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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2006
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________________ to ______________________
Commission File Number: 000-51234
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NORTH PENN BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
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Pennsylvania 20-1882440
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
216 Adams Avenue, Scranton, PA 18503
(Address of principal executive offices)
(570) 344-6113
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practical date: 1,443,555 as of November 14, 2006.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2006 and
December 31, 2005
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2006 and 2005
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2006 and 2005
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation.
Item 3. Controls and Procedures.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits.
PART I - FINANCIAL INFORMATION
North Penn Bancorp, Inc. (the "Company") was organized on November 22,
2004 in anticipation of the mutual holding company reorganization of North Penn
Bank (the "Bank"). The reorganization was completed on June 1, 2005. The Company
is a bank holding company and parent of the Bank. The principal activities of
the Company are the ownership and supervision of the Bank and, therefore, the
information presented in this report is primarily for the Bank and its
subsidiary.
ITEM I. FINANCIAL STATEMENTS
NORTH PENN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2006 2005
(Unaudited) (Audited)
--------- ---------
(In thousands)
ASSETS:
Cash and due from banks $ 4,521 $ 2,333
Interest bearing deposits 27 20
--------- ---------
Total cash and cash equivalents 4,548 2,353
Investment securities, available for sale 14,611 15,651
Investment securities, held to maturity -- --
Equity securities at cost, substantially restricted 997 991
Loans, net of allowance for loan losses 89,957 79,560
Bank premises and equipment - net 4,401 3,592
Accrued interest receivable 740 480
Cash surrender value of life insurance 2,075 2,018
Deferred income taxes 417 448
Other real estate owned 92 105
Other assets 132 183
--------- ---------
TOTAL ASSETS $ 117,970 $ 105,381
========= =========
LIABILITIES:
Deposits:
Non-interest bearing deposits $ 7,964 $ 7,306
Interest bearing demand deposits 28,692 23,604
Interest bearing time deposits 54,750 46,519
--------- ---------
Total deposits 91,406 77,429
Other borrowed funds 12,747 14,698
Accrued interest and other liabilities 771 459
--------- ---------
TOTAL LIABILITIES 104,924 92,586
STOCKHOLDERS' EQUITY
Preferred stock, no par; 20,000,000 authorized; issued and
outstanding, none -- --
Common stock, par value $0.10; 80,000,000 authorized; issued
and outstanding, 1,443,555 (Note 5) 144 144
Additional paid-in capital 5,853 5,853
Retained earnings 7,664 7,481
Unearned ESOP shares (509) (509)
Accumulated other comprehensive income (106) (174)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 13,046 12,795
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 117,970 $ 105,381
========= =========
See notes to unaudited consolidated financial statements.
3
NORTH PENN BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(In thousands)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
----------- ----------- ----------- -----------
INTEREST INCOME
Interest on loans $ 4,594 $ 3,218 $ 1,633 $ 1,149
Interest and dividends on investments 517 619 166 200
----------- ----------- ----------- -----------
Total interest income 5,111 3,837 1,799 1,349
INTEREST EXPENSE
Interest on deposits 1,899 1,210 744 418
Interest on borrowed funds 627 319 194 150
----------- ----------- ----------- -----------
Total interest expense 2,526 1,529 938 568
----------- ----------- ----------- -----------
NET INTEREST INCOME 2,585 2,308 861 781
PROVISION FOR LOAN LOSSES 90 75 30 30
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,495 2,233 831 751
----------- ----------- ----------- -----------
OTHER INCOME
Service charges on deposit accounts 94 84 28 29
Other income 151 164 44 44
Gain on sale of securities 11 4 -- --
----------- ----------- ----------- -----------
TOTAL OTHER INCOME 256 252 72 73
OTHER EXPENSE
Salaries and employee benefits 1,350 1,186 470 443
Occupancy and equipment expense 479 379 168 132
Other expenses 611 596 220 158
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSE 2,440 2,161 858 733
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 311 324 45 91
INCOME TAX EXPENSE 41 109 (7) 7
----------- ----------- ----------- -----------
NET INCOME 270 215 52 84
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gain (loss) arising
during period, net of income tax 68 (248) 290 (134)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 338 $ (33) $ 342 $ (50)
=========== =========== =========== ===========
Weighted average number of shares outstanding 1,393,844 1,443,555 1,393,844 1,443,555
Earnings per share $ 0.19 $ 0.15 $ 0.04 $ 0.06
Dividends per share $ 0.06 $ 0.00 $ 0.03 $ 0.00
See notes to unaudited consolidated financial statements.
4
NORTH PENN BANCORP, INC. AND SUBSIDIARY
(UNAUDITED) CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(In thousands)
2006 2005
-------- --------
Operating Activities:
Net income $ 270 $ 215
Items not requiring (providing) cash
Depreciation 222 156
Provision for loan losses 90 75
Amortization of securities (net of accretion) 20 116
Increase in cash surrender value of life insurance (57) (57)
Net realized gain on securities (11) (4)
Net realized gain on other real estate owned (29) --
Changes in:
Accrued interest income and other assets (213) 382
Accrued interest expense and other liabilities 312 (68)
-------- --------
Net Cash Provided by Operating Activities 604 815
-------- --------
Investing Activities:
Purchase bank premises and equipment (1,031) (250)
Proceeds from sale of other real estate owned 134 --
Proceeds from sale of securities "available for sale" 48 4,519
Purchase of securities "available for sale" (290) (7,455)
Redemptions of securities "available for sale" 500 5,262
Redemptions of securities "held to maturity" -- 500
Redemptions of mortgage-backed securities "available for sale" 876 1,430
Purchase of life insurance policies -- (125)
Purchase of restricted stock (6) (82)
Net increase in loans to customers (10,579) (10,339)
-------- --------
Net Cash Used in Investing Activities (10,348) (6,540)
-------- --------
Financing Activities:
Net increase (decrease) in deposits 13,977 (3,388)
(Decrease) increase in borrowed funds (1,951) 5,350
Net proceeds of initial public stock offering -- 5,714
Initial capitalization of North Penn Mutual Holding Company -- (100)
Cash dividends paid (87) --
-------- --------
Net Cash Provided by Financing Activities 11,939 7,576
-------- --------
Net Increase in Cash and Cash Equivalents 2,195 1,851
-------- --------
Cash and Cash Equivalents, January 1 $ 2,353 $ 1,659
-------- --------
Cash and Cash Equivalents, September 30 $ 4,548 $ 3,510
======== ========
Supplementary Schedule of Cash Flow Information:
Cash paid during the period for:
Interest $ 2,526 $ 1,488
Income taxes 36 46
Non-cash investing and financing activities:
Transfer from loans to other real estate owned 92 105
See notes to unaudited consolidated financial statements.
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
North Penn Bancorp, Inc. was organized on November 22, 2004 to be the
bank holding company for North Penn Bank (Bank) in connection with the
Bank's mutual holding company reorganization and minority stock
issuance. The common stock trades on the OTC Bulletin Board under the
symbol "NPEN". The Bank operates from five offices under a state
savings bank charter and provides financial services to individuals and
corporate customers primarily in Northeastern Pennsylvania. The Bank's
primary deposit products are savings and demand deposit accounts and
certificates of deposit. Its primary lending products are real estate,
commercial and consumer loans.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of North Penn Bancorp, Inc., its wholly-owned subsidiary, North Penn
Bank, and North Penn Bank's wholly-owned subsidiary, Norpenco, Inc.
These entities are collectively referred to herein as the Company. All
significant intercompany accounts and transactions have been eliminated
in consolidation. Norpenco, Inc. received approval and began purchasing
bank stocks in October, 2004. Its sole activities are purchasing bank
stocks and receiving dividends on such stocks.
The accounting policies of the Company conform with accounting
principles generally accepted in the United States of America and with
general practices within the banking industry.
BASIS OF PRESENTATION
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principals for interim
financial information. In the opinion of management, all adjustments
that are of a normal recurring nature and are considered necessary for
a fair presentation have been included. They are not, however,
necessarily indicative of the results of consolidated operations for a
full year.
All information is presented in thousands of dollars, except per share
amounts.
6
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses on
loans and the valuation of real estate acquired in connection with
foreclosures or in the satisfaction of loans. In connection with the
determination of the allowances for losses on loans and foreclosed real
estate, management periodically obtains independent appraisals for
significant properties.
2. INVESTMENT SECURITIES
The Bank's investments in securities are classified in two categories
and accounted for as follows:
Securities Held-to-Maturity. Bonds, notes and debentures for which the
Bank has the positive intent and ability to hold to maturity are
reported at cost, adjusted for amortization of premiums and accretion
of discounts.
Securities Available-for-Sale. Securities available-for-sale consist of
bonds, notes, debentures and equity securities not classified to be
held-to-maturity and are carried at fair value with unrealized holding
gains and losses, net of tax, reported as a separate component of other
comprehensive income until realized.
Purchase premiums and discounts are recognized in interest income on
the straight-line basis over the terms of the securities, which
approximates the interest method. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost
that are deemed to be other than temporary are reflected in earnings as
realized losses. Gains and losses on the sale of securities are
recorded on the trade date and are determined using the specific
identification method and are reported as other income in the statement
of income.
The amortized cost and fair value of investment securities at September
30, 2006 and December 31, 2005 are as follows:
7
AVAILABLE-FOR-SALE
SEPTEMBER 30, 2006
(In thousands)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ------- ------- -------
U.S. Agency securities $ 385 $ -- $ (5) $ 380
Mortgage-backed securities 5,607 1 (205) 5,403
Municipal securities 7,026 87 (1) 7,112
Other securities 754 -- (9) 745
------- ------- ------- -------
Total debt securities 13,772 88 (220) 13,640
Equity securities 998 29 (56) 971
------- ------- ------- -------
Total Available for Sale $14,770 $ 117 $ (276) $14,611
======= ======= ======= =======
HELD-TO-MATURITY
SEPTEMBER 30, 2006
(In thousands)
None
AVAILABLE-FOR-SALE
DECEMBER 31, 2005
(In thousands)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ------- ------- -------
U.S. Agency securities $ 385 $ -- $ (8) $ 377
Mortgage-backed securities 6,494 1 (149) 6,346
Municipal securities 7,026 -- (74) 6,952
Other securities 1,264 3 (11) 1,256
------- ------- ------- -------
Total debt securities 15,169 4 (242) 14,931
Equity securities 745 15 (40) 720
------- ------- ------- -------
Total Available for Sale $15,914 $ 19 $ (282) $15,651
======= ======= ======= =======
HELD-TO-MATURITY
DECEMBER 31, 2005
(In thousands)
None
8
The gross fair value and unrealized losses of the Bank's investments,
aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position at
September 30, 2006 is as follows:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
-------------------- -------------------- -------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
------- ------- ------- ------- ------- -------
U.S. Agencies $ -- $ -- $ 380 $ (5) $ 380 $ (5)
Mortgage-backed 464 (7) 4,891 (198) 5,355 (205)
Municipal -- -- 434 (1) 434 (1)
Other securities 745 (9) -- -- 745 (9)
Equity securities 302 (17) 410 (39) 712 (56)
------- ------- ------- ------- ------- -------
$ 1,511 $ (33) 6,115 $ (243) $ 7,626 $ (276)
======= ======= ======= ======= ======= =======
The above table at September 30, 2006 includes 24 securities that have
unrealized losses for less than 12 months and 29 securities that have
been in an unrealized loss position for 12 or more months.
The Bank invests in debt securities of the U.S. government, U.S.
agencies, U.S. sponsored agencies, obligations of states and political
subdivisions and corporate obligations. Changes in market value of all
debt securities can result from changes in interest rates. Changes in
credit quality can affect securities of states and political
subdivisions and corporate obligations. The changes in market value of
the debt securities held by the Bank have been due to changes in
interest rates, and because the Bank has the ability to hold these
investments until maturity, the Bank does not consider these
investments to be other-than-temporarily impaired at September 30,
2006.
The Bank invests in equity securities of other banks through its
subsidiary, Norpenco, Inc. Management has evaluated the near-term
prospects of the issuers with unrealized losses, in relation to the
severity and duration of the impairment. Based on that evaluation, and
the Bank's ability to hold these stocks for a reasonable period of time
sufficient for a forecasted recovery of fair value, the management does
not consider these investments to be other-than-temporarily impaired at
September 30, 2006.
9
3. LOANS
SEPTEMBER 30, DECEMBER 31,
2006 2005
------- -------
Real estate mortgages: (In thousands)
Construction and land development $ 887 $ 1,126
Residential, 1 - 4 family 45,134 43,159
Residential, multi-family 35 1,997
Commercial 33,501 23,738
------- -------
Total real estate mortgages 79,557 70,020
Commercial 1,573 1,069
Consumer 9,918 9,496
------- -------
Total loans 91,048 80,585
Allowance for loan loss 1,091 1,025
------- -------
Total loans, net $89,957 $79,560
======= =======
Loans are stated at the principal amount outstanding, net of any
unearned income, deferred loan fees and the allowance for loan losses.
Interest on mortgage and commercial loans is calculated at the time of
payment based on the current outstanding balance of the loan. Interest
on consumer loans is recognized on the simple interest method.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the bank's past
loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to pay, the
estimated value of any underlying collateral and current economic
conditions.
Uncollectible interest on loans that are contractually past due 90 days
or more is credited to an allowance established through management's
periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are
received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments is back to normal, in
which case the loan is returned to accrual status.
4. OTHER BORROWINGS
The Bank has a line of credit agreement with FHLBank of Pittsburgh for
short term borrowings varying from one day to three years. Advances on
this line must be secured by "qualifying collateral" as defined in the
agreement and bear interest at fixed or variable rates as determined at
the date advances are made. The line expires in June, 2011. At
September 30, 2006, the Bank borrowed $747 in overnight funds.
10
The Bank also has a $5,000 borrowing with FHLBank of Pittsburgh at a
fixed rate of 6.19%, which was issued in July of 2000, and matures July
of 2010. The loan requires monthly interest payments, with the
principal due at maturity.
The Bank also has a $7,000 borrowing with FHLBank of Pittsburgh at a
fixed rate of 4.34%, which was issued in July of 2005, and matures July
of 2015. The loan requires quarterly interest payments, with the
principal due at maturity.
5. EARNINGS PER SHARE
Earnings per share are calculated based on 1,443,555 shares outstanding
less 49,711 unearned ESOP shares for the current period. See footnote 7
regarding fully diluted earnings per share.
6. CONSTRUCTION OF A BRANCH
On May 1, 2006, a new branch office opened in Effort, Pennsylvania. At
December 31, 2004, the land purchased by the Bank in the amount of $571
was recorded in "Other Assets," since it was intended to be transferred
to North Penn Bancorp, Inc. At September 30, 2006, the total cost of
the branch facility, including furniture, fixtures and equipment was
approximately $1,401, not including the land acquisition costs of $571.
The cost is no longer designated "construction-in-progress," but is now
included in "Bank premises and equipment". The company recorded $30 of
depreciation expense as of September 30, 2006. The land is still held
as an asset of North Penn Bank.
7. OMNIBUS STOCK OPTION PLAN
The Company's 2006 Omnibus Stock Option Plan (the Plan), which is
shareholder-approved, permits the grant of stock options and shares to
its employees for up to 93,119 shares of common stock. The Company
believes that such awards better align the interests of its employees
with those of its shareholders. Option awards are generally granted
with an exercise price equal to the average price of the last trade
date; those option awards generally vest based on five years of
continuous service and have ten-year contractual terms. Stock awards
generally vest over five years. Certain option and stock awards provide
for accelerated vesting if there is a change in control (as defined in
the Plan).
The fair value of each option award is estimated on the date of grant
using the Black-Scholes option pricing model. Expected volatilities are
based on implied volatilities from traded options on the Company's
stock, historical volatility of the Company's stock, and other factors.
The expected term of options granted is ten years. The risk-free rate
11
for periods within the contractual life of the option is based on the
U.S. Treasury yield curve in effect at the time of grant. The dividend
yield is assumed at 0% based on historical dividends paid.
Shares were granted on September 26, 2006. A summary of the status of
the Company's nonvested shares as of September 30, 2006, and changes
during the period ended September 30, 2006, is presented below:
WEIGHTED-AVERAGE
NONVESTED SHARES SHARES (000) GRANT-DATE FAIR VALUE
---------------- ----------- ---------------------
Nonvested at January 1, 2006 0 $ 0.00
Granted 32 $11.15
Vested 0 $ 0.00
Forfeited 0 $ 0.00
Nonvested at September 30, 2006 32 $11.15
As of September 30, 2006, there was $200 of total unrecognized
compensation cost related to nonvested share-based compensation
arrangements granted under the Plan. That cost is expected to be
recognized over a weighted-average period of 5 years. Since the grant
date was September 26, 2006, the amount of compensation cost to be
recognized from that date to September 30, 2006 would be negligible and
has not been reflected on the income statement. The effect on a
weighted earnings per share calculation would also be negligible and
has not been reflected.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements" within the
meaning of the federal securities laws. These statements are not
historical facts but rather are statements based on North Penn Bancorp,
Inc.'s current expectations regarding its business strategies, intended
results and future performance. Forward-looking statements may be
preceded by terms such as "expects," "believes," "anticipates,"
"intends" and similar expressions.
Management's ability to predict results or the effect of future plans
or statements is inherently uncertain. Factors which could affect
actual results in which North Penn Bancorp, Inc. operates, as well as
nationwide, include North Penn Bancorp, Inc.'s ability to control costs
and expenses, competitive products and pricing, loan delinquency rates
and changes in federal and state legislation and regulation. These
factors should be considered in evaluating the forward-looking
statements and undue reliance should not be placed on such statements.
North Penn Bancorp, Inc. assumes no obligation to update any
forward-looking statements.
FINANCIAL CONDITION
Our total assets increased $12,589, or 12%, from $105,381 at December
31, 2005 to $117,970 at September 30, 2006. The increase was primarily
due to loan growth, specifically in the commercial real estate sector.
Net loans increased $10,397 or 13%, from $79,560 at December 31, 2005
to $89,957 million at September 30, 2006. The majority of the increase
stemmed from commercial real estate loans. The Bank has been increasing
its commercial loan portfolio to diversify its loan portfolio and
reduce its exposure to the interest rate risk associated with
residential mortgages. Most of the Bank's commercial loans are secured
by real estate in order to minimize their risk.
The allowance for loan losses was $1,091 at September 30, 2006,
compared to $1,025 at December 31, 2005. We recorded $30 in loan loss
provision expense for the three months and $90 for the nine months
ended September 30, 2006. The Bank had no loans charged-off during the
three months and $32 charged off during the nine months ended September
30, 2006. However, during the third quarter, the Bank recovered $8 in
repayments from consumer loans charged off earlier in the year.
Management assesses the adequacy of the allowance for loan losses based
on evaluating known and inherent risks in the loan portfolio and upon
management's continuing analysis of the factors underlying the quality
of the loan portfolio.
13
While management believes that, based on information currently
available, the allowance for loan losses is sufficient to cover losses
inherent in its loan portfolio at this time, no assurance can be given
that the level of the allowance for loan losses is sufficient to cover
future possible loan losses incurred by the Bank or that future
adjustments to the allowance for loan losses will not be necessary if
economic and other conditions differ substantially from the economic
and other conditions used by management to determine the current level
of the allowance for loan losses. Management may in the future increase
the level of the allowance for loan losses as a percentage of total
loans and non-performing loans in the event it increases the level of
commercial or consumer lending as a percentage of its total loan
portfolio. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the allowance
for loan losses. Such agencies may require the Bank to provide
additions to the allowance based upon judgments different from
management.
Non-performing loans, which are loans past due 90 days or more and
non-accruing loans, totaled $244 at September 30, 2006, compared to
$539 at December 31, 2005. The improvement was primarily in
non-accruing residential mortgages which decreased by $289, while
non-accruing consumer loans decreased by $6. The ratio of the Bank's
allowance for loan losses to total loans was 1.20% at September 30,
2006 and 1.27% at December 31, 2005.
Total deposits increased $13,977, or 18%, from $77,429 at December 31,
2005 to $91,406 at September 30, 2006. Non-interest bearing deposits
increased by $658 or 9%, while interest bearing demand deposits
increased $5,088 or 22%, and time deposits increased $8,231, or 18%.
The increase in non-interest bearing deposits is primarily due to
fluctuations in consumer and commercial accounts. The increases in
interest bearing demand deposits and time deposits are primarily due to
accounts being opened through our new branch in Effort, PA, coupled
with increasing balances of our already existing customers.
Other borrowings decreased $1,951, or 13%, from $14,698 at December 31,
2005 to $12,747 at September 30, 2006, due to pay downs in overnight
borrowings from FHLBank of Pittsburgh. Borrowings are primarily being
used to fund loan growth when deposit growth is inadequate and
repayment is made when deposit growth exceeds loan demand.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND 2005
Net income for the third quarter of 2006 decreased $32, or 38%, to $52,
compared to $84 in 2005. Net income for the nine months ended September
14
30, 2006 increased $55, or 26%, to $270, compared to $215 in 2005. Net
income increased primarily due to the increase in loan interest and fee
income.
Interest income for the third quarter of 2006 increased $450, or 33%,
to $1,799, compared to $1,349 in 2005. Interest income for the nine
months ended September 30, 2006 increased $1,274, or 33%, to $5,111
compared to $3,837 for September 30, 2005. Interest on loans increased
$484, or 42%, from $1,149 in 2005 to $1,633 during the third quarter in
2006. For the nine months ended September 30, interest on loans
increased $1,376, or 43%, from $3,218 for 2005, to $4,594 for 2006. The
increases are due to higher loan volumes and the increase in the prime
rate. Interest on investments decreased $34, or 17%, from $200 to $166
during the third quarter, and $102, or 16%, from $619 to $517 for the
nine months ended September 30, 2006 due to lower balances of
investments.
Interest expense during the third quarter increased $370, or 65%, from
$568 in 2005 to $938 in 2006. For the nine months ended September 30,
2006, interest expense increased $997, or 65%, from $1,529 in 2005 to
$2,526 in 2006. Interest on deposits for the third quarter increased
$326, or 78%, from $418 in 2005 to $744 in 2006, due to increases in
volume and rate of time and demand deposits. For the nine months ended
September 30, interest on deposits increased $689, or 57%, from $1,210
in 2005 to $1,899 in 2006. Interest on borrowed funds increased $44, or
29%, for the third quarter of 2006 and $308, or 97%, for the nine
months ended September 30, 2006 due to the increases in the rate and
average volume of overnight borrowings.
Net interest income for the third quarter increased $80, or 10%, from
$781 in 2005, to $861 in 2006. For the nine months ended September 30,
2006, net interest income increased $277, or 12%, from $2,308 to
$2,585.
Other income for the third quarter decreased $1, or 1%, from $73, in
2005, to $72 in 2006. Total other expenses increased $125, or 17%, from
$733 in 2005 to $858 in 2006. Salaries and employee benefits increased
$27, or 6%, from $443 in 2005, to $470 in 2006, while occupancy and
equipment expense increased $36, or 27%, from $132 in 2005, to $168 in
2006, and other expenses increased $62, or 39%, from $158 in 2005 to
$220 in 2006. The increase in expenses was related to increased
personnel and operating expenses involved with our new branch.
For the nine months ended September 30, other income increased $4, or
2%, from $252 in 2005 to $256 in 2006. Total other expenses increased
$279, or 13%, from $2,161 in 2005 to $2,440 in 2006. Salaries and
employee benefits increased $164, or 14%, from $1,186 in 2005 to $1,350
in 2006, largely related to increased personnel in our new branch.
Occupancy and equipment expense increased $100, or 26%, from $379 in
2005 to $479 in 2006, while other expenses increased $15, or 3%, from
15
$596 in 2005 to $611 in 2006, primarily due to the contribution to our
charitable foundation in 2005, offset by expenses incurred in opening
and supplying our new branch in the second and third quarters of 2006.
Applicable taxes for the third quarter decreased $14 or 200%, from $7
in 2005 to ($7) in 2006. For the nine months ended September 30, 2006,
taxes decreased $68 or 62%, from $109 in 2005 to $41 in 2006. The
reduction in taxes is due to higher tax free income.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and
interest payments on loans and FHLBank advances. While maturities
and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions, and
competition. The Bank's regulators require the Bank to maintain
sufficient liquidity to ensure its safe and sound operation.
A review of the Consolidated Statements of Cash Flows included in
the accompanying financial statements shows that the Bank's cash
and cash equivalents increased $2,195 for the nine months ended
September 30, 2006. During that period, cash was primarily
provided from earnings and customer deposits and primarily used to
fund loans to customers and pay down overnight borrowings.
The Company's and North Penn Bank's capital ratios at September
30, 2006 and December 31, 2005 as well as the required minimum
ratios for capital adequacy purposes and to be well capitalized
under the prompt corrective action provisions as defined by the
FDIC are summarized as follows:
16
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
---------------------- ----------------------- ------------------------
AMOUNT RATI O AMOUNT RATIO AMOUNT RATIO
----------- ------- ---------- --------- ---------- ----------
AT SEPTEMBER 30, 2006:
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS:
Consolidated $13,152 13.73% >$3,832 >4.0% >$5,748 > 6.0%
North Penn Bank $11,131 11.86% >$3,754 >4.0% >$5,631 > 6.0%
TOTAL CAPITAL TO RISK-WEIGHTED ASSETS:
Consolidated $13,046 13.62% >$7,665 >8.0% >$9,581 >10.0%
North Penn Bank $11,055 11.78% >$7,508 >8.0% >$9,386 >10.0%
TIER 1 CAPITAL TO TOTAL AVERAGE ASSETS:
Consolidated $13,152 11.25% >$4,678 >4.0% >$5,847 > 5.0%
North Penn Bank $11,131 9.68% >$4,600 >4.0% >$5,749 > 5.0%
TANGIBLE CAPITAL TO TOTAL AVERAGE ASSETS:
Consolidated $13,152 11.25% >$1,754 >1.5% N/A N/A
North Penn Bank $11,131 9.68% >$1,725 >1.5% N/A N/A
Risk-Weighted Assets:
Consolidated $95,808
North Penn Bank $93,856
Average Assets:
Consolidated $116,940
North Penn Bank $114,988
AT DECEMBER 31, 2005:
---------------------------------------
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS:
Consolidated $13,450 17.03% >$3,158 >4.0% >$4,737 > 6.0%
North Penn Bank $10,824 13.76% >$3,146 >4.0% >$4,720 > 6.0%
TOTAL CAPITAL TO RISK-WEIGHTED ASSETS:
Consolidated $13,304 16.85% >$6,317 >8.0% >$7,896 >10.0%
North Penn Bank $10,677 13.57% >$6,293 >8.0% >$7,866 >10.0%
TIER 1 CAPITAL TO TOTAL AVERAGE ASSETS:
Consolidated $13,450 13.44% >$4,002 >4.0% >$5,003 > 5.0%
North Penn Bank $10,824 11.20% >$3,866 >4.0% >$4,833 > 5.0%
TANGIBLE CAPITAL TO TOTAL AVERAGE ASSETS:
Consolidated $13,450 13.44% >$1,501 >1.5% N/A N/A
North Penn Bank $10,824 11.20% >$1,450 >1.5% N/A N/A
Risk-Weighted Assets:
Consolidated $78,958
North Penn Bank $78,659
Average Assets:
Consolidated $100,060
North Penn Bank $96,659
17
RELATED PARTIES
The Company does not have any material transactions involving related
persons or entities, other than traditional banking transactions, which
are made on the same terms and conditions as those prevailing at the
time for comparable transactions with unrelated parties.
ITEM 3. CONTROLS AND PROCEDURES.
The Company's management, including the Company's principal executive
officer and principal financial officer, have evaluated the
effectiveness of the Company's "disclosure controls and procedures," as
such term is defined in Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended, (the "Exchange Act"). Based upon
their evaluation, the principal executive officer and principal
financial officer concluded that, as of the end of the period covered
by this report, the Company's disclosure controls and procedures were
effective for the purpose of ensuring that the information required to
be disclosed in the reports that the Company files or submits under the
Exchange Act with the Securities and Exchange Commission (the "SEC")
(1) is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and (2) is accumulated
and communicated to the Company's management, including its principal
executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business.
Such routine legal proceedings, in the aggregate, are believed by
management to be immaterial to the Company's financial condition or
results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
USE OF PROCEEDS
1. The effective date of the Securities Act statement for which the use of
proceeds information is being disclosed is December 10, 2004. The
Commission file number assigned to the registration statement is
333-121121.
19
2. From March 28, 2005 to September 30, 2006, the amount of net offering
proceeds used for certain items and any other purposes for which at
least 5% of the Company's total offering proceeds or $100,000
(whichever is less) has been used are listed below:
Amount of Net
Activity Proceeds
--------------------------------------------------------------------
Net Offering Proceeds $5,714,000
Construction of Plant, Building and Facilities 1,000,000
Purchase and Installation of Machinery and Equipment 401,000
Purchase of Real Estate --
Acquisition of Other Business(es) --
Repayment of Indebtedness --
Working Capital --
Temporary Investments --
North Penn Bank 2,929,000
North Penn Mutual Holding Company 100,000
North Penn Charitable Foundation 100,000
North Penn Bank Employee Stock Ownership Plan 545,000
Dividends Paid 130,000
----------
Proceeds Remaining at North Penn Bancorp, Inc. $ 509,000
==========
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5 OTHER INFORMATION.
None
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS DESCRIPTION
-------- -------------------------------------------------------------------
3.1 Certificate of Incorporation of North Penn Bancorp, Inc.(1)
3.2 By-laws of North Penn Bancorp, Inc.(1)
4. Specimen Stock Certificate of North Penn Bancorp, Inc. (1)
11.1 Statement re: computation of per share earnings ((2))
31.1 Rule 13a-14(a) /15d-14(a) Chief Executive Officer Certification
31.2 Rule 13a-14(a) /15d-14(a) Principal Accounting Officer Certification
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Principal Accounting Officer
- ------------
(1) Incorporated herein by reference into this document from Form SB-2
Registration Statement, as amended, filed on December 10, 2004,
Registration No. 333-121121.
(2) Note 5 of the Notes to Unaudited Consolidated Financial Statements is
incorporated herein by reference.
21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be so signed on its behalf by the undersigned, thereunto duly
authorized.
NORTH PENN BANCORP, INC
Dated: November 14, 2006 /s/ Frederick L. Hickman
------------------------ ----------------------------------
Frederick L. Hickman
President and
Chief Executive Officer
Dated: November 14, 2006 /s/ Glenn J. Clark
------------------------ ----------------------------------
Glenn J. Clark
Assistant Vice President and
Principal Accounting Officer