UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





(Mark
One)


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





For the
quarterly period ended    September 30, 2009





 ̈
            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





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)





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 Web site, 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 such shorter period that the registrant was required to submit
and post such files).   Yes  ̈     No
 ̈





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 filer  ̈                                           Accelerated
filer  ̈


Non-accelerated
filer    ̈                                           Smaller
reporting company x


(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).  Yes  ̈  No  x





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practical date: As of November 13, 2009 the issuer had
1,349,071 shares of common stock, par value $0.10 per share,
outstanding.














PART
I - FINANCIAL INFORMATION





PageItem
      1. Financial Statements.Consolidated
      Balance Sheets at September 30, 2009 and December 31, 2008
                
                
                3Consolidated
      Statements of Income for the Three and Nine Months Ended September 30,
      2009 and 2008
                
                
                4Consolidated
      Statements of Cash Flows for the Nine Months Ended September 30, 2009 and
      2008
                
                
                5Notes
      to Unaudited Consolidated Financial Statements
                
                
                6Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                
                
                19Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk.
                
                
                23Item
      4. Controls and Procedures.
                
                
                23PART
      II - OTHER INFORMATIONItem
      1. Legal Proceedings
                
                
                23Item
      1A.Risk Factors
                
                
                23Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                
                
                24Item
      3. Defaults Upon Senior Securities.
                
                
                24Item
      4. Other Information.
                
                
                24Item
      5. Exhibits.
                
                
                24





2





PART
I – FINANCIAL INFORMATION





Item
1.    Financial Statements





North
Penn Bancorp, Inc. and Subsidiary


Consolidated
Balance Sheets





September
      30,
                  2009
                
                
                December
      31,
                  2008(Unaudited)
                
                
                (Audited)(In
      thousands)ASSETS:Cash
      and due from banks
                
                $
                1,951
                
                
                $
                1,604Interest
      bearing deposits at other financial institutions
                
                
                567
                
                
                
                43Total
      cash and cash equivalents
                
                
                2,518
                
                
                
                1,647Federal
      funds sold
                
                
                10,350
                
                
                
                627Investment
      securities, available for sale
                
                
                19,548
                
                
                
                20,293Equity
      securities at cost, substantially restricted
                
                
                1,143
                
                
                
                1,090Loans,
      net of allowance for loan losses of $1,243 in 2009 and $1,170 in
      2008
                
                
                109,450
                
                
                
                106,106Loans
      held for sale
                
                
                -
                
                
                
                684Bank
      premises and equipment – net
                
                
                3,985
                
                
                
                4,126Accrued
      interest receivable
                
                
                687
                
                
                
                676Cash
      surrender value of life insurance
                
                
                2,978
                
                
                
                2,864Deferred
      income taxes
                
                
                390
                
                
                
                657Other
      real estate owned
                
                
                204Other
      assets
                
                
                225
                
                
                
                220TOTAL
      ASSETS
                
                $
                151,478
                
                
                $
                138,990LIABILITIES:Deposits:Non-interest
      bearing deposits
                
                $
                6,697
                
                
                $
                6,985Interest
      bearing demand deposits
                
                
                47,563
                
                
                
                48,468Interest
      bearing time deposits
                
                
                65,089
                
                
                
                43,700Total
      deposits
                
                
                119,349
                
                
                
                99,153Other
      borrowed funds
                
                
                12,000
                
                
                
                19,648Accrued
      interest and other liabilities
                
                
                944
                
                
                
                891TOTAL
      LIABILITIES
                
                
                132,293
                
                
                
                119,692STOCKHOLDERS’
      EQUITY:Preferred
      stock, no par; 20,000,000 authorized; issued and outstanding,
      none
                
                
                -
                
                
                
                -Common
      stock, par value $0.10; 80,000,000 authorized; 1,581,571shares issued in
      2009 and 2008; outstanding: 1,370,271 in 2009 and 1,478,571 in
      2008
                
                
                158
                
                
                
                158Additional
      paid-in capital
                
                
                13,550
                
                
                
                13,480Retained
      earnings
                
                
                8,134
                
                
                
                7,905Unearned
      ESOP shares
                
                
                (980
                )
                
                
                (980
                )Accumulated
      other comprehensive income/ (loss)
                
                
                58
                
                
                
                (460
                )Treasury
      Stock at cost, shares: 211,300 in 2009 and 103,000 in 2008
                
                
                (1,735
                )
                
                
                (805
                )TOTAL
      STOCKHOLDERS’ EQUITY
                
                
                19,185
                
                
                
                19,298TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                151,478
                
                
                $
                138,990





See notes
to unaudited consolidated financial statements.





3





North
Penn Bancorp, Inc. and Subsidiary


Unaudited
Consolidated Statements of Income


For
the Three and Nine Months Ended September 30, 2009 and 2008


(In
thousands)





Nine
      Months Ended
                          September
      30,
                        
                        
                        Three
      Months Ended
                          September
      30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008INTEREST
      INCOMEInterest
      on loans
                        
                        $
                        5,114
                        
                        
                        $
                        5,130
                        
                        
                        $
                        1,700
                        
                        
                        $
                        1,731Interest
      on federal funds sold
                        
                        
                        5
                        
                        
                        
                        93
                        
                        
                        
                        2
                        
                        
                        
                        32Interest
      on tax exempt investments
                        
                        
                        222
                        
                        
                        
                        216
                        
                        
                        
                        74
                        
                        
                        
                        73Interest
      on investments
                        
                        
                        338
                        
                        
                        
                        278
                        
                        
                        
                        104
                        
                        
                        
                        124Dividends
      on investments
                        
                        
                        35
                        
                        
                        
                        56
                        
                        
                        
                        20
                        
                        
                        
                        15Total
      interest income
                        
                        
                        5,714
                        
                        
                        
                        5,773
                        
                        
                        
                        1,900
                        
                        
                        
                        1,975INTEREST
      EXPENSEInterest
      on deposits
                        
                        
                        1,896
                        
                        
                        
                        2,089
                        
                        
                        
                        629
                        
                        
                        
                        662Interest
      on short-term borrowings
                        
                        
                        10
                        
                        
                        
                        15
                        
                        
                        
                        -
                        
                        
                        
                        -Interest
      on long-term borrowings
                        
                        
                        462
                        
                        
                        
                        469
                        
                        
                        
                        154
                        
                        
                        
                        159Total
      interest expense
                        
                        
                        2,368
                        
                        
                        
                        2,573
                        
                        
                        
                        783
                        
                        
                        
                        821NET
      INTEREST INCOME
                        
                        
                        3,346
                        
                        
                        
                        3,200
                        
                        
                        
                        1,117
                        
                        
                        
                        1,154PROVISION
      FOR LOAN LOSSES
                        
                        
                        135
                        
                        
                        
                        31
                        
                        
                        
                        45
                        
                        
                        
                        -NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
                        
                        
                        3,211
                        
                        
                        
                        3,169
                        
                        
                        
                        1,072
                        
                        
                        
                        1,154OTHER
      INCOMEService
      charges and fees
                        
                        
                        111
                        
                        
                        
                        103
                        
                        
                        
                        38
                        
                        
                        
                        37Other
      operating income
                        
                        
                        89
                        
                        
                        
                        80
                        
                        
                        
                        35
                        
                        
                        
                        28Earnings
      on bank owned life insurance
                        
                        
                        118
                        
                        
                        
                        64
                        
                        
                        
                        38
                        
                        
                        
                        19Gain
      on sale of securities
                        
                        
                        -
                        
                        
                        
                        2
                        
                        
                        
                        -
                        
                        
                        
                        2Net
      gain on sale of loans
                        
                        
                        14
                        
                        
                        
                        1
                        
                        
                        
                        -
                        
                        
                        
                        -TOTAL
      OTHER INCOME
                        
                        
                        332
                        
                        
                        
                        250
                        
                        
                        
                        111
                        
                        
                        
                        86OTHER
      EXPENSESalaries
      and employee benefits
                        
                        
                        1,616
                        
                        
                        
                        1,544
                        
                        
                        
                        527
                        
                        
                        
                        506Occupancy
      and equipment expense
                        
                        
                        451
                        
                        
                        
                        502
                        
                        
                        
                        146
                        
                        
                        
                        161Other
      operating expenses
                        
                        
                        753
                        
                        
                        
                        694
                        
                        
                        
                        232
                        
                        
                        
                        243FDIC
      insurance premiums
                        
                        
                        196
                        
                        
                        
                        9
                        
                        
                        
                        43
                        
                        
                        
                        4Loss
      from accounting errors
                        
                        
                        -
                        
                        
                        
                        475
                        
                        
                        
                        -
                        
                        
                        
                        -TOTAL
      OTHER EXPENSE
                        
                        
                        3,017
                        
                        
                        
                        3,224
                        
                        
                        
                        948
                        
                        
                        
                        914INCOME
      BEFORE INCOME TAXES
                        
                        
                        527
                        
                        
                        
                        195
                        
                        
                        
                        235
                        
                        
                        
                        326INCOME
      TAX EXPENSE
                        
                        
                        160
                        
                        
                        
                        40
                        
                        
                        
                        90
                        
                        
                        
                        120NET
      INCOME
                        
                        
                        367
                        
                        
                        
                        155
                        
                        
                        
                        145
                        
                        
                        
                        206OTHER
      COMPREHENSIVE INCOME/(LOSS):Unrealized
      holding gain arising during period, net of income tax
                        
                        
                        518
                        
                        
                        
                        (518
                        )
                        
                        
                        413
                        
                        
                        
                        (420
                        )COMPREHENSIVE
      INCOME(LOSS)
                        
                        $
                        885
                        
                        
                        $
                        (363
                        )
                        
                        $
                        568
                        
                        
                        $
                        (214
                        )Weighted
      average number of shares outstanding
                        
                        
                        1,400,044
                        
                        
                        
                        1,536,761
                        
                        
                        
                        1,365,371
                        
                        
                        
                        1,536,761Earnings
      per share, basic and diluted
                        
                        $
                        0.26
                        
                        
                        $
                        0.10
                        
                        
                        $
                        0.11
                        
                        
                        $
                        0.13Dividends
      per share
                        
                        $
                        0.09
                        
                        
                        $
                        0.09
                        
                        
                        $
                        0.03
                        
                        
                        $
                        0.03




See notes
to unaudited consolidated financial statements.





4





North
Penn Bancorp, Inc. and Subsidiary


Unaudited
Consolidated Statements of Cash Flows


For
the Nine Months Ended September 30, 2009 and 2008


(In
thousands)




2009
                
                
                2008Operating
      Activities:Net
      income
                
                $
                367
                
                
                $
                155Items
      not requiring (providing) cashDepreciation
                
                
                174
                
                
                
                192Provision
      for loan losses
                
                
                135
                
                
                
                31Amortization
      of securities (net of accretion)
                
                
                28
                
                
                
                15Increase
      in cash surrender value of life insurance
                
                
                (118
                )
                
                
                (2
                )Net
      realized gain on securities
                
                
                -
                
                
                
                (2
                )Net
      realized gain on sale of bank premises and equipment
                
                
                -
                
                
                
                (2
                )Net
      realized gain on sale of loans
                
                
                (14
                )
                
                
                (1
                )Changes
      in:Accrued
      interest income and other assets
                
                
                (16
                )
                
                
                (212
                )Accrued
      interest expense and other liabilities
                
                
                126
                
                
                
                151Net
      Cash Provided By Operating Activities
                
                
                682
                
                
                
                325Investing
      Activities:Purchase
      of bank premises and equipment
                
                
                (32
                )
                
                
                (137
                )Proceeds
      from sale of bank premises and equipment
                
                
                -
                
                
                
                11Proceeds
      from sale of other real estate
                
                
                -
                
                
                
                100Purchase
      of securities “available for sale”
                
                
                (2,749
                )
                
                
                (9,724
                )Sales
      of securities “available for sale”
                
                
                70
                
                
                
                28Federal
      funds sold, net
                
                
                (9,723
                )
                
                
                (4,230
                )Matured
      or called securities “available for sale”
                
                
                2,593
                
                
                
                940Redemptions
      of mortgage-backed securities “available forsale”
                
                
                1,589
                
                
                
                1,079(Purchase)
      redemption of restricted stock
                
                
                (53
                )
                
                
                279Net
      increase in loans to customers
                
                
                (3,683
                )
                
                
                (2,544
                )Proceeds
      from sale of loans
                
                
                698
                
                
                
                776Net
      Cash Used In Investing Activities
                
                
                (11,290
                )
                
                
                (13,422
                )Financing
      Activities:Increase
      in deposits
                
                
                20,196
                
                
                
                18,911Decrease
      in borrowed funds
                
                
                (7,648
                )
                
                
                (5,879
                )Treasury
      stock purchased
                
                
                (931
                )
                
                
                -Cash
      dividends paid
                
                
                (138
                )
                
                
                (95
                )Net
      Cash Provided By Financing Activities
                
                
                11,479
                
                
                
                12,937Net
      Increase (Decrease) In Cash and Cash Equivalents
                
                
                871
                
                
                
                (160
                )Cash
      and Cash Equivalents, January 1
                
                
                1,647
                
                
                
                3,178Cash
      and Cash Equivalents, September 30
                
                $
                2,518
                
                
                $
                3,018Supplementary
      Schedule of Cash Flow Information:Cash
      paid during the period for:Interest
                
                $
                2,366
                
                
                $
                2,493Income
      taxes
                
                
                112
                
                
                
                116Non-cash
      investing and financing activities:Unrealized
      gains (losses) on securities
                
                $
                786
                
                
                $
                (784
                )





See notes
to unaudited consolidated financial statements.





5





Notes
to Unaudited Consolidated Financial Statements





1.
            Nature
      of Operations and Summary of Significant Accounting
    Policies





Nature
of Operations





North
Penn Bancorp, Inc. (Company) is the holding company for North Penn Bank (Bank);
a Pennsylvania state chartered savings bank.  The Company’s common
stock is quoted on the OTC Bulletin Board under the symbol
“NPBP.OB.”  The Bank operates from five offices 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 accounting principles generally accepted in the United States of America
for interim financial information.  Accordingly, they do not include
all of the information and footnotes required by us, generally accepted
accounting principles for complete financial statements.  In the
opinion of management, all adjustments considered necessary for fair
presentation have been included.





Recent
Accounting Pronouncements





FASB ASC
820-10-In February 2008, the FASB issued new guidance impacting FASB ASC
820-10, (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 North Penn Bank’s consolidated financial position or results
of operations.





FASB ASC
805-In December 2007, the FASB issued new guidance impacting FASB ASC
805, Business
Combinations (SFAS No. 141(R)-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 non-controlling interest in the
acquirer, (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.





FASB ASC
810-10-In
December 2007, the FASB issued FASB ASC 810-10, Consolidation (Statement No.
160-Non-controlling Interest in Consolidated Financial Statements- an amendment
of ARB No. 51).  FASB ASC 810-10 requires the ownership interest 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 parent’s equity.  It also requires the amount of
consolidated net income attributable to the parent and the non-controlling
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 operation.





6





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 and the required disclosures have
been included.





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
the 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(R)).  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 disclosure that provides 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.





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(R) and SFAS No. 160).  SAB 112 was effective for the Company
as of June 30, 2009.  There was no material impact to North Penn
Bank’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
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.





7





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 that 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 operation.





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 earning
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.





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 September2009,
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.





8





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.





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-Transfers and Servicing, 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 ASC 460-Guarantees,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.




Certain
items in the 2008 consolidated financial statements have been reclassified to
conform to the 2009 financial statement presentation.  Such
reclassifications had no effect on the consolidated net income or financial
condition.





2.
            Investment
      Securities





The
Company’s investments in securities are classified in two categories and
accounted for as follows:





9




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





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





The
amortized cost and fair value of investment securities at September 30, 2009 and
December 31, 2008 are as follows:





Available-for-Sale


September
30, 2009


(In
thousands)





Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                Fair
                  ValueU.S.
      Agency securities
                
                $
                1,500
                
                
                $
                26
                
                
                $
                -
                
                
                $
                1,526Mortgage-backed
      securities
                
                
                2,990
                
                
                
                108
                
                
                
                -
                
                
                
                3,098State
      & political subdivisions
                
                
                8,422
                
                
                
                345
                
                
                
                
                
                
                
                8,767Other
      bonds
                
                
                4,940
                
                
                
                155
                
                
                
                137
                
                
                
                4,958Total
      debt securities
                
                
                17,852
                
                
                
                634
                
                
                
                137
                
                
                
                18,349Equity
      securities
                
                
                1,608
                
                
                
                9
                
                
                
                418
                
                
                
                1,199Total
      Available-for-Sale
                
                $
                19,460
                
                
                $
                643
                
                
                $
                555
                
                
                $
                19,548





Available-for-Sale


December
31, 2008


(In
thousands)





Amortized
                    Cost
                  
                  
                  Gross
                    Unrealized
                    Gains
                  
                  
                  Gross
                    Unrealized
                    Losses
                  
                  
                  Fair
                    ValueU.S.
      Agency securities
                  
                  $
                  3,000
                  
                  
                  $
                  16
                  
                  
                  $
                  -
                  
                  
                  $
                  3,016Mortgage-backed
      securities
                  
                  
                  5,074
                  
                  
                  
                  68
                  
                  
                  
                  -
                  
                  
                  
                  5,142State
      & political subdivisions
                  
                  
                  8,529
                  
                  
                  
                  20
                  
                  
                  
                  338
                  
                  
                  
                  8,211Other
      bonds
                  
                  
                  3,017
                  
                  
                  
                  38
                  
                  
                  
                  189
                  
                  
                  
                  2,866Total
      debt securities
                  
                  
                  19,620
                  
                  
                  
                  142
                  
                  
                  
                  527
                  
                  
                  
                  19,235Equity
      securities
                  
                  
                  1,371
                  
                  
                  
                  11
                  
                  
                  
                  324
                  
                  
                  
                  1,058Total
      Available-for-Sale
                  
                  $
                  20,991
                  
                  
                  $
                  153
                  
                  
                  $
                  851
                  
                  
                  $
                  20,293





All of
the Company’s investment securities were classified as available-for-sale at
September 30, 2009 and December 31, 2008.





10





The gross
fair value and unrealized losses of the Company’s investment securities,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position at September 30, 2009, are as
follows:




Less than 12 months
                    
                    
                    12 months or longer
                    
                    
                    TotalFair
                      Value
                    
                    
                    Unrealized
                      Losses
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      Losses
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      LossesU.S.
      Agencies
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Mortgage-backed
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Municipal
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Other
      securities
                    
                    
                    462
                    
                    
                    
                    (47
                    )
                    
                    
                    872
                    
                    
                    
                    (90
                    )
                    
                    
                    1,334
                    
                    
                    
                    (137
                    )Equity
      securities
                    
                    
                    432
                    
                    
                    
                    (72
                    )
                    
                    
                    595
                    
                    
                    
                    (346
                    )
                    
                    
                    1,027
                    
                    
                    
                    (418
                    )Total
                    
                    $
                    894
                    
                    
                    $
                    (119
                    )
                    
                    $
                    1,467
                    
                    
                    $
                    (436
                    )
                    
                    $
                    2,361
                    
                    
                    $
                    (555
                    )





The above
table at September 30, 2009 includes 19 securities that have unrealized losses
for less than 12 months and 35 securities that have been in an unrealized loss
position for 12 or more months.





The
Company 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.  Because the changes in market value of debt securities
is due to changes in interest rates, and since the Company does not intend to
sell the securities and it is more likely than not that the Company will not
have to sell the securities before recovery of their cost basis, the Company
does not consider these investments to be other-than-temporarily impaired at
September 30, 2009.





The
Company 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 cost, management does not consider these investments to be
other-than-temporarily impaired at September 30, 2009.





3.
            Loans





September 30,
                          2009
                        
                        
                        December 31,
                          2008(In
      thousands)Real
      estate mortgages:Construction
      and land development
                        
                        $
                        -
                        
                        
                        $
                        546Residential,
      1 – 4 family
                        
                        
                        46,485
                        
                        
                        
                        44,986Residential,
      multi-family
                        
                        
                        1,113
                        
                        
                        
                        1,147Commercial
                        
                        
                        56,126
                        
                        
                        
                        53,448Total
      real estate mortgages
                        
                        
                        103,724
                        
                        
                        
                        100,127Commercial
                        
                        
                        2,812
                        
                        
                        
                        1,796Consumer
                        
                        
                        4,158
                        
                        
                        
                        5,353Total
      loans
                        
                        
                        110,694
                        
                        
                        
                        107,276Allowance
      for loan losses
                        
                        
                        1,243
                        
                        
                        
                        1,170Total
      loans, net
                        
                        $
                        109,450
                        
                        
                        $
                        106,106





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.





11





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





Non-performing
loans, which are loans past due 90 days or more and non-accruing loans, totaled
$1.5 million at September 30, 2009, compared to $1.1 million at December 31,
2008.





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.





The
following table sets forth the period-end balances of and changes in the
allowance for loan losses as of September 30, 2009 and December 31,
2008:





September
      30,
                    
                    
                    December
      31,(Dollars
      in thousands)
                    
                    2009
                    
                    
                    2008Balance
      at beginning of period
                    
                    $
                    1,170
                    
                    
                    $
                    1,171Charge-offs:Commercial
                    
                    
                    50
                    
                    
                    
                    -Real
      estate mortgages
                    
                    
                    -
                    
                    
                    
                    3Consumer
                    
                    
                    22
                    
                    
                    
                    47Total
                    
                    
                    72
                    
                    
                    
                    50Recoveries:Commercial
                    
                    
                    -
                    
                    
                    
                    -Real
      estate mortgages
                    
                    
                    -
                    
                    
                    
                    -Consumer
                    
                    
                    10
                    
                    
                    
                    18Total
                    
                    
                    10
                    
                    
                    
                    18Net
      charge-offs
                    
                    
                    62
                    
                    
                    
                    32Provision
      charged to operations
                    
                    
                    135
                    
                    
                    
                    31Balance
      at end of period
                    
                    $
                    1,243
                    
                    
                    $
                    1,170





4.
            Other
      Borrowings





The Bank
has a line of credit agreement 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 September 30, 2009, this line of
credit had a zero balance.





12





The Bank
has a $5.0 million borrowing with the FHLB at a fixed rate of 6.19%, which was
issued in July, 2000, and matures July, 2010.  The loan requires
monthly interest payments, with the principal due at maturity.





The Bank
also has a $7.0 million borrowing with the FHLB at a fixed rate of 4.34%, which
was issued in July, 2005, and matures in July, 2015.  This 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 by FASB ASC 260-10 Earnings per Share, SFAS No.
128, Earnings Per Share
(SFAS 128).  Diluted earnings per share at September 30, 2009,
includes common shares issuable upon exercise of employee stock options as
follows:




Nine Months Ended
                      September 30,
                    
                    
                    Three Months Ended
                      September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Income
      (Numerator)
                    
                    $
                    367,000
                    
                    
                    $
                    155,000
                    
                    
                    $
                    145,000
                    
                    
                    $
                    206,000Shares
      (Denominator)Basic
      shares outstanding
                    
                    
                    1,400,044
                    
                    
                    
                    1,536,761
                    
                    
                    
                    1,365,371
                    
                    
                    
                    1,536,761Effective
      of dilutive shares
                    
                    
                    -
                    
                    
                    
                    728
                    
                    
                    
                    -
                    
                    
                    
                    728Diluted
      shares outstanding
                    
                    
                    1,400,044
                    
                    
                    
                    1,537,489
                    
                    
                    
                    1,365,371
                    
                    
                    
                    1,537,489Earnings
      per shareBasic
                    
                    $
                    0.26
                    
                    
                    $
                    0.10
                    
                    
                    $
                    0.11
                    
                    
                    $
                    0.13Diluted
                    
                    $
                    0.26
                    
                    
                    $
                    0.10
                    
                    
                    $
                    0.11
                    
                    
                    $
                    0.13





6.
            Omnibus
      Stock Option Plan




Stock-based
compensation is accounted for in accordance with FASB ASC 718-10-Compensation Stock Compensation, SFAS No.
123(R),Share-Based
Payment. The Company establishes fair value for its equity awards to
determine their cost. The Company recognizes the related expense for
employees over the appropriate vesting period, or when applicable, service
period, using the straight-line method. However, consistent with the standard,
the amount of stock-based compensation recognized at any date must at least
equal the portion of the grant date value of the award that is vested at that
date and as a result it may be necessary to recognize the expense using a
ratable method. In accordance with FASB ASC 505-50 Equity Based Payments to
Non-Employees, Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees, the compensation expense for
non-employees is recognized on the grant date, or when applicable, the service
period, using the straight-line method.




The
Company’s 2006 Omnibus Stock Option Plan (the Plan) authorizes the issuance of
shares of common stock pursuant to awards that may be granted in the form of
stock options and restricted stock awards. Under the Plan, the Company reserved
101,865 shares of common stock for future issuance. The purpose of the Plan is
to attract and retain personnel for positions of substantial responsibility and
to provide additional incentive to certain officers, directors, advisory
directors, employees and other persons to promote the success of the Company.
Under the Plan, options expire ten years after the date of grant, unless
terminated earlier under the option terms. A committee of non-employee directors
has the authority to determine the conditions upon which the options granted
will vest. Options are granted at the then fair market value of the Company’s
stock.





13





On May
26, 2009, the Company’s stockholders approved the Company’s 2009 Equity
Incentive Plan (the 2009 plan).  The Company has reserved 119,000
shares of common stock for future issuance upon the grant or exercise of awards
made pursuant to the plan.  Of the 119,000 shares, 85,000 is the
maximum number of shares of common stock which may be issued upon the exercise
of options to purchase shares of common stock, while 34,000 is the maximum that
may be distributed upon the vesting of stock awards.  As of September
30, 2009, no awards had been made under the 2009 plan.





A summary
of the status of the Company’s stock options as of September 30, 2009 is as
follows:




Number of
                      Shares
                    
                    
                    Weighted
                      Average
                      Exercise PriceOutstanding,
      January 1, 2009
                    
                    
                    62,879
                    
                    
                    $
                    9.11Granted
                    
                    
                    1,000
                    
                    
                    $
                    8.50Exercised
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    -
                    
                    
                    
                    -Outstanding,
      September 30, 2009
                    
                    
                    63,879
                    
                    
                    $
                    9.10Exercisable,
      September 30, 2009
                    
                    
                    22,620
                    
                    
                    $
                    9.60





The
following table summarizes all stock options outstanding as of September 30,
2009:





Options OutstandingDate Issued
                  
                  Number of
                    Shares
                  
                  
                  Weighted
                    Average
                    Exercise Price
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual LifeSeptember
      26, 2006
                  
                  
                  25,116
                  
                  
                  $
                  10.19
                  
                  
                  
                  7.0October
      23, 2007
                  
                  
                  3,766
                  
                  
                  $
                  9.95
                  
                  
                  
                  8.1May
      28, 2008
                  
                  
                  33,997
                  
                  
                  $
                  8.25
                  
                  
                  
                  8.7May
      11, 2009
                  
                  
                  1,000
                  
                  
                  $
                  8.50
                  
                  
                  
                  9.5





A summary
of non-vested shares as of September 30, 2009 is as follows:




Options:
                    
                    
                    Awards:Number
                      of
                      Shares
                    
                    
                    Weighted
                      Average
                      Grant
                      Date Fair
                      Value
                    
                    
                    Number
                      of
                      Shares
                    
                    
                    Weighted
                      Average
                      Grant
                      Date Fair
                      ValueNonvested,
      January 1, 2009
                    
                    
                    52,080
                    
                    
                    $
                    3.40
                    
                    
                    
                    22,992
                    
                    
                    $
                    8.47Issued
                    
                    
                    1,000
                    
                    
                    
                    2.70
                    
                    
                    
                    500
                    
                    
                    
                    8.50Vested
                    
                    
                    (11,822
                    )
                    
                    
                    3.18
                    
                    
                    
                    (4,949
                    )
                    
                    
                    8.59Forfeited
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    -Nonvested,
      September 30, 2009
                    
                    
                    41,258
                    
                    
                    $
                    3.45
                    
                    
                    
                    18,543
                    
                    
                    $
                    8.44





The
compensation expense recognized for awards under the Company’s equity plans at
September 30, 2009 and 2008 was $71,000 and $46,000, respectively.





As of
September 30, 2009, there was approximately $277,000 of total unrecognized
compensation cost related to options and nonvested stock awards granted under
the Company’s equity plans.  The cost of the options and stock awards
is expected to be recognized over a weighted-average period of five
years.





14




7.
            Guarantees




FASB ASC
460 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 ASC 450 Contingencies,SFAS 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.




On
September 16, 2009, the Bank renewed the Mortgage Partnership Finance (MPF)
Master Commitment (the Commitment) with the FHLB, which was originally executed
on September 2006 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 16,
2010. The maximum potential amount of future payments that the Bank is required
to make under the guarantee is $225,000. 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 nine-months ended September 30, 2009 and the year
ended December 31, 2008 (dollars in thousands):





2009
                  
                  
                  2008Beginning
      balance
                  
                  $
                  1,327
                  
                  
                  $
                  1,334Additions
                  
                  
                  4
                  
                  
                  
                  647Collections
                  
                  
                  (72
                  )
                  
                  
                  (654
                  )Ending
      balance
                  
                  $
                  1,259
                  
                  
                  $
                  1,327





15





9.
            Retirement
      Plans





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 Statement of Financial
Accounting Standards 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.





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, 2008 and 2007, the required contributions due were
$94,000 and $138,000 respectively.





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.  It is estimated that the
increased cost of higher matching will be approximately $42,000 for
2009.





10.
            Fair
      Value Measurements




Effective
January 1, 2008, the Company adopted FASB ASC 820 Fair Value Measurements and
Disclosures,SFAS No. 157, Fair Value Measurements, which, among other
things, requires enhanced disclosures about assets and liabilities carried at
fair value.




In April
2009, the Financial Accounting Standards Board (FASB) issued Staff Position FASB
ASC 820 Fair Value
Measurements and Disclosures (FSP) No. 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 (FSP FAS
157-4).  The standard, defines fair value as the price that would be
received to sell the asset or transfer the liability in an orderly transaction
(that is, not a forced liquidation or distressed sale) between market
participants at the measurement date under current market
conditions.  Additional guidance is provided on determining when the
volume and level of activity for the asset or liability has significantly
decreased.  The FSP also includes guidance on identifying
circumstances when a transaction may not be considered orderly.




A list of
factors is provided that a reporting entity should evaluate to determine whether
there has been a significant decrease in the volume and level of activity for
the asset or liability in relation to normal market activity for the asset or
liability.  When the reporting entity concludes there has been a
significant decrease in the volume and level of activity for the asset or
liability, further analysis of the information from that market is needed and
significant adjustments to the related prices may be necessary to estimate fair
value in accordance with FASB ASC 820-Fair Value Measurements and
Disclosures.




This FSP
clarifies that when there has been a significant decrease in the volume and
level of activity for the asset or liability, some transactions may not be
orderly.  In those situations, the entity must evaluate the weight of
the evidence to determine whether the transaction is orderly.  The FSP
provides a list of circumstances that may indicate that a transaction is not
orderly.  A transaction price that is not associated with an orderly
transaction is given little, if any, weight when estimating fair
value.  This FSP is effective for the Corporation for interim and
annual reporting periods ending June 30, 2009 and after.





16




FASB
ASC 820-Fair Value
Measurements and Disclosures 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
by SFAS No. 157 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.  Other real estate owned is recorded at fair value on a
non-recurring basis.  Values are estimated using Level 3 inputs, 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-for-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
values of all loans are 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 to reflect the Bank’s current market
pricing.  The discount rates for non-maturity deposits are the current
book rate of the deposit.




Other
borrowing:  The fair value of the other borrowing is estimated
using the rates currently offered for similar borrowing.




Accrued
interest:  The carrying amounts of accrued interest approximate
their fair values.




Off-balance-sheet
instruments:  The fair value of letters of credit is based on
fees currently charged for similar agreements.




The
following table presents the assets reported on the consolidated balance sheets
at their fair value as of September 30, 2009 by level within the fair value
hierarchy. As required by FASB ASC 820 Fair Value Measurements and Disclosures,
SFAS No. 157, financial assets and liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value
measurement.  There were no changes during 2009 in Level III
assets.





17




Assets
measured at fair value on a recurring basis (in thousands):




September 30, 2009Level I
                      
                      
                      Level II
                      
                      
                      Level III
                      
                      
                      TotalAssets:Securities
      available-for-sale
                      
                      $
                      1,136
                      
                      
                      $
                      18,349
                      
                      
                      $
                      63
                      
                      
                      $
                      19,548





Assets
measured at fair value on a non-recurring basis (in thousands):




September 30, 2009Level I
                    
                    
                    Level II
                    
                    
                    Level III
                    
                    
                    TotalAssets:Other
      Real Estate Owned
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    204
                    
                    
                    $
                    204





Fair
Value of Financial Instruments





The estimated fair values of the
Company’s financial instruments are as follows (in thousands):




September 30, 2009
                    
                    
                    December 31, 2008Carrying
                      Amount
                    
                    
                    Estimated
                      Fair Value
                    
                    
                    Carrying
                      Amount
                    
                    
                    Estimated
                      Fair ValueFinancial
      Assets:Cash
      and cash equivalents
                    
                    
                    2,518
                    
                    
                    
                    2,518
                    
                    
                    
                    1,647
                    
                    
                    
                    1,647Investments
      available for sale
                    
                    
                    19,548
                    
                    
                    
                    19,548
                    
                    
                    
                    20,293
                    
                    
                    
                    20,293Restricted
      equity securities
                    
                    
                    1,143
                    
                    
                    
                    1,143
                    
                    
                    
                    1,090
                    
                    
                    
                    1,090Loans
                    
                    
                    110,693
                    
                    
                    
                    110,438
                    
                    
                    
                    102,276
                    
                    
                    
                    111,291Accrued
      interest receivable
                    
                    
                    687
                    
                    
                    
                    687
                    
                    
                    
                    676
                    
                    
                    
                    676Total
      financial assets
                    
                    
                    134,589
                    
                    
                    
                    134,334
                    
                    
                    
                    130,982
                    
                    
                    
                    134,997Financial
      liabilities:Deposits
                    
                    
                    119,349
                    
                    
                    
                    120,004
                    
                    
                    
                    99,153
                    
                    
                    
                    99,577Other
      borrowings
                    
                    
                    12,000
                    
                    
                    
                    12,454
                    
                    
                    
                    19,648
                    
                    
                    
                    20,701Accrued
      interest payable
                    
                    
                    254
                    
                    
                    
                    254
                    
                    
                    
                    251
                    
                    
                    
                    251Total
      financial liabilities
                    
                    
                    131,603
                    
                    
                    
                    132,712
                    
                    
                    
                    119,052
                    
                    
                    
                    120,529Off-balance
      sheet liabilities:
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Standby
      letters of credit
                    
                    
                    2,010
                    
                    
                    
                    2,010
                    
                    
                    
                    -
                    
                    
                    
                    -





11.
            Subsequent
      Events




In
connection with preparation of these financial statements, the Company has
evaluated events and transactions through November 16, 2009, which is the date
the financial statements were available to be issued.




On
November 4, 2009, the Company issued restricted stock grants totaling 17,611 and
stock options covering 41,872 to various directors and employees.




For the
year ended December 31, 2008, the Company recorded a “Loss due to Accounting
Errors” of $475,000.  This loss resulted from discrepancies within our
primary correspondent account that were intentionally hidden by a former
employee.  The Company submitted a claim for this loss to its
insurance carrier, which the insurance carrier has acknowledged is
covered.  Net of deductible, the Company expects to receive
approximately $468,000 in the fourth quarter of this year.





18





Item
2.    Management’s Discussion and Analysis of Financial
Condition and Results of Operations.





Forward-Looking
Statements





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





The
Company’s forward-looking statements are subject to the following principal
risks and uncertainties: general economic conditions and trends, either
nationally or locally; conditions in the securities markets; changes in interest
rates; changes in deposit flows, and in the demand for deposit and loan products
and other financial services; changes in real estate values; changes in the
quality or composition of the Company’s loan or investment portfolios; changes
in competitive pressures among financial institutions or from non-financial
institutions; the Company’s ability to retain key members of management; changes
in legislation, regulation, and policies; and a variety of other matters which,
by their nature, are subject to significant uncertainties.  The
Company provides greater detail regarding some of these factors in its Form 10-K
for the year ended December 31, 2008, 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 total
assets increased $12.5 million, or 9.0%, from $139.0 million at December 31,
2008 to $151.5 million at September 30, 2009.  Significant changes in
asset totals from December 31, 2008 to September 30, 2009 included an increase
of $9.7 million in Federal funds sold.





Our
overall loan portfolio increased a net of $3,344,000 or 3.2%, since December 31,
2008.  Consumer loans decreased $1,195,000 from $5.4 million at
December 31, 2008 to $4.2 million at September 30, 2009, as the Bank has chosen
not to aggressively pursue that segment of loans. Commercial real estate loans
have increased $2,678,000 from $53.4 million at December 31, 2008 to $56.1
million at September 30, 2009. Residential mortgages increased $1,465,000 from
December 31, 2008, and commercial loans not secured by real estate increased
$1,016,000.





Investment
securities decreased $745,000, or 3.7%, to $19.5 million from $20.3 million
since December 31, 2008. The Company had securities in the amount of $1,600,000
called and $993,000 matured during the first nine months. The Company also
purchased $304,000 in equity securities and $2,445,000 in corporate bonds,
during 2009.





The
allowance for loan loss increased $73,000 during the nine months ended September
30, 2009. The provision for loan losses amounted to $135,000 for the first nine
months of 2009. Subtracting from the provision were charge-offs of $50,000 for a
commercial loan and $22,000 for consumer loans.  The Bank was able to
recover approximately $10,000 during the same period. Management assesses the
adequacy of the allowance for loan losses through a quarterly analysis of the
loan portfolio and upon management’s continuing analysis of the factors
underlying the quality of the loan portfolio. The ratio of the Bank’s allowance
for loan losses to total loans was 1.12% at September 30, 2009
and   1.09% at December 31, 2008. We are constantly monitoring
credit quality so that we can respond quickly to any deterioration with action
to include required collection efforts and increased allowance for loan loss
protection, if deemed necessary.





19





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
$1.5 million at September 30, 2009, compared to $1.1 million at December 31,
2008. The ratio of non-performing loans to total loans was 1.35% and 1.03% at
September 30, 2009 and December 31, 2008, respectively.





Total
deposits increased $20.2 million, or 20.4%, to $119.3 million at September 30,
2009 from $99.2 million at December 31, 2008. Non-interest bearing deposits
decreased slightly to $6.7 million at September 30, 2009 from $7.0 million at
December 31, 2008, while time deposits increased $21.4 million to $65.1 million
at September 30, 2009 from $43.7 million at December 31, 2008. Interest bearing
demand deposits decreased $0.9 million, or 1.9%.  The significant
growth in new money consisted primarily of thirteen month time
deposits.  A slight premium rate was initially offered due to
anticipated growth in commercial real estate loans.  The opportunity
to cross sell lower cost deposit products also factored into this
strategy.  When it became apparent that the growth in the time deposit
product exceeded our expectations of the growth in loan, we eliminated the
slight premium in that rate previously offered.  However, the robust
deposit growth continued due to customer orientation away from the stock market
and problematic larger institutions.  Deposit growth has since abated
and we anticipate that loans in our pipeline will eventually reduce our excess
liquidity.





Borrowings
decreased $7.6 million, or 38.9%, from $19.6 million at December 31, 2008 to
$12.0 million at September 30, 2009. The Company fully paid down our overnight
borrowings, leaving only two long term FHLB borrowings.





Results
of Operations





Comparison
of the Three Month and Nine Month Periods Ended September 30, 2009 and
2008





Net
income for the nine months ended September 30, 2009 totaled $367,000, compared
to $155,000 for the same period in 2008.  Net income for the nine
months of 2008 was negatively affected by a $475,000 pre-tax loss due to
accounting errors within the Bank’s primary correspondent bank
account.  For the three months ending September 30, 2009, the Company
had net income of $145,000 compared to the net income of $206,000 for the
quarter ended September 30, 2008.  The difference in net income for
the third quarter of 2009 resulted from the FDIC premium increase of
approximately $30,000 compared to 2008 and an increase in salaries and benefits
of $21,000 over the prior year.





Net
interest income increased $146,000 or 4.6%, to $3.3 million for the first nine
months of 2009 from $3.2 million for the same period in 2008.  Net
interest income for the third quarter ended September 30, 2009 decreased
$37,000, or 3.2%, as compared to the quarter ended September 30,
2008.





20





The
Company’s interest income for the nine months of 2009 decreased $59,000 or 1.0%
to $5.7 million from $5.8 million for the same period in 2008.  Loan
interest and fee income decreased $30,000 or 1.8% to $1.7 million for the third
quarter ended September 30, 2009.  Interest income from federal funds
sold was $5,000 for the nine months ended September 30, 2009, and during the
same period in 2008, the Company realized $93,000.  The reduction is
due to the lower rates that are paid for federal funds during this
period.  Interest on investments increased $60,000 or 21.6%, to
$338,000, from $278,000 at the same period in 2008.





For the
nine months ended September 30, 2009, interest expense decreased $205,000, or
8.0%, to $2.4 million in 2009 from $2.6 million in 2008.  Interest
expense during the third quarter decreased $38,000, or 4.6%, to $783,000 in 2009
from $821,000 in 2008.  For the nine months ended September 30,
interest on deposits decreased $193,000, or 9.2%, from $2.1 million to $1.9
million in 2009 due to lower interest rates.  Interest on deposits for
the third quarter of 2009 decreased $33,000, or 5.0% to
$629,000.  This was an effect of lower rates being offset by greater
volumes.





Other
income for the three months ended September 30, 2009 increased $25,000, or
29.1%, to $111,000 in 2009 from $86,000 in 2008.  The increase in
other income was primarily attributable to higher income from bank owned life
insurance.  Total other expenses increased $34,000 or 3.7% to $948,000
in 2009 from $914,000 in 2008.  Salaries and employee benefits
increased $21,000 or 4.2% to $527,000 in 2009 from $506,000 in
2008.  Occupancy and equipment expense decreased $15,000, or 9.3%, to
$146,000 in 2009 from $161,000 in 2008, while other expenses increased $28,000
or 11.3% to $275,000 in 2009 from $247,000 in 2008.  The increase in
expense was mainly due to the increased and special FDIC assessment of
$187,000.





For the
nine months ended September 30, other income increased $82,000 or 32.8% to
$332,000 in 2009 from $250,000 in 2008.  The majority of the increase
is due to the $14,000 gain on the sale of loans and the higher income from bank
owned life insurance.  Total other expenses decreased $208,000, or
6.5%, to $3.0 million in 2009 compared to $3.2 million in
2008.  Salaries and employee benefits increased $72,000, or 4.7%,
while occupancy and equipment expense decreased $51,000, or 10.2%, to $451,000
in 2009 from $502,000 in 2008.  Other expenses increased $246,000 or
35.0% to $949,000 in 2009 from $703,000 in 2008.  The 2009 other
expense category was negatively impacted by the increase in FDIC assessments of
$187,000.





In the
course of preparing the financial statements for the year ended December 31,
2008, the Company determined that detail listings of residential loans sold and
commercial participations sold did not reconcile to corresponding general ledger
accounts at December 31, 2008. Upon performing further procedures, the Company
found that the cause of the misstatements were intentionally incorrect
accounting entries and reconciliations posted by a former officer of the Company
beginning in early 2008.   Since management believes the amounts
are not recoverable, a loss was recorded in the amount of $475,000 in the first
quarter of 2008.





Liquidity
and Capital Resources





The
Bank’s primary sources of funds are deposits, principal and interest payments on
loans, FHLB advances and proceeds from mortgage loan sales.  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.





The
Bank’s cash and cash equivalents increased $871,000 for the nine months ended
September 30, 2009.  During that period, cash was primarily provided
from earnings and customer deposits and primarily used to pay down overnight
borrowings, purchase investments, and invest in federal funds sold.





North
Penn Bank's capital ratios at September 30, 2009 and December 31, 2008 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:





21




For capital
      adequacy
                                                      
                                                      To be well
      capitalized
                                                        Under
      prompt
                                                        corrective actionActual
                                                      
                                                      purposes
                                                      
                                                      ProvisionsAmount
                                                      
                                                      
                                                      Ratio
                                                      
                                                      Amount
                                                      
                                                      Ratio
                                                      
                                                      Amount
                                                      
                                                      RatioAt September 30, 2009:Total Capital (to Risk-WeightedAssets):North
      Penn Bank
                                                      
                                                      $
                                                      17,351
                                                      
                                                      
                                                      
                                                      15.33
                                                      %
                                                      >$
      9,151
                                                      
                                                      >8.0%
                                                      
                                                      >$11,439
                                                      
                                                      >10.0%Tier
      1 Capital (to Risk-Weighted Assets):North
      Penn Bank
                                                      
                                                      $
                                                      16,108
                                                      
                                                      
                                                      
                                                      14.08
                                                      %
                                                      >$
      4,576
                                                      
                                                      >4.0%
                                                      
                                                      >$
      6,863
                                                      
                                                      >6.0%Tier
      1 Capital (to Average Assets):North
      Penn Bank
                                                      
                                                      $
                                                      16,108
                                                      
                                                      
                                                      
                                                      10.65
                                                      %
                                                      >$
      6,048
                                                      
                                                      >4.0%
                                                      
                                                      >$
      7,560
                                                      
                                                      >5.0%Risk-Weighted
      Assets:
                                                      
                                                      $
                                                      114,389Average
      Assets:
                                                      
                                                      $
                                                      151,209Reconciliation
      of GAAP Capital to Regulatory CapitalTotal
      Equity Capital September 30, 2009
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      16,437Plus:
      Unrealized Gain/Loss onInvestments
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (328
                                                      )Less:
      Disallowed Servicing Rights
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (1
                                                      )Total
      Tier 1 Capital September 30, 2009
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      16,108Plus:
      Allowance for loan losses
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      1,243Total
      Risk-based Capital September 30, 2009
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      17,351At 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:
                                                      
                                                      $
                                                      110,977Average
      Assets:
                                                      
                                                      $
                                                      134,261Reconciliation
      of GAAP Capital to Regulatory CapitalTotal
      Equity Capital December 31, 2008
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      15,390Plus:
      Unrealized Gain/Loss onInvestments
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      147Less:
      Disallowed Servicing Rights
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (1
                                                      )Total
      Tier 1 Capital December 31, 2008
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      15,536Plus:
      Allowance for loan losses
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      1,170Total
      Risk-based Capital December 31, 2008
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      16,706




Stock
Repurchase Plan





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 current repurchase authorization will
remain in effect until all shares have been repurchased or until the Company
terminates the authorization.  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.





22





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.





As a
result of the loss from accounting errors in 2008, management has made progress
in developing various improvements to the Company’s internal control over
financial reporting.  The Audit Committee of the Board of Directors
and all members of the senior management team through the Financial Statement
Disclosure Committee have taken an active role in evaluating policies,
procedures and controls in the accounting and financial reporting
areas.  The reconcilement function has been reevaluated and specific
responsibilities, the frequency and review process are in
place.  Access rights to various accounting functions within the
Bank’s core processing/accounting system are being
reevaluated.  Management oversight has been enhanced over the general
ledger entry function, both as to ensuring that proposed entries are reviewed
for propriety and authority level, as well as review of accounting reports that
result after the entries have been processed.  A comprehensive policy
is in effect which will provide guidance to accounting personnel, senior
management and the Audit Committee.  Based upon this evaluation, the
Company’s disclosure controls and procedures were effective as of the end of the
period covered by this quarterly report.




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 our Annual Report on Form 10-K for the year
ended December 31, 2008, which could materially affect our business, financial
condition or future results. At September 30, 2009 the risk factors of the
Company have not changed materially from those reported in our Annual Report on
Form 10-K. However, the risks described in our Annual Report on Form 10-K 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.





23





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





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 ProgramsJuly
      1, 2009
                                    Through
                                    July
      31, 2009
                                  
                                  
                                  8,500
                                  
                                  
                                  
                                  8.72
                                  
                                  
                                  
                                  172,400
                                  
                                  
                                  
                                  128,098August
      1, 2009
                                    through
                                    August
      31, 2009
                                  
                                  
                                  14,000
                                  
                                  
                                  $
                                  8.86
                                  
                                  
                                  
                                  186,400
                                  
                                  
                                  
                                  114,098September
      1, 2009
                                    through
                                    September
      30, 2009
                                  
                                  
                                  24,900
                                  
                                  
                                  $
                                  8.90
                                  
                                  
                                  
                                  211,300
                                  
                                  
                                  
                                  89,198Total
                                  
                                  
                                  47,400
                                  
                                  
                                  $
                                  8.86





(1) On
October 1, 2008, the Company announced a repurchase program of 158,157 shares,
approximately 10% of all shares outstanding. On April 28, 2009, the North Penn
Bancorp., Inc.’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.





Item
3.        Defaults Upon Senior
Securities.





None





Item
4.       Other
Information.





None





Item
5.       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 form 10-K filed with the commission on
      March 31, 2009)
 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))
 31.1
              Rule
      13a-14(a) /15d-14(a) Chief Executive Officer
  Certification
 31.1
              Rule
      13a-14(a) /15d-14(a) Chief Financial Officer
  Certification
 32.1
              Section
      1350 Certification of Chief Executive
Officer
 32.1
              Section
      1350 Certification of Chief Financial
Officer





24





SIGNATURES





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





North
      Penn Bancorp, IncDated:
                      November
      16, 2009
                      
                      /s/ Frederick L. HickmanFrederick
      L. Hickman
                        President
      and Chief Executive
                        OfficerDated:
                      November
      16, 2009
                      
                      /s Robin R. WeikelRobin
      R. Weikel
                        Chief
      Financial
Officer





25