Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



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FORM 10-Q

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(Mark One)

x

        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period endedJune 30, 2008o

        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the transition period from __________________ to ______________________



Commission File Number:           000-52839



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NORTH PENN BANCORP, INC.

(Exact name of registrant as specified in its charter)



Pennsylvania

        26-0261305(State or other jurisdiction of Incorporation or organization)

        (IRS Employer Identification No.)




216 Adams Avenue, Scranton, PA  18503

(Address of principal executive offices)



(570) 344-6113

(Registrants telephone number)



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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.   YesxNoo



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 Rule12b-2 of the Exchange Act.

(Check one):

Large accelerated filero

        Accelerated fileroNon-accelerated filero

        Smaller reporting companyx(Do not check if smaller reporting company)




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



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practical date: As of August 12, 2008, the issuer had 1,581,571 shares of common stock, par value $0.10 per share, outstanding.





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PART I - FINANCIAL INFORMATION



PageItem 1.

        Financial StatementsConsolidated Balance Sheets at June 30, 2008 and December 31, 2007

        3Consolidated Statements of Income for the Three and Six Months Ended June 30, 2008 and 2007

        4Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007

        5Notes to Unaudited Consolidated Financial Statements

        6Item 2.

        Managements Discussion and Analysis of Financial Condition and Results of  Operations

        13Item 3.

        Quantitative and Qualitative Disclosures About Market Risk

        17Item 4.

        Controls and Procedures

        17PART II

        OTHER INFORMATIONItem 1.

        Legal Proceedings

        17Item 1A.

        Risk Factors

        17Item 2.

        Unregistered Sales of Equity Securities and Use of Proceeds

        18Item 3.

        Defaults Upon Senior Securities

        18Item 4.

        Submission of Matters to a Vote of Security Holders

        18Item 5.

        Other Information

        18Item 6.

        Exhibits

        18






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Table of Contents

PART I  FINANCIAL INFORMATION



Item 1.

        Financial Statements




North Penn Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets



June 30,2008

        

        December 31,2007(Unaudited)

        

        (Audited)(In thousands)ASSETS:Cash and due from banks

        

        $

        2,447

        

        $

        3,071Interest bearing deposits

        

        

        52

        

        

        107Total cash and cash equivalents

        

        

        2,499

        

        

        3,178Federal funds sold

        

        

        13,745

        

        

        Investment securities, available for sale

        

        

        16,330

        

        

        13,366Equity securities at cost, substantially restricted

        

        

        794

        

        

        1,060Loans, net of allowance for loan losses of $1,184 in 2008 and $1,171 in 2007

        

        

        98,531

        

        

        97,247Bank premises and equipment  net

        

        

        4,162

        

        

        4,159Accrued interest receivable

        

        

        606

        

        

        695Cash surrender value of life insurance

        

        

        2,177

        

        

        2,137Deferred income taxes

        

        

        516

        

        

        466Other real estate owned

        

        

        

        

        

        100Other assets

        

        

        160

        

        

        124TOTAL ASSETS

        

        $

        139,520

        

        $

        122,532LIABILITIES:Deposits:Non-interest bearing deposits

        

        $

        7,496

        

        $

        7,424Interest bearing demand deposits

        

        

        55,587

        

        

        32,922Interest bearing time deposits

        

        

        43,206

        

        

        43,337Total deposits

        

        

        106,289

        

        

        83,683Other borrowed funds

        

        

        12,000

        

        

        17,879Accrued interest and other liabilities

        

        

        993

        

        

        786TOTAL LIABILITIES

        

        

        119,282

        

        

        102,348STOCKHOLDERS EQUITYPreferred stock, no par; 20,000,000 authorized; issued and outstanding, none

        

        

        

        

        

        Common stock, par value $0.10; 80,000,000 authorized; issued and outstanding, 1,581,571

        

        

        158

        

        

        158Additional paid-in capital

        

        

        13,454

        

        

        13,433Retained earnings

        

        

        7,873

        

        

        7,742Unearned ESOP shares

        

        

        (1,059

        )

        

        (1,059

        )Accumulated other comprehensive income

        

        

        (188

        )

        

        (90

        )TOTAL STOCKHOLDERS EQUITY

        

        

        20,238

        

        

        20,184TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

        

        $

        139,520

        

        $

        122,532




See notes to unaudited consolidated financial statements.



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Table of Contents

North Penn Bancorp, Inc. and Subsidiary

Unaudited Consolidated Statements of Income

For the Three and Six Months Ended June 30, 2008 and 2007

(In thousands)



Six Months Ended

        

        Three Months EndedJune 30,2008

        

        June 30,2007

        

        June 30,2008,

        

        June 30,2007,INTEREST INCOMEInterest on loans

        

        $

        3,399

        

        $

        3,399

        

        $

        1,685

        

        $

        1,709Interest on fed funds sold

        

        

        61

        

        

        

        

        

        29

        

        

        Interest on tax exempt investments

        

        

        143

        

        

        143

        

        

        71

        

        

        71Interest on investments

        

        

        154

        

        

        130

        

        

        88

        

        

        66Dividends on investments

        

        

        41

        

        

        60

        

        

        16

        

        

        27Total interest income

        

        

        3,798

        

        

        3,732

        

        

        1,889

        

        

        1,873INTEREST EXPENSEInterest on deposits

        

        

        1,427

        

        

        1,420

        

        

        683

        

        

        685Interest on short-term borrowings

        

        

        15

        

        

        236

        

        

        

        

        

        132Interest on long-term borrowings

        

        

        310

        

        

        308

        

        

        155

        

        

        155Total interest expense

        

        

        1,752

        

        

        1,964

        

        

        838

        

        

        972NET INTEREST INCOME

        

        

        2,046

        

        

        1,768

        

        

        1,051

        

        

        901PROVISION FOR LOAN LOSSES

        

        

        31

        

        

        60

        

        

        

        

        

        30NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

        

        

        2,015

        

        

        1,708

        

        

        1,051

        

        

        871OTHER INCOMEService charges on deposit accounts

        

        

        66

        

        

        72

        

        

        12

        

        

        40Other operating income

        

        

        97

        

        

        106

        

        

        73

        

        

        46Gain on sale of loans

        

        

        

        

        

        79

        

        

        

        

        

        79Gain on sale of securities

        

        

        1

        

        

        34

        

        

        3

        

        

        17TOTAL OTHER INCOME

        

        

        164

        

        

        291

        

        

        88

        

        

        182OTHER EXPENSESalaries and employee benefits

        

        

        1,038

        

        

        944

        

        

        524

        

        

        481Occupancy and equipment expense

        

        

        341

        

        

        304

        

        

        175

        

        

        155Other operating expenses

        

        

        456

        

        

        439

        

        

        260

        

        

        237TOTAL OTHER EXPENSE

        

        

        1,835

        

        

        1,687

        

        

        959

        

        

        873INCOME BEFORE INCOME TAXES

        

        

        344

        

        

        312

        

        

        180

        

        

        180INCOME TAX EXPENSE

        

        

        118

        

        

        97

        

        

        64

        

        

        60NET INCOME

        

        

        226

        

        

        215

        

        

        116

        

        

        120OTHER COMPREHENSIVE INCOME (LOSS):Unrealized holding loss arising during period, net of income tax

        

        

        (98

        )

        

        (154

        )

        

        (120

        )

        

        (107

        )COMPREHENSIVE INCOME (LOSS)

        

        $

        128

        

        $

        61

        

        $

        (4

        )

        $

        13Weighted average number of shares outstanding

        

        

        1,536,761

        

        

        1,527,230

        

        

        1,536,761

        

        

        1,527,230Earnings per share, basic and diluted

        

        $

        0.15

        

        $

        0.14

        

        $

        0.08

        

        $

        0.08Dividends per share

        

        $

        0.06

        

        $

        0.06

        

        $

        0.03

        

        $

        0.03




See notes to unaudited consolidated financial statements.



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North Penn Bancorp, Inc. and Subsidiary

Unaudited Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2008 and 2007

(In thousands)



2008

        

        2007Operating Activities:Net income

        

        $

        226

        

        $

        215Items not requiring (providing) cashDepreciation

        

        

        124

        

        

        135Provision for loan losses

        

        

        31

        

        

        60Amortization of securities (net of accretion)

        

        

        10

        

        

        7Increase in cash surrender value of life insurance

        

        

        (40

        )

        

        (5

        )Net realized gain on securities

        

        

        (1

        )

        

        (34

        )Net realized gain on sale of bank premises and equipment

        

        

        (3

        )

        

        Net realized gain on other real estate owned

        

        

        

        

        

        (6

        )Net realized gain on sale of loans

        

        

        

        

        

        (79

        )Changes in:Accrued interest income and other assets

        

        

        53

        

        

        (224

        )Accrued interest expense and other liabilities

        

        

        180

        

        

        112Net Cash Provided by Operating Activities

        

        

        580

        

        

        181Investing Activities:Purchase bank premises and equipment

        

        

        (131

        )

        

        (42

        )Proceeds from sale of bank premises and equipment

        

        

        7

        

        

        Proceeds from sale of other real estate owned

        

        

        100

        

        

        427Purchase of securities available for sale

        

        

        (4,652

        )

        

        (198

        )Sale of securities available for sale

        

        

        28

        

        

        189Federal funds sold, net

        

        

        (13,745

        )

        

        Matured or called securities available for sale

        

        

        885

        

        

        Redemptions of mortgage-backed securities available for sale

        

        

        618

        

        

        460Net sale (purchase) of restricted stock

        

        

        266

        

        

        (3

        )Net increase in loans to customers

        

        

        (1,315

        )

        

        (3,309

        )Proceeds from sale of loans

        

        

        

        

        

        4,440Net Cash (Used in) Provided by Investing Activities

        

        

        (17,939

        )

        

        1,964Financing Activities:Increase (decrease) in deposits

        

        

        22,606

        

        

        (1,963

        )Decrease in borrowed funds

        

        

        (5,879

        )

        

        (1,081

        )Cash dividends paid

        

        

        (47

        )

        

        (87

        )Net Cash Provided by (Used In) Financing Activities

        

        

        16,680

        

        

        (3,131

        )Net Decrease in Cash and Cash Equivalents

        

        

        (679

        )

        

        (986

        )Cash and Cash Equivalents, January 1

        

        $

        3,178

        

        $

        4,116Cash and Cash Equivalents, June 30

        

        $

        2,499

        

        $

        3,130Supplementary Schedule of Cash Flow Information:Cash paid during the period for:Interest

        

        $

        1,663

        

        $

        1,995Income taxes

        

        

        91

        

        

        62Non-cash investing and financing activities:None




See notes to unaudited consolidated financial statements.



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Table of Contents

Notes to Unaudited Consolidated Financial Statements



1.

        Nature Of Operations And Summary Of Significant Accounting Policies




Nature of Operations



North Penn Bancorp, Inc. (Company) is the holding company for North Penn Bank (Bank).  The Companys common stock is quoted on the OTC Bulletin Board under the symbol NPBP.OB.  The Bank operates from five offices under a state savings bank charter and provides financial services to individuals and corporate customers primarily in Northeastern Pennsylvania.  The Banks primary deposit products are savings and demand deposit accounts and certificates of deposit.  Its primary lending products are real estate, commercial and consumer loans.



Principles Of Consolidation



The accompanying consolidated financial statements include the accounts of North Penn Bancorp, Inc., its wholly-owned subsidiary, North Penn Bank and North Penn Banks wholly-owned subsidiaries, Norpenco, Inc. and North Penn Settlement Services, LLC. These entities are collectively referred to herein as the Company.  All significant intercompany accounts and transactions have been eliminated in consolidation. Norpenco, Inc.s sole activities are purchasing bank stocks and receiving dividends on such stocks. North Penn Settlement Services, LLC, receives non interest income from providing title search work.



The accounting policies of the Company conform with accounting principles generally accepted in the United States of America and with general practices within the banking industry.



Basis of Presentation



The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principals for interim financial information.  In the opinion of management, all adjustments that are of a normal recurring nature and are considered necessary for a fair presentation have been included.  They are not, however, necessarily indicative of the results of consolidated operations for a full year.



Use Of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.



Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses on loans and the valuation of real estate acquired in connection with foreclosures or in the satisfaction of loans.  In connection with the determination of the allowances for losses on loans and foreclosed real estate, management periodically obtains independent appraisals for significant properties.



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Mortgage Partnership Finance Program

The Bank participates in the Mortgage Partnership Finance (MPF) Program of the Federal Home Loan Bank of Pittsburgh (FHLB).  The program is intended to provide member institutions with an alternative to holding fixed-rate mortgages in their loan portfolios or selling them in the secondary market.  An institution participates in the MPF Program by either originating individual loans on a flow basis as an agent for the FHLB pursuant to the MPF 100 Program or by selling, as a principal, closed loans owned by an institution to the FHLB pursuant to one of the FHLBs closed-loan programs.  Under the MPF Program(s), credit risk is shared by the participating institution and the FHLB by structuring the loss exposure in several layers, with the participating institution being liable for losses after application of an initial layer of losses (after any private mortgage
insurance) is absorbed by the FHLB, subject to an agreed-upon maximum amount of such secondary credit enhancement which is intended to be in an amount equivalent to a AA credit risk rating by a rating agency.  The participating institution may also be liable for certain first layer losses after a specified period of time.  The participating institution receives credit enhancement fees from the FHLB for providing this credit enhancement and continuing to manage the credit risk of the MPF Program loans.  Participating institutions are also paid specified servicing fees for servicing the loans.

Transfers involving sales with the Bank acting as principal are accounted for in accordance with SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities(SFAS 140), with the recognition of gains and losses on the sale and related mortgage servicing rights.

The credit enhancement feature of the MPF Program is accounted for by the Bank as a financial guarantee in accordance with FASB Interpretation No. 45,Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45) and reported on the balance sheet at its initial fair value.  Subsequent changes in the recorded guarantee amount would result from termination of any portion or all of the guarantee, additional guarantees being issued or increases in the expected losses resulting from the guarantee.  Such changes in recorded amounts are recognized in the consolidated statements of income or as an increase in the offsetting guarantee fees receivable account in the case of additional guarantees being issued.



2.

        Investment Securities




The Banks investments in securities are classified in two categories and accounted for as follows:



Securities Held-to-Maturity.  Bonds, notes and debentures for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts.



Securities Available-for-Sale.Securities available-for-sale consist of bonds, notes, debentures and equity securities not classified to be held-to-maturity and are carried at fair value with unrealized holding gains and losses, net of tax, reported as a separate component of other comprehensive income until realized.



Purchase premiums and discounts are recognized in interest income on the straight-line basis over the terms of the securities, which approximates the interest method.  Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method and are reported as other income in the statement of income.



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Table of Contents

The amortized cost and fair value of investment securities at June 30, 2008 and December 31, 2007 are as follows:



Available-for-Sale

June 30, 2008

(In thousands)



AmortizedCost

        

        GrossUnrealizedGains

        

        GrossUnrealizedLosses

        

        FairValueU.S. Agency securities

        $

        

        

        $

        

        

        $

        

        

        $

        Mortgage-backed securities

        

        4,892

        

        

        1

        

        

        30

        

        

        4,863Municipal securities

        

        7,526

        

        

        7

        

        

        38

        

        

        7,495Other securities

        

        3,017

        

        

        31

        

        

        56

        

        

        2,992Total debt securities

        

        15,435

        

        

        39

        

        

        124

        

        

        15,350Equity securities

        

        1,181

        

        

        12

        

        

        213

        

        

        980Total Available for Sale

        $

        16,616

        

        $

        51

        

        $

        337

        

        $

        16,330






Available-for-Sale

December 31, 2007

(In thousands)



AmortizedCost

        

        GrossUnrealizedGains

        

        GrossUnrealizedLosses

        

        FairValueU.S. Agency securities

        $

        385

        

        $

        

        

        $

        

        

        $

        385Mortgage-backed securities

        

        4,521

        

        

        

        

        

        41

        

        

        4,480Municipal securities

        

        7,026

        

        

        37

        

        

        2

        

        

        7,061Other securities

        

        500

        

        

        

        

        

        

        

        

        500Total debt securities

        

        12,432

        

        

        37

        

        

        43

        

        

        12,426Equity securities

        

        1,071

        

        

        22

        

        

        153

        

        

        940Total Available for Sale

        $

        13,503

        

        $

        59

        

        $

        196

        

        $

        13,366




The Companys investment securities were all classified as available for sale at June 30, 2008 and December 31, 2007.



The gross fair value and unrealized losses of the Banks investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2008 is as follows (in thousands):



Less than 12 months

        

        12 months or longer

        

        TotalFairValue

        

        UnrealizedLosses

        

        FairValue

        

        UnrealizedLosses

        

        

        FairValue

        

        

        UnrealizedLossesU.S. Agencies

        

        $

        

        

        $

        

        

        $

        

        

        $

        

        

        $

        

        

        $

        Mortgage-backed

        

        

        4,050

        

        

        30

        

        

        

        

        

        

        

        

        4,050

        

        

        30Municipal

        

        

        5,436

        

        

        38

        

        

        

        

        

        

        

        

        5,436

        

        

        38Other securities

        

        

        2,012

        

        

        56

        

        

        

        

        

        

        

        

        2,012

        

        

        56Equity securities

        

        

        298

        

        

        51

        

        

        532

        

        

        162

        

        

        830

        

        

        213$

        11,796

        

        $

        175

        

        $

        532

        

        $

        162

        

        $

        12,328

        

        $

        337




The above table at June 30, 2008 includes 17 securities that have unrealized losses for less than 12 months and 25 securities that have been in an unrealized loss position for 12 or more months.



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The Bank invests in debt securities of the U.S. government, U.S. agencies, U.S. sponsored agencies, obligations of states and political subdivisions and corporate obligations.  Changes in market value of all debt securities can result from changes in interest rates.  Changes in credit quality can affect securities of states and political subdivisions and corporate obligations.  The changes in market value of the debt securities held by the Bank have been due to changes in interest rates, and because the Bank has the ability to hold these investments until maturity, the Bank does not consider these investments to be other-than-temporarily impaired at June 30, 2008.



The Bank invests in equity securities of other banks through its subsidiary, Norpenco, Inc.  Management has evaluated the near-term prospects of the issuers with unrealized losses, in relation to the severity and duration of the impairment.  Based on that evaluation, and the Banks ability to hold these stocks for a reasonable period of time sufficient for a forecasted recovery of fair value, management does not consider these investments to be other-than-temporarily impaired at June 30, 2008.



3.

        Loans




June 30,2008

        

        December 31,2007(In thousands)Real estate mortgages:Construction and land development

        

        $

        97

        

        $

        154Residential, 1  4 family

        

        

        45,628

        

        

        45,593Residential, multi-family

        

        

        1,421

        

        

        1,446Commercial

        

        

        45,369

        

        

        41,685Total real estate mortgages

        

        

        92,515

        

        

        88,878Commercial

        

        

        1,023

        

        

        2,157Consumer

        

        

        6,177

        

        

        7,383Total loans

        

        

        99,715

        

        

        98,418Allowance for loan losses

        

        

        1,184

        

        

        1,171Total loans, net

        

        $

        98,531

        

        $

        97,247




Loans are stated at the principal amount outstanding, net of any unearned income, deferred loan fees and the allowance for loan losses. Interest on mortgage and commercial loans is calculated at the time of payment based on the current outstanding balance of the loan.  Interest on consumer loans is recognized on the simple interest method.



The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries).  Managements periodic evaluation of the adequacy of the allowance is based on the Banks past loan loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrowers ability to pay, the estimated value of any underlying collateral and current economic conditions.



Uncollectible interest on loans that are contractually past due 90 days or more is credited to an allowance established through managements periodic evaluation.  The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in managements judgment, the borrowers ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status.



Allowance for Loan Losses



The Bank determines the provision for loan losses through a quarterly analysis of the loan portfolio.  Factors such as changes in the nature and volume of the portfolio, overall portfolio quality, concentrations of credit risk, review of specific problem loans, current economic conditions and trends that affect the ability of borrowers to pay, and prior loss experience within the various loan categories are considered when reviewing the risks of the portfolio.  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.



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Table of Contents

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 June 30 and December 31 for the year indicated:



(Dollars in thousands)

        

        June 30,2008

        

        December 31,2007Balance at beginning of period

        

        $

        1,171

        

        $

        1,121Charge-offs:Commercial

        

        

        -

        

        

        -Real estate mortgages

        

        

        3

        

        

        -Consumer

        

        

        25

        

        

        45Total

        

        

        28

        

        

        45Recoveries:Commercial

        

        

        -

        

        

        -Real estate mortgages

        

        

        -

        

        

        -Consumer

        

        

        10

        

        

        9Total

        

        

        10

        

        

        9Net charge-offs

        

        

        18

        

        

        36Provision charged to operations

        

        

        31

        

        

        86Balance at end of period

        

        $

        1,184

        

        $

        1,171




4.

        Other Borrowings




The Bank has a line of credit agreement with FHLBank of Pittsburgh for short term borrowings varying from one day to three years.  Advances on this line must be secured by qualifying collateral as defined in the agreement and bear interest at fixed or variable rates as determined at the date advances are made.  The line expires in June, 2011.  As of June 30, 2008, this line of credit had a zero balance.



The Bank also has a $5,000,000 borrowing with FHLBank of Pittsburgh at a fixed rate of 6.19%, which was issued in July of 2000, and matures July of 2010.  The loan requires monthly interest payments, with the principal due at maturity.



The Bank also has a $7,000,000 borrowing with FHLBank of Pittsburgh at a fixed rate of 4.34%, which was issued in July of 2005, and matures July of 2015.  The loan requires quarterly interest payments, with the principal due at maturity.



5.

        Earnings Per Share




Basic earnings per share is computed on the weighted average number of common shares outstanding during each year, adjusted for unearned shares of the ESOP, as prescribed in Statement of Financial Accounting Standards No. 128,Earnings Per Share(SFAS 128).   Diluted earnings per share includes common shares issuable upon exercise of employee stock options as follows:



Six Months EndedJune 30,

        

        Three Months EndedJune 30,2008

        

        2007

        

        2008

        

        2007Numerator

        

        $

        226,000

        

        $

        215,000

        

        $

        116,000

        

        $

        120,000DenominatorBasic shares outstanding

        

        

        1,536,761

        

        

        1,527,230

        

        

        1,536,761

        

        

        1,527,230Effective of dilutive shares

        

        

        1,467

        

        

        1,225

        

        

        1,467

        

        

        1,225Diluted shares outstanding

        

        

        1,538,228

        

        

        1,528,455

        

        

        1,538,228

        

        

        1,528,455Earnings per shareBasic

        

        $

        0.15

        

        $

        0.14

        

        $

        0.08

        

        $

        0.08Diluted

        

        $

        0.15

        

        $

        0.14

        

        $

        0.08

        

        $

        0.08




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Table of Contents

6.

        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.



The exercise price and vesting 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.



Restricted stock grants totaling 20,994 shares were awarded on May 28, 2008 having a fair value of $173,000.  The grants vest over five years.  The market value as of the grant date of the restricted stock grants is charged to expense as the grants vest.



Stock Options.Stock options covering 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.



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)

        $  0.12Volatility (%)

        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.



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Table of Contents

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)

        $  0.12Volatility (%)

        19.00%Risk-free Interest Rate (%)

        4.01%Expected Life

        10 years




A third 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)

        $  0.12Volatility (%)

        29.24%Risk-free Interest Rate (%)

        1.89%Expected Life

        10 years




During the six months ended June 30, 2008, the Company recorded approximately $22,000 in expense included in Salaries and employee benefits on the accompanying financial statements. As of June 30, 2008, there was approximately $393,000 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.



Numberof Shares

        

        Weighted AverageExercise Price

        

        Weighted AverageRemainingContractual TermOutstanding, January 1, 2008

        

        33,250

        

        $

        10.19

        

        Granted

        

        34,997

        

        

        8.25

        

        Exercised

        

        

        

        

        

        

        Forfeited  or expired

        

        

        

        

        

        

        Outstanding, June 30, 2008

        

        68,247

        

        $

        9.19

        

        9.2Exercisable, June 30, 2008

        

        5,896

        

        $

        10.21

        

        8.3






Stock Options

        

        Restricted StockNonvested shares

        

        Numberof Shares

        

        Weighted-AverageGrant-DateFair Value

        

        Numberof Shares

        

        Weighted-AverageGrant-DateFair ValueNonvested,  January 1, 2008

        

        27,354

        

        $

        3.83

        

        4,258

        

        $

        10.21Granted

        

        34,997

        

        

        3.18

        

        20,994

        

        

        8.25Vested

        

        

        

        

        

        

        

        

        

        Forfeited

        

        

        

        

        

        

        

        

        

        Nonvested, June 30, 2008

        

        62,351

        

        $

        3.47

        

        25,252

        

        $

        8.58




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Table of Contents

7.

        Guarantees


FASB Interpretation No. 45,Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45), requires certain guarantees to be recorded at fair value as a liability at inception and when a loss is probable and reasonably estimable, as those terms are defined in FASB Statement No. 5,Accounting for Contingencies(FAS 5).  FIN 45 also requires a guarantor to make significant new disclosures even when the likelihood of making any payments under the guarantee is remote.

In September 2006, the Bank executed a Mortgage Partnership Finance (MPF) Master Commitment (the Commitment) with the FHLBank of Pittsburgh (FHLB) to deliver $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, 2008. The maximum potential amount of future payments that the Bank is required to make under the guarantee is $250,000. 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.



8.

        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 quarter ended June 30, 2008 and the year ended December 31, 2007 (dollars in thousands):



2008

        

        2007Beginning balance

        

        $

        1,334

        

        $

        922Additions

        

        

        596

        

        

        539Collections

        

        

        (607

        )

        

        (127

        )Ending balance

        

        $

        1,323

        

        $

        1,334






Item 2.

        Managements Discussion and Analysis or Plan of Operation




Forward-Looking Statements



North Penn Bancorp, Inc. makes forward-looking statements in this report.  These forward-looking statements may include: statements of goals, intentions and expectations; estimates of risks and of future costs and benefits; assessments of probable loan losses; assessments of market risk; and statements of the ability to achieve financial and other goals.  Forward-looking statements are typically identified by words such as believe, expect, anticipate, intend, outlook, estimate, forecast, project and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made. The Company does not assume any duty and does not undertake to update its
forward-looking statements.  Because forward-looking statements are subject to assumptions and uncertainties, actual results or future events could differ, possibly materially, from those that the Company anticipated in its forward-looking statements, and future results could differ materially from historical performance.



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The Companys forward-looking statements are subject to the following principal risks and uncertainties: general economic conditions and trends, either nationally or locally; conditions in the securities markets; changes in interest rates; changes in deposit flows, and in the demand for deposit and loan products and other financial services; changes in real estate values; changes in the quality or composition of the Companys loan or investment portfolios; changes in competitive pressures among financial institutions or from non-financial institutions; the Companys ability to retain key members of management; changes in legislation, regulation, and policies; and a variety of other matters which, by their nature, are subject to significant uncertainties.  The Company provides greater detail regarding some of these factors in its Form 10-KSB for the year ended
December 31, 2007, including in the Risk Factors section of that report.  The Companys forward-looking statements may also be subject to other risks and uncertainties, including those that it may discuss elsewhere in this report or in its other filings with the SEC.



Financial Condition



Our balance sheet grew $17.0 million, or 13.9%, to $139.5 million at June 30, 2008 from $122.5 million at December 31, 2007.  This growth was due to a large increase in our deposits, which we used to pay down overnight borrowings, purchase investments, and invest in federal funds sold.



Investment securities increased a net of $3.0 million, or 22.6%, to $16.3 million at June 30, 2008 from $13.3 million since December 31, 2007. During the six months ended June 30, 2008, the Company purchased $3.0 million in corporate securities, $995,000 in mortgage-backed securities, and $500,000 in municipal securities. The growth in securities during the six months ended June 30, 2008 was offset by the maturing of a corporate bond, the calling of a federal agency bond and typical pay downs of mortgage-backed securities. The Company also purchased $137,000 in equity securities and sold two equity securities worth $28,000 during the six months ended June 30, 2008.



Net loans increased $1.3 million, or 1.3%, to $98.5 million at June 30, 2008 from $97.2 million at December 31, 2007.  The growth was primarily in the commercial real estate area, offset by reductions in the consumer loan segment.



The provision for loan loss increased $31,000 for the six months ended June 30, 2008.  The Bank had $3,000 in mortgage loans and $25,000 in consumer loans charged-off during the first six months of 2008. The Bank was also able to recover $10,000 in recoveries during the same period. Management assesses the adequacy of the allowance for loan losses based on evaluating known and inherent losses in the loan portfolio and upon managements continuing analysis of the factors underlying the quality of the loan portfolio.



While management believes that, based on information currently available, the allowance for loan losses is sufficient to cover losses inherent in its loan portfolio at this time, no assurance can be given that the level of the allowance for loan losses is sufficient to cover future possible loan losses incurred by the Bank or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.  Management may in the future increase the level of the allowance for loan losses as a percentage of total loans and non-performing loans in the event it increases the level of commercial or consumer lending as a percentage of its total loan portfolio.  In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the allowance for loan losses.  Such agencies may require the Bank to provide additions to the allowance based upon judgments different from management.



Non-performing loans, which are loans past due 90 days or more and non-accruing loans, totaled $221,000 at June 30, 2008, compared to $378,000 at December 31, 2007.  The improvement was primarily in non-accruing residential mortgages.   The ratio of the Banks allowance for loan losses to total loans was 1.19% at June 30, 2008 and December 31, 2007.



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Our deposits increased $22.6 million, or 27.0%, to $106.3 million at June 30, 2008 from $83.7 million at December 31, 2008.  Non-interest bearing deposits increased slightly; to $7.5 million at June 30, 2008 from $7.4 million at December 31, 2007, while time deposits decreased by roughly the same amount, to $43.2 million at June 30, 2008 from $43.3 million at December 31, 2007. Interest bearing demand deposits increased $22.6 million, or 68.8%. The increase in interest bearing demand deposits is due to growth in our Signature Savings account as well as continued growth in  municipal deposits.



The Companys borrowings decreased $5.9 million, or 33.0%, to $12.0 million at June 30, 2008 from $17.9 million at December 31, 2007. The difference in borrowing was attributable to paying off our overnight line of credit with FHLBank of Pittsburgh. The remaining balance is comprised of two long term notes with FHLBank of Pittsburgh.



Results of Operations



Comparison of the Three and Six Month Periods Ended June 30, 2008 and 2007



Net income for the six months ended June 30, 2008 totaled $226,000, an increase of $11,000, or 5.1%, over the same period in 2007. Net income for the three months ended June 30, 2008 decreased $4,000, or 3.3 %, to $116,000 compared to the quarter ended June 30, 2007.  The quarterly income for 2007 was bolstered by a gain on the sale of mortgage loans.



Net interest income increased $278,000 or 15.4%, to $2.0 million for the first half of 2008 from $1.8 million for the same period in 2007. Net interest income for the second quarter ended June 30, 2008 increased $150,000, or 16.6%, to $1.1 million from $901,000 for the quarter ended June 30, 2007.



The Companys interest income for the three and six months ended June 30, 2008 continued to remain at a level consistent with that of 2007. Loan interest and fee income is at the same amount for the six months ended June 30, 2008 and 2007.  We were able to increase the volume of loans to balance out what was sold off in 2007. Interest income from federal funds sold was $61,000 for the six months ended June 30, 2008. During the same period in 2007, the Company did not have interest income from federal funds sold.  Interest on investments increased $24,000 or 18.5%, to $154,000 during the second quarter, from $130,000 at the same period in 2007. The increase is due to the securities purchased during the first half of the year.



For the six months ended June 30,
2008, interest expense decreased $212,000, or 10.6%, to $1.8 million in 2008 from $2.0 million in 2007. Interest expense during
the second quarter decreased $134,000, or 13.8%, to $838,000 in 2008 from $972,000 in 2007. For the six months ended June 30,
interest on deposits remained consistent at $1.4 million for both 2008 and 2007. Interest on deposits for the second quarter of
2008 also remained consistent with the second quarter of 2007. This was an effect of lower rates being offset by greater volumes.
Interest on short term borrowings decreased $132,000, for the second quarter of 2008 and $221,000 or 93.6%, for the six months
ended June 30, 2008 due to the decreases in the volume of our overnight borrowings.



Other income for the second quarter decreased $94,000, or 51.6%, to $88,000 in 2008 from $182,000 in 2007.  Other income for the second quarter of 2007 included a one time gain on the sale of loans.  Total other expenses increased $86,000, or 9.9%, to $959,000 in 2008 from $873,000 in 2007.  Salaries and employee benefits increased $43,000, or 8.9%, to $524,000 in 2008 from $481,000 in 2007.  Occupancy and equipment expense increased $20,000, or 12.9%, to $175,000 in 2008 from $155,000 in 2007, while other expenses increased $23,000, or 9.7%, to $260,000 in 2008 from $237,000 in 2007.



For the six months ended June 30, other income decreased $127,000 or 43.6%, to $164,000 in 2008 from $291,000 in 2007.  The majority of this decrease was related to the one time gain on loan sales during 2007.  Total other expenses increased $148,000, or 8.7%, to $1.8 million in 2008 from $1.7 million in 2007.  Salaries and employee benefits increased $94,000, or 10.0%, to $1.0 million in 2008 from $944,000 in 2007, while occupancy and equipment expense increased $37,000, or 12.2%, to $341,000 in 2008 from $304,000 in 2007.  Other expenses increased $17,000, or 3.9%, to $456,000 in 2008 from $439,000 in 2007.



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Liquidity and Capital Resources



The Banks primary sources of funds are deposits, principal and interest payments on loans and FHLBank advances. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition.  The Banks regulators require the Bank to maintain sufficient liquidity to ensure its safe and sound operation.



Cash and cash equivalents decreased $679,000 for the six months ended June 30, 2008.  During that period, cash was primarily provided from earnings and customer deposits, and was primarily used to pay down overnight borrowing.



North Penn Banks capital ratios at June 30, 2008 and December 31, 2007 as well as the required minimum ratios for capital adequacy purposes and to be well capitalized under the prompt corrective action provisions as defined by the FDIC are summarized as follows:



Actual

        

        For capital adequacypurposes

        

        To be well capitalizedunder promptcorrective actionprovisionsAmount

        

        Ratio

        

        Amount

        

        Ratio

        

        Amount

        

        RatioAt June 30, 2008:Total Capital (to Risk-Weighted Assets):North Penn Bank

        

        $

        16,583

        

        16.06

        %

        >$ 8,261

        

        >8.0

        %

        >$10,326

        

        >10.0

        %Tier 1 Capital (to Risk-Weighted Assets):North Penn Bank

        

        $

        15,399

        

        14.91

        %

        >$ 4,130

        

        >4.0

        %

        >$ 6,196

        

        >6.0

        %Tier 1 Capital (to Average Assets):North Penn Bank

        

        $

        15,399

        

        11.97

        %

        >$ 5,147

        

        >4.0

        %

        >$ 6,433

        

        >5.0

        %Risk-Weighted Assets:

        

        $

        103,261Average Assets:

        

        $

        128,664Reconciliation of GAAP Capital to Regulatory CapitalTotal Equity Capital June 30, 2008

        

        $

        15,411Plus: Unrealized Gain/Loss on Investments

        

        

        (11

        )Less: Disallowed Servicing Rights

        

        

        (1

        )Total Tier Capital June 30, 2008

        

        $

        15,399Plus: Allowance for loan losses

        

        

        1,184Total Risk-based Capital June 30, 2008

        

        $

        16,583At December 31, 2007:Total Capital (to Risk-Weighted Assets):North Penn Bank

        

        $

        16,319

        

        16.97

        %

        >$ 7,695

        

        >8.0

        %

        >$ 9,619

        

        >10.0

        %Tier 1 Capital (to Risk-Weighted Assets):North Penn Bank

        

        $

        15,148

        

        15.75

        %

        >$ 3,847

        

        >4.0

        %

        >$ 5,771

        

        >6.0

        %Tier 1 Capital (to Average Assets):North Penn Bank

        

        $

        15,148

        

        12.71

        %

        >$ 4,766

        

        >4.0

        %

        >$ 5,958

        

        >5.0

        %Risk-Weighted Assets:

        

        $

        96,186Average Assets:

        

        $

        119,156Reconciliation of GAAP Capital to Regulatory CapitalTotal Equity Capital December 31, 2007

        

        $

        15,190Plus: Unrealized Gain/Loss on Investments

        

        

        (41

        )Less: Disallowed Servicing Rights

        

        

        (1

        )Total Tier Capital December 31, 2007

        

        $

        15,148Plus: Allowance for loan losses

        

        

        1,171Total Risk-based Capital December 31, 2007

        

        $

        16,319




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Table of Contents

Related Parties



The Company does not have any material transactions involving related persons or entities, other than traditional banking transactions, which are made on the same terms and conditions as those prevailing at the time for comparable transactions with unrelated parties.



Item 3.

        Quantitative and Qualitative Disclosure About Market Risk




Not applicable as the Company is a smaller reporting company.



Item 4.

        Controls and Procedures




The Companys management, including the Companys principal executive officer and principal financial officer, have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange Act).  Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Companys disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms, and (2) is accumulated and communicated to the Companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.



There have been no changes in the Companys internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(e) that occurred during the Companys last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



PART II  OTHER INFORMATION



Item 1.

        Legal Proceedings




The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business.  Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Companys financial condition or results of operations.



Item 1A.

        Risk Factors




In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I  Item 1  Description of Business - Risk Factors in our Annual Report on Form 10-KSB for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. At June 30, 2008 the risk factors of the Company have not changed materially from those reported in our Annual Report on Form 10-KSB.  However, the risks described in our Annual Report on Form 10-KSB are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.



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Table of Contents

Item 2.

        Unregistered Sales of Equity Securities and Use of Proceeds




The Company did not repurchase any shares of its common stock during the quarter ended June 30, 2008 and did not have any publicly announced repurchase plans or programs.



Item 3.

        Defaults Upon Senior Securities




None.



Item 4.

        Submission of Matters to a Vote of Security Holders




The Annual Meeting of Shareholders of North Penn Bancorp, Inc. on May 28, 2008.



The results of the items submitted for a vote are as follows:



The following three Directors were elected for a term of three years, expiring in 2011 



Name

        Votes for

        Votes withheldGordon S. Florey

        1,348,330

        105,729Virginia D. McGregor

        1,340,178

        113,881James W. Reid

        1,362,688

        91,371




The ratification of Appointment of McGrail Merkel Quinn & Associates as Independent Registered Public Accounting Firm of North Penn Bancorp, Inc. for the fiscal year ending December 31, 2008.



Votes for

        1,387,605Votes against

        19,828Votes abstained

        46,626




Name of Each Director Whose Term of Office Continued After the Annual Meeting:



Name

        Term ExpiresFrank H. Mechler

        2009Hebert C. Kneller

        2009David Samuel

        2009Kevin M. Lamont

        2010Frederick L. Hickman

        2010




Subsequent Events:

David Samuel passed away on June 9th, 2008.



Item 5.

        Other Information




None.



Item 6.

        Exhibits




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))3.3
        Amended and Restated Article IV, Sections 1 & 2 of North Penn Bancorp, Inc. bylaws.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 with Frederick L. Hickman31.1

        Rule 13a-14(a) /15d-14(a) Chief Executive Officer Certification31.2

        Rule 13a-14(a) /15d-14(a) Principal Accounting Officer Certification32.1

        Section 1350 Certification of Chief Executive Officer32.2

        Section 1350 Certification of Principal Accounting Officer




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Table of Contents

SIGNATURES



In accordance with the requirements of the Exchange Act, the registrant caused this report to be so signed on its behalf by the undersigned, thereunto duly authorized.



North Penn Bancorp, Inc.Dated:

        August 14, 2008

        

        /s/   Frederick L. HickmanFrederick L. HickmanPresident andChief Executive OfficerDated:

        August 14, 2008

        

        /s/   Glenn J. ClarkGlenn J. ClarkAssistant Vice President andPrincipal Accounting Officer




19

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