**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





(Mark
                One)x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                the quarterly period ended
            September
                30, 2008o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACTFor
                the transition period from __________________
            to
            ______________________Commission
                File Number:000-52839





NORTH
      PENN BANCORP, INC.


(Exact
      name of small business issuer 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(Issuer’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 o





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 o
            
            Accelerated filer oNon-accelerated filer o
            
            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 o
      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 October 12, 2008, the issuer
      had
      1,581,571 shares of common stock, par value $0.10 per share, outstanding.









**PART
                  I.**
              **FINANCIAL
                INFORMATION**Item
                1.
              Financial
                  StatementsConsolidated
                  Balance Sheets at September 30, 2008 and December 31, 2007
              3Consolidated
                  Statements of Income for the Three and Nine Months Ended September
                  30,
                  2008 and 2007
              4Consolidated
                  Statements of Cash Flows for the Nine Months Ended September 30,
                  2008 and
                  2007
              5Notes
                  to Unaudited Consolidated Financial Statements
              6Item
                2.
              Management’s
                  Discussion and Analysis or Plan of Operation
              14Item
                3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              18Item
                4.
              Controls
                  and Procedures
              18**PART
                  II**
              **OTHER
                  INFORMATION**Item
                1.
              Legal
                  Proceedings
              18Item
                1A.
              Risk
                  Factors
              18Item
                2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              19Item
                3.
              Defaults
                  Upon Senior Securities
              19Item
                4.
              Submission
                  of Matters to a Vote of Security Holders
              19Item
                5.
              Other
                  Information
              19Item
                6.
              Exhibits
              20








**ITEM
      I.**  **FINANCIAL STATEMENTS**





**North
      Penn Bancorp, Inc. and Subsidiary**


**Consolidated
      Balance Sheets**




**September
                30, 2008**
            
            
            **December
                31, 2007**(Unaudited)
            
            
            (Audited)(In
                thousands)ASSETS:Cash
                and due from banks
            
            $
            2,977
            
            $
            3,071Interest
                bearing deposits
            
            
            41
            
            
            107Total
                cash and cash equivalents
            
            
            3,018
            
            
            3,178Federal
                funds sold
            
            
            4,230
            
            
            -Investment
                securities, available for sale
            
            
            20,245
            
            
            13,366Equity
                securities at cost, substantially restricted
            
            
            781
            
            
            1,060Loans,
                net of allowance for loan losses of $1,192 in 2008 and $1,171 in
                2007
            
            
            99,461
            
            
            97,247Bank
                premises and equipment - net
            
            
            4,095
            
            
            4,159Accrued
                interest receivable
            
            
            675
            
            
            695Cash
                surrender value of life insurance
            
            
            2,135
            
            
            2,137Deferred
                income taxes
            
            
            732
            
            
            466Other
                real estate owned
            
            
            -
            
            
            100Other
                assets
            
            
            158
            
            
            124TOTAL
                ASSETS
            
            $
            135,530
            
            $
            122,532LIABILITIES:Deposits:Non-interest
                bearing deposits
            
            $
            8,858
            
            $
            7,424Interest
                bearing demand deposits
            
            
            53,395
            
            
            32,922Interest
                bearing time deposits
            
            
            40,341
            
            
            43,337Total
                deposits
            
            
            102,594
            
            
            83,683Other
                borrowed funds
            
            
            12,000
            
            
            17,879Accrued
                interest and other liabilities
            
            
            934
            
            
            786TOTAL
                LIABILITIES
            
            
            115,528
            
            
            102,348STOCKHOLDERS’
                EQUITYPreferred
                stock, no par; 20,000,000 authorized; issued and outstanding,
                none
            
            
            -
            
            
            -Common
                stock, par value $0.10; 80,000,000 authorized; issued and outstanding,
                1,581,571
            
            
            158
            
            
            158Additional
                paid-in capital
            
            
            13,479
            
            
            13,433Retained
                earnings
            
            
            8,032
            
            
            7,742Unearned
                ESOP shares
            
            
            (1,059
            )
            
            (1,059
            )Accumulated
                other comprehensive income
            
            
            (608
            )
            
            (90
            )TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            20,002
            
            
            20,184TOTAL
                LIABILITIES AND STOCKHOLDER’S EQUITY
            
            $
            135,530
            
            $
            122,532




See
      notes
      to unaudited consolidated financial statements.


3


**North
      Penn Bancorp, Inc. and Subsidiary**


**Unaudited
      Consolidated Statements of Income**


**For
      the Three and Nine Months Ended September 30, 2008 and
      2007**


(In
      thousands)




**Nine
                Months Ended**
            
            **Three
                Months Ended****September
                30,**
            
            **September
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****INTEREST
                INCOME**Interest
                on loans
            
            $
            5,130
            
            $
            5,077
            
            $
            1,731
            
            $
            1,678Interest
                on fed funds sold
            
            
            93
            
            
            -
            
            
            32
            
            
            -Interest
                on tax exempt investments
            
            
            216
            
            
            215
            
            
            73
            
            
            72Interest
                on investments
            
            
            278
            
            
            197
            
            
            124
            
            
            67Dividends
                on investments
            
            
            56
            
            
            82
            
            
            15
            
            
            22Total
                interest income
            
            
            5,773
            
            
            5,571
            
            
            1,975
            
            
            1,839**INTEREST
                EXPENSE**Interest
                on deposits
            
            
            2,089
            
            
            2,123
            
            
            662
            
            
            703Interest
                on short term borrowings
            
            
            15
            
            
            357
            
            
            -
            
            
            121Interest
                on long term borrowings
            
            
            469
            
            
            468
            
            
            159
            
            
            160Total
                interest expense
            
            
            2,573
            
            
            2,948
            
            
            821
            
            
            984**NET
                INTEREST INCOME**
            
            
            3,200
            
            
            2,623
            
            
            1,154
            
            
            855**PROVISION
                FOR LOAN LOSSES**
            
            
            31
            
            
            66
            
            
            -
            
            
            6**NET
                INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES**
            
            
            3,169
            
            
            2,557
            
            
            1,154
            
            
            849**OTHER
                INCOME**Service
                charges on deposit accounts
            
            
            103
            
            
            102
            
            
            37
            
            
            30Other
                operating income
            
            
            144
            
            
            156
            
            
            47
            
            
            50Gain
                on sale of loans
            
            
            2
            
            
            79
            
            
            2
            
            
            -Gain
                on sale of securities
            
            
            1
            
            
            41
            
            
            -
            
            
            7**TOTAL
                OTHER INCOME**
            
            
            250
            
            
            378
            
            
            86
            
            
            87**OTHER
                EXPENSE**Salaries
                and employee benefits
            
            
            1,544
            
            
            1,442
            
            
            506
            
            
            498Occupancy
                and equipment expense
            
            
            502
            
            
            459
            
            
            161
            
            
            155Other
                operating expenses
            
            
            703
            
            
            692
            
            
            247
            
            
            253**TOTAL
                OTHER EXPENSE**
            
            
            2,749
            
            
            2,593
            
            
            914
            
            
            906**INCOME
                BEFORE INCOME TAXES**
            
            
            670
            
            
            342
            
            
            326
            
            
            30**INCOME
                TAX EXPENSE**
            
            
            238
            
            
            104
            
            
            120
            
            
            7**NET
                INCOME**
            
            
            432
            
            
            238
            
            
            206
            
            
            23**OTHER
                COMPREHENSIVE INCOME (LOSS):**Unrealized
                holding gain (loss) arising during period, net of income
                tax
            
            
            (518
            )
            
            (49
            )
            
            (420
            )
            
            105**COMPREHENSIVE
                INCOME**
            
            $
            (86
            )
            $
            189
            
            $
            (214
            )
            $
            128Weighted
                average number of shares outstanding
            
            
            1,536,761
            
            
            1,527,230
            
            
            1,536,761
            
            
            1,527,230Earnings
                per share, basic and diluted
            
            $
            0.28
            
            $
            0.16
            
            $
            0.13
            
            $
            0.02Dividends
                per share
            
            $
            0.09
            
            $
            0.06
            
            $
            0.03
            
            $
            0.03




See
      notes
      to unaudited consolidated financial statements.





4


**North
      Penn Bancorp, Inc. and Subsidiary**


**Unaudited
      Consolidated Statements of Cash Flows**


**For
      the Nine Months Ended September 30, 2008 and 2007**


(In
      thousands)




**2008**
            
            **2007**Operating
                Activities:Net
                income
            
            $
            432
            
            $
            238Items
                not requiring (providing) cashDepreciation
            
            
            192
            
            
            206Provision
                for loan losses
            
            
            31
            
            
            66Amortization
                of securities (net of accretion)
            
            
            15
            
            
            11(Decrease)
                increase in cash surrender value of life insurance
            
            
            (2
            )
            
            24Net
                realized gain on securities
            
            
            (1
            )
            
            (41
            )Net
                realized gain on sale of bank premise and equipment
            
            
            (2
            )
            
            -Net
                realized gain on other real estate owned
            
            
            -
            
            
            (6
            )Net
                realized gain on sale of loans
            
            
            (2
            )
            
            (79
            )Changes
                in:Accrued
                interest income and other assets
            
            
            (14
            )
            
            (566
            )Accrued
                interest expense and other liabilities
            
            
            151
            
            
            258Net
                Cash Provided by Operating Activities
            
            
            800
            
            
            111Investing
                Activities:Purchase
                bank premises and equipment
            
            
            (137
            )
            
            (77
            )Proceeds
                from sale of bank premises and equipment
            
            
            11
            
            
            -Proceeds
                from sale of other real estate owned
            
            
            100
            
            
            427Purchase
                of securities “available for sale”
            
            
            (9,724
            )
            
            (223
            )Sale
                of securities “available for sale”
            
            
            28
            
            
            213Federal
                funds sold, net
            
            
            (4,230
            )
            
            -Redemptions
                of securities “available for sale”
            
            
            940
            
            
            -Redemptions
                of mortgage-backed securities “available for sale”
            
            
            1,079
            
            
            701Net
                sale of restricted stock
            
            
            279
            
            
            14Net
                increase in loans to customers
            
            
            (3,019
            )
            
            (3,681
            )Proceeds
                from sale of loans
            
            
            776
            
            
            4,440Net
                Cash (Used in) Provided by Investing Activities
            
            
            (13,897
            )
            
            1,814Financing
                Activities:Net
                increase (decrease) in deposits
            
            
            18,911
            
            
            (1,295
            )Decrease
                in borrowed funds
            
            
            (5,879
            )
            
            (2,746
            )Cash
                dividends paid
            
            
            (95
            )
            
            (130
            )Net
                Cash Provided by (Used In) Financing Activities
            
            
            12,937
            
            
            (4,171
            )Net
                Decrease in Cash and Cash Equivalents
            
            
            (160
            )
            
            (2,246
            )Cash
                and Cash Equivalents, January 1
            
            $
            3,178
            
            $
            4,116Cash
                and Cash Equivalents, September 30
            
            $
            3,018
            
            $
            1,870Supplementary
                Schedule of Cash Flow Information:Cash
                paid during the period for:Interest
            
            $
            2,493
            
            $
            3,072Income
                taxes
            
            
            116
            
            
            64Non-cash
                investing and financing activities:None




See
      notes
      to unaudited consolidated financial statements.





5





**Notes
      to Unaudited Consolidated Financial Statements**





**1.**
            **Nature
                Of Operations And Summary
                Of**


**Significant
      Accounting Policies**





**Nature
      of Operations**





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





**Principles
      Of Consolidation**





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





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





**Basis
      of Presentation**





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





**Use
      Of Estimates**





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





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





6


**Mortgage
      Partnership Finance Program**




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




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




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







**2.**
              **Investment
                  Securities**





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





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





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





Purchase
      premiums and discounts are recognized in interest income on the straight-line
      basis over the terms of the securities, which approximates the interest method.
      Declines in the fair value of held-to-maturity and available-for-sale securities
      below their cost 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.




7


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




**Available-for-Sale**


**September
      30, 2008**


(In
      thousands)




**Amortized
                Cost**
            
            
            **Gross
                Unrealized Gains**
            
            
            **Gross
                Unrealized Losses**
            
            
            **Fair
                Value**U.S.
                Agency securities
            
            $
            3,000
            
            $
            8
            
            $
            -
            
            $
            3,008Mortgage-backed
                securities
            
            
            5,384
            
            
            -
            
            
            45
            
            
            5,339Municipal
                securities
            
            
            8,531
            
            
            -
            
            
            427
            
            
            8,104Other
                securities
            
            
            3,017
            
            
            -
            
            
            276
            
            
            2,741Total
                debt securities
            
            
            19,932
            
            
            8
            
            
            748
            
            
            19,192Equity
                securities
            
            
            1,234
            
            
            25
            
            
            206
            
            
            1,053Total
                Available for Sale
            
            $
            21,166
            
            $
            33
            
            $
            954
            
            $
            20,245





**Available-for-Sale**


**December
      31, 2007**


(In
      thousands)




**Amortized
                Cost**
            
            
            **Gross
                Unrealized Gains**
            
            
            **Gross
                Unrealized Losses**
            
            
            **FairValue**U.S.
                Agency securities
            
            $
            385
            
            $
            -
            
            $
            -
            
            $
            385Mortgage-backed
                securities
            
            
            4,521
            
            
            -
            
            
            41
            
            
            4,480Municipal
                securities
            
            
            7,026
            
            
            37
            
            
            2
            
            
            7,061Other
                securities
            
            
            500
            
            
            -
            
            
            -
            
            
            500Total
                debt securities
            
            
            12,432
            
            
            37
            
            
            43
            
            
            12,426Equity
                securities
            
            
            1,071
            
            
            22
            
            
            153
            
            
            940Total
                Available for Sale
            
            $
            13,503
            
            $
            59
            
            $
            196
            
            $
            13,366





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




**Less
                than 12 months**
            
            
            **12
                months or longer**
            
            
            **Total****FairValue**
            
            
            **Unrealized
                Losses**
            
            
            **Fair
                Value**
            
            
            **Unrealized
                Losses**
            
            
            **FairValue**
            
            
            **Unrealized
                Losses**U.S.
                Agencies
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Mortgage-backed
            
            
            5,111
            
            
            45
            
            
            
            
            
            
            
            
            5,111
            
            
            45Municipal
            
            
            8,104
            
            
            427
            
            
            -
            
            
            -
            
            
            8,104
            
            
            427Other
                securities
            
            
            2,741
            
            
            276
            
            
            -
            
            
            -
            
            
            2,741
            
            
            276Equity
                securities
            
            
            302
            
            
            54
            
            
            434
            
            
            152
            
            
            736
            
            
            206$
            16,258
            
            $
            802
            
            $
            434
            
            $
            152
            
            $
            16,692
            
            $
            954








The
      above
      table at September 30, 2008 includes 51 securities that have unrealized losses
      for less than 12 months and 24 securities that have been in an unrealized loss
      position for 12 or more months. The
      Company has analyzed its investment portfolio and determined that the market
      value fluctuations in these securities are consistent with the broader market
      and not a cause for recognition of a current loss.





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





8


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





**3.**
            **Loans**




**September
                30,**
              **2008**
            
            
            **December
                31,**
              **2007**Real
                estate mortgages:
            
            
            (In
                thousands)Construction
                and land development
            
            $
            409
            
            $
            154Residential,
                1 - 4 family
            
            
            46,024
            
            
            45,593Residential,
                multi-family
            
            
            1,409
            
            
            1,446Commercial
            
            
            46,245
            
            
            41,685Total
                real estate mortgages
            
            
            94,087
            
            
            88,878Commercial
            
            
            922
            
            
            2,157Consumer
            
            
            5,644
            
            
            7,383Total
                loans
            
            
            100,653
            
            
            98,418Allowance
                for loan loss
            
            
            1,192
            
            
            1,171Total
                loans, net
            
            $
            99,461
            
            $
            97,247








The
      Company's lending is primarily residential and commercial secured mortgage
      loans, in Northeastern Pennsylvania, based upon conservative underwriting
      standards.





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.





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





**Allowance
      for Loan Losses**





The
      Bank
      determines the provision for loan losses through a quarterly analysis of the
      loan portfolio. Factors such as changes in the nature and volume of the
      portfolio, overall portfolio quality, concentrations of credit risk, review
      of
      specific problem loans, current economic conditions and trends that affect
      the
      ability of borrowers to pay, and prior loss experience within the various loan
      categories are considered when reviewing the risks of the portfolio. Part of
      management’s review includes risk ratings of commercial loans, and the
      engagement of an external loan review of all loans over $400,000, insider loans
      and delinquent loans.





9


The
      following table sets forth the changes in the allowance for loan losses for
      the
      nine months ended September 30, 2008 and for the year ended December 31, 2007
      as
      indicated:




**September
                30,**
            
            
            **December
                31,**(Dollars
                in thousands)
            
            
            **2008**
            
            
            **2007**Balance
                at beginning of period
            
            $
            1,171
            
            $
            1,121Charge-offs:Commercial
            
            
            -
            
            
            -Real
                estate mortgages
            
            
            3
            
            
            -Consumer
            
            
            25
            
            
            45Total
            
            
            28
            
            
            45Recoveries:Commercial
            
            
            -
            
            
            -Real
                estate mortgages
            
            
            -
            
            
            -Consumer
            
            
            18
            
            
            9Total
            
            
            18
            
            
            9Net
                charge-offs
            
            
            10
            
            
            36Provision
                charged to operations
            
            
            31
            
            
            86Balance
                at end of period
            
            $
            1,192
            
            $
            1,171





**4.**
            **Other
                Borrowings**





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




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





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





**5.**  **Earnings
      Per Share**





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





10




**Nine
                Months Ended**
              **September
                30,**
            
            **Three
                Months Ended**
              **September
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Numerator
            
            $
            432,000
            
            $
            238,000
            
            $
            206,000
            
            $
            23,000DenominatorBasic
                shares outstanding
            
            
            1,536,761
            
            
            1,527,230
            
            
            1,536,761
            
            
            1,527,230Effective
                of dilutive shares
            
            
            728
            
            
            1,092
            
            
            728
            
            
            1,092Diluted
                shares outstanding
            
            
            1,537,489
            
            
            1,528,322
            
            
            1,537,489
            
            
            1,528,322Earnings
                per shareBasic
            
            $
            0.28
            
            $
            0.16
            
            $
            0.13
            
            $
            0.02Diluted
            
            $
            0.28
            
            $
            0.16
            
            $
            0.13
            
            $
            0.02








**6.**
            **Omnibus
                Stock Option Plan**




***Stock
      Awards.*** In May
      of 2006, the Company's stockholders approved the 2006 Omnibus Stock Option
      Plan,
      under which the Company reserved 101,685 shares of common stock for future
      issuance. The Plan provides for grants of stock options and restricted stock
      awards. Only present and future employees and directors are eligible to receive
      incentive awards under the 2006 Omnibus Plan. The Company believes that such
      awards better align the interests of its employees with its
      stockholders.




The
      exercise price and vesting are determined by the Board of Directors at the
      date
      of grant. Options generally vest over five years, and expire ten years after
      the
      date of grant. Certain option and stock awards provide for accelerated vesting
      if there is a change in control (as defined in the Plan).





***Stock
      Grants.*** Restricted
      stock grants totaling 5,323 shares were awarded on September 26, 2006 having
      a
      fair value of $54,000. The grants vest over five years. The market value as
      of
      the grant date of the restricted stock grants is charged to expense as the
      grants vest.





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





***Stock
      Options.*** Stock
      options covering 29,484 shares of common stock were awarded on September 26,
      2006. The option awards were granted with an exercise price equal to the average
      price of the last trade date. The stock options vest and therefore become
      exercisable on a pro rata basis annually over five years from the date awarded,
      commencing September 26, 2007. The options are available to be exercised for
      a
      period of ten years after the date awarded.




The
      fair
      value of each option grant was estimated to be $3.86 on the date of grant using
      the Black-Scholes option pricing model with the following assumptions used
      for
      grants during the applicable period:





Dividend
                Yield (per share)
            $
                0.12Volatility
                (%)
            3.76%Risk-free
                Interest Rate (%)
            4.76%Expected
                Life
            10
                years





An
      additional set of stock options covering 3,766 shares were awarded on October
      23, 2007. The option awards were granted with an exercise price equal to the
      average price of the last trade date. The stock options vest and therefore
      become exercisable on a pro rata basis annually over five years from the date
      awarded, commencing October 27, 2008. The options are available to be exercised
      for a period of ten years after the date awarded.





11


The
      fair
      value of each option grant was estimated to be $3.64 on the date of grant using
      the Black-Scholes option pricing model with the following assumptions used
      for
      grants during the applicable period:





Dividend
                Yield (per share)
            $
                0.12Volatility
                (%)
            19.00%Risk-free
                Interest Rate (%)
            4.01%Expected
                Life
            10
                years





A
      third
      set of stock options covering 34,997 shares were awarded on May 28, 2008. The
      option awards were granted with an exercise price equal to the average price
      of
      the last trade date. The stock options vest and therefore become exercisable
      on
      a pro rata basis annually over five years from the date awarded, commencing
      May
      28, 2009. The options are available to be exercised for a period of ten years
      after the date awarded.





The
      fair
      value of each option grant was estimated to be $3.18 on the date of grant using
      the Black-Scholes option pricing model with the following assumptions used
      for
      grants during the applicable period:





Dividend
                Yield (per share)
            $
                0.12Volatility
                (%)
            29.24%Risk-free
                Interest Rate (%)
            1.89%Expected
                Life
            10
                years





During
      the nine months ended September 30, 2008, the Company recorded approximately
      $46,000 in expense included in “Salaries and employee benefits” on the
      accompanying financial statements. As of September 30, 2008, there was
      approximately $369,000 of total unrecognized compensation cost related to
      unvested options and grants. That cost is expected to be recognized over a
      weighted-average period of 5 years. The Company plans on obtaining shares to
      be
      issued upon exercise of stock options through authorized common stock.




**Number
                of Shares**
            
            
            **Weighted
                -Average Exercise Price**
            
            
            **Weighted
                -Average Remaining Contractual Term**Outstanding,
                January 1, 2008
            
            
            33,250
            
            $
            10.19
            
            
            -Granted
            
            
            34,997
            
            $
            8.25
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -Forfeited
                or expired
            
            
            (4,368
            )
            $
            10.21
            
            
            -Outstanding,
                September 30, 2008
            
            
            63,879
            
            $
            9.12
            
            
            9.0Exercisable,
                September 30, 2008
            
            
            10,919
            
            $
            10.21
            
            
            8.0







**Stock
                Options**
            
            
            **Restricted
                Stock**Nonvested
                shares
            
            
            **Number
                of Shares**
            
            
            **Weighted-Average
                Grant-Date Fair Value**
            
            
            **Number
                of Shares**
            
            
            **Weighted-Average
                Grant-Date Fair Value**Nonvested,
                January 1, 2008
            
            
            27,354
            
            $
            3.83
            
            
            4,258
            
            $
            10.21Granted
            
            
            34,997
            
            $
            3.18
            
            
            20,994
            
            $
            8.25Vested
            
            
            (5,023
            )
            $
            3.86
            
            
            (874
            )
            $
            10.21Forfeited
            
            
            (3,494
            )
            $
            3.86
            
            
            (765
            )
            $
            10.21Nonvested,
                September 30, 2008
            
            
            53,834
            
            $
            3.40
            
            
            23,613
            
            $
            8.47





12





**7.**
            **Guarantees**




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




In
      September 2006, the Bank executed a Mortgage Partnership Finance (MPF) Master
      Commitment (the Commitment) with the FHLBank of Pittsburgh (FHLB) to deliver
      $10.0 million of mortgage loans and to guarantee the payment of any realized
      losses that exceed the FHLB’s first loss account for mortgages delivered under
      the Commitment. The Bank receives credit enhancement fees from the FHLB for
      providing this guarantee and continuing to manage the credit risk of the MPF
      Program mortgage loans. The term of the Commitment and guarantee per the Master
      Commitment is through September 25, 2009. The maximum potential amount of future
      payments that the Bank is required to make under the guarantee is $450,000.
      Under the Commitment, the Bank agrees to service the loans and therefore, is
      responsible for any necessary foreclosure proceedings. Any future recoveries
      on
      any losses would not be paid by the FHLB under the Commitment. The Bank has
      not
      experienced any losses under these guarantees.





**8.**
            **Related-Party
                Transactions**





The
      Company routinely enters into banking transactions with its directors and
      officers. Such transactions are made in the ordinary course of business on
      substantially the same terms and conditions, including interest rates and
      collateral, as those prevailing at the same time for comparable transactions
      with other customers, and do not, in the opinion of management, involve more
      than normal credit risk or present other unfavorable features. A summary of
      loans to directors and officers and related parties is as follows for the
      quarter ended September 30, 2008 and the year ended December 31, 2007 (dollars
      in thousands):





**2008**
            
            **2007**Beginning
                balance
            
            $
            1,334
            
            $
            922Additions
            
            
            596
            
            
            539Collections
            
            
            (745
            )
            
            (127
            )Ending
                balance
            
            $
            1,185
            
            $
            1,334




**9.**
            **Fair
                Value Measurements (SFAS No.
                157)**




Effective
      January 1, 2008, the Company adopted SFAS No. 157, which, among other things,
      requires enhanced disclosures about assets and liabilities carried at fair
      value. SFAS No. 157 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.





13


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





The
      following table presents the assets reported on the consolidated statements
      of
      financial condition at their fair value as of September 30, 2008 by level within
      the fair value hierarchy. As required by 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.




**September
                30, 2008****Level
                I**
            
            **Level
                II**
            
            **Level
                III**
            
            **Total****Assets:**Securities
                available-for-sale
            
            $
            20,209
            
            $
            -
            
            $
            36
            
            $
            20,245








**Item
      2.**   **Management’s
      Discussion and Analysis or Plan of Operation.**








**Forward-Looking
      Statements**





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





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








**Financial
      Condition**





The
      Company’s total assets increased $13.0 million, or 10.6%, to $135.5 million at
      September 30, 2008 from $122.5 million at December 31, 2007. The increase was
      the result of purchasing investment securities, increasing our federal funds
      sold position and an increase in net loans. Asset growth during the period
      was
      funded by an increase in deposits.





14


Investment
      securities increased $6.9 million, or 51.9%, to $20.2 million at September
      30,
      2008 from $13.3 million at December 31, 2007. During the nine months ended
      September 30, 2008, the Company purchased $3.0 million in corporate securities,
      $3.0 million in government securities, $2.0 million in mortgage-backed
      securities, and $1.6 million in municipal securities. The growth in securities
      during the nine months ended September 30, 2008 was offset by the maturing
      of a
      corporate bond and a mortgage-backed security, the calling of a federal agency
      bond and typical pay downs of mortgage-backed securities. The Company also
      purchased $191,000 in equity securities and sold two equity securities worth
      $28,000 during the nine months ended September 30, 2008.





Net
      loans
      increased $2.3 million, or 2.4%, to $99.5 million at September 30, 2008, from
      $97.2 million at December 31, 2007. The bank sold $750,000 of residential
      mortgages during the third quarter of 2008 to alleviate interest rate risk
      associated with individual mortgages and reinvested the funds in commercial
      loans. Our commercial loan portfolio increased $4.5 million, or 10.8%, to $46.2
      million at September 30, 2008, from $41.7 million at December 31,
      2007.





The
      Bank
      recorded no loan loss provision expense for the three months and $31,000 for
      the
      nine months ended September 30, 2008. The Bank had three consumer loans totaling
      $25,000 and mortgages of $3,000 charged off during the year. Management assesses
      the adequacy of the allowance for loan losses based on evaluating known and
      inherent risks in the loan portfolio and upon management’s continuing analysis
      of the factors underlying the quality of the loan portfolio.





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





Non-performing
      loans, which are loans past due 90 days or more and non-accruing loans, totaled
      $191,000 at September 30, 2008, compared to $378,000 at December 31, 2007.
      The
      improvement was in non-accruing residential mortgages which decreased by
      $187,000. The ratio of the Bank’s allowance for loan losses to total loans was
      1.18% at September 30, 2008 and 1.19% at December 31, 2007. The ratio of the
      Bank’s allowance for loan losses to non performing loans was 624.1% at September
      30, 2008 and 309.8% at December 31, 2007.





Total
      deposits increased $18.9 million, or 22.6%, to $102.6 million at September
      30,
      2008 from $83.7 million at December 31, 2007. Non-interest bearing deposits
      increased $1.5 million or 20.3%, interest bearing demand deposits increased
      $20.5 million or 62.3%, while time deposits decreased $3.0 million, or 6.9%.
      The
      increase in interest bearing demand deposits is due to growth in our Signature
      Savings account as well as continued growth in municipal deposits.





Other
      borrowings decreased $5.9 million, or 33.0%, to $12.0 million at September
      30,
      2008 from $17.9 million at December 31, 2007, due to pay downs in our overnight
      borrowing from FHLBank of Pittsburgh. Borrowings are primarily being used to
      fund loan growth when deposit growth is inadequate and repayment is made when
      deposit growth exceeds loan demand.





15





**Results
      of Operations**





**Comparison
      of the Three and Nine Month Periods Ended September 30, 2008 and
      2007**





Net
      income for the third quarter of 2008 increased $183,000, or 795.7%, to $206,000,
      compared to $23,000 in 2007. Net income for the nine months ended September
      30,
      2008 increased $194,000, or 81.5%, to $432,000 compared to $238,000 in 2007.





Net
      interest income for the third quarter increased $299,000, or 35.0%, to $1.2
      million in 2008, from $855,000 in 2007. For the nine months ended September
      30,
      2008, net interest income increased $577,000, or 22.0%, to $3.2 million in
      2008
      from $2.6 million in 2007.





Interest
      income for the third quarter of 2008 increased $136,000, or 7.4%, compared
      to
      2007. Interest income for the nine months ended September 30, 2008 increased
      $200,000, or 3.6%, to $5.8 million compared to $5.6 million for September 30,
      2007. Interest on loans remained relatively unchanged for the quarter and nine
      months ended September 30, 2008 compared to the same period in 2007. For the
      nine months ended September 30, 2008 and 2007, interest on loans amounted to
      approximately $5.1 million for both periods. Interest income from federal funds
      sold was $93,000 for the nine months ended September 30, 2008. During the same
      period in 2007, the Company did not have interest income from federal funds
      sold. Interest on investments increased $51,000 or 31.7%, to $212,000 from
      $161,000 during the third quarter, and $56,000 or 11.3%, to $550,000 from
      $494,000 for the nine months ended September 30, 2008. This additional interest
      income was due to investment purchases made during the year.





Interest
      expense during the third quarter decreased $163,000, or 16.6%, to $821,000
      in
      2008 from $984,000 in 2007. For the nine months ended September 30, 2008,
      interest expense decreased $300,000, or 10.3%, to $2.6 million in 2008 from
      $2.9
      million in 2007. Interest on deposits for the third quarter decreased $42,000
      or
      6.0%, to $661,000 in 2008, from $703,000 in 2007, due to decreases in the
      average volume and rate of time deposits. For the nine months ended September
      30, interest on deposits remained relatively unchanged at $2.1 million in both
      2008 and 2007. Interest on short term borrowed funds decreased $121,000, or
      100.0%, for the third quarter of 2008 and $342,000, or 95.8%, for the nine
      months ended September 30, 2008 due to significant decreases in the volume
      of
      overnight borrowings.





Other
      income for the third quarter decreased $1,000, or 1.1%, to $86,000, in 2008,
      from $87,000 in 2007. Total other expenses increased $8,000, or 0.9%, to
      $914,000 in 2008 from $906,000 in 2007. Salaries and employee benefits increased
      $8,000, or 1.6%, to $506,000 in 2008, from $498,000 in 2007. Occupancy and
      equipment expense increased $6,000 or 3.9%, to $161,000 in 2008, from $155,000
      in 2007, while other operating expenses increased $6,000 or 2.4%, to $247,000
      in
      2008 from $253,000 in 2007.





For
      the
      nine months ended September 30, other income decreased $128,000, or 33.9%,
      to
      $250,000 in 2008 from $378,000 in 2007, due to a larger gain recognized in
      2007
      on the sale of loans and securities. Total other expenses increased $156,000,
      or
      6.0%, to $2.7 million in 2008 from $2.6 million in 2007. Salaries and employee
      benefits increased $102,000 or 7.3%, to $1.5 million in 2008 from $1.4 million
      in 2007, due to increases in employee benefits and costs related to our stock
      award program. Occupancy and equipment expense increased $43,000, or 9.4%,
      to
      $502,000 in 2008 from $459,000 in 2007, while other operating expenses increased
      $11,000, or 1.6%, to $703,000 in 2008 from $692,000 in 2007.





Applicable
      taxes for the third quarter increased $113,000 to $120,000 in 2008 from $7,000
      in 2007. For the nine months ended September 30, 2008, taxes increased $134,000
      or 128.8%, to $238,000 in 2008 from $104,000 in 2007, largely due to the
      increase in federal and state taxable income.





16


**Liquidity
      and Capital Resources**





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





The
      Bank’s cash and cash equivalents decreased $160,000 for the nine months ended
      September 30, 2008. During that period, cash was primarily provided from
      earnings and customer deposits and primarily used to pay down overnight
      borrowings, purchase investment securities and fund new loans.





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


**Actual**
              
              
              **For
                  capital adequacy purposes**
              
              
              **To
                  be well capitalized under prompt corrective action
                  provisions****Amount**
              
              
              **Ratio**
              
              
              **Amount**
              
              
              **Ratio**
              
              
              **Amount**
              
              
              **Ratio****At
                September 30, 2008:****Total
                  Capital (to Risk-Weighted Assets):**North
                  Penn Bank
              
              $
              16,509
              
              
              15.86
              %
              
              ≥$
                    8,330
              
              
              ≥8.0
              %
              
              ≥$
                    10,413
              
              
              ≥10.0
              %**Tier
                  1 Capital (to Risk-Weighted Assets):**North
                  Penn Bank
              
              $
              15,317
              
              
              14.71
              %
              
              ≥$
                    4,165
              
              
              ≥4.0
              %
              
              ≥$
                    6,248
              
              
              ≥6.0
              %**Tier
                  1 Capital (to Average Assets):**North
                  Penn Bank
              
              $
              15,317
              
              
              11.36
              %
              
              ≥$
                    5,394
              
              
              ≥4.0
              %
              
              ≥$
                    6,742
              
              
              ≥5.0
              %Risk-Weighted
                  Assets:
              
              $
              104,125Average
                  Assets:
              
              $
              134,840


**Reconciliation
                  of GAAP Capital to Regulatory Capital**Total
                  Equity Capital September 30, 2008
              
              $
              15,257Plus:
                  Unrealized Gain/Loss on Investments
              
              
              (426
              )Less:
                  Disallowed Servicing Rights
              
              
              (365
              )Less:
                  Disallowed Servicing Rights
              
              
              (1
              )Total
                  Tier Capital September 30, 2008
              
              $
              15,317Plus:
                  Allowance for loan losses
              
              
              1,192Total
                  Risk-based Capital September 30, 2008
              
              $
              16,509
  **At
                    December 31, 2007:****Total
                    Capital (to Risk-Weighted Assets):**North
                    Penn Bank
                
                $
                16,319
                
                
                16.97
                %
                
                
                ≥$
                      7,695
                
                
                ≥8.0
                %
                
                ≥$
                      9,619
                
                
                ≥10.0
                %**Tier
                    1 Capital (to Risk-Weighted Assets):**North
                    Penn Bank
                
                $
                15,148
                
                
                15.75
                %
                
                
                ≥$
                      3,847
                
                
                ≥4.0
                %
                
                ≥$
                      5,771
                
                
                ≥6.0
                %**Tier
                    1 Capital (to Average Assets):**North
                    Penn Bank
                
                $
                15,148
                
                
                12.71
                %
                
                
                ≥$
                      4,766
                
                
                ≥4.0
                %
                
                ≥$
                      5,958
                
                
                ≥5.0
                %Risk-Weighted
                    Assets:
                
                $
                96,186Average
                    Assets:
                
                $
                119,156
 **Reconciliation
                  of GAAP Capital to Regulatory Capital**Total
                  Equity Capital December 31, 2007
              
              $
              15,190Plus:
                  Unrealized Gain/Loss on Investments
              
              
              (41
              )Less:
                  Disallowed Servicing Rights
              
              
              (1
              )Total
                  Tier Capital December 31, 2007
              
              $
              15,148Plus:
                  Allowance for loan losses
              
              
              1,171Total
                  Risk-based Capital December 31, 2007
              
              $
              16,319







17


**Related
      Parties**





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





**Item
      3.**   **Quantitative
      and Qualitative Disclosure About Market Risk**





Not
      applicable as the Company is a smaller reporting company.





**Item
      4.**   **Controls
      and Procedures.**





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





There
      have been no changes in the Company’s internal control over financial reporting
      during the quarter ended September 30, 2008 that have materially affected,
      or
      are reasonably likely to materially affect, the Company’s internal control over
      financial reporting.





**PART
      II - OTHER INFORMATION**





**Item
      1.**   **Legal
      Proceedings.**





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





**Item
      1A .**  **Risk
      Factors**





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





18





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





The
      Company did not purchase any equity securities during the quarter ended
      September 30, 2008. On October 1, 2008, the Company announced a repurchase
      program of 158,157 shares, approximately 10% of all shares outstanding. The
      program commenced on October 6, 2008 and will be in effect until all shares
      have
      been repurchased or until March 6, 2009. Purchases under the program will be
      conducted solely through a Rule 10b5-1 repurchase plan with Stifel, Nicolaus
      & Company, Incorporated and will be based upon the parameters of the Rule
      10b5-1 repurchase plan. The Rule 10b5-1 repurchase plan allows the Company
      to
      repurchase its shares during periods when it would normally not be active in
      the
      market due to its internal trading blackout period.





**Item
      3.**   **Defaults
      Upon Senior Securities.**





None.





**Item
      4.**   **Submission
      of Matters to a Vote of Security Holders.**





None





**Item
      5**   **Other
      Information.**





None





19


**Item
      6.**   **Exhibits
      and Reports on Form 8-K.**




**Exhibits**





31.1
            Rule
                13a-14(a) /15d-14(a) Chief Executive Officer
                Certification





31.2
            Rule
                13a-14(a) /15d-14(a) Principal Accounting Officer
                Certification





32.1
            Section
                1350 Certification of Chief Executive
                Officer





32.2
            Section
                1350 Certification of Principal Accounting
                Officer





20


SIGNATURES





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





North
                Penn Bancorp, IncDated:
            November
                13, 2008
            
            /s/
                Frederick L. HickmanFrederick
                L. Hickman
              President
                and
              Chief
                Executive OfficerDated:
            November
                13, 2008
            
            /s/
                Glenn J. ClarkGlenn
                J. Clark
              Assistant
                Vice President and
              Principal
                Accounting Officer


21