UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





(Mark
One)


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





For the
quarterly period ended September 30,
2010





o
            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  o





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 o     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 November 11, 2010 the issuer had
1,288,620 shares of common stock, par value $0.10 per share,
outstanding.










PART I -
FINANCIAL INFORMATION





PageItem
      1. Financial Statements.Consolidated
      Balance Sheets at September 30, 2010 and December 31, 2009
            
            3Consolidated
      Statements of Income for the Three and Nine Months Ended September
      30, 2010 and 2009
            
            4Consolidated
      Statements of Cash Flows for the Nine Months Ended September 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
            
            25Item
      1A.Risk Factors
            
            26Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            
            26Item
      3. Defaults Upon Senior Securities.
            
            26Item
      4. [Removed and Reserved].
            
            26Item
      5. Other Information.
            
            26Item
      6. Exhibits.
            
            26




2


PART
I – FINANCIAL INFORMATION





Item
1. Financial Statements





North
Penn Bancorp, Inc. and Subsidiary


Consolidated
Balance Sheets


(In thousands)





September
      30,
              2010
            
            
            December
      31,
              2009(Unaudited)
            
            
            (Audited)(In
      thousands)ASSETS:Cash
      and due from banks
            
            $
            2,825
            
            
            $
            2,652Interest
      bearing deposits
            
            
            56
            
            
            
            560Federal
      funds sold
            
            
            15,888
            
            
            
            8,700Total
      cash and cash equivalents
            
            
            18,769
            
            
            
            11,912Investment
      securities, available for sale
            
            
            15,497
            
            
            
            19,398Equity
      securities at cost, substantially restricted
            
            
            1,143
            
            
            
            1,143Loans,
      net of allowance for loan losses of $1,667 in 2010 and $1,484 in
      2009
            
            
            119,696
            
            
            
            114,546Bank
      premises and equipment – net
            
            
            3,860
            
            
            
            3,965Accrued
      interest receivable
            
            
            754
            
            
            
            665Cash
      surrender value of bank-owned life insurance
            
            
            3,124
            
            
            
            3,015Deferred
      income taxes
            
            
            553
            
            
            
            705Prepaid
      FDIC insurance
            
            
            443
            
            
            
            604Other
      real estate owned
            
            
            398
            
            
            
            88Other
      assets
            
            
            268
            
            
            
            286TOTAL
      ASSETS
            
            $
            164,505
            
            
            $
            156,327LIABILITIES:Deposits:Non-interest
      bearing
            
            $
            7,160
            
            
            $
            8,785Interest
      bearing
            
            
            129,388
            
            
            
            115,270Total
      deposits
            
            
            136,548
            
            
            
            124,055Other
      borrowed funds
            
            
            7,000
            
            
            
            12,000Accrued
      interest and other liabilities
            
            
            1,049
            
            
            
            1,002TOTAL
      LIABILITIES
            
            
            144,597
            
            
            
            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; 1,581,571 shares issued ;
      outstanding: 1,285,148 at September 30, 2010 and 1,330,071 at December 31,
      2009
            
            
            158
            
            
            
            158Additional
      paid-in capital
            
            
            13,695
            
            
            
            13,580Retained
      earnings
            
            
            9,142
            
            
            
            8,541Unearned
      ESOP shares
            
            
            (853
            )
            
            
            (907
            )Accumulated
      other comprehensive income, (loss)
            
            
            382
            
            
            
            (2
            )Treasury
      Stock at cost, shares: 296,423 at September 30, 2010 in 2010 and 251,500
      at December 31, 2009
            
            
            (2,616
            )
            
            
            (2,100
            )TOTAL
      STOCKHOLDERS’ EQUITY
            
            
            19,908
            
            
            
            19,270TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            164,505
            
            
            $
            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 Nine Months Ended September 30, 2010 and 2009





Nine
      Months Ended
            
            
            Three
      Months Ended(In
      thousands)
            
            September30,
              2010
            
            
            September
      30,
              2009
            
            
            September30,
              2010
            
            
            September
      30,
              2009INTEREST
      INCOMEInterest
      on loans
            
            $
            5,349
            
            
            $
            5,113
            
            
            $
            1,800
            
            
            $
            1,698Interest
      on tax exempt loans
            
            
            31
            
            
            
            1
            
            
            
            9
            
            
            
            2Interest
      on federal funds sold
            
            
            11
            
            
            
            5
            
            
            
            4
            
            
            
            2Interest
      on tax exempt investments
            
            
            228
            
            
            
            222
            
            
            
            74
            
            
            
            74Interest
      and dividends on investments
            
            
            391
            
            
            
            373
            
            
            
            117
            
            
            
            124Total
      interest income
            
            
            6,010
            
            
            
            5,714
            
            
            
            2,004
            
            
            
            1,900INTEREST
      EXPENSEInterest
      on deposits
            
            
            1,502
            
            
            
            1,896
            
            
            
            476
            
            
            
            629Interest
      on short-term borrowings
            
            
            -
            
            
            
            10
            
            
            
            -
            
            
            
            -Interest
      on long-term borrowings
            
            
            408
            
            
            
            462
            
            
            
            92
            
            
            
            154Total
      interest expense
            
            
            1,910
            
            
            
            2,368
            
            
            
            568
            
            
            
            783NET
      INTEREST INCOME
            
            
            4,100
            
            
            
            3,346
            
            
            
            1,436
            
            
            
            1,117PROVISION
      FOR LOAN LOSSES
            
            
            334
            
            
            
            135
            
            
            
            133
            
            
            
            45NET
      INTEREST INCOMEAFTER
      PROVISION FOR LOAN LOSSES
            
            
            3,766
            
            
            
            3,211
            
            
            
            1,303
            
            
            
            1,072OTHER
      INCOMEService
      charges and fees
            
            
            120
            
            
            
            111
            
            
            
            37
            
            
            
            38Bank-owned
      life insurance income
            
            
            109
            
            
            
            118
            
            
            
            36
            
            
            
            38Other
      operating income
            
            
            65
            
            
            
            89
            
            
            
            12
            
            
            
            35Gain
      on sale of securities
            
            
            8
            
            
            
            -
            
            
            
            8
            
            
            
            -Gain
      on sale of loans
            
            
            123
            
            
            
            14
            
            
            
            28
            
            
            
            -Impairment
      losses on investment securities
            
            
            (24
            )
            
            
            -
            
            
            
            -
            
            
            
            -TOTAL
      OTHER INCOME
            
            
            401
            
            
            
            332
            
            
            
            121
            
            
            
            111OTHER
      EXPENSESalaries
      and employee benefits
            
            
            1,760
            
            
            
            1,616
            
            
            
            590
            
            
            
            527Occupancy
      and equipment expense
            
            
            428
            
            
            
            451
            
            
            
            163
            
            
            
            146FDIC
      insurance expense
            
            
            165
            
            
            
            196
            
            
            
            58
            
            
            
            43Professional
      services expense
            
            
            205
            
            
            
            208
            
            
            
            71
            
            
            
            56Other
      operating expenses
            
            
            549
            
            
            
            545
            
            
            
            202
            
            
            
            176TOTAL
      OTHER EXPENSE
            
            
            3,107
            
            
            
            3,016
            
            
            
            1,084
            
            
            
            948INCOME
      BEFORE INCOME TAXES
            
            
            1,060
            
            
            
            527
            
            
            
            340
            
            
            
            235INCOME
      TAX EXPENSE
            
            
            235
            
            
            
            160
            
            
            
            90
            
            
            
            90NET
      INCOME
            
            
            825
            
            
            
            367
            
            
            
            250
            
            
            
            145OTHER
      COMPREHENSIVE INCOMEUnrealized
      holding gain arising during period,net
      of income tax
            
            
            384
            
            
            
            518
            
            
            
            237
            
            
            
            413COMPREHENSIVE
      INCOME
            
            $
            1,209
            
            
            $
            885
            
            
            $
            368
            
            
            $
            558Weighted
      average number of shares outstanding
            
            
            1,305,634
            
            
            
            1,400,044
            
            
            
            1,285,148
            
            
            
            1,365,371Earnings
      per share, basic
            
            $
            0.63
            
            
            $
            0.26
            
            
            $
            0.19
            
            
            $
            0.11Earnings
      per share, diluted
            
            $
            0.62
            
            
            $
            0.26
            
            
            $
            0.19
            
            
            
            0.11Dividends
      per share
            
            $
            0.17
            
            
            $
            0.09
            
            
            $
            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 Nine Months Ended September 30, 2010 and 2009


(In
thousands)




2010
            
            
            2009Operating
      Activities:Net
      income
            
            $
            825
            
            
            $
            367Items
      not requiring (providing) cashDepreciation
            
            
            135
            
            
            
            174Provision
      for loan losses
            
            
            334
            
            
            
            135Deferred
      income tax benefit
            
            
            (61
            )
            
            
            -Amortization
      of securities (net of accretion)
            
            
            (7
            )
            
            
            28ESOP
      expense
            
            
            54
            
            
            
            51Stock
      option expense
            
            
            115
            
            
            
            71Increase
      in cash surrender value of life insurance
            
            
            (109
            )
            
            
            (118
            )Impairment
      loss on investment securities
            
            
            24
            
            
            
            -Net
      realized gain on sale of investment securities
            
            
            (8
            )
            
            
            -Net
      realized gain on sale of loans
            
            
            (123
            )
            
            
            (14
            )Changes
      in:Prepaid
      FDIC insurance
            
            
            161
            
            
            
            -Accrued
      interest receivable and other assets
            
            
            (71
            )
            
            
            (138
            )Accrued
      interest expense and other liabilities
            
            
            (6
            )
            
            
            126Net
      Cash Provided By Operating Activities
            
            
            1,263
            
            
            
            682Investing
      Activities:Purchase
      of bank premises and equipment
            
            
            (30
            )
            
            
            (32
            )Proceeds
      from sale of bank premises and equipment
            
            
            -
            
            
            
            -Proceeds
      from sale of other real estate
            
            
            -
            
            
            
            -Purchase
      of securities “available for sale”
            
            
            (84
            )
            
            
            (2,749
            )Sales
      of securities “available for sale”
            
            
            43
            
            
            
            70Matured
      or called securities “available for sale”
            
            
            3,150
            
            
            
            2,593Redemptions
      of mortgage-backed securities “available forSale”
            
            
            1,380
            
            
            
            1,589(Purchase)
      of restricted stock
            
            
            -
            
            
            
            (53
            )Net
      increase in loans to customers
            
            
            (8,673
            )
            
            
            (3,683
            )Proceeds
      from sale of loans
            
            
            3,002
            
            
            
            698Net
      Cash (Used) In Investing Activities
            
            
            (1,212
            )
            
            
            (1,567
            )Financing
      Activities:Increase
      in deposits
            
            
            12,493
            
            
            
            20,196Decrease
      in borrowed funds
            
            
            (5,000
            )
            
            
            (7,648
            )Treasury
      stock purchased
            
            
            (516
            )
            
            
            (931
            )Cash
      dividends paid
            
            
            (171
            )
            
            
            (138
            )Net
      Cash Provided By Financing Activities
            
            
            6,806
            
            
            
            11,479Net
      Increase In Cash and Cash Equivalents
            
            
            6,857
            
            
            
            10,594Cash
      and Cash Equivalents, January 1
            
            
            11,912
            
            
            
            2,274Cash
      and Cash Equivalents, September 30
            
            $
            18,769
            
            
            $
            12,868Supplementary
      Schedule of Cash Flow Information:Cash
      paid during the period for:Interest
            
            $
            2,004
            
            
            $
            2,366Income
      taxes
            
            
            312
            
            
            
            112





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
September 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
September 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. The
adoption of this update did not have a significant impact to the Company’s
financial condition, results of operations or cash flows.




6





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. In
January 2010, the FASB amended previous guidance related to fair value
measurements and disclosures, which requires new disclosures for transfers in
and out of Levels 1 and 2 and requires a reconciliation to be provided for the
activity in Level 3 fair value measurements. A reporting entity should disclose
separately the amounts of significant transfers in and out of Levels 1 and 2 and
provide an explanation for the transfers. This guidance is effective for interim
periods beginning after December 15, 2009, and did not have a material
effect on the Company’s results of operations or financial
position.





In the
reconciliation for fair value measurements using unobservable inputs (Level 3) a
reporting entity should present separately information about purchases, sales,
issuances, and settlements on a gross basis rather than a net basis. Disclosures
relating to purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurement will become effective beginning after
December 15, 2010, and for interim periods within those fiscal years. The
adoption of this standard is not expected to have a material effect on the
Company’s results of operations or financial position but it will require
expansion of the Company’s future disclosures about fair value
measurements.




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.




7





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.





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 September 30, 2010 and
December 31, 2009 are as follows:




Available-for-Sale


September
30, 2010


(In
thousands)





Amortized
      Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Fair
      ValueU.S.
      Agency securities
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Mortgage-backed
      securities
            
            
            1,270
            
            
            
            70
            
            
            
            -
            
            
            
            1,340State
      & political subdivisions
            
            
            7,559
            
            
            
            440
            
            
            
            -
            
            
            
            7,999Other
      bonds
            
            
            4,490
            
            
            
            308
            
            
            
            -
            
            
            
            4,798Total
      debt securities
            
            
            13,319
            
            
            
            818
            
            
            
            -
            
            
            
            14,137Equity
      securities
            
            
            1,624
            
            
            
            40
            
            
            
            304
            
            
            
            1,360Total
      Available-for-Sale
            
            $
            14,943
            
            
            $
            858
            
            
            $
            304
            
            
            $
            15,497





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
September 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 September 30, 2010, are as
follows:




Less
      than 12 months
            
            
            12
      months or longer
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedValue
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesU.S.
      Agencies
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Mortgage-backed
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Municipal
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Other
      securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Equity
      securities
            
            
            293
            
            
            
            35
            
            
            
            660
            
            
            
            266
            
            
            
            953
            
            
            
            301Total
            
            $
            293
            
            
            $
            35
            
            
            $
            660
            
            
            $
            266
            
            
            $
            953
            
            
            $
            301




The above
table at September 30, 2010 includes 10 securities that have unrealized losses
for less than 12 months and 33 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 43 securities in
an unrealized position as of September 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
September 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





September
      30,
              2010
            
            
            December
      31,
              2009Real
      estate mortgages:
            
            (In
      thousands)Construction
      and land development
            
            $
            116
            
            
            $
            327Residential,
      1 – 4 family
            
            
            44,043
            
            
            
            47,439Residential,
      multi-family
            
            
            869
            
            
            
            908Commercial
            
            
            70,866
            
            
            
            60,269Total
      real estate mortgages
            
            
            115,894
            
            
            
            108,943Commercial
            
            
            2,943
            
            
            
            3,368Consumer
            
            
            2,526
            
            
            
            3,719Total
      loans
            
            
            121,363
            
            
            
            116,030Allowance
      for loan losses
            
            
            1,667
            
            
            
            1,484Total
      loans, net
            
            $
            119,696
            
            
            $
            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 September 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 September 30, 2010 and September 30,
2009.





Three
      months ended
            
            
            Nine
      months endedSeptember
      30,
            
            
            September
      30,(Dollars
      in thousands)2010
            
            
            2009
            
            
            2010
            
            
            2009Balance
      at beginning of period
            
            $
            1,564
            
            
            $
            1,205
            
            
            $
            1,484
            
            
            $
            1
      ,170Charge-offs:Commercial
            
            
            -
            
            
            
            -
            
            
            
            39
            
            
            
            50Real
      estate mortgages
            
            
            30
            
            
            
            -
            
            
            
            113
            
            
            
            -Consumer
            
            
            -
            
            
            
            7
            
            
            
            -
            
            
            
            22Total
            
            $
            30
            
            
            $
            7
            
            
            $
            152
            
            
            $
            72Recoveries:Commercial
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Real
      estate mortgages
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
            
            
            -
            
            
            
            -
            
            
            
            1
            
            
            
            10Total
            
            
            -
            
            
            
            -
            
            
            
            1
            
            
            
            10Net
      charge-offs
            
            
            30
            
            
            
            7
            
            
            
            151
            
            
            
            62Provision
      charged to operations
            
            
            133
            
            
            
            45
            
            
            
            334
            
            
            
            135Balance
      at end of period
            
            $
            1,667
            
            
            $
            1,243
            
            
            $
            1,667
            
            
            $
            1,243





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
September 30, 2010, the Bank had $1.8 million in non-accrual loans as compared
with $1.8 million at December 31, 2009 and $1.5 million at September 30,
2009.  As of September 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 September 30, 2010, for purposes of accounting
and reporting in accordance with FASB ASC 310-10.35 Receivables – Subsequent
Measurement (SFAS 114), the Bank had $1.8 million in “impaired”
loans.





The
following table presents information regarding non-accrual mortgage, consumer
and other loans, and foreclosed real estate as of the dates
indicated:





(Dollars
      in thousands)
            
            September
      30
            
            
            December,
      312010
            
            
            2009Non-accrual
      commercial
            
            
            -
            
            
            $
            42Non-accrual
      commercial mortgage
            
            $
            1,006
            
            
            
            960Non-accrual
      residential mortgage
            
            
            817
            
            
            
            768Non-accrual
      consumer
            
            
            23
            
            
            
            4Total
      non-performing loans
            
            $
            1,846
            
            
            $
            1,774Foreclosed
      real estate
            
            
            398
            
            
            
            88Total
      non-performing assets
            
            $
            2,244
            
            
            $
            1,862




Loss
      reserve ratios:Net
      loan charge-offs to average loans
            
            
            0.12
            %
            
            
            0.15
            %Allowance
      as a percentage of total loans
            
            
            1.37
            %
            
            
            1.28
            %




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 September, 2011.  At
September 30, 2010, this line of credit had a $0 balance.




13





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%.  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.





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:




Nine
      Months Ended
            
            
            Three
      Months EndedSeptember
      30,
            
            
            September
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009Income
      (Numerator)
            
            $
            825,000
            
            
            $
            367,000
            
            
            $
            250,000
            
            
            $
            145,000Shares
      (Denominator)Basic
      shares outstanding
            
            
            1,305,634
            
            
            
            1,400,044
            
            
            
            1,285,148
            
            
            
            1,365,371Effective
      of dilutive shares
            
            
            19,423
            
            
            
            -
            
            
            
            19,639
            
            
            
            -Diluted
      shares outstanding
            
            
            1,325,057
            
            
            
            1,400,044
            
            
            
            1,304,787
            
            
            
            1,365,371Earnings
      per shareBasic
            
            $
            .63
            
            
            $
            .26
            
            
            $
            .19
            
            
            $
            .11Diluted
            
            $
            .62
            
            
            $
            .26
            
            
            $
            .19
            
            
            $
            .11




6.  Stock-Based
Compensation




Stock-based
compensation is accounted for in accordance with FASB - ASC 718-10,
Compensation –Stock Compensation. 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 this
standard, the amount of stock-based compensation recognized at any date must at
least equal the portion of the grant date value of the award that is vested at
that date and as a result it may be necessary to recognize the expense using a
ratable method. In accordance with FASB ASC 505-50 Equity Based Payments to
Non-Employees, 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.




14




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).





At
September 30, 2010, all stock grants and options authorized by the 2006 Omnibus
Stock Option Plan and the 2009 Equity Incentive Plan have been
awarded.




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.  Compensation expense for this plan is being
recorded over the 60-month vesting period and is based on the market value of
the Company’s stock as of the date the awards were made.  On May 4,
2010, restricted stock grants totaling 750 shares were awarded having a fair
value of $7,125. On August 24, 2010, restricted stock grants totaling 19,774
were awarded having a fair market value of $188,842.  There were 500
restricted stock awards made and subsequently forfeited for nine months ended
September 30, 2009.




Information
regarding the Company’s restricted stock (all unvested) and changes during
the nine months ended September 30, 2010 and 2009, respectively.




Nine
      Months Ended September 30,2010
            
            
            2009Stock
    Grants
            
            Number
              of
              Shares
            
            
            WeightedAvg
      FairValue atGrantDate
            
            
            Number
              of
              Shares
            
            
            WeightedAvg FairValue atGrantDateBalance,
      January 1,
            
            
            42,528
            
            
            $
            8.81
            
            
            
            24,976
            
            
            $
            8.66Granted
            
            
            20,524
            
            
            
            9.55
            
            
            
            500
            
            
            
            8.50Forfeited
      and surrendered
            
            
            -
            
            
            
            -
            
            
            
            (500
            )
            
            
            8.50Outstanding,
      September 30,
            
            
            63,052
            
            
            $
            9.06
            
            
            
            24,976
            
            
            $
            8.66





There
were 12,070 vested shares of restricted stock awards at September 30, 2010 and
7,123 vested shares of restricted stock at September 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.





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
      yea
            rs




15




On August
24, 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 September 30, 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)
            
            
            1.68
            %Volatility
      (%)
            
            
            28.84
            %Risk-free
      Interest Rate (%)
            
            
            1.73
            %Expected
      Life
            
            6.5
      yea
            rs




Nine
      Months Ended September 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
            
            
            52,995
            
            
            
            9.55
            
            
            
            1,000
            
            
            
            8.50Exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -
            
            
            
            1,000
            
            
            
            8.50Outstanding, September 30,
            
            
            157,632
            
            
            $
            9.28
            
            
            
            63,265
            
            
            $
            9.27Exercisable, September
      30,
            
            
            35,584
            
            
            $
            9.53
            
            
            
            23,008
            
            
            $
            9.68




The
weighted average remaining contractual life of stock options award is 8.74
years.




The
compensation expense recognized for option and stock grant awards for the nine
month period ending September 30, 2010 and 2009 was $115,000 and $71,000,
respectively.





As of
September 30, 2010, there was approximately $727,000 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.




16





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.




8.           
Related-Party Transactions





The
Company routinely enters into banking transactions with its directors and
officers.  Such transactions are made in the ordinary course of
business on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the same time for comparable
transactions with other customers, and do not, in the opinion of management,
involve more than normal credit risk or present other unfavorable
features.  A summary of loans to directors and officers and related
parties is as follows for the nine-months ended September 30, 2010 and the year
ended December 31, 2009 (dollars in thousands):





2010
            
            
            2009Beginning
      balance
            
            $
            1,067
            
            
            $
            1,327Additions
            
            
            -
            
            
            
            -Collections
            
            
            (65
            )
            
            
            (260
            )Ending
      balance
            
            $
            1,002
            
            
            $
            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 FASB ASC 715 Compensation
Retirement Benefits.  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, 2010 and June 30, 2009, the required contributions
due were $21,000 and $48,000 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.




17





10.           Fair
Value Measurements




Effective
January 1, 2008, the Company adopted FASB ASC 820 Fair Value Measurements and
Disclosures, which, among other things, requires enhanced disclosures
about assets and liabilities carried at fair value.  This 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 Standard also includes guidance on
identifying circumstances when a transaction may not be considered
orderly.




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




This
Standard also 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 Standard 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 Standard is effective for the
Corporation for interim and annual reporting periods ending September 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 the Standard’s 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.




18




The
methods and assumptions used to estimate the fair values of each class of
financial instrument are as follows:




Cash and cash
equivalents:  The carrying amount of cash and cash equivalents
approximate their fair value.




Available-for-sale and
held-for-maturity securities:Fair values for securities are
based on bid prices received from securities dealers.  Restricted
equity securities are carried at cost, which approximates fair
value.




Loans:The fair
values of all loans are estimated by the net present value of the future
expected cash flows.




Deposit
liabilities:  The fair value of demand deposits, NOW accounts,
savings accounts, and money market deposits is estimated by the net present
value of the future expected cash flows.  For certificates of deposit,
the discount rates used to reflect the Bank’s current market
pricing.  The discount rates for non-maturity deposits are the current
book rate of the deposit.




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




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




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




The
following table presents the assets reported on the consolidated balance sheets
at their fair value as of September 30, 2010 and December 31, 2009 by level
within the fair value hierarchy. As required by FASB ASC 820 Fair Value Measurements and
Disclosures,  financial assets and liabilities are classified
in their entirety based on the lowest level of input that is significant to the
fair value measurement.  There were no changes during 2010 in Level
III assets.




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




September 30, 2010
            
            
            December 31, 2009Carrying
              Amount
            
            
            Estimated
              Fair Value
            
            
            Carrying
              Amount
            
            
            Estimated
              Fair ValueFinancial
      Assets:Cash
      and cash equivalents
            
            $
            18,770
            
            
            $
            18,770
            
            
            $
            11,912
            
            
            $
            11,912Investments
      available for sale
            
            
            15,497
            
            
            
            15,497
            
            
            
            19,398
            
            
            
            19,398Restricted
      equity securities
            
            
            1,143
            
            
            
            1,143
            
            
            
            1,143
            
            
            
            1,143Loans
            
            
            119,696
            
            
            
            122,627
            
            
            
            114,546
            
            
            
            114,483Accrued
      interest receivable
            
            
            754
            
            
            
            754
            
            
            
            665
            
            
            
            665Total
      financial assets
            
            $
            155,860
            
            
            $
            158,791
            
            
            $
            147,664
            
            
            $
            147,601Financial
      liabilities:Deposits
            
            $
            136,569
            
            
            $
            136,065
            
            
            $
            124,055
            
            
            $
            122,608Other
      borrowings
            
            
            7,000
            
            
            
            7,732
            
            
            
            12,000
            
            
            
            12,378Accrued
      interest payable
            
            
            232
            
            
            
            232
            
            
            
            1,002
            
            
            
            1,002Total
      financial liabilities
            
            $
            143,801
            
            
            $
            144,029
            
            
            $
            137,057
            
            
            $
            135,988Off-balance
      sheet liabilities:
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Commitments
      to extend credit
            
            $
            6,492
            
            
            $
            6,492
            
            
            $
            5,251
            
            
            $
            5,251




19




11.           Stockholder’s
Equity




Changes in stockholders’ equity for the
nine month period ended September 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
      income:Net
      income
            
            
            -
            
            
            
            -
            
            
            
            825
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            825Unrealized
      losses on securities, net of income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            384
            
            
            
            -
            
            
            
            384Comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,209ESOP
      shares released
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            54
            
            
            
            -
            
            
            
            -
            
            
            
            54Restricted
      Stock Awards
            
            
            -
            
            
            
            115
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            115Purchase
      of Treasury Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (516
            )
            
            
            (516
            )Cash
      dividend - $0.17 per share
            
            
            -
            
            
            
            -
            
            
            
            (224
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (224
            )Balance,September
      30, 2010
            
            $
            158
            
            
            $
            13,695
            
            
            $
            9,142
            
            
            $
            (853
            )
            
            $
            382
            
            
            $
            (2,616
            )
            
            $
            19,908




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;




20




·
            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;





·
            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. Total assets
increased $8.2 million, or 5.2%, from $156.3 million at December 31, 2009 to
$164.5 million at September 30, 2010.  Significant changes in asset
totals from December 31, 2009 to September 30, 2010 included an increase in cash
and cash equivalents of $6.9 million, while net loans increased $5.2
million.  Total liabilities increased $7.5 million or 5.5% to $144.6
million at September 30, 2010 as compared to $137.1 million at December 31, 2009
due to a $12.5 million increase in total deposits.  The increase in
liabilities was partially offset by our repayment of a $5.0 million Federal Home
Loan Bank advance. The advance had a fixed rate coupon of
6.19%.  Stockholders’ equity increased $638,000 or 3.3% to $19.9
million at September 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.
Net loans increased $5.2 million or 4.5%, since December 31,
2009.  Commercial real estate loans have increased $10.6 million, from
$60.3 million at December 31, 2009 to $70.9 million at September 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
$1.2 million from $3.7 million at December 31, 2009 to $2.5 million at September
30, 2010, as the Bank has chosen not to aggressively pursue that segment of
loans. Residential mortgage loans decreased $3.4 million from December 31, 2009,
primarily due to sale of $2.9 million in residential mortgage
loans.





Investment
securities decreased $3.9 million, or 20.1%, to $15.5 million at September 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 $183,000 or 12.3% during the nine months
ending September 30, 2010.  For the nine month period ending September
30, 2010, there were charge-offs of $152,000 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 1.37% at
September 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.




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 $1.8 million at both September 30, 2010 and December 31, 2009. The
ratio of non-performing loans to total loans was 1.52% and 1.53% at September
30, 2010 and December 31, 2009, respectively.





Liabilities. Total deposits
increased $12.5 million, or 10.1%, to $136.5 million at September 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 $8.6 million or 13.1% to $57.3
million at September 30, 2010 from $65.9 million at December 31, 2009. The
decrease in time deposits was offset by an increase in core deposits of $21.1
million or 36.2% to $79.2 million at September 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.  The increase in liabilities was partially
offset by our repayment of a $5.0 million Federal Home Loan Bank advance. The
advance had a fixed rate coupon of 6.19%.





Stockholders’ Equity.Stockholders’
equity increased $638,000 or 3.3% to $19.9 million at September 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





Results
of Operations





Comparison
of the Three Month and Nine Month Periods Ended September 30, 2010 and
2009





General. For the three months
ended September 30, 2010, net income increased $105,000 to $250,000 when
compared to net income of $145,000 for the same period in 2009.  The
primary reason for the increase resulted from a $319,000 increase in net
interest income for the three months ended September 30, 2010 as compared to the
same period in 2009.




22





Net
income for the nine months ended September 30, 2010 totaled $825,000, an
increase of $458,000 or 125% as compared to a net income of $367,000 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 third quarter ended September 30, 2010 increased
$319,000, or 28.6%, as compared to the third quarter ended September 30,
2009.  Net interest income increased $754,000 or 22.5%, to $4.1
million for the nine months ended September 30, 2010 from $3.3 million for the
comparable 2009 period.





For the
three month period ended September 30, 2010, interest income increased $104,000
or 5.5% to $2.0 million as compared with $1.9 million for the comparable period
in 2009. The Company’s interest income for the nine month period ended September
30, 2010 increased $296,000 or 5.2% to $6.0 million as compared with $5.7
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 September 30, 2010, total interest expense was $568,000 which
was a decrease of $215,000 or 27.5% from the three month period ended September
30, 2009.  Total interest expense for the nine months ended September
30, 2010 was $1.9 million, a decrease of $458,000 or 19.3%, compared to $2.4
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 along with the repayment of the FHLB advance of $5.0 million in
July 2010, 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 September 30, 2010, the provision for loan losses was $133,000, an $88,000
or 196% increase over the $45,000 provision for the same period in
2009.  The provision charged to current earnings was $334,000 for the
nine months ended September 30, 2010, a $199,000 or 147.4% increase as compared
to a provision for loan losses of $135,000 for the nine months ended September
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.





Non-Interest
Income.  Non-interest income increased $10,000 or 9.0% to
$121,000 for the three months ended September 30, 2010 compared to $111,000 for
the three months ended September 30, 2009.  For the nine months ended
September 30, 2010, non-interest income totaled $401,000, an increase of $69,000
or 20.8% compared to the same period in 2009. The increase in non-interest
income for the three and nine months ended September 2010 compared to the same
periods in 2009 was primarily attributed to a pre-tax gains from the sale of
mortgage loans. The increase in non-interest income for the nine months ending
September 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.




Non-Interest Expense.
Non-interest expense increased $136,000 or 14.3%, to $1.1 million for the three
months ended September 30, 2010 compared to $948,000 million for the three
months ended September 30, 2009.  For the nine months ended September
30, 2010, non-interest expense totaled $3.1 million, a $91,000 or 3.0% increase
over the same period in 2009.





The
primary reason for the increase in non-interest expense in both periods was an
increase in salary and employee benefits.  Salary and employee
benefits increased $63,000 and $144,000 for the three and nine month periods in
2010, respectively over the same periods in 2009.  Occupancy and
furniture expense, professional fees and all other expenses collectively
increased $58,000 for the three month period ending September 30, 2010 as
compared with same period in 2009 and decreased $22,000 for the nine month
period ending September 30, 2010 as compared with same period in
2009.  FDIC insurance expense decreased $15,000 for the three month
period ended September 30, 2010  as compared with the same period in
2009 and decreased $31,000 for the nine month period ending September 30, 2010
as compared with same period in 2009.




23





Income Taxes, The Company’s
income tax expense was $90,000 for the three months ended September 30, 2010 and
also for the comparable three month period in 2009.  The Company’s
income tax expense increased $75,000 or 46.9% to $235,000 for the nine months
ended September 30, 2010 compared to $160,000 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 $6.9 million for the nine months
ended September 30, 2009.  During that period, cash was primarily
provided from earnings and customer deposits and primarily used to pay down
borrowings, fund the loan portfolio, and invest in federal funds
sold.





North
Penn Bank's capital ratios at September 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:





To
      be well capitalizedunder
      promptFor
      capital adequacy
              
              corrective
      actionActual
              
              purposes
              
              provisionsAmount
              
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              RatioAt
      September 30, 2010:Total
      Capital (to Risk-Weighted Assets):North
      Penn Bank
              
              $
              18,959
              
              
              
              14.77
              %
              >
      10,272
              
              >8.0%
              
              >$12,841
              
              >10.0
              %Tier
      1 Capital (to Risk-Weighted Assets):North
      Penn Bank
              
              $
              17,353
              
              
              
              13.51
              %
              >$
      5,136
              
              >4.0%
              
              >$
      7,704
              
              >6.0
              %Tier
      1 Capital (to Average Assets):North
      Penn Bank
              
              $
              17,353
              
              
              
              10.82
              %
              >$
      6,415
              
              >4.0%
              
              >$
      8,019
              
              >5.0
              %Risk-Weighted
      Assets:
              
              $
              128,405Average
      Assets:
              
              $
              160,383Reconciliation
      of GAAP Capital to RegulatoryCapitalTotal
      Equity Capital September 30, 2010
              
              
              
              
              
              $
              17,897Plus:
      Unrealized Gain/Loss onInvestments
              
              
              
              
              
              
              (539
              )Less:
      Disallowed Servicing Rights
              
              
              
              
              
              
              (5
              )Total
      Tier 1 Capital September 30, 2010
              
              
              
              
              
              $
              17,353Plus:
      Allowance for loan losses
              
              
              
              
              
              
              1,606Total
      Risk-based Capital September 30, 2010
              
              
              
              
              
              $
              18,959
  24
  At
      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 RegulatoryCapitalTotal
      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 September 30, 2010 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.




25





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 and our quarterly report on Form 10-Q for the quarter
ended June 30, 2010, which could materially affect our business, financial
condition or future results. At September 30, 2010 the risk factors of the
Company have not changed materially from those previously reported. However, the
risks described in our Annual Report on Form 10-K and prior quarterly reports on
Form 10-Q 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.




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




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
September 30, 2010, all 142,341
shares have been purchased at an average cost per share of $9.50.





There
were no stock repurchases during the quarter ended September 30,
2010.




Item 3. Defaults Upon Senior
Securities.





None.





Item
4. [Removed and reserved]





Item 5 Other
Information.





None





Item
6. Exhibits.




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




26




SIGNATURES





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




North
      Penn Bancorp, IncDated: 
      November 15, 2010
              
              /s/
      Frederick L. HickmanFrederick
      L. Hickman
                President
      and Chief Executive Officer
  Dated: 
      November 15, 2010
                
                /s
      Joseph F. McDonaldJoseph
      F. McDonald
                  Chief
      Financial Officer




27