Attached files
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EX-21 - North Penn Bancorp Inc | v179315_ex21.htm |
EX-23.2 - North Penn Bancorp Inc | v179315_ex23-2.htm |
EX-31.1 - North Penn Bancorp Inc | v179315_ex31-1.htm |
EX-23.1 - North Penn Bancorp Inc | v179315_ex23-1.htm |
EX-32.2 - North Penn Bancorp Inc | v179315_ex32-2.htm |
EX-32.1 - North Penn Bancorp Inc | v179315_ex32-1.htm |
EX-31.2 - North Penn Bancorp Inc | v179315_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended
|
December 31,
2009
|
¨ TRANSITION REPORT PURSUANT TO UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from
|
to
|
Commission
file number
|
000-52839
|
NORTH
PENN BANCORP, INC.
(Exact
name of Registrant as specified in its charter)
Pennsylvania
|
26-0261305
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
216
Adams Avenue, Scranton, Pennsylvania
|
18503
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code
|
|
(570) 344-6113
|
Securities
registered pursuant to Section 12(b) of the Act:
|
None
|
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $0.10 per share
(Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ Nox
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ Nox
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 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 has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for shorter period that the registrant was required to submit and
post such files). Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
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
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
|
Non-accelerated
filer ¨ (Do not check if
a smaller reporting company)
|
Small
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No
x
The
aggregate market value of the Company’s common stock held by non-affiliates on
December 31, 2009, based on the closing price of such stock on that date totaled
$10,810,188
The
number of shares of common stock outstanding as of March 15, 2010 was
1,327,271.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Corporation’s definitive proxy statement relating to the 2010 Annual
Meeting of Stockholders, to be held on May 25, 2010, are incorporated by
reference in Part III.
North
Penn Bancorp, Inc.
Form
10-K
INDEX
Page
|
|||
FORWARD-LOOKING
STATEMENTS
|
1
|
||
PART
I
|
|||
ITEM
1 – BUSINESS
|
1
|
||
ITEM
1A – RISK FACTORS
|
14
|
||
ITEM
1B – UNRESOLVED STAFF COMMENTS
|
|||
ITEM
2 –PROPERTIES
|
19
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||
ITEM
3 – LEGAL PROCEEDINGS
|
19
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||
ITEM
4 – (REMOVED AND RESERVED)
|
19
|
||
PART
II
|
|||
ITEM
5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
|
19
|
||
ITEM
6 – SELECTED FINANCIAL DATA
|
20
|
||
ITEM
7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
|
20
|
||
ITEM
7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
29
|
||
ITEM
8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
30
|
||
ITEM
9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
|
64
|
||
ITEM
9A(T) – CONTROLS AND PROCEDURES
|
64
|
||
ITEM
9B– OTHER INFORMATION
|
65
|
||
PART
III
|
|||
ITEM
10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
65
|
||
ITEM
11 – EXECUTIVE COMPENSATION
|
65
|
||
ITEM
12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
66
|
||
ITEM
13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
66
|
||
ITEM
14 –PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
66
|
||
PART
IV
|
|||
ITEM
15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
66
|
||
SIGNATURES
|
|
67
|
II
FORWARD-LOOKING
STATEMENTS
Cautionary
Statement for Purposes of the Private Securities Litigation Reform Act of
1995
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’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.
If one or
more of the factors affecting our forward-looking information and statements
proves incorrect, then our actual results could differ materially from those
expressed in forward-looking information and statements contained in this annual
report. Therefore, we caution you not to place undue reliance on our
forward-looking information and statements.
We do not
intend to update our forward-looking information and statements to reflect
change. All forward-looking statements attributable to us are
expressly qualified by these cautionary statements.
PART
I
ITEM
1. BUSINESS
Corporate
History
North
Penn Bank was organized on February 28, 1877 as The German Building Association
of Scranton. The institution eventually became North Penn Savings and
Loan Association. On October 1, 2003, North Penn converted from a
Pennsylvania state-chartered savings association to a Pennsylvania
state-chartered savings bank and changed its name to North Penn Bank (the
“Bank”). . North Penn Bancorp, Inc. (the “Company”) was
organized on November 22, 2004 in anticipation of the mutual holding company
reorganization and minority stock issuance of North Penn Bank. The mutual
holding company reorganization and minority stock issuance was completed on June
1, 2005. In the stock issuance, the Company sold 44.1% of its
outstanding shares of common stock to the public, issued 53.9% of its
outstanding shares of common stock to North Penn Mutual Holding Company, the
mutual holding company parent of the Company and the Bank, and contributed 2% of
its outstanding shares of common stock to North Penn Charitable
Foundation.
The
“second-step” conversion of the Bank from the mutual holding company structure
to the stock holding company structure was consummated on October
1, 2007, at which time the shares held by North Penn Mutual Holding
Company were sold in an offering to certain depositors of the Bank and
others. The Company exchanged shares of its common stock for the then
issued and outstanding shares of prior North Penn Bancorp, Inc.,
the mid-tier holding company for the Bank, held by persons other than North
Penn Mutual Holding Company. As a result of the conversion,
the current North Penn Bancorp is the successor to the original North Penn
Bancorp. The Company’s common stock trades on the OTC Bulletin Board under
the symbol “NPBP.OB”.
1
The
principal activities of the Company are ownership and supervision of the
Bank. The Bank is a community-oriented full-service savings bank
providing traditional financial services to consumers and businesses in
Northeastern Pennsylvania, including the communities in Lackawanna, Luzerne,
Wayne and Monroe counties, among others. The Company and the Bank
(sometimes referred to herein as “we”) compete with the many existing and larger
financial institutions in our geographic market by emphasizing personalized
service, responsive decision making and an overall commitment to
excellence.
The Bank
offers commercial and consumer loans of all types, including real estate loans,
residential mortgage loans, home equity loans and lines of credit, auto loans
and other credit products. The Bank’s deposit services include
business and individual demand and time deposit accounts, NOW accounts, money
market accounts, Individual Retirement Accounts and holiday
accounts. We provide a number of convenience-oriented services and
products to our customers, including direct payroll and social security deposit
services, bank-by-mail services, access to a national automated teller machine
network, safe deposit boxes, night depository facilities, notary services and
travelers checks. We also offer internet banking and electronic bill
payment.
As of
December 31, 2009, the Bank employed 36 full-time and 10 part-time
employees. None of these employees are represented by a
collective bargaining agent, and the Company believes that it enjoys good
relations with its personnel.
Management
Strategy
We
operate as an independent community bank that offers a broad range of
customer-focused financial services as an alternative to large regional,
multi-state banks in our market area. Management has invested in the
infrastructure and staffing to support our strategy of serving the financial
needs of businesses, individuals and municipalities in our market area focusing
on core deposit generation and quality loan growth which provides a favorable
platform for long-term sustainable growth. Highlights of management’s business
strategy are as follows:
Operating as a
Community Bank. We are a
community bank that strives to deliver unmatched personal service and value to
customers and shareholders. Our employees are united by a proud tradition of
delivering excellent customer service. As an independent
community bank, we emphasize the local nature of our decision-making to respond
more effectively to the needs of our customers while providing a full range of
financial services to the businesses, individuals, and municipalities in our
market area. We desire to preserve the integrity and traditional values in the
way we conduct business as we achieve consistent, quality financial
performance. As a result, we are able to provide, at the local level,
the financial services required to meet the needs of the majority of existing
and potential customers in our market.
Enhancing
Customer Service.
We are committed to providing superior customer service as a way to
differentiate us from our competition. In addition, we offer multiple
access channels to our customers, including our branch and ATM network and
internet banking.
Growing and
maintaining a Diversified Loan Portfolio. We offer a broad range of
loan products to commercial businesses, real estate owners, developers and
individuals. We have experienced commercial lenders in place to attract
commercial loans, which we are pursuing to balance our large portfolio of
residential mortgages. We are actively pursuing business
relationships by capitalizing on the experience of our lending team, as well as
existing customers, to develop deposit and lending relationships which emphasize
service. We have experienced consistent and significant growth in our
commercial loan portfolio while continuing to provide residential mortgage and
consumer lending services. As a result, we believe that we have developed a high
quality diversified loan portfolio with a favorable mix of loan types,
maturities and yields.
2
Expanding our
Banking Franchise.
Management intends to continue the expansion of the banking franchise and
to increase the number of customers served and products used by businesses and
consumers in our market area. Our strategy is to deliver exceptional customer
service, which depends on multiple access channels, as well as courteous
personal contact from a trained and motivated workforce. This approach has
resulted in a relatively high level of core deposits, which drives our overall
cost of funds.
Market
Area
We are
headquartered in Scranton, Pennsylvania, which is located in Northeastern
Pennsylvania. In addition to our main office in center city Scranton,
we operate four branch offices, located in Scranton, Clarks Summit, Stroudsburg
and Effort, Pennsylvania. We consider our primary market area to
include Lackawanna and Monroe Counties, and to a lesser extent, certain areas of
the adjoining counties.
Competition
Banking
is a very competitive business, with both large and small banks competing for
the same customers. In addition, non-bank competitors, such as
brokerage firms, credit unions, insurance companies and mortgage brokers, are
offering customers loan and deposit services. Legislative, regulatory
and technological changes in the financial services industry have created these
new competitors, and will continue to do so in the future. Technological
advances have lowered the barriers to enter new market areas, allowed banks to
expand their geographic reach by providing services over the internet and made
it possible for non-depository institutions to offer products and services that
traditionally have been provided by banks. Changes in federal law
permit affiliation among banks, securities firms and insurance companies, which
increases competition in the financial services industry
Executive
Officers of the Registrant
Name
|
Age
|
Principal
Occupation for Past Five Years
|
||
Frederick
L. Hickman
|
54
|
President,
Chief Executive Officer of North Penn Bancorp and North Penn
Bank.
|
||
Thomas
J. Dziak
|
54
|
Executive
Vice President – Senior Lending Officer of North Penn Bancorp and North
Penn Bank.
|
||
Thomas
A. Byrne
|
49
|
Senior
Vice President – Commercial Lending Officer of North Penn Bancorp and
North Penn Bank. Prior to joining North Penn Bank in January of 2005, Mr.
Byrne served as a vice president and commercial loan officer at Community
Bank & Trust.
|
||
Christe
A. Casciano Sr.
|
53
|
Senior
Vice President – Chief Technology and Risk Officer of North Penn Bancorp
and North Penn Bank. Prior to joining North Penn Bank in April
of 2007, Mr. Casciano served as Vice President and Director of Marketing
at Penn Security Bank and Trust Co.
|
||
Joseph
F. McDonald
|
55
|
Senior
Vice President – Chief Financial Officer of North Penn Bancorp and North
Penn Bank. Prior to joining North Penn Bank, Mr. McDonald was
Senior Vice President of National Penn Bancshares in Boyertown,
Pennsylvania. Prior to National Penn Bancshares’s merger with
Keystone Nazareth Bank and Trust Company (“KNBT”) in February, 2008, Mr.
McDonald served as Senior Vice President, Controller of
KNBT.
|
3
Available
Information
The
Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, and any amendments to such reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, are made available free of charge on our website,
www.northpennbank.com, as soon as reasonably practicable after such reports are
electronically filed with, or furnished to, the Securities and Exchange
Commission. The information on our website shall not be considered as
incorporated by reference into this Annual Report on Form 10-K.
Loan
Portfolio
The
Bank’s business of making loans is its primary source of
income. Historically, the principal lending activity of the Bank has
been the origination of fixed and adjustable rate mortgage (“ARM”) loans
collateralized by one- to four-family residential properties located in its
market area. The Company also originates multifamily, commercial real estate,
commercial, construction and consumer loans which typically have higher yields
than traditional one- to four-family loans
.
In recent
years, the Bank has increased its emphasis on commercial lending and has
actively pursued small business accounts.
Commercial
Loans
Our
commercial lending consists primarily of real estate based loans, including
commercial and residential real estate collateral, with conservative
loan-to-value ratios and the ability to repay based on operating cash flow. The
Bank has continued developing the commercial business loan
program. The purpose of this program is to increase the Bank’s
interest rate sensitive assets, increase interest income and diversify both the
loan portfolio and the Bank’s customer base. The Bank has two
experienced commercial lenders to help in this effort. The terms and
conditions of each loan are tailored to the needs of the borrower and based on
the financial strength of the project and any guarantors. In reaching
a decision on whether to make a commercial real estate loan, we consider the net
operating income of the property, the borrower’s expertise and credit history
and the value of the underlying property. Loan to value ratios are a
very important consideration. Generally, however, commercial real
estate loans originated by us will not exceed 80% of the appraised value or the
purchase price of the property, whichever is less. We also make
commercial vehicle loans.
Residential
Mortgages
The Bank
makes fixed and adjustable mortgages and home equity loans on owner occupied
residential real estate. The Bank offers fixed-rate mortgage loans
with maturities up to 30 years and less than 20% down payment supplemented with
private mortgage insurance. These loans are secured by one- to four-family
residences that are located in its primary market area. All of
the mortgages are underwritten to be eligible for resale in the secondary
market.
Home
equity loans are offered as both closed end loans and lines of
credit. Closed end loans can be fixed rate or
adjustable. Home equity lines of credit have adjustable rates. The
underwriting standards utilized for home equity loans and equity lines of credit
include a determination of the applicant’s credit history, an assessment of the
applicant’s ability to meet existing obligations and payments on the proposed
loan and the value of the collateral securing the loan. The combined
(first and second mortgage liens) loan-to-value ratio for home equity loans and
equity lines of credit is generally limited to 80% These loans offer the
consumer access to liquidity and lower interest rates, and interest payments may
be tax deductible.
Consumer
Loans
The Bank
offers secured consumer loans, including deposit secured loans, auto loans, and
indirect auto loans made through new and used car dealers. Our
procedures for underwriting consumer loans include an assessment of an
applicant’s credit history and the ability to meet existing obligations and
payments on the proposed loan. Although an applicant’s creditworthiness is a
primary consideration, the underwriting process also includes a comparison of
the value of the collateral security, if any, to the proposed loan
amount.
4
The
following table summarizes the Bank’s loan portfolio by type of loan on the
dates indicated.
At
December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Percent
|
|
Percent
|
|
Percent
|
|||||||||||||||||||
(Dollars
in thousands)
|
Amount
|
of
Total
|
Amount
|
of
Total
|
Amount
|
of
Total
|
||||||||||||||||||
Commercial
|
$ | 3,368 | 2.91 | % | $ | 1,796 | 1.67 | % | $ | 2,157 | 2.19 | % | ||||||||||||
Real
estate mortgages
|
108,943 | 93.89 | % | 100,127 | 93.34 | % | 88,878 | 90.31 | % | |||||||||||||||
Consumer
|
3,719 | 3.21 | % | 5,353 | 4.99 | % | 7,383 | 7.50 | % | |||||||||||||||
Total
gross loans
|
116,030 | 100.00 | % | 107,276 | 100.00 | % | 98,418 | 100.00 | % | |||||||||||||||
Less:
allowance for loan losses
|
1,484 | 1,170 | 1,171 | |||||||||||||||||||||
Loans,
net
|
$ | 114,546 | $ | 106,106 | $ | 97,247 |
The
following table sets forth the estimated maturity of the Bank’s loan portfolio
as December 31, 2009. The table does not include prepayments or
scheduled principal repayments.
Within One Year
|
One-Five Years
|
Over Five Years
|
Total
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Commercial
|
$ | 116 | $ | 797 | $ | 2,455 | $ | 3,368 | ||||||||
Real
estate mortgages
|
6,483 | 3,307 | 99,152 | 108,942 | ||||||||||||
Consumer
|
348 | 2,996 | 376 | 3,720 | ||||||||||||
Total
|
$ | 6,947 | $ | 7,100 | $ | 101,983 | $ | 116,030 |
The
following table presents, as of December 31, 2009, the dollar amount of all
loans due after December 31, 2010, and whether such loans have fixed or
adjustable interest rates.
Due
After December 31, 2010
|
||||||||||||
Fixed
|
Adjustable
|
Total
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Commercial
|
$ | 3,252 | $ | - | $ | 3,252 | ||||||
Real
estate mortgages
|
47,685 | 54,774 | 102,459 | |||||||||
Consumer
|
3,371 | 1 | 3,372 | |||||||||
Total
|
$ | 54,424 | $ | 54,775 | $ | 109,083 |
Risk
Elements
Risk
elements in the loan portfolio include past due, non-accrual loans, other real
estate owned and a concentration of loans to one type of borrower. We
monitor the loan portfolio to reduce the risk of delinquent and problem
credits. Underwriting standards, including, but not limited to,
loan-to-value and debt-to-income ratios, are followed to limit credit risk in
the portfolio. Loan review is conducted by an outside party that
evaluates loan quality, including adherence to underwriting
standards. The loan review report goes directly to the Bank’s Board
of Directors for their evaluation. The Pennsylvania Department of
Banking and the Federal Deposit Insurance Corporations (FDIC), as the Bank’s
regulators, also review the loan portfolio as part of their review
process.
Asset
Quality
The Bank
manages asset quality and controls credit risk through diversification of the
loan portfolio and the application of policies designed to foster sound
underwriting and loan monitoring practices. The Bank’s senior
officers are responsible for monitoring asset quality, establishing credit
policies and procedures subject to approval by the Board of Directors, ensuring
the policies and procedures are followed and adjusting policies as
appropriate.
5
Non-performing
assets include non-performing loans and foreclosed real estate held for
sale. Non-performing loans consist of loans where the principal,
interest, or both, is 90 or more days past due and loans that have been placed
on non-accrual. Income recognition of interest is discontinued when,
in the opinion of management, the payment of such interest becomes
doubtful. A loan is generally classified as non-accrual when
principal or interest has been in default for 90 days or more or because of
deterioration in the financial condition of the borrower such that payment in
full of principal or interest is not expected. Loans past due 90 days
or more and still accruing interest are loans that are generally well secured
and in the process of collection. When loans are placed on
non-accrual, accruing interest is no longer posted to earnings. At
December 31, 2009, the Bank had $1.8 million in non-accrual loans as compared
with $1.1 million at December 31, 2008. As of December 31, 2009, for
purposes of accounting and reporting in accordance with FASB ASC 310-40
Receivables – Troubled Debt Restructuring by Creditors (SFAS 15), the Bank had
no significant troubled debt restructuring. As of December 31, 2009,
for purposes of accounting and reporting in accordance with FASB ASC 310-10.35
Receivables – Subsequent Measurement (SFAS 114), the Bank had $1.8 million in
“impaired” loans.
The
following table presents information regarding non-accrual mortgage, consumer
and other loans, and foreclosed real estate as of the date
indicated:
At
December 31
|
||||||||
(Dollars
in Thousands)
|
2009
|
2008
|
||||||
Non-accrual
commercial
|
$ | 42 | - | |||||
Non-accrual
commercial mortgage
|
960 | 572 | ||||||
Non-accrual
residential mortgage
|
768 | 500 | ||||||
Non-accrual
consumer
|
4 | 35 | ||||||
Total
non-performing loans
|
1,774 | $ | 1,107 | |||||
Foreclosed
real estate
|
88 | - | ||||||
Total
non-performing assets
|
$ | 1,862 | $ | 1,107 |
For the
period ended December 31, 2009, the bank would have received an additional
$44,000 in interest income under the original terms of such loans.
Allowance
for Loan Losses
The Bank
determines the provision for loan losses through a quarterly analysis of the
loan portfolio. The allowance for loan losses is established through provisions
for losses charged to earnings. Loan losses are charged against the
allowance when management believes that the collection of principal is
unlikely. Recoveries of loans previously charged-off are credited to
the allowance when realized. The allowance for loan losses is the
amount that management has determined to be necessary to absorb probable
incurred loan losses inherent in the existing portfolio. Management’s
evaluations, which are subject to periodic review by the Bank’s regulators, are
made using a consistently applied methodology that takes into consideration such
factors as the Company’s past loan loss experience, changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans and collateral values, and current economic conditions. Part
of management’s review includes risk ratings of commercial loans, and the
engagement of an external loan review of all loans over $400,000, insider loans
and delinquent loans. Modifications to the methodology used in the
allowance for loan losses evaluation may be necessary in the future based on
further deterioration in economic and real estate market conditions, new
information obtained regarding known problem loans, regulatory guidelines and
examinations, the identification of additional problem loans, and other
factors.
Management
considers the allowance for loan losses adequate to cover the estimated losses
inherent in the Bank’s loan portfolio as of December 31, 2009. Management
believes it has established the allowance in accordance with accounting
principles generally accepted in the United States and will consider future
additions to the allowance that may be necessary based on changes in economic
and other conditions. Additionally, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank’s allowance for
loan losses. Such agencies may require the recognition of adjustments to the
allowances based on their judgments of information available to them at the time
of their examinations.
6
Management
realizes that general economic trends greatly affect loan losses. The recent
downturn in the real estate market has resulted in increased loan delinquencies,
defaults and foreclosures, and we believe that these trends are likely to
continue. Assurances cannot be made either (1) that further
charges to the allowance account will not be significant in relation to the
normal activity or (2) that further evaluation of the loan portfolio based
on prevailing conditions may not require sizable additions to the allowance and
charges to provision expense.
The
following table sets forth the year-end balances of and changes in the allowance
for loan losses, as well as certain related ratios, as of December 31 for the
year indicated:
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
Balance
at beginning of period
|
$ | 1,170 | $ | 1,171 | $ | 1,121 | ||||||
Charge-offs:
|
||||||||||||
Commercial
|
146 | - | - | |||||||||
Real
estate mortgages
|
3 | - | ||||||||||
Consumer
|
25 | 47 | 45 | |||||||||
TOTAL
|
171 | 50 | 45 | |||||||||
Recoveries:
|
||||||||||||
Commercial
|
- | - | - | |||||||||
Real
estate mortgages
|
- | - | - | |||||||||
Consumer
|
10 | 18 | 9 | |||||||||
TOTAL
|
10 | 18 | 9 | |||||||||
Net
charge-offs
|
161 | 32 | 36 | |||||||||
Provision
charged to operations
|
475 | 31 | 86 | |||||||||
Balance
at end of period
|
$ | 1,484 | $ | 1,170 | $ | 1,171 | ||||||
Average
loans outstanding, December 31
|
109,740 | $ | 101,543 | $ | 96,567 | |||||||
Loan
reserve ratios:
|
||||||||||||
Net
loan charge-offs to average loans
|
0.15 | % | 0.03 | % | 0.04 | % | ||||||
Allowance
as a percentage of total loans
|
1.28 | % | 1.09 | % | 1.19 | % |
The
following table sets forth the breakdown of the allowance for loan losses by
loan category as of December 31 for the year indicated:
2009
|
2008
|
2007
|
||||||||||||||||||||||
(Dollars in thousands)
|
Amount
|
% of
Total
Loans
|
Amount
|
% of
Total
Loans
|
Amount
|
% of
Total
Loans
|
||||||||||||||||||
Construction
and land development
|
$ | - | 0.3 | % | $ | - | 0.5 | % | $ | - | 0.1 | % | ||||||||||||
Residential,
1-4 family
|
476 | 40.9 | % | 313 | 41.9 | % | 310 | 46.3 | % | |||||||||||||||
Residential,
multi-family
|
- | 0.8 | % | - | 1.1 | % | - | 1.5 | % | |||||||||||||||
Commercial
real estate
|
963 | 51.9 | % | 765 | 49.9 | % | 749 | 42.4 | % | |||||||||||||||
Commercial
|
- | 2.9 | % | - | 1.7 | % | - | 2.2 | % | |||||||||||||||
Consumer
|
45 | 3.2 | % | 92 | 4.9 | % | 112 | 7.5 | % | |||||||||||||||
Total
|
$ | 1,484 | 100.0 | % | $ | 1,170 | 100.0 | % | $ | 1,171 | 100.0 | % |
7
Securities
Securities,
primarily U.S. government agency bonds, mortgage-backed, and municipal bonds,
totaled $19.4 million or 12.4% of total assets at December 31, 2009 as compared
with $20.3 million or 14.6% of assets at December 31, 2008. The
Bank’s securities portfolio is used to assist the Bank in liquidity,
asset/liability management and earnings. Securities can be classified
as securities “held-to-maturity” or “available-for-sale.” Investment securities
held-to-maturity are carried at cost adjusted for amortization of premiums and
accretion of discounts. Securities available-for-sale may be sold in
response to changes in market interest rates, changes in the security’s
prepayment risk, increases in loan demand, general liquidity needs and other
similar factors. Available-for-sale securities are carried at fair market value
with unrealized gains and losses, net of tax, being included in the Bank’s
accumulated other comprehensive income account. At December 31, 2009,
accumulated other comprehensive income, a component of shareholders’ equity, was
a loss of $2,000 versus a loss of $460,000 at December 31, 2008. The
Bank classifies all new bond purchases as available-for-sale.
The
following tables summarize the composition of our investment portfolio as of the
date indicated,
Securities
Portfolio
December
31, 2009
Available
for Sale
|
||||||||
(Dollars
in thousands)
|
Amortized
Cost
|
Estimated
Fair Value
|
||||||
U.S.
Agency securities
|
$ | 1,500 | $ | 1,518 | ||||
Mortgage-backed
securities
|
2,662 | 2,751 | ||||||
State
& political subdivisions
|
8,719 | 8,855 | ||||||
Other
bonds
|
4,969 | 5,090 | ||||||
Total
debt securities
|
17,850 | 18,214 | ||||||
Equity
securities
|
1,591 | 1,184 | ||||||
Total
securities
|
$ | 19,441 | $ | 19,398 |
December 31, 2008
Available for Sale
|
||||||||
(Dollars in thousands)
|
Amortized
Cost
|
Estimated
Fair Value
|
||||||
U.S. Agency securities
|
$ | 3,000 | $ | 3,016 | ||||
Mortgage-backed
securities
|
5,074 | 5,142 | ||||||
State
& political subdivisions
|
8,529 | 8,211 | ||||||
Other
bonds
|
3,017 | 2,866 | ||||||
Total
debt securities
|
$ | 19,620 | $ | 19,235 | ||||
Equity
securities
|
1,371 | 1,058 | ||||||
Total
securities
|
$ | 20,991 | $ | 20,293 |
December 31, 2007
Available for Sale
|
||||||||
(Dollars in thousands)
|
Amortized
Cost
|
Estimated
Fair Value
|
||||||
U.S. Agency securities
|
$ | 385 | $ | 385 | ||||
Mortgage-backed
securities
|
4,521 | 4,480 | ||||||
State
& political subdivisions
|
7,026 | 7,061 | ||||||
Other
bonds
|
500 | 500 | ||||||
Total
debt securities
|
$ | 12,432 | $ | 12,426 | ||||
Equity
securities
|
1,071 | 940 | ||||||
Total
securities
|
$ | 13,503 | $ | 13,366 |
8
The
amortized cost and weighted average yield of the Bank’s investment securities at
December 31, 2009, by contractual maturity, are reflected in the following
table. Actual maturities will differ from contractual maturities
because certain borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
At December 31, 2009
|
||||||||||||||||||||
Due in 1
year or less
|
Due in
1–5
years
|
Due in
5–10
years
|
Due
after 10
years
|
Total
|
||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||
US
Agency securities:
|
||||||||||||||||||||
Amortized
cost
|
$ | 1,000 | $ | 500 | $ | - | $ | - | $ | 1,500 | ||||||||||
Weighted
average yield
|
3.75 | % | 0.79 | % |
%
|
%
|
2.76 | % | ||||||||||||
State
& political subdivisions
|
||||||||||||||||||||
Amortized
cost
|
$ | 1,050 | $ | 710 | $ | 3,187 | $ | 3,772 | $ | 8,719 | ||||||||||
Weighted
average yield (1)
|
4.15 | % | 4.26 | % | 3.94 | % | 4.01 | % | 4.02 | % | ||||||||||
Mortgage-backed
securities
|
||||||||||||||||||||
Amortized
cost
|
$ | 1,146 | $ | - | $ | 975 | $ | 541 | $ | 2,662 | ||||||||||
Weighted
average yield
|
4.14 | % |
%
|
4.70 | % | 4.81 | % | 4.48 | % | |||||||||||
Other
bonds
|
||||||||||||||||||||
Amortized
cost
|
$ | 494 | $ | 3,445 | $ | 1,030 | - | $ | 4,969 | |||||||||||
Weighted
average yield
|
2.97 | % | 3.87 | % | 6.88 | % | 4.40 | % | ||||||||||||
Total
amortized cost
|
$ | 3,690 | $ | 4,655 | $ | 5,192 | $ | 4,313 | $ | 17,850 | ||||||||||
Total
fair value
|
$ | 3,737 | $ | 4,709 | $ | 5,382 | $ | 4,387 | $ | 18,214 | ||||||||||
Weighted
average yield
|
3.88 | % | 3.55 | % | 4.66 | % | 4.11 | % |
(1) Yields
on tax-exempt securities were adjusted to a tax-equivalent basis using a 34%
rate.
Deposits
The
Bank’s primary source of funds is retail deposit accounts held primarily by
individuals and businesses within our market area. We offer a variety of deposit
accounts with a range of interest rates and terms. Our deposits consist of
interest bearing and non-interest bearing checking accounts, money market,
savings and certificate of deposit accounts and also IRA accounts. The Bank’s
customer relationship strategy focuses on relationship banking for retail and
business customers to enhance their overall experience with us. Deposit activity
is influenced by state and local economic activity, changes in interest rates,
internal pricing decisions and competition. The Bank uses traditional means of
advertising our deposit products and generally do not solicit retail deposits
from outside its market area. Deposits are primarily obtained from the areas
surrounding our branch locations.
The
following table sets forth the distribution of average deposits by major
category and the average rate paid in each year as applicable:
Distribution
of Average Deposits
Years Ended December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
(Dollars in thousands)
|
Average
Balance
|
Average
Rate
|
Average
Balance
|
Average
Rate
|
Average
Balance
|
Average
Rate
|
||||||||||||||||||
Non-interest
bearing demand deposits
|
$ | 8,653 | 0.00 | % | $ | 7,433 | 0.00 | % | $ | 8,437 | 0.00 | % | ||||||||||||
Interest
bearing demand deposits
|
10,386 | 1.24 | % | 10,533 | 1.76 | % | 8,266 | 2.32 | % | |||||||||||||||
Savings
and money market deposits
|
37,149 | 1.48 | % | 37,524 | 2.19 | % | 18,742 | 2.88 | % | |||||||||||||||
Time
deposits
|
60,305 | 3.01 | % | 42,545 | 3.90 | % | 49,201 | 4.50 | % | |||||||||||||||
Total
deposits
|
$ | 116,493 | $ | 99,900 | $ | 84,646 |
9
Maturities
of Time Deposits of $100,000 and Over
The
following table is a summary of time deposits of $100,000 or more by remaining
maturities as of December 31, 2009:
(Dollars
in thousands)
|
Amount
|
Percent
|
||||||
Three
months or less
|
$ | 6,950 | 41.26 | % | ||||
Three
to six months
|
5,284 | 31.37 | ||||||
Six
to twelve months
|
2,444 | 14.51 | ||||||
Over
twelve months
|
2,166 | 12.86 | ||||||
Total
|
$ | 16,844 | 100.00 | % |
Total
deposits were $124.1 million at December 31, 2009 compared to total deposits of
$99.2 million at December 31, 2008 and total deposits of $83.7 million at
December 31, 2007.
Short-Term
Borrowings
The Bank,
as part of its operating strategy, utilizes advances from the FHLBank of
Pittsburgh (“FHLB”) as an alternative to retail deposits to fund its
operations. The Bank has a line-of-credit with FHLBank of Pittsburgh
for short-term borrowings varying from one day to three
years. Borrowings under this line of credit are secured by qualified
assets in the form of a blanket lien. Interest paid on these
short-term borrowings varies based on interest rate fluctuations. At
December 31, 2009, we had not utilized this credit facility. At
December 31, 2008 and December 31, 2007, the line had a balance of $7,648,000
and $5,879,000, respectively.
The
following table sets forth information regarding FHLBank of Pittsburgh overnight
advances during the years ended.
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
Maximum
amount outstanding at any month end
|
$ | 3,985 | $ | 7,648 | $ | 11,287 | ||||||
Average
amount outstanding
|
$ | 909 | $ | 1,172 | $ | 7,804 | ||||||
Weighted
average interest rate
|
1.08 | % | 1.69 | % | 5.11 | % | ||||||
Balance
outstanding at end of period
|
$ | - | $ | 7,648 | $ | 5,879 | ||||||
Weighted
average interest rate at end of period
|
- | % | 0.59 | % | 5.13 | % |
REGULATION
AND SUPERVISION
Regulation
of Pennsylvania Savings Banks
General.
As a Pennsylvania state chartered savings bank with deposits insured by
the Deposit Insurance Fund of the Federal Deposit Insurance Corporation
(“FDIC”), North Penn Bank is subject to extensive regulation and examination by
the Pennsylvania Department of Banking and by the FDIC, which insures its
deposits to the maximum extent permitted by law. The federal and state laws and
regulations applicable to banks regulate, among other things, the scope of their
business, their investments, the reserves required to be kept against deposits,
the timing of the availability of deposited funds and the nature and amount of
and collateral for certain loans. The laws and regulations governing North Penn
Bank generally have been promulgated to protect depositors and not for the
purpose of protecting stockholders. This regulatory structure also
gives the federal and state banking agencies extensive discretion in connection
with their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulation, whether by the Pennsylvania
Department of Banking, the FDIC or the United States Congress, could have a
material impact on us and our operations.
10
Federal
law provides the federal banking regulators, including the FDIC and the Office
of Thrift Supervision, with substantial enforcement powers. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders, and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
Pennsylvania
Savings Bank Law. The Pennsylvania Banking Code (the “Code”) contains
detailed provisions governing the organization, location of offices, rights and
responsibilities of trustees, officers, and employees, as well as corporate
powers, savings and investment operations and other aspects of North Penn Bank
and its affairs. The Code delegates extensive rule-making power and
administrative discretion to the Pennsylvania Department of Banking so that the
supervision and regulation of state chartered savings banks may be flexible and
readily responsive to changes in economic conditions and in savings and lending
practices.
The Code
also provides state-chartered savings banks with all of the powers enjoyed by
federal savings and loan associations, subject to regulation by the Pennsylvania
Department of Banking. The Federal Deposit Insurance Act, however,
prohibits a state-chartered bank from making new investments or loans or
becoming involved in activities as principal and making equity investments which
are not permitted for national banks unless (1) the FDIC determines the activity
or investment does not pose a significant risk of loss to the Deposit Insurance
Fund and (2) the bank meets all applicable capital
requirements. Accordingly, the additional operating authority
provided to us by the Code is significantly restricted by the Federal Deposit
Insurance Act.
Federal Deposit
Insurance. North Penn Bank’s deposits
are insured up to applicable limits by the Deposit Insurance Fund of the Federal
Deposit Insurance Corporation. Under the Federal Deposit Insurance Corporation’s
risk-based assessment system, insured institutions are assigned to one of four
risk categories based on supervisory evaluations, regulatory capital levels and
certain other factors, with less risky institutions paying lower assessments. An
institution’s assessment rate depends upon the category to which it is assigned.
Effective April 1, 2009, assessment rates range from seven to 77-1/2 basis
points. No institution may pay a dividend if in default of the federal deposit
insurance assessment. The Federal Deposit Insurance Corporation
imposed on all insured institutions a special emergency assessment of five basis
points of total assets minus Tier 1 capital, as of June 30, 2009 (capped at ten
basis points of an institution’s deposit assessment base), in order to cover
losses to the Deposit Insurance Fund. That special assessment was
collected on September 30, 2009. The Federal Deposit Insurance
Corporation provided for similar assessments during the final two quarters of
2009, if deemed necessary. However, in lieu of further special
assessments, the Federal Deposit Insurance Corporation required insured
institutions to prepay estimated quarterly risk-based assessments for the fourth
quarter of 2009 through the fourth quarter of 2012. The estimated
assessments, which include an assumed annual assessment base increase of 5%,
were recorded as a prepaid expense asset as of December 30, 2009. As
of December 31, 2009, and each quarter thereafter, a charge to earnings will be
recorded for each regular assessment with an offsetting credit to the prepaid
asset. The Federal Deposit Insurance Corporation has authority to
increase insurance assessments. A significant increase in insurance premiums
would likely have an adverse effect on the operating expenses and results of
operations of North Penn Bank. Management cannot predict what insurance
assessment rates will be in the future.
Regulatory
Capital Requirements. The FDIC has promulgated capital
adequacy requirements for state-chartered banks that, like us, are not members
of the Federal Reserve System. At December 31, 2008, we exceeded all
regulatory capital requirements and were classified as “well
capitalized.”
The
FDIC’s capital regulations establish a minimum 3% Tier 1 leverage capital
requirement for the most highly rated state-chartered, non-member banks, with an
additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively increases the minimum Tier
1 leverage ratio for such other banks to 4% to 5% or more. Under the FDIC’s
regulation, the highest-rated banks are those that the FDIC determines are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset
quality, high liquidity, good earnings and, in general, which are considered a
strong banking organization, rated composite 1 under the Uniform Financial
Institutions Rating System. Tier 1 or core capital is defined as the
sum of common stockholders’ equity (including retained earnings), non-cumulative
perpetual preferred stock and related surplus, and minority interests in
consolidated subsidiaries, minus all intangible assets other than certain
purchased mortgage servicing rights and purchased credit card
relationships.
11
The
FDIC’s regulations also require that state-chartered, non-member banks meet a
risk-based capital standard. The risk-based capital standard requires
the maintenance of total capital (which is defined as Tier 1 capital and
supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining
the amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital for the risk-based standards are the same as those
for the leverage capital requirement. The components of supplementary
(Tier 2) capital include cumulative perpetual preferred stock, mandatory
subordinated debt, perpetual subordinated debt, intermediate-term preferred
stock, up to 45% of unrealized gains on equity securities and a bank’s allowance
for loan and lease losses. Allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of supplementary capital
that may be included in total capital is limited to 100% of Tier 1
capital.
A bank
that has less than the minimum leverage capital requirement is subject to
various capital plan and activities restriction requirements. The
FDIC’s regulations also provide that any insured depository institution with a
ratio of Tier 1 capital to total assets that is less than 2% is deemed to be
operating in an unsafe or unsound condition pursuant to Section 8(a) of the
Federal Deposit Insurance Act and could be subject to potential termination of
deposit insurance.
We are
also subject to minimum capital requirements imposed by the Pennsylvania
Department of Banking on Pennsylvania-chartered depository
institutions. Under the Pennsylvania Department of Banking’s capital
regulations, a Pennsylvania bank or savings bank must maintain a minimum
leverage ratio of Tier 1 capital (as defined under the FDIC’s capital
regulations) to total assets of 4%. In addition, the Pennsylvania
Department of Banking has the supervisory discretion to require a higher
leverage ratio for any institutions based on the institution’s substandard
performance in any of a number of areas. We were in compliance with
both the FDIC and the Pennsylvania Department of Banking capital requirements as
of December 31, 2009.
Restrictions on
Dividends. The Code states, in part, that dividends may be
declared and paid only out of accumulated net earnings and may not be declared
or paid unless surplus (retained earnings) is at least equal to contributed
capital. The Bank has not declared or paid any dividends that have
caused its retained earnings to be reduced below the amount
required. Finally, dividends may not be declared or paid if the Bank
is in default in payment of any assessment due the FDIC.
Affiliate
Transaction Restrictions. Federal laws strictly limit the
ability of banks to make loans to, and to engage in certain other transactions
with (collectively, “covered transactions”), their affiliates, including their
bank holding companies and the holding companies’ nonbank
affiliates. The aggregate amount of covered transactions with any
individual affiliate is limited to 10% of a bank’s capital and surplus, and the
aggregate amount of covered transactions with all affiliates is limited to 20%
of capital and surplus. Further, loans and extensions of credit
generally are required to be secured by eligible collateral in specified
amounts. Federal law also requires that all transactions between a
bank and its affiliates be on terms as favorable to the bank as transactions
with non-affiliates.
The
Sarbanes-Oxley Act of 2002 generally prohibits a company from making loans to
its executive officers and directors. However, that act contains a specific
exception for loans by a depository institution to its executive officers and
directors in compliance with federal banking laws. Under such laws, North Penn
Bank’s authority to extend credit to executive officers, directors and 10%
shareholders (“insiders”), as well as entities such persons control, is limited.
The law restricts both the individual and aggregate amount of loans North Penn
Bank may make to insiders based, in part, on North Penn Bank’s capital position
and requires certain Board approval procedures to be followed. Such loans must
be made on terms substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. There is an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. There are additional restrictions
applicable to loans to executive officers.
12
Federal Home Loan
Bank System. We are a member of FHLBank of Pittsburgh, which
is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan
Bank serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from funds deposited by member
institutions and proceeds from the sale of consolidated obligations of the
Federal Home Loan Bank system. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the Federal Home Loan Bank. As a member, we are required
to purchase and maintain stock in FHLBank of Pittsburgh. At December
31, 2009, we were in compliance with this requirement.
Loans to One
Borrower. Under Pennsylvania law, savings banks have, subject
to certain exemptions, lending limits to one borrower in an amount equal to 15%
of the institution's capital accounts. An institution's capital
account includes the aggregate of all capital, surplus, undivided profits,
capital securities and general reserves for loan losses. As of
December 31, 2009, our loans-to-one borrower limitation was $2,500,500 and we
were in compliance with such limitation.
Regulation
of Holding Companies
General. Federal
law allows a state savings bank that qualifies as a “qualified thrift lender” to
elect to be treated as a savings association for purposes of the savings and
loan holding company provisions of federal law. Such election allows
its holding company to be regulated as a savings and loan holding company by the
Office of Thrift Supervision rather than as a bank holding company by the
Federal Reserve Board. The Bank has elected to be treated as a
savings association so that the Company will be regulated as a savings and loan
holding company under federal law. As such, the Company has
registered with the Office of Thrift Supervision and is subject to Office of
Thrift Supervision regulations, examinations, supervision, reporting
requirements and regulations concerning corporate governance and
activities. In addition, the Office of Thrift Supervision has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the Office
of Thrift Supervision to restrict or prohibit activities that are determined to
be a serious risk to the Bank.
As a
unitary savings and loan holding company, the Company is able to engage only in
activities permitted to a financial holding company and those permitted for a
multiple savings and loan holding company, which includes non-banking activities
that the Federal Reserve Board has determined to be permissible for bank holding
companies.
Limitation on
Capital Distributions. Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to shareholders of another institution in a cash-out
merger. Under the regulations, an application to and the prior
approval of the Office of Thrift Supervision is required before any capital
distribution if the institution does not meet the criteria for “expedited
treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination
and Community Reinvestment Act ratings in the two top categories), the total
capital distributions for the calendar year exceed net income for that year plus
the amount of retained net income for the preceding two years, the institution
would be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with the Office of
Thrift Supervision. If an application is not required, the
institution must still provide prior notice to the Office of Thrift Supervision
of the capital distribution if, like the Bank, it is a subsidiary of a holding
company. If the Bank’s capital were ever to fall below its regulatory
requirements or regulators notified it that it was in need of increased
supervision, its ability to make capital distributions could be
restricted. In addition, the Office of Thrift Supervision could
prohibit a proposed capital distribution that would otherwise be permitted by
the regulation if the agency determines that such distribution would constitute
an unsafe or unsound practice.
Qualified Thrift
Lender Test. In order for the Company
to be regulated by the Office of Thrift Supervision as a savings and loan
holding company (rather than by the Federal Reserve Board as a bank holding
company) the Bank must meet a qualified thrift lender test. Under the
test, the Bank is required to either qualify as a “domestic building and loan
association” under the Internal Revenue Code or maintain at least 65% of its
“portfolio assets” (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain “qualified
thrift investments” (primarily residential mortgages and related investments,
including certain mortgage-backed securities) in at least 9 months out of each
12 month period. Education loans, credit card loans and small
business loans may be considered “qualified thrift investments.” As
of December 31, 2009, the Bank met the qualified thrift lender
test.
13
Acquisition of
Control. Under the federal Change in Bank Control Act, a
notice must be submitted to the Office of Thrift Supervision if any person
(including a company), or group acting in concert, seeks to acquire “control” of
a savings and loan holding company or savings association. An
acquisition of “control” can occur upon the acquisition of 10% or more of the
voting stock of a savings and loan holding company or savings institution or as
otherwise defined by the Office of Thrift Supervision. Under the
Change in Bank Control Act, the Office of Thrift Supervision has 60 days from
the filing of a complete notice to act, taking into consideration certain
factors, including the financial and managerial resources of the acquirer and
the anti-trust effects of the acquisition. Any company that so
acquires control would then be subject to regulation as a savings and loan
holding company.
ITEM
1A. Risk Factors
Recent
Legislation in Response to Market and Economic Conditions May Significantly
Affect Our Operations, Financial Condition, and Earnings.
Instability
and volatility in the credit markets has led to the adoption of legislation and
regulatory actions which have the potential to significantly affect financial
institutions and holding companies, including us.
In
response to this financial crisis affecting the banking system and financial
markets, the United States Congress enacted the Emergency Economic Stabilization
Act of 2008 and the American Recovery and Reinvestment Act of 2009. Under these
and other laws and government actions:
|
·
|
the
U.S. Department of the Treasury, or “Treasury,” has provided capital to
financial institutions and adopted programs to facilitate and finance the
purchase of problem assets and finance asset-backed securities via the
Troubled Assets Relief Program, or
“TARP”;
|
|
·
|
the
FDIC has temporarily increased the limits on federal deposit insurance
with the exception of depository institutions who have voluntarily opted
out of the program and has also provided availability of temporary
liquidity guarantee, or “TLG”, of all FDIC-insured institutions and their
affiliates’ debt, as well as deposits in noninterest-bearing transaction
deposit accounts; and
|
|
·
|
the
federal government has undertaken various forms of economic stimulus,
including assistance to homeowners in restructuring mortgage payments on
qualifying loans.
|
TARP and
the TLG are winding down, and the effects of this wind-down cannot be
predicted.
In
addition, the federal government is considering various proposals for a
comprehensive reform of the financial services industry and markets and
coordinating reforms with other countries. There can be no assurance that these
various initiatives or any other future legislative or regulatory initiatives
will be successful at improving economic conditions globally, nationally or in
our markets, or that the measures adopted will not have adverse consequences.
These new laws, regulations, and changes will increase our FDIC insurance
premiums and may also increase our costs of regulatory compliance and of doing
business, and otherwise affect our operations. At this time, we
cannot fully determine the extent of these effects, or any other effects, on us
caused by these and future laws and regulations. However, they may
significantly affect the markets in which we do business, the markets for and
value of our investments, and our ongoing operations, costs and
profitability.
14
Difficult
Market Conditions Have Adversely Affected Our Industry.
We are
operating in a challenging and uncertain economic environment, including
generally uncertain national and local conditions. Financial
institutions continue to be affected by sharp declines in the real estate market
and constrained financial markets. Dramatic declines in the housing
market over the past two years, with falling home prices and increasing
foreclosure, unemployment and under-employment, have negatively impacted the
credit performance of mortgage loans and resulted in significant write-downs of
asset values by financial institutions, including government-sponsored entities
as well as major commercial and investment banks. These write-downs,
initially of mortgage-backed securities but spreading to credit default swaps
and other derivative and cash securities, in turn, have caused many financial
institutions to seek additional capital, to merge with larger and stronger
institutions and, in some cases, to fail. Reflecting concern about
the stability of the financial markets generally and the strength of
counterparties, many lenders and institutional investors have reduced or ceased
providing funding to borrowers, including to other financial
institutions. This market turmoil and tightening of credit have led
to an increased level of commercial and consumer delinquencies, lack of consumer
confidence, increased market volatility and widespread reduction of business
activity generally. The resulting economic pressure on consumers and
lack of confidence in the financial markets may adversely affect our business,
financial condition and results of operations. A worsening of these
conditions would likely exacerbate the adverse effects of these difficult market
conditions on us and others in the financial services industry. In
particular, we may face the following risks in connection with these
events:
·
|
We
expect to face increased regulation of our industry, and compliance with
such regulation may increase our costs, limit our ability to pursue
business opportunities, and increase compliance
challenges.
|
·
|
Our
ability to assess the creditworthiness of our customers or to estimate the
values of our assets may be impaired if the models and approaches we use
become less predictive of future behaviors, valuations, assumptions or
estimates. The process we use to estimate losses inherent in our credit
exposure or estimate the value of certain assets requires difficult,
subjective, and complex judgments, including forecasts of economic
conditions and how these economic predictions might impair the ability of
our borrowers to repay their loans or impact the value of assets, which
may no longer be capable of accurate estimation which may, in turn, impact
the reliability of the process.
|
·
|
Competition
in our industry could intensify as a result of the increasing
consolidation of financial services companies in connection with current
market conditions.
|
A further
deterioration in economic conditions or a prolonged delay in economic recovery
areas could result in the following consequences, any of which could have a
material adverse effect on our business:
|
·
|
Loan
delinquencies may increase further;
|
|
·
|
Problem
assets and foreclosures may increase
further;
|
|
·
|
Demand
for our products and services may
decline;
|
|
·
|
Collateral
for loans made by us, especially real estate, may decline further in
value, in turn reducing a customer’s borrowing power, and reducing the
value of assets and collateral associated with our loans;
and
|
|
·
|
Investments
in mortgage-backed securities may decline in value as a result of
performance of the underlying loans or the diminution of the value of the
underlying real estate collateral.
|
Our
emphasis on commercial lending may expose us to increased lending
risks.
These
types of loans generally expose a lender to greater risk of non-payment and loss
than one- to four-family residential mortgage loans because repayment of the
loans often depends on the successful operation of the property and the income
stream of the borrowers. Such loans typically involve larger loan
balances to single borrowers or groups of related borrowers compared to one- to
four-family residential mortgage loans. Commercial business loans
expose us to additional risks since they typically are made on the basis of the
borrower’s ability to make repayments from the cash flow of the borrower’s
business and are secured by non-real estate collateral that may depreciate over
time. In addition, some of our commercial borrowers have more than
one loan outstanding with us. Consequently, an adverse development
with respect to one loan or one credit relationship may expose us to a greater
risk of loss compared to an adverse development with respect to a one- to
four-family residential mortgage loan.
15
The
unseasoned nature of our commercial loan portfolio may expose us to increased
lending risks.
A
significant amount of our commercial and multi-family real estate loans and
commercial business loans are unseasoned, meaning that they were originated
recently. Our limited experience with these loans does not provide us
with a significant payment history pattern with which to judge future
collectability. Furthermore, these loans have not been subjected to
unfavorable economic conditions. As a result, it may be difficult to
predict the future performance of this part of our loan
portfolio. These loans may have delinquency or charge-off levels
above our expectations, which could adversely affect our future
performance.
Changes
in interest rates could reduce our net interest income and
earnings.
Our net
interest income is the interest we earn on loans and investments less the
interest we pay on our deposits and borrowings. Our net interest margin is the
difference between the yield we earn on our assets and the interest rate we pay
for deposits and our other sources of funding. Changes in interest
rates—up or down—could adversely affect our net interest margin and, as a
result, our net interest income. Although the yield we earn on our assets and
our funding costs tend to move in the same direction in response to changes in
interest rates, one can rise or fall faster than the other, causing our net
interest margin to expand or contract. Our liabilities tend to be shorter in
duration than our assets, so they may adjust faster in response to changes in
interest rates. As a result, when interest rates rise, our funding costs may
rise faster than the yield we earn on our assets, causing our net interest
margin to contract until the yield catches up. Changes in the slope
of the “yield curve”—or the spread between short-term and long-term interest
rates—could also reduce our net interest margin. Normally, the yield curve is
upward sloping, meaning short-term rates are lower than long-term rates. Because
our liabilities tend to be shorter in duration than our assets, when the yield
curve flattens or even inverts, we could experience pressure on our net interest
margin as our cost of funds increases relative to the yield we can earn on our
assets.
Our
efforts to increase core deposits may not be successful, which would limit our
ability to grow.
Our goal
is to fund growth of interest-earning assets by attracting core deposits, which
we define as demand, savings and money market deposits. Our primary
markets for deposits are the communities in which our offices are
located. We face significant competition for core deposits from other
financial institutions. If we are unable to attract core deposits, we
will not be able to increase our interest-earning assets unless we use other
funding sources, such as certificates of deposit or borrowed funds, which
generally require us to pay higher interest rates compared to core
deposits. In addition, competition may require us to pay higher rates
on core deposits. Many institutions currently offer high yielding
checking, savings and/or money market accounts. We may have to offer
similar high yielding accounts in order to attract core deposits, which would
contribute to the compression of our interest rate spread and net interest
margin, which would have a negative effect on our profitability. We
currently do not have any plans to expand our market area for
deposits.
Higher
FDIC deposit insurance premiums and assessments could adversely affect our
financial condition.
FDIC
insurance premiums increased substantially in 2009 and we expect to pay
significantly higher FDIC premiums in the future. Market developments have
significantly depleted the DIF and reduced the ratio of reserves to insured
deposits. The FDIC adopted a revised risk-based deposit insurance assessment
schedule on February 27, 2009, which raised deposit insurance premiums. On
May 22, 2009, the FDIC also implemented a five basis point special
assessment of each insured depository institution’s assets minus Tier 1 capital
as of June 30, 2009, but no more than 10 basis points times the
institution’s assessment base for the second quarter of 2009, which was
collected on September 30, 2009. In imposing the special assessment, the
FDIC noted that additional special assessments may be imposed by the FDIC for
future periods.
On
November 12, 2009, the FDIC adopted a final rule that requires insured
depository institutions to prepay their quarterly risk-based assessments for the
fourth quarter of 2009, and for all of 2010, 2011, and 2012, on
December 30, 2009, along with each institution’s risk-based deposit
insurance assessment for the third quarter of 2009. For purposes of calculating
the prepaid amount, the base assessment rate in effect at September 30,
2009 would be used for 2010. That rate would be increased by an annualized 3
basis points for 2011 and 2012 assessments. The prepayment calculation would
also assume a 5 percent annual growth rate, increased quarterly, through the end
of 2012. Under the final rule, an institution will account for the prepayment by
recording the entire amount of its prepaid assessment as a prepaid expense (an
asset) as of
16
December 30,
2009. Subsequently, each institution will record an expense (charge to earnings)
for its regular quarterly assessment and an offsetting credit to the prepaid
assessment until the asset is exhausted. Once the asset is exhausted, the
institution would resume paying and accounting for quarterly deposit insurance
assessments as they do currently. Under the final rule, the FDIC stated that its
requirement for prepaid assessments does not preclude the FDIC from changing
assessment rates or from further revising the risk-based assessment system
during 2009, 2010, 2011, 2012, or thereafter, pursuant to notice-and-comment
rulemaking procedures provided by statute, and therefore, continued actions by
the FDIC could significantly increase the Bank’s noninterest expense in fiscal
2010 and for the foreseeable future.
Determination
of the appropriate level of the allowance for loan losses involves a high degree
of subjectivity and requires significant estimates, and actual losses may vary
from current estimates.
The
Bank maintains an allowance for loan losses to provide for loans in its
portfolio that may not be repaid in their entirety. The determination of the
appropriate level of the allowance for loan losses involves a high degree of
subjectivity and requires us and the Bank to make significant estimates of
current credit risks and future trends, all of which may undergo material
changes.
In
evaluating the adequacy of the Bank's allowance for loan losses, we consider
numerous quantitative factors, including our historical charge-off experience,
growth of our loan portfolio, changes in the composition of our loan portfolio
and the volume of delinquent and classified loans. In addition, we use
information about specific borrower situations, including their financial
position and estimated collateral values, to estimate the risk and amount of
loss for those borrowers. Finally, we consider many qualitative factors,
including general and economic business conditions, duration of the current
business cycle, current general market collateral valuations, trends apparent in
any of the factors we take into account and other matters, which are by nature
subjective and fluid. Our estimates of the risk of loss and amount of loss on
any loan are complicated by the significant uncertainties surrounding the Bank's
borrowers' abilities to successfully execute their business models through
changing economic environments, competitive challenges and other factors. In
considering information about specific borrower situations, our analysis is
subject to the risk that we are provided inaccurate or incomplete information.
Because of the degree of uncertainty and susceptibility of these factors to
change, the Bank's actual losses may vary from our current
estimates.
Additionally,
bank regulators periodically review the Bank's allowance for loan losses and may
require an increase in the provision for loan losses or recognize loan
charge-offs based upon their judgments, which may be different from ours. Any
increase in the Bank's allowance for loan losses or loan charge-offs required by
these regulatory authorities may adversely affect our operating
results.
Because
most of our borrowers are located in Northeast Pennsylvania, a downturn in the
local economy or a decline in local real estate values could cause increases in
nonperforming loans, which could hurt our profits.
Substantially
all of our loans are secured by real estate or made to businesses in Northeast
Pennsylvania. As a result of this concentration, a downturn in the
local economy could cause significant increases in nonperforming loans, which
would hurt our profits. A decline in real estate values could cause
some of our mortgage loans to become inadequately collateralized, which would
expose us to a greater risk of loss. Additionally, a decline in real
estate values could adversely impact our portfolio of commercial real estate
loans and could result in a decline in the origination of such
loans.
17
Strong
competition within our market area could hurt our profits and inhibit
growth.
We face
intense competition in making loans, attracting deposits and hiring and
retaining experienced employees. This competition has made it more
difficult for us to make new loans and attract deposits. Price
competition for loans and deposits sometimes results in us charging lower
interest rates on our loans and paying higher interest rates on our deposits,
which reduces our net interest income. Competition also makes it more
difficult and costly to attract and retain qualified employees. Many
of the institutions with which we compete have substantially greater resources
and lending limits than we have and may offer products and services that we do
not provide. We expect competition to increase in the future as a
result of legislative, regulatory and technological changes and the continuing
trend of consolidation in the financial services industry. Our
profitability depends upon our continued ability to compete successfully in our
market area.
We
are dependent upon the services of our management team.
We rely
heavily on our President and Chief Executive Officer, Frederick L. Hickman and
our senior executives Thomas J. Dziak and Thomas A. Byrne. The loss
of our chief executive officer or other senior executive officers could have a
material adverse impact on our operations because, as a small community bank, we
have fewer management-level personnel that have the experience and expertise to
readily replace these individuals. Changes in key personnel and their
responsibilities may be disruptive to our business and could have a material
adverse effect on our business, financial condition and results of
operations. We have employment agreements with Messrs. Hickman, Dziak
and Byrne. We do not maintain key man life insurance for these
executives.
The
Company’s articles of incorporation and bylaws and certain laws and regulations
may prevent or make more difficult certain transactions, including a sale or
merger of the Company.
Provisions
of the Company’s articles of incorporation and bylaws, state corporate law and
federal banking regulations may make it more difficult for companies or persons
to acquire control of the Company. As a result, our shareholders may
not have the opportunity to participate in such a transaction and the trading
price of our common stock may not rise to the level of other institutions that
are more vulnerable to hostile takeovers. The factors that may
discourage takeover attempts or make them more difficult include:
|
·
|
Articles of incorporation and
bylaws. Provisions of the articles of incorporation and bylaws
of the Company may make it more difficult and expensive to pursue a
takeover attempt that the board of directors opposes. These
provisions also make more difficult the removal of current directors or
management, or the election of new directors. These provisions
include:
|
|
·
|
supermajority
voting requirements for certain business combinations and changes to some
provisions of the articles of incorporation and
bylaws;
|
|
·
|
limitation
on the right to vote shares;
|
|
·
|
the
election of directors to staggered terms of three
years;
|
|
·
|
provisions
regarding the timing and content of shareholder proposals and
nominations;
|
|
·
|
provisions
restricting the calling of special meetings of
shareholders;
|
|
·
|
the
absence of cumulative voting by shareholders in the election of directors;
and
|
|
·
|
the
removal of directors only for
cause.
|
|
·
|
Pennsylvania anti-takeover
statutes. Pennsylvania law contains four anti-takeover
sections that apply to public reporting companies relating to control
share acquisitions, the disgorgement of profits by certain controlling
persons, business combination transactions with interested shareholders
and the ability of shareholders to put their stock following a control
transaction.
|
|
·
|
Office of Thrift Supervision
regulations. Office of Thrift Supervision regulations
prohibit, for three years following the completion of our second-step
conversion, the offer to acquire or the acquisition of more than 10% of
any class of equity security of a converted institution without the prior
approval of the Office of Thrift Supervision.
|
18
ITEM
2. PROPERTIES
The Bank
currently conducts its business through its five full-service banking offices in
Scranton, Stroudsburg, Clarks Summit and Effort, Pennsylvania. The
Bank owns all of its offices, except for Clarks Summit, which is subject to a
renewable lease that expires in 2011. The net book value of the land,
buildings, furniture, fixtures and equipment owned by the Company was $4.0
million as of December 31, 2009.
ITEM
3. LEGAL PROCEEDINGS
We are
periodically parties to or otherwise involved in legal proceedings arising in
the normal course of business, such as claims to enforce liens, claims involving
the making and servicing of real property loans, and other issues incident to
our business. We do not believe that there is any pending or
threatened proceeding against us which, if determined adversely, would have a
material effect on our business or financial position.
ITEM
4. (REMOVED AND RESERVED)
PART
II
ITEM
5.
|
MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND REGISTRANT’S ISSUER
PURCHASES OF EQUITY SECURITIES
|
Our
common stock is quoted on the OTC Bulletin Board under the symbol “NPBP.OB”. An
active trading market does not currently exist for our common
stock.
The
following table sets forth the high and low bid information for the periods
indicated. Share price and dividend information has not been adjusted to reflect
the exchange of the former North Penn Bancorp common stock for 1.092 shares of
the Company’s common stock on October 1, 2007.
2009
|
Dividends
|
High
|
Low
|
Close
|
||||||||||||
First
Quarter
|
$ | 0.03 | $ | 8.00 | $ | 6.00 | $ | 6.00 | ||||||||
Second
Quarter
|
$ | 0.03 | $ | 8.80 | $ | 6.00 | $ | 8.55 | ||||||||
Third
Quarter
|
$ | 0.03 | $ | 9.25 | $ | 8.55 | $ | 9.25 | ||||||||
Fourth
Quarter
|
$ | 0.03 | $ | 9.25 | $ | 8.75 | $ | 9.25 |
2008
|
Dividends
|
High
|
Low
|
Close
|
||||||||||||
First
Quarter
|
$ | 0.03 | $ | 9.20 | $ | 8.35 | $ | 8.50 | ||||||||
Second
Quarter
|
$ | 0.03 | $ | 9.00 | $ | 7.40 | $ | 7.40 | ||||||||
Third
Quarter
|
$ | 0.03 | $ | 8.65 | $ | 7.30 | $ | 7.75 | ||||||||
Fourth
Quarter
|
$ | 0.03 | $ | 8.25 | $ | 6.95 | $ | 7.25 |
The
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual
transactions.
As of
March 15, 2010, there were approximately 770 holders of record of our common
stock.
Registrar
and Transfer, Inc. serves as transfer agent and registrar for our common
stock.
19
On
October 1, 2008, North Penn Bancorp, Inc. announced that its Board of
Directors authorized a stock repurchase plan for up to 158,157 shares of the
Company’s outstanding common stock.
On
April 28, 2009, the Company’s Board of Directors authorized the completion of
the previous 10% stock repurchase plan (29,657 shares) and the repurchase of up
to 142,341 shares of the Company’s outstanding common stock, or approximately
10% of outstanding shares. The initial program was subsequently
completed during the second quarter of 2009. The Company’s average
cost per share of shares under this program was $7.99
The
current repurchase authorization will remain in effect until all shares have
been repurchased or until the Company terminates the authorization. As of
December 31, 2009, 93,343 shares have been purchased under this second plan at
an average cost per share of $8.96.
Purchases
under the program will be conducted solely through a Rule 10b5-1 repurchase plan
with Stifel, Nicolaus & Company, Incorporated and will be based upon the
parameters of the Rule 10b5-1 repurchase plan. The Rule 10b5-1
repurchase plan allows the Company to repurchase its shares during periods when
it would normally not be active in the market due to its internal trading
blackout period.
The
information under Notes 17 to the Company’s Consolidated Financial Statements
the Company’s dividend policy is incorporated herein by reference.
Period
|
(a)
Total number of
Shares Purchased
|
(b)
Average Price Paid
per Share
|
(c)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (1)
|
(d)
Maximum Number of Shares
that May Yet Be Purchased
Under the Plans or Programs
|
||||||||||||
October 1,
2009
through
October 31,
2009
|
15,700 | $ | 8.95 | 227,000 | 73,498 | |||||||||||
November
1, 2009
through
November
30, 2009
|
14,500 | $ | 9.11 | 241,500 | 58,998 | |||||||||||
December
1, 2009
through
December
31, 2009
|
10,000 | $ | 9.20 | 251,500 | 48,998 | |||||||||||
Total
|
37,200 | $ | 9.09 |
ITEM
6. SELECTED FINANCIAL DATA
Not
applicable as the Company is a smaller reporting company.
ITEM
7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Overview
The
following presents a review of North Penn Bancorp’s results of operations and
financial condition. This information should be read in conjunction with its
consolidated financial statements and the accompanying notes to financial
statements. The Company’s consolidated earnings are derived primarily from the
operations of its wholly owned savings bank subsidiary, North Penn Bank, and to
a lesser degree its other subsidiaries
20
Effective
June 1, 2005, the Bank became a wholly owned subsidiary of North Penn Bancorp,
Inc., which has no material operations other than ownership of the Bank. The
Bank conducts community banking activities by accepting deposits and making
loans in our market area. The Bank’s lending products include
commercial loans and mortgages, and lines of credit, consumer and home equity
loans, and residential mortgages on single family and multi family
dwellings. The Bank maintains an investment portfolio of municipal,
U.S. government and investment grade corporate bonds to manage its liquidity and
interest rate risk. The Bank’s loan and investment portfolios are
funded with deposits as well as collateralized borrowings from FHLBank of
Pittsburgh, secured by a blanket lien on the Bank’s loans.
Our
earnings come primarily from net interest income, which is the difference
between what we earn on loans and investments and what we pay for our deposits
and borrowings. The net interest income is impacted buy our loan loss provision,
other income, and other expenses.
Critical
Accounting Matters
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as the date of the financial statements and
the reported amounts of income and expenses during the reporting
period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the allowance
for loan losses and the valuation of the deferred tax assets.
We
consider the allowance for loan losses to be a critical accounting policy.
Determining the amount of the allowance for loan losses necessarily involves a
high degree of judgment. Management reviews the level of the allowance on a
quarterly basis, at a minimum, and establishes the provision for loan losses
based on the composition of the loan portfolio, delinquency levels, loss
experience, economic conditions, and other factors related to the collectability
of the loan portfolio.
Although
we believe that we use the best information available to establish the allowance
for loan losses, future additions to the allowance may be necessary based on
estimates that are susceptible to change as a result of changes in economic
conditions and other factors. In addition, our regulatory authorities as an
integral part of their examination process periodically review our allowance for
loan losses. Such agencies may require us to recognize adjustments to the
allowance based on its judgments about information available to it at the time
of examination.
The Bank
believes that the judgments used in establishing the allowance for loan losses
are based on reliable present information. In assessing the
sufficiency of the allowance for loan losses, management considers, among other
things described above, how well prior estimates have related to actual
experience. The Bank has not found it necessary to call into question
the reliability of judgments used in its calculation.
There are
also no particular risk elements in the local economy that put a group or
category of loans at increased risk, however, the Bank is pursuing commercial
loans secured primarily by real estate, which may bear a higher risk of
loss. These factors could lead to higher levels of allowance in
future periods.
The
estimate of the allowance level is always subject to normal inherent risk
associated with any loan portfolio and can change based on future events, not
known or predictable.
We use
the asset and liability method of accounting for deferred income taxes. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. If current available information raises doubt as to the realization of
deferred tax assets, a valuation allowance is established. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. We exercise significant judgment in evaluating the
amount and timing of recognition of the resulting tax liabilities and assets,
including projections of future taxable income. These judgments and estimates
are reviewed continually as regulatory and business factors
change. Management’s recording of deferred tax assets and liabilities
and the need for a valuation allowance is made based on information available to
the Bank at the time. In particular, management evaluates the
recoverability of deferred tax assets based on the ability of the Bank to
generate future profits to utilize such benefits. Management employs
budgeting and periodic reporting processes to continually monitor
progress. These factors lower the inherent risk in the assumption of
future profits. Historically, the Bank has had sufficient profits for
tax recovery.
21
Statement of Changes in
Financial Condition
General. Our assets increased
$17.3 million, or 12.5% to $156.3 million at December 31, 2009 compared to
$139.0 million at December 31, 2008. An increase in loans outstanding combined
with an increase in cash and cash equivalents were the primary reasons for the
growth in assets. Liabilities increased $17.4 million or 14.5% to $137.1 million
at December 31, 2009 as compared with $119.7 million at December 31,
2008. The primary reason for the increase was an increase in
deposits. Stockholders’ equity remained essentially unchanged at
$19.3 million at both December 31, 2009 and 2008.
Assets. Cash and cash
equivalents increased $9.6 million or 423.8% to $11.9 million at December 31,
2010 as compared to $2.3 million at December 31, 2009. The primary reason for
the increase in cash and cash equivalents was due to liquidity caused by the
maturities of investments and increased deposits at December 31,
2009.
Gross
loans, net of loans held for sale, increased $8.4 million or 8.0% to $114.5
million at December 31, 2009 as compared with $106.1 million at December 31,
2008. Commercial mortgages increased $6.7 million, or 12.6%, from $53.4 million
at December 31, 2008, to $60.2 million at December 31, 2009. Commercial loans
increased $1.6 million or 87.8% to $3.4 million at December 31, 2009 from $1.8
million at December 31, 2008. We continue to implement our strategy of
diversifying the mix within our loan portfolio by increasing commercial real
estate and commercial business loans.
Our
residential mortgage portfolio increased $2.2 million, or 4.9%, to $48.4 million
at December 31, 2009, from $46.1 million at December 31, 2008. Consumer loans
decreased $1.6 million from $5.4 million at December 31, 2008 to $3.7 million at
December 31, 2009.
The
investment portfolio decreased $895,000, or 4.4%, to $19.4 million at December
31, 2009, from $20.3 million at December 31, 2008. The decrease was
primarily the result of declines in mortgage-backed securities portfolio of $2.4
million or 46.5% and in the US Agency securities portfolio of $1.5 million or
49.7%. We intend to maintain a level of investment securities
that is sufficient to maintain pledging and collateralized borrowing
requirements while also temporarily deploying excess liquidity
The
Company reviews investment debt securities on an ongoing basis for the presence
of other than temporary impairment (“OTTI”). An impairment that is an
“other-than-temporary-impairment” is a decline
in the fair value of an investment below its amortized cost attributable to
factors that indicate the decline will not be recovered over the anticipated
holding period of the investment. Other-than-temporary-impairments result in
reducing the security’s carrying value by the amount of credit loss. The credit
component of the other-than-temporary impairment loss is realized through the
statement of income and the remainder of the loss remains in other comprehensive
income. After our review, we concluded that two securities were
impaired. OTTI losses of $38,000 on these securities were recognized during the
fourth quarter 2009. In accordance, with FASB ASC 320, the impairment
was deemed credit related and run entirely though the income
statement.
Deposits.
Total deposits increased $24.9 million, or 25.1%, to $124.1 million at December
31, 2009, from $99.2 million at December 31, 2008. The increase reflects, in
part, our continuing efforts to attract and maintain deposits to utilize as a
primary source of funds to fuel our growth in loans. Core deposits
which consist of all deposits other than certificates of deposit, increased $2.7
million or 4.8% to $58.1 million at December 31, 2009 as compared with $55.5
million at December 31, 2008. Time deposit
products, which include certificates of deposit, increased $22.2 million, or
50.8%, from $43.7 million at December 31, 2008, to $65.9 million at December 31,
2009. The Bank has tried to lessen its dependency on more volatile
and rate sensitive certificates of deposit and has focused more on growing core
deposits, particularly non-interest-bearing deposits.
22
Borrowings.
Borrowings were $12.0 million at December 31, 2009, a $7.6 million or 38.9%
decrease over the $19.6 million at December 31, 2008. As of December
31, 2009, we have two outstanding loans, a line of credit and a letter of credit
with FHLBank of Pittsburgh. Our line of credit is available up to $15.0 million
at an interest rate equal to the current overnight rate. This line is a source
of liquidity which is used to fund our loan demand when deposit volume is
inadequate. We have a long term note of $5.0 million with FHLBank
which matures on July 18, 2010. The annual percentage rate on this note is 6.19%
and carries a prepayment penalty equal to a percentage of the remaining interest
payments. The Bank also has a long term note of $7.0 million from the FHLBank of
Pittsburgh at a rate of 4.34%, maturing July 13, 2015.
Equity.
Stockholders’ equity remained essentially unchanged at $19.3 million at both
December 31, 2009 and 2008. The increase in net income and improvement in
accumulated other comprehensive loss were offset by our continuing purchases of
Treasury Stock and payment of cash dividends. In 2008, a stock repurchase plan
was approved and commenced whereby up to 10% of the company’s common stock will
be purchased in the open market. In addition, on April 28, 2009, the
Board of Directors authorized completion of the 2008 Plan (29,657 shares) and
the repurchase of up to 142,341 shares of our outstanding common stock, or 10%
of outstanding shares. At December 31, 2009, Treasury Stock purchases totaled
$2.1 million, a $1.3 million or 160.9% increase as compared with $805,000 at
December 31, 2008.
Comparison of Results of
Operations for the Years Ended December 31, 2009 and 2008
General. For the year ended December
31, 2009, we recorded net income of $787,000 an increase of $433,000 or 122.3%
compared to net income of $354,000 for December 31, 2008.
Net
Interest Income.
Our principal source of revenue
is net interest income. Net interest income is the difference between interest
earned on securities and loans, less the interest paid on deposits and borrowed
funds. Net interest income and margin are influenced by many factors, primarily
the volume and mix of earning assets, funding sources and interest rate
fluctuations. Other factors include prepayment risk on mortgage and
investment-related assets and the composition and maturity of earning assets and
interest-bearing liabilities. Our primary interest earning assets are loans,
while deposits make up the majority of our interest bearing liabilities. Loans
typically generate more interest income than investment securities with similar
maturities. In the current market, wholesale funding sources cost less than
certain client deposits; however, ordinarily funding from client deposits costs
less than wholesale funding sources. Factors, such as general economic activity,
Federal Reserve Board monetary policy and price volatility of competing
alternative investments, can also exert significant influence on our ability to
optimize the mix of assets and funding and the net interest income and
margin.
Net
interest income increased $169,000 or 3.9%, to $4.5 million for the year ended
December 31, 2009, compared to $4.4 million for the year ended December 31,
2008. Interest income remained flat at $7.7 million for both
years. Interest expense decreased $185,000, or 5.6%, to $3.1 million
at December 31, 2009 from $3.3 million at December 31, 2008, due to lower
interest rates in deposits and reduced utilization of overnight borrowing.
Consequently, the interest rate spread on a full tax equivalent basis decreased
to 2.95% for the year ended December 31, 2009, compared to 3.09% for 2008. The
ratio of average interest-earning assets to average interest-bearing liabilities
decreased from 120.32% for the year ended December 31, 2008, to 116.97% for the
year ended December 31, 2009.
Interest
Income. Total interest income was essentially unchanged at $7.7 million
for the years ending December 31, 2009 and 2008. Increased loan
volume partially offset a 74 basis point decrease in full tax equivalent total
earning asset yield. For the year ending December 31, 2009, average
interest earning assets increased $16.4 million or 13.1% to $141.2 million as
compared with $124.9 million for the comparable period in
2008. The primary reason for the increase in average
interest earning assets was growth in the average balance of
loans. For the twelve months ending December 31, 2009, average
mortgages and average commercial loans increased $8.9 million or 9.5% and $1.1
million or 83.8% respectively, over the same period in 2008.
Total
loan income for the year ended December 31, 2009 was $6.9 million, a $63,000 or
0.9% increase over the comparable 2008 period.
23
For the
twelve months ended December 31, 2009, total average investment securities
decreased $2.0 or 11.6% as compared to the same period in 2008. The
primary reason for the decrease was that maturing investments were used to help
fund growth in our lending portfolio.
Interest
Expense. Interest expense for the year ended December 31, 2009 totaled
$3.1 million. This represents a decrease of $185,000, or 5.6%, for the year
compared to $3.3 million in 2008. The primary reason for the increase was a 60
basis point decline in yield on interest bearing liabilities between the twelve
months ended December 31, 2009 and 2008. The decline in yield
partially offset growth in total interest bearing liabilities.
For the
year ending December 31, 2009, average interest bearing liabilities increased
$17.0 million or 16.4% to $120.7 million as compared with $103.8 million for the
comparable period in 2008. The primary reason for the growth in
average interest bearing liabilities was the growth in average time deposits of
$17.8 million or 41.8% to $60.3 million for the year ended December 31,
2009. This compares with $42.5 million for the year ended December
31, 2008
The
FHLBank of Pittsburgh average advance balance decreased $263,000 million, or
2.0%, to $12.9 million at December 31, 2009 from $13.2 million for the year
ended December 31, 2008. The decrease was the result of reduced need
for overnight borrowings due to growth of deposits.
The
following table presents information regarding average balances of assets and
liabilities, as well as the total dollar amounts of interest income and
dividends from average interest-earning assets and interest expense on average
interest-bearing liabilities and the resulting average yields and
costs. The yields and costs for the periods indicated are derived by
dividing annual income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. For purposes of the below
table, average balances have been calculated using the average of daily
balances, and non-accrual loans are included in
average balances; however, accrued interest income has been excluded from these
loans.
24
Average Balance, Interest
Income and Expense, Average Yield and Rates
Years
Ended December 31,
|
||||||||||||||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
Interest
|
Average
|
Interest
|
Average
|
Interest
|
Average
|
|||||||||||||||||||||||||||||||
Average
|
Income/
|
Interest
|
Average
|
Income/
|
Interest
|
Average
|
Income/
|
Interest
|
||||||||||||||||||||||||||||
(Dollars
in thousands)
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
|||||||||||||||||||||||||||
Interest
Earning Assets:
|
||||||||||||||||||||||||||||||||||||
Loans:
|
||||||||||||||||||||||||||||||||||||
Commercial
|
$ | 2,302 | $ | 138 | 5.99 | % | $ | 1,188 | $ | 95 | 8.00 | % | $ | 1,749 | $ | 120 | 6.86 | % | ||||||||||||||||||
Real
estate mortgages
|
102,942 | 6,389 | 6.21 | % | 94,058 | 6,248 | 6.64 | % | 85,801 | 6,086 | 7.09 | % | ||||||||||||||||||||||||
Consumer
|
4,496 | 351 | 7.81 | % | 6,297 | 479 | 7.61 | % | 9,017 | 591 | 6.55 | % | ||||||||||||||||||||||||
Total
loans
|
109,740 | 6,878 | 6.27 | % | 101,543 | 6,822 | 6.72 | % | 96,567 | 6,797 | 7.04 | % | ||||||||||||||||||||||||
Investment
securities:
|
||||||||||||||||||||||||||||||||||||
U.S.
government securities
|
5,838 | 214 | 3.67 | % | 6,383 | 252 | 3.95 | % | 5,221 | 220 | 4.21 | % | ||||||||||||||||||||||||
Municipal securities
(1)
|
8,622 | 475 | 5.51 | % | 7,774 | 440 | 5.66 | % | 7,017 | 435 | 6.20 | % | ||||||||||||||||||||||||
Other
securities
|
3,891 | 197 | 5.06 | % | 2,279 | 141 | 6.19 | % | 497 | 18 | 3.62 | % | ||||||||||||||||||||||||
Equities
|
1,100 | 1.64 | % | 999 | 42 | 4.10 | % | 969 | 37 | 3.82 | % | |||||||||||||||||||||||||
Total
securities
|
19,451 | 886 | 4.86 | % | 17,435 | 875 | 5.02 | % | 13,704 | 710 | 5.18 | % | ||||||||||||||||||||||||
Equity
securities at cost
|
1,591 | 47 | 2.95 | % | 827 | 42 | 5.08 | % | 1,183 | 75 | 6.34 | % | ||||||||||||||||||||||||
Deposits
in banks
|
2,887 | 1 | 0.03 | % | 728 | 7 | 0.96 | % | 530 | 18 | 3.40 | % | ||||||||||||||||||||||||
Fed
funds sold
|
7,569 | 12 | 0.16 | % | 4,325 | 95 | 2.20 | % | - | - | - | % | ||||||||||||||||||||||||
Total
interest earning assets
|
141,238 | 7,863 | 5.54 | % | 124,858 | 7,841 | 6.28 | % | 111,984 | 7,600 | 6.79 | % | ||||||||||||||||||||||||
Non-interest
earning assets:
|
||||||||||||||||||||||||||||||||||||
Cash
and due from banks
|
2,886 | 1,430 | 1,821 | |||||||||||||||||||||||||||||||||
Other
assets
|
6,953 | 2,910 | 5,875 | |||||||||||||||||||||||||||||||||
Less: allowance
for loan losses
|
(1,232 | ) | (1,192 | ) | (1,157 | ) | ||||||||||||||||||||||||||||||
Total
non-interest earning assets
|
8,607 | 3,148 | 6,539 | |||||||||||||||||||||||||||||||||
Total
assets
|
149,845 | $ | 128,006 | $ | 118,523 | |||||||||||||||||||||||||||||||
Liabilities
and stockholders’ equity
|
||||||||||||||||||||||||||||||||||||
Interest
bearing liabilities
|
||||||||||||||||||||||||||||||||||||
Deposits:
|
||||||||||||||||||||||||||||||||||||
Interest
bearing demand
|
10,386 | 129 | 1.24 | % | $ | 10,533 | 185 | 1.76 | % | $ | 8,266 | 135 | 1.63 | % | ||||||||||||||||||||||
Savings
and money market
|
37,149 | 551 | 1.48 | % | 37,524 | 822 | 2.19 | % | 18,742 | 434 | 2.32 | % | ||||||||||||||||||||||||
Time
deposits
|
60,305 | 1,815 | 3.01 | % | 42,545 | 1,661 | 3.90 | % | 49,201 | 2,248 | 4.57 | % | ||||||||||||||||||||||||
Total
interest bearing deposits
|
107,840 | 2,495 | 2.31 | % | 90,602 | 2,668 | 2.94 | % | 76,209 | 2,817 | 3.70 | % | ||||||||||||||||||||||||
Other
borrowings
|
12,909 | 631 | 4.89 | % | 13,172 | 643 | 4.88 | % | 19,761 | 1,043 | 5.28 | % | ||||||||||||||||||||||||
Total
interest bearing liabilities
|
120,749 | 3,126 | 2.59 | % | 103,774 | 3,311 | 3.19 | % | 95,970 | 3,860 | 4.02 | % | ||||||||||||||||||||||||
Total non-interest
bearing liabilities
|
9,598 | 9,099 | 10,441 | |||||||||||||||||||||||||||||||||
Total
liabilities
|
130,347 | 112,873 | 106,411 | |||||||||||||||||||||||||||||||||
Stockholders’
equity
|
19,498 | 15,133 | 12,112 | |||||||||||||||||||||||||||||||||
Total
liabilities and stockholders’
equity
|
149,845 | $ | 128,006 | $ | 118,523 | |||||||||||||||||||||||||||||||
Net interest spread
(1)
|
2.95 | % | $ | 4,530 | 3.09 | % | $ | 3,740 | 2.77 | % | ||||||||||||||||||||||||||
Net interest margin
(1)
|
3.33 | % | 3.63 | % | 3.34 | % | ||||||||||||||||||||||||||||||
Taxable
equivalent adjustment
|
$ | 149 | $ | 150 | $ | 148 | ||||||||||||||||||||||||||||||
Average
earning assets as a percentage of interest bearing
liabilities
|
116.97 | % | 120.32 | % | 116.69 | % |
(1)
The yield on municipal securities is computed on a tax equivalent basis at the
U.S. federal income tax rate of 34%.
We
believe that it is common practice in the banking industry to present interest
income and related yield information on tax exempt securities on a
tax-equivalent basis and that such information is useful to investors because it
facilitates comparisons among financial institutions. However, the
adjustment of interest income and yields on tax exempt securities to a tax
equivalent amount may be considered to include non-GAAP financial
information. A reconciliation to GAAP is provided
below.
25
Tax
Equivalent Reconciliation
Years
Ended December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
(Dollars
in thousands)
|
Interest
|
Average
Yield
|
Interest
|
Average
Yield
|
Interest
|
Average
Yield
|
||||||||||||||||||
Municipal
securities – nontaxable
|
$ | 288 | 3.80 | % | $ | 290 | 3.73 | % | $ | 287 | 4.09 | % | ||||||||||||
Tax equivalent
adjustment (1)
|
149 | 150 | 148 | |||||||||||||||||||||
Municipal
securities – tax equivalent
|
$ | 437 | 5.75 | % | $ | 440 | 5.66 | % | $ | 435 | 6.20 | % | ||||||||||||
Net
interest income – nontaxable
|
$ | 4,549 | $ | 4,380 | $ | 3,592 | ||||||||||||||||||
Tax equivalent
adjustment (1)
|
149 | 150 | 148 | |||||||||||||||||||||
Net
interest income – tax equivalent
|
$ | 4,698 | $ | 4,530 | $ | 3,740 | ||||||||||||||||||
Interest
rate spread – no tax adjustment
|
2.85 | % | 2.97 | % | 2.63 | % | ||||||||||||||||||
Net
interest margin – no tax adjustment
|
3.22 | % | 3.51 | % | 3.21 | % |
(1)
The tax equivalent adjustment is based on a tax rate of 34% for all periods
presented.
26
Rate/Volume
Analysis
Year Ended December 31, 2009
Compared to 2008
|
||||||||||||
Increase (Decrease)
Due to
|
||||||||||||
(Dollars
in thousands)
|
Net
|
Volume
|
Rate
|
|||||||||
Interest
Income:
|
||||||||||||
Loans
|
$ | 56 | $ | 551 | $ | (495 | ) | |||||
Investment
securities
|
10 | 101 | (91 | ) | ||||||||
Equity
securities
|
5 | 39 | (34 | ) | ||||||||
Deposits
in other banks
|
(5 | ) | 21 | (26 | ) | |||||||
Fed
funds sold
|
(83 | ) | 71 | (154 | ) | |||||||
Total
|
$ | (17 | ) | $ | 783 | $ | (800 | ) | ||||
Interest
Expense:
|
||||||||||||
Interest
bearing demand deposits
|
$ | (56 | ) | $ | (3 | ) | $ | (53 | ) | |||
Savings
and money market deposits
|
(271 | ) | (8 | ) | (263 | ) | ||||||
Time
deposits
|
154 | 693 | (539 | ) | ||||||||
Other
borrowings
|
(12 | ) | (13 | ) | 1 | |||||||
Total
|
$ | (185 | ) | $ | 669 | $ | (854 | ) | ||||
Net
Interest Income
|
$ | 168 | $ | 114 | $ | 54 |
Changes
in interest due to volume and rate have been allocated by reference to changes
in the average balances and the average interest rates of interest earning
assets and interest bearing liabilities.
Interest
Sensitivity Analysis
At December 31, 2009 Maturing Or Repricing
In:
|
||||||||||||||||||||
Within 3 Months
|
4 – 12
Months
|
1 – 5
Years
|
Over
5 Years
|
Total
|
||||||||||||||||
Interest
earning assets:
|
||||||||||||||||||||
Interest
bearing deposits
|
$ | 560 | - | - | - | $ | 560 | |||||||||||||
Investment
securities
|
- | 3,741 | 4,337 | 11,320 | 19,398 | |||||||||||||||
Loans
|
16,434 | 7,365 | 45,702 | 46,529 | 116,030 | |||||||||||||||
Total
interest earning assets
|
$ | 16,994 | $ | 11,106 | $ | 50,039 | $ | 57,849 | $ | 135,988 | ||||||||||
Interest
bearing liabilities:
|
||||||||||||||||||||
Interest
bearing demand
|
$ | 7,916 | - | - | - | $ | 7,916 | |||||||||||||
Money
market
|
7,598 | - | - | - | 7,598 | |||||||||||||||
Savings
|
- | - | - | 33,838 | 33,838 | |||||||||||||||
Time
deposits
|
24,758 | 28,830 | 12,330 | - | 65,918 | |||||||||||||||
Borrowed
funds
|
- | 5,000 | - | 7,000 | 12,000 | |||||||||||||||
Total
interest bearing liabilities
|
$ | 40,272 | $ | 33,830 | $ | 12,330 | $ | 40,838 | $ | 124,270 | ||||||||||
Period
Gap
|
$ | (23,278 | ) | $ | (22,724 | ) | $ | 37,709 | $ | 17,011 | ||||||||||
Cumulative
gap
|
$ | (23,278 | ) | $ | (46,002 | ) | $ | (8,293 | ) | $ | 8,718 | |||||||||
Ratio
of cumulative gap to
total assets
|
(14.89 | %) | (29.43 | %) | (5.30 | %) | 5.58 | % |
*Adjustable
rate loans have been distributed among the categories by repricing
dates.
*Mortgage
backed investments and loans do not take into account principal
prepayments.
*All
transaction deposit accounts have been placed into the within three months
category as they have no stated maturity and rates will adjust as market rates
adjust.
*All
savings accounts have been placed in the beyond five years category based upon
historical experience.
27
Earnings
are dependent on maintaining adequate net interest yield or spread between rates
earned on assets and the cost of interest bearing liabilities. We must manage
our interest rate sensitivity to maintain adequate spread during rising and
declining interest rate environments. Decisions about which bonds to purchase
are based upon factors such as term, yield and asset quality. Short term bonds
enhance rate sensitivity but typically have lower yields. Our investment
strategy carries the majority of our investments as maturing after the five year
period illustrated above. All of our investments are held available for sale
which gives us the flexibility to sell in response to market changes. The money
can then be used to fund loan growth or reinvested in bonds at the new interest
rate.
Having a
similar amount of assets repricing, or maturing, at or about the same time as
our liabilities reprice or mature, reduces our interest rate risk. However, we
recognize certain trends and historical experiences for some products. We know
that while all our customers could withdraw their money on any given day, they
do not do so, even with interest rate changes. Accounts such as savings,
interest checking, and money market accounts are core deposits and do not have
the same reaction to interest rate changes as time deposits do. These accounts
tend to change according to cash flow and the transaction needs of our
customers.
According
to the table, we have a negative gap position, which means our liabilities will
reprice faster than our assets. When interest rates are rising, this will tend
to reduce our interest spread and our net interest income, and when rates are
falling; our interest spread and net income should increase.
Provisions for
Loan Losses; Allowance for Loan Losses. For the year ending
December 31, 2009, we recorded a provision for loan loss in the amount of
$475,000, compared to $31,000 for the year ended December 31,
2008. The increase in the provision expense reflects an increase in
the levels of delinquent loans and management’s analysis of economic conditions
in the Bank’s market areas. In addition, the increased provision
reflects our continuing strategy of growing our commercial
portfolio. These loans have a higher risk of default and loss than
single-family residential mortgage loans because repayment of the loans often
depends on the successful operation of a business or the underlying
property
The
allowance for loan losses as a percent of total loans was 1.28% at December 31,
2009, compared to 1.09% at December 31, 2008.
The
following table illustrates information related to the Bank’s nonperforming
assets at the dates indicated. The Bank had no troubled debt
restructurings or accruing loans past due 90 or more days at the dates
presented.
At
December 31,
|
||||||||||||
2009
|
2008
|
%
Change
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Nonaccrual
loans
|
$ | 1,774 | $ | 1,107 | 60.3 | % | ||||||
Other
real estate owned
|
88 | - | ||||||||||
Total
nonperforming assets
|
$ | 1,862 | $ | 1,107 | 68.2 | % | ||||||
Total
nonperforming loans to total loans
|
1.53 | % | 1.03 | % | 48.4 | % | ||||||
Total
nonperforming loans to total assets
|
1.13 | % | 0.80 | % | 41.8 | % | ||||||
Total
nonperforming assets to total assets
|
1.19 | % | 0.80 | % | 48.88 | % |
Non-Interest Income
For the
year ended December 31, 2009, non-interest income totaled $404,000, a $66,000 or
19.5% increase over the same period in 2008. The increase was primarily the
result a $56,000 or 58.9% increase in income on bank owned life insurance over
the comparable period in 2008. The increase in non-interest income
was partially offset by an other-than-temporary impairment charge on several
equity securities of $38,000 for the year ending December 31,
2009.
28
Non-Interest
Expense
For the
year ended December 31, 2009, non-interest expense decreased $566,000 or 13.5%
to $3.6 million as compared to $4.2 million for the year ending December 31,
2008. The primary reason for the decrease was the 2009 receipt of a
net insurance settlement of $468,000 stemming from the 2008 loss on accounting
errors of $475,000. Salaries and employee benefits increased $79,000
or 3.9% to $2.1 million for the year ended December 31, 2009 as compared with
the same period in 2008. Primary reason for the increase was increased benefit
costs and merit increases for staff. For the year ended December 31, 2009, FDIC
insurance was $240,000 as compared to $14,000 for the same period in 2008. The increase in
the FDIC assessment for the year ended December 31, 2009 was attributable to the
expiration of credits during 2008, an increase in the assessment rate for 2009
and an FDIC-imposed industry-wide 5 basis point special assessment totaling
$67,000.
Income taxes.
The Bank recorded income tax expense for the year ended December 31, 2009
of $85,000, compared to an income tax expense of $153,000 for the year ended
December 31, 2008.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCOVERIES ABOUT MARKET
RISK
Not
applicable as the Company is a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
29
30
31
North
Penn Bancorp, Inc. and Subsidiary
Consolidated
Balance Sheets
December
31, 2009 and 2008
(In
thousands, except per share amounts)
|
2009
|
2008
|
||||||
ASSETS
|
||||||||
Cash
and due from banks
|
$ | 2,652 | $ | 1,604 | ||||
Interest
bearing deposits at other financial institutions
|
560 | 43 | ||||||
Federal
funds sold
|
8,700 | 627 | ||||||
Total
cash and cash equivalents
|
11,912 | 2,274 | ||||||
Investment
securities, available for sale
|
19,398 | 20,293 | ||||||
Equity
securities at cost, substantially restricted
|
1,143 | 1,090 | ||||||
Loans,
net of allowance for loan losses of $1,484 in 2009 and $1,170
in 2008
|
114,546 | 106,106 | ||||||
Loans
held for sale
|
- | 684 | ||||||
Bank
premises and equipment, net
|
3,965 | 4,126 | ||||||
Accrued
interest receivable
|
665 | 676 | ||||||
Cash
surrender value of bank-owned life insurance
|
3,015 | 2,864 | ||||||
Deferred
income taxes
|
705 | 657 | ||||||
Prepaid
FDIC insurance
|
604 | - | ||||||
Other
real estate owned
|
88 | - | ||||||
Other
assets
|
286 | 220 | ||||||
TOTAL
ASSETS
|
$ | 156,327 | $ | 138,990 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
LIABILITIES
|
||||||||
Deposits:
|
||||||||
Non-interest
bearing
|
$ | 8,785 | $ | 6,985 | ||||
Interest
bearing
|
115,270 | 92,168 | ||||||
Total
deposits
|
124,055 | 99,153 | ||||||
Other
borrowed funds
|
12,000 | 19,648 | ||||||
Accrued
interest and other liabilities
|
1,002 | 891 | ||||||
TOTAL
LIABILITIES
|
137,057 | 119,692 | ||||||
STOCKHOLDERS’
EQUITY
|
||||||||
Preferred
stock, no par value; authorized 20,000,000 shares; none
issued
|
- | - | ||||||
Common
stock, par value $0.10; 80,000,000 shares authorized; 1,581,571 shares
issued in 2009 and 2008; outstanding: 1,330,071 in 2009 and 1,478,571 in
2008
|
158 | 158 | ||||||
Additional
paid-in capital
|
13,580 | 13,480 | ||||||
Retained
earnings
|
8,541 | 7,905 | ||||||
Unearned
ESOP shares
|
(907 | ) | (980 | ) | ||||
Accumulated
other comprehensive loss
|
(2 | ) | (460 | ) | ||||
Treasury
stock – at cost: 251,500 and 103,000 shares at December 31, 2009
and 2008, respectively
|
(2,100 | ) | (805 | ) | ||||
TOTAL
STOCKHOLDERS’ EQUITY
|
19,270 | 19,298 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 156,327 | $ | 138,990 |
See notes
to consolidated financial statements.
32
North
Penn Bancorp, Inc. and Subsidiary
Consolidated
Statements of Income
For
the Years ended December 31, 2009 and 2008
(In
thousands, except per share amounts)
|
||||||||
2009
|
2008
|
|||||||
INTEREST
INCOME
|
||||||||
Interest
on loans
|
$ | 6,878 | $ | 6,822 | ||||
Interest
and dividends on investments
|
797 | 869 | ||||||
Total
interest income
|
7,675 | 7,691 | ||||||
INTEREST
EXPENSE
|
||||||||
Interest
on deposits
|
2,495 | 2,668 | ||||||
Interest
on borrowed funds
|
631 | 643 | ||||||
Total
interest expense
|
3,126 | 3,311 | ||||||
NET
INTEREST INCOME
|
4,549 | 4,380 | ||||||
PROVISION
FOR LOAN LOSSES
|
475 | 31 | ||||||
NET
INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
|
4,074 | 4,349 | ||||||
OTHER
INCOME
|
||||||||
Service
charges and fees
|
244 | 233 | ||||||
Bank-owned
life insurance income
|
151 | 95 | ||||||
Other
operating income
|
35 | 4 | ||||||
Gain
on sale of other real estate owned
|
6 | 1 | ||||||
Gain
on sale of loans
|
6 | 2 | ||||||
Gain
on sale of bank premises and equipment
|
- | 2 | ||||||
Gain
on sale of investment securities
|
8 | 1 | ||||||
Impairment
losses on investment securities
|
(38 | ) | - | |||||
TOTAL
OTHER INCOME
|
412 | 338 | ||||||
OTHER
EXPENSE
|
||||||||
Salaries
and employee benefits
|
2,129 | 2,050 | ||||||
Occupancy
and equipment expense
|
656 | 675 | ||||||
FDIC
insurance expense
|
240 | 14 | ||||||
Professional
services expense
|
408 | 349 | ||||||
Other
expenses
|
649 | 617 | ||||||
Loss
(recovery) from accounting errors
|
(468 | ) | 475 | |||||
TOTAL
OTHER EXPENSE
|
3,614 | 4,180 | ||||||
INCOME
BEFORE INCOME TAXES
|
872 | 507 | ||||||
INCOME
TAX EXPENSE
|
85 | 153 | ||||||
NET
INCOME
|
$ | 787 | $ | 354 | ||||
Weighted
average number of shares outstanding
|
1,376,069 | 1,518,560 | ||||||
Earnings
per share, basic and diluted
|
$ | 0.57 | $ | 0.23 |
See notes
to consolidated financial statements.
33
North
Penn Bancorp, Inc. and Subsidiary
Consolidated
Statements of Changes in Stockholders’ Equity
For
the Years ended December 31, 2009 and 2008
(In
thousands, except per share amounts)
|
Common
Stock
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Unearned
ESOP
Shares
|
Accum-
ulated
Other
Comp-
rehensive
Income
(Loss)
|
Treasury
Stock
|
Total
|
|||||||||||||||||||||
Balance,
December 31, 2007
|
$ | 158 | $ | 13,433 | $ | 7,742 | $ | (1,059 | ) | $ | (90 | ) | $ | - | $ | 20,184 | ||||||||||||
Comprehensive
(loss):
|
||||||||||||||||||||||||||||
Net
income
|
- | - | 354 | - | - | - | 354 | |||||||||||||||||||||
Unrealized
losses on securities, net of income taxes
|
- | - | - | - | (370 | ) | - | (370 | ) | |||||||||||||||||||
Comprehensive
(loss)
|
(16 | ) | ||||||||||||||||||||||||||
ESOP
shares released
|
- | (27 | ) | - | 79 | - | - | 52 | ||||||||||||||||||||
Restricted
Stock Awards
|
- | 74 | - | - | - | - | 74 | |||||||||||||||||||||
Purchase
of Treasury Stock
|
(805 | ) | (805 | ) | ||||||||||||||||||||||||
Cash
dividend - $0.12 per share
|
- | - | (191 | ) | - | - | - | (191 | ) | |||||||||||||||||||
Balance,
December 31, 2008
|
158 | 13,480 | 7,905 | (980 | ) | (460 | ) | (805 | ) | 19,298 | ||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||
Net
income
|
- | - | 787 | - | - | - | 787 | |||||||||||||||||||||
Unrealized
gain on securities, net of income taxes
|
- | - | - | - | 458 | - | 458 | |||||||||||||||||||||
Comprehensive
income
|
- | - | - | - | - | - | 1,245 | |||||||||||||||||||||
ESOP
shares released
|
- | (3 | ) | - | 73 | - | - | 70 | ||||||||||||||||||||
Restricted
stock awards
|
- | 103 | - | - | - | - | 103 | |||||||||||||||||||||
Purchase
of treasury stock
|
- | - | - | - | - | (1,295 | ) | (1,295 | ) | |||||||||||||||||||
Cash
dividend - $0.12 per share
|
- | - | (151 | ) | - | - | - | (151 | ) | |||||||||||||||||||
Balance,
December 31, 2009
|
$ | 158 | $ | 13,580 | $ | 8,541 | $ | (907 | ) | $ | (2 | ) | $ | (2,100 | ) | $ | 19,270 |
See notes
to consolidated financial statements.
34
North
Penn Bancorp, Inc. and Subsidiary
Consolidated
Statements of Cash Flows
For
the Years Ended December 31, 2009 and 2008
(In
thousands)
|
2009
|
2008
|
||||||
Operating
Activities:
|
||||||||
Net
income
|
$ | 787 | $ | 354 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||
Depreciation
|
232 | 259 | ||||||
Provision
for loan losses
|
475 | 31 | ||||||
Deferred
income tax benefit
|
(245 | ) | - | |||||
Amortization
of securities (net of accretion)
|
4 | 19 | ||||||
Increase
in cash surrender value of life insurance
|
(151 | ) | (25 | ) | ||||
Gain
on sale of investment securities
|
(8 | ) | (1 | ) | ||||
Gain
on sale of bank premises and equipment
|
- | (2 | ) | |||||
Gain
on other real estate owned
|
(6 | ) | (1 | ) | ||||
Gain
on sale of loans held for sale
|
(6 | ) | (2 | ) | ||||
Impairment
loss on investment securities
|
38 | - | ||||||
ESOP
expense
|
70 | 52 | ||||||
Stock
option expense
|
103 | 70 | ||||||
Changes
in:
|
||||||||
Prepaid
FDIC insurance
|
(604 | ) | - | |||||
Accrued
interest income and other assets
|
(85 | ) | (77 | ) | ||||
Accrued
interest expense and other liabilities
|
111 | 109 | ||||||
Net
Cash Provided by Operating Activities
|
715 | 786 | ||||||
Investing
Activities:
|
||||||||
Purchase
bank premises and equipment
|
(71 | ) | (235 | ) | ||||
Proceeds
from sale of bank premises and equipment
|
- | 11 | ||||||
Proceeds
from sale of other real estate owned
|
117 | 100 | ||||||
Sale
of securities “available for sale”
|
76 | 28 | ||||||
Purchase
of securities “available for sale”
|
(3,027 | ) | (9,860 | ) | ||||
Matured
or called securities “available for sale”
|
2,593 | 940 | ||||||
Redemptions
of mortgage-backed securities “available for sale”
|
1,904 | 1,387 | ||||||
Purchase
of restricted stock
|
(53 | ) | (30 | ) | ||||
Net
increase in loans to customers
|
(9,114 | ) | (10,348 | ) | ||||
Proceeds
from sale of loans held for sale
|
690 | 776 | ||||||
Purchase
of life insurance policies
|
(702 | ) | ||||||
Net
Cash Used in Investing Activities
|
(6,885 | ) | (17,933 | ) | ||||
Financing
Activities:
|
||||||||
Net
increase in deposits
|
24,902 | 15,470 | ||||||
Net
increase (decrease) in short term borrowings
|
(7,648 | ) | 1,769 | |||||
Treasury
stock purchased
|
(1,295 | ) | (805 | ) | ||||
Cash
dividends paid
|
(151 | ) | (191 | ) | ||||
Net
Cash Provided by Financing Activities
|
15,808 | 16,243 | ||||||
Net
increase (decrease) in Cash and Cash Equivalents
|
9,638 | (904 | ) | |||||
Cash
and Cash Equivalents, January 1
|
$ | 2,274 | $ | 3,178 | ||||
Cash
and Cash Equivalents, December 31
|
$ | 11,912 | $ | 2,274 | ||||
Supplementary
Schedule of Cash Flow Information:
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
|
$ | 3,126 | $ | 3,272 | ||||
Income
taxes
|
133 | 146 | ||||||
Non-cash
investing and financing activities:
|
||||||||
Transfer
from loans to other real estate owned
|
199 | - |
See notes
to consolidated financial statements.
35
Notes
to Consolidated Financial Statements
Note
1 - Nature of Operations and Summary of Significant Accounting
Policies
Nature
of Operations
North
Penn Bancorp, Inc. is the holding company for North Penn Bank
(Bank). The common stock trades on the OTC Bulletin Board under the
symbol “NPBP.OB”. The Bank operates from five offices under a
Pennsylvania 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.
Basis
of Financial Statement Presentation
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.
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 losses on loans and the valuation of real
estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for
loses on loans and foreclosed real estate, management periodically obtains
independent appraisals for significant properties.
Recent
Accounting Pronouncements
FASB ASC
820-10 — In February 2008, the FASB issued new guidance impacting FASB
ASC 820-10, Fair Value Measurements and Disclosures (FASB Staff Position No.
157-2). The staff position delays the effective date of FASB ASC 820-10 (SFAS
No. 157) for nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis. The delay expired January 1, 2009, and the expiration of the
delay did not have a material impact on the Company’s consolidated financial
positions or results of operations.
36
FASB ASC
805 — In December 2007, the FASB issued new guidance impacting FASB ASC
805, Business
Combinations (SFAS No 141® — Business Combinations). The new guidance
establishes principles and requirements for how an acquiring company (1)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in the
acquiree, (2) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and (3) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The new standard
became effective for the Company on January 1, 2009. The adoption of this
standard did not have a material impact on the Company’s consolidated financial
position or results of operations.
FASB ASC
810-10 — In December 2007, the FASB issued FASB ASC 810-10, Consolidation
(Statement No. 160 — Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51). FASB ASC
810-10 requires the ownership interests in subsidiaries held by parties other
than the parent be clearly identified, labeled and presented in the consolidated
balance sheet within equity, but separate from the parent’s equity. It also
requires the amount of consolidated net income attributable to the parent and
the noncontrolling interest to be clearly identified and presented on the face
of the consolidated statement of income. The new standard became effective for
the Company on January 1, 2009. The adoption of this standard did not have a
material impact on the Company’s consolidated financial position or results of
operations.
FASB ASC
815-10 — In March 2008, the FASB issued FASB ASC 815-10, Derivatives and
Hedging (Statement No. 161 —Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement No.
133). FASB ASC 815-10 requires enhanced disclosures about how and why an
entity uses derivative instruments, how derivative instruments and related items
are accounted for and how derivative instruments and related hedged items affect
an entity’s financial position, financial performance and cash flows. The new
standard became effective for the Company on January 1, 2009. The adoption of
this standard did not have a material impact on the Company’s consolidated
financial position or results of operations.
FASB ASC
855 — In May 2009, the FASB issued FASB ASC 855, Subsequent Events
(Statement No. 165 — Subsequent Events). FASB ASC
855 establishes the period after the balance sheet date during which management
shall evaluate events or transactions that may occur for potential recognition
or disclosure in financial statements and the circumstances under which an
entity shall recognize events or transactions that occur after the balance sheet
date. FASB ASC 855 also requires disclosure of the date through which subsequent
events have been evaluated. The Company adopted this standard for the interim
reporting period ending June 30, 2009. The adoption of this standard did not
have a material impact on the Company’s consolidated financial position or
results of operations.
FASB ASC
860 — In June 2009, the FASB issued new guidance impacting FASB ASC 860,
Transfers and Servicing (Statement No. 166 — Accounting for Transfers of
Financial Assets — an amendment of FASB Statement No. 140). The new
guidance removes the concept of a qualifying special-purpose entity and limits
the circumstances in which a financial asset, or portion of a financial asset,
should be derecognized when the transferor has not transferred the entire
financial asset to an entity that is not consolidated with the transferor in the
financial statements being presented and/or when the transferor has continuing
involvement with the transferred financial asset. The new standard will become
effective for the Company on January 1, 2010. The Company is currently
evaluating the impact of adopting the new standard on the consolidated financial
statements.
FASB ASC
810-10 — In June 2009, the FASB issued new guidance impacting FASB ASC
810-10, Consolidation (Statement No. 167 —Amendments to FASB Interpretation
No. 46®). The new guidance amends tests for variable interest entities to
determine whether a variable interest entity must be consolidated. FASB ASC
810-10 requires an entity to perform an analysis to determine whether an
entity’s variable interest or interests give it a controlling financial interest
in a variable interest entity. This standard requires ongoing reassessments of
whether an entity is the primary beneficiary of a variable interest entity and
enhanced disclosures that provide more transparent information about an entity’s
involvement with a variable interest entity. The new guidance will become
effective for the Company on January 1, 2010 and the Company is currently
evaluating the impact of adopting the standard on the consolidated financial
statements.
37
FASB ASC
105-10 — In June 2009, the FASB issued FASB ASC 105-10, Generally
Accepted Accounting Principles (Statement No. 168 — The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles). The new guidance replaces SFAS No. 162 and establishes the
FASB Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with generally accepted
accounting principles (“GAAP”). Rules and interpretative releases of the
Securities and Exchange Commission under federal securities laws are also
sources of authoritative GAAP for SEC registrants. The new standard became
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The adoption of this statement did not have a material
impact on the Company’s consolidated financial position or results of
operations. Technical references to generally accepted accounting principles
included in the Notes to Consolidated Financial Statements are provided under
the new FASB ASC structure with the prior terminology included
parenthetically.
FASB ASC
715-20-50 — In December 2008, the FASB issued new guidance impacting FASB
ASC 715-20-50, Compensation Retirement Benefits — Defined Benefit Plans —
General (FASB Staff Position No. 132®- 1, Employers’ Disclosures about
Postretirement Benefit Plan Assets). This provides guidance on an
employer’s disclosures about plan assets of a defined benefit pension or other
postretirement plan. The guidance requires disclosure of the fair value of each
major category of plan assets for pension plans and other postretirement benefit
plans. This standard becomes effective for the Company on January 1, 2010. The
Company is currently evaluating the impact of adopting the new guidance on the
consolidated financial statements, but it is not expected to have a material
impact
FASB ASC
825-10-50 — In April 2009, the FASB issued new guidance impacting FASB
ASC 825-10-50, Financial Instruments (FASB Staff Position No. FAS 107-1 and APB
28-1, Interim Disclosures
about Fair Value of Financial Instruments). This guidance amends existing
GAAP to require disclosures about fair values of financial instruments for
interim reporting periods as well as in annual financial statements. The
guidance also amends existing GAAP to require those disclosures in summarized
financial information at interim reporting periods. The Company adopted this
standard for the interim reporting period ending March 31, 2009 and did not have
a material impact on the Company’s consolidated financial position or results of
operations.
FASB ASC
320-10 — In April 2009, the FASB issued new guidance impacting FASB ASC
320-10, Investments — Debt and Equity Securities (FASB Staff Position No. FAS
115-2, Recognition and
Presentation of Other-Than-Temporary Impairments). This guidance amends
the other-than-temporary impairment guidance in U.S. generally accepted
accounting principles for debt securities. If an entity determines that it has
an other-than-temporary impairment on a security, it must recognize the credit
loss on the security in the income statement. The credit loss is defined as the
difference between the present value of the cash flows expected to be collected
and the amortized cost basis. FASB ASC 320-10 expands disclosures about
other-than-temporary impairment and requires that the annual disclosures in
existing generally accepted accounting principles be made for interim reporting
periods. The Company adopted this guidance for the interim reporting period
ending March 31, 2009 and did not have a material impact on the Company’s
consolidated financial position or results of operations.
FASB ASC
820 — In April 2009, the FASB issued new guidance impacting FASB ASC 820,
Fair Value Measurements and Disclosures (FASB Staff Position No. FAS 157-4,
Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly). This
provides additional guidance on determining fair value when the volume and level
of activity for the asset or liability have significantly decreased when
compared with normal market activity for the asset or liability. A significant
decrease in the volume or level of activity for the asset or liability is an
indication that transactions or quoted prices may not be determinative of fair
value because transactions may not be orderly. In that circumstance, further
analysis of transactions or quoted prices is needed, and an adjustment to the
transactions or quoted prices may be necessary to estimate fair value. The
Company adopted this guidance for the interim reporting period ending March 31,
2009 and it did not have a material impact on the Company’s consolidated
financial position or results of operations.
38
SAB 111 —
In April 2009, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 111 (“SAB 111”). SAB 111 amends Topic 5.M in the Staff Accounting
Bulletin series entitled Other
Than Temporary Impairment of Certain Investments in Debt and Equity
Securities. On April 9, 2009, the FASB issued new guidance impacting FASB
ASC 320-10, Investments — Debt and Equity Securities (FASB Staff Position No.
FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments). SAB 111 maintains the previous views
related to equity securities and amends Topic 5.M to exclude debt securities
from its scope. SAB 111 was effective for the Company as of March 31, 2009.
There was no material impact to the Company’s consolidated financial position or
results of operations upon adoption.
SAB 112 —
In June 2009, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 112 (“SAB 112”). SAB 112 revises or rescinds portions of the
interpretative guidance included in the Staff Accounting Bulletin series in
order to make the interpretative guidance consistent with the recent
pronouncements by the FASB, specifically FASB ASC 805 and FASB ASC 810-10 (SFAS
No. 141® and SFAS No.
160). SAB 112 was effective for the Company as of June 30, 2009. There was no
material impact to the Company’s consolidated financial position or results of
operations upon adoption.
FASB ASC
323 — In November 2008, the FASB Emerging Issues Task Force reached a
consensus on FASB ASC 323, Investments — Equity Method and Joint Ventures (Issue
No. 08-6, Equity Method
Investment Accounting Considerations). The new guidance clarifies the
accounting for certain transactions and impairment considerations involving
equity method investments. An equity investor shall not separately test an
investee’s underlying assets for impairment but will recognize its share of any
impairment charge recorded by an investee in earnings and consider the effect of
the impairment on its investment. An equity investor shall account for a share
issuance by an investee as if the investor had sold a proportionate share of its
investment, with any gain or loss recognized in earnings. The new guidance
became effective for the Company on January 1, 2009 and did not have a material
impact on the Company’s consolidated financial position or results of
operations.
FASB ASC
350 — In November 2008, the FASB Emerging Issues Task Force reached a
consensus on FASB ASC 350, Intangibles — Goodwill and Other (Issue No. 08-7,
Accounting for Defensive
Intangible Assets). The new guidance clarifies how to account for
defensive intangible assets subsequent to initial measurement. The guidance
applies to acquired intangible assets in situations in which an entity does not
intend to actively use an asset but intends to hold the asset to prevent others
from obtaining access to the asset. A defensive intangible asset should be
accounted for as a separate unit of accounting with an expected life that
reflects the consumption of the expected benefits related to the asset. The
benefit from holding a defensive intangible asset is the direct and indirect
cash flows resulting from the entity preventing others from using the asset. The
new guidance was effective for intangible assets acquired on or after January 1,
2009 and did not have a material impact on the Company’s consolidated financial
position or results of operations.
FASB ASC
260-10 — In June 2008, the FASB issued new guidance impacting FASB ASC
260-10, Earnings Per Share (FSP No. EITF 03-06-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities). This new guidance concluded that all outstanding unvested
share-based payment awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common shareholders and therefore are
considered participating securities for purposes of computing earnings per
share. Entities that have participating securities that are not convertible into
common stock are required to use the “two-class” method of computing earnings
per share. The two-class method is an earnings allocation formula that
determines earnings per share for each class of common stock and participating
security according to dividends declared (or accumulated) and participation
rights in undistributed earnings. This new guidance was effective for fiscal
years beginning after December 15, 2008 and interim periods within those fiscal
years. This new guidance became effective for the Company on January 1, 2009 and
did not have a material impact on the Company’s consolidated financial position
or results of operations.
39
FASB ASC
820-10 — In August 2009, the FASB issued an update (ASC No. 2009-05,
Measuring Liabilities at Fair Value) impacting FASB ASC 820-10, Fair Value
Measurements and Disclosures. The update provides clarification about measuring
liabilities at fair value in circumstances where a quoted price in an active
market for an identical liability is not available and the valuation techniques
that should be used. The update also clarifies that when estimating the fair
value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction
that prevents the transfer of the liability. This update became effective for
the Company for the reporting period ending September 30, 2009 and did not have
a material impact on the Company’s consolidated financial position or results of
operations.
FASB ASC
820-10 — In September 2009, the FASB issued an update (ASC No. 2009-12,
Investments in Certain Entities That Calculate Net Asset Value per Share (or its
equivalent)) impacting FASB ASC 820-10, Fair Value Measurements and Disclosures.
The amendments in this update permit, as a practical expedient, a reporting
entity to measure the fair value of an investment that is within the scope of
the amendments in this update on the basis of the net asset value per share of
the investment (or its equivalent) if the net asset value of the investment is
calculated in a manner consistent with the measurement principles of Topic 946,
Financial Services-Investment Companies. The amendments in this update also
require disclosures by major category of investment about the attributes of
investments within the scope of the amendments in this update, such as the
nature of any restrictions on the ability to redeem an investment on the
measurement date. This update becomes effective for the Company for interim and
annual reporting periods ending after December 15, 2009. The Company is
currently evaluating the impact of adopting the new guidance on the consolidated
financial statements, but it is not expected to have a material
impact.
FASB ASC
505-20 — In January 2010, the FASB issued an update (ASC No. 2010-01,
Accounting for Distributions to Shareholders with Components of Stock and Cash)
impacting FASB ASC 505-20, Equity - Stock Dividends and Stock Splits. The
amendments in this update clarify that the stock portion of a distribution to
shareholders that allows them to elect to receive cash or stock with a potential
limitation on the total amount of cash that all shareholders can elect to
receive in the aggregate is considered a share issuance that is reflected in
earnings per share and is not a stock dividend. This update became effective for
the Company for interim and annual periods ending after December 15, 2009 and
did not have a material impact on the Company’s consolidated financial position
or results of operations.
FASB ASC
810-10 — In January 2010, the FASB issued an update (ASC No. 2010-02,
Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope
Clarification) impacting FASB ASC 810-10, Consolidation. The amendments in this
update address implementation issues related to the changes of ownership
provisions originally issued as FASB Statement 160. It also improves the
disclosures related to retained investments in a deconsolidated subsidiary or a
preexisting interest held by an acquirer in a business combination. This update
became effective for the Company for interim and annual periods ending after
December 15, 2009 and did not have a material impact on the Company’s
consolidated financial position or results of operations.
FASB ASC
820-10 — In January 2010, the FASB issued an update (ASC No. 2010-06,
Improving Disclosures about Fair Value Measurements) impacting FASB ASC 820-10,
Fair Value Measurements and Disclosures. The amendments in this update require
new disclosures about significant transfers in and out of Level 1 and Level 2
fair value measurements. The amendments also require a reporting entity to
provide information about activity for purchases, sales, issuances and
settlements in level 3 fair value measurements and clarify disclosures about the
Level of disaggregation and disclosures about inputs and valuation techniques.
This update becomes effective for the Company for interim and annual reporting
periods beginning after December 15, 2009. The Company is currently evaluating
the impact of adopting the new guidance on the consolidated financial
statements.
Investment
Securities
The
Company’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 Company 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 Bonds, notes, debentures and equity securities not
classified as securities 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. The Company
classifies all new purchases of securities as
“available-for-sale”.
40
Purchase
premiums and discounts are recognized in interest income on the straight-line
basis over the term 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 Statements of Income.
The
Company has no derivative financial instruments required to be disclosed under
FASB ASC 815-10 Derivatives and Hedging (SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.)
Restricted
Securities
Restricted
equity securities consist of stock in Federal Home Loan Bank of Pittsburgh
(“FHLB-Pittsburgh”) and, Atlantic Central Bankers Bank (“ACBB”) and do not have
a readily determinable fair value because their ownership is restricted, and
they can be sold back only to the FHLB-Pittsburgh, ACBB, or to another member
institution. Therefore, these securities are classified as restricted equity
investment securities, carried at cost, and evaluated for impairment. At
December 31, 2009, the Company held $1,106,000 in stock of FHLB-Pittsburgh, and
$37,000 in stock of ACBB. At December 31, 2008, the Company held $1,053,000 in
stock of the FHLB-Pittsburgh and $37,000 in stock of ACBB.
The
Company evaluated its holding of restricted stock for impairment and deemed the
stock to not be impaired due to the expected recoverability of cost, which
equals the value reflected within the Company’s consolidated financial
statements. The decision was based on several items ranging from the estimated
true economic losses embedded within FHLB’s mortgage portfolio to the FHLB’s
liquidity position and credit rating. The Company utilizes the impairment
framework outlined in GAAP to evaluate stock for impairment. The following
factors were evaluated to determine the ultimate recoverability of the cost of
the Company’s restricted stock holdings; (i) the significance of the decline in
net assets of the FHLB as compared to the capital stock amount for the FHLB and
the length of time this situation has persisted; (ii) commitments by the FHLB to
make payments required by law or regulation and the level of such payments in
relation to the operating performance of the FHLB; (iii) the impact of
legislative and regulatory changes on the institutions and, accordingly, on the
customer base of the FHLB; (iv) the liquidity position of the FHLB; and (v)
whether a decline is temporary or whether it affects the ultimate recoverability
of the FHLB stock based on (a) the materiality of the carrying amount to the
member institution and (b) whether an assessment of the institution’s
operational needs for the foreseeable future allow management to dispose of the
stock. Based on the analysis of these factors, the Company determined that its
holdings of restricted stock were not impaired at December 31, 2009 and
2008.
Loans
Loans are
stated at the principal amount outstanding, net of any unearned income, and the
allowance for loan losses. Loan fees and certain direct loan origination costs
are deferred, and the net fee or cost is recognized as an adjustment to yield
using the interest method over the contractual lives of the loans. 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 Company’s past loan loss experience,
known and inherent losses in the portfolio, adverse situations that may affect
the borrower’s ability to repay, the estimated value of any underlying
collateral and current economic conditions.
41
A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of
payments delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan
basis for commercial and construction loans by either 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.
Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify
individual consumer and residential loans for impairment
disclosures.
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 previously accrued
interest on these loans, and income is subsequently recognized thereafter 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 resumes
on a contractual basis in which case the loan is returned to accrual
status.
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 FASB ASC 860-10 Transfers and Servicing (SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities) 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 ASC 460-10 Guarantees (FASB
Interpretation No. 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others) 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.
Loan
Servicing
The
Company generally retains the right to service mortgage loans sold to
others. The cost allocated to the mortgage servicing rights retained
has been recognized as a separate asset and is being amortized in proportion to
and over the period of estimated net servicing income.
42
Mortgage
servicing rights are periodically evaluated for impairment based on the fair
value of those rights. Fair values are estimated using discounted
cash flows based on current market rates of interest and current expected future
prepayment rates. For purposes of measuring impairment, the rights
must be stratified by one or more predominant risk characteristics of the
underlying loans. The Company stratifies its capitalized mortgage
servicing rights based on the term of the underlying loans. The
amount of impairment recognized is the amount, if any, by which the amortized
cost of the rights for each stratum, exceed their fair value.
Premises
and Equipment
The
Company operates from one leased and four owned facilities. Land is
carried at cost. Premises and equipment are stated at cost less
accumulated depreciation. Provision for depreciation, computed on the
straight-line method and accelerated method, is charged to operating expenses
over the estimated useful lives of the assets. Maintenance and
repairs are charged to operating expense as incurred.
The
estimated useful lives used to compute depreciation are as follows:
Years
|
|||
Buildings
|
19 – 39 | ||
Furniture
and equipment
|
5 – 10 |
Foreclosed
Real Estate
Foreclosed
real estate is carried at the lower of cost or fair value at the time of
foreclosure. Management periodically performs valuations and a loss
is recognized by a charge to operations if the carrying value of a property
exceeds its net realizable value. Additional costs associated with
holding the properties are expensed as incurred. The balance of
foreclosed real estate was $88,000 at December 31, 2009. There was no foreclosed
real estate at December 31, 2008.
Bank
Owned Life Insurance
The
Company invests in Bank Owned Life Insurance (BOLI) with split-dollar life
provisions. Purchases of BOLI provide life insurance coverage on certain
employees with the Company being the owner and beneficiary of the
policies.
Treasury
Stock
Stock
held in treasury is accounted for using the cost method which treats stock held
in treasury as a reduction to total stockholders’ equity. The cost
basis for subsequent sales of treasury shares is determined using a first-in,
first-out method.
Postretirement
Employee Benefits
The
Company provides postretirement benefits in the form of term life insurance and
health insurance coverage for a limited period of time. The costs are
funded as incurred and are not significant to the accompanying consolidated
financial statements.
Advertising
Expenses
Advertising
costs are expensed as incurred. Advertising expense for the year ended December
31, 2009 were $43,000 compared to $46,000 for the year ended December 31,
2008.
43
Income
Taxes
Deferred
income taxes are provided using the liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carry forwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of the changes in tax laws and rates of the date of
enactment.
The
Company adopted the provisions of FASB ASC 740-1-25 Income Taxes Recognition
(FIN 48, Accounting for
Uncertainty in Income Taxes,) on January 1, 2007. When tax returns are
filed, it is highly certain that some positions taken would be sustained upon
examination by the taxing authorities, while others are subject to uncertainty
about the merits of the position taken or the amount of the position that would
be ultimately sustained. The benefit of a tax position is recognized in the
financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than
50% likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the balance sheet along with any associated
interest and penalties that would be payable to the taxing authorities upon
examination. The Company does not have any unrecognized tax benefits at December
31, 2009 and 2008 or during the years then ended. No unrecognized tax benefits
are expected to arise within the next twelve months.
Interest
and penalties associated with unrecognized tax benefits are classified as
additional income taxes in the consolidated statements of income. No interest or
penalties for income taxes were recognized during the years ended December 31,
2009 and 2008.
Cash
Flows
For
purposes of the Statements of Cash Flows, cash and due from banks include cash
on hand, demand deposits at other financial institutions (including cash items
in process of clearing) and federal funds sold. Cash flows from loans
and deposits are reported net.
The
Company may, from time to time, maintain correspondent bank balances in excess
of $250,000 each. Management is not aware of any evidence that would
indicate that such deposits are at risk.
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 FASB – ASC 260-10 Earnings per share SFAS No. 128, Earnings Per
Share. Diluted earnings per share include common shares
issuable upon exercise of employee stock options (Note 10) as
follows:
December 31, 2009
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per-Share
Amount
|
|||||||||
Basic
EPS
|
||||||||||||
Income
available
|
$ | 787,257 | 1,376,069 | $ | 0.57 | |||||||
Options
includable
|
- | 7,125 | - | |||||||||
Diluted EPS
|
$ | 787,527 | 1,383,194 | $ | 0.57 |
December 31, 2008
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per-Share
Amount
|
|||||||||
Basic
EPS
|
||||||||||||
Income
available
|
$ | 354,000 | 1,518,560 | $ | 0.23 | |||||||
Options
includable
|
- | 101 | - | |||||||||
Diluted EPS
|
$ | 354,000 | 1,518,661 | $ | 0.23 |
44
Reclassifications
Certain
amounts in the consolidated financial statements for 2008 have been reclassified
to conform to presentations used in the 2009 consolidated financial statements.
Such reclassifications had no effect on the company’s consolidated financial
position or net income.
Subsequent
Events
Management
has evaluated subsequent events through March 31, 2010, the date the
consolidated statements were issued. On March 23, 2010, the Board of
Directors of North Penn Bancorp, Inc., the holding company for North Penn Bank,
declared a quarterly cash dividend of $.04 per share and a special cash dividend
of $0.05 per share on its outstanding common stock, both dividends payable on or
about April 30, 2010 to stockholders of record as of the close of business on
April 15, 2010.
Note
2 - Investment Securities
The
amortized cost and fair value of investment securities at December 31 are as
follows (in thousands):
2009
|
||||||||||||||||
Amortized
Cost
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Fair value
|
|||||||||||||
Available-for-sale
|
||||||||||||||||
U.S.
Agency securities
|
$ | 1,500 | $ | 18 | $ | - | $ | 1,518 | ||||||||
Mortgage-backed
securities
|
2,662 | 89 | - | 2,751 | ||||||||||||
State
& political subdivisions
|
8,719 | 142 | 6 | 8,855 | ||||||||||||
Other
bonds
|
4,969 | 164 | 43 | 5,090 | ||||||||||||
Total
debt securities
|
17,850 | 413 | 49 | 18,214 | ||||||||||||
Equity
securities
|
1,591 | 15 | 422 | 1,184 | ||||||||||||
Total
available-for-sale
|
$ | 19,441 | $ | 428 | $ | 471 | $ | 19,398 |
2008
|
||||||||||||||||
Amortized
Cost
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Fair value
|
|||||||||||||
Available-for-sale
|
||||||||||||||||
U.S.
Agency securities
|
$ | 3,000 | $ | 16 | $ | - | $ | 3,016 | ||||||||
Mortgage-backed
securities
|
5,074 | 68 | - | 5,142 | ||||||||||||
State
& political subdivisions
|
8,529 | 20 | 338 | 8,211 | ||||||||||||
Other
bonds
|
3,017 | 38 | 189 | 2,866 | ||||||||||||
Total
debt securities
|
19,620 | 142 | 527 | 19,235 | ||||||||||||
Equity
securities
|
1,371 | 11 | 324 | 1,058 | ||||||||||||
Total
available-for-sale
|
$ | 20,991 | $ | 153 | $ | 851 | $ | 20,293 |
The
amortized cost and fair value of debt securities at December 31, 2009, by
contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
45
Securities Available for Sale
|
||||||||
Amortized
Cost
|
Fair Value
|
|||||||
Due
in one year or less
|
$ | 3,690 | $ | 3,737 | ||||
Due
after one year through five years
|
4,655 | 4,709 | ||||||
Due
after five years through ten years
|
5,192 | 5,382 | ||||||
Due
after ten years
|
4,313 | 4,387 | ||||||
Total
debt securities
|
$ | 17,850 | $ | 18,215 |
There
were no aggregate investments with a single issuer (excluding the U.S.
Government and its agencies) which exceeded ten percent of consolidated
shareholders’ equity at December 31, 2009. The quality rating of the obligations
of state and political subdivisions are generally investment grade, as rated by
Moody’s or Standard and Poors. The typical exceptions may be local issues which
may not be rated, but would be secured by the full faith and credit obligations
of the communities that would issue these securities. The state and political
subdivision investments are actively traded in a liquid market.
Proceeds
from sales of available-for-sale securities totaled $76,000 and $28,000 during
2009 and 2008, respectively. Gross gains realized from the sale of
securities totaled $8,000 and $1,000 for the years ended December 31, 2009 and
2008, respectively.
Securities
available-for-sale with amortized costs and fair values of $11,312,000 and
$11,030,000 at December 31, 2009 and $12,726,000 and $12,395,000, at December
31, 2008 were pledged as collateral on public deposits with the FHLBank of
Pittsburgh.
The gross
fair value and unrealized losses of the Company’s investments, aggregated by
investment category and length of time that individual securities have been in
continuous unrealized loss position, at December 31, 2009 and 2008 are as
follows (in thousands):
December 31,
2009
|
Less than 12 months
|
12 months or more
|
Totals
|
|||||||||||||||||||||
Fair
Value
|
Unrealized
losses
|
Fair
Value
|
Unrealized
losses
|
Fair
Value
|
Unrealized
losses
|
|||||||||||||||||||
U.S.
Agency securities
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Mortgage-backed
securities
|
- | - | - | - | - | - | ||||||||||||||||||
State
& political subdivisions
|
293 | 6 | - | - | 293 | 6 | ||||||||||||||||||
Other
bonds
|
921 | 43 | 921 | 43 | ||||||||||||||||||||
Equity
securities
|
354 | 114 | 575 | 308 | 929 | 422 | ||||||||||||||||||
Total
|
$ | 647 | $ | 120 | $ | 1,496 | $ | 351 | $ | 2,143 | $ | 471 |
December 31,
2008
|
Less than 12 months
|
12 months or more
|
Totals
|
|||||||||||||||||||||
Fair
Value
|
Unrealized
losses
|
Fair
Value
|
Unrealized
losses
|
Fair
Value
|
Unrealized
losses
|
|||||||||||||||||||
U.S.
Agency securities
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Mortgage-backed
securities
|
- | - | - | - | - | |||||||||||||||||||
State
& political subdivisions
|
6,678 | 338 | - | - | 6,678 | 338 | ||||||||||||||||||
Other
bonds
|
1,795 | 189 | - | - | 1,795 | 189 | ||||||||||||||||||
Equity
securities
|
490 | 87 | 454 | 237 | 944 | 324 | ||||||||||||||||||
Total
|
$ | 8,963 | $ | 614 | $ | 454 | $ | 237 | $ | 9,417 | $ | 851 |
46
The table
at December 31, 2009 includes 20 securities that have losses for less than
twelve months and 31 securities that have been in an unrealized loss position
for twelve or more months.
U.S. Agency
Securities There were no unrealized losses on the Company’s
investments in direct obligations of U.S. government agencies at December 31,
2009.
Mortgage-Backed
Securities There were no unrealized losses on the
Company’s investments in federal agency mortgage-backed securities at December
31, 2009.
State & Political
Subdivisions There was one unrealized loss in state and
municipal subdivision security for less than twelve months at December 31,
2009.
Other
Bonds There was one unrealized loss in other bonds for
twelve months or more at December 31, 2009.
Equity Securities At December
31, 2009, there were unrealized losses in 19 equity securities for the less than
twelve month category and unrealized losses in 30 equity securities for twelve
months or more.
The
Company invests in various forms of agency debt including mortgage backed
securities and callable debt. The mortgage backed securities are issued by FHLMC
(Federal Home Loan Mortgage Company) of FNMA (Federal National Mortgage
Association). The municipal securities consist of general obligations and
revenue bonds. The equity securities consist of stocks in other bank holding
companies. The fair market value of the above securities is
influenced by market interest rates, prepayment speeds on mortgage securities,
bid to offer spreads in the market place and credit premiums for various types
of agency debt. These factors change continuously and therefore the market value
of these securities may be higher or lower that the Company’s carrying value at
any measurement date. Management does not believe any of their 51 securities in
an unrealized position as of December 31, 2009 represents an
other-than-temporary impairment. The Company has the ability to hold the
remaining securities contained in the above table for a time necessary to
recover the cost.
Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation. Investment securities classified as available-for-sale or
held-to-maturity are generally evaluated for OTTI under FASB ASC 320 (SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities). In
determining OTTI under the FASB 320 (SFAS No. 115) model, management considers
many factors, including (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, (3) whether the market decline was affected by
macroeconomic conditions; and (4) whether the entity has the intent to sell the
debt security or more likely than not will be required to sell the debt security
before its anticipated recovery. The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and
judgement and is based on the information available to management at a point in
time.
When
other-than-temporary impairment occurs, the amount of the other-than-temporary
impairment recognized in earnings depends on whether an entity intends to sell
the security or more likely than not will be required to sell the security
before recovery of its amortized cost basis less any current-period credit loss.
If an entity intends to sell or more likely than not will be required to sell
the security before recovery of its amortized cost basis less any current-period
credit loss, the other-than-temporary impairment shall be recognized in earnings
equal to the entire difference between the investment’s amortized cost basis and
its fair value at the balance sheet date. If an entity does not intend to sell
the security and it is not more likely than not that the entity will be required
to sell the security before recovery of its amortized cost basis less any
current-period loss, the other-than-temporary impairment shall be separated into
the amount representing the credit loss and the amount related to all other
factors. The amount of the total other-than-temporary impairment related to the
credit loss is determined based on the present value of cash flows expected to
be collected and is recognized in earnings. The amount of the total
other-than-temporary impairment related to the other factors shall be recognized
in other comprehensive income, net of applicable taxes. The previous amortized
cost basis less the other-than-temporary impairment recognized in earnings shall
become the new amortized cost basis of the investment.
47
The
Company’s investment in equity securities consists entirely of bank
stocks. The unrealized losses are from forty bank stocks due to
market fluctuation. The Company also reviews investment debt
securities on an ongoing basis for the presence of other than temporary
impairment (“OTTI”). An impairment that is an
“other-than-temporary-impairment” is a decline in the fair value of an
investment below its amortized cost attributable to factors that indicate the
decline will not be recovered over the anticipated holding period of the
investment. Other-than-temporary-impairments result in reducing the security’s
carrying value by the amount of credit loss. The credit component of the
other-than-temporary impairment loss is realized through the statement of income
and the remainder of the loss remains in other comprehensive
income. After our review, we concluded that two securities were
impaired. OTTI losses of $38,000 on these securities were recognized during the
fourth quarter 2009. In accordance, with FASB ASC 320, the impairment
was deemed credit related and run entirely through the statement
of income.
Note
3 - Loans Receivable
Loans
receivable consist of the following at December 31, 2009 and 2008 (in
thousands):
2009
|
2008
|
|||||||
Real
estate mortgages
|
||||||||
Construction
and land development
|
$ | 327 | $ | 546 | ||||
Residential,
1 – 4 family
|
47,439 | 44,986 | ||||||
Residential,
multi-family
|
908 | 1,147 | ||||||
Commercial
|
60,269 | 53,448 | ||||||
Total
real estate mortgages
|
108,943 | 100,127 | ||||||
Commercial
|
3,368 | 1,796 | ||||||
Consumer
|
3,719 | 5,353 | ||||||
Total
loans
|
116,030 | 107,276 | ||||||
Allowance
for loan losses
|
1,484 | 1,170 | ||||||
Total
loans, net
|
$ | 114,546 | $ | 106,106 |
The Bank
is subject to a loans-to-one-borrower limitation of 15% of capital
funds. At December 31, 2009, the loans-to-one-borrower limitation was
$2,500,500. At December 31, 2009, there were no loans outstanding or
committed to any one borrower that individually or in the aggregate exceeds that
limit.
The Bank
lends primarily to customers in its local market area. Most loans are
mortgage loans, which include loans secured by commercial and residential real
estate and construction loans. Accordingly, lending activities could
be affected by changes in the general economy, the regional economy, or real
estate values. At December 31, 2009 and 2008, mortgage loans totaled
$108,943,000 and $100,127,000 respectively. Mortgage loans represent
93.9% of total gross loans at December 31, 2009 and 93.3% of total gross loans
at December 31, 2008.
Nonaccrual
loans represent loans, which are ninety days or more in arrears or in the
process of foreclosure. These loans totaled approximately $1,774,000
and $1,107,000 at December 31, 2009 and 2008, respectively. The
allowance for loan losses allocated to impaired loans was $345,000 and $42,000
at December 31, 2009 and 2008, respectively. Additional interest
income that would have been earned under the original terms of such loans would
have amounted to $45,000 and $30,000 for the years ended December 31, 2009 and
2008, respectively.
The
following is a summary of the activity of the allowance for loan losses (in
thousands):
2009
|
2008
|
|||||||
Balance,
beginning of year
|
$ | 1.170 | $ | 1,171 | ||||
Provision
for loan losses
|
475 | 31 | ||||||
Recoveries
|
10 | 18 | ||||||
Loans
charged-off
|
(171 | ) | (50 | ) | ||||
Balance,
end of year
|
$ | 1,484 | $ | 1,170 |
48
From time
to time, the Company may agree to modify the contractual terms of a borrower’s
loan. In cases where such modifications represent a concession to a borrower
experiencing financial difficulty, the modification is considered a troubled
debt restructuring. Loans modified in a troubled debt restructuring are placed
on non-accrual status until the Company determines the future collection of
principal and interest is reasonably assured, which generally requires that the
borrower demonstrate a period of performance according to the restructured terms
of six months. At December 31, 2009, there were no loans classified as troubled
debt restructurings.
Note
4 – Loan Servicing
Mortgage
loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balance of mortgage loans
serviced for others was $4,176,000 at December 31, 2009 and $5,147,000 at
December 31, 2008.
Note
5 - Premises and Equipment, Net
Premises
and equipment at December 31, 2009 and 2008 are summarized as follows (in
thousands):
2009
|
2008
|
|||||||
Land
and improvements
|
$ | 1,273 | $ | 1,273 | ||||
Building
and improvements
|
5,399 | 5,399 | ||||||
Furniture
and equipment
|
1,928 | 1,858 | ||||||
8,600 | 8,530 | |||||||
Less: Accumulated
depreciation and amortization
|
4,635 | 4,404 | ||||||
Premises
and equipment, net
|
$ | 3,965 | $ | 4,126 |
Depreciation
expense was $232,000 and $259,000 for the years ended December 31, 2009 and
2008, respectively.
Note
6 - Deposits
Deposits
consist of the following major classifications at December 31, 2009 and 2008
(dollars in thousands):
2009
|
2008
|
|||||||||||||||
Amount
|
% of total
deposits
|
Amount
|
% of total
deposits
|
|||||||||||||
Non-interest
checking
|
$ | 8,785 | 7.1 | % | $ | 6,985 | 7.0 | % | ||||||||
Interest
checking
|
7,916 | 6.4 | 10,221 | 10.3 | ||||||||||||
Money
market
|
7,598 | 6.1 | 11,631 | 11.7 | ||||||||||||
Savings
|
33,779 | 27.2 | 26,616 | 26.9 | ||||||||||||
Time
deposits
|
65,977 | 53.2 | 43,700 | 44.1 | ||||||||||||
Total
|
$ | 124,055 | 100 | % | $ | 99,153 | 100 | % |
Time
deposit accounts of $100,000 and over totaled approximately $16,844,000 at
December 31, 2009. Time deposit accounts of $100,000 and over totaled
approximately $10,893,000 at December 31, 2008.
49
At
December 31, 2009 and 2008, scheduled maturities of time deposits were as
follows:
Maturing
in:
|
2009
|
2008
|
||||||
One
Year
|
$ | 53,587 | $ | 24,008 | ||||
Two
Years
|
6,624 | 15,053 | ||||||
Three
Years
|
2,323 | 2,081 | ||||||
Four
Years
|
841 | 1,752 | ||||||
Five
Years
|
2,602 | 806 | ||||||
Thereafter
|
- | - | ||||||
Total
|
$ | 65,977 | $ | 43,700 |
Interest
expense on deposits consisted of the following for the years ended December 31,
2009 and 2008:
2009
|
2008
|
|||||||
Interest
checking
|
$ | 129 | $ | 185 | ||||
Money
market
|
102 | 245 | ||||||
Savings
|
449 | 577 | ||||||
Time
deposits
|
1,815 | 1,661 | ||||||
$ | 2,495 | $ | 2,668 |
Note
7 – Other Borrowings
Short-Term
Borrowings
The
Company has a line of credit with the FHLB 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
December 31, 2009, the Company had no overnight funds. At December
31, 2008, the Company borrowed $7,648,000 in overnight funds with interest at
.59%.
The
Company’s maximum overnight borrowing outstanding at any month-end during the
year was $3,985,000. The average amount outstanding for the year ended December
31, 2009 amounted to $909,000 and the average interest rate was
1.08%.
Term
Borrowings
The
Company also has two term loans from the FHLB. One is a $5 million
term loan 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 other loan is $7 million issued in July
of 2005 and matures July of 2015. The interest rate is fixed at
4.34%, for two years, at which time the FHLB has the option to convert it to an
adjustable rate if the related index reaches the strike rate of 8.00% (0.11% as
of December 31, 2009). Interest is due quarterly and the principal is
due at maturity.
All of
the above borrowings are secured by the Company’s mortgages.
The
Company’s collateralized maximum borrowing capacity with FHLBank of Pittsburgh
was $63,471,000 as of December 31, 2009.
50
Note
8 – Retirement Plans
Defined
Benefit Plan
The
Company participates in the Financial Institution Retirement Fund (the Fund)
administered by the Pentegra Group. The Fund operates as a multi-employer plan
for accounting purposes under FASB ASC 715 Compensation Retirement Benefits
(SFAS) No. 87 Employers’ Accounting for Pensions. As such, the annual pension
expense to be recorded is defined as the amount of the required annual
contribution.
The Fund
covers all employees who have met the stated age and service requirements. A
benefit formula provides for retirement benefits that are calculated as a
percentage of salary during their working career, as defined. More details can
be found in the plan document. In February, 2009, the Bank’s Board of Directors
authorized the freezing of benefits within the defined benefit plan as of April
1, 2009.
For
the plan years ending June 30, 2009 and 2008, the required contributions due
were $48,000 and $94,000 respectively. The required contribution for Plan year
ending June 30, 2010 is $21,000.
401(k)
Plan
The Bank
also sponsors a 401(k) Plan (the Plan). The Plan covers all employees who meet
age and service requirements. Participants in the Plan are permitted to make
contributions up to 20% of their compensation. In March, 2009, the Board of
Directors approved an increase in matching employees’ contributions within the
Bank’s existing 401k plan from 50% of the first 6% to 100% of the first 6% as of
April 1, 2009. We estimate that the increased cost of higher matching will be
approximately $26,000 for 2009. Employer contributions to the Plan amounted to
$45,000 and $26, 000 for the years ended December 31, 2009 and 2008,
respectively.
Employee
Stock Ownership Plan
In
connection with the initial public offering, the Company adopted an employee
stock ownership plan for eligible employees of North Penn Bank effective June 1,
2005. Eligible employees who are 21 years old and employed by the Bank as of the
effective date of the offering begin participating in the plan as of that date.
Thereafter, new employees of the Bank who are 21 years old and have been
credited with at least one year of service with North Penn Bank will be eligible
to participate in the employee stock ownership plan as of the first entry date
following their completion of the plan’s eligibility requirements. The ESOP used
$545,000 in proceeds from a term loan obtained from the Company to purchase
58,106 shares of the Company’s common stock. The term loan principal is payable
in fifteen equal annual installments. Interest is at prime plus .5% and payable
quarterly. Each year, the Bank intends to make discretionary contributions to
the ESOP which will be equal to the required principal and interest payments on
the term loan. The loan is further paid down by the amount of dividends paid, if
any, on the common stock owned by the ESOP.
As part
of the Company’s second step conversion, a second ESOP loan in the amount of
$680,000 was obtained by North Penn Bank from North Penn Bancorp to purchase an
additional 68,000 shares of common stock. The loan is payable in twenty, equal,
annual installments. Interest is at 7.75% and payable quarterly. The loan is
further paid down by the amount of dividends paid, if any, on the common stock
owned by the ESOP.
Shares
purchased with the loan proceeds are initially pledged as collateral for the
term loan and are held in a suspense account for future allocation among
participants. Contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of
compensation.
The ESOP
is accounted for in accordance with FASB ASC 718-40 Compensation – Stock
Compensation –Employee Stock Purchase Plans SOP 93-6, Employers’ Accounting for Employee
Stock Ownership Plans. The shares pledged as collateral are deducted from
stockholders’ equity as unearned ESOP shares in the accompanying consolidated
balance sheets. As shares are released from collateral, the Company reports
compensation expense equal to the current market price of the shares, and the
shares become outstanding for EPS computations.
51
For the
year ended December 31, 2009, compensation expense amounted to
$82,000. At December 31, 2009, total ESOP shares amounted to 125,830,
with 32,962 shares allocated and 92,868 shares unearned. The fair
value of unearned shares amounted to $859,000 at December 31, 2009.
For the
year ended December 31, 2008, compensation expense amounted to
$52,000. At December 31, 2008, total ESOP shares amounted to 125,830,
with 25,241 shares allocated and 100,589 shares unearned. The fair
value of unearned shares amounted to $729,000 at December 31, 2008.
Supplemental
Executive Retirement Plan
Effective
July 1, 2004, the Company established an unfunded supplemental executive
retirement plan to provide certain officers with additional benefits upon
termination or retirement. The Company expensed $56,000 and $31,000 for the
years ended December 31, 2009 and 2008 respectively in the accompanying
consolidated financial statements.
.
Note
9 - Omnibus Stock Option Plan
Stock
Awards. In May of 2006, the Company's stockholders approved the 2006
Omnibus Stock Option Plan, under which the Company reserved 101,685 shares of
common stock for future issuance. The Plan provides for grants of stock options
and restricted stock awards. Only present and future employees and directors are
eligible to receive incentive awards under the 2006 Omnibus Plan. The
Company believes that such awards better align the interests of its employees
with its stockholders.
On May
26, 2009, the Company’s stockholders approved the 2009 Equity Incentive
Plan. The
Board of Directors has reserved a total of 119,000 shares of common stock
for issuance upon the grant or exercise of awards made pursuant to the 2009
Plan. The Plan provides for grants of stock options and
restricted stock awards. All of the Company’s employees, officers, and
directors are eligible to participate in the 2009 Plan.
The
exercise price and vesting of both plans are determined by the Board of
Directors at the date of grant. Options generally vest over five years, and
expire ten years after the date of grant. Certain option and stock awards
provide for accelerated vesting if there is a change in control (as defined in
the Plan).
Stock Grants.
Restricted stock grants totaling 5,323 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. During 2009, 874 shares vested at fair value of
$8,900.
Restricted
stock grants totaling 21,229 shares were awarded on May 28, 2008 having a fair
value of $175,000. The grants vest over five years. During 2009, 4.310 shares
vested at a fair value of $36,000. The market value as of the grant date of the
restricted stock grants is charged to expense as the grants vest.
On May
9th, 2009, restricted stock grants totaling 500 shares were awarded having a
fair value of $4,300. 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.
Restricted
stock grants totaling 17,611 shares were awarded on November 4, 2009, having a
fair value of $158,000. 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.
Compensation
expense for all stock grants was $49,000 in 2009.
Stock Options.
Stock options covering 29,484 shares of common stock were awarded on
September 26, 2006. The option awards were granted with an exercise price equal
to the average price of 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.
52
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
|
An
additional set of stock options covering 3,766 shares were awarded on October
23, 2007. The option awards were granted with an exercise price equal to the
average price of 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 October 27, 2008. The options are available to be
exercised for a period of ten years after the date awarded.
The fair
value of each option grant was estimated to be $3.64 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
(%)
|
19.00 | % | ||
Risk-free
Interest Rate (%)
|
4.01 | % | ||
Expected
Life
|
10
years
|
An
additional set of stock options covering 34,997 shares were awarded on May 28,
2008. The option awards were granted with an exercise price equal to the average
price of 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 May 28, 2009. The options are available to be exercised for
a period of ten years after the date awarded.
The fair
value of each option grant was estimated to be $3.18 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
(%)
|
29.24 | % | ||
Risk-free
Interest Rate (%)
|
1.89 | % | ||
Expected
Life
|
10
years
|
An
additional set of stock options covering 1,000 shares were awarded on May 11,
2009. The option awards were granted with an exercise price equal to the average
price of 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 May 11, 2010. The options are available to be exercised for
a period of ten years after the date awarded.
The fair
value of each option grant was estimated to be $3.18 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
(%)
|
29.24 | % | ||
Risk-free
Interest Rate (%)
|
1.89 | % | ||
Expected
Life
|
10
years
|
53
This
group of options was forfeited at December 31, 2009.
An
additional set of stock options covering 41,872 shares were awarded on November
4, 2009. The option awards were granted with an exercise price equal to the
average price of 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 November 4, 2010. The options are available to be
exercised for a period of ten years after the date awarded.
The fair
value of each option grant was estimated to be $2.79 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
(%)
|
29.24 | % | ||
Risk-free
Interest Rate (%)
|
1.89 | % | ||
Expected
Life
|
6.25
years
|
Exercise
prices of options outstanding at December 31, 2009 ranged from $8.25 to
$10.21. The outstanding options at December 31, 2009 have an
intrinsic value, which is the amount of the underlying stock exceeds the
exercise price, of $55,000
During
the year ended December 31, 2009, the Company recorded options expense of
$54,000 included in “Salaries and employee benefits” on the accompanying
consolidated financial statements. As of December 31, 2009, there was
approximately $521,000 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.
Number of
Shares
|
Weighted –
Average
Exercise Price
|
Weighted –
Average
Remaining
Contractual Term
|
||||||||||
Outstanding,
January 1, 2009
|
62,879 | $ | 10.19 | - | ||||||||
Granted
|
43,258 | $ | 8.99 | - | ||||||||
Exercised
|
- | - | - | |||||||||
Forfeited
or expired
|
(1,500 | ) | $ | 8.67 | - | |||||||
Outstanding,
December 31, 2009
|
104,637 | $ | 9.44 | 8.7 | ||||||||
Exercisable,
December 31, 2009
|
23,761 | $ | 10.37 | 7.4 |
Stock Options
|
Restricted Stock
|
|||||||||||||||
Nonvested shares
|
Number
of Shares
|
Weighted-
Average
Grant-Date
Fair Value
|
Number
of
Shares
|
Weighted-
Average
Grant-Date
Fair Value
|
||||||||||||
Nonvested, January
1, 2009
|
52,080 | $ | 3.40 | 22,992 | $ | 8.47 | ||||||||||
Granted
|
42,872 | $ | 2.79 | 18,111 | $ | 8.99 | ||||||||||
Vested
|
(12,576 | ) | $ | 3.84 | (4,949 | ) | $ | 8.90 | ||||||||
Forfeited
|
(1,500 | ) | $ | 3.71 | (750 | ) | $ | 8.67 | ||||||||
Nonvested,
December 31, 2009
|
80,876 | $ | 3.40 | 35,404 | $ | 8.81 |
54
Note
10 - Income Taxes
The
Company and its subsidiary file a consolidated Federal income tax
return. North Penn Bancorp, Inc. and Norpenco, Inc. each file a
Pennsylvania corporate tax report and North Penn Bank files a Pennsylvania
Mutual Thrift Earnings Report.
Retained
earnings at December 31, 2009 and 2008, included approximately $1.2 million
representing accumulated bad debt reserves in excess of actual experience, for
which no provision for Federal income taxes has been made, in accordance with
FASB ASC 740-10-25 Income Taxes – Recognition and Accounting Principles Board
Statement No. 23, Accounting for Income Taxes – Special
Areas... These amounts represent an allocation of income to bad debt
deductions for tax purposes only. If anything other than tax bad debt
losses are charged to this accumulated bad debt reserve, taxable income would be
created at the then-current corporate tax rates. The unrecorded
deferred income tax liability related to this at 34% was $418,000 at December
31, 2009 and 2008. The Company’s liquidity
and capital position causes management to believe that these tax restrictions
will not be violated.
Total
income tax expense (benefit) for the years ended December 31, 2009 and 2008, is
as follows (in thousands):
2009
|
2008
|
|||||||
Federal:
|
||||||||
Currently
payable
|
$ | 234 | $ | 86 | ||||
Deferred
tax benefit
|
(240 | ) | - | |||||
Total
Federal taxes
|
(6 | ) | 86 | |||||
State:
|
||||||||
Currently
payable
|
96 | 67 | ||||||
Deferred
tax expense
|
(5 | ) | - | |||||
Total
State taxes
|
91 | 67 | ||||||
Total
income tax expense
|
$ | 85 | $ | 153 |
A
reconciliation of income taxes at statutory rates (34% for both years) to the
actual income tax provision reported in the Consolidated Statements of Income is
as follows (in thousands):
2009
|
2008
|
|||||||
Tax
expense at statutory rate on pretax income
|
$ | 296 | $ | 172 | ||||
Bank
owned life insurance income
|
(51 | ) | (18 | ) | ||||
State
income taxes
|
91 | 67 | ||||||
Tax
exempt interest income
|
(111 | ) | (87 | ) | ||||
Tax
effect of deferred compensation asset
|
(90 | ) | - | |||||
Tax
effect of other items, net
|
(50 | ) | 19 | |||||
Applicable
income tax expense
|
$ | 85 | $ | 153 | ||||
Effective
tax rate
|
10 | % | 30 | % |
55
Significant
deferred tax assets and liabilities at December 31, 2009 and 2008 are as follows
(dollars in thousands):
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Allowance
for loan losses
|
$ | 480 | $ | 354 | ||||
Contribution
carryover
|
94 | 129 | ||||||
Deferred
compensation
|
90 | - | ||||||
AMT
credits
|
79 | - | ||||||
Unrealized
security losses
|
41 | 238 | ||||||
Other
|
66 | - | ||||||
850 | 721 | |||||||
Less
valuation allowance
|
(145 | ) | (64 | ) | ||||
Total
|
$ | 705 | $ | 657 |
The
Company has provided valuation allowances of $66,000 on contribution
carryforwards and $79,000 on AMT credit carryforwards to reduce the total amount
that management believes will ultimately be realized. Realization of
deferred tax assets is dependent upon sufficient future taxable income during
the period that deductible temporary differences and carry forwards are expected
to be available to reduce taxable income.
Note
11 – Accumulated Other Comprehensive Income
Accumulated
other comprehensive income(loss) of $458,000 and ($370,000) for years ended
December 31, 2009 and 2008, respectively, consisted entirely of unrealized gains
and losses on available-for-sale securities, net of tax.
A
reconciliation of other comprehensive income(loss) for the years ended December
31, 2009 and 2008, are as follows (dollars in thousands):
2009
|
||||||||||||
Before-Tax
Amount
|
Tax
Benefit
(Expense)
|
Net-of-Tax
Amount
|
||||||||||
Unrealized
losses on available-for-sale securities:
|
||||||||||||
Unrealized
holding losses arising during the year
|
$ | 693 | $ | (230 | ) | $ | 463 | |||||
Less:
Reclassification adjustment for net Gains realized in
income
|
(8 | ) | (3 | ) | (5 | ) | ||||||
Net
unrealized losses
|
$ | 685 | $ | (227 | ) | $ | 458 |
2008
|
||||||||||||
Before-Tax
Amount
|
Tax Benefit
(Expense)
|
Net-of-Tax
Amount
|
||||||||||
Unrealized
losses on available-for-sale securities:
|
||||||||||||
Unrealized
holding losses arising during the year
|
$ | (560 | ) | $ | 191 | $ | (369 | ) | ||||
Less:
Reclassification adjustment for net Gains realized in
income
|
1 | - | 1 | |||||||||
Net
unrealized gains
|
$ | (561 | ) | $ | 191 | $ | (370 | ) |
Note
12 - Guarantees
FASB ASC
460-10 Guarantees FIN 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 ASC 450
Contingencies SFAS Statement No. 5, Accounting for Contingencies
(FAS 5) and also requires a guarantor to make significant new disclosures even
when the likelihood of making any payments under the guarantee is
remote.
56
In
September 2006, the Bank executed a Mortgage Partnership Finance (MPF) Master
Commitment (the Commitment) with the FHLBank of Pittsburgh (FHLB) to deliver
$10.0 million of mortgage loans and to guarantee the payment of any realized
losses that exceed the FHLB’s first loss 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, 2009. The maximum
potential amount of future payments that the Bank is required to make under the
guarantee is $450,000. 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.
Note
13 - Commitments and Contingencies
Financial
Instruments With Off-Balance-Sheet Risk
The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business. These financial instruments include
commitments to extend credit to meet the financing needs of its
customers. Such commitments have been made in the normal course of
business and at current prevailing market terms. The commitments,
once funded, are principally to originate commercial loans and other loans
secured by real estate. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments. The Company does not anticipate any losses as a result
of these transactions. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the Consolidated Balance Sheets.
Commitments
issued to potential borrowers of the Bank at December 31, 2009 and 2008 were as
follows (dollars in thousands):
2009
|
2008
|
|||||||
Fixed-rate
commitments
|
$ | 30 | $ | 625 | ||||
Variable/adjustable-rate
commitments
|
1,674 | 4,651 | ||||||
Total
|
$ | 1,704 | $ | 5,276 |
Interest
rates range from 5.625% to 6.125% for fixed rate commitments at December 31,
2009.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. These
commitments include loans-in-process, available borrowings under commercial line
of credit agreements and available borrowings under home equity
agreements. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements.
Operating
lease
The
Company has an operating lease for commercial space for its Abington
Branch. The lease commenced upon occupancy in April 1999 for a ten
year period with five options to renew for three years each. The
annual lease cost is composed of minimum rent per square foot, plus a
proportionate share of certain operating costs and a flat fee for the
drive-up/ATM area, plus cost of living adjustments at renewal. The Company has
been granted a limited right of first refusal for purchase.
57
The future minimum rental
commitments under this lease at December 31, 2009 are as follows:
2010
|
50 | |||
2011
|
49 | |||
Total
|
$ | 99 |
Note
14 - Fair Value Disclosures
Fair
Value Measurements
Effective
January 1, 2008, the Company adopted FASB ASC 820 Fair Value Measures and
Disclosures SFAS No. 157, Fair
Value Measurements, which, among other things, requires enhanced
disclosures about assets and liabilities carried at fair value. This standard
establishes a hierarchal disclosure framework associated with the level of
pricing observability utilized in measuring assets and liabilities at fair
value. The three broad levels defined in the standard hierarchy are as
follows:
Level
|
I:Quoted
prices are available in active markets for identical assets or liabilities
as of the record date.
|
Level
|
II:Pricing
inputs are other than quoted prices in active markets, which are either
directly or indirectly observable as of the reported date. The nature of
these assets and liabilities include items for which quoted prices are
available but traded less frequently, and items that are fair valued using
other financial instruments, the parameters of which can be directly
observed.
|
Level
|
III:Assets
and liabilities that have little to no pricing observability as of the
reported date. These items do not have two-way markets and are measured
using management’s best estimate of fair value, where the inputs into the
determination of fair value require significant management judgment or
estimation
|
Investments
available for sale are recorded at fair value on a recurring basis. Loans held
for sale are recorded at fair value on a nonrecurring basis based on the lower
of cost or market.
The
following required disclosure of the estimated fair value of financial
instruments has been determined by the Company using available market
information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect in the
estimated fair value amounts.
The
methods and assumptions used to estimate the fair values of each class of
financial instrument are as follows:
Cash and cash
equivalents: The carrying amount of cash and cash equivalents
approximate their fair value.
Available-for-sale and
held-to-maturity securities: Fair values for securities are
based on bid prices received from securities dealers. Restricted
equity securities are carried at cost, which approximates fair
value.
Loans: The fair
value of all loans is estimated by the net present value of the future expected
cash flows.
Deposit
liabilities: The fair value of demand deposits, NOW accounts,
savings accounts, and money market deposits is estimated by the net present
value of the future expected cash flows. For certificates of deposit,
the discount rates used reflect the Bank’s current market
pricing. The discount rates used for nonmaturity deposits are the
current book rate of the deposits.
58
Other
borrowings: The fair value of other borrowings is estimated
using the rates currently offered for similar borrowings.
Accrued
interest: The carrying amounts of accrued interest approximate
their fair values.
Off-balance-sheet
instruments: Commitments to extend credit are generally
short-term and are priced to market at the time of
funding. Therefore, the estimated fair value of these financial
instruments is nominal prior to funding.
The
following table presents the assets reported on the consolidated balance sheets
at their fair value as of December 31, 2009 by level within the fair value
hierarchy. As required by FASB ASC 820 Fair value Measures and Disclosures,
financial assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value
measurement.
Assets
measured at fair value on a recurring basis (in thousands):
December 31, 2009
|
||||||||||||||||
Level I
|
Level II
|
Level III
|
Total
|
|||||||||||||
Assets:
|
||||||||||||||||
Securities
available-for-sale
|
$ | 1,187 | $ | 18,211 | $ | - | $ | 19,398 |
December 31, 2008
|
||||||||||||||||
Level I
|
Level II
|
Level III
|
Total
|
|||||||||||||
Assets:
|
||||||||||||||||
Securities
available-for-sale
|
$
|
1,022
|
$
|
19,235
|
$
|
36
|
$
|
20,293
|
Fair
Value of Financial Instruments
The
estimated fair value of the Company’s financial instruments at December 31, 2009
and 2008 was as follows (in thousands):
2009
|
2008
|
|||||||||||||||
Carrying
Amount
|
Estimated
Fair value
|
Carrying
Amount
|
Estimated
Fair value
|
|||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 11,912 | 11,912 | $ | 2,274 | 2,274 | ||||||||||
Investments
available for sale
|
19,398 | 19,398 | 20,293 | 20,293 | ||||||||||||
Restricted
equity securities
|
1,143 | 1,143 | 1,090 | 1,090 | ||||||||||||
Loans
|
114,546 | 114,483 | 107,276 | 111,291 | ||||||||||||
Accrued
interest receivable
|
665 | 665 | 676 | 676 | ||||||||||||
Total
financial assets
|
$ | 147,664 | 147,601 | $ | 131,609 | 135,624 | ||||||||||
Financial
liabilities:
|
||||||||||||||||
Deposits
|
$ | 124,055 | 122,608 | $ | 99,153 | 99,577 | ||||||||||
Other
borrowings
|
12,000 | 12,378 | 19,648 | 20,701 | ||||||||||||
Accrued
interest payable
|
1,002 | 1,002 | 251 | 251 | ||||||||||||
Total
financial liabilities
|
$ | 137,057 | 135,988 | $ | 119,052 | 120,529 | ||||||||||
Off-balance
sheet liabilities:
|
||||||||||||||||
Commitments
to extend credit
|
$ | 5,251 | 5,251 | $ | 2,224 | 2,224 |
59
Note
15 - Related-Party Transactions
The
Company routinely enters into banking transactions with its directors and
officers. Such transactions are made in the ordinary course of
business on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the same time for comparable
transactions with other customers, and do not, in the opinion of management,
involve more than normal credit risk or present other unfavorable
features. A summary of loans to directors and officers and related
parties is as follows for the years ended December 31, 2009 and 2008 (dollars in
thousands):
2009
|
2008
|
|||||||
Beginning
balance
|
$ | 1,327 | $ | 1,334 | ||||
Additions
|
- | 647 | ||||||
Collections
|
(260 | ) | (654 | ) | ||||
Ending
balance
|
$ | 1,067 | $ | 1,327 |
Note
16 - Litigation
As
previously reported, the Company’s financial results for the fourth quarter 2008
included a pre-tax charge of $475,000 for losses attributable to accounting
errors. The Company has continued reviewing, and strengthening where
necessary, its internal control procedures. On November 13, 2009,the
Company recognized a net recovery of $468,000 from its insurance carrier in
settlement of the Company’s insurance claim.
At
December 31, 2009, the Company was neither engaged in any existing nor aware of
any pending legal proceedings. From time to time, the Company is a
party to legal proceedings within the normal course of business wherein it
enforces its security interest in loans made by it, and other maters of a
similar nature.
Note
17 - Dividend Policy
Company
The
Company paid a quarterly cash dividend of $0.03 in 2009. Payments of
cash dividends to our stockholders may be dependent on the payment of a cash
dividend from the Bank to the Company. The payment of cash dividends
by the Bank to the Company is limited by regulations of the FDIC and the
Pennsylvania Department of Banking. The Company’s future dividend
policy is subject to the discretion of the Board of Directors and will depend
upon a number of factors including future earnings, financial conditions, cash
needs, and general business conditions. Holders of common stock will
be entitled to receive dividends as and when declared by the board of directors
out of funds legally available for that purpose.
Bank
The
amount of dividends that may be paid by the Bank depends upon the Bank’s
earnings and capital position. The Bank may not make a distribution
that would constitute a return of capital during the three-year term of the
business plan submitted in connection with the stock offering. The
Bank may not make a capital distribution if, after making the distribution, it
would be under capitalized.
Any
payment of dividends by the Bank that would be deemed to be drawn out of its bad
debt reserves would require the Bank to pay federal income taxes at the then
current tax rate on the amount deemed distributed. We do not
contemplate any distribution by the Bank that would result in this type of tax
liability.
60
As a
state bank subject to the regulations of the FDIC, the Bank must obtain approval
for any dividend if the total of all dividends declared in any calendar year
would exceed the total of its net profits, as defined by applicable regulations,
for that year, combined with its retained net profits for the preceding two
years, less any required transfers to surplus. In addition, the Bank
may not pay a dividend in an amount greater than its retained earnings then on
hand after deducting its losses and bad debts. For this purpose, bad
debts are generally defined to include the principal amount of loans which are
in arrears with respect to interest by six months or more unless such loans are
fully secured and in the process of collection. Moreover, for
purposes of this limitation, the Bank is not permitted to add the balance in its
allowance for loan loss account to its undivided profits then on hand; however,
it may net the sum of its bad debts as so defined against the balance in its
allowance for loan loss account and deduct from undivided profits only bad debts
as so defined in excess of that amount.
In
addition, the FDIC is authorized to determine under certain circumstances
relating to the financial condition of a bank that the payment of dividends
would be an unsafe or unsound practice and to prohibit payment
thereof. The payment of dividends that deplete a bank’s capital base
could be deemed to constitute such an unsafe or unsound practice.
Note
18 - Regulatory Matters
The Bank
is subject to various regulatory capital requirements administered by state and
federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory – and possible additional
discretionary – actions by regulators that, if undertaken, could have a direct
material effect on the Company’s and Bank’s financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank’s assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the table below) of total
and Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital to average assets (as
defined). Management believes, as of December 31, 2009, the Bank met
all capital adequacy requirements to which they are subject.
As of
December 31, 2009, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table below. There are no conditions or events since
that notification that management believes have changed the Bank’s
category.
61
The
Bank’s actual capital amounts and ratios at December 31, 2009and 2008 are
presented in the following table (dollars in thousands):
Actual
|
For capital adequacy
purposes
|
To be well capitalized
under prompt
corrective action
provisions
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
At
December 31, 2009:
|
||||||||||||||||||||||||
Total
Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
North
Penn Bank
|
$ | 18,151 | 15.07 | % |
>$9,634
|
>8.0
|
% |
>$12,042
|
>10.0
|
% | ||||||||||||||
Tier
1 Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
North
Penn Bank
|
$ | 16,667 | 13.84 | % |
>$4,817
|
>4.0
|
% |
>$7,225
|
>6.0
|
% | ||||||||||||||
Tier
1 Capital (to Average Assets):
|
||||||||||||||||||||||||
North
Penn Bank
|
$ | 16,667 | 11.35 | % |
>$5,874
|
>4.0
|
% |
>$7,343
|
>5.0
|
% | ||||||||||||||
Risk-Weighted
Assets:
|
$ | 120,425 | ||||||||||||||||||||||
Average
Assets:
|
$ | 146,866 | ||||||||||||||||||||||
Reconciliation
of GAAP Capital to Regulatory Capital
|
||||||||||||||||||||||||
Total
Equity Capital December 31, 2009
|
$ | 16,670 | ||||||||||||||||||||||
Plus:
Unrealized Gain/Loss on Investments
|
(2 | ) | ||||||||||||||||||||||
Less:
Disallowed Servicing Rights
|
(1 | ) | ||||||||||||||||||||||
Total
Tier Capital December 31, 2009
|
$ | 16,667 | ||||||||||||||||||||||
Plus:
Allowance for loan losses
|
1,484 | |||||||||||||||||||||||
Total
Risk-based Capital December 31, 2009
|
$ | 18,151 | ||||||||||||||||||||||
At
December 31, 2008:
|
||||||||||||||||||||||||
Total
Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
North
Penn Bank
|
$ | 16,706 | 15.05 | % |
>$8,878
|
>8.0
|
% |
>$11,098
|
>10.0
|
% | ||||||||||||||
Tier
1 Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
North
Penn Bank
|
$ | 15,536 | 14.00 | % |
>$4,439
|
>4.0
|
% |
>$6,659
|
>6.0
|
% | ||||||||||||||
Tier
1 Capital (to Average Assets):
|
||||||||||||||||||||||||
North
Penn Bank
|
$ | 15,536 | 11.57 | % |
>$5,370
|
>4.0
|
% |
>$6,713
|
>5.0
|
% | ||||||||||||||
Risk-Weighted
Assets:
|
$ | 110,977 | ||||||||||||||||||||||
Average
Assets:
|
$ | 134,261 | ||||||||||||||||||||||
Reconciliation
of GAAP Capital to Regulatory Capital
|
||||||||||||||||||||||||
Total
Equity Capital December 31, 2008
|
$ | 15,390 | ||||||||||||||||||||||
Plus:
Unrealized Gain/Loss on Investments
|
147 | |||||||||||||||||||||||
Less:
Disallowed Servicing Rights
|
(1 | ) | ||||||||||||||||||||||
Total
Tier Capital December 31, 2008
|
$ | 15,536 | ||||||||||||||||||||||
Plus:
Allowance for loan losses
|
1,170 | |||||||||||||||||||||||
Total
Risk-based Capital December 31, 2008
|
$ | 16,706 |
Note
19 - Parent Company Financial Information
Condensed
financial information of North Penn Bancorp, Inc. (parent company only) was as
follows:
BALANCE
SHEETS
(Amounts
in thousands)
December
31,
|
||||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Cash
|
$ | 848 | $ | 2,483 | ||||
Investment
in subsidiary
|
16,671 | 15,390 | ||||||
Bank
premises, net
|
1,155 | 1,216 | ||||||
Deferred
income taxes
|
27 | 65 | ||||||
Due
from subsidiary bank
|
684 | 286 | ||||||
Other
assets
|
69 | 8 | ||||||
Total
assets
|
$ | 19,454 | $ | 19,448 | ||||
Liabilities
and Stockholders’ Equity
|
||||||||
Accrued
income taxes and other liabilities
|
$ | 184 | $ | 150 | ||||
Total
liabilities
|
184 | 150 | ||||||
Preferred
Stock
|
- | - | ||||||
Common
stock
|
158 | 158 | ||||||
Additional
paid-in-capital
|
13,580 | 13,480 | ||||||
Retained
earnings
|
8,541 | 7,905 | ||||||
Unearned
ESOP shares
|
(907 | ) | (980 | ) | ||||
Accumulated
other comprehensive loss
|
(2 | ) | (460 | ) | ||||
Treasury
stock- at cost
|
(2,100 | ) | (805 | ) | ||||
Total
stockholders’ equity
|
19,270 | 19,298 | ||||||
Total
Liabilities and Stockholders’ Equity
|
$ | 19,454 | $ | 19,448 |
62
STATEMENTS
OF INCOME
(Amounts
in thousands)
2009
|
2008
|
|||||||
Income
|
||||||||
Interest
income
|
$ | 66 | $ | - | ||||
Other income
|
61 | 34 | ||||||
Total
income
|
127 | 34 | ||||||
Expenses
|
||||||||
Occupancy
and equipment expense-depreciation
|
61 | 73 | ||||||
Other
expenses
|
106 | 94 | ||||||
Total
expenses
|
167 | 167 | ||||||
Loss
before income tax expense and equity in undistributed earnings of
subsidiary
|
(40 | ) | (133 | ) | ||||
Income
tax expense
|
- | 9 | ||||||
Loss
before equity in undistributed earnings of subsidiary
|
(40 | ) | (142 | ) | ||||
Equity
in undistributed earnings of subsidiary
|
827 | 496 | ||||||
Net
income
|
$ | 787 | $ | 354 |
STATEMENTS
OF CASH FLOWS
|
||||||||
(Amounts
in thousands)
|
||||||||
|
2009
|
2008
|
||||||
Operating
activities:
|
||||||||
Net
income
|
$ | 787 | $ | 354 | ||||
Adjustments
to reconcile net income to net cash used in operating
activities:
|
||||||||
Depreciation
expense
|
61 | 73 | ||||||
Deferred
income tax provision
|
38 | - | ||||||
Undistributed
income of subsidiary
|
(827 | ) | (496 | ) | ||||
Increase
in other assets
|
(61 | ) | (154 | ) | ||||
Increase
in due from bank-operating
|
(274 | ) | - | |||||
Increase
in other liabilities
|
34 | 59 | ||||||
Net
cash used in operating activities
|
(242 | ) | (164 | ) | ||||
Investing
activities:
|
- | - | ||||||
Financing
activities:
|
||||||||
ESOP
share released
|
53 | 52 | ||||||
Cash
dividends paid
|
(151 | ) | (191 | ) | ||||
Purchase
of treasury stock
|
(1,295 | ) | (805 | ) | ||||
Net
cash used in financing activities
|
(1,393 | ) | (944 | ) | ||||
Net
decrease in cash and cash equivalents
|
(1,635 | ) | (1,108 | ) | ||||
Cash
and cash equivalents January 1
|
2,483 | 3,591 | ||||||
Cash
and cash equivalents December 31
|
$ | 848 | $ | 2,483 |
63
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
On August
13, 2009, McGrail Merkel Quinn & Associates resigned as North Penn Bancorp,
Inc.'s (the "Company") independent registered public accounting firm. McGrail
Merkel Quinn & Associates' report on the Company's consolidated financial
statements for the two fiscal years ended December 31, 2008 and 2007 did not
contain an adverse opinion or disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope or accounting principles.
During
the fiscal years ended December 31, 2008 and 2007, as well as the interim period
preceding the resignation of McGrail Merkel Quinn & Associates, there were
no disagreements or reportable events of the kind described in Item 304(a)(1)(v)
of Regulation S-K of the Securities and Exchange Commission (the "Commission")
between the Company and McGrail Merkel Quinn & Associates on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to the satisfaction of McGrail Merkel
Quinn & Associates, would have caused McGrail Merkel Quinn & Associates
to make a reference to the subject matter of the disagreement or reportable
event in connection with the issuance of its audit reports.
ITEM
9A(T). CONTROLS AND PROCEDURES
North
Penn Bancorp, Inc., under the supervision and with the participation of its
management, including its Chief Executive Officer and the Principal Accounting
Officer, evaluated the effectiveness of the design and operation of North Penn’s
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end
of the period covered by this report. Based on that evaluation, North
Penn’s Chief Executive Officer and Principal Accounting Officer concluded that
North Penn’s disclosure controls and procedures are effective. There
were no significant changes to North Penn’s disclosure controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
Exchange
Act Rule 13a-15(e) defines “disclosure controls and procedures” as controls and
other procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Commission’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that such information is
accumulated and communicated to the issuer’s management, including its principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, and management has assessed
the effectiveness of the Company’s internal control over financial reporting as
of December 31, 2008 based upon the criteria set forth in a report entitled
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on its assessment,
the Company’s management has concluded that the Company maintained effective
internal control over financial reporting as of December 31,
2009.
64
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
There
have been no changes in the Company’s internal control over financial reporting
during the quarter ended December 31, 2009 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The
names, ages, periods of service as a director, principal occupations, business
experience and other directorships of Directors and nominees for director of the
Company are set forth in the Company’s definitive proxy statement for the annual
meeting of shareholders (“Proxy Statement”) in the section entitled “ITEMS TO BE
VOTED ON BY SHAREHOLDERS – Item 1 - Election of Directors,” which information is
incorporated herein by reference.
The
names, ages, positions held with the Company, periods of service as executive
officer, and business experience for executive officers of the Company is set
forth in Part I, Item 1, “Description of Business - Executive Officers of the
Registrant” to this annual report on Form 10-K, which information is
incorporated herein by reference.
Information
regarding the identity of the Audit Committee as a separately designated
standing committee of the Board and information regarding the status of one or
more members of the Audit Committee being an “audit committee financial expert”
are set forth in the Proxy Statement in the section entitled “CORPORATE
GOVERNANCE AND BOARD MATTERS – Audit Committee,” which information is
incorporated herein by reference.
Information
regarding compliance with Section 16(a) of the Exchange Act is set forth in the
Proxy Statement in the section entitled “OTHER INFORMATION RELATING TO DIRECTORS
AND EXECUTIVE OFFICERS – Section 16(a) Beneficial Ownership Reporting
Compliance,” which information is incorporated herein by reference.
The
Company has adopted a Code of Ethics that applies to directors, officers and
employees of the Company and the Bank. A copy of the Code of Ethics
is posted on the Company’s website at www.northpennbank.com. The
Company intends to satisfy the disclosure requirement under Item 9 of Form 8-K
regarding an amendment to, or a waiver from, a provision of its Code of Ethics
by posting such information on its website.
ITEM
11. EXECUTIVE COMPENSATION
The
information under the caption “EXECUTIVE COMPENSATION” in the Proxy Statement is
incorporated by reference in response to this Item 10. The
information under the caption “CORPORATE GOVERNANCE AND BOARD MATTERS –
Directors Compensation” in the Proxy Statement is incorporated by reference in
response to this Item 10.
65
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
information under the caption “STOCK OWNERSHIP” in the Proxy Statement is
incorporated by reference in response to this Item 11.
Equity
Compensation Plan Information
Plan Category
|
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
|
Weighted-average
exercise price of
outstanding
options, warrants
and rights
|
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
|
|||||||||
Equity
compensation plans approved by security holders
|
104,637 | $ | 9.44 | 52,996 | ||||||||
Equity
compensation plans not approved by security holders
|
- | - | - | |||||||||
Total
|
104,637 | $ | 9.44 | 52,996 |
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The
information under the caption “OTHER INFORMATION RELATING TO DIRECTORS AND
EXECUTIVE OFFICERS – Transactions with Management” is incorporated by reference
in response to this Item 12. The information under the caption
“CORPORATE GOVERNANCE AND BOARD MATTERS – Directors Independence” is
incorporated by reference in response to this Item 12.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information under the caption “AUDIT RELATED MATTERS – Auditor Fees” in the
Proxy Statement is incorporated by reference in response to this Item
14.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
3.1
|
Articles
of Incorporation of North Penn Bancorp, Inc. (Incorporated herein by
reference to Exhibit 3.1 to the Company’s Registration Statement on Form
SB-2 (File No. 333-143601))
|
|
3.2
|
Bylaws
of North Penn Bancorp, Inc. (Incorporated herein by reference to Exhibit
3.2 to the Company’s Registration Statement on Form SB-2 (File No.
333-143601))
|
|
4
|
Specimen
Stock Certificate (Incorporated herein by reference to Exhibit 4 to the
Company’s Registration Statement on Form SB-2 (File No.
333-143601))
|
|
10.1
|
*Amended
and Restated Employment Agreement between North Penn Bancorp, Inc., North
Penn Bank and Frederick L. Hickman incorporated herein by reference to
Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 30,
2008. (file no. 000-52839)
|
|
10.2
|
*Amended
and Restated Employment Agreement between North Penn Bancorp, Inc., North
Penn Bank and Thomas J. Dziak incorporated herein by reference to Exhibit
10.2 to the Company’s Form 10-KSB for the quarter ended December 31, 2007.
(file no. 000-52839)
|
66
10.3
|
*Amended
and Restated Employment Agreement between North Penn Bancorp, Inc., North
Penn Bank and Thomas A. Byrne incorporated herein by reference to Exhibit
10.3 to the Company’s Form 10-KSB for the quarter ended December 31, 2007.
(file no. 000-52839)
|
|
10.4
|
*North
Penn Bancorp, Inc. 2006 Omnibus Stock Option Plan (Incorporated
herein by reference to Appendix A to Schedule 14A Definitive Proxy
Statement of North Penn Bancorp, Inc. filed on March 31, 2006 (File No.
000-51234))
|
|
10.5
|
North
Penn Bancorp, Inc. 2009 Equity Incentive Plan (Incorporated herin by
reference to Appendix A to Schedule 14A Definitive Proxy Statement of
Northe Penn Bancorp, Inc. filed on April 20, 2009 (File No.
000-52839)
|
|
10.6
|
*Supplemental
Executive Retirement Agreement dated December 14, 2004 between North Penn
Bank and Frederick L. Hickman (Incorporated
herein by reference to Exhibit 10.7 to Form 10-K of North Penn Bancorp,
Inc. for the year ended December 31, 2006 (File No.
000-51234))
|
|
10.7
|
*Supplemental
Executive Retirement Agreement dated December 14, 2004 between North Penn
Bank and Thomas J. Dziak (Incorporated herein by reference to Exhibit 10.8
to the Company’s Registration Statement on Form SB-2 (File No.
333-143601))
|
|
10.8
|
*Supplemental
Executive Retirement Agreement dated April 1, 2005 between North Penn Bank
and Thomas A. Byrne (Incorporated herein by reference to Exhibit 10.9 to
the Company’s Registration Statement on Form SB-2 (File No.
333-143601))
|
|
21
|
List
of Subsidiaries
|
|
23.1
|
Consent
of J.H. Williams & Co., LLP
|
|
23.2
|
Consent
of McGrail Merkel Quinn and Associates
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification
|
|
32.1
|
Section
1350 Certification
|
*
Management contract or compensatory plan contract or arrangement filed pursuant
to Item 601(b)(10)(ii)(A) of Regulation S-B.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NORTH
PENN BANCORP, INC.
|
||
(Registrant)
|
||
By
|
/s/
Frederick L. Hickman
|
|
Frederick
L. Hickman
|
||
President
and Chief Executive Officer
|
||
Principal
Executive Officer
|
||
Date
|
March
31, 2010
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/
Gordon S. Florey
|
March
31, 2010
|
|
Gordon
S. Florey, Director
|
Date
|
|
/s/
Frederick L. Hickman
|
March
31, 2010
|
|
Frederick
L. Hickman
|
Date
|
|
President,
Chief Executive Officer and Director
|
||
/s/
Herbert C. Kneller
|
March
31, 2010
|
|
Herbert
C. Kneller, Director
|
Date
|
67
/s/
Virginia D. McGregor
|
March
31, 2010
|
|
Virginia
D. McGregor, Director
|
Date
|
|
/s/
Frank H. Mechler
|
March
31, 2010
|
|
Frank
H. Mechler, Director
|
Date
|
|
/s/
James W. Reid
|
March
31, 2010
|
|
James
W. Reid, Director
|
Date
|
|
/s/
Kevin M. Lamont
|
March
31, 2010
|
|
Kevin
M. Lamont, Chairman of the Board and Director
|
Date
|
68