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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
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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.
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(Exact name of small business issuer as specified in its charter)
Pennsylvania 20-1882440
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(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
216 Adams Avenue, Scranton, PA 18503
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(Address of principal executive offices)
(570) 344-6113
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(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]
As of August 14, 2007, the issuer had 1,443,555 shares of common stock, par
value $0.10 per share, outstanding.
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 June 30, 2007 and December 31, 2006
Consolidated Statements of Income
for the Three and Six Months Ended June 30, 2007 and 2006
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2007 and 2006
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.
2
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
NORTH PENN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2007 2006
--------- ------------
(Unaudited) (Audited)
(In thousands)
ASSETS:
Cash and due from banks $ 3,034 4,029
Interest bearing deposits 96 87
--------- ---------
Total cash and cash equivalents 3,130 4,116
Investment securities, available for sale 13,570 14,227
Equity securities at cost, substantially restricted 1,239 1,236
Loans, net of allowance for loan losses 93,621 95,154
Bank premises and equipment - net 4,249 4,342
Accrued interest receivable 621 638
Cash surrender value of life insurance 2,099 2,094
Deferred income taxes 497 417
Other real estate owned 100 100
Other assets 372 132
--------- ---------
TOTAL ASSETS $ 119,498 $ 122,456
========= =========
LIABILITIES:
Deposits:
Non-interest bearing deposits $ 7,585 $ 6,993
Interest bearing demand deposits 29,588 26,026
Interest bearing time deposits 47,610 53,727
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Total deposits 84,783 86,746
Other borrowed funds 20,660 21,741
Accrued interest and other liabilities 939 843
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TOTAL LIABILITIES 106,382 109,330
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, 1,443,555 144 144
Additional paid-in capital 5,886 5,870
Retained earnings 7,751 7,623
Unearned ESOP shares (460) (460)
Accumulated other comprehensive income (205) (51)
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TOTAL STOCKHOLDERS' EQUITY 13,116 13,126
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 119,498 $ 122,456
========= =========
See notes to unaudited consolidated financial statements.
3
NORTH PENN BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(In thousands)
SIX MONTHS ENDED THREE MONTHS ENDED
------------------------- -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2007 2006 2007 2006
---------- --------- --------- ----------
INTEREST INCOME
Interest on loans $ 3,399 $ 2,961 $ 1,709 $ 1,536
Interest and dividends on investments 333 351 164 179
---------- --------- --------- ----------
Total interest income 3,732 3,312 1,873 1,715
INTEREST EXPENSE
Interest on deposits 1,420 1,155 685 651
Interest on borrowed funds 544 433 287 208
---------- --------- --------- ----------
Total interest expense 1,964 1,588 972 859
---------- --------- --------- ----------
NET INTEREST INCOME 1,768 1,724 901 856
PROVISION FOR LOAN LOSSES 60 60 30 30
---------- --------- --------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 1,708 1,664 871 826
---------- --------- --------- ----------
OTHER INCOME
Service charges on deposit accounts 72 66 40 35
Other operating income 106 107 46 41
Gain on sale of loans 79 - 79 -
Gain on sale of securities 34 11 17 11
---------- --------- --------- ----------
TOTAL OTHER INCOME 291 184 182 87
OTHER EXPENSE
Salaries and employee benefits 944 880 481 436
Occupancy and equipment expense 304 311 155 169
Other operating expenses 439 391 237 229
---------- --------- --------- ----------
TOTAL OTHER EXPENSE 1,687 1,582 873 834
---------- --------- --------- ----------
INCOME BEFORE INCOME TAXES 312 266 180 79
INCOME TAX EXPENSE 97 48 60 7
---------- --------- --------- ----------
NET INCOME 215 218 120 72
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding loss arising during period,
net of income tax (154) (222) (107) (112)
---------- --------- --------- ----------
COMPREHENSIVE INCOME $ 61 $ (4) $ 13 $ (40)
========== ======== ========= =========
Weighted average number of shares outstanding
1,398,562 1,393,844 1,398,562 1,393,844
Earnings per share, basic and diluted $ 0.15 $ 0.16 $ 0.09 $ 0.05
Dividends per share $ 0.06 $ 0.03 $ 0.03 $ 0.03
See notes to unaudited consolidated financial statements.
4
NORTH PENN BANCORP, INC. AND SUBSIDIARY
(UNAUDITED) CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(In thousands)
2007 2006
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Operating Activities:
Net income $ 215 $ 218
Items not requiring (providing) cash
Depreciation 135 135
Provision for loan losses 60 60
Amortization of securities (net of accretion) 7 15
Increase in cash surrender value of life insurance (5) (38)
Net realized gain on securities (34) (11)
Net realized gain on other real estate owned (6) (29)
Net realized gain on sale of loans (79) --
Changes in:
Accrued interest income and other assets (224) 41
Accrued interest expense and other liabilities 112 206
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Net Cash Provided by Operating Activities 181 597
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Investing Activities:
Purchase bank premises and equipment (42) (973)
Proceeds from sale of other real estate owned 427 134
Proceeds from sale of securities "available for sale" 189 48
Purchase of securities "available for sale" (198) (220)
Redemptions of securities "available for sale" -- 500
Redemptions of mortgage-backed securities "available for sale" 460 545
Net purchase of restricted stock (3) (107)
Net increase in loans to customers (3,309) (9,822)
Proceeds from sale of loans 4,440 --
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Net Cash Provided by (Used in) Investing Activities 1,964 (9,895)
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Financing Activities:
(Decrease) increase in deposits (1,963) 10,039
(Decrease) increase in borrowed funds (1,081) 1,174
Cash dividends paid (87) (43)
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Net Cash (Used In) Provided by Financing Activities (3,131) 11,170
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Net (Decrease) Increase in Cash and Cash Equivalents (986) 1,872
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Cash and Cash Equivalents, January 1 $ 4,116 $ 2,353
-------- --------
Cash and Cash Equivalents, June 30 $ 3,130 $ 4,225
======== ========
Supplementary Schedule of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,995 $ 1,588
Income taxes 62 21
Non-cash investing and financing activities:
None
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. (Company) is the bank holding company for
North Penn Bank (Bank). The Company's common stock is quoted on the OTC
Bulletin Board under the symbol "NPEN.OB". 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 subsidiaries, Norpenco, Inc.
and North Penn Settlement Services, LLC. These entities are
collectively referred to herein as the Company. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Norpenco, Inc.'s sole activities are purchasing bank
stocks and receiving dividends on such stocks. North Penn Settlement
Services, LLC, receives non interest income from providing title search
work.
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.
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.
6
MORTGAGE PARTNERSHIP FINANCE PROGRAM
The Bank participates in the Mortgage Partnership Finance (MPF) Program
of the Federal Home Loan Bank of Pittsburgh (FHLB). The program is
intended to provide member institutions with an alternative to holding
fixed-rate mortgages in their loan portfolios or selling them in the
secondary market. An institution participates in the MPF Program by
either originating individual loans on a "flow" basis as an agent for
the FHLB pursuant to the "MPF 100 Program" or by selling, as a
principal, closed loans owned by an institution to the FHLB pursuant to
one of the FHLB's closed-loan programs. Under the MPF Program(s),
credit risk is shared by the participating institution and the FHLB by
structuring the loss exposure in several layers, with the participating
institution being liable for losses after application of an initial
layer of losses (after any private mortgage insurance) is absorbed by
the FHLB, subject to an agreed-upon maximum amount of such secondary
credit enhancement which is intended to be in an amount equivalent to a
"AA" credit risk rating by a rating agency. The participating
institution may also be liable for certain first layer losses after a
specified period of time. The participating institution receives credit
enhancement fees from the FHLB for providing this credit enhancement
and continuing to manage the credit risk of the MPF Program loans.
Participating institutions are also paid specified servicing fees for
servicing the loans.
Transfers involving sales with the Bank acting as principal are
accounted for in accordance with SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities
(SFAS 140), with the recognition of gains and losses on the sale and
related mortgage servicing rights.
The credit enhancement feature of the MPF Program is accounted for by
the Bank as a financial guarantee in accordance with FASB
Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45) and reported on the balance sheet at
its initial fair value. Subsequent changes in the recorded guarantee
amount would result from termination of any portion or all of the
guarantee, additional guarantees being issued or increases in the
expected losses resulting from the guarantee. Such changes in recorded
amounts are recognized in the consolidated statements of income or as
an increase in the offsetting guarantee fees receivable account in the
case of additional guarantees being issued.
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
7
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 June 30,
2007 and December 31, 2006 are as follows:
AVAILABLE-FOR-SALE
JUNE 30, 2007
(In thousands)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ------- ------- -------
U.S. Agency securities $ 385 $ -- $ 7 $ 378
Mortgage-backed securities 4,926 5 157 4,774
Municipal securities 7,025 -- 101 6,924
Other securities 502 -- 5 497
------- ------- ------- -------
Total debt securities 12,838 5 270 12,573
Equity securities 1,043 39 85 997
------- ------- ------- -------
Total Available for Sale $13,881 $ 44 $ 355 $13,570
======= ======= ======= =======
AVAILABLE-FOR-SALE
DECEMBER 31, 2006
(In thousands)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ------- ------- -------
U.S. Agency securities $ 385 $ -- $ 7 $ 378
Mortgage-backed securities 5,391 2 113 5,280
Municipal securities 7,026 51 -- 7,077
Other securities 503 -- 8 495
------- ------- ------- -------
Total debt securities 13,305 53 128 13,230
Equity securities 999 51 53 997
------- ------- ------- -------
Total Available for Sale $14,304 $ 104 $ 181 $14,227
======= ======= ======= =======
All of the Company's investment securities were classified as available
for sale at June 30, 2007 and December 31, 2006.
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 June
30, 2007 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 $ -- $ -- $ 378 $ 7 $ 378 $ 7
Mortgage-backed 306 8 4,083 149 4,389 157
Municipal 6,924 101 -- -- 6,924 101
Other securities -- -- 497 5 497 5
Equity securities 303 26 365 59 668 85
------- ------- ------- ------- ------- -------
$ 7,533 $ 135 $ 5,323 $ 220 $12,856 $ 355
======= ======= ======= ======= ======= =======
8
The above table at June 30, 2007 includes 31 securities that have
unrealized losses for less than 12 months and 31 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 June 30, 2007.
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
June 30, 2007.
3. LOANS
JUNE 30, DECEMBER 31,
2007 2006
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(In thousands)
Real estate mortgages:
Construction and land development $ 1,015 $ 1,186
Residential, 1 - 4 family 41,058 42,323
Residential, multi-family 2,325 2,449
Commercial 39,354 37,711
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Total real estate mortgages 83,752 83,669
Commercial 1,831 1,742
Consumer 9,219 10,864
------- -------
Total loans 94,802 96,275
Allowance for loan loss 1,181 1,121
------- -------
Total loans, net $93,621 $95,154
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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 losses 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.
9
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 June 30,
2007, the Bank borrowed $8,660,000 in overnight funds.
The Bank also has a $5,000,000 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 $7,000,000 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
Basic earnings per share is computed on the weighted average number of
common shares outstanding during each year, adjusted for unearned
shares of the ESOP, as prescribed in Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS 128). Diluted earnings per
share includes common shares issuable upon exercise of employee stock
options as follows:
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Numerator $ 215,000 $ 218,000 $ 120,000 $ 72,000
Denominator
Basic shares outstanding 1,398,562 1,393,844 1,398,562 1,393,844
Effective of dilutive shares 1,122 -- 1,122 --
---------- ---------- ---------- ----------
Diluted shares outstanding 1,399,684 1,393,844 1,399,684 1,393,844
Earnings per share
Basic $ 0.15 $ 0.16 $ 0.09 $ 0.05
Diluted $ 0.15 $ 0.16 $ 0.09 $ 0.05
As of June 30, 2006 there were no dilutive shares.
6. OMNIBUS STOCK OPTION PLAN
STOCK GRANTS. Restricted stock grants totaling 4,875 shares were
awarded on September 26, 2006 having a fair value of $54,000. The
grants vest over five years. The market value as of the grant date of
the restricted stock grants is charged to expense as the grants vest.
STOCK OPTIONS. Stock options covering 27,000 shares of common stock
were awarded on September 26, 2006. The option awards were granted with
an exercise price equal to the average price on the last trade date.
The stock options vest and therefore become exercisable on a pro rata
basis annually over five years from the date awarded, commencing
September 26, 2007. The options are available to be exercised for a
period of ten years after the date awarded.
10
The fair value of each option grant was estimated to be $3.86 on the
date of grant using the Black-Scholes option pricing model with the
following assumptions used for grants during the applicable period:
Dividend Yield (per share) $ 0.12
Volatility (%) 3.76%
Risk-free Interest Rate (%) 4.76%
Expected Life 10 years
During the quarter and six months ended June 30, 2007, the Company
recorded $8,000 and $16,000, respectively, in expense included in
"Salaries and employee benefits" on the accompanying financial
statements. As of June 30, 2007, there was approximately $135,000 of
total unrecognized compensation cost related to unvested options and
grants. That cost is expected to be recognized over a weighted-average
period of 5 years. The Company plans on obtaining shares to be issued
upon exercise of stock options through authorized common stock.
WEIGHTED -AVERAGE
NUMBER OF WEIGHTED -AVERAGE REMAINING
SHARES EXERCISE PRICE CONTRACTUAL TERM
--------- ----------------- -----------------
Outstanding, January 1, 2007 27,000 $ 11.15 --
Granted -- -- --
Exercised -- -- --
Forfeited or expired -- -- --
------
Outstanding, June 30, 2007 27,000 $ 11.15 9.3
======
STOCK OPTIONS RESTRICTED STOCK
------------------------------- -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
NUMBER OF GRANT-DATE FAIR NUMBER OF GRANT-DATE FAIR
SHARES VALUE SHARES VALUE
--------- ---------------- --------- ----------------
Nonvested shares
Nonvested, January 1, 2007 27,000 $ 3.86 4,875 $ 11.15
Granted -- -- -- --
Vested -- -- -- --
Forfeited -- -- -- --
------ -----
Nonvested, June 30, 2007 27,000 $ 3.86 4,875 $ 11.15
====== =====
7. GUARANTEES
FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45), requires certain guarantees to be
recorded at fair value as a liability at inception and when a loss is
probable and reasonably estimable, as those terms are defined in FASB
Statement No. 5, Accounting for Contingencies (FAS 5). FIN 45 also
requires a guarantor to make significant new disclosures even when the
likelihood of making any payments under the guarantee is remote.
In September 2006, the Bank executed a Mortgage Partnership Finance
(MPF) Master Commitment (the Commitment) with the FHLBank of Pittsburgh
(FHLB) to deliver $5.0 million of mortgage loans and to guarantee the
payment of any realized losses that exceed the FHLB's first loss
11
account for mortgages delivered under the Commitment. The Bank receives
credit enhancement fees from the FHLB for providing this guarantee and
continuing to manage the credit risk of the MPF Program mortgage loans.
The term of the Commitment and guarantee per the Master Commitment is
through September 25, 2007. The maximum potential amount of future
payments that the Bank is required to make under the guarantee is
$125,000. Under the Commitment, the Bank agrees to service the loans
and therefore, is responsible for any necessary foreclosure
proceedings. Any future recoveries on any losses would not be paid by
the FHLB under the Commitment. The Bank has not experienced any losses
under these guarantees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
North Penn Bancorp, Inc. makes forward-looking statements in this
report. These forward-looking statements may include: statements of
goals, intentions and expectations; estimates of risks and of future
costs and benefits; assessments of probable loan losses; assessments of
market risk; and statements of the ability to achieve financial and
other goals. Forward-looking statements are typically identified by
words such as "believe," "expect," "anticipate," "intend," "outlook,"
"estimate," "forecast," "project" and other similar words and
expressions. Forward-looking statements are subject to numerous
assumptions, risks and uncertainties, which change over time.
Forward-looking statements speak only as of the date they are made. The
Company does not assume any duty and does not undertake to update its
forward-looking statements. Because forward-looking statements are
subject to assumptions and uncertainties, actual results or future
events could differ, possibly materially, from those that the Company
anticipated in its forward-looking statements, and future results could
differ materially from historical performance.
The Company's forward-looking statements are subject to the following
principal risks and uncertainties: general economic conditions and
trends, either nationally or locally; conditions in the securities
markets; changes in interest rates; changes in deposit flows, and in
the demand for deposit and loan products and other financial services;
changes in real estate values; changes in the quality or composition of
the Company's loan or investment portfolios; changes in competitive
pressures among financial institutions or from non-financial
institutions; the Company's ability to retain key members of
management; changes in legislation, regulation, and policies; and a
variety of other matters which, by their nature, are subject to
significant uncertainties. The Company provides greater detail
regarding some of these factors in its Form 10-KSB for the year ended
December 31, 2006, including in the Risk Factors section of that
report. The Company's forward-looking statements may also be subject to
other risks and uncertainties, including those that it may discuss
elsewhere in this report or in its other filings with the SEC.
RECENT DEVELOPMENTS
On April 24, 2007, the Boards of Directors of the Company, North Penn
Mutual Holding Company and the Bank adopted a Plan of Conversion and
Reorganization (the "Plan") pursuant to which the Bank will reorganize
from the mutual holding company structure to the stock holding company
structure. Pursuant to the terms of the Plan, shares of the Company's
common stock, other than those held by North Penn Mutual Holding
Company, will be converted into shares of a new Pennsylvania
corporation pursuant to an exchange ratio designed to preserve their
aggregate percentage ownership interest. The new Pennsylvania holding
company will offer shares of its common stock for sale to the Bank's
eligible account holders, to the Bank's tax-qualified employee benefit
plans and to members of the general public in a subscription and
community offering in the manner, and subject to the priorities, set
forth in the Plan. The conversion will be subject to approval of the
Bank's depositors, the Company's shareholders (including the approval
of a majority of the shares held by persons other than North Penn
Mutual Holding Company) and regulatory agencies.
12
FINANCIAL CONDITION
Our total assets decreased $3.0 million, or 2.4%, to $119.5 at June 30,
2007 from $122.5 million at December 31, 2006. The decrease was
primarily the result of selling a small portion of our mortgage loan
portfolio.
Net loans decreased $1.6 million, or 1.7%, to $93.6 million at June 30,
2007 from $95.2 million at December 31, 2006, primarily due to the sale
of $4.4 million in mortgage loans. The Bank chose to sell a segment of
its mortgage loan portfolio to reduce its exposure to the interest rate
risk associated with residential mortgages and to pay down a portion of
our overnight borrowings.
Investment securities declined $657,000, or 4.6%, since December 31,
2006 primarily as a result of pay downs on mortgage-backed securities.
During the six months ended June 30, 2007, we continued to use our
liquidity to originate loans and did not purchase any debt securities.
The allowance for loan loss increased $30,000 for the quarter ended and
$60,000 for the six months ended June 30, 2007. The Bank had no loans
charged-off and no recoveries during the six months ended June 30,
2007. Management assesses the adequacy of the allowance for loan losses
based on evaluating known and inherent losses in the loan portfolio and
upon management's continuing analysis of the factors underlying the
quality of the loan portfolio.
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 $417,000 at June 30, 2007, compared to
$594,000 at December 31, 2006. The improvement was primarily in
non-accruing residential mortgages which decreased by $255,000 while
non-accruing consumer loans increased by $6,000. The ratio of the
Bank's allowance for loan losses to total loans was 1.25% at June 30,
2007 and 1.16% at December 31, 2006.
Total deposits decreased $1.9 million, or 2.2%, from $86.7 million at
December 31, 2006 to $84.8 million at June 30, 2007. Non-interest
bearing deposits increased by $592,000, or 8.5%, while interest bearing
demand deposits increased $3.6 million, or 13.8%. These increases were
offset by a decrease in time deposits of $6.1 million, or 11.4%. 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 decreases in time deposits are
primarily due to changes in the marketplace.
Borrowings decreased $1.0 million, or 4.6%, to $20.7 million at June
30, 2007 from $21.7 million at December 31, 2006, as a portion of the
proceeds from the sale of loans were used to pay down our overnight
borrowings from FHLBank of Pittsburgh. Borrowings are primarily being
used to fund loan growth when deposit growth is inadequate.
13
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2007 AND 2006
Net income for the second quarter of 2007 increased $48,000, or 66.7%,
to $120,000, compared to $72,000 in 2006. Net income for the six months
ended June 30, 2007 decreased $3,000, or 1.4 %, to $215,000 from
$218,000 for the six months ended June 30, 2006. Included in the
current year is a gain on the sale of loans of $79,000.
Net interest income for the second quarter increased $45,000, or 5.3%,
to $901,000 in 2007 from $856,000 in 2006. For the six months ended
June 30, 2007, net interest income increased $44,000 or 2.6%, to $1.8
million from $1.7 million.
Interest income for the second quarter of 2007 increased $158,000 or
9.3%, to $1.9 million compared to $1.7 million in 2006. Interest income
for the six months ended June 30, 2007 increased $420,000, or 12.7%, to
$3.7 million compared to $3.3 million for the six months ended June 30,
2006. Interest on loans increased $173,000, or 11.5%, to $1.7 million
during the second quarter of 2007 from $1.5 million in 2006. For the
six months ended June 30, interest on loans increased $438,000, or
14.6%, to $3.4 million for 2007 from $3.0 million for 2006. The
increases are due to slightly higher commercial loan volumes. Interest
on investments decreased $15,000 or 8.4%, to $164,000 during the second
quarter, from $179,000 and $18,000, or 5.1%, from $351,000 to $333,000
for the six months ended June 30, 2007 due to lower balances of
investments.
Interest expense during the second quarter increased $113,000, or
13.2%, to $972,000 in 2007 from $859,000 in 2006. For the six months
ended June 30, 2007, interest expense increased $376,000, or 23.5%, to
$2.0 million in 2007 from $1.6 million in 2006. Interest on deposits
for the second quarter increased $34,000 or 5.2%, to $685,000 in 2007,
from $651,000 in 2006, due to increases in the volume of demand
deposits and the rates on time deposits. For the six months ended June
30, interest on deposits increased $265,000, or 22.1%, to $1.4 million
in 2007, from $1.2 million in 2006. Interest on borrowed funds
increased $79,000, or 38.0%, for the second quarter of 2007 and
$111,000 or 25.6%, for the six months ended June 30, 2007 due to the
increases in the rate and volume of overnight borrowings.
Other income for the second quarter increased $95,000 or 109.2%, to
$182,000 in 2007 from $87,000 in 2006. The biggest contributor to this
increase was a gain of $79,000 on the sale of $4.4 million of our
mortgage loans during the second quarter. Total other expenses
increased $39,000 or 4.7%, to $873,000 in 2007 from $834,000 in 2006.
Salaries and employee benefits increased $45,000 or 10.3%, to $481,000
in 2007 from $436,000 in 2006. A portion of this increase is related to
additional staffing at our Effort branch location which opened in May
of 2006 and the addition of a Retail Banking Manager hired in the
second quarter of 2007. Occupancy and equipment expense decreased
$14,000 or 8.3%, to $155,000 in 2007 from $169,000 in 2006, while other
expenses increased $8,000 or 3.5%, to $237,000 in 2007 from $229,000 in
2006.
For the six months ended June 30, other income increased $107,000 or
58.2%, to $291,000 in 2007 from $184,000 in 2006. The majority of this
increase was related to the gain on loan sales as well as gains on the
sale of equity securities. Total other expenses increased $105,000 or
6.6%, to $1.7 million in 2007 from $1.6 million in 2006. Salaries and
employee benefits increased $64,000 or 7.3%, to $944,000 in 2007 from
$880,000 in 2006, while occupancy and equipment expense decreased
$7,000, or 2.3%, to $304,000 in 2007 from $311,000 in 2006. Other
expenses increased $48,000, or 12.3%, to $439,000 in 2007 from $391,000
in 2006.
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,
14
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 decreased $986,000 for the six months ended June 30, 2007.
During that period, cash was primarily provided from earnings, customer
deposits and the sale of loans to FHLBank of Pittsburgh and primarily
used to fund new loans.
The Company's and North Penn Bank's capital ratios at June 30, 2007 and
December 31, 2006 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:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ----------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
AT JUNE 30, 2007:
-------------------------------------
TOTAL CAPITAL TO RISK-WEIGHTED ASSETS:
Consolidated $14,851 15.54% >$7,647 >8.0% >$9,559 >10.0%
North Penn Bank $12,608 13.41% >$7,521 >8.0% >$9,401 >10.0%
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS:
Consolidated $13,275 13.89% >$3,823 >4.0% >$5,735 >6.0%
North Penn Bank $11,433 12.16% >$3,760 >4.0% >$5,641 >6.0%
TIER 1 CAPITAL TO TOTAL AVERAGE ASSETS:
Consolidated $13,275 11.09% >$4,788 >4.0% >$5,986 >5.0%
North Penn Bank $11,433 9.68% >$4,725 >4.0% >$5,907 >5.0%
Risk-Weighted Assets:
Consolidated $95,587
North Penn Bank $94,011
Average Assets:
Consolidated $119,710
North Penn Bank $118,134
AT DECEMBER 31, 2006:
-------------------------------------
TOTAL CAPITAL TO RISK-WEIGHTED ASSETS:
Consolidated $14,295 15.13% >$7,560 >8.0% >$9,450 >10.0%
North Penn Bank $12,326 13.17% >$7,487 >8.0% >$9,359 >10.0%
TIER 1 CAPITAL TO RISK-WEIGHTED ASSETS:
Consolidated $13,175 13.94% >$3,780 >4.0% >$5,670 >6.0%
North Penn Bank $11,206 11.97% >$3,744 >4.0% >$5,615 >6.0%
TIER 1 CAPITAL TO TOTAL AVERAGE ASSETS:
Consolidated $13,175 11.02% >$4,782 >4.0% >$5,977 >5.0%
North Penn Bank $11,206 9.45% >$4,746 >4.0% >$5,932 >5.0%
Risk-Weighted Assets:
Consolidated $94,496
North Penn Bank $93,586
Average Assets:
Consolidated $119,548
North Penn Bank $118,641
15
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.
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.
The Company did not repurchase any shares of its common stock during
the quarter ended June 30, 2007 and did not have any publicly announced
repurchase plans or programs.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Shareholders of North Penn Bancorp, Inc. on May
24, 2007.
The results of the items submitted for a vote are as follows:
The following two Directors were elected for a term of three years,
expiring in 2010 -
NAME VOTES FOR VOTES AGAINST VOTES NOT CAST
---- --------- ------------- --------------
Frederick L. Hickman 1,383,703 4,727 55,125
Kevin M. Lamont 1,383,803 4,627 55,125
16
The following Director was elected for a term of one year, expiring in
2008 -
NAME VOTES FOR VOTES AGAINST VOTES NOT CAST
---- --------- ------------- --------------
Virginia D. McGregor 1,370,703 17,727 55,125
The ratification of Appointment of McGrail Merkel Quinn & Associates as
Independent Registered Public Accounting Firm of North Penn Bancorp,
Inc. for the fiscal year ending December 31, 2007.
Votes for 1,384,050
Votes against 4,380
Votes abstained 0
Votes not cast 55,125
Name of Each Director Whose Term of Office Continued After the Annual
Meeting:
NAME TERM EXPIRES
---- ------------
Gordon S. Florey 2008
James W. Reid, Esq. 2008
Virginia D. McGregor 2008
Frank H. Mechler 2009
Hebert C. Kneller 2009
David Samuel 2009
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS
3.1 Certificate of Incorporation of North Penn Bancorp, Inc.*
3.2 By-laws of North Penn Bancorp, Inc.*
4. Specimen Stock Certificate of North Penn Bancorp, Inc.*
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
- ----------
* Incorporated herein by reference into this document from Form SB-2
Registration Statement, as amended, filed on December 10, 2004, Registration
No. 333-121121.
17
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: August 14, 2007 /s/ Frederick L. Hickman
--------------- ----------------------------
Frederick L. Hickman
President and
Chief Executive Officer
Dated: August 14, 2007 /s/ Glenn J. Clark
--------------- ----------------------------
Glenn J. Clark
Assistant Vice President and
Principal Accounting Officer
18