	4
Condensed consolidated statements of income - three months ended June 30, 2008 and 2007	5
Condensed consolidated statements of income – six months ended June 30, 2008 and 2007	6
Condensed consolidated statements of comprehensive income – three and six months ended June 30, 2008 and 2007	7
Condensed consolidated statements of cash flows – six months ended June 30, 2008 and 2007	8
Notes to condensed consolidated financial statements	9 – 15
Item 2 – Management’s discussion and analysis of financial condition and results of operations	16 – 27
Item 3 – Quantitative and qualitative disclosures about market risk	28
Item 4 – Controls and procedures	28

PART II - OTHER INFORMATION	29

Item 1 – Legal proceedings	30
Item 1A – Risk Factors	30
Item 2 – Unregistered sales of equity securities and use of proceeds	30
Item 3 – Defaults upon senior securities	31
Item 4 – Submission of matters to a vote of security holders	31
Item 5 – Other information	31
Item 6 – Index to Exhibits	31 – 33

Signatures	34

Exhibits	35 – 40

		TOWER BANCORP, INC.
		(REGISTRANT)

		/s/ Jeff B. Shank
		Jeff B. Shank, President, CEO
		(Principal Executive Officer)
Date:	July 31, 2008

		/s/ Franklin T. Klink, III
		Franklin T. Klink, III,
		Treasurer
		(Principal Financial Officer)
Date:	July 31, 2008

Date:	July 31, 2008	By:		/s/Jeff B. Shank
			Jeff B. Shank,
			President/CEO
			(Principal Executive
			Officer)

Date:	July 31, 2008	By:		/s/ Franklin T. Klink, III
			Franklin T. Klink, III
			Treasurer
			(Principal Financial
			Officer)

Exhibit		Description of Exhibit
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

	/s/ Franklin T. Klink, III
	Chief Financial Officer
	July 31, 2008