10-Q

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended    September 30, 2009

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

For the transition period from __________________         to           ______________________

Commission File Number:   000-52839

NORTH PENN BANCORP, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania	26-0261305
(State or other jurisdiction of Incorporation or organization)	(IRS Employer Identification No.)

216 Adams Avenue, Scranton, PA  18503

(Address of principal executive offices)

(570) 344-6113

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ¨     No ¨  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act.

(Check one):

Large accelerated filer ¨                                           Accelerated filer ¨

Non-accelerated filer   ¨                                           Smaller reporting company x

(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No  x

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

PART I - FINANCIAL INFORMATION

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

2

PART I – FINANCIAL INFORMATION

Item 1.    Financial Statements

North Penn Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets

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

See notes to unaudited consolidated financial statements.

3

North Penn Bancorp, Inc. and Subsidiary

Unaudited Consolidated Statements of Income

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

(In thousands)

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

See notes to unaudited consolidated financial statements.

4

North Penn Bancorp, Inc. and Subsidiary

Unaudited Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2009 and 2008

(In thousands)

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

See notes to unaudited consolidated financial statements.

5

Notes to Unaudited Consolidated Financial Statements

1.  Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

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

Principles of Consolidation

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

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

Basis of Presentation

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.  Accordingly, they do not include all of the information and footnotes required by us, generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments considered necessary for fair presentation have been included.

Recent Accounting Pronouncements

FASB ASC 820-10-In February 2008, the FASB issued new guidance impacting FASB ASC 820-10, (FASB Staff Position No. 157-2).  The staff position delays the effective date of FASB ASC 820-10 (SFAS No. 157) for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The delay expired January 1, 2009, and the expiration of the delay did not have a material impact on North Penn Bank’s consolidated financial position or results of operations.

FASB ASC 805-In December 2007, the FASB issued new guidance impacting FASB ASC 805, Business Combinations (SFAS No. 141(R)-Business Combinations).  The new guidance establishes principles and requirements for how an acquiring company (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquirer, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The new standard became effective for the Company on January 1, 2009.

FASB ASC 810-10-In December 2007, the FASB issued FASB ASC 810-10, Consolidation (Statement No. 160-Non-controlling Interest in Consolidated Financial Statements- an amendment of ARB No. 51).  FASB ASC 810-10 requires the ownership interest in subsidiaries held by parties other than the parent be clearly identified, labeled and presented in the consolidated balance sheet within equity, but separate from parent’s equity.  It also requires the amount of consolidated net income attributable to the parent and the non-controlling interest to be clearly identified and presented on the face of the consolidated statement of income.  The new standard became effective for the Company on January 1, 2009.  The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operation.

6

FASB ASC 815-10-In March 2008, the FASB issued FASB ASC 815-10, Derivatives and Hedging (Statement No. 161-Disclosures about Derivative Instruments and Hedging Activities- an amendment of FASB Statement No. 133).  FASB ASC 815-10 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  The new standard became effective for the Company on January 1, 2009.  The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operations and the required disclosures have been included.

FASB ASC 855- In May 2009, the FASB issued FASB ASC 855, Subsequent Events (Statement No. 165-Subsequent Events).  FASB ASC 855 establishes the period after the balance sheet date during which management shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements and the circumstances under which an entity shall recognize events or transactions that occur after the balance sheet date.  FASB ASC 855 also requires disclosure of the date through which subsequent events have been evaluated.  The Company adopted this standard for the interim reporting period ending June 30, 2009.  The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

FASB ASC 860-In June 2009, the FASB issued new guidance impacting FASB ASC 860, Transfers and servicing (Statement No. 166- Accounting for Transfers of Financial Assets- an amendment of FASB Statement No. 140).  The new guidance removes the concept of a qualifying special-purpose entity and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset.  The new standard will become effective for the Company on January 1, 2010.  The Company is currently evaluating the impact of adopting the new standard on the consolidated financial statements.

FASB ASC 810-10-In June 2009, the FASB issued new guidance impacting FASB ASC 810-10, Consolidation (Statement No. 167- Amendments to FASB Interpretation No. 46(R)).  The new guidance amends tests for variable interest entities to determine whether a variable interest entity must be consolidated.  FASB ASC 810-10 requires an entity to perform an analysis to determine whether an entity’s variable interest or interests give it a controlling financial interest in a variable interest entity.  This standard requires ongoing reassessments of whether an entity is the primary beneficiary of a variable interest entity and enhanced disclosure that provides more transparent information about an entity’s involvement with a variable interest entity.  The new guidance will become effective for the Company on January 1, 2010 and the Company is currently evaluating the impact of adopting the standard on the consolidated financial statements.

SAB 112- In June 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 112 (“SAB 112”).  SAB 112 revises or rescinds portions of the interpretative guidance included in the Staff Accounting Bulletin series in order to make the interpretative guidance consistent with the recent pronouncements by the FASB, specifically FASB ASC 805 and FASB ASC 810-10 (SFAS No. 141(R) and SFAS No. 160).  SAB 112 was effective for the Company as of June 30, 2009.  There was no material impact to North Penn Bank’s consolidated financial position or results of operations upon adoption.

FASB ASC 323-In November 2008, the FASB Emerging Issues Task Force reached a consensus on FASB ASC 323, Investments-Equity Method and Joint Ventures (Issue No. 08-6, Equity Method Investment Accounting Considerations).  The new guidance clarifies the accounting for certain transactions and impairment considerations involving equity method investments.  An equity investor shall not separately test an investee’s underlying assets for impairment but will recognize its share of any impairment charge recorded by an investee in earnings and consider the effect of the impairment on its investment.  An equity investor shall account for a share issuance by an investee as if the investor had sold proportionate share of its investment, with any gain or loss recognized in earnings.  The new guidance became effective for the Company on January 1, 2009 and did not have a material impact on the Company’s consolidated financial position or results of operations.

7

FASB ASC 350-In November 2008, the FASB Emerging Issues Task Force reached a consensus on FASB ASC 350, Intangibles-Goodwill and Other (Issue No. 08-7, Accounting for Defensive Intangible Assets).  The new guidance clarifies how to account for defensive intangible assets subsequent to initial measurement.  The guidance applies to acquired intangible assets in situations in which an entity does not intend to actively use an asset but intends to hold the asset to prevent others from obtaining access to the asset.  A defensive intangible asset should be accounted for as a separate unit of accounting with an expected life that reflects the consumption of the expected benefits related to that asset.  The benefit from holding a defensive intangible asset is the direct and indirect cash flows resulting from the entity preventing others from using the asset.  The new guidance was effective for intangible assets acquired on or after January 1, 2009 and did not have a material impact on the Company’s consolidated financial position or results of operation.

FASB ASC 260-10-In June 2008, the FASB issued new guidance impacting FASB ASC 260-10, Earnings per Share (FSP No. EITF 03-06-1, Determining Whether Instruments Granted in Share-based Payment Transactions are Participating Securities).  This new guidance concluded that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders and therefore are considered participating securities for purposes of computing earnings per share.  Entities that have participating securities that are not convertible into common stock are required to use the “two-class” method of computing earnings per share.  The two-class method is an earning allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.  This new guidance was effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years.  This new guidance became effective for the Company on January 1, 2009 and did not have a material impact on the Company’s consolidated financial position or results of operations.

FASB ASC 820-10- In August 2009, the FASB issued an update (ASC No. 2009-05, Measuring Liabilities at Fair Value) impacting FASB ASC 820-10, Fair Value Measurements and Disclosures.  The update provides clarification about measuring liabilities at fair value in circumstances where a quoted price in an active market for an identical liability is not available and the valuation techniques that should be used.  The update also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  This update became effective for the Company for the reporting period ending September 30, 2009 and did not have a material impact on the Company’s consolidated financial position or results of operations.

FASB ASC 820-10- In September2009, the FASB issued an update (ASC No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or its equivalent)) impacting FASB ASC 820-10, Fair Value Measurements and Disclosures.  The amendments in this update permit, as a practical expedient, a reporting entity to measure the fair value of an investment that is within the scope of the amendments in this update on the basis of the net asset value per share of the investment (or its equivalent) if the net asset value of the investment is calculated in a manner consistent with the measurement principles of Topic 946, Financial Services-Investment Companies.  The amendments in this update also require disclosures by major category of investment about the attributes of investments within the scope of the amendments in this update, such as the nature of any restrictions on the ability to redeem an investment on the measurement date.  This update becomes effective for the Company for interim and annual reporting periods ending after December 15, 2009.  The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

8

Use of Estimates

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

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

Mortgage Partnership Finance Program

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

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

The credit enhancement feature of the MPF Program is accounted for by the Bank as a financial guarantee in accordance with FASB ASC 460-Guarantees, FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45) and reported on the balance sheet at its initial fair value.  Subsequent changes in the recorded guarantee amount would result from termination of any portion or all of the guarantee, additional guarantees being issued or increases in the expected losses resulting from the guarantee.  Such changes in recorded amounts are recognized in the consolidated statements of income or as an increase in the offsetting guarantee fees receivable account in the case of additional guarantees being issued.

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

2. Investment Securities

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

9

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

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

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

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

Available-for-Sale

September 30, 2009

(In thousands)

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

Available-for-Sale

December 31, 2008

(In thousands)

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

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

10

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

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

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

The Company invests in debt securities of the U.S. government, U.S. agencies, U.S. sponsored agencies, obligations of states and political subdivisions and corporate obligations.  Changes in market value of all debt securities can result from changes in interest rates.  Changes in credit quality can affect securities of states and political subdivisions and corporate obligations.  Because the changes in market value of debt securities is due to changes in interest rates, and since the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2009.

The Company invests in equity securities of other banks through its subsidiary, Norpenco, Inc.  Management has evaluated the near-term prospects of the issuers with unrealized losses in relation to the severity and duration of the impairment.  Based on that evaluation, and the Bank’s ability to hold these stocks for a reasonable period of time sufficient for a forecasted recovery of cost, management does not consider these investments to be other-than-temporarily impaired at September 30, 2009.

3.  Loans

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

Loans are stated at the principal amount outstanding, net of any unearned income, deferred loan fees and the allowance for loan losses.  Interest on mortgage and commercial loans is calculated at the time of payment based on the current outstanding balance of the loan.  Interest on consumer loans is recognized on the simple interest method.

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

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

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

Allowance for Loan Losses

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

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

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

4. Other Borrowings

The Bank has a line of credit agreement with the FHLB for short term borrowings varying from one day to three years.  Advances on this line must be secured by “qualifying collateral” as defined in the agreement and bear interest at fixed or variable rates as determined at the date advances are made.  The line expires in June, 2011.  At September 30, 2009, this line of credit had a zero balance.

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

The Bank also has a $7.0 million borrowing with the FHLB at a fixed rate of 4.34%, which was issued in July, 2005, and matures in July, 2015.  This loan requires quarterly interest payments, with the principal due at maturity.

5. Earnings Per Share

Basic earnings per share is computed on the weighted average number of common shares outstanding during each year, adjusted for unearned shares of the ESOP, as prescribed by FASB ASC 260-10 Earnings per Share, SFAS No. 128, Earnings Per Share (SFAS 128).  Diluted earnings per share at September 30, 2009, includes common shares issuable upon exercise of employee stock options as follows:

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

6. Omnibus Stock Option Plan

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

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

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

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

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

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

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

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

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

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

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

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7. Guarantees

FASB ASC 460 Guarantees, FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), requires certain guarantees to be recorded at fair value as a liability at inception and when a loss is probable and reasonably estimable, as those terms are defined in FASB ASC 450 Contingencies, SFAS No. 5, Accounting for Contingencies (FAS 5).  FIN 45 also requires a guarantor to make significant new disclosures even when the likelihood of making any payments under the guarantee is remote.

On September 16, 2009, the Bank renewed the Mortgage Partnership Finance (MPF) Master Commitment (the Commitment) with the FHLB, which was originally executed on September 2006 to deliver $10.0 million of mortgage loans and to guarantee the payment of any realized losses that exceed the FHLB’s first loss account for mortgages delivered under the Commitment.  The Bank receives credit enhancement fees from the FHLB for providing this guarantee and continuing to manage the credit risk of the MPF Program mortgage loans.  The term of the Commitment and guarantee per the Master Commitment is through September 16, 2010. The maximum potential amount of future payments that the Bank is required to make under the guarantee is $225,000. Under the Commitment, the Bank agrees to service the loans and therefore, is responsible for any necessary foreclosure proceedings.  Any future recoveries on any losses would not be paid by the FHLB under the Commitment.  The Bank has not experienced any losses under these guarantees.

8. Related-Party Transactions

The Company routinely enters into banking transactions with its directors and officers.  Such transactions are made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and do not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.  A summary of loans to directors and officers and related parties is as follows for the nine-months ended September 30, 2009 and the year ended December 31, 2008 (dollars in thousands):

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

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9. Retirement Plans

The Company participates in the Financial Institution Retirement Fund (the Fund) administered by the Pentegra Group.  The Fund operates as a multi-employer plan for accounting purposes under Statement of Financial Accounting Standards No. 87 Employers’ Accounting for Pensions.  As such, the annual pension expense to be recorded is defined as the amount of the required annual contribution.

In February, 2009, the Bank’s Board of Directors authorized the freezing of benefits within the defined benefit plan as of April 1, 2009.  For the plan years ending June 30, 2008 and 2007, the required contributions due were $94,000 and $138,000 respectively.

In March, 2009, the Board of Directors approved an increase in matching employees’ contributions within the Bank’s existing 401k plan from 50% of the first 6% to 100% of the first 6% as of April 1, 2009.  It is estimated that the increased cost of higher matching will be approximately $42,000 for 2009.

10. Fair Value Measurements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fair Value of Financial Instruments

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

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

11. Subsequent Events

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

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

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

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

Forward-Looking Statements

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

The Company’s forward-looking statements are subject to the following principal risks and uncertainties: general economic conditions and trends, either nationally or locally; conditions in the securities markets; changes in interest rates; changes in deposit flows, and in the demand for deposit and loan products and other financial services; changes in real estate values; changes in the quality or composition of the Company’s loan or investment portfolios; changes in competitive pressures among financial institutions or from non-financial institutions; the Company’s ability to retain key members of management; changes in legislation, regulation, and policies; and a variety of other matters which, by their nature, are subject to significant uncertainties.  The Company provides greater detail regarding some of these factors in its Form 10-K for the year ended December 31, 2008, including in the Risk Factors section of that report.  The Company’s forward-looking statements may also be subject to other risks and uncertainties, including those that it may discuss elsewhere in this report or in its other filings with the SEC.

Financial Condition

Our total assets increased $12.5 million, or 9.0%, from $139.0 million at December 31, 2008 to $151.5 million at September 30, 2009.  Significant changes in asset totals from December 31, 2008 to September 30, 2009 included an increase of $9.7 million in Federal funds sold.

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

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

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

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

Non-performing loans, which are loans past due 90 days or more and non-accruing loans, totaled $1.5 million at September 30, 2009, compared to $1.1 million at December 31, 2008. The ratio of non-performing loans to total loans was 1.35% and 1.03% at September 30, 2009 and December 31, 2008, respectively.

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

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

Results of Operations

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

North Penn Bank's capital ratios at September 30, 2009 and December 31, 2008 as well as the required minimum ratios for capital adequacy purposes and to be well capitalized under the prompt corrective action provisions as defined by the FDIC are summarized as follows:

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						For capital adequacy		To be well capitalized  Under prompt corrective action
	Actual					purposes		Provisions
	Amount		Ratio			Amount	Ratio	Amount	Ratio
At September 30, 2009:
Total Capital (to Risk-Weighted Assets):
North Penn Bank	$	17,351		15.33	%	>$ 9,151	>8.0%	>$11,439	>10.0%
Tier 1 Capital (to Risk-Weighted Assets):
North Penn Bank	$	16,108		14.08	%	>$ 4,576	>4.0%	>$ 6,863	>6.0%
Tier 1 Capital (to Average Assets):
North Penn Bank	$	16,108		10.65	%	>$ 6,048	>4.0%	>$ 7,560	>5.0%
Risk-Weighted Assets:	$	114,389
Average Assets:	$	151,209
Reconciliation of GAAP Capital to Regulatory Capital
Total Equity Capital September 30, 2009			$	16,437
Plus: Unrealized Gain/Loss on
Investments				(328	)
Less: Disallowed Servicing Rights				(1	)
Total Tier 1 Capital September 30, 2009			$	16,108
Plus: Allowance for loan losses				1,243
Total Risk-based Capital September 30, 2009			$	17,351
At December 31, 2008:
Total Capital (to Risk-Weighted Assets):
North Penn Bank	$	16,706		15.05	%	>$8,878	>8.0%	>$11,098	>10.0%
Tier 1 Capital (to Risk-Weighted Assets):
North Penn Bank	$	15,536		14.00	%	>$4,439	>4.0%	>$ 6,659	>6.0%
Tier 1 Capital (to Average Assets):
North Penn Bank	$	15,536		11.57	%	>$5,370	>4.0%	>$ 6,713	>5.0%
Risk-Weighted Assets:	$	110,977
Average Assets:	$	134,261
Reconciliation of GAAP Capital to Regulatory Capital
Total Equity Capital December 31, 2008			$	15,390
Plus: Unrealized Gain/Loss on
Investments				147
Less: Disallowed Servicing Rights				(1	)
Total Tier 1 Capital December 31, 2008			$	15,536
Plus: Allowance for loan losses				1,170
Total Risk-based Capital December 31, 2008			$	16,706

Stock Repurchase Plan

On April 28, 2009, the Company’s Board of Directors authorized the completion of the previous 10% stock repurchase plan (29,657 shares) and the repurchase of up to 142,341 shares of the Company’s outstanding common stock, or approximately 10% of outstanding shares.  The current repurchase authorization will remain in effect until all shares have been repurchased or until the Company terminates the authorization.  Purchases under the program will be conducted solely through a Rule 10b5-1 repurchase plan with Stifel, Nicolaus & Company, Incorporated and will be based upon the parameters of the Rule 10b5-1 repurchase plan.   The Rule 10b5-1 repurchase plan allows the Company to repurchase its shares during periods when it would normally not be active in the market due to its internal trading blackout period.

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Item 3.   Quantitative and Qualitative Disclosure About Market Risk

Not applicable as the Company is a smaller reporting company.

Item 4.    Controls and Procedures

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

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

PART II – OTHER INFORMATION

Item 1.       Legal Proceedings.

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

Item 1A .   Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. At September 30, 2009 the risk factors of the Company have not changed materially from those reported in our Annual Report on Form 10-K. However, the risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

(1) On October 1, 2008, the Company announced a repurchase program of 158,157 shares, approximately 10% of all shares outstanding. On April 28, 2009, the North Penn Bancorp., Inc.’s Board of Directors authorized the completion of the previous 10% stock repurchase plan (29,657 shares) and the repurchase of up to 142,341 shares of the Company’s outstanding common stock, or approximately 10% of outstanding shares.

Item 3.        Defaults Upon Senior Securities.

None

Item 4.       Other Information.

None

Item 5.       Exhibits.

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

3.2 Bylaws of North Penn Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.2 to the Company’s form 10-K filed with the commission on March 31, 2009)

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

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

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

32.1 Section 1350 Certification of Chief Executive Officer

32.1 Section 1350 Certification of Chief Financial Officer

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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, Inc
Dated:	November 16, 2009	/s/ Frederick L. Hickman
		Frederick L. Hickman President and Chief Executive Officer
Dated:	November 16, 2009	/s Robin R. Weikel
		Robin R. Weikel Chief Financial Officer

25

EX-31.1

Exhibit 31.1

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

CERTIFICATION

I, Frederick L. Hickman, President and Chief Executive Officer of North Penn Bancorp, Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of North Penn Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	November 16, 2009	/s/ Frederick L. Hickman
		Frederick L. Hickman
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

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

CERTIFICATION

I, Robin R. Weikel, Chief Financial Officer of North Penn Bancorp, Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of North Penn Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	November 16, 2009	/s/ Robin R. Weikel
		Robin R. Weikel
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of North Penn Bancorp, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Frederick L. Hickman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	November 16, 2009	/s/ Frederick L. Hickman
		Frederick L. Hickman
		President and Chief Executive Officer

EX-32.1

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of North Penn Bancorp, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robin R. Weikel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	November 16, 2009	/s/ Robin R. Weikel
		Robin R. Weikel
		Chief Financial Officer