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           June 30, 2010
 
  ̈
              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 August 5, 2010 the issuer had
1,285,148 shares of common stock, par value $0.10 per share,
outstanding.
  
 
 PagePART
      I - FINANCIAL INFORMATIONItem
      1. Financial Statements.Consolidated
      Balance Sheets at June 30, 2010 and December 31, 2009
                    
                    3Consolidated
      Statements of Income for the Three and Six Months Ended June 30, 2010 and
      2009
                    
                    4Consolidated
      Statements of Cash Flows for the Six Months Ended June 30, 2010 and
      2009
                    
                    5Notes
      to Unaudited Consolidated Financial Statements
                    
                    6Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                    
                    20Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk.
                    
                    25Item
      4. Controls and Procedures.
                    
                    25PART
      II - OTHER INFORMATIONItem
      1. Legal Proceedings
                    
                    26Item
      1A.Risk Factors
                    
                    26Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                    
                    27Item
      3. Defaults Upon Senior Securities.
                    
                    27Item
      4. [Removed and Reserved].
                    
                    27Item
      5. Other Information.
                    
                    27Item
      6. Exhibits.
                    
                    27
  2
  PART
I – FINANCIAL INFORMATION
 
 Item
1.  Financial Statements
 
 North
Penn Bancorp, Inc. and Subsidiary
 Consolidated
Balance Sheets
 (In thousands)
 
 June 30,
                    2010
                  
                  
                  December 31,
                    2009(Unaudited)
                  
                  
                  (Audited)(In
      thousands)ASSETS:Cash
      and due from banks
                  
                  $
                  7,784
                  
                  
                  $
                  2,652Interest
      bearing deposits
                  
                  
                  299
                  
                  
                  
                  560Federal
      funds sold
                  
                  
                  6,011
                  
                  
                  
                  8,700Total
      cash and cash equivalents
                  
                  
                  14,094
                  
                  
                  
                  11,912Investment
      securities, available for sale
                  
                  
                  17,822
                  
                  
                  
                  19,398Equity
      securities at cost, substantially restricted
                  
                  
                  1,143
                  
                  
                  
                  1,143Loans,
      net of allowance for loan losses of $1,564 in 2010 and $1,484 in
      2009
                  
                  
                  119,579
                  
                  
                  
                  114,546Bank
      premises and equipment – net
                  
                  
                  3,917
                  
                  
                  
                  3,965Accrued
      interest receivable
                  
                  
                  731
                  
                  
                  
                  665Cash
      surrender value of bank-owned life insurance
                  
                  
                  3,089
                  
                  
                  
                  3,015Deferred
      income taxes
                  
                  
                  668
                  
                  
                  
                  705Prepaid
      FDIC insurance
                  
                  
                  497
                  
                  
                  
                  604Other
      real estate owned
                  
                  
                  88
                  
                  
                  
                  88Other
      assets
                  
                  
                  288
                  
                  
                  
                  286TOTAL
      ASSETS
                  
                  $
                  161,916
                  
                  
                  $
                  156,327LIABILITIES:Deposits:Non-interest
      bearing
                  
                  $
                  7,069
                  
                  
                  $
                  8,785Interest
      bearing
                  
                  
                  122,467
                  
                  
                  
                  115,270Total
      deposits
                  
                  
                  129,536
                  
                  
                  
                  124,055Other
      borrowed funds
                  
                  
                  12,000
                  
                  
                  
                  12,000Accrued
      interest and other liabilities
                  
                  
                  980
                  
                  
                  
                  1,002TOTAL
      LIABILITIES
                  
                  
                  142,516
                  
                  
                  
                  137,057STOCKHOLDERS’
      EQUITY:Preferred
      stock, no par; 20,000,000 authorized; issued and outstanding,
      none
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, par value $0.10; 80,000,000 authorized; 1,585,646 shares issued ;
      outstanding: 1,285,148 at June 30, 2010 and 1,330,071 at December 31,
      2009
                  
                  
                  158
                  
                  
                  
                  158Additional
      paid-in capital
                  
                  
                  13,640
                  
                  
                  
                  13,580Retained
      earnings
                  
                  
                  8,944
                  
                  
                  
                  8,541Unearned
      ESOP shares
                  
                  
                  (871
                  )
                  
                  
                  (907
                  )Accumulated
      other comprehensive income, (loss)
                  
                  
                  145
                  
                  
                  
                  (2
                  )Treasury
      Stock at cost, shares: 300,498 at June 30, 2010 in 2010 and 251,500 at
      December 31, 2009
                  
                  
                  (2,616
                  )
                  
                  
                  (2,100
                  )TOTAL
      STOCKHOLDERS’ EQUITY
                  
                  
                  19,400
                  
                  
                  
                  19,270TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
                  $
                  161,916
                  
                  
                  $
                  156,327
 
 See notes
to unaudited consolidated financial statements.
  3
 
 North
Penn Bancorp, Inc. and Subsidiary
 Unaudited
Consolidated Statements of Income
 For
the Three and Six Months Ended June 30, 2010 and 2009
 Six Months Ended
                                      
                                      
                                      Three Months Ended(In thousands)
                                      
                                      June 30,
                                        2010
                                      
                                      
                                      June 30,
                                        2009
                                      
                                      
                                      June 30,
                                        2010
                                      
                                      
                                      June 30,
                                        2009INTEREST
      INCOMEInterest
      on loans
                                      
                                      $
                                      3,550
                                      
                                      
                                      $
                                      3,414
                                      
                                      
                                      $
                                      1,813
                                      
                                      
                                      $
                                      1,695Interest
      on tax exempt loans
                                      
                                      
                                      22
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      8
                                      
                                      
                                      
                                      -Interest
      on federal funds sold
                                      
                                      
                                      7
                                      
                                      
                                      
                                      3
                                      
                                      
                                      
                                      3
                                      
                                      
                                      
                                      2Interest
      on tax exempt investments
                                      
                                      
                                      154
                                      
                                      
                                      
                                      148
                                      
                                      
                                      
                                      73
                                      
                                      
                                      
                                      74Interest
      and dividends on investments
                                      
                                      
                                      273
                                      
                                      
                                      
                                      249
                                      
                                      
                                      
                                      148
                                      
                                      
                                      
                                      115Total
      interest income
                                      
                                      
                                      4,006
                                      
                                      
                                      
                                      3,814
                                      
                                      
                                      
                                      2,045
                                      
                                      
                                      
                                      1,886INTEREST
      EXPENSEInterest
      on deposits
                                      
                                      
                                      1,026
                                      
                                      
                                      
                                      1,267
                                      
                                      
                                      
                                      469
                                      
                                      
                                      
                                      654Interest
      on short-term borrowings
                                      
                                      
                                      -
                                      
                                      
                                      
                                      10
                                      
                                      
                                      
                                      -Interest
      on long-term borrowings
                                      
                                      
                                      316
                                      
                                      
                                      
                                      308
                                      
                                      
                                      
                                      158
                                      
                                      
                                      
                                      152Total
      interest expense
                                      
                                      
                                      1,342
                                      
                                      
                                      
                                      1,585
                                      
                                      
                                      
                                      627
                                      
                                      
                                      
                                      806NET
      INTEREST INCOME
                                      
                                      
                                      2,664
                                      
                                      
                                      
                                      2,229
                                      
                                      
                                      
                                      1,418
                                      
                                      
                                      
                                      1,080PROVISION
      FOR LOAN LOSSES
                                      
                                      
                                      201
                                      
                                      
                                      
                                      90
                                      
                                      
                                      
                                      162
                                      
                                      
                                      
                                      38NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
                                      
                                      
                                      2,463
                                      
                                      
                                      
                                      2,139
                                      
                                      
                                      
                                      1,256
                                      
                                      
                                      
                                      1,042OTHER
      INCOMEService
      charges and fees
                                      
                                      
                                      83
                                      
                                      
                                      
                                      73
                                      
                                      
                                      
                                      49
                                      
                                      
                                      
                                      25Bank-owned
      life insurance
                                      
                                      
                                      73
                                      
                                      
                                      
                                      80
                                      
                                      
                                      
                                      35
                                      
                                      
                                      
                                      37Other
      operating income
                                      
                                      
                                      53
                                      
                                      
                                      
                                      54
                                      
                                      
                                      
                                      29
                                      
                                      
                                      
                                      44Gain
      on sale of loans
                                      
                                      
                                      95
                                      
                                      
                                      
                                      14
                                      
                                      
                                      
                                      95
                                      
                                      
                                      
                                      -Impairment
      losses on investment securities
                                      
                                      
                                      (24
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -TOTAL
      OTHER INCOME
                                      
                                      
                                      280
                                      
                                      
                                      
                                      221
                                      
                                      
                                      
                                      208
                                      
                                      
                                      
                                      106OTHER
      EXPENSESalaries
      and employee benefits
                                      
                                      
                                      1,170
                                      
                                      
                                      
                                      1,089
                                      
                                      
                                      
                                      587
                                      
                                      
                                      
                                      585Occupancy
      and equipment expense
                                      
                                      
                                      265
                                      
                                      
                                      
                                      305
                                      
                                      
                                      
                                      133
                                      
                                      
                                      
                                      154FDIC
      insurance expense
                                      
                                      
                                      107
                                      
                                      
                                      
                                      153
                                      
                                      
                                      
                                      53
                                      
                                      
                                      
                                      148Professional
      services expense
                                      
                                      
                                      134
                                      
                                      
                                      
                                      151
                                      
                                      
                                      
                                      65
                                      
                                      
                                      
                                      74Other
      operating expenses
                                      
                                      
                                      347
                                      
                                      
                                      
                                      370
                                      
                                      
                                      
                                      184
                                      
                                      
                                      
                                      226TOTAL
      OTHER EXPENSE
                                      
                                      
                                      2,023
                                      
                                      
                                      
                                      2,068
                                      
                                      
                                      
                                      1,022
                                      
                                      
                                      
                                      1,187INCOME(LOSS)
      BEFORE INCOME TAXES
                                      
                                      
                                      720
                                      
                                      
                                      
                                      292
                                      
                                      
                                      
                                      442
                                      
                                      
                                      
                                      (39
                                      )INCOME
      TAX EXPENSE(BENEFIT)
                                      
                                      
                                      145
                                      
                                      
                                      
                                      70
                                      
                                      
                                      
                                      89
                                      
                                      
                                      
                                      (37
                                      )NET
      INCOME/(LOSS)
                                      
                                      
                                      575
                                      
                                      
                                      
                                      222
                                      
                                      
                                      
                                      353
                                      
                                      
                                      
                                      (2
                                      )OTHER
      COMPREHENSIVE INCOME/(LOSS):Unrealized
      holding gain arising during period, net of income tax
                                      
                                      
                                      147
                                      
                                      
                                      
                                      (10
                                      )
                                      
                                      
                                      15
                                      
                                      
                                      
                                      (105
                                      )COMPREHENSIVE
      INCOME(LOSS)
                                      
                                      $
                                      722
                                      
                                      
                                      $
                                      212
                                      
                                      
                                      $
                                      368
                                      
                                      
                                      $
                                      (107
                                      )Weighted
      average number of shares outstanding
                                      
                                      
                                      1,316,047
                                      
                                      
                                      
                                      1,417,697
                                      
                                      
                                      
                                      1,302,700
                                      
                                      
                                      
                                      1,408,559Earnings
      per share, basic
                                      
                                      $
                                      0.44
                                      
                                      
                                      $
                                      0.16
                                      
                                      
                                      $
                                      0.27
                                      
                                      
                                      $
                                      -Earnings
      per share, diluted
                                      
                                      $
                                      0.43
                                      
                                      
                                      $
                                      0.16
                                      
                                      
                                      $
                                      0.27
                                      
                                      
                                      
                                      -Dividends
      per share
                                      
                                      $
                                      0.13
                                      
                                      
                                      $
                                      0.06
                                      
                                      
                                      $
                                      0.04
                                      
                                      
                                      $
                                      0.03
 
 See notes
to unaudited consolidated financial statements.
  4
  North
Penn Bancorp, Inc. and Subsidiary
 Unaudited
Consolidated Statements of Cash Flows
 For
the Six Months Ended June 30, 2010 and 2009
 (In
thousands)
 2010
                  
                  
                  2009Operating Activities:Net
      income
                  
                  $
                  575
                  
                  
                  $
                  222Items
      not requiring (providing) cashDepreciation
                  
                  
                  89
                  
                  
                  
                  116Provision
      for loan losses
                  
                  
                  201
                  
                  
                  
                  90Deferred
      income tax benefit
                  
                  
                  (50
                  )
                  
                  
                  -Amortization
      of securities (net of accretion)
                  
                  
                  (6
                  )
                  
                  
                  9ESOP
      expense
                  
                  
                  36
                  
                  
                  
                  37Stock
      option expense
                  
                  
                  60
                  
                  
                  
                  47Increase
      in cash surrender value of life insurance
                  
                  
                  (73
                  )
                  
                  
                  (78
                  )Impairment
      loss on investment securities
                  
                  
                  24Net
      realized gain on sale of loans
                  
                  
                  (95
                  )
                  
                  
                  (14
                  )Changes
      in:Prepaid
      FDIC insurance
                  
                  
                  107
                  
                  
                  
                  -Accrued
      interest income and other assets
                  
                  
                  (51
                  )
                  
                  
                  (4
                  )Accrued
      interest expense and other liabilities
                  
                  
                  (22
                  )
                  
                  
                  (62
                  )Net
      Cash Provided By Operating Activities
                  
                  
                  795
                  
                  
                  
                  363Investing
      Activities:Purchase
      of bank premises and equipment
                  
                  
                  (41
                  )
                  
                  
                  (15
                  )Proceeds
      from sale of bank premises and equipment
                  
                  
                  -
                  
                  
                  
                  -Proceeds
      from sale of other real estate
                  
                  
                  -
                  
                  
                  
                  -Purchase
      of securities “available for sale”
                  
                  
                  (42
                  )
                  
                  
                  (1,612
                  )Sales
      of securities “available for sale”
                  
                  
                  -
                  
                  
                  
                  15Matured
      or called securities “available for sale”
                  
                  
                  1,100
                  
                  
                  
                  993Redemptions
      of mortgage-backed securities “available for sale”
                  
                  
                  732
                  
                  
                  
                  1,182(Purchase)
      redemption of restricted stock
                  
                  
                  -
                  
                  
                  
                  (53
                  )Net
      increase in loans to customers
                  
                  
                  (7,793
                  )
                  
                  
                  (874
                  )Proceeds
      from sale of loans
                  
                  
                  2,585
                  
                  
                  
                  698Net
      Cash Provided by/(Used) In Investing Activities
                  
                  
                  (3,459
                  )
                  
                  
                  334Financing
      Activities:Increase
      in deposits
                  
                  
                  5,481
                  
                  
                  
                  19,169Decrease
      in borrowed funds
                  
                  
                  -
                  
                  
                  
                  (7,648
                  )Treasury
      stock purchased
                  
                  
                  (516
                  )
                  
                  
                  (508
                  )Cash
      dividends paid
                  
                  
                  (119
                  )
                  
                  
                  (94
                  )Net
      Cash Provided By Financing Activities
                  
                  
                  4,846
                  
                  
                  
                  10,919Net
      Increase In Cash and Cash Equivalents
                  
                  
                  2,182
                  
                  
                  
                  11,616Cash
      and Cash Equivalents, January 1
                  
                  
                  11,912
                  
                  
                  
                  2,274Cash
      and Cash Equivalents, June 30
                  
                  $
                  14,094
                  
                  
                  $
                  13,980Supplementary
      Schedule of Cash Flow Information:Cash
      paid during the period for:Interest
                  
                  $
                  1,431
                  
                  
                  $
                  1,539Income
      taxes
                  
                  
                  254
                  
                  
                  
                  79
 
 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).  The Company’s common stock is quoted on the OTC Bulletin
Board under the symbol “NPBP.OB.”  The Bank operates from five offices
under a state savings bank charter and provides financial services to
individuals and corporate customers primarily in Northeastern
Pennsylvania.  The Bank’s primary deposit products are savings and
demand deposit accounts and certificates of deposit. Its primary lending
products are real estate, commercial and consumer loans.
 
 Principles
of Consolidation
 
 The
accompanying consolidated financial statements include the accounts of North
Penn Bancorp, Inc., its wholly-owned subsidiary, North Penn Bank and North Penn
Bank’s wholly-owned subsidiaries, Norpenco, Inc. and North Penn Settlement
Services, LLC.  These entities are collectively referred to herein as
the Company.  All significant intercompany accounts and transactions
have been eliminated in consolidation. Norpenco, Inc.’s sole activities are
purchasing bank stocks and receiving dividends on such stocks. North Penn
Settlement Services, LLC receives non-interest income from providing title
search work.
 
 The
accounting policies of the Company conform with accounting principles generally
accepted in the United States of America and with general practices within the
banking industry.
 
 Basis
of Presentation
 
 The
unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principals for interim financial
information.  In the opinion of management, all adjustments that are
of a normal recurring nature and are considered necessary for a fair
presentation have been included.  They are not, however, necessarily
indicative of the results of consolidated operations for a full
year.
 
 Adoption of New Accounting
Standards
  In
June 2009, the FASB amended previous guidance relating to transfers of
financial assets that eliminates the concept of a qualifying special purpose
entity. This guidance must be applied as of the beginning of each reporting
entity’s first annual reporting period that begins after November 15, 2009,
for interim periods within that first annual reporting period and for interim
and annual reporting periods thereafter. This guidance must be applied to
transfers occurring on or after its effective date. Additionally, on and after
the effective date, the concept of a qualifying special-purpose entity is no
longer relevant for accounting purposes. Therefore, formerly qualifying
special-purpose entities should be evaluated for consolidation by reporting
entities on and after the effective date in accordance with the applicable
consolidation guidance. The disclosure provisions were also amended and apply to
transfers that occurred both before and after the effective date of this
guidance. The adoption of this update did not have a significant impact on the
Company’s financial condition, results of operations or cash flows.
  In
June 2009, the FASB amended previous guidance for consolidation of variable
interest entity guidance by replacing the quantitative-based risks and rewards
calculation for determining which enterprise, if any, has a controlling
financial interest in a variable interest entity. The amended guidance use an
approach that focuses on identifying which enterprise has the power to direct
the activities of a variable interest entity that most significantly impact the
entity’s economic performance and (1) the obligation to absorb losses of
the entity or (2) the right to receive benefits from the entity. Additional
disclosures about an enterprise’s involvement in variable interest entities are
also required. This guidance is effective as of the beginning of each reporting
entity’s first annual reporting period that begins after November 15, 2009,
for interim periods within that first annual reporting period, and for interim
and annual reporting periods thereafter. Early adoption is
prohibited.
  6
  The
adoption of this update did not have a significant impact to the Company’s
financial condition, results of operations or cash flows.
 
 FASB ASC
Topic 855, “Subsequent Events.” New authoritative accounting guidance under ASC
Topic 855, “Subsequent Events,” amends prior guidance. Under this amended
guidance, SEC filers are no longer required to disclose the date through which
subsequent events have been evaluated in originally issued and revised financial
statements. This guidance became effective upon issuance.
 
 Newly Issued But Not Yet Effective
Accounting Standards
 
 Accounting
Standards Update (ASU) 2009-16, Transfers and Servicing (Topic 860)-Accounting
for Transfers of Financial Assets has been issued.  ASU 2009-16 will
require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets.  This standard is
effective for the Company October 1, 2010 and is not expected to have a material
effect on the Company’s financial statements.
 
 ASC
2009-17, Consolidations (Topic 810)-Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities has been issued. ASU
2009-17 changes how a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. This standard is effective for the Company
October 1, 2010 and is not expected to have a material effect on the Company’s
financial statements.
 
 ASC
2010-06, Fair Value Measurements and Disclosures (Topic 820):Improving
Disclosures about Fair Value Measurements has been issued.  ASU
2010-06 requires some new disclosures and clarifies some existing disclosure
requirements about fair value measurement. This standard is generally effective
for the Company October 1, 2010 and is not expected to have a material effect on
the Company’s financial statements.
 
 In
February 2010, the FASB issued ASU 2010-09, Subsequent Events (“Topic 855”):
Amendments to Certain Recognition and Disclosure Requirements. The amendments
remove the requirement for an SEC registrant to disclose the date through which
subsequent events were evaluated as this requirement would have potentially
conflicted with SEC reporting requirements. Removal of the disclosure
requirement is not expected to affect the nature or timing of subsequent events
evaluations performed by the Company. This ASU became effective upon
issuance.
 
 FASB ASC
Topic 310, “Receivables.” New authoritative accounting guidance under Accounting
Standard Codification (“ASC”) Topic 310, “Receivables,” clarifies that
modifications of loans that are accounted for within a pool under Subtopic
310-30 do not result in the removal of those loans from the pool even if the
modification of those loans would otherwise be considered a troubled debt
restructuring. An entity will continue to be required to consider whether the
pool of assets in which the loan is included is impaired if expected cash flows
for the pool change. This guidance becomes effective prospectively for
modifications of loans accounted for within pools under Subtopic 310-30
occurring in the first interim or annual period on or after July 15, 2010 with
early application permitted. The adoption of this new authoritative guidance
under ASC Topic 310 is not expected to have a material impact on the Company’s
consolidated financial statements, results of operations or
liquidity.
 
 Additional
new authoritative accounting guidance (Accounting Standards Update (“ASU”) No.
2010-20) under ASC Topic 310, “Receivables,” requires significant new
disclosures about the allowance for credit losses and the credit quality of
financing receivables. The requirements are intended to enhance transparency
regarding credit losses and the credit quality of loan and lease receivables.
Under this statement, allowance for credit losses and fair value are to be
disclosed by portfolio segment, while credit quality information, impaired
financing receivables and non-accrual status are to be presented by class of
financing receivable. Disclosure of the nature and extent, the financial impact
and segment information of troubled debt restructurings will also be required.
The disclosures are to be presented at the level of disaggregation that
management uses when assessing and monitoring the portfolio’s risk and
performance. This ASU is effective for interim and annual reporting periods
after December 15, 2010. The Company will include these disclosures in the notes
to the financial statements beginning December 31, 2010.
  7
 
 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.
 
 Reclassifications
 
 Certain
amounts in the consolidated financial statements for 2009 have been reclassified
to conform to presentations used in the 2010 consolidated financial statements.
Such reclassifications had no effect on the company’s consolidated financial
position or net income.
 
 2.
              Investment
      Securities
 
 The
Company’s investments in securities are classified in two categories and
accounted for as follows:
 
 Securities
Held-to-Maturity.  Bonds, notes and debentures for which the
Company has the positive intent and ability to hold to maturity are reported at
cost, adjusted for amortization of premiums and accretion of
discounts.
 
 Securities
Available-for-Sale.  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.
  8
 
 The
amortized cost and fair value of investment securities at June 30, 2010 and
December 31, 2009 are as follows:
 
 Available-for-Sale
 June
30, 2010
 (In
thousands)
 
 Amortized
                      Cost
                    
                    
                    Gross
                      Unrealized
                      Gains
                    
                    
                    Gross
                      Unrealized
                      Losses
                    
                    
                    Fair
                      ValueU.S.
      Agency securities
                    
                    $
                    1,500
                    
                    
                    $
                    2
                    
                    
                    $
                    -
                    
                    
                    $
                    1,502Mortgage-backed
      securities
                    
                    
                    1,922
                    
                    
                    
                    85
                    
                    
                    
                    -
                    
                    
                    
                    2,007State
      & political subdivisions
                    
                    
                    8,115
                    
                    
                    
                    230
                    
                    
                    
                    1
                    
                    
                    
                    8,344Other
      bonds
                    
                    
                    4,485
                    
                    
                    
                    199
                    
                    
                    
                    30
                    
                    
                    
                    4,654Total
      debt securities
                    
                    
                    16,022
                    
                    
                    
                    516
                    
                    
                    
                    31
                    
                    
                    
                    16,507Equity
      securities
                    
                    
                    1,610
                    
                    
                    
                    43
                    
                    
                    
                    338
                    
                    
                    
                    1,315Total
      Available-for-Sale
                    
                    $
                    17,632
                    
                    
                    $
                    559
                    
                    
                    $
                    369
                    
                    
                    $
                    17,822
 
 Available-for-Sale
 December
31, 2009
 (In
thousands)
 
 Amortized
                      Cost
                    
                    
                    Gross
                      Unrealized
                      Gains
                    
                    
                    Gross
                      Unrealized
                      Losses
                    
                    
                    Fair
                      ValueU.S.
      Agency securities
                    
                    $
                    1,500
                    
                    
                    $
                    18
                    
                    
                    $
                    -
                    
                    
                    $
                    1,518Mortgage-backed
      securities
                    
                    
                    2,662
                    
                    
                    
                    89
                    
                    
                    
                    -
                    
                    
                    
                    2,751State
      & political subdivisions
                    
                    
                    8,719
                    
                    
                    
                    142
                    
                    
                    
                    6
                    
                    
                    
                    8,855Other
      bonds
                    
                    
                    4,969
                    
                    
                    
                    164
                    
                    
                    
                    43
                    
                    
                    
                    5,090Total
      debt securities
                    
                    
                    17,850
                    
                    
                    
                    413
                    
                    
                    
                    49
                    
                    
                    
                    18,214Equity
      securities
                    
                    
                    1,591
                    
                    
                    
                    15
                    
                    
                    
                    422
                    
                    
                    
                    1,184Total
      Available-for-Sale
                    
                    $
                    19,441
                    
                    
                    $
                    428
                    
                    
                    $
                    471
                    
                    
                    $
                    19,398
 
 All of
the Company’s investment securities were classified as available-for-sale at
June 30, 2010 and December 31, 2009.
 
 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 June 30, 2010, 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
                      
                      
                      300
                      
                      
                      
                      1
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      300
                      
                      
                      
                      1Other
      securities
                      
                      
                      940
                      
                      
                      
                      30
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      940
                      
                      
                      
                      30Equity
      securities
                      
                      
                      321
                      
                      
                      
                      36
                      
                      
                      
                      572
                      
                      
                      
                      298
                      
                      
                      
                      893
                      
                      
                      
                      334Total
                      
                      $
                      1,561
                      
                      
                      $
                      67
                      
                      
                      $
                      572
                      
                      
                      $
                      298
                      
                      
                      $
                      2,133
                      
                      
                      $
                      365
 
 The above
table at June 30, 2010 includes 13 securities that have unrealized losses for
less than 12 months and 32 securities that have been in an unrealized loss
position for 12 or more months.
  9
 
 The
Company invests in various forms of agency debt including mortgage backed
securities and callable debt. The mortgage backed securities are issued by FHLMC
(Federal Home Loan Mortgage Company) of FNMA (Federal National Mortgage
Association). The municipal securities consist of general obligations and
revenue bonds. The equity securities consist of stocks in other bank holding
companies.  The fair market value of the above securities is
influenced by market interest rates, prepayment speeds on mortgage securities,
bid to offer spreads in the market place and credit premiums for various types
of agency debt. These factors change continuously and therefore the market value
of these securities may be higher or lower that the Company’s carrying value at
any measurement date. Management does not believe any of their 45 securities in
an unrealized position as of June 30, 2010 represents an other-than-temporary
impairment. The Company has the ability to hold the remaining securities
contained in the above table for a time necessary to recover the
cost.
 
 Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation. Investment securities classified as available-for-sale or
held-to-maturity are generally evaluated for OTTI under FASB ASC 320 (SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities). In
determining OTTI under the FASB ASC 320 model, management considers many
factors, including (1) the length of time and the extent to which the fair value
has been less than cost , (2) the financial condition and near-term prospects of
the issuer, (3) whether the market decline was affected by macroeconomic
conditions; and (4) whether the entity has the intent to sell the debt security
or more likely than not will be required to sell the debt security before its
anticipated recovery. The assessment of whether an other-than-temporary decline
exists involves a high degree of subjectivity and judgement and is based on the
information available to management at a point in time.
 
 When
other-than-temporary impairment occurs, the amount of the other-than-temporary
impairment recognized in earnings depends on whether an entity intends to sell
the security or more likely than not will be required to sell the security
before recovery of its amortized cost basis less any current-period credit loss.
If an entity intends to sell or more likely than not will be required to sell
the security before recovery of its amortized cost basis less any current-period
credit loss, the other-than-temporary impairment shall be recognized in earnings
equal to the entire difference between the investment’s amortized cost basis and
its fair value at the balance sheet date. If an entity does not intend to sell
the security and it is not more likely than not that the entity will be required
to sell the security before recovery of its amortized cost basis less any
current-period loss, the other-than-temporary impairment shall be separated into
the amount representing the credit loss and the amount related to all other
factors. The amount of the total other-than-temporary impairment related to the
credit loss is determined based on the present value of cash flows expected to
be collected and is recognized in earnings. The amount of the total
other-than-temporary impairment related to the other factors shall be recognized
in other comprehensive income, net of applicable taxes. The previous amortized
cost basis less the other-than-temporary impairment recognized in earnings shall
become the new amortized cost basis of the investment.
  The
Company’s investment in equity securities consists entirely of bank
stocks. The Company invests in equity securities of other banks through its
subsidiary, Norpenco, Inc  The unrealized losses are from forty three bank
stocks due to market fluctuation.  The Company also reviews investment
debt securities on an ongoing basis for the presence of other than temporary
impairment OTTI.  An impairment that is an
“other-than-temporary-impairment” is a decline in the fair value of an
investment below its amortized cost attributable to factors that indicate the
decline will not be recovered over the anticipated holding period of the
investment. Other-than-temporary-impairments result in reducing the security’s
carrying value by the amount of credit loss. The credit component of the
other-than-temporary impairment loss is realized through the statement of income
and the remainder of the loss remains in other comprehensive
income.  After our March 31, 2010 review, we concluded that two
securities were impaired. OTTI losses of $24,000 on these securities were
recognized during the first quarter 2010.  In accordance, with FASB
ASC 320, the impairment was deemed credit related and run entirely through the
statement of income.
  10
 
 Restricted
Securities
 
 Restricted
equity securities consist of stock in Federal Home Loan Bank of Pittsburgh
(“FHLB-Pittsburgh”) and, Atlantic Central Bankers Bank (“ACBB”) and do not have
a readily determinable fair value because their ownership is restricted, and
they can be sold back only to the FHLB-Pittsburgh, ACBB, or to another member
institution. Therefore, these securities are classified as restricted equity
investment securities, carried at cost, and evaluated for impairment. At both
June 30, 2010 and December 31, 2009, the Company held $1,106,000 in stock of
FHLB-Pittsburgh, and $37,000 in stock of ACBB.
 
 At
December 31, 2009, the Company evaluated its holding of restricted stock for
impairment and deemed the stock to not be impaired due to the expected
recoverability of cost, which equals the value reflected within the Company’s
consolidated financial statements. The decision was based on several items
ranging from the estimated true economic losses embedded within FHLB’s mortgage
portfolio to the FHLB’s liquidity position and credit rating. The Company
utilizes the impairment framework outlined in GAAP to evaluate stock for
impairment.
 
 3.
              Loans
 
 June 30,
                          2010
                        
                        
                        December 31,
                          2009(In
      thousands)Real
      estate mortgages:Construction
      and land development
                        
                        $
                        125
                        
                        
                        $
                        327Residential,
      1 – 4 family
                        
                        
                        45,242
                        
                        
                        
                        47,439Residential,
      multi-family
                        
                        
                        882
                        
                        
                        
                        908Commercial
                        
                        
                        67,452
                        
                        
                        
                        60,269Total
      real estate mortgages
                        
                        
                        113,701
                        
                        
                        
                        108,943Commercial
                        
                        
                        4,530
                        
                        
                        
                        3,368Consumer
                        
                        
                        2,912
                        
                        
                        
                        3,719Total
      loans
                        
                        
                        121,143
                        
                        
                        
                        116,030Allowance
      for loan losses
                        
                        
                        1,564
                        
                        
                        
                        1,484Total
      loans, net
                        
                        $
                        119,579
                        
                        
                        $
                        114,546
 
 Loans are
stated at the principal amount outstanding, net of any unearned income, deferred
loan fees and the allowance for loan losses.  Interest on mortgage and
commercial loans is calculated at the time of payment based on the current
outstanding balance of the loan.  Interest on consumer loans is
recognized on the simple interest method.
 
 The
allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries).  Management’s periodic evaluation of
the adequacy of the allowance is based on the Bank’s past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower’s ability to pay, the estimated value of any underlying collateral
and current economic conditions.
 
 Non-performing
loans consist of loans where the principal, interest, or both, is 90 or more
days past due and loans that have been placed on non-accrual.  Income
recognition of interest is discontinued when, in the opinion of management, the
payment of such interest becomes doubtful. 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.
  11
  Allowance
for Loan Losses
 
 The Bank
determines the provision for loan losses through a quarterly analysis of the
loan portfolio. The allowance for loan losses is established through provisions
for losses charged to earnings. Loan losses are charged against the allowance
when management believes that the collection of principal is unlikely.
Recoveries of loans previously charged-off are credited to the allowance when
realized. The allowance for loan losses is the amount that management has
determined to be necessary to absorb probable incurred loan losses inherent in
the existing portfolio. Management’s evaluations, which are subject to periodic
review by the Bank’s regulators, are made using a consistently applied
methodology that takes into consideration such factors as the Company’s past
loan loss experience, changes in the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem loans and collateral
values, and current economic conditions. Part of management’s review includes
risk ratings of commercial loans, and the engagement of an external loan review
of all loans over $400,000, insider loans and delinquent loans. Modifications to
the methodology used in the allowance for loan losses evaluation may be
necessary in the future based on further deterioration in economic and real
estate market conditions, new information obtained regarding known problem
loans, regulatory guidelines and examinations, the identification of additional
problem loans, and other factors.
 
 Management
considers the allowance for loan losses adequate to cover the estimated losses
inherent in the Bank’s loan portfolio as of June 30, 2010. Management believes
it has established the allowance in accordance with accounting principles
generally accepted in the United States and will consider future additions to
the allowance that may be necessary based on changes in economic and other
conditions. Additionally, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank’s allowance for loan
losses. Such agencies may require the recognition of adjustments to the
allowances based on their judgments of information available to them at the time
of their examinations.
  Management
realizes that general economic trends greatly affect loan losses. The recent
downturn in the real estate market has resulted in increased loan delinquencies,
defaults and foreclosures, and we believe that these trends are likely to
continue.  Assurances cannot be made either (1) that further
charges to the allowance account will not be significant in relation to the
normal activity or (2) that further evaluation of the loan portfolio based
on prevailing conditions may not require sizable additions to the allowance and
charges to provision expense.
  The
following table sets forth the period-end balances of and changes in the
allowance for loan losses as of June 30, 2010, June 30, 2009, and December 31,
2009:
 
 (Dollars
      in thousands)
                            
                            June
      30,
                            
                            
                            June
      30,
                            
                            
                            December
      312010
                            
                            
                            2009
                            
                            
                            2009Balance
      at beginning of period
                            
                            $
                            1,484
                            
                            
                            $
                            1,170
                            
                            
                            $
                            1,170Charge-offsCommercial
                            
                            
                            39
                            
                            
                            
                            50
                            
                            
                            
                            146Real
      estate mortgages
                            
                            
                            83
                            
                            
                            
                            -
                            
                            
                            
                            -Consumer
                            
                            
                            -
                            
                            
                            
                            15
                            
                            
                            
                            25Total
                            
                            $
                            122
                            
                            
                            $
                            65
                            
                            
                            $
                            171Recoveries:Commercial
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Real
      estate mortgages
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Consumer
                            
                            
                            1
                            
                            
                            
                            10
                            
                            
                            
                            10Total
                            
                            
                            1
                            
                            
                            
                            10
                            
                            
                            
                            10Net
      charge-offs
                            
                            
                            121
                            
                            
                            
                            55
                            
                            
                            
                            161Provision
      charged to operations
                            
                            
                            201
                            
                            
                            
                            90
                            
                            
                            
                            475Balance
      at end of period
                            
                            $
                            1,564
                            
                            
                            $
                            1,205
                            
                            
                            $
                            1,484Loss
      reserve ratios:Net
      1oan charge-offs to average 1oans
                            
                            
                            0.10
                            %
                            
                            
                            0.05
                            %
                            
                            
                            0.15
                            %Allowance
      as a percentage of total loans
                            
                            
                            1.29
                            %
                            
                            
                            1.11
                            %
                            
                            
                            1.28
                            %
  12
 
 The Bank
manages asset quality and controls credit risk through diversification of the
loan portfolio and the application of policies designed to foster sound
underwriting and loan monitoring practices.  The Bank’s senior
officers are responsible for monitoring asset quality, establishing credit
policies and procedures subject to approval by the Board of Directors, ensuring
the policies and procedures are followed and adjusting policies as
appropriate.
 
 Non-performing
assets include non-performing loans and foreclosed real estate held for
sale.  Non-performing loans consist of loans where the principal,
interest, or both, is 90 or more days past due and loans that have been placed
on non-accrual.  Income recognition of interest is discontinued when,
in the opinion of management, the payment of such interest becomes
doubtful.  A loan is generally classified as non-accrual when
principal or interest has been in default for 90 days or more or because of
deterioration in the financial condition of the borrower such that payment in
full of principal or interest is not expected.  Loans past due 90 days
or more and still accruing interest are loans that are generally well secured
and in the process of collection.  When loans are placed on
non-accrual, accruing interest is no longer posted to earnings.  At
June 30, 2010, the Bank had $1.3 million in non-accrual loans as compared with
$1.8 million at December 31, 2009 and $1.3 million at June 30,
2009.  As of June 30, 2010, for purposes of accounting and reporting
in accordance with FASB ASC 310-40 Receivables – Troubled Debt Restructuring by
Creditors (SFAS 15), the Bank had no significant troubled debt
restructuring.  As of June 30, 2010, for purposes of accounting and
reporting in accordance with FASB ASC 310-10.35 Receivables – Subsequent
Measurement (SFAS 114), the Bank had $1.3 million in “impaired”
loans.
 
 The
following table presents information regarding non-accrual mortgage, consumer
and other loans, and foreclosed real estate as of the dates
indicated:
 
 (Dollars
      in thousands)
                      
                      June
      30,
                      
                      
                      June
      30,
                      
                      
                      December,
      312010
                      
                      
                      2009
                      
                      
                      2009Non-accrual
      commercial
                      
                      
                      -
                      
                      
                      $
                      17
                      
                      
                      $
                      42Non-accrual
      commercial mortgage
                      
                      $
                      449
                      
                      
                      
                      160
                      
                      
                      
                      960Non-accrual
      residential mortgage
                      
                      
                      784
                      
                      
                      
                      1,064
                      
                      
                      
                      768Non-accrual
      consumer
                      
                      
                      27
                      
                      
                      
                      28
                      
                      
                      
                      4Total
      non-performing loans
                      
                      $
                      1,260
                      
                      
                      $
                      1,269
                      
                      
                      $
                      1,774Foreclosed
      real estate
                      
                      
                      88
                      
                      
                      
                      -
                      
                      
                      
                      88Total
      non-performing assets
                      
                      $
                      1,348
                      
                      
                      $
                      1,269
                      
                      
                      $
                      1,862
 
 (See NOTE 11  Subsequent
Events for additional information on non-accrual loans)
 
 4.
              Other
      Borrowings
 
 The Bank
has a line of credit agreement with the Federal Home Loan Bank of Pittsburgh for
short term borrowings varying from one day to three years.  Advances
on this line must be secured by “qualifying collateral” as defined in the
agreement and bear interest at fixed or variable rates as determined at the date
advances are made.  The line expires in June, 2011.  At
March 31, 2010, this line of credit had a zero balance.
 
 The Bank
has a $5,000,000 borrowing with the Federal Home Loan Bank of Pittsburgh at a
fixed rate of 6.19%, which was issued in July of 2000, and matures July of
2010.  The loan requires monthly interest payments, with the principal
due at maturity. (See NOTE
11  Subsequent Events)
 
 The Bank
also has a $7,000,000 borrowing with the Federal Home Loan Bank of Pittsburgh at
a fixed rate of 4.34%, which was issued in July of 2005, and matures in July of
2015.  This loan requires quarterly interest payments, with the
principal due at maturity.
  13
  5.
              Earnings
      Per Share
 
 Basic
earnings per share is computed on the weighted average number of common shares
outstanding during each year, adjusted for unearned shares of the ESOP, as
prescribed in FASB – ASC 260-10 Earnings per share SFAS No. 128, Earnings Per
Share.   Diluted earnings per share  include
common shares issuable upon exercise of employee stock options  as
follows:
 
 Six Months Ended
                      June 30,
                    
                    
                    Three Months Ended
                      June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Income
      (Numerator)
                    
                    $
                    574,000
                    
                    
                    $
                    222,000
                    
                    
                    $
                    353,000
                    
                    
                    $
                    (2,000
                    )Shares
      (Denominator)Basic
      shares outstanding
                    
                    
                    1,316,047
                    
                    
                    
                    1,417,697
                    
                    
                    
                    1,302,700
                    
                    
                    
                    1,408,559Effective
      of dilutive shares
                    
                    
                    14,769
                    
                    
                    
                    -
                    
                    
                    
                    17,861
                    
                    
                    
                    -Diluted
      shares outstanding
                    
                    
                    1,330,816
                    
                    
                    
                    1,417,697
                    
                    
                    
                    1,320,561
                    
                    
                    
                    1,408,559Earnings
      per shareBasic
                    
                    $
                    .44
                    
                    
                    $
                    .16
                    
                    
                    $
                    .27
                    
                    
                    $
                    -Diluted
                    
                    $
                    .43
                    
                    
                    $
                    .16
                    
                    
                    $
                    .27
                    
                    
                    $
                    -
 
 6.
              Stock-Based
      Compensation
  Stock-based
compensation is accounted for in accordance with 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 SFAS No. 123(R), 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 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.
 
 Stock
Awards. In May of 2006, the Company's stockholders approved the 2006
Omnibus Stock Option Plan, under which the Company reserved 101,685 shares of
common stock for future issuance. The Plan provides for grants of stock options
and restricted stock awards. Only present and future employees and directors are
eligible to receive incentive awards under the 2006 Omnibus Plan.  The
Company believes that such awards better align the interests of its employees
with its stockholders.
 
 On May
26, 2009, the Company’s stockholders approved the 2009 Equity Incentive Plan.
The Board of Directors has reserved a total of 119,000shares of common stock
for issuance upon the grant or exercise of awards made pursuant to the 2009
Plan.  The Plan provides for grants of stock options and restricted stock
awards. All of the Company’s employees, officers, and directors are
eligible to participate in the 2009 Plan.
 
 The
exercise price and vesting of both plans are determined by the Board of
Directors at the date of grant. Options generally vest over five years, and
expire ten years after the date of grant. Certain option and stock awards
provide for accelerated vesting if there is a change in control (as defined in
the Plan).
  14
 
 Stock Grants.Restricted stock
awards are considered fixed awards as the number of shares and fair value is
known at the date of grant and fair value over the requisite service period,
generally five years.  For the six months ended June 30, 2010,
restricted stock grants totaling 750 shares were awarded having a fair value of
$7,125. The grants vest over five years.  There were 500 restricted
stock awards made and subsequently forfeited for six months ended June 30,
2009.
 
 Information
regarding the Company’s restricted stock(all unvested) and changes during the
six months ended June 30, 2010 and 2009, respectively.
 
 Six Months Ended June 30,2010
                                      
                                      
                                      2009Stock Grants
                                      
                                      Number
                                        of
                                        Shares
                                      
                                      
                                      Weighted
                                        Avg Fair
                                        Value at
                                        Grant
                                        Date
                                      
                                      
                                      Number
                                        of
                                        Shares
                                      
                                      
                                      Weighted
                                        Avg Fair
                                        Value at
                                        Grant
                                        DateBalance,
      January 1,
                                      
                                      
                                      42,528
                                      
                                      
                                      $
                                      8.81
                                      
                                      
                                      
                                      24,976
                                      
                                      
                                      $
                                      8.66Granted
                                      
                                      
                                      750
                                      
                                      
                                      
                                      9.50
                                      
                                      
                                      
                                      500
                                      
                                      
                                      
                                      8.50Forfeited
      and surrendered
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (500
                                      )
                                      
                                      
                                      8.50Outstanding,
      June 30,
                                      
                                      
                                      43,278
                                      
                                      
                                      $
                                      8.82
                                      
                                      
                                      
                                      24,976
                                      
                                      
                                      $
                                      8.66
 
 There
were 11,196 vested shares of restricted stock awards vested at June 30, 2010 and
6,249 vested shares of restricted stock at June 30, 2009.
 
 Stock Options.. The option awards were granted with an exercise price equal to the
average price on the last trade date. The stock options vest and therefore
become exercisable on a pro rata basis annually over five years from the date
awarded. The options are available to be exercised for a period of ten years
after the date awarded.
 
 On March
4, 2010, the Company issued stock options covering 1,500 shares. The option
awards were granted with an exercise price equal to the average price on the
last trade date. The stock options vest and therefore become exercisable on a
pro rata basis annually over five years from the date awarded, commencing March
4, 2011. The options are available to be exercised for a period of ten years
after the date awarded. There were no stock options awarded for the three month
ended March 31, 2009.
 
 The fair
value of each option grant was estimated to be $2.74 on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants during the applicable period:
  Dividend
      Yield (per share)
                    
                    
                    1.60
                    %Volatility
      (%)
                    
                    
                    29.24
                    %Risk-free
      Interest Rate (%)
                    
                    
                    2.84
                    %Expected
      Life
                    
                    6.5 years
  15
  Six Months Ended June 30,2010
                              
                              
                              2009Stock Options
                              
                              Number of
                                Options
                              
                              
                              Weighted
                                Avg Exercise
                                Price
                              
                              
                              Number of
                                Options
                              
                              
                              Weighted
                                Avg Exercise
                                PriceBalance,
      January 1,
                              
                              
                              104,637
                              
                              
                              $
                              9.14
                              
                              
                              
                              63,265
                              
                              
                              $
                              9.71Granted
                              
                              
                              1,500
                              
                              
                              
                              9.50
                              
                              
                              
                              1,000
                              
                              
                              
                              8.50Exercised
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Forfeited
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,000
                              
                              
                              
                              8.50Outstanding,
      June 30,
                              
                              
                              106,137
                              
                              
                              $
                              9.15
                              
                              
                              
                              63,265
                              
                              
                              $
                              9.27Exercisable,
      June 31,
                              
                              
                              30,561
                              
                              
                              $
                              9.41
                              
                              
                              
                              17,985
                              
                              
                              $
                              9.52
 
 The
weighted average remaining contractural life of stock options award is 8.51
years.
 
 The
compensation expense recognized for option and restricted stock awards for the
six month period ending June 30, 2010 and 2009 was $72,000 and $47,000,
respectively.
 
 As of
June 30, 2010, there was approximately $209,000 of total unrecognized
compensation cost related to options and unvested stock awards. The cost of the
options and stock awards is expected to be recognized over a weighted-average
period of five years.
  7.
              Guarantees
  Mortgage Partnership Finance Program
  The Bank
participates in the Mortgage Partnership Finance (MPF) Program of the Federal
Home Loan Bank of Pittsburgh (FHLB). The program is intended to provide member
institutions with an alternative to holding fixed-rate mortgages in their loan
portfolios or selling them in the secondary market. An institution participates
in the MPF Program by either originating individual loans on a “flow” basis as
an agent for the FHLB pursuant to the “MPF 100 Program” or by selling, as a
principal, closed loans owned by an institution to the FHLB pursuant to one of
the FHLB’s closed-loan programs. Under the MPF Program(s), credit risk is shared
by the participating institution and the FHLB by structuring the loss exposure
in several layers, with the participating institution being liable for losses
after application of an initial layer of losses (after any private mortgage
insurance) is absorbed by the FHLB, subject to an agreed-upon maximum amount of
such secondary credit enhancement which is intended to be in an amount
equivalent to a “AA” credit risk rating by a rating agency. The participating
institution may also be liable for certain first layer losses after a specified
period of time. The participating institution receives credit enhancement fees
from the FHLB for providing this credit enhancement and continuing to manage the
credit risk of the MPF Program loans. Participating institutions are also paid
specified servicing fees for servicing the loans.
 
 Transfers
involving sales with the Bank acting as principal are accounted for in
accordance with FASB ASC 860-10 Transfers and Servicing (SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities) with the
recognition of gains and losses on the sale and related mortgage servicing
rights.
 
 The
credit enhancement feature of the MPF Program is accounted for by the Bank as a
financial guarantee in accordance with FASB ASC 460-10 Guarantees (FASB
Interpretation No. 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others)and reported on the balance sheet at its initial
fair value. Subsequent changes in the recorded guarantee amount would result
from termination of any portion or all of the guarantee, additional guarantees
being issued or increases in the expected losses resulting from the guarantee.
Such changes in recorded amounts are recognized in the consolidated statements
of income or as an increase in the offsetting guarantee fees receivable account
in the case of additional guarantees being issued.
  16
  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 six-months ended June 30, 2009 and the year ended
December 31, 2008 (dollars in thousands):
 
 2010
                    
                    
                    2009Beginning
      balance
                    
                    $
                    1,067
                    
                    
                    $
                    1,327Additions
                    
                    
                    -
                    
                    
                    
                    -Collections
                    
                    
                    (45
                    )
                    
                    
                    (260
                    )Ending
      balance
                    
                    $
                    1,022
                    
                    
                    $
                    1,067
 
 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.
 
 401(k)
Plan
 
 The Bank
also sponsors a 401(k) Plan (the Plan). The Plan covers all employees who meet
age and service requirements. Participants in the Plan are permitted to make
contributions up to 20% of their compensation. In March, 2009, the Board of
Directors approved an increase in matching employees’ contributions within the
Bank’s existing 401k plan from 50% of the first 6% to 100% of the first 6% as of
April 1, 2009.
 
 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.
  17
 
 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.
 
 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.
  18
  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.
 
 The
estimated fair values of the Company’s financial instruments are as follows (in
thousands):
  June 30,2010
                    
                    
                    December 31, 2009Carrying
                      Amount
                    
                    
                    Estimated
                      Fair Value
                    
                    
                    Carrying
                      Amount
                    
                    
                    Estimated
                      Fair ValueFinancial Assets:Cash
      and cash equivalents
                    
                    $
                    14,094
                    
                    
                    $
                    14,094
                    
                    
                    $
                    11,912
                    
                    
                    $
                    11,912Investments
      available for sale
                    
                    
                    17,822
                    
                    
                    
                    17,822
                    
                    
                    
                    19,398
                    
                    
                    
                    19,398Restricted
      equity securities
                    
                    
                    1,143
                    
                    
                    
                    1,143
                    
                    
                    
                    1,143
                    
                    
                    
                    1,143Loans
                    
                    
                    119,579
                    
                    
                    
                    122,244
                    
                    
                    
                    114,546
                    
                    
                    
                    114,483Accrued
      interest receivable
                    
                    
                    731
                    
                    
                    
                    731
                    
                    
                    
                    665
                    
                    
                    
                    665Total
      financial assets
                    
                    
                    153,369
                    
                    
                    
                    156,034
                    
                    
                    
                    147,664
                    
                    
                    
                    147,601Financial
      liabilities:Deposits
                    
                    
                    129,536
                    
                    
                    
                    128,193
                    
                    
                    
                    124,055
                    
                    
                    
                    122,608Other
      borrowings
                    
                    
                    12,000
                    
                    
                    
                    12,614
                    
                    
                    
                    12,000
                    
                    
                    
                    12,378Accrued
      interest payable
                    
                    
                    237
                    
                    
                    
                    237
                    
                    
                    
                    1,002
                    
                    
                    
                    1,002Total
      financial liabilities
                    
                    
                    141,773
                    
                    
                    
                    141,044
                    
                    
                    
                    137,057
                    
                    
                    
                    135,988Off-balance
      sheet liabilities:
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Commitments
      to extend credit
                    
                    
                    5,317
                    
                    
                    
                    5,317
                    
                    
                    
                    5,251
                    
                    
                    
                    5,251
 
 11.
              Subsequent
      Events
  On July
19, 2010, the Company redeemed its maturing $5,000,000 borrowing with the
Federal Home Loan Bank of Pittsburgh.  The advance had a fixed rate of
6.19%.
  In
addition, during the month of July, the Company became aware of deterioration in
two related loans. Each loan had been less than 30 days past due at June 30,
2010 and were not part of non-performing assets at June 30, 2010. The Company’s
portion of the principal balance of the two loans is approximately $616,000 and
is collateralized with real estate. The Company provided $100,000 to the
allowance for loan loss at June 30, 2010 and placed these loans in
non-performing status in July 2010.
  19




12.
            Stockholder’s
      Equity




Changes in stockholders’ equity for the
period ended June 30, 2010 were as follows:




(In thousands, except per
                        share amounts)
                      
                      Common
                        Stock
                      
                      
                      Additional
                        Paid-in
                        Capital
                      
                      
                      Retained
                        Earnings
                      
                      
                      Unearned
                        ESOP
                        Shares
                      
                      
                      Accum-
                        ulated
                        Other
                        Comp-
                        rehensive
                        Income
                        (Loss)
                      
                      
                      Treasury
                        Stock
                      
                      
                      TotalBalance,
      January 1, 2010
                      
                      $
                      158
                      
                      
                      $
                      13,580
                      
                      
                      $
                      8,541
                      
                      
                      $
                      (907
                      )
                      
                      $
                      (2
                      )
                      
                      $
                      (2,100)
                      
                      
                      $
                      19,270Comprehensive
      (loss):Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      575
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      575Unrealized
      losses on securities, net of income taxes
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      147
                      
                      
                      
                      -
                      
                      
                      
                      147Comprehensive
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      722ESOP
      shares released
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      36
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      36Restricted
      Stock Awards
                      
                      
                      -
                      
                      
                      
                      60
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      60Purchase
      of Treasury Stock
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (516
                      )
                      
                      
                      (516
                      )Cash
      dividend - $0.14 per share
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (172
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (172
                      )Balance,June
      30, 2010
                      
                      $
                      158
                      
                      
                      $
                      13,640
                      
                      
                      $
                      8,944
                      
                      
                      $
                      (871
                      )
                      
                      $
                      145
                      
                      
                      $
                      (2,616
                      )
                      
                      $
                      19,400




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





Forward-Looking
Statements





This
Quarterly Report on Form 10-Q, as well as other periodic reports filed with the
Securities and Exchange Commission, and written or oral communications made from
time to time by or on behalf of North Penn and its subsidiaries (the “Company”),
may contain statements relating to future events or future results of the
Company that are considered “forward-looking statements” under the Private
Securities Litigation Reform Act of 1995. These forward-looking statements may
be identified by the use of words such as “believe,” “expect,”
“anticipate,”  “plan,” “estimate,” “intend” and “potential,” or words
of similar meaning, or future or conditional verbs such as “should,” “could,” or
“may.”   Forward-looking statements include statements of our
goals, intentions and expectations; statements regarding our business plans,
prospects, growth and operating strategies; statements regarding the quality of
our loan and investment portfolios; and estimates of our risks and future costs
and benefits.




Forward-looking
statements reflect our expectation or prediction of future conditions, events or
results based on information currently available. These forward-looking
statements are subject to significant risks and uncertainties that may cause
actual results to differ materially from those in such
statements.  These risk and uncertainties include, but are not limited
to, the risks identified herein and in Item 1A of the Annual Report on Form 10-K
filed on March 31, 2010 and the following:





·
            general business and economic
      conditions nationally or in the markets we serve could adversely affect,
      among other things, real estate prices, unemployment levels, and consumer
      and business confidence, which could lead to decreases in the demand for
      loans, deposits and other financial services that we provide and increases
      in loan delinquencies and
defaults;





·
            changes or volatility in the
      capital markets and interest rates may adversely impact the value of
      securities, loans, deposits and other financial instruments and the
      interest rate sensitivity of our balance sheet as well as our
      liquidity;





·
            our liquidity requirements could
      be adversely affected by changes in our assets and
      liabilities;





·
            our investment securities
      portfolio is subject to credit risk, market risk, and liquidity risk as
      well as changes in the estimates we use to value certain of the securities
      in our portfolio;




20





·
            the effect of legislative or
      regulatory developments including changes in laws concerning taxes,
      banking, securities, insurance and other aspects of the financial services
      industry;





·
            competitive factors among
      financial services companies, including product and pricing pressures and
      our ability to attract, develop and retain qualified banking
      professionals;





·
            the effect of changes in
      accounting policies and practices, as may be adopted by the Financial
      Accounting Standards Board, the Securities and Exchange Commission, the
      Public Company Accounting Oversight Board and other regulatory agencies;
      and





·
            the effect of fiscal and
      governmental policies of the United States federal
      government.





Forward-looking
statements speak only as of the date of this report.  We do not
undertake to update forward-looking statements to reflect circumstances or
events that occur after the date of this report or to reflect the occurrence of
unanticipated events except as required by federal securities laws.





Statement of Changes in
Financial Condition





General. Our total assets
increased $5.6 million, or 3.6%, from $156.3 million at December 31, 2009 to
$161.9 million at June 30, 2010.  Significant changes in asset totals
from December 31, 2009 to June 30, 2010 included an increase in cash and cash
equivalents of $2.2 million, while net loans increased $5.0
million.  Total liabilities increased $5.5 million or 4.0% to $142.5
million at June 30, 2010 as compared to $137.1 million at December 31, 2009 due
to a $5.5 million increase in total deposits.   Stockholders’
equity increased $130,000 or 0.7% to $19.4 million at June 30, 2010 as compared
with $19.3 million at December 31, 2009.  The primary reason for the
increase in stockholders’ equity was earnings for the period and an increase in
accumulated other comprehensive income due to an increase in the market value of
available for sale investment securities.





Assets.Our net loans increased $5.0 million or 4.4%, since December 31,
2009.  Commercial real estate loans have increased $7.2 million, from
$60.3 million at December 31, 2009 to $67.5 million at June 30, 2010.
Substantially all of the Company’s commercial real estate loans are secured by
properties located in the Bank’s primary market area. Consumer loans decreased
$807,000 from $3.7 million at December 31, 2009 to $2.9 million at June 30,
2010, as the Bank has chosen not to aggressively pursue that segment of loans.
Residential mortgage loans decreased $2.2 million from December 31, 2009,
primarily due to sale of $2.5 million in residential mortgage
loans.  The sale occurred during the second quarter and resulted in a
pre-tax gain of $95,000.





Investment
securities decreased $1.6 million, or 8.12%, to $17.8 million at June 30, 2010
from $19.4 million at December 31, 2009.  Our intent is to maintain a
level of investment securities that is sufficient to maintain pledging and
collateralized borrowing requirements while also temporarily deploying excess
liquidity.





Allowance for Loan Losses.The
allowance for loan loss increased $80,000 or 5.4% during the first six months
ending June 30, 2010.  For the six month period ending June 30, 2010,
there were charge-offs of $122,000 and recoveries of $1,000. Management assesses
the adequacy of the allowance for loan losses based on evaluating known and
inherent losses in the loan portfolio and upon management’s continuing analysis
of the factors underlying the quality of the loan portfolio. The ratio of the
Bank’s allowance for loan losses to total loans was 1.29% at June 30, 2010 and
1.28% at December 31, 2009. We are continually monitoring credit quality so that
we can respond quickly to any deterioration with action to include strong
collection efforts and increased allowance for loan loss protection.(See NOTE 11, Subsequent
Events)





21




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
Assets.   On loans where the collection of principal or
interest payments is doubtful, the accrual of interest income ceases
(“non-accrual” loans).  On loans 90 days or more past due as to
principal and interest payments, the Company’s policy, with certain limited
exceptions, is to discontinue accruing interest.  On occasion, this
action may be taken earlier if the financial condition of the borrower raises
significant concern with regard to the borrower’s ability to service the debt in
accordance with the terms of the loan agreement.  Interest income is
not accrued on these loans until the borrowers’ financial condition and payment
record demonstrate an ability to service the debt.  Real estate that
is acquired as a result of foreclosure is classified as other real estate
owned.  Other real estate owned is recorded at the lower of cost or
fair value less estimated selling costs.  Costs associated with
acquiring and improving a foreclosed property may be capitalized to the extent
that the carrying value does not exceed fair value less estimated selling
costs.  Holding costs are charged to expense.  Gains and
losses on the sale of other real estate owned are credited or charged to
operations, as incurred.





Non-performing
loans totaled $1.3 million at June 30, 2010, compared to $1.8 million at
December 31, 2009. The ratio of non-performing loans to total loans was 1.04%
and 1.53% at June 30, 2010 and December 31, 2009, respectively.





Liabilities. Total deposits
increased $5.5 million, or 4.4%, to $129.5 million at June 30, 2010 from $124.1
million at December 31, 2009.  The primary reason for the increase is
a reflection of our attractive deposit products and the economic environment
causing consumers to be conservative in their approach to
investing.  Time deposits decreased $14.3 million or 21.7% to $51.7
million at June 30, 2010 from $65.9 million at December 31, 2009. The decrease
in time deposits was offset by an increase in core deposits of $19.9 million or
34.2% to $78.0 million at June 30, 2010 from $58.1 million at December 31, 2009.
Core deposits consist of all deposits other than certificates of
deposit.  Management has attempted to lessen its dependency on more
volatile and rate sensitive certificates of deposit and has focused more on
growing core deposits.





Stockholders’ Equity.Stockholders’ equity increased $130,000 or 0.7% to $19.4 million at June
30, 2010 as compared with $19.3 million at December 31, 2009.  Net
income for the period and improvement in accumulated other comprehensive loss
were the primary reasons for the increase.  The increase was partially
offset by our continuing purchases of Treasury Stock and payment of cash
dividends.  On March 23, 2010, the Company approved a 33% increase in
its quarterly dividend on its outstanding common stock from $0.03 to $0.04 per
share.  In addition, the Company approved a special cash dividend of $0.05
per share on its outstanding common stock.  Both the quarterly cash
dividend and the special cash dividend were paid on April 30, 2010 to
shareholders of record as of the close of business on April 15,
2010.





22




Results
of Operations





Comparison
of the Three Month and Six Month Periods Ended June 30, 2010 and
2009





General. For the three months
ended June 30, 2010, net income increased $355,000 when compared to a net loss
of $2,000 for the same period in 2009.  The primary reason for the
increase resulted from a $338,000 increase in net interest income for the three
months ended June 30, 2010 as compared to the same period in 2009.





Net
income for the six months ended June 30, 2010 totaled $575,000, an increase of
$353,000 or 159% as compared to a net income of $222,000 for the same period in
2009.  The primary reason for the increase was an increase in net
interest income and control of non-interest expense.  The increase in
net income was partially offset by an increase in provision for loan
loss.





Net interest income. Net
interest income for the second quarter ended June 30, 2010 increased $338,000,
or 31.3%, as compared to the quarter ended June 30, 2009.  Net
interest income increased $435,000 or 19.5%, to $2.7 million for the first half
of 2010 from $2.2 million for the comparable 2009 period.





For the
three month period ended June 30, 2010, interest income increased $159,000 or
8.4% to $2.0 million as compared with $1.9 million for the comparable period in
2009. The Company’s interest income for the six month period ended June 30, 2010
increased $192,000 or 5.0% to $4.0 million as compared with $3.8 million for the
same period in 2009.  Increased volume of loans was the primary reason
for the increase in interest income.





For the
three months ended June 30, 2010, total interest expense was $627,000 a decrease
of $179,000 or 22.2% over the six month period ended June 30,
2009.  Total interest expense for the six months ended June 30, 2010
was $1.3 million, a decrease of $243,000 or 15.3%, compared to $1.6 million for
the same period in 2009.   The decrease in interest expense reflects
the Company’s continued focus on improvements in deposit mix. This strategy
contributed almost entirely to the decline in interest expense for both
periods.





Provision for Loan
Loss.  The Company’s provision for loan and lease losses is
based on interrelated factors such as the composition of and risk in our loan
portfolio, the level of non-accruing and delinquent loans and the related
collateral, as well as economic considerations.  For the three months
ended June 30, 2010, the provision for loan losses was $162,000, a $124,000 or
326.3% increase over the $38,000 provision for the same period in
2009.  The provision charged to current earnings was $201,000 for the
six months ended June 30, 2010, an $111,000 or 123.3% increase as compared to a
provision for loan losses of $90,000 for the six months ended June 30,
2009.  The increase for both periods is primarily due to the Company’s
increasing commercial portfolio deterioration of two related loans which
materialized in July 2010. (See
NOTE 11 Subsequent Events)





Non-Interest
Income.  Non-interest income increased $102,000 or 96.2% to
$208,000 for the three months ended June 30, 2010 compared to $106,000 for the
three months ended June 30, 2009.  For the six months ended June 30,
2010, non-interest income totaled $280,000, an increase of $59,000 or 26.7%
compared to the same period in 2009. The increase in non-interest income for the
three and six months ended June 2010 compared to the same periods in 2009 was
primarily attributed to a pre-tax gain of $95,000 from a sale of mortgage loans.
The increase in non-interest income for the six months ending June 30, 2010 over
the comparable 2009 period was partially offset by an other-than-temporary
impairment charge on two equity securities of $24,000 that occurred during the
first quarter of 2010.





23





Non-Interest Expense.
Non-interest expense decreased $165,000 or 13.9%, to $1.0 million for the three
months ended June 30, 2010 compared to $1.2 million for the three months ended
June 30, 2009.  For the six months ended June 30, 2010, non-interest
expense totaled $2.0 million, a $45,000 or 2.2% decrease over the same period in
2009.





The
primary reason for the decrease in both periods was theFDIC’s
special assessment of five basis points on each FDIC-insured depository
institution's assets on June 30, 2009. FDIC insurance expense for both the three
and six month periods in 2010 decreased $95,000 and $46,000, respectively over
the same period in 2009.  Occupancy and furniture expense,
professional fees and all other expenses collectively declined $72,000 and
$80,000 for the three and six month periods ending June 30, 2010 as compared
with same periods in 2009.  Salary and employee benefits increased
$2,000 and $81,000 for the three and six month period ending June 30, 2010 as
compared with similar 2009 periods.





Income
Taxes. For the three months ended June 30, 2010, the Company’s income tax
expense increased $126,000 over the same period in 2009.  The
Company’s income tax benefit for the three months ended June 30, 2009 was due to
an operating loss for that period.





The
Company’s income tax expense increased $75,000 or 107.1% to $145,000 for the six
months ended June 30, 2010 compared to $70,000 for the same period in 2009.
The primary reason for the increase was primarily due to higher levels of income
before tax.





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 $2.2 million for the six months ended
June 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 June 30, 2010 and December 31, 2009 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:





24





Actual
                                                                      
                                                                      
                                                                      For capitaladequacy
                                                                        purposes
                                                                      
                                                                      
                                                                      To be well capitalized
                                                                        under prompt
                                                                        corrective action
                                                                        provisionsAmount
                                                                      
                                                                      
                                                                      Ratio
                                                                      
                                                                      
                                                                      Amount
                                                                      
                                                                      
                                                                      Ratio
                                                                      
                                                                      
                                                                      Amount
                                                                      
                                                                      
                                                                      RatioAt
      June 30, 2010:Total
      Capital (to Risk-Weighted Assets):North
      Penn Bank
                                                                      
                                                                      $
                                                                      18,556
                                                                      
                                                                      
                                                                      
                                                                      14.15
                                                                      %
                                                                      
                                                                      >
                                                                      10,492
                                                                      
                                                                      
                                                                      >
                                                                      8.0
                                                                      %
                                                                      
                                                                      >$
                                                                      13,115
                                                                      
                                                                      
                                                                      >
                                                                      10.0
                                                                      %Tier
      1 Capital (to Risk-Weighted Assets):North
      Penn Bank
                                                                      
                                                                      $
                                                                      16,992
                                                                      
                                                                      
                                                                      
                                                                      12.96
                                                                      %
                                                                      
                                                                      >$
                                                                      5,246
                                                                      
                                                                      
                                                                      >
                                                                      4.0
                                                                      %
                                                                      
                                                                      >$
                                                                      7,881
                                                                      
                                                                      
                                                                      >
                                                                      6.0
                                                                      %Tier
      1 Capital (to Average Assets):North
      Penn Bank
                                                                      
                                                                      $
                                                                      16,992
                                                                      
                                                                      
                                                                      
                                                                      10.78
                                                                      %
                                                                      
                                                                      >$
                                                                      6,305
                                                                      
                                                                      
                                                                      >
                                                                      4.0
                                                                      %
                                                                      
                                                                      >$
                                                                      7,881
                                                                      
                                                                      
                                                                      >
                                                                      5.0
                                                                      %Risk-Weighted
      Assets:
                                                                      
                                                                      $
                                                                      131,148Average
      Assets:
                                                                      
                                                                      $
                                                                      157,618Reconciliation
      of GAAP Capital to Regulatory CapitalTotal
      Equity Capital June 30, 2010
                                                                      
                                                                      $
                                                                      17,433Plus:
      Unrealized Gain/Loss on Investments
                                                                      
                                                                      
                                                                      (437
                                                                      )Less:
      Disallowed Servicing Rights
                                                                      
                                                                      
                                                                      (4
                                                                      )Total
      Tier 1 Capital June 30, 2010
                                                                      
                                                                      $
                                                                      16,992Plus:
      Allowance for loan losses
                                                                      
                                                                      
                                                                      1,564Total
      Risk-based Capital June 30, 2010
                                                                      
                                                                      $
                                                                      18,556At
      December 31, 2009:Total
      Capital (to Risk-Weighted Assets):North
      Penn Bank
                                                                      
                                                                      $
                                                                      18,151
                                                                      
                                                                      
                                                                      
                                                                      15.05
                                                                      %
                                                                      
                                                                      >$
                                                                      8,878
                                                                      
                                                                      
                                                                      >
                                                                      8.0
                                                                      %
                                                                      
                                                                      >$
                                                                      11,098
                                                                      
                                                                      
                                                                      >
                                                                      10.0
                                                                      %Tier
      1 Capital (to Risk-Weighted Assets):North
      Penn Bank
                                                                      
                                                                      $
                                                                      16,667
                                                                      
                                                                      
                                                                      
                                                                      14.00
                                                                      %
                                                                      
                                                                      >$
                                                                      4,439
                                                                      
                                                                      
                                                                      >
                                                                      4.0
                                                                      %
                                                                      
                                                                      >$
                                                                      6,659
                                                                      
                                                                      
                                                                      >
                                                                      6.0
                                                                      %Tier
      1 Capital (to Average Assets):North
      Penn Bank
                                                                      
                                                                      $
                                                                      16,667
                                                                      
                                                                      
                                                                      
                                                                      11.57
                                                                      %
                                                                      
                                                                      >$
                                                                      5,370
                                                                      
                                                                      
                                                                      >
                                                                      4.0
                                                                      %
                                                                      
                                                                      >$
                                                                      6,713
                                                                      
                                                                      
                                                                      >
                                                                      5.0
                                                                      %Risk-Weighted
      Assets:
                                                                      
                                                                      $
                                                                      120,425Average
      Assets:
                                                                      
                                                                      $
                                                                      146,866Reconciliation
      of GAAP Capital to Regulatory CapitalTotal
      Equity Capital December 31, 2009
                                                                      
                                                                      $
                                                                      16,670Plus:
      Unrealized Gain/Loss onInvestments
                                                                      
                                                                      
                                                                      (2
                                                                      )Less:
      Disallowed Servicing Rights
                                                                      
                                                                      
                                                                      (1
                                                                      )Total
      Tier 1 Capital December 31, 2009
                                                                      
                                                                      $
                                                                      16,667Plus:
      Allowance for loan losses
                                                                      
                                                                      
                                                                      1,484Total
      Risk-based Capital December 31, 2009
                                                                      
                                                                      $
                                                                      18,151





Item
      3.
            Quantitative
      and Qualitative Disclosure About Market
Risk





Not
applicable as the Company is a smaller reporting company.





Item
      4.
            Controls
      and Procedures





North
Penn Bancorp, Inc., under the supervision and with the participation of its
management, including its Chief Executive Officer and the Principal Accounting
Officer, evaluated the effectiveness of the design and operation of North Penn’s
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end
of the period covered by this report. Based on that evaluation, North Penn’s
Chief Executive Officer and Principal Accounting Officer concluded that North
Penn’s disclosure controls and procedures were effective. There were no
significant changes to North Penn’s disclosure controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.





Exchange
Act Rule 13a-15(e) defines “disclosure controls and procedures” as controls and
other procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Commission’s rules and
forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that such information is
accumulated and communicated to the issuer’s management, including its principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.





There
have been no changes in the Company’s internal control over financial reporting
during the quarter ended June 30, 2010 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.





25






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, 2009, which could materially affect our business, financial
condition or future results. Other than as noted below, at June 30, 2010 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.




Recently
enacted regulatory reform may have a material impact on our
operations.




On July 21, 2010, the President signed
into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”).  The Dodd-Frank Act restructures the regulation of
depository institutions.  The Dodd-Frank Act contains various
provisions designed to enhance the regulation of depository institutions and
prevent the recurrence of a financial crisis such as occurred in
2008-2009.  Also included is the creation of a new federal agency to
administer and enforce consumer and fair lending laws, a function that is now
performed by the depository institution regulators.  The federal
preemption of state laws currently accorded federally chartered depository
institutions will be reduced as well.  The full impact of the
Dodd-Frank Act on our business and operations will not be known for years until
regulations implementing the statute are written and adopted.  The
Dodd-Frank Act may have a material impact on our operations, particularly
through increased compliance costs resulting from possible future consumer and
fair lending regulations.


26




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 ProgramsApril
      1, 2010Through
                                                                      
                                                                      
                                                                      27,600
                                                                      
                                                                      
                                                                      $
                                                                      10.52
                                                                      
                                                                      
                                                                      
                                                                      281,900
                                                                      
                                                                      
                                                                      
                                                                      18,598April
      30, 2010May
      1, 2010through
                                                                      
                                                                      
                                                                      11,500
                                                                      
                                                                      
                                                                      $
                                                                      10.80
                                                                      
                                                                      
                                                                      
                                                                      293,400
                                                                      
                                                                      
                                                                      
                                                                      7,098May
      31, 2010June
      1, 2010through
                                                                      
                                                                      
                                                                      7,098
                                                                      
                                                                      
                                                                      $
                                                                      10.68
                                                                      
                                                                      
                                                                      
                                                                      300,048
                                                                      
                                                                      
                                                                      
                                                                      -June
      30, 2010Total
                                                                      
                                                                      
                                                                      46,198
                                                                      
                                                                      
                                                                      $
                                                                      10.62





(1)On
October 1, 2008, North Penn Bancorp, Inc. announced that its Board of
Directors authorized a stock repurchase plan for up to 158,157 shares of the
Company’s outstanding common stock.





On
April 28, 2009, the Company’s Board of Directors authorized the completion of
the previous 10% stock repurchase plan (29,657 shares) and the repurchase of up
to 142,341 shares of the Company’s outstanding common stock, or approximately
10% of outstanding shares.  The initial program was subsequently
completed during the second quarter of 2009.  The Company’s average
cost per share of shares under this program was $7.99.





The
Company completed its second repurchase authorization in June 2010. As of June
30, 2010, all 142,341
shares have been purchased at an average cost per share of $9.50.





Item 3.
            Defaults Upon Senior
      Securities.





None.





Item
      4.
            [Removed
      and reserved]





Item 5
            Other
      Information.





None





Item 
      6.
            Exhibits.





3.1
              
              Articles
      of Incorporation of North Penn Bancorp, Inc. (Incorporated herein by
      reference to Exhibit 3.1 to the Company’s Registration Statement on Form
      SB-2 (File No. 333-143601))3.2
              
              Bylaws
      of North Penn Bancorp, Inc. (Incorporated herein by reference to Exhibit
      3.2 to the Company’s Registration Statement on Form SB-2 (File No.
      333-143601))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
  Certification31.1
              
              Rule
      13a-14(a) /15d-14(a) Chief Financial Officer
  Certification32.1
              
              Section
      1350 Certification of Chief Executive Officer32.1
              
              Section
      1350 Certification of Chief Financial
Officer




27





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:
                              August
      13, 2010
                              
                              /s/
      Frederick L. HickmanFrederick
      L. HickmanPresident
      and Chief Executive OfficerDated:
                              August
      13, 2010
                              
                              /s
      Joseph F. McDonaldJoseph
      F. McDonaldChief
      Financial
Officer




28