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             March 31, 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 o


Non-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





As of May
6, 2010, the issuer had 1,300,024 shares of common stock, par value $0.10 per
share, outstanding.





PART
I - FINANCIAL INFORMATION





PageItem
      1. Financial Statements.Consolidated
      Balance Sheets at March 31, 2010 and December 31, 2009
              3Consolidated
      Statements of Income for the Three Months Ended March 31, 2010 and
      2009
              4Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2010 and
      2009
              5Notes
      to Unaudited Consolidated Financial Statements
              6Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
              21Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk.
              26Item
      4. Controls and Procedures.
              26PART
      II - OTHER INFORMATIONItem
      1. Legal Proceedings
              26Item
      1A. Risk Factors
              26Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
              27Item
      3. Defaults Upon Senior Securities.
              27Item
      4. (Removed and Reserved)
              27Item
      5. Other Information.
              27Item
      6. Exhibits.
              27


2


PART
I – FINANCIAL INFORMATION





Item
1. Financial Statements





North
Penn Bancorp, Inc. and Subsidiary


Consolidated
Balance Sheets


(In thousands)





March 31,
                    2010
                  
                  
                  December 31,
                    2009(Unaudited)
                  
                  
                  (Audited)ASSETS:Cash
      and due from banks
                  
                  $
                  2,007
                  
                  
                  $
                  2,652Interest
      bearing deposits
                  
                  
                  322
                  
                  
                  
                  560Federal
      funds sold
                  
                  
                  4,649
                  
                  
                  
                  8,700Total
      cash and cash equivalents
                  
                  
                  6,978
                  
                  
                  
                  11,912Investment
      securities, available for sale
                  
                  
                  19,159
                  
                  
                  
                  19,398Equity
      securities at cost, substantially restricted
                  
                  
                  1,143
                  
                  
                  
                  1,143Loans,
      net of allowance for loan losses of $1,523 in 2010 and $1,484 in
      2009
                  
                  
                  118,811
                  
                  
                  
                  114,546Bank
      premises and equipment – net
                  
                  
                  3,948
                  
                  
                  
                  3,965Accrued
      interest receivable
                  
                  
                  731
                  
                  
                  
                  665Cash
      surrender value of bank-owned life insurance
                  
                  
                  3,052
                  
                  
                  
                  3,015Deferred
      income taxes
                  
                  
                  647
                  
                  
                  
                  705Prepaid
      FDIC insurance
                  
                  
                  551
                  
                  
                  
                  604Other
      real estate owned
                  
                  
                  88
                  
                  
                  
                  88Other
      assets
                  
                  
                  425
                  
                  
                  
                  286TOTAL
      ASSETS
                  
                  $
                  155,533
                  
                  
                  $
                  156,327LIABILITIES:Deposits:Non-interest
      bearing
                  
                  $
                  6,702
                  
                  
                  $
                  8,785Interest
      bearing
                  
                  
                  116,046
                  
                  
                  
                  115,270Total
      deposits
                  
                  
                  122,748
                  
                  
                  
                  124,055Other
      borrowed funds
                  
                  
                  12,000
                  
                  
                  
                  12,000Accrued
      interest and other liabilities
                  
                  
                  1,255
                  
                  
                  
                  1,002TOTAL
      LIABILITIES
                  
                  
                  136,003
                  
                  
                  
                  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; 1,581,571shares issued in
      2010 and 2009; outstanding: 1,327,271 in 2010 and 1,330,071 in
      2009
                  
                  
                  158
                  
                  
                  
                  158Additional
      paid-in capital
                  
                  
                  13,616
                  
                  
                  
                  13,580Retained
      earnings
                  
                  
                  8,642
                  
                  
                  
                  8,541Unearned
      ESOP shares
                  
                  
                  (889
                  )
                  
                  
                  (907
                  )Accumulated
      other comprehensive income, (loss)
                  
                  
                  129
                  
                  
                  
                  (2
                  )Treasury
      Stock at cost, shares: 254,300 in 2010 and 251,500 in 2009
                  
                  
                  (2,126
                  )
                  
                  
                  (2,100
                  )TOTAL
      STOCKHOLDERS’ EQUITY
                  
                  
                  19,530
                  
                  
                  
                  19,270TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
                  $
                  155,533
                  
                  
                  $
                  156,327





See notes
to unaudited consolidated financial statements.


3


North
Penn Bancorp, Inc. and Subsidiary


Unaudited
Consolidated Statements of Income


For
the Three Months Ended March 31, 2010 and 2009


(In thousands)





2010
                      
                      
                      2009INTEREST
      INCOMEInterest
      on loans
                      
                      $
                      1,737
                      
                      
                      $
                      1,719Interest
      on tax exempt loans
                      
                      
                      14
                      
                      
                      
                      -Interest
      on federal funds sold
                      
                      
                      4
                      
                      
                      
                      1Interest
      on tax exempt investments
                      
                      
                      81
                      
                      
                      
                      74Interest
      and dividends on investments
                      
                      
                      125
                      
                      
                      
                      134Total
      interest income
                      
                      
                      1,961
                      
                      
                      
                      1,928INTEREST
      EXPENSEInterest
      on deposits
                      
                      
                      557
                      
                      
                      
                      613Interest
      on short-term borrowings
                      
                      
                      -
                      
                      
                      
                      13Interest
      on long-term borrowings
                      
                      
                      158
                      
                      
                      
                      153Total
      interest expense
                      
                      
                      715
                      
                      
                      
                      779NET
      INTEREST INCOME
                      
                      
                      1,246
                      
                      
                      
                      1,149PROVISION
      FOR LOAN LOSSES
                      
                      
                      39
                      
                      
                      
                      52NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
                      
                      
                      1,207
                      
                      
                      
                      1,097OTHER
      INCOMEService
      charges and fees
                      
                      
                      34
                      
                      
                      
                      48Bank-owned
      life insurance income
                      
                      
                      38
                      
                      
                      
                      43Other
      operating income
                      
                      
                      24
                      
                      
                      
                      10Gain
      on sale of loans
                      
                      
                      -
                      
                      
                      
                      14Impairment
      losses on investment securities
                      
                      
                      (24
                      )
                      
                      
                      -TOTAL
      OTHER INCOME
                      
                      
                      72
                      
                      
                      
                      115OTHER
      EXPENSESalaries
      and employee benefits
                      
                      
                      583
                      
                      
                      
                      504Occupancy
      and equipment expense
                      
                      
                      132
                      
                      
                      
                      151FDIC
      insurance expense
                      
                      
                      54
                      
                      
                      
                      5Professional
      services expense
                      
                      
                      69
                      
                      
                      
                      77Other
      operating expenses
                      
                      
                      163
                      
                      
                      
                      144TOTAL
      OTHER EXPENSE
                      
                      
                      1,001
                      
                      
                      
                      881INCOME(LOSS)
      BEFORE INCOME TAXES
                      
                      
                      278
                      
                      
                      
                      331INCOME
      TAX EXPENSE
                      
                      
                      56
                      
                      
                      
                      107NET
      INCOME
                      
                      
                      222
                      
                      
                      
                      224OTHER
      COMPREHENSIVE INCOME/(LOSS):Unrealized
      holding gain arising during period, net of income tax
                      
                      
                      131
                      
                      
                      
                      115COMPREHENSIVE
      INCOME(LOSS)
                      
                      $
                      353
                      
                      
                      $
                      339Weighted
      average number of shares outstanding
                      
                      
                      1,342,477
                      
                      
                      
                      1,426,835Earnings
      per share, basic and diluted
                      
                      $
                      0.17
                      
                      
                      $
                      0.16Dividends
      per share
                      
                      $
                      .09
                      
                      
                      $
                      0.03


See notes
to unaudited consolidated financial statements.


4


North
Penn Bancorp, Inc. and Subsidiary


Unaudited
Consolidated Statements of Cash Flows


For
the Three Months Ended March 31, 2010 and 2009


(In
thousands)




2010
                          
                          
                          2009Operating
      Activities:Net
      income
                          
                          $
                          222
                          
                          
                          $
                          224Items
      not requiring (providing) cashDepreciation
                          
                          
                          42
                          
                          
                          
                          58Provision
      for loan losses
                          
                          
                          39
                          
                          
                          
                          52Amortization
      of securities (net of accretion)
                          
                          
                          15
                          
                          
                          
                          (2
                          )ESOP
      expense
                          
                          
                          17
                          
                          
                          
                          13Stock
      option expense
                          
                          
                          36
                          
                          
                          
                          24Increase
      in cash surrender value of life insurance
                          
                          
                          (37
                          )
                          
                          
                          (42
                          )Impairment
      loss on investment securities
                          
                          
                          24
                          
                          
                          
                          -Net
      realized gain on sale of loans
                          
                          
                          -
                          
                          
                          
                          (14
                          )Changes
      in:Prepaid
      FDIC insurance
                          
                          
                          53Accrued
      interest income and other assets
                          
                          
                          (225
                          )
                          
                          
                          (67
                          )Accrued
      interest expense and other liabilities
                          
                          
                          254
                          
                          
                          
                          23Net
      Cash Provided By Operating Activities
                          
                          
                          440
                          
                          
                          
                          269Investing
      Activities:Purchase
      of bank premises and equipment
                          
                          
                          (25
                          )
                          
                          
                          (4
                          )Purchase
      of securities “available for sale”
                          
                          
                          (6
                          )
                          
                          
                          (30
                          )Maturity
      or called securities “available for sale”
                          
                          
                          -
                          
                          
                          
                          500Redemptions
      of mortgage-backed securities “available for sale”
                          
                          
                          415
                          
                          
                          
                          541Purchase
      redemption of restricted stock
                          
                          
                          -
                          
                          
                          
                          (53
                          )Net
      decrease (increase) in loans to customers
                          
                          
                          (4,304
                          )
                          
                          
                          1,272Proceeds
      from sale of loans
                          
                          
                          -
                          
                          
                          
                          698Net
      Cash Provided by (Used In) Investing Activities
                          
                          
                          (3,920
                          )
                          
                          
                          2,924Financing
      Activities:Increase
      in deposits
                          
                          
                          (1,307
                          )
                          
                          
                          9,801Decrease
      in borrowed funds
                          
                          
                          -
                          
                          
                          
                          (7,648
                          )Treasury
      stock purchased
                          
                          
                          (26
                          )
                          
                          
                          (200
                          )Cash
      dividends paid
                          
                          
                          (121
                          )
                          
                          
                          (47
                          )Net
      Cash Provided By (Used In) Financing Activities
                          
                          
                          (1,454
                          )
                          
                          
                          1,906Net
      Increase (Decrease) In Cash and Cash Equivalents
                          
                          
                          (4,934
                          )
                          
                          
                          5,099Cash
      and Cash Equivalents, January 1
                          
                          
                          11,912
                          
                          
                          
                          2,274Cash
      and Cash Equivalents, March 31
                          
                          $
                          6,978
                          
                          
                          $
                          7,373Supplementary
      Schedule of Cash Flow Information:Cash
      paid during the period for:Interest
                          
                          $
                          761
                          
                          
                          $
                          733Income
      taxes
                          
                          $
                          149
                          
                          
                          $
                          45





See notes
to unaudited consolidated financial statements.


5


Notes
to Unaudited Consolidated Financial Statements





1.
            Nature
      Of Operations And Summary Of Significant Accounting
    Policies





Nature
of Operations





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





Principles
of Consolidation





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





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





Basis
of Presentation





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





Adoption
of New Accounting Standards




In
June 2009, the FASB amended previous guidance relating to transfers of
financial assets that eliminates the concept of a qualifying special purpose
entity. This guidance must be applied as of the beginning of each reporting
entity’s first annual reporting period that begins after November 15, 2009,
for interim periods within that first annual reporting period and for interim
and annual reporting periods thereafter. This guidance must be applied to
transfers occurring on or after its effective date. Additionally, on and after
the effective date, the concept of a qualifying special-purpose entity is no
longer relevant for accounting purposes. Therefore, formerly qualifying
special-purpose entities should be evaluated for consolidation by reporting
entities on and after the effective date in accordance with the applicable
consolidation guidance. The disclosure provisions were also amended and apply to
transfers that occurred both before and after the effective date of this
guidance. The adoption of this update did not have a significant impact to the
Company’s financial condition, results of operations or cash
flows.


6




In
June 2009, the FASB amended previous guidance for consolidation of variable
interest entity guidance by replacing the quantitative-based risks and rewards
calculation for determining which enterprise, if any, has a controlling
financial interest in a variable interest entity. The amended guidance use an
approach that focuses on identifying which enterprise has the power to direct
the activities of a variable interest entity that most significantly impact the
entity’s economic performance and (1) the obligation to absorb losses of
the entity or (2) the right to receive benefits from the entity. Additional
disclosures about an enterprise’s involvement in variable interest entities are
also required. This guidance is effective as of the beginning of each reporting
entity’s first annual reporting period that begins after November 15, 2009,
for interim periods within that first annual reporting period, and for interim
and annual reporting periods thereafter. Early adoption is prohibited. The
adoption of this update did not have a significant impact to the Company’s
financial condition, results of operations or cash flows.




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 Entitieshas been issued. ASU 2009-17 changes how a reporting entity determines
when an entity that is insufficiently capitalized or is not controlled through
voting (or similar rights) should be consolidated. This standard is effective
for the Company October 1, 2010 and is not expected to have a material effect on
the Company’s financial statements.





ASC
2010-06, Fair Value
Measurements and Disclosures (Topic 820):Improving Disclosures about Fair
Value Measurements has been issued.  ASU 2010-06 requires some
new disclosures and clarifies some existing disclosure requirements about fair
value measurement. This standard is generally effective for the Company October
1, 2010 and is not expected to have a material effect on the Company’s financial
statements.





In
February 2010, the FASB issued ASU 2010-09, Subsequent Events (“Topic 855”):
Amendments to Certain Recognition and Disclosure Requirements. The amendments
remove the requirement for an SEC registrant to disclose the date through which
subsequent events were evaluated as this requirement would have potentially
conflicted with SEC reporting requirements. Removal of the disclosure
requirement is not expected to affect the nature or timing of subsequent events
evaluations performed by the Company. This ASU became effective upon
issuance.





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.


7


Subsequent Events





Management
has evaluated subsequent events through May 13, 2010, the date the consolidated
statements were issued.  No material subsequent events have occurred
since March 31, 2010 that requires recognition or disclosure in the consolidated
financial statements.





2.           Investment
Securities





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





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





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





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





The
amortized cost and fair value of investment securities at March 31, 2010 and
December 31, 2009 are as follows:





Available-for-Sale


March
31, 2010


(In
thousands)





Amortized
      Cost
                
                
                Gross
      Unrealized Gains
                
                
                Gross
      Unrealized Losses
                
                
                Fair
      ValueU.S.
      Agency securities
                
                $
                1,500
                
                
                $
                11
                
                
                $
                -
                
                
                $
                1,511Mortgage-backed
      securities
                
                
                2,242
                
                
                
                76
                
                
                
                -
                
                
                
                2,318State
      & political subdivisions
                
                
                8,717
                
                
                
                218
                
                
                
                3
                
                
                
                8,932Other
      bonds
                
                
                4,960
                
                
                
                192
                
                
                
                29
                
                
                
                5,123Total
      debt securities
                
                
                17,419
                
                
                
                497
                
                
                
                32
                
                
                
                17,884Equity
      securities
                
                
                1,574
                
                
                
                37
                
                
                
                336
                
                
                
                1,275Total
      Available-for-Sale
                
                $
                18,993
                
                
                $
                534
                
                
                $
                368
                
                
                $
                19,159


8


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
March 31, 2010 and December 31, 2009.





The gross
fair value and unrealized losses of the Bank’s investments, aggregated by
investment category and length of time that individual securities have been in a
continuous unrealized loss position at March 31, 2010 is as
follows:





Less than 12 months
                        
                        
                        12 months or longer
                        
                        
                        TotalFair
                          Value
                        
                        
                        Unrealized
                          Losses
                        
                        
                        Fair Value
                        
                        
                        Unrealized Losses
                        
                        
                        Fair
                          Value
                        
                        
                        Unrealized
                          LossesU.S.
      Agencies
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -Mortgage-backed
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Municipal
                        
                        
                        297
                        
                        
                        
                        2
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        297
                        
                        
                        
                        2Other
      securities
                        
                        
                        933
                        
                        
                        
                        29
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        933
                        
                        
                        
                        29Equity
      securities
                        
                        
                        201
                        
                        
                        
                        37
                        
                        
                        
                        639
                        
                        
                        
                        300
                        
                        
                        
                        840
                        
                        
                        
                        337Total
                        
                        $
                        1,431
                        
                        
                        $
                        68
                        
                        
                        $
                        639
                        
                        
                        $
                        300
                        
                        
                        $
                        2070
                        
                        
                        $
                        368





The above
table at March 31, 2010 includes 11 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.





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 44 securities in
an unrealized position as of March 31, 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.


9


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 unrealized losses are from forty 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.





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
March 31, 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.


10


3.           Loans





March 31,
                        2010
                      
                      
                      December 31,
                        2009(In thousands)Real estate mortgages:Construction
      and land development
                      
                      $
                      450
                      
                      
                      $
                      327Residential,
      1 – 4 family
                      
                      
                      46,931
                      
                      
                      
                      47,439Residential,
      multi-family
                      
                      
                      895
                      
                      
                      
                      908Commercial
                      
                      
                      64,785
                      
                      
                      
                      60,269Total
      real estate mortgages
                      
                      
                      113,061
                      
                      
                      
                      108,943Commercial
                      
                      
                      3,992
                      
                      
                      
                      3,368Consumer
                      
                      
                      3,281
                      
                      
                      
                      3,719Total
      loans
                      
                      
                      120,334
                      
                      
                      
                      116,030Allowance
      for loan losses
                      
                      
                      1,523
                      
                      
                      
                      1,484Total
      loans, net
                      
                      $
                      118,811
                      
                      
                      $
                      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.





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.


11


Management
considers the allowance for loan losses adequate to cover the estimated losses
inherent in the Bank’s loan portfolio as of March 31, 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 March 31, 2010 and December 31,
2009:





March 31,
                      
                      
                      December 31,(Dollars in thousands)
                      
                      2010
                      
                      
                      2009Balance
      at beginning of period
                      
                      $
                      1,484
                      
                      
                      $
                      1,170Charge-offs:Commercial
                      
                      
                      -
                      
                      
                      
                      146Real
      estate mortgages
                      
                      
                      -Consumer
                      
                      
                      -
                      
                      
                      
                      25Total
                      
                      
                      -
                      
                      
                      
                      171Recoveries:Commercial
                      
                      
                      -
                      
                      
                      
                      -Real
      estate mortgages
                      
                      
                      -
                      
                      
                      
                      -Consumer
                      
                      
                      -
                      
                      
                      
                      10Total
                      
                      
                      -
                      
                      
                      
                      10Net
      charge-offs
                      
                      
                      -
                      
                      
                      
                      161Provision
      charged to operations
                      
                      
                      39
                      
                      
                      
                      475Balance
      at end of period
                      
                      $
                      1,523
                      
                      
                      $
                      1,484





Loan
      reserve ratios:Net
      loan charge-offs to average loans
                            
                            
                            -
                            
                            
                            
                            0.15
                            %Allowance
      as a percentage of total loans
                            
                            
                            1.27
                            %
                            
                            
                            1.28
                            %





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.


12




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
March 31, 2010, the Bank had $1.6 million in non-accrual loans as compared with
$1.8 million at December 31, 2009.  As of March 31, 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 March 31, 2009, for purposes of
accounting and reporting in accordance with FASB ASC 310-10.35 Receivables –
Subsequent Measurement (SFAS 114), the Bank had $1.6 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:





March 31
                    
                    
                    December 312010
                    
                    
                    2009Non-accrual
      commercial
                    
                    $
                    18
                    
                    
                    
                    42Non-accrual
      commercial mortgage
                    
                    
                    901
                    
                    
                    
                    960Non-accrual
      residential mortgage
                    
                    
                    699
                    
                    
                    
                    768Non-accrual
      consumer
                    
                    
                    25
                    
                    
                    
                    4Total
      non-performing loans
                    
                    $
                    1,643
                    
                    
                    $
                    1,774Foreclosed
      real estate
                    
                    
                    88
                    
                    
                    
                    88Total
      non-performing assets
                    
                    $
                    1,731
                    
                    
                    $
                    1,862





4.           Other
Borrowings





The Bank
has a line of credit agreement with the Federal Home Loan Bank of Pittsburgh for
short term borrowings varying from one day to three years.  Advances
on this line must be secured by “qualifying collateral” as defined in the
agreement and bear interest at fixed or variable rates as determined at the date
advances are made.  The line expires in June, 2011.  At
March 31, 2010, this line of credit had a zero balance.





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





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


13


5.           Earnings
Per Share





Basic
earnings per share is computed on the weighted average number of common shares
outstanding during each year, adjusted for unearned shares of the ESOP, as
prescribed in FASB – ASC 260-10 Earnings per share SFAS No. 128, Earnings Per
Share.   Diluted earnings per share  include
common shares issuable upon exercise of employee stock options  as
follows:




March 31, 2010
                    
                    Income
                      (Numerator)
                    
                    
                    Shares
                      (Denominator)
                    
                    
                    Per-Share
                      AmountBasic
      EPSIncome
      available
                    
                    $
                    222,000
                    
                    
                    
                    1,329,542
                    
                    
                    $
                    0.17Options
      includable
                    
                    
                    -
                    
                    
                    
                    12,935
                    
                    
                    
                    -Diluted  EPS
                    
                    $
                    222,000
                    
                    
                    
                    1,342,477
                    
                    
                    $
                    0.17





March 31, 2009
                  
                  Income
                    (Numerator)
                  
                  
                  Shares
                    (Denominator)
                  
                  
                  Per-Share
                    AmountBasic
      EPSIncome
      available
                  
                  $
                  224,000
                  
                  
                  
                  1,426,835
                  
                  
                  $
                  0.16Options
      includable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Diluted  EPS
                  
                  $
                  224,000
                  
                  
                  
                  1,426,835
                  
                  
                  $
                  0.16





6.
            Stock-Based
      Compensation




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





On May
26, 2009, the Company’s stockholders approved the 2009 Equity Incentive Plan.
The Board of Directors has reserved a total of 119,000shares of common stock
for issuance upon the grant or exercise of awards made pursuant to the 2009
Plan.   The Plan provides for grants of stock options and
restricted stock awards. All of the Company’s employees, officers, and
directors are eligible to participate in the 2009 Plan.





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





Stock Grants.Restricted stock
awards are considered fixed awards as the number of shares and fair value is
known at the date of grant and fair value over the requisite service period,
generally five years.  For the three months ended March 31, 2010,
restricted stock grants totaling 750 shares were awarded having a fair value of
$7,125. The grants vest over five years.  There were no restricted
stock awards made for three months ended March 31, 2009.


14


The
following table reflects the activities related to restricted stock awards
outstanding for the three months ended March 31, 2010 and 2009,
respectively.





Three Months Ended March 31,2010
                      
                      
                      2009Stock Grants
                      
                      Number
                        of
                        Shares
                      
                      
                      Weighted
                        Avg Fair
                        Value at
                        Grant
                        Date
                      
                      
                      Number
                        of
                        Shares
                      
                      
                      Weighted
                        Avg Fair
                        Value at
                        Grant
                        DateBalance,
      January 1, 2010
                      
                      
                      42,337
                      
                      
                      $
                      8.94
                      
                      
                      
                      24,976
                      
                      
                      $
                      8.90Granted
                      
                      
                      750
                      
                      
                      
                      9.50
                      
                      
                      
                      -
                      
                      
                      
                      -Vested
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Forfeited
      and surrendered
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Outstanding,
      March 31, 2010
                      
                      
                      43,087
                      
                      
                      $
                      8.95
                      
                      
                      
                      24,976
                      
                      
                      $
                      8.90Exercisable,
      March 31, 2010
                      
                      
                      6,931
                      
                      
                      $
                      9.56
                      
                      
                      
                      1,748
                      
                      
                      $
                      11.15





Stock Options.. The option awards were granted with an exercise price equal to the
average price on the last trade date.  The stock options vest and
therefore become exercisable on a pro rata basis annually over five years from
the date awarded. The options are available to be exercised for a period of ten
years after the date awarded.





On March
4, 2010, the Company issued stock options covering 1,500 shares. The option
awards were granted with an exercise price equal to the average price on the
last trade date.  The stock options vest and therefore become
exercisable on a pro rata basis annually over five years from the date awarded,
commencing March 4, 2011. The options are available to be exercised for a period
of ten years after the date awarded. There were no stock options awarded for the
three month ended March 31, 2009.





The fair
value of each option grant was estimated to be $2.74 on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants during the applicable period:




Dividend
      Yield (per share)
                    
                    
                    1.60
                    %Volatility
      (%)
                    
                    
                    29.24
                    %Risk-free
      Interest Rate (%)
                    
                    
                    2.84
                    %Expected
      Life
                    
                    6.5 years


15





Three
      Months Ended March 31,2010
                              
                              
                              2009Stock Options
                              
                              Number of
                                Options
                              
                              
                              Weighted
                                Avg Exercise
                                Price
                              
                              
                              Number of
                                Options
                              
                              
                              Weighted
                                Avg Exercise
                                PriceBalance,
      January 1, 2010
                              
                              
                              104,637
                              
                              
                              $
                              9.44
                              
                              
                              
                              63,265
                              
                              
                              $
                              9.71Granted
                              
                              
                              1,500
                              
                              
                              
                              9.50
                              
                              
                              
                              -
                              
                              
                              
                              -Exercised
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Forfeited
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Outstanding,
      March 31, 2010
                              
                              
                              106,137
                              
                              
                              $
                              9.44
                              
                              
                              
                              63,265
                              
                              
                              $
                              9.71Exercisable,
      March 31, 2010
                              
                              
                              23,761
                              
                              
                              $
                              10.37
                              
                              
                              
                              11,186
                              
                              
                              $
                              11.00





The
weighted average remaining contractural life of stock options award is 8.51
years





The
compensation expense recognized for option and restricted stock awards for the
quarters ended March 31, 2010 and 2009 was $36,000 and $24,000,
respectively.





As of
March 31, 2010, there was approximately $281,000 of total unrecognized
compensation cost related to options and unvested stock awards. The cost of the
options and stock awards is expected to be recognized over a weighted-average
period of five years.





7.           
Guarantees




Mortgage Partnership Finance Program




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





Transfers
involving sales with the Bank acting as principal are accounted for in
accordance with FASB ASC 860-10 Transfers and Servicing (SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities) with the
recognition of gains and losses on the sale and related mortgage servicing
rights.


16


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.





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





8.           
Related-Party Transactions





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





March 31,
                      
                      
                      December 31,2010
                      
                      
                      2009Beginning
      balance
                      
                      $
                      1,067
                      
                      
                      $
                      1,327AdditionsCollections
                      
                      
                      (23
                      )
                      
                      
                      (260
                      )Ending
      balance
                      
                      $
                      1,044
                      
                      
                      $
                      1,067





9.           Retirement
Plans





Defined
Benefit Plan





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
(SFAS) No. 87 Employers’ Accounting for Pensions. As such, the annual pension
expense to be recorded is defined as the amount of the required annual
contribution.





The Fund
covers all employees who have met the stated age and service requirements. A
benefit formula provides for retirement benefits that are calculated as a
percentage of salary during their working career, as defined. More details can
be found in the plan document. 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 2009, the required contributions due
were $21,000 and $48,000 respectively.


17


401(k)
Plan





The Bank
also sponsors a 401(k) Plan (the Plan). The Plan covers all employees who meet
age and service requirements. Participants in the Plan are permitted to make
contributions up to 20% of their compensation. In March, 2009, the Board of
Directors approved an increase in matching employees’ contributions within the
Bank’s existing 401k plan from 50% of the first 6% to 100% of the first 6% as of
April 1, 2009.





10.         Fair
Value Measurements




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




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




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




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





FASB
ASC 820-Fair Value
Measurements and Disclosures establishes a hierarchal disclosure
framework associated with the level of pricing observability utilized in
measuring assets and liabilities at fair value. The three broad levels defined
by SFAS No. 157 hierarchy are as follows:




Level
I:          Quoted prices are
available in active markets for identical assets or liabilities as of the record
date.




Level
II:        Pricing inputs are other than
quoted prices in active markets, which are either directly or indirectly
observable as of the reported date. The nature of these assets and liabilities
include items for which quoted prices are available but traded less frequently,
and items that are fair valued using other financial instruments, the parameters
of which can be directly observed.


18


Level
III:       Assets and liabilities that have
little to no pricing observability as of the reported date. These items do not
have two-way markets and are measured using management’s best estimate of fair
value, where the inputs into the determination of fair value require significant
management judgment or estimation




Investments
available for sale are recorded at fair value on a recurring
basis.  Other real estate owned is recorded at fair value on a
non-recurring basis.  Values are estimated using Level 3 inputs, based
on the lower of cost or market.




The
following required disclosure of the estimated fair value of financial
instruments has been determined by the Company using available market
information and appropriate valuation methodologies.  However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value.  Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange.  The use of different market
assumptions and/or estimation methodologies may have a material effect in the
estimated fair value amounts.




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




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




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




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




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




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




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




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




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


19


Fair
Value of Financial Instruments





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





March 31, 2010
            
            
            December 31, 2009Carrying
              Amount
            
            
            Estimated
              Fair Value
            
            
            Carrying
              Amount
            
            
            Estimated
              Fair ValueFinancial
      Assets:Cash
      and cash equivalents
            
            $
            6,978
            
            
            
            6,978
            
            
            $
            11,912
            
            
            
            11,912Investments
      available for sale
            
            
            19,159
            
            
            
            19,159
            
            
            
            19,398
            
            
            
            19,398Restricted
      equity securities
            
            
            1,143
            
            
            
            1,143
            
            
            
            1,143
            
            
            
            1,143Loans
            
            
            118,811
            
            
            
            120,312
            
            
            
            114,546
            
            
            
            114,483Accrued
      interest receivable
            
            
            731
            
            
            
            731
            
            
            
            665
            
            
            
            665Total
      financial assets
            
            $
            146,822
            
            
            
            134,334
            
            
            $
            147,664
            
            
            
            147,601Financial
      liabilities:Deposits
            
            $
            122,748
            
            
            
            121,166
            
            
            $
            124,055
            
            
            
            122,608Other
      borrowings
            
            
            12,000
            
            
            
            12,432
            
            
            
            12,000
            
            
            
            12,378Accrued
      interest payable
            
            
            280
            
            
            
            280
            
            
            
            1,002
            
            
            
            1,002Total
      financial liabilities
            
            $
            135,028
            
            
            
            133,878
            
            
            $
            137,057
            
            
            
            135,988Off-balance
      sheet liabilities:
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Commitments
      to extend credit
            
            $
            7,417
            
            
            
            7,417
            
            
            $
            5,251
            
            
            
            5,251





11.         Stockholder’s
Equity




Changes in stockholders’ equity for the
period ended March 31, 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
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    222
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    222Unrealized
      losses on securities, net of income taxes
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    131
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    131Comprehensive
      income
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    353ESOP
      shares released
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    18
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    18Restricted
      Stock Awards
                                    
                                    
                                    -
                                    
                                    
                                    
                                    36
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    36Purchase
      of Treasury Stock
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (26
                                    )
                                    
                                    
                                    (26
                                    )Cash
      dividend - $0.09 per share
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (121
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (121
                                    )Balance,March
      31, 2010
                                    
                                    $
                                    158
                                    
                                    
                                    $
                                    13,616
                                    
                                    
                                    $
                                    8,642
                                    
                                    
                                    $
                                    (889
                                    )
                                    
                                    $
                                    129
                                    
                                    
                                    $
                                    (2,126
                                    )
                                    
                                    $
                                    19,530


20


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





Cautionary
Statement for Purposes of the Private Securities Litigation Reform Act of
1995





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





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





If one or
more of the factors affecting our forward-looking information and statements
proves incorrect, then our actual results could differ materially from those
expressed in forward-looking information and statements contained in this annual
report.  Therefore, we caution you not to place undue reliance on our
forward-looking information and statements.





We do not
intend to update our forward-looking information and statements to reflect
change.  All forward-looking statements attributable to us are
expressly qualified by these cautionary statements.





Critical
Accounting Policies




Critical
accounting policies are defined as those that are reflective of significant
judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. We believe that
the critical accounting policies upon which our financial condition and results
of operation depend, and which involve the most complex subjective decisions or
assessments, are included in the discussion entitled “Critical Accounting
Policies” in Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2009, and all amendments
thereto, as filed with the Securities and Exchange Commission. There are no
material changes to the critical accounting policies disclosed in the Annual
Report on Form 10-K.


21


Statement of Changes in
Financial Condition





General. Our total assets
decreased $794,000, or 0.5%, from $156.3 million at December 31, 2009 to $155.5
million at March 31, 2010.  Significant changes in asset totals from
December 31, 2009 to March 31, 2010 included a decrease of $4.1 million in
Federal funds sold, while net loans increased $4.3 million.  Total
liabilities decreased $1.1 million or 0.8% to $136.0 million at March 31, 2010
as compared to $137.1million at December 31, 2009 due to a $1.3 million decline
in total deposits.   Stockholders’ equity increased $260,000 or
1.3% to $19.5 million at March 31, 2010 as compared with $19.3 million at
December 31, 2009.  The primary reason for the increase in
stockholders’ equity was earnings for the period and an increase in accumulated
other comprehensive income due to an increase in the market value of available
for sale investment securities.





Assets.Our loan portfolio increased a net of $4.3 million or 3.7%, since
December 31, 2009.  Commercial real estate loans have increased $4.5
million, from $60.3 million at December 31, 2009 to $64.8 million at March 31,
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 $438,000 from $3.7 million at December 31, 2009 to $3.3 million at
March 31, 2010, as the Bank has chosen not to aggressively pursue that segment
of loans. Residential mortgages decreased $508,000 from December 31, 2009, as
demand for refinancing has slowed.





Investment
securities decreased $239,000, or 1.2%, to $19.2 million at March 31, 2010 from
$19.4 million at December 31, 2009. We intend 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 $39,000 during the first quarter of
2010.  For the period three month period ending March 31, 2010, there
were no loans charged-off or recoveries. 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 1.27% at March 31, 2010 and 1.28% at December
31, 2009. We are carefully 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.





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.


22


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 $1.6 million at March 31, 2010, compared to $1.8 million at
December 31, 2009. The ratio of non-performing loans to total loans was 1.37%
and 1.53% at March 31, 2010 and December 31, 2009, respectively.





Liabilities. Total deposits
decreased $1.3 million, or 1.1%, to $122.7 million at March 31, 2010 from $124.1
million at December 31, 2009.  The primary reason for the decrease in
deposits was that time deposits decreased $8.0 million or 12.2% to $57.9 million
at March 31, 2010 from $66.0 million at December 31, 2009. The decrease in time
deposits was partially offset by an increase in core deposits of $6.7 or 11.6%
to $64.8 million at March 31, 2010 from $58.1 million at December 31, 2009. Core
deposits consist of all deposits other than certificates of
deposit.  The Bank has tried to lessen its dependency on more volatile
and rate sensitive certificates of deposit and has focused more on growing core
deposits, particularly non-interest-bearing deposits





Stockholders’ Equity.Stockholders’ equity increased $260,000 or 1.3% to $19.5 million at March
31, 2010 as compared with $19.3 million at December 31, 2009.  Net
income for the period and improvement in accumulated other comprehensive loss
were the primary reasons for the increase.  The increase was partially
offset by our continuing purchases of Treasury Stock and payment of cash
dividends.  On March 23, 2010, the Company approved a 33% increase in
its quarterly dividend on its outstanding common stock from $0.03 to $0.04 per
share.  In addition, the Company approved a special cash dividend of $0.05
per share on its outstanding common stock.  Both the quarterly cash
dividend and the special cash dividend were paid on April 30, 2010 to
shareholders of record as of the close of business on April 15,
2010.





Comparison of Results of
Operations for the Three Month Periods  Ended March 31, 2010 and
2009





General. The Company’s net
income for the three months ended March 31, 2010 was $222,000, virtually
unchanged from net income of $224,000 for the three months ended March 31, 2009.
The Company was able to offset increases in non-interest expenses, such as FDIC
insurance, with an increase in net interest income. Net interest income is the
difference between interest earned on securities and loans, less the interest
paid on deposits and borrowed funds.





Net Interest
Income.  For the three months ended March 31, 2010, the Company
increased net interest income by $97,000 or 8.4% to $1.2 million as compared to
$1.1 million for the same period in 2009. Interest income on loans increased
$33,000 or 1.9% to $1.8 million over the three months ended March 31, 2010
versus the same period in 2009.  Interest and dividend income on
investment securities was $209,000 which was unchanged at both
periods.  Increased volume of loans was the primary reason for the
increase in loan interest income.


23


Interest
expense decreased $64,000, or 8.2%, from $779,000 for the three months ended
March 31, 2009 to $715,000 for the same period in 2010.  Interest on
deposits decreased $56,000 or 9.1%, from $613,000 for the three months ended
March 31, 2009 to $557,000 in 2010 due to substantially lower rates on
deposits.





Provision for Loan Loss. For
the three months ending March 31, 2010, the Company recorded a provision for
loan loss in the amount of $39,000, compared to $52,000 for the three months
ended March 31, 2009. The Company had no charge-offs for the three months ending
March 31, 2010. The allowance for loan losses as a percent of total loans was
1.27% at March 31, 2010 compared to 1.28% at December 31, 2009.





Non-Interest
Income.   Non-interest income decreased $43,000 or 37.4%
to $72,000 for the three months ended March 31, 2010 as compared to $115,000 for
the same period in 2009. The decrease in non-interest income for the three
months ending March 31, 2010 over the comparable 2009 period was primarily
caused by an other-than-temporary impairment charge on two equity securities of
$24,000 for the three months ending March  31,
2010.  Service charges and fees also decreased $14,000 over the same
periods. The primary reason for the decrease was a decline of $7,000 in returned
check fees. For the three months ended March 31, 2010, the Company did not
record any gains or losses on sale of other real estate, loans or securities.
For the three months ended March 31, 2009, the company reported a gain on sale
of loans of $14,000.





Non-Interest
Expense.For the three months ended March 31, 2010,
non-interest expense increased $120,000 or 13.6% to $1.0 million as compared
with $881,000 for the three months ended March 31, 2009.  The primary
reasons for the increase was a $79,000 increase in salary and employee benefits
and a $49,000 increase in FDIC insurance expense.  The primary reason
for the increase in salary and employee benefits was utilizing accrual method
for month end salaries for the three months ended March 31, 2010.  The
increase in FDIC insurance is the result increased assessments due to losses
incurred by the Deposit Insurance Fund.





Income taxes.The Bank recorded income
tax expense for the three months ended March 31, 2010 of $56,000 as opposed to
$107,000 for the same period in 2009.  The primary reason for the
decrease was the application of  Alternative Minimum Tax credits for
the three months ended March 31, 2010.





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.


24


North
Penn Bank's capital ratios at March 31, 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:





Actual
                                    
                                    
                                    For capital adequacy
                                      purposes
                                    
                                    
                                    To be well capitalized
                                      under prompt
                                      corrective action
                                      provisionsAmount
                                    
                                    
                                    Ratio
                                    
                                    
                                    Amount
                                    
                                    
                                    Ratio
                                    
                                    
                                    Amount
                                    
                                    
                                    RatioAt March 31, 2010:Total
      Capital (to Risk-Weighted Assets):North
      Penn Bank
                                    
                                    $
                                    18,122
                                    
                                    
                                    
                                    14.63
                                    %
                                    
                                    $
                                    ≥
      9,912
                                    
                                    
                                    
                                    ≥8.0
                                    %
                                    
                                    $
                                    ≥12,381
                                    
                                    
                                    
                                    ≥10.0
                                    %Tier
      1 Capital (to Risk-Weighted Assets):North
      Penn Bank
                                    
                                    $
                                    16,599
                                    
                                    
                                    
                                    13.40
                                    %
                                    
                                    $
                                    ≥ 4,956
                                    
                                    
                                    
                                    ≥4.0
                                    %
                                    
                                    $
                                    ≥ 7,434
                                    
                                    
                                    
                                    ≥6.0
                                    %Tier
      1 Capital (to Average Assets):North
      Penn Bank
                                    
                                    $
                                    16,599
                                    
                                    
                                    
                                    10.97
                                    %
                                    
                                    $
                                    ≥ 6,053
                                    
                                    
                                    
                                    ≥4.0
                                    %
                                    
                                    $
                                    ≥ 7,566
                                    
                                    
                                    
                                    ≥5.0
                                    %Risk-Weighted
      Assets:
                                    
                                    $
                                    123,905Average
      Assets:
                                    
                                    $
                                    151,314Reconciliation
      of GAAP Capital to Regulatory CapitalTotal
      Equity Capital March 31, 2010
                                    
                                    
                                    
                                    
                                    
                                    $
                                    15,787Plus:
      Unrealized Gain/Loss on   Investments
                                    
                                    
                                    
                                    
                                    
                                    
                                    (98
                                    )Less:
      Disallowed Servicing Rights
                                    
                                    
                                    
                                    
                                    
                                    
                                    (1
                                    )Total
      Tier 1 Capital March 31, 2010
                                    
                                    
                                    
                                    
                                    
                                    $
                                    15,688Plus:
      Allowance for loan losses
                                    
                                    
                                    
                                    
                                    
                                    
                                    1,215Total
      Risk-based Capital March 31, 2010
                                    
                                    
                                    
                                    
                                    
                                    $
                                    16,903At December 31, 2009:Total
      Capital (to Risk-Weighted Assets):North
      Penn Bank
                                    
                                    $
                                    18,151
                                    
                                    
                                    
                                    15.07
                                    %
                                    
                                    $
                                    ≥9,634
                                    
                                    
                                    
                                    ≥8.0
                                    %
                                    
                                    $
                                    ≥12,042
                                    
                                    
                                    
                                    ≥10.0
                                    %Tier
      1 Capital (to Risk-Weighted Assets):North
      Penn Bank
                                    
                                    $
                                    16,667
                                    
                                    
                                    
                                    13.84
                                    %
                                    
                                    $
                                    ≥4,817
                                    
                                    
                                    
                                    ≥4.0
                                    %
                                    
                                    $
                                    ≥ 7,225
                                    
                                    
                                    
                                    ≥6.0
                                    %Tier
      1 Capital (to Average Assets):North
      Penn Bank
                                    
                                    $
                                    16,667
                                    
                                    
                                    
                                    11.35
                                    %
                                    
                                    $
                                    ≥5,874
                                    
                                    
                                    
                                    ≥4.0
                                    %
                                    
                                    $
                                    ≥ 7,343
                                    
                                    
                                    
                                    ≥5.0
                                    %Risk-Weighted
      Assets:
                                    
                                    $
                                    120,425Average
      Assets:
                                    
                                    $
                                    14,866Reconciliation
      of GAAP Capital to Regulatory CapitalTotal
      Equity Capital December 31, 2009
                                    
                                    
                                    
                                    
                                    
                                    $
                                    16,670Plus:
      Unrealized Gain/Loss on Investments
                                    
                                    
                                    
                                    
                                    
                                    
                                    (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


25


Item
3.                
Quantitative and Qualitative Disclosure About Market Risk





Not
applicable as the Company is a smaller reporting company.





Item
4T.               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 March 31, 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.





Item
1A .          Risk
Factors





In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in our Annual Report on Form 10-K for the year
ended December 31, 2009, which could materially affect our business, financial
condition or future results. At March 31, 2010 the risk factors of the Company
have not changed materially from those reported in our Annual Report on Form
10-K. However, the risks described in our Annual Report on Form 10-K are not the
only risks that we face. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition and/or operating
results.


26


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





Period
                    
                    (a)
                      Total number of
                      Shares
                      Purchased
                    
                    
                    (b)
                      Average Price
                      Paid per Share
                    
                    
                    (c)
                      Total Number of
                      Shares Purchased as
                      Part of Publicly
                      Announced Plans or
                      Programs (1)
                    
                    
                    (d)
                      Maximum Number of
                      Shares that May Yet Be
                      Purchased Under the Plans
                      or ProgramsJanuary
      1, 2010
                      through
                      January
      31, 2010
                    
                    
                    -
                    
                    
                    
                    -February
      1, 2010
                      through
                      February
      28, 2010
                    
                    
                    -
                    
                    
                    
                    -March
      1, 2010
                      through
                      March
      31, 2010
                    
                    
                    2,800
                    
                    
                    $
                    9.35
                    
                    
                    
                    254,300
                    
                    
                    
                    46,198Total
                    
                    
                    2,800
                    
                    
                    $
                    9.35





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





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





The
current repurchase authorization will remain in effect until all shares have
been repurchased or until the Company terminates the authorization. As of
December 31, 2009, 93,343 shares have been purchased under this second plan at
an average cost per share of $8.96.





Item
3.         Defaults Upon Senior
Securities.





None.





Item
4. [Removed and Reserved].





Item
5         Other
Information.





None





Item
6.         Exhibits.





3.1
            Articles
      of Incorporation of North Penn Bancorp, Inc. (Incorporated herein by
      reference to Exhibit 3.1 to the Company’s Registration Statement on
      Form SB-2 (File
No. 333-143601))


3.2
            Bylaws
      of North Penn Bancorp, Inc. (Incorporated herein by reference to
      Exhibit 3.2 to the Company’s Registration Statement on Form SB-2
      (File No. 333-143601))


27


4
            Specimen
      Stock Certificate(Incorporated herein by reference to Exhibit 4 to
      the Company’s Registration Statement on Form SB-2 (File
      No. 333-143601))


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


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


32.1
            Section
      1350 Certification of Chief Executive
Officer


32.1
            Section
      1350 Certification of Chief Financial
Officer


28


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:
                  May
      14, 2010
                  
                  /s/
      Frederick L. HickmanFrederick
      L. Hickman
                    President
      and Chief Executive OfficerDated:
                  May
      14, 2010
                  
                  /s
      Joseph F. McDonaldJoseph
      F. McDonald
                    Chief
      Financial
Officer


29