North Penn Bancorp Inc - FORM 10-K

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - North Penn Bancorp Inc	v216650_ex32-1.htm
EX-21 - EXHIBIT 21 - North Penn Bancorp Inc	v216650_ex21.htm
EX-23 - EXHIBIT 23 - North Penn Bancorp Inc	v216650_ex23.htm
EX-31.1 - EXHIBIT 31.1 - North Penn Bancorp Inc	v216650_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - North Penn Bancorp Inc	v216650_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - North Penn Bancorp Inc	v216650_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2010

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

For the transition period from

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)		(I.R.S. Employer Identification No.)

216 Adams Avenue, Scranton, Pennsylvania		18503
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (570) 344-6113

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.10 per share
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 Website, 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 shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Small reporting company x

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

The aggregate market value of the Company’s common stock held by non-affiliates on June 30, 2010, based on the closing price of such stock on that date totaled $9,188,970

The number of shares of common stock outstanding as of March 25, 2011 was 1,335,524.

DOCUMENTS INCORPORATED BY REFERENCE

None.

North Penn Bancorp, Inc.

Form 10-K

INDEX

			Page
FORWARD-LOOKING STATEMENTS				3

PART I
	ITEM 1	BUSINESS		4
	ITEM 1A	RISK FACTORS		18
	ITEM 1B	UNRESOLVED STAFF COMMENTS
	ITEM 2	PROPERTIES		22
	ITEM 3	LEGAL PROCEEDINGS		22
	ITEM 4	(REMOVED AND RESERVED)		22

PART II
	ITEM 5	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		22
	ITEM 6	SELECTED FINANCIAL DATA		23
	ITEM 7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION		23
	ITEM 7A	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		29
	ITEM 8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		29
	ITEM 9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		65
	ITEM 9A	CONTROLS AND PROCEDURES		65
	ITEM 9B	OTHER INFORMATION		66

PART III
	ITEM 10	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		66
	ITEM 11	EXECUTIVE COMPENSATION		68
	ITEM 12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		73
	ITEM 13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		75
	ITEM 14	PRINCIPAL ACCOUNTANT FEES AND SERVICES		76

PART IV
	ITEM 15	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		76

SIGNATURES				78

FORWARD-LOOKING STATEMENTS

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

Forward-Looking Statements

North Penn Bancorp, Inc. makes forward-looking statements in this report and we may from time to time make other statements, regarding our outlook or expectations for earnings, revenues, expenses and/or other matters regarding or affecting North Penn Bancorp that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. 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. We do not assume any duty and do not undertake to update our 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 we anticipated in our forward-looking statements and future results could differ materially from our historical performance.

Our forward-looking statements are subject to the following principal risks and uncertainties. We provide greater detail regarding some of these factors elsewhere in other documents filed with the SEC. Our forward-looking statements may also be subject to other risks and uncertainties, including those discussed elsewhere in this Report or in our other filings with the SEC.

	·	Our business and operating results are affected by business and economic conditions generally or specifically in the principal markets in which we do business. We are affected by changes in our customers’ and counterparties’ financial performance, customer preferences and behavior, values of real estate and other collateral, and levels of economic and business activity, among other things.

	·	The values of our assets and liabilities, as well as our overall financial performance, are also affected by changes in interest rates or in valuations in the debt and equity markets. Actions by the Federal Reserve and other government agencies, including those that impact money supply and market interest rates, can affect our activities and financial results.

Competition can have an impact on customer acquisition, growth and retention, as well as on our credit spreads and product pricing, which can affect market share, deposits and revenues.

Legal and regulatory developments could have an impact on our ability to operate our businesses or our financial condition or results of operations or our competitive position or reputation. Reputational impacts, in turn, could affect matters such as business generation and retention, our ability to attract and retain management, liquidity and funding. These legal and regulatory developments could include: (a) the unfavorable resolution of legal proceedings or regulatory and other governmental inquiries; (b) increased litigation risk from recent regulatory and other governmental developments; (c) the results of the regulatory examination process, our failure to satisfy the requirements of agreements with governmental agencies, and regulators’ future use of supervisory and enforcement tools; (d) legislative and regulatory reforms, including changes to laws and regulations involving financial institutions, tax, pension, and the protection of confidential customer information; and (e) changes in accounting policies and principles.

	·	Our business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through the effective use of third-party insurance and capital management and asset/liability techniques.

	·	Our ability to anticipate and respond to technological changes can have an impact on our ability to respond to customer needs and to meet competitive demands.

	·	Our business and operating results can be affected by widespread natural disasters, terrorist activities or international hostilities, either as a result of the impact on the economy and financial and capital markets generally or on us or on our customers, suppliers or other counterparties specifically.

	·	Recent and future legislation and regulatory actions responding to instability and volatility in the credit market may significantly affect our operations, financial condition and earnings. Future legislative or regulatory actions could impair our rights against borrowers, result in increased credit losses, and significantly increase our operating expenses.

While the degree of volatility in the financial markets has abated from the levels experienced in 2008 – 2009 uncertainty persists that may adversely affect us and the financial services industry as a whole. A sluggish economy and high unemployment continue to impact commercial and consumer delinquencies dampening consumer confidence while the high level of mortgage foreclosures continue to press on the real estate markets. The continued economic pressure on businesses and consumers has affected and will likely further affect our business, financial condition and results of operations.

PART I

ITEM 1. BUSINESS

Corporate History

North Penn Bank was organized on February 28, 1877 as The German Building Association of Scranton. The institution eventually became North Penn Savings and Loan Association. On October 1, 2003, North Penn converted from a Pennsylvania state-chartered savings association to a Pennsylvania state-chartered savings bank and changed its name to North Penn Bank (the “Bank”). North Penn Bancorp, Inc. (the “Company”) is the holding company for the Bank. The Company’s common stock trades on the OTC Bulletin Board under the symbol “NPBP.OB”.

The principal activities of the Company are ownership and supervision of the Bank. The Bank is a community-oriented, full-service savings bank providing traditional financial services to consumers and businesses in Northeastern Pennsylvania, including the communities in Lackawanna, Luzerne, Wayne and Monroe counties, among others. The Company and the Bank (sometimes referred to herein as “we”) compete with the many existing and larger financial institutions in our geographic market by emphasizing personalized service, responsive decision making and an overall commitment to excellence.

The Bank offers commercial and consumer loans of all types, including real estate loans, residential mortgage loans, home equity loans and lines of credit, auto loans and other credit products. The Bank’s deposit services include business and individual demand and time deposit accounts, NOW accounts, money market accounts, Individual Retirement Accounts and holiday accounts. We provide a number of convenience-oriented services and products to our customers, including direct payroll and social security deposit services, bank-by-mail services, access to a national automated teller machine network, safe deposit boxes, night depository facilities, notary services and travelers checks. We also offer internet banking and electronic bill payment.

Pending Acquisition

On December 14, 2010, the Company and Norwood Financial Corp. (“Norwood Financial”), the parent company of Wayne Bank, entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which the Company will merge with and into Norwood Financial. Concurrent with the merger, it is expected that the Bank will merge with and into Wayne Bank.

Under the terms of the Merger Agreement, each outstanding share of the Company’s common stock will be converted into either the right to receive $19.12 in cash or 0.6829 shares of Norwood Financial common stock. In addition, the elections of the Company’s stockholders will be subject to the requirement that $12,194,000 of the merger consideration (which includes amounts paid in cancellation of existing stock options) be paid in cash and that the remainder be paid in Norwood Financial common stock. All of the Company’s, whether or not vested, will be canceled at the effective time of the merger in exchange for a cash payment equal to the difference between $19.12 and the exercise price of the stock option.

The transaction is subject to termination by the Company if the price of Norwood Financial common stock both declines by 20% during a defined measurement period and underperforms the Nasdaq Bank Index by 20% during that same period, unless Norwood Financial increases the exchange ratio for the stock portion of the merger consideration as set forth in the merger agreement.

The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of North Penn. The merger is currently expected to be completed in the second quarter of 2011.

Commercial Bank Services

North Penn Bank offers a broad range of lending, depository, and related financial services to individuals and small to medium sized businesses located primarily in Greater Scranton area. In the lending area, these services include short and medium term loans, lines of credit, letters of credit, real estate construction loans and mortgage loans. In addition to commercial real estate loans, we make commercial and industrial loans, which are not always secured by real estate. These types of loans can diversify the Company’s exposure in a depressed real estate market.

We have experienced commercial lenders in place to attract commercial loans, which we are pursuing to balance our large portfolio of residential mortgages. We are actively pursuing business relationships by capitalizing on the experience of our lending team, as well as existing customers, to develop deposit and lending relationships which emphasize service. As a result, we believe that we have developed a high quality diversified loan portfolio with a favorable mix of loan types, maturities and yields.

Depository products include demand deposits, as well as savings, money market and time accounts. We also offer wire transfer, internet banking and night depository services to the business community. We desire to preserve the integrity and traditional values in the way we conduct business as we achieve consistent, quality financial performance.

Consumer Banking

North Penn Bank also offers a broad range of consumer banking services, including checking accounts, savings accounts, NOW accounts, money market accounts, certificates of deposit, internet banking, secured and unsecured loans, consumer installment loans, mortgage loans, and safe deposit services. Although we have experienced consistent and significant growth in our commercial loan portfolio, we have continued to provide residential mortgage and consumer lending services. As a result, we are able to provide, at the local level, the financial services required to meet the needs of the majority of existing and potential customers in our market.

Competition

We face considerable competition in our market areas for deposits and loans from other depository institutions. Many of our depository institution competitors have substantially greater resources, broader geographic markets, and higher lending limits than ours and are also able to provide more services and make greater use of media advertising. In recent years, intense market demands, economic pressures, increased customer awareness of products and services, and the availability of electronic services have forced banking institutions to diversify their services and become more cost-effective.

North Penn Bank also competes with credit unions, brokerage firms, insurance companies, money market mutual funds, consumer finance companies, mortgage companies and other financial companies, some of which are not subject to the same degree of regulation and restrictions as North Penn Bank in attracting deposits and making loans. Interest rates on deposit accounts, convenience of facilities, products and services, and marketing are all significant factors in the competition for deposits. Competition for loans comes from other commercial banks (including de novo banks in our market area), savings institutions, insurance companies, consumer finance companies, credit unions, mortgage banking firms and other institutional lenders. We primarily compete for loan originations through our structuring of loan transactions and the overall quality of service. Competition is affected by the availability of lendable funds, general and local economic conditions, interest rates, and other factors that are not readily predictable.

Concentration

The Company is not dependent for deposits or exposed by loan concentrations to a single customer or a small group of customers the loss of any one or more of which would have a material adverse effect upon the financial condition of the Company.

Employees

As of December 31, 2010, the Bank employed 34 full-time and 11 part-time employees. None of these employees are represented by a collective bargaining agent, and the Company believes that it enjoys good relations with its personnel.

Executive Officers of the Registrant

Name	Age	Principal Occupation for Past Five Years
Frederick L. Hickman	55	President, Chief Executive Officer of North Penn Bancorp and North Penn Bank.
Thomas J. Dziak	55	Executive Vice President – Senior Lending Officer of North Penn Bancorp and North Penn Bank.
Thomas A. Byrne	50	Senior Vice President – Commercial Lending Officer of North Penn Bancorp and North Penn Bank. Prior to joining North Penn Bank in January of 2005, Mr. Byrne served as a vice president and commercial loan officer at Community Bank & Trust.
Christe A. Casciano Sr.	54	Senior Vice President – Chief Technology and Risk Officer of North Penn Bancorp and North Penn Bank. Prior to joining North Penn Bank in April of 2007, Mr. Casciano served as Vice President and Director of Marketing at Penn Security Bank and Trust Co.
Joseph F. McDonald	56	Senior Vice President – Chief Financial Officer of North Penn Bancorp and North Penn Bank. Prior to joining North Penn Bank, Mr. McDonald was Senior Vice President of National Penn Bancshares in Boyertown, Pennsylvania. Prior to National Penn Bancshares’s merger with Keystone Nazareth Bank and Trust Company (“KNBT”) in February, 2008, Mr. McDonald served as Senior Vice President, Controller of KNBT.

Available Information

The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on our website, www.northpennbank.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. The information on our website shall not be considered as incorporated by reference into this Annual Report on Form 10-K.

Loan Portfolio

The Bank’s business of making loans is its primary source of income. Historically, the principal lending activity of the Bank has been the origination of fixed and adjustable rate mortgage (“ARM”) loans collateralized by one- to four-family residential properties located in its market area. The Company also originates multifamily, commercial real estate, commercial, construction and consumer loans which typically have higher yields than traditional one- to four-family loans.

In recent years, the Bank has increased its emphasis on commercial lending and has actively pursued small business accounts.

Commercial Loans

Our commercial lending consists primarily of real estate based loans, including commercial and residential real estate collateral, with conservative loan-to-value ratios and the ability to repay based on operating cash flow. The Bank has continued developing the commercial business loan program. The purpose of this program is to increase the Bank’s interest rate sensitive assets, increase interest income and diversify both the loan portfolio and the Bank’s customer base. The Bank has two experienced commercial lenders to help in this effort. The terms and conditions of each loan are tailored to the needs of the borrower and based on the financial strength of the project and any guarantors. In reaching a decision on whether to make a commercial real estate loan, we consider the net operating income of the property, the borrower’s expertise and credit history and the value of the underlying property. Loan to value ratios are a very important consideration. Generally, however, commercial real estate loans originated by us will not exceed 80% of the appraised value or the purchase price of the property, whichever is less. We also make commercial vehicle loans.

Residential Mortgages

The Bank makes fixed and adjustable mortgages and home equity loans on owner occupied residential real estate. The Bank offers fixed-rate mortgage loans with maturities up to 30 years and less than 20% down payment supplemented with private mortgage insurance. These loans are secured by one- to four-family residences that are located in its primary market area. All of the mortgages are underwritten to be eligible for resale in the secondary market.

Home equity loans are offered as both closed end loans and lines of credit. Closed end loans can be fixed rate or adjustable. Home equity lines of credit have adjustable rates. The underwriting standards utilized for home equity loans and equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. The combined (first and second mortgage liens) loan-to-value ratio for home equity loans and equity lines of credit is generally limited to 80% These loans offer the consumer access to liquidity and lower interest rates, and interest payments may be tax deductible.

Consumer Loans

The Bank offers secured consumer loans, including deposit secured loans, auto loans, and indirect auto loans made through new and used car dealers. Our procedures for underwriting consumer loans include an assessment of an applicant’s credit history and the ability to meet existing obligations and payments on the proposed loan. Although an applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral security, if any, to the proposed loan amount.

The following table summarizes the Bank’s loan portfolio by type of loan on the dates indicated.

	At December 31,
	2010					2009					2008
(Dollars in thousands)	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
Commercial	$	3,149		2.59	%	$	3,368		2.91	%	$	1,796		1.67	%
Real estate mortgages		116,428		95.62	%		108,932		93.89	%		100,127		93.34	%
Consumer		2,185		1.79	%		3,719		4.99	%		5,353		4.99	%
Total gross loans		121,762		100.00	%		116,019		100.00	%		107,276		100.00	%
Add: deferred loan cost & fees, net		49					11					-
Less: allowance for loan losses		1,531					1,484					1,170
Loans, net	$	120,280				$	114,546				$	106,106

The following table sets forth the estimated maturity of the Bank’s loan portfolio as December 31, 2010. The table does not include prepayments or scheduled principal repayments.

(Dollars in thousands)	Within One Year		One-Five Years		Over Five Years		Total
Commercial	$	1,451	$	1,100	$	598	$	3,149
Real estate mortgages		6,679		2,140		107,609		116,428
Consumer		207		1,700		278		2,185
Total	$	8,337	$	4,940	$	108,485	$	121,762

The following table presents, as of December 31, 2010 the dollar amount of all loans due after December 31, 2011, and whether such loans have fixed or adjustable interest rates.

	Due After December 31, 2010
(Dollars in thousands)	Fixed		Adjustable		Total
Commercial	$	1,674	$	24	$	1,698
Real estate mortgages		47,030		62,719		109,749
Consumer		1,974		4		1,978
Total	$	50,678	$	62,747	$	113,425

Risk Elements

Risk elements in the loan portfolio include past due, non-accrual loans, other real estate owned and a concentration of loans to one type of borrower. We monitor the loan portfolio to reduce the risk of delinquent and problem credits. Underwriting standards, including, but not limited to, loan-to-value and debt-to-income ratios, are followed to limit credit risk in the portfolio. Loan review is conducted by an outside party that evaluates loan quality, including adherence to underwriting standards. The loan review report goes directly to the Bank’s Board of Directors for their evaluation. The Pennsylvania Department of Banking and the Federal Deposit Insurance Corporations (FDIC), as the Bank’s regulators, also review the loan portfolio as part of their review process.

Asset Quality

The Bank manages asset quality and controls credit risk through diversification of the loan portfolio and the application of policies designed to foster sound underwriting and loan monitoring practices. The Bank’s senior officers are responsible for monitoring asset quality, establishing credit policies and procedures subject to approval by the Board of Directors, ensuring the policies and procedures are followed and adjusting policies as appropriate.

Non-performing assets include non-performing loans and foreclosed real estate held for sale. Non-performing loans consist of loans where the principal, interest, or both, is 90 or more days past due and loans that have been placed on non-accrual. Income recognition of interest is discontinued when, in the opinion of management, the payment of such interest becomes doubtful. A loan is generally classified as non-accrual when principal or interest has been in default for 90 days or more or because of deterioration in the financial condition of the borrower such that payment in full of principal or interest is not expected. Loans past due 90 days or more and still accruing interest are loans that are generally well secured and in the process of collection. When loans are placed on non-accrual, accruing interest is no longer posted to earnings. At December 31, 2010, the Bank had $1.3 million in non-accrual loans as compared with $1.8 million at December 31, 2009. As of December 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 December 31, 2010, for purposes of accounting and reporting in accordance with FASB ASC 310-10.35 Receivables – Subsequent Measurement (SFAS 114), the Bank had $1.3 million in “impaired” loans.

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

	At December 31,
(Dollars in Thousands)	2010		2009
Non-accrual commercial	$	-	$	42
Non-accrual commercial mortgage		293		960
Non-accrual residential mortgage		953		768
Non-accrual consumer		18		4
Total non-performing loans		1,264		1,774
Foreclosed real estate		929		88
Total non-performing assets	$	2,193	$	1,862

For the period ended December 31, 2010, the bank would have received an additional $111,000 in interest income under the original terms of such loans.

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. Management considers the allowance for loan losses adequate to cover the estimated losses inherent in the Bank’s loan portfolio as of December 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. See Part II, Item 8, Financial Statements and Supplementary Data --- Note 1 of Notes to Consolidated Financial Statements for additional information on management’s evaluation of the adequacy for allowance for loan loss reserve.

Securities

Securities, primarily U.S. government agency bonds, mortgage-backed, and municipal bonds, totaled $14.6 million or 8.9% of total assets at December 31, 2010 as compared with $19.4 million or 12.4% of assets at December 31, 2009. The Bank’s securities portfolio is used to assist the Bank in liquidity, asset/liability management and earnings. Securities can be classified as securities “held-to-maturity” or “available-for-sale.” Investment securities held-to-maturity are carried at cost adjusted for amortization of premiums and accretion of discounts. Securities available-for-sale may be sold in response to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand, general liquidity needs and other similar factors. Available-for-sale securities are carried at fair market value with unrealized gains and losses, net of tax, being included in the Bank’s accumulated other comprehensive income account. At December 31, 2010, accumulated other comprehensive income, a component of shareholders’ equity, was a gain of $119,000 versus a loss of $2,000 at December 31, 2009. The Bank classifies all new bond purchases as available-for-sale.

The following tables summarize the composition of our investment portfolio as of the date indicated,

Securities Portfolio

	December 31, 2010 Available for Sale
(Dollars in thousands)	Amortized Cost		Estimated Fair Value
Mortgage-backed securities	$	1,056	$	1,116
State & political subdivisions		7,559		7,558
Other bonds		4,495		4,733
Total debt securities		13,110		13,407
Equity securities		1,303		1,173
Total securities	$	14,413	$	14,580

	December 31, 2009 Available for Sale
(Dollars in thousands)	Amortized Cost		Estimated Fair Value
U.S. Agency securities	$	1,500	$	1,518
Mortgage-backed securities		2,662		2,751
State & political subdivisions		8,719		8,855
Other bonds		4,969		5,090
Total debt securities		17,850		18,214
Equity securities		1,591		1,184
Total securities	$	19,441	$	19,398

	December 31, 2008 Available for Sale
(Dollars in thousands)	Amortized Cost		Estimated Fair Value
U.S. Agency securities	$	3,000	$	3,016
Mortgage-backed securities		5,074		5,142
State & political subdivisions		8,529		8,211
Other bonds		3,017		2,866
Total debt securities		19,620		19,235
Equity securities		1,371		1,058
Total securities	$	20,991	$	20,293

The amortized cost and weighted average yield of the Bank’s investment securities at December 31, 2010, by contractual maturity, are reflected in the following table. Actual maturities will differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	At December 31, 2010
(Dollars in thousands)	Due in 1 year or less			Due in 1–5 years			Due in 5–10 years			Due after 10 years			Total
State & political subdivisions
Amortized cost	$	-		$	599		$	3,187		$	3,773		$	7,559
Weighted average yield (1)					4.26	%		3.94	%		4.04	%		4.02	%
Mortgage-backed securities
Amortized cost	$	-		$	-		$	692		$	364		$	1,056
Weighted average yield		-	%	-		%		4.71	%		3.97	%		4.46	%
Other bonds
Amortized cost	$	-		$	3,469		$	1,026			-		$	4,495
Weighted average yield		-	%		2.82	%		6.88	%		-	%		3.75	%
Total amortized cost	$	-		$	4,068		$	4,905		$	4,137		$	13,110
Total fair value	$	-		$	4,193		$	5,079		$	4,135		$	13,407
Weighted average yield		-	%		3.03	%		4.66	%		4.03	%

(1) Yields on tax-exempt securities were adjusted to a tax-equivalent basis using a 34% rate.

Deposits

The Bank’s primary source of funds is retail deposit accounts held primarily by individuals and businesses within our market area. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposits consist of interest bearing and non-interest bearing checking accounts, money market, savings and certificate of deposit accounts and also IRA accounts. The Bank’s customer relationship strategy focuses on relationship banking for retail and business customers to enhance their overall experience with us. Deposit activity is influenced by state and local economic activity, changes in interest rates, internal pricing decisions and competition. The Bank uses traditional means of advertising our deposit products and generally do not solicit retail deposits from outside its market area. Deposits are primarily obtained from the areas surrounding our branch locations.

The following table sets forth the distribution of average deposits by major category and the average rate paid in each year as applicable:

Distribution of Average Deposits

	Years Ended December 31,
	2010					2009					2008
(Dollars in thousands)	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
Non-interest bearing demand deposits	$	7,583		0.00	%	$	8,653		0.00	%	$	7,433		0.00	%
Interest bearing demand deposits		12,181		0.93	%		10,386		1.24	%		10,533		1.76	%
Savings and money market deposits		53,565		1.13	%		37,149		1.48	%		37,524		2.19	%
Time deposits		57,266		2.20	%		60,305		3.01	%		42545		3.90	%
Total deposits	$	130,595				$	116,943				$	99,900

Maturities of Time Deposits of $100,000 and Over

The following table is a summary of time deposits of $100,000 or more by remaining maturities as of December 31, 2010:

(Dollars in thousands)	Amount		Percent
Three months or less	$	2,026		11.06	%
Three to six months		1,668		9.11
Six to twelve months		3,143		17.15
Over twelve months		11,485		62.68
Total	$	18,323		100.00	%

Total deposits were $136.3 million at December 31, 2010 compared to total deposits of $124.1 million at December 31, 2009 and total deposits of $99.2 million at December 31, 2008.

Short-Term Borrowings

The Bank, as part of its operating strategy, utilizes advances from the FHLBank of Pittsburgh (“FHLB”) as an alternative to retail deposits to fund its operations. The Bank has a line-of-credit with FHLBank of Pittsburgh for short-term borrowings varying from one day to three years. Borrowings under this line of credit are secured by qualified assets in the form of a blanket lien. Interest paid on these short-term borrowings varies based on interest rate fluctuations. At both December 31, 2010 and 2009, we had not utilized this credit facility. At December 31, 2008, the line had a balance of $7,648,000.

The following table sets forth information regarding FHLBank of Pittsburgh overnight advances during the years ended.

(Dollars in thousands)	2010			2009			2008
Maximum amount outstanding at any month end	$	-		$	3,985		$	7,648
Average amount outstanding	$	-		$	909		$	1,172
Weighted average interest rate		-	%		1.08	%		1.69	%
Balance outstanding at end of period	$	-		$	-		$	7,648
Weighted average interest rate at end of period		-	%		-	%		0.59	%

REGULATION AND SUPERVISION

Regulatory Restructuring Legislation

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), signed by the President on July 21, 2010, provides for the regulation and supervision of savings and loan holding companies like the Company to be transferred from the Office of Thrift Supervision to the Federal Reserve Board, which currently supervises bank holding companies. The Office of Thrift Supervision will be eliminated. The transfer will occur one year from the July 21, 2010 enactment of the Dodd-Frank Act, subject to a possible six month extension. The Dodd-Frank Act also provides for the creation of a new agency, the Consumer Financial Protection Bureau, as an independent bureau of the Federal Reserve Board, to take over the implementation of federal consumer financial protection and fair lending laws from the depository institution regulators. However, institutions of $10 billion or fewer in assets will continue to be examined for compliance with such laws and regulations by, and subject to the primary enforcement authority of, the prudential regulator rather than the Consumer Financial Protection Bureau.

In addition to eliminating the Office of Thrift Supervision and creating the Consumer Financial Protection Bureau, the Dodd-Frank Act, among other things, requires changes in the way that institutions are assessed for deposit insurance, mandates the imposition of consolidated capital requirements on savings and loan holding companies, requires that originators of securitized loans retain a percentage of the risk for the transferred loans, directs the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contains a number of reforms related to mortgage originations. Many of the provisions of the Dodd-Frank Act contain delayed effective dates and/or require the issuance of regulations. As a result, it will be some time before their impact on operations can be assessed by management. However, there is a significant possibility that the Dodd-Frank Act will, at a minimum, result in an increased regulatory burden and higher compliance, operating, and possibly, interest costs for the Company and the Bank.

Regulation of Pennsylvania Savings Banks

General. As a Pennsylvania state chartered savings bank with deposits insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”), North Penn Bank is subject to extensive regulation and examination by the Pennsylvania Department of Banking and by the FDIC, which insures its deposits to the maximum extent permitted by law. The federal and state laws and regulations applicable to banks regulate, among other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The laws and regulations governing North Penn Bank generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. This regulatory structure also gives the federal and state banking agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Pennsylvania Department of Banking, the FDIC or the United States Congress, could have a material impact on us and our operations.

Federal law provides the federal banking regulators, including the FDIC and the Office of Thrift Supervision, with substantial enforcement powers. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders, and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

Pennsylvania Savings Bank Law. The Pennsylvania Banking Code (the “Code”) contains detailed provisions governing the organization, location of offices, rights and responsibilities of trustees, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of North Penn Bank and its affairs. The Code delegates extensive rule-making power and administrative discretion to the Pennsylvania Department of Banking so that the supervision and regulation of state chartered savings banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.

The Code also provides state-chartered savings banks with all of the powers enjoyed by federal savings and loan associations, subject to regulation by the Pennsylvania Department of Banking. The Federal Deposit Insurance Act, however, prohibits a state-chartered bank from making new investments or loans or becoming involved in activities as principal and making equity investments which are not permitted for national banks unless (1) the FDIC determines the activity or investment does not pose a significant risk of loss to the Deposit Insurance Fund and (2) the bank meets all applicable capital requirements. Accordingly, the additional operating authority provided to us by the Code is significantly restricted by the Federal Deposit Insurance Act.

Federal Deposit Insurance. North Penn Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned, and certain adjustments specified by FDIC regulations. Assessment rates currently range from seven to 77-1/2 basis points of assessable deposits. No institution may pay a dividend if in default of the federal deposit insurance assessment. The Dodd-Frank Act requires the FDIC to amend its procedures to base assessments on average consolidated total assets less average tangible equity rather than deposits. On February 7, 2011, the FDIC issued final rules, effective April 1, 2011, implementing changes to the assessment rules resulting from the Dodd-Frank Act. Initially, the base assessment rates will range from 2.5 to 45 basis points. The rate schedules will automatically adjust in the future when the Deposit Insurance Fund reaches certain milestones.

The FDIC may adjust the scale uniformly from one quarter to the next, except that no adjustment can deviate more than three basis points from the base scale without notice and comment. No institution may pay a dividend if in default of the federal deposit insurance assessment

The FDIC imposed on all insured institutions a special emergency assessment of five basis points of total assets minus tier 1 capital, as of June 30, 2009 (capped at ten basis points of an institution’s deposit assessment base), in order to cover losses to the Deposit Insurance Fund. That special assessment was collected on September 30, 2009. The FDIC provided for similar assessments during the final two quarters of 2009, if deemed necessary. However, in lieu of further special assessments, the FDIC required insured institutions to prepay estimated quarterly risk-based assessments for the fourth quarter of 2009 through the fourth quarter of 2012. The estimated assessments, which include an assumed annual assessment base increase of 5%, were recorded as a prepaid expense asset as of December 30, 2009. As of December 31, 2009, and each quarter thereafter, a charge to earnings is recorded for each regular assessment with an offsetting credit to the prepaid asset. Due to the recent difficult economic conditions, deposit insurance per account owner has been raised to $250,000. That coverage was made permanent by the Dodd-Frank Act. In addition, the FDIC adopted an optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest-bearing transaction accounts would receive unlimited insurance coverage until June 30, 2010, subsequently extended to December 31, 2010, and certain senior unsecured debt issued by institutions and their holding companies between October 13, 2008 and October 31, 2009 would be guaranteed by the FDIC through June 30, 2012, or in some cases, December 31, 2012. The Bank opted to participate in the unlimited noninterest- bearing transaction account coverage and the Bank and the Company opted to participate in the unsecured debt guarantee program. The Dodd-Frank Act extended the unlimited coverage for certain noninterest-bearing transaction accounts from January 1, 2011 until December 31, 2012 without the opportunity for opt out.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC and the FDIC has recently exercised that discretion by establishing a long range fund ratio of 2%.

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or regulatory condition imposed in writing. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance

Regulatory Capital Requirements. The FDIC has promulgated capital adequacy requirements for state-chartered banks that, like us, are not members of the Federal Reserve System. At December 31, 2010, we exceeded all regulatory capital requirements and were classified as “well capitalized.”

The FDIC’s capital regulations establish a minimum 3% Tier 1 leverage capital requirement for the most highly rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively increases the minimum Tier 1 leverage ratio for such other banks to 4% to 5% or more. Under the FDIC’s regulation, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System. Tier 1 or core capital is defined as the sum of common stockholders’ equity (including retained earnings), non-cumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain purchased mortgage servicing rights and purchased credit card relationships.

The FDIC’s regulations also require that state-chartered, non-member banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of total capital (which is defined as Tier 1 capital and supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier 1 capital for the risk-based standards are the same as those for the leverage capital requirement. The components of supplementary (Tier 2) capital include cumulative perpetual preferred stock, mandatory subordinated debt, perpetual subordinated debt, intermediate-term preferred stock, up to 45% of unrealized gains on equity securities and a bank’s allowance for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital that may be included in total capital is limited to 100% of Tier 1 capital.

A bank that has less than the minimum leverage capital requirement is subject to various capital plan and activities restriction requirements. The FDIC’s regulations also provide that any insured depository institution with a ratio of Tier 1 capital to total assets that is less than 2% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the Federal Deposit Insurance Act and could be subject to potential termination of deposit insurance.

We are also subject to minimum capital requirements imposed by the Pennsylvania Department of Banking on Pennsylvania-chartered depository institutions. Under the Pennsylvania Department of Banking’s capital regulations, a Pennsylvania bank or savings bank must maintain a minimum leverage ratio of Tier 1 capital (as defined under the FDIC’s capital regulations) to total assets of 4%. In addition, the Pennsylvania Department of Banking has the supervisory discretion to require a higher leverage ratio for any institutions based on the institution’s substandard performance in any of a number of areas. We were in compliance with both the FDIC and the Pennsylvania Department of Banking capital requirements as of December 31, 2010.

Restrictions on Dividends. The Code states, in part, that dividends may be declared and paid only out of accumulated net earnings and may not be declared or paid unless surplus (retained earnings) is at least equal to contributed capital. The Bank has not declared or paid any dividends that have caused its retained earnings to be reduced below the amount required. Finally, dividends may not be declared or paid if the Bank is in default in payment of any assessment due the FDIC.

Affiliate Transaction Restrictions. Federal laws strictly limit the ability of banks to make loans to, and to engage in certain other transactions with (collectively, “covered transactions”), their affiliates, including their bank holding companies and the holding companies’ nonbank affiliates. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of a bank’s capital and surplus, and the aggregate amount of covered transactions with all affiliates is limited to 20% of capital and surplus. Further, loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that all transactions between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.

The Sarbanes-Oxley Act of 2002 generally prohibits a company from making loans to its executive officers and directors. However, that act contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, North Penn Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The law restricts both the individual and aggregate amount of loans North Penn Bank may make to insiders based, in part, on North Penn Bank’s capital position and requires certain Board approval procedures to be followed. Such loans must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. There are additional restrictions applicable to loans to executive officers.

Federal Home Loan Bank System. We are a member of FHLBank of Pittsburgh, which is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank. As a member, we are required to purchase and maintain stock in FHLBank of Pittsburgh. At December 31, 2010, we were in compliance with this requirement.

Loans to One Borrower. Under Pennsylvania law, savings banks have, subject to certain exemptions, lending limits to one borrower in an amount equal to 15% of the institution’s capital accounts. An institution’s capital account includes the aggregate of all capital, surplus, undivided profits, capital securities and general reserves for loan losses. As of December 31, 2010, our loans-to-one borrower limitation was $2,935,800 and we were in compliance with such limitation.

Regulation of Holding Companies

General. Federal law allows a state savings bank that qualifies as a “qualified thrift lender” to elect to be treated as a savings association for purposes of the savings and loan holding company provisions of federal law. Such election allows its holding company to be regulated as a savings and loan holding company by the Office of Thrift Supervision rather than as a bank holding company by the Federal Reserve Board. The Bank has elected to be treated as a savings association so that the Company will be regulated as a savings and loan holding company under federal law. As such, the Company has registered with the Office of Thrift Supervision and is subject to Office of Thrift Supervision regulations, examinations, supervision, reporting requirements and regulations concerning corporate governance and activities. In addition, the Office of Thrift Supervision has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the Bank.

The Dodd-Frank Act regulatory restructuring transfers to the Federal Reserve Board the responsibility for regulating and supervising savings and loan holding companies. That will occur one year from the July 21, 2010 effective date of the Dodd-Frank Act, subject to a possible six month extension.

As a unitary savings and loan holding company, the Company is able to engage only in activities permitted to a financial holding company and those permitted for a multiple savings and loan holding company, which includes non-banking activities that the Federal Reserve Board has determined to be permissible for bank holding companies.

Limitation on Capital Distributions. Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the Office of Thrift Supervision is required before any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if, like the Bank, it is a subsidiary of a holding company. If the Bank’s capital were ever to fall below its regulatory requirements or regulators notified it that it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution that would otherwise be permitted by the regulation if the agency determines that such distribution would constitute an unsafe or unsound practice.

Qualified Thrift Lender Test. In order for the Company to be regulated by the Office of Thrift Supervision as a savings and loan holding company (rather than by the Federal Reserve Board as a bank holding company) the Bank must meet a qualified thrift lender test. Under the test, the Bank is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period. Education loans, credit card loans and small business loans may be considered “qualified thrift investments.” As of December 31, 2009, the Bank met the qualified thrift lender test.

Capital. Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. Instruments such as cumulative preferred stock and trust preferred securities will no longer be includable as Tier 1 capital as is currently the case with bank holding companies. Instruments issued by May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less. There is a five-year transition period (from the July 21, 2010 effective date of the Dodd-Frank Act) before the capital requirements will apply to savings and loan holding companies.

Source of Strength. The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress

Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be submitted to the Office of Thrift Supervision if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company or savings association. An acquisition of “control” can occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or savings institution or as otherwise defined by the Office of Thrift Supervision. Under the Change in Bank Control Act, the Office of Thrift Supervision has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company.

ITEM 1A. Risk Factors

The economic recession could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings.

Our business activities and earnings are affected by general business conditions in the United States and in our local market area. These conditions include short-term and long-term interest rates, inflation, unemployment levels, monetary supply, consumer confidence and spending, fluctuations in both debt and equity capital markets, and the strength of the economy in the United States generally and in our market area in particular. The national economy has recently experienced a recession, with rising unemployment levels, declines in real estate values and erosion in consumer confidence. Dramatic declines in the U.S. housing market over the past few years, with falling home prices and increasing foreclosures, have negatively affected the performance of mortgage loans and resulted in significant write-downs of asset values by many financial institutions. A prolonged or more severe economic downturn, continued elevated levels of unemployment, further declines in the values of real estate, or other events that affect household and/or corporate incomes could impair the ability of our borrowers to repay their loans in accordance with their terms. Nearly all of our loans are secured by real estate or made to businesses in Northeast Pennsylvania. As a result of this concentration, a prolonged or more severe downturn in the local economy could result in significant increases in nonperforming loans, which would negatively impact our interest income and result in higher provisions for loan losses, which would hurt our earnings. The economic downturn could also result in reduced demand for credit or fee-based products and services, which would hurt our revenues.

Our emphasis on commercial lending may expose us to increased lending risks.

These types of loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Commercial business loans expose us to additional risks since they typically are made on the basis of the borrower’s ability to make repayments from the cash flow of the borrower’s business and are secured by non-real estate collateral that may depreciate over time. In addition, some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to a greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.

The unseasoned nature of our commercial loan portfolio may expose us to increased lending risks.

A significant amount of our commercial and multi-family real estate loans and commercial business loans are unseasoned, meaning that they were originated recently. Our limited experience with these loans does not provide us with a significant payment history pattern with which to judge future collectability. Furthermore, these loans have not been subjected to unfavorable economic conditions. As a result, it may be difficult to predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our expectations, which could adversely affect our future performance.

Changes in interest rates could reduce our net interest income and earnings.

Our net interest income is the interest we earn on loans and investments less the interest we pay on our deposits and borrowings. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets.

Our efforts to increase core deposits may not be successful, which would limit our ability to grow.

Our goal is to fund growth of interest-earning assets by attracting core deposits, which we define as demand, savings and money market deposits. Our primary markets for deposits are the communities in which our offices are located. We face significant competition for core deposits from other financial institutions. If we are unable to attract core deposits, we will not be able to increase our interest-earning assets unless we use other funding sources, such as certificates of deposit or borrowed funds, which generally require us to pay higher interest rates compared to core deposits. In addition, competition may require us to pay higher rates on core deposits. Many institutions currently offer high yielding checking, savings and/or money market accounts. We may have to offer similar high yielding accounts in order to attract core deposits, which would contribute to the compression of our interest rate spread and net interest margin, which would have a negative effect on our profitability. We currently do not have any plans to expand our market area for deposits.

Increased and/or special FDIC assessments will hurt our earnings.

The recent economic recession has caused a high level of bank failures, which has dramatically increased FDIC resolution costs and led to a significant reduction in the balance of the Deposit Insurance Fund. As a result, the FDIC has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. Increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the FDIC imposed a special assessment on all insured institutions. Our special assessment, which was reflected in earnings for the quarter ended June 30, 2009, was $67,000. In lieu of imposing an additional special assessment, the FDIC required all institutions to prepay their assessments for all of 2010, 2011 and 2012, which for us totaled $645,000. Additional increases in the base assessment rate or additional special assessments would negatively impact our earnings.

Determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires significant estimates, and actual losses may vary from current estimates.

The Bank maintains an allowance for loan losses to provide for loans in its portfolio that may not be repaid in their entirety. The determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires us and the Bank to make significant estimates of current credit risks and future trends, all of which may undergo material changes.

In evaluating the adequacy of the Bank’s allowance for loan losses, we consider numerous quantitative factors, including our historical charge-off experience, growth of our loan portfolio, changes in the composition of our loan portfolio and the volume of delinquent and classified loans. In addition, we use information about specific borrower situations, including their financial position and estimated collateral values, to estimate the risk and amount of loss for those borrowers. Finally, we consider many qualitative factors, including general and economic business conditions, duration of the current business cycle, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters, which are by nature subjective and fluid. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding the Bank’s borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors. In considering information about specific borrower situations, our analysis is subject to the risk that we are provided inaccurate or incomplete information. Because of the degree of uncertainty and susceptibility of these factors to change, the Bank’s actual losses may vary from our current estimates.

Additionally, bank regulators periodically review the Bank’s allowance for loan losses and may require an increase in the provision for loan losses or recognize loan charge-offs based upon their judgments, which may be different from ours. Any increase in the Bank’s allowance for loan losses or loan charge-offs required by these regulatory authorities may adversely affect our operating results.

Because most of our borrowers are located in Northeast Pennsylvania, a downturn in the local economy or a decline in local real estate values could cause increases in nonperforming loans, which could hurt our profits.

Substantially all of our loans are secured by real estate or made to businesses in Northeast Pennsylvania. As a result of this concentration, a downturn in the local economy could cause significant increases in nonperforming loans, which would hurt our profits. A decline in real estate values could cause some of our mortgage loans to become inadequately collateralized, which would expose us to a greater risk of loss. Additionally, a decline in real estate values could adversely impact our portfolio of commercial real estate loans and could result in a decline in the origination of such loans.

Strong competition within our market area could hurt our profits and inhibit growth.

We face intense competition in making loans, attracting deposits and hiring and retaining experienced employees. This competition has made it more difficult for us to make new loans and attract deposits. Price competition for loans and deposits sometimes results in us charging lower interest rates on our loans and paying higher interest rates on our deposits, which reduces our net interest income. Competition also makes it more difficult and costly to attract and retain qualified employees. Many of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer products and services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area.

We are dependent upon the services of our management team.

We rely heavily on our President and Chief Executive Officer, Frederick L. Hickman and our senior executives Thomas J. Dziak and Thomas A. Byrne. The loss of our chief executive officer or other senior executive officers could have a material adverse impact on our operations because, as a small community bank, we have fewer management-level personnel that have the experience and expertise to readily replace these individuals. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations. We have employment agreements with Messrs. Hickman, Dziak and Byrne. We do not maintain key man life insurance for these executives.

Changes in accounting standards could impact reported earnings

Current accounting and tax rules, standards, policies and interpretations influence the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time. Events that may not have a direct impact on us, such as bankruptcy of major U.S. companies, have resulted in legislators, regulators, and authoritative bodies, such as the Financial Accounting Standards Board, the Securities and Exchange Commission, the Public Company Accounting Oversight Board and various taxing authorities, responding by adopting and/or proposing substantive revision to laws, regulations, rules, standards, policies and interpretations. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. A change in accounting standards may adversely affect reported financial condition and results of operations.

The merger agreement with Norwood Financial may be terminated in accordance with its terms and the merger may not be completed.

The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the merger. Those conditions include: approval of the merger agreement by the Company’s shareholders, regulatory approvals, absence of orders prohibiting the completion of the merger, approval of the shares of Norwood Financial common stock to be issued to the Company’s shareholders for listing on the NASDAQ Global Market, the continued accuracy of the representations and warranties by both parties and the performance by both parties of their covenants and agreements, and the receipt by both parties of legal opinions from their respective tax counsels.

If the merger agreement is terminated, there may be various consequences, including:

•

The Company’s businesses may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger; and

•

the market price of the Company’s common stock might decline to the extent that the current market price reflects a market assumption that the merger will be completed.

If the merger agreement is terminated and the Company’s board of directors seeks another merger or business combination, North Penn shareholders cannot be certain that North Penn will be able to find a party willing to offer equivalent or more attractive consideration than the consideration Norwood Financial has agreed to provide in the merger.

The merger agreement limits North Penn’s ability to pursue alternatives to the merger.

The merger agreement contains “no-shop” provisions that, subject to limited exceptions, limit the Company’s ability to initiate, solicit, encourage or knowingly facilitate any inquiries or competing third-party proposal, or engage in any negotiations, or provide any confidential information, or have any discussions with any person relating to a proposal to acquire all or a significant part of North Penn. In addition, the Company has agreed to pay Norwood Financial a termination fee in the amount of $1.125 million in the event that Norwood or the Company terminates the merger agreement for certain reasons. These provisions might discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of the Company from considering or proposing that acquisition even if it were prepared to pay consideration with a higher per share market price than that proposed in the merger, or might result in a potential competing acquiror proposing to pay a lower per share price to acquire the Company than it might otherwise have proposed to pay. Until the merger agreement is approved by the Company’s shareholders, the Company can consider and participate in discussions and negotiations with respect to an alternative unsolicited bona fide acquisition proposal (subject to its obligation to pay a termination fee under certain circumstances) so long as the board of directors determines in good faith (after consultation with legal counsel and its financial advisor) that it is legally necessary to do so to comply with its fiduciary duties to the Company’s under Pennsylvania law and that such alternative acquisition proposal constitutes a superior proposal. The Company has agreed to keep Norwood Financial appraised of developments, discussions and negotiations relating to any such acquisition proposal.

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

On July 21, 2010, the President signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act restructures the regulation of depository institutions. Savings and loan holding companies, including the Company, will be regulated by the Board of Governors of the Federal Reserve System. The Dodd-Frank Act also creates a new federal agency to administer consumer protection and fair lending laws, a function that is now performed by the depository institution regulators. The Dodd-Frank Act also will impose consolidated capital requirements on savings and loan holding companies effective in five years, which will limit our ability to borrow at the holding company level and invest the proceeds from such borrowings as capital in the Bank that could be leveraged to support additional growth. The Dodd-Frank Act contains various other provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased regulatory burden and compliance costs.

ITEM 2. PROPERTIES

The Bank currently conducts its business through its five full-service banking offices in Scranton, Stroudsburg, Clarks Summit and Effort, Pennsylvania. The Bank owns all of its offices, except for Clarks Summit, which is subject to a renewable lease that expires in 2011. The net book value of the land, buildings, furniture, fixtures and equipment owned by the Company was $3.8 million as of December 31, 2010.

ITEM 3. LEGAL PROCEEDINGS

We are periodically parties to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to our business. We do not believe that there is any pending or threatened proceeding against us which, if determined adversely, would have a material effect on our business or financial position.

ITEM 4. (REMOVED AND RESERVED)

PART II

ITEM 5.

MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND REGISTRANT’S ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is quoted on the OTC Bulletin Board under the symbol “NPBP.OB”. An active trading market does not currently exist for our common stock.

The following table sets forth the high and low bid information for the periods indicated.

2010	Dividends		High		Low		Close
First Quarter	$	0.03	$	10.00	$	9.10	$	9.40
Second Quarter*	$	0.09	$	11.06	$	9.35	$	10.10
Third Quarter	$	0.04	$	10.95	$	9.25	$	10.75
Fourth Quarter	$	0.04	$	17.50	$	10.55	$	17.50

* Second Quarter 2010 dividend included a $0.05 per share special dividend.

2009	Dividends		High		Low		Close
First Quarter	$	0.03	$	8.00	$	6.00	$	6.00
Second Quarter	$	0.03	$	8.80	$	6.00	$	8.55
Third Quarter	$	0.03	$	9.25	$	8.55	$	9.25
Fourth Quarter	$	0.03	$	9.25	$	8.75	$	9.25

The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. As of March 24, 2010, there were approximately 387 registered holders of record of our common stock.

Registrar and Transfer, Inc. serves as transfer agent and registrar for our common stock.

The Company did not repurchase any shares of its common stock in the quarter ended December 31, 2010.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable as the Company is a smaller reporting company.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Overview

The following presents a review of North Penn Bancorp’s results of operations and financial condition. This information should be read in conjunction with its consolidated financial statements and the accompanying notes to financial statements. The Company’s consolidated earnings are derived primarily from the operations of its wholly owned savings bank subsidiary, North Penn Bank, and to a lesser degree its other subsidiaries

The Bank is a wholly owned subsidiary of the Company, which has no material operations other than ownership of the Bank. The Bank conducts community banking activities by accepting deposits and making loans in our market area. The Bank’s lending products include commercial loans and mortgages, and lines of credit, consumer and home equity loans, and residential mortgages on single family and multi family dwellings. The Bank maintains an investment portfolio of municipal, U.S. government and investment grade corporate bonds to manage its liquidity and interest rate risk. The Bank’s loan and investment portfolios are funded with deposits as well as collateralized borrowings from FHLBank of Pittsburgh, secured by a blanket lien on the Bank’s loans.

Our earnings come primarily from net interest income, which is the difference between what we earn on loans and investments and what we pay for our deposits and borrowings. The net interest income is impacted buy our loan loss provision, other income, and other expenses.

Critical Accounting Matters

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation of the deferred tax assets.

We consider the allowance for loan losses to be a critical accounting policy. The reserve for loan and lease losses represents our management’s estimate of probable losses inherent in the loan and lease portfolio and the establishment of a reserve that is sufficient to absorb those losses. In determining an adequate reserve, our management makes numerous judgments, assumptions, and estimates based on continuous review of the loan and lease portfolio, estimates of client performance, collateral values, and disposition, as well as historical loss rates and expected cash flows. In assessing these factors, our management benefits from lengthy professional experiences with credit decisions and related outcomes. Nonetheless, if our management’s underlying assumptions prove to be inaccurate, the reserve for loan and lease losses would have to be adjusted. See Part II, Item 8, Financial Statements and Supplementary Data --- Note 1 of Notes to Consolidated Financial Statements for additional information on management’s evaluation of the adequacy for allowance for loan loss reserve

We use the asset and liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed continually as regulatory and business factors change. Management’s recording of deferred tax assets and liabilities and the need for a valuation allowance is made based on information available to the Bank at the time. In particular, management evaluates the recoverability of deferred tax assets based on the ability of the Bank to generate future profits to utilize such benefits. Management employs budgeting and periodic reporting processes to continually monitor progress. These factors lower the inherent risk in the assumption of future profits. Historically, the Bank has had sufficient profits for tax recovery.

Statement of Changes in Financial Condition

General. Our assets increased $7.6 million, or 4.9% to $164.0 million at December 31, 2010 compared to $156.3 million at December 31, 2009. An increase in loans outstanding combined with an increase in cash and cash equivalents were the primary reasons for the growth in assets. Liabilities increased $7.3 million or 5.3% to $144.4 million at December 31, 2010 as compared with $137.1 million at December 31, 2009. The primary reason for the increase was an increase in deposits. Stockholders’ equity increased $302,000 or 1.6% to $19.6 million at December 31, 2010 as compared to $19.3 million at December 31, 2009.

Assets. Cash and cash equivalents increased $6.3 million or 52.7% to $18.2 million at December 31, 2010 as compared to $11.9 million at December 31, 2009. The primary reason for the increase in cash and cash equivalents was due to liquidity caused by the maturities of investments and increased deposits at December 31, 2010.

Gross loans, net of loans held for sale, increased $5.7 million or 5.0% to $121.8 million at December 31, 2010 as compared with $116.0 million at December 31, 2009. Commercial mortgages increased $12.2 million, or 20.2%, from $60.3 million at December 31, 2009, to $72.4 million at December 31, 2010. Commercial loans decreased $219,000 or 6.5% to $3.1 million at December 31, 2010 from $3.4 million at December 31, 2009. We continue to implement our strategy of diversifying the mix within our loan portfolio by increasing commercial real estate and commercial business loans despite difficult economic conditions.

Our residential mortgage portfolio decreased $4.6 million or 9.8%, to $42.8 million at December 31, 2010, from $47.4 million at December 31, 2009. Reduced mortgage demand by consumers contributed to the decrease along with our selling mortgage loans into the secondary market. Consumer loans decreased $1.5 million from $3.7 million at December 31, 2009 to $2.2 million at December 31, 2010.

The investment portfolio decreased $4.8 million or 24.8%, to $14.6 million at December 31, 2010, from $19.4 million at December 31, 2009. The decrease was primarily the result of reductions in mortgage-backed securities of $1.6 million, a decrease in the US Agency securities of $1.5 million and a $1.3 million decrease in state and political subdivision securities. We intend to maintain a level of investment securities that is sufficient to maintain pledging and collateralized borrowing requirements and also provide a funding source for our growing loan portfolio.

The Company 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. In 2009, after our review, we concluded that two securities totaling $38,000 were impaired. OTTI losses of $38,000 were incurred. During 2010, our review identified two securities totaling $23,000 that were impaired. OTTI losses of $23,000 were incurred for 2010. In accordance, with FASB ASC 320, the impairment was deemed credit related and run entirely though the income statement.

Deposits. Total deposits increased $12.3 million, or 9.9%, to $136.3 million at December 31, 2010, from $124.1 million at December 31, 2009. The increase reflects, in part, our continuing efforts to attract and maintain deposits to utilize as a primary source of funds to fuel our growth in loans. Core deposits, which consist of all deposits other than certificates of deposit, increased $22.6 million or 38.8% to $80.1 million at December 31, 2010 as compared with $58.1 million at December 31, 2009. Time deposit products, which include certificates of deposit, decreased $10.3 million, or 15.7%, from $65.9 million at December 31, 2009, to $55.6 million at December 31, 2010. 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.

Borrowings. Borrowings were $7.0 million at December 31, 2010, a $5.0 million or 41.7% decrease over $12.0 million at December 31, 2009. In July 2010, we paid off a maturing long term note of $5.0 million. The annual percentage rate of this note was 6.19%. As of December 31, 2010, we had one outstanding loan, a line of credit and a letter of credit with FHLBank of Pittsburgh. Our line of credit is available up to $15.0 million at an interest rate equal to the current overnight rate. This line is a source of liquidity which is used to fund our loan demand when deposit volume is inadequate. The outstanding loan at FHLB of Pittsburgh has a principal balance of $7.0 million with a rate of 4.34%. This note matures July 13, 2015 and carries a prepayment penalty equal to a percentage of the remaining interest payments.

Equity. Stockholders’ equity increased $302,000 to $19.6 million at December 31, 2010 as compared to $19.3 million at December 31, 2009. The increases in net income and improvement in accumulated other comprehensive loss were offset by our continuing purchases of treasury stock and payment of cash dividends. During 2010, we paid a special dividend of $0.05 per share and also increased the quarterly dividend from $0.03 to $0.04 per share.

In 2008, a stock repurchase plan was approved and commenced whereby up to 10% of the company’s common stock will be purchased in the open market. In addition, on April 28, 2009, the Board of Directors authorized completion of the 2008 plan (29,657 shares) and the repurchase of up to 142,341 shares of our outstanding common stock, or 10% of outstanding shares. The Company completed its second repurchase authorization in June 2010. As of June 30, 2010, all 142,341 shares had been purchased at an average cost per share of $9.50.

Comparison of Results of Operations for the Years Ended December 31, 2010 and 2009

General. For the year ended December 31, 2010, we recorded net income of $714,000, a decrease of $73,000 or 9.3% compared to net income of $787,000 for the year ended December 31, 2009.

Net Interest Income. Our principal source of revenue is 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 and margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources and interest rate fluctuations. Other factors include prepayment risk on mortgage and investment-related assets and the composition and maturity of earning assets and interest-bearing liabilities. Our primary interest earning assets are loans, while deposits make up the majority of our interest bearing liabilities. Loans typically generate more interest income than investment securities with similar maturities. In the current market, wholesale funding sources cost less than certain client deposits; however, ordinarily funding from client deposits costs less than wholesale funding sources. Factors, such as general economic activity, Federal Reserve Board monetary policy and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize the mix of assets and funding and the net interest income and margin.

Net interest income increased $795,000, or 17.5%, to $5.3 million for the year ended December 31, 2010, compared to $4.5 million for the year ended December 31, 2009. Interest income increased $133,000 for the year ended December 31, 2010 to $7.8 million compared to $7.7 million for the year ended December 31, 2009. Interest expense decreased $663,000, or 21.2%, to $2.5 million at December 31, 2010 from $3.1 million at December 31, 2009, due to lower interest rates in deposits. Consequently, the interest rate spread on a fully tax equivalent basis increased to 3.39% for the year ended December 31, 2010, compared to 2.95% for 2009. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 114.59% for the year ended December 31, 2010, from 116.97% for the year ended December 31, 2009.

Interest Income. For the year ended December 31, 2010 total interest income increased $133,000 to $7.8 million as compared to $7.7 million for the same period in 2009. Increased loan volume partially offset a 29 basis point decrease in fully tax equivalent total earning asset yield. For the year ending December 31, 2010, average interest earning assets increased $10.9 million or 7.7% to $152.1 million as compared with $141.2 million for the comparable period in 2009. The primary reason for the increase in average interest earning assets was growth in the average balance of loans. For the year ended December 31, 2010, the total average loan balances increased $10.7 million or 9.8%, over the year ended 2009.

Total loan income for the year ended December 31, 2010 was $7.1 million, a $257,000 or 3.7% increase over the comparable 2009 period.

For 2010, total average investment securities decreased $2.2 million or 11.5% as compared to 2009. The primary reason for the decrease was that maturing investments were used to help fund growth in our lending portfolio and assure liquidity.

Interest Expense. Interest expense for the year ended December 31, 2010 totaled $2.5 million. This represents a decrease of $662,000, or 21.2%, for the year compared to $3.1 million in 2009. The primary reason for the increase was a 73 basis point decline in yield on interest bearing liabilities between 2010 and 2009. The decline in yield partially offset growth in total interest bearing liabilities.

For the year ended December 31, 2010, average interest bearing liabilities increased $12.0 million or 9.9% to $132.0 million as compared with $120.7 million for 2009. The primary reason for the growth in average interest bearing liabilities was the growth in average savings and money market deposits of $16.4 million, or 44.2%, to $53.6 million for the year ended December 31, 2010. The primary reason for the increase was the Company’s effort to increase core deposits.

The average balance in other borrowings decreased $3.2 million, or 24.6%, to $9.7 million at December 31, 2010 from $12.9 million for the year ended December 31, 2009. The decrease was the result of the Company paying off a $5.0 million advance in July.

The following table presents information regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income and dividends from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing annual income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of the below table, average balances have been calculated using the average of daily balances, and non-accrual loans are included in average balances; however, accrued interest income has been excluded from these loans.

Average Balance, Interest Income and Expense, Average Yield and Rates

	Years Ended December 31,
	2010								2009								2008
(Dollars in thousands)	Average Balance			Interest Income/ Expense		Average Interest Rate			Average Balance			Interest Income/ Expense		Average Interest Rate			Average Balance			Interest Income/ Expense		Average Interest Rate
Interest Earning Assets:
Loans:
Commercial	$	3,543		$	170		4.80	%	$	2,302		$	138		5.99	%	$	1,188		$	95		8.00	%
Real estate mortgages		114,019			6,754		5.92			102,942			6,389		6.21			94,058			6,248		6.64
Consumer		2,885			227		7.87			4,496			351		7.81			6,297			479		7.61
Total loans		120,448			7,151		5.94			109,740			6,878		6.27			101,543			6,822		6.72

Investment securities:
U.S. government securities		937			25		2.67			5,838			214		3.67			6,383			252		3.95
Municipal securities (1)		8,302			477		5.75			8,622			474		5.50			7,774			440		5.66
Other securities		6,846			256		3.74			3,891			197		5.06			2,279			141		6.19
Equities		1,133			1		0.09			1,100			1		0.08			999			42		4.10
Total securities		17,218			759		4.41			19,451			886		4.86			17,435			875		5.02

Equity securities at cost		1,303			51		3.91			1,591			47		2.95			827			42		5.08
Deposits in banks		2,650			6		0.23			2,887			1		0.03			728			7		0.96
Fed funds sold		10,486			20		0.19			7,569			12		0.16			4,325			95		2,20
Total interest earning assets		152,105			7,987		5.25			141,238			7,824		5.54			124,858			7,841		6.28

Non-interest earning assets:
Cash and due from banks		868								2,886								1,430
Other assets		9,278								6,953								2,910
Less: allowance for loan losses		(1,585	)							(1,232	)							(1,192	)
Total non-interest earning assets		8,561								8,607								3,148
Total assets	$	160,666							$	149,845							$	128,006

Liabilities and stockholders’ equity
Interest bearing liabilities
Deposits:
Interest bearing demand	$	12,181			113		0.93		$	10,386			129		1.24		$	10,533			185		1.76
Savings and money market		53,565			605		1.13			37,149			551		1.48			37,524			822		2.19
Time deposits		57,266			1,262		2.20			60,305			1,815		3.01			42,545			1,661		2.94
Total interest bearing deposits		123,012			1,980		1.61			107,840			2,495		2.31			90,602			2,668		2.94
Other borrowings		9,727			483		4.97			12,909			631		4.89			13,172			643		4.88
Total interest bearing liabilities		132,739			2,463		1.86			120,749			3,126		2.59			103,774			3,311		3.19
Total non-interest bearing liabilities		8,346								9,598								9,099
Total liabilities		141,086								130,347								112,873
Stockholders’ equity		19,580								19,498								15,133
Total liabilities and stockholders’ equity	$	160,666							$	149,845							$	128,006
Net interest spread (1)				$	5,524		3.39					$	4,698		2.95					$	4,530		3.09
Net interest margin (1)							3.63								3.33								3.63
Taxable equivalent adjustment				$	174	$	174					$	149							$	150
Average earning assets as a percentage of interest bearing liabilities							114.59	%							116.97	%							120.32	%

(1) The yield on municipal securities is computed on a tax equivalent basis at the U.S. federal income tax rate of 34%.

We believe that it is common practice in the banking industry to present interest income and related yield information on tax exempt securities on a tax-equivalent basis and that such information is useful to investors because it facilitates comparisons among financial institutions. However, the adjustment of interest income and yields on tax exempt securities to a tax equivalent amount may be considered to include non-GAAP financial information. A reconciliation to GAAP is provided below.

Tax Equivalent Reconciliation

	Years Ended December 31,
	2010					2009					2008
(Dollars in thousands)	Interest		Average Yield			Interest		Average Yield			Interest		Average Yield
Municipal securities – nontaxable		319		4.07	%	$	288		3.80	%	$	290		3.73	%
Tax equivalent adjustment (1)		158					149					150
Municipal securities – tax equivalent		477		5.75	%	$	437		5.75	%	$	440		5.66	%

Commercial Loans – Tax Free		154		4.35	%		-		-			-		-
Tax equivalent adjustment (1)		16					-					-
Commercial Loans – tax equivalent		170		4.80	%		-		-			-		-

Net interest income – nontaxable		5,350				$	4,549				$	4,380
Tax equivalent adjustment (1)		174					149					150
Net interest income – tax equivalent		5,524				$	4,698				$	4,530

Interest rate spread – no tax adjustment				3.28	%				2.85	%				2.97	%
Net interest margin – no tax adjustment				3.52	%				3.22	%				3.51	%

(1) The tax equivalent adjustment is based on a tax rate of 34% for all periods presented.

Rate/Volume Analysis

	Year Ended December 31, 2010 Compared to 2009
				Increase (Decrease) Due to
(Dollars in thousands)	Net			Volume			Rate
Interest Income:
Loans	$	273		$	671		$	(398	)
Investment securities		(127	)		(102	)		(25	)
Equity securities		4			(9	)		13
Deposits in other banks		5			-			5
Fed funds sold		8			5			3
Total	$	163		$	565		$	(402	)

Interest Expense:
Interest bearing demand deposits	$	(16	)	$	22		$	(38	)
Savings and money market deposits		54			243			(189	)
Time deposits		(553	)		(91	)		(462	)
Other borrowings		(148	)		(156	)		8
Total	$	(663	)	$	19		$	(682	)
Net Interest Income	$	826		$	546		$	280

Changes in interest due to volume and rate have been allocated by reference to changes in the average balances and the average interest rates of interest earning assets and interest bearing liabilities.

Interest Sensitivity Analysis

	At December 31, 2010 Maturing Or Repricing In:
	Within 3 Months			4 – 12 Months			1 – 5 Years			Over 5 Years			Total
Interest earning assets:
Interest bearing deposits	$	345		$	-		$	-		$	-		$	345
Federal funds sold		16,072												16,072
Investment securities		3,391			390			9,291			1,508			14,580
Equity securities substantially restricted											1,087			1,087
Loans		20,368			24,274			56,467			20,807			121,916
Total interest earning assets	$	40,176		$	24,664		$	65,758		$	23,402		$	154,000

Interest bearing liabilities:
Interest bearing	$	366		$	1,098		$	10,740		$	-		$	12,204
Money market		879			2,635			10,496			-			14,010
Savings		1,202			3,606			19,232			23,620			47,660
Time deposits		6,287			17,986			31,333			-			55,606
Borrowed funds		-			147			7,000			-			7,147
Total interest bearing liabilities	$	8,734		$	25,472		$	78,801		$	23,620		$	136,627
Period gap	$	31,442		$	(808	)	$	(13,043	)	$	(218	)
Cumulative gap	$	31,442		$	30,634		$	17,591		$	17,373
Ratio of cumulative gap to total assets		19.17	%		18.67	%		10.72	%		10.59	%

Assumptions:

This section measures the timing mismatch of the reprice of assets and liabilities. A positive gap would indicate that assets reprice faster than liabilities, and a negative gap would indicate that liabilities reprice faster than assets.

As of December 31, 2010 our Asset Liability service provider adjusted its gap calculation from utilizing a contractually defined reprice of earning assets and costing liabilities to a more true-to-life calculation of repricing earning assets and costing liabilities balances. The new gap calculation utilizes caps, floors and period caps to determine if an instrument’s rate changes during a scheduled rate reset period. If a rate resets but due to caps, floors or period caps the rate does not change, the balance of the instrument is not included in the gap calculation. This will result in a more accurate gap analysis that will show the true repricing characteristics of the balance sheet.

*Adjustable rate loans have been distributed among the categories by repricing dates.

*Mortgage backed investments and loans do not take into account principal prepayments.

Earnings are dependent on maintaining adequate net interest yield or spread between rates earned on assets and the cost of interest bearing liabilities. We must manage our interest rate sensitivity to maintain adequate spread during rising and declining interest rate environments. Decisions about which bonds to purchase are based upon factors such as term, yield and asset quality. Short term bonds enhance rate sensitivity but typically have lower yields. Our investment strategy carries the majority of our investments as maturing after the five year period illustrated above. All of our investments are held available for sale which gives us the flexibility to sell in response to market changes. The money can then be used to fund loan growth or reinvested in bonds at the new interest rate.

Having a similar amount of assets repricing, or maturing, at or about the same time as our liabilities reprice or mature, reduces our interest rate risk. However, we recognize certain trends and historical experiences for some products. We know that while all our customers could withdraw their money on any given day, they do not do so, even with interest rate changes. Accounts such as savings, interest checking, and money market accounts are core deposits and do not have the same reaction to interest rate changes as time deposits do. These accounts tend to change according to cash flow and the transaction needs of our customers.

According to the table, we have a positive gap position, which means our assets will reprice faster than our liabilities.. When interest rates are rising, this will tend to increase our interest spread and our net interest income, and when rates are falling; our interest spread and net income should decrease.

Provisions for Loan Losses For the year ended December 31, 2010, we recorded a provision for loan loss in the amount of $384,000, compared to $475,000 for the year ended December 31, 2009 The provision for the year ended December 31, 2010 exceeded net charge-offs by $47,000, which increased the allowance to $1.53 million at December 31, 2010. The allowance as a percentage of non-performing loans increased to 121% at December 31, 2010 from 83.7% at December 31, 2009. The allowance for loan losses as a percent of total loans was 1.26% at December 31, 2010, compared to 1.28% at December 31, 2009. The improvements in credit quality metrics during the period stemmed mostly from declining levels of non-performing loans and classified loans combined with an increase in the allowance. The Company has been responsive to credit quality and has continued to work proactively on early identification and resolution of credit quality issues.

On a quarterly basis, the Company’s Board of Directors and management perform a detailed analysis of the adequacy of the allowance for loan losses. This analysis includes an evaluation of credit risk concentration, delinquency trends, past loss experience, current economic conditions, composition of loan portfolio, classified loans and other relevant factors.

The Company will continue to monitor its allowance for loan losses and make future adjustments to the allowance through the provision for loan losses as conditions warrant. Although the Company believes that the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio, there can be no assurance that future losses will not exceed the estimated amounts or that additional provisions will not be required in the future.

The Bank is subject to periodic examination by the Pennsylvania Department of Banking and the FDIC. As part of the examination, the regulators will assess the adequacy of the Bank’s allowance for loan losses and may include factors not considered by the Bank. In the event that a regulatory examination results in a conclusion that the Bank’s allowance for loan losses is not adequate, the Bank may be required to increase its provision for loan losses.

Non-Interest Income. For the year ended December 31, 2010, non-interest income totaled $472,000, a $60,000 or 14.6% increase over the same period in 2009. The increase was primarily the result an $117,000 increase in income from gain on sale of loans over the comparable period in 2009. The increase in non-interest income was partially offset by a loss on sale of securities of $30,000 compared with a gain of $8,000 in 2009.

Non-Interest Expense. For the year ended December 31, 2010, non-interest expense increased $890,000 or 24.6% to $4.5 million as compared to $3.6 million for the year ended December 31, 2009. The primary reason for the increase was the receipt, in 2009, of a net insurance settlement of $468,000. Salaries and employee benefits increased $355,000 or 16.7% to $2.5 million for the year ended December 31, 2010 as compared with the same period in 2009. Primary reasons for the increase were increased benefit costs, stock option expenses and merit increases for staff. For the year ended December 31, 2010, noninterest expense was impacted by $164,000 in transaction costs related to the proposed acquisition of North Penn Bancorp, by Norwood Financial.

Income taxes. The Bank recorded income tax expense for the year ended December 31, 2010 of $214,000, compared to an income tax expense of $85,000 for the year ended December 31, 2009. The primary reason for the increase was that merger related costs were determined not to be tax deductible. This had the impact of increasing taxable income.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCOVERIES ABOUT MARKET RISK

Not applicable as the Company is a smaller reporting company.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

North Penn Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 2010 and 2009

(in thousands except per share amounts)	2010			2009
ASSETS
Cash and due from banks	$	1,778		$	2,652
Interest bearing deposits at other financial institutions		345			560
Federal funds sold		16,072			8,700
Total cash and cash equivalents		18,195			11,912
Investment securities, available for sale		14,580			19,398
Equity securities at cost, substantially restricted		1,087			1,143
Loans, net of allowance for loan losses of $1,531 in 2010 and $1,484 in 2009		120,280			114,546
Bank premises and equipment, net		3,811			3,965
Accrued interest receivable		580			665
Cash surrender value of bank-owned life insurance		3,160			3,015
Deferred income taxes		705			705
Prepaid FDIC insurance		432			604
Other real estate owned		929			88
Other assets		174			286
TOTAL ASSETS	$	163,933		$	156,327
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing	$	6,832		$	8,785
Interest bearing		129,479			115,270
Total deposits		136,311			124,055
Other borrowed funds		7,000			12,000
Accrued interest and other liabilities		1,050			1,002
TOTAL LIABILITIES		144,361			137,057

STOCKHOLDERS’ EQUITY
Preferred stock, no par value; authorized 20,000,000 shares; none issued		-			-
Common stock, par value $0.10; 80,000,000 shares authorized; 1,581,571 shares issued in 2010 and 2009; outstanding: 1,334,844 in 2010(includes 47,516 shares of unvested restricted stock) and 1,348,883 in 2009 (includes 18,812 shares of unvested restricted stock)		158			158
Additional paid-in capital		13,698			13,580
Retained earnings		8,995			8,541
Unearned ESOP shares		(836	)		(907	)
Accumulated other comprehensive income (loss)		119			(2	)
Treasury stock – at cost: 294,243 and 251,500 shares at December 31, 2010 and 2009, respectively		(2,562	)		(2,100	)
TOTAL STOCKHOLDERS’ EQUITY		19,572			19,270
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	163,933		$	156,327

See notes to consolidated financial statements.

North Penn Bancorp, Inc. and Subsidiary

Consolidated Statements of Income

For the Years ended December 31, 2010 and 2009

(In thousands, except per share amounts)	2010			2009
INTEREST INCOME
Interest on loans	$	7,130		$	6,878
Interest and dividends on investments		678			797
Total interest income		7,808			7,675
INTEREST EXPENSE
Interest on deposits		1,980			2,495
Interest on borrowed funds		484			631
Total interest expense		2,464			3,126

NET INTEREST INCOME		5,344			4,549

PROVISION FOR LOAN LOSSES		384			475

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		4,960			4,074
OTHER INCOME
Service charges and fees		225			244
Bank-owned life insurance income		145			151
Other operating income		33			35
Gain on sale of other real estate owned		-			6
Gain on sale of loans		123			6
Gain(loss) on sale of investment securities		(30	)		8
Impairment losses on investment securities		(24	)		(38	)
TOTAL OTHER INCOME		472			412
OTHER EXPENSE
Salaries and employee benefits		2,484			2,129
Occupancy and equipment expense		593			656
FDIC insurance expense		186			240
Professional services expense		490			408
Other expenses		751			649
Insurance recovery		-			(468	)
TOTAL OTHER EXPENSE		4,504			3,614

INCOME BEFORE INCOME TAXES		928			872

INCOME TAX EXPENSE		214			85

NET INCOME	$	714		$	787
Weighted average number of shares outstanding:
Basic		1,338,686			1,376,069
Diluted		1,383,286			1,383,194
Earnings per share:
Basic	$	0.53		$	0.57
Diluted		0.52			0.57

See notes to consolidated financial statements.

North Penn Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

For the Years ended December 31, 2010 and 2009

(In thousands, except per share amounts)	Common Stock		Additional Paid-in Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance, December 31, 2008	$	158	$	13,480		$	7,905		$	(980	)	$	(460	)	$	$ (805	)	$	19,298
Comprehensive income:
Net income		-		-			787			-			-			-			787
Unrealized gains on securities, net of income taxes		-		-			-			-			458			-			458
Comprehensive income																			1,245
ESOP shares released		-		(3	)		-			73			-			-			70
Restricted stock awards		-		103			-			-			-			-			103
Purchase of treasury stock																(1,295	)		(1,295	)
Cash dividends		-		-			(151	)		-			-			-			(151	)

Balance, December 31, 2009		158		13,580			8,541			(907	)		(2	)		(2,100	)		19,270

Comprehensive income:
Net income		-		-			714			-			-			-			714
Unrealized gains on securities, net of income taxes		-		-			-			-			121			-			121
Comprehensive income		-		-			-			-			-			-			835
ESOP shares released		-		7			-			71			-			-			78
Restricted stock awards		-		165			-			-			-			-			165
Purchase of treasury stock		-		-			-			-			-			(516	)		(516	)
Issuance of treasury stock for stock awards				(54	)											54			-
Cash dividends		-		-			(260	)		-			-			-			(260	)

Balance, December 31, 2010	$	158	$	13,698		$	8,995		$	(836	)	$	119		$	(2,562	)	$	19,572

See notes to consolidated financial statements.

North Penn Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2010 and 2009

(In thousands)	2010			2009
Operating Activities:
Net income	$	714		$	787
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		191			232
Provision for loan losses		384			475
Deferred income tax benefit		(90	)		(245	)
Amortization of securities (net of accretion)		(9	)		4
Increase in cash surrender value of life insurance		(145	)		(151	)
Gain (loss) on sale of investment securities		30			(8	)
Gain on sale of other real estate owned		-			(6	)
Gain on sale of loans		(123	)		(6	)
Impairment loss on investment securities		24			38
ESOP expense		78			70
Stock option expense		165			103
Changes in:
Prepaid FDIC insurance		172			(604	)
Accrued interest income and other assets		197			(85	)
Accrued interest expense and other liabilities		(5	)		111
Net Cash Provided by Operating Activities		1,583			715

Investing Activities:
Purchase of bank premises and equipment		(37	)		(71	)
Proceeds from sale other real estate owned		-			117
Proceeds from sale of securities “available for sale”		319			76
Purchase of securities “available for sale”		(85	)		(3,027	)
Proceeds from matured or called securities “available for sale”		3,480			2,593
Redemptions of mortgage-backed securities “available for sale”		1,270			1,904
(Purchase) redemption of restricted stock		56			(53	)
Net increase in loans to customers		(9,838	)		(9,114	)
Proceeds from sale of loans		3,002			690
Net Cash Used in Investing Activities		(1,833	)		(6,885	)

Financing Activities:
Net increase in deposits		12,256			24,902
Net (decrease) in short term borrowings		(5,000	)		(7,648	)
Treasury stock purchased		(516	)		(1,295	)
Cash dividends paid		(207	)		(151	)
Net Cash Provided by Financing Activities		6,533			15,808
Net increase (decrease) in Cash and Cash Equivalents		6,283			9,638

Cash and Cash Equivalents, January 1	$	11,912		$	2,274
Cash and Cash Equivalents, December 31	$	18,195		$	11,912
Supplementary Schedule of Cash Flow Information:
Cash paid during the period for:
Interest	$	2,009		$	3,126
Income taxes		379			133

Non-cash investing and financing activities:
Transfer from loans to other real estate owned		841			199

See notes to consolidated financial statements.

Notes to Consolidated Financial Statements

Note 1 - Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

North Penn Bancorp, Inc. is the holding company for North Penn Bank (Bank). The common stock trades on the OTC Bulletin Board under the symbol “NPBP.OB”. The Bank operates from five offices under a Pennsylvania 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.

Basis of Financial Statement Presentation

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.

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 significantly differ from those estimates.

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

Segment Reporting

Management does not separately allocate expenses, including the cost of funding loan demand, between commercial, retail and mortgage banking operations of the Company. Currently management measures the performance and allocates the resources of the Company as a single segment.

Adoption of New Accounting Standards

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

FASB ASC Topic 320, “Investments—Debt and Equity Securities.” New accounting guidance (i) changed existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaced the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under ASC Topic 320, 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 to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. This guidance became effective during the first quarter of 2009 and did not significantly impact the Corporation’s financial statements.

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 did not have a material effect on the Company’s financial statements.

ASC 2010-06, Fair Value Measurements and Disclosures (Topic 820):Improving Disclosures about Fair Value Measurements has been issued. In January 2010, the FASB amended previous guidance related to fair value measurements and disclosures, which requires new disclosures for transfers in and out of Levels 1 and 2 and requires a reconciliation to be provided for the activity in Level 3 fair value measurements. A reporting entity should disclose separately the amounts of significant transfers in and out of Levels 1 and 2 and provide an explanation for the transfers. This guidance is effective for interim periods beginning after December 15, 2009, and did not have a material effect on the Company’s results of operations or financial position.

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

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

FASB ASC Topic 310, “Receivables.” New authoritative accounting guidance under Accounting Standard Codification (“ASC”) Topic 310, “Receivables,” clarifies that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. This guidance becomes effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period on or after July 15, 2010 with early application permitted. The adoption of this new authoritative guidance under ASC Topic 310 is not expected to have a material impact on the Company’s consolidated financial statements, results of operations or liquidity.

Additional new authoritative accounting guidance (Accounting Standards Update (“ASU”) No. 2010-20) under ASC Topic 310, “Receivables,” requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and non-accrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. This ASU is effective for interim and annual reporting periods after December 15, 2010. The Company will include these disclosures in the notes to the financial statements beginning December 31, 2010.

Investment Securities

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

Securities Held-to-Maturity Bonds, notes and debentures for which the Company has the positive intent and ability to hold to maturity are reported at amortized cost, adjusted for amortization of premiums and accretion of discounts. The Company currently has no securities-held-to-maturity.

Securities Available-for-Sale Bonds, notes, debentures and equity securities not classified as securities 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. The Company classifies all new purchases of securities as “available-for-sale”.

Purchase premiums and discounts are recognized in interest income on the straight-line basis over the term 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 Statements of Income.

The Company has no derivative financial instruments required to be disclosed under FASB ASC 815-10 Derivatives and Hedging (SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.)

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 December 31, 2010, the Company held $1,050,000 in stock of FHLB-Pittsburgh, and $37,000 in stock of ACBB. At December 31, 2009, the Company held $1,106,000 in stock of the FHLB-Pittsburgh and $37,000 in stock of ACBB.

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. The following factors were evaluated to determine the ultimate recoverability of the cost of the Company’s restricted stock holdings; (i) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted; (ii) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (iii) the impact of legislative and regulatory changes on the institutions and, accordingly, on the customer base of the FHLB; (iv) the liquidity position of the FHLB; and (v) whether a decline is temporary or whether it affects the ultimate recoverability of the FHLB stock based on (a) the materiality of the carrying amount to the member institution and (b) whether an assessment of the institution’s operational needs for the foreseeable future allow management to dispose of the stock. Based on the analysis of these factors, the Company determined that its holdings of restricted stock were not impaired at December 31, 2010 and 2009.

Loans

Loans are stated at the principal amount outstanding, net of any unearned income, deferred costs or fees and the allowance for loan losses. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to yield using the interest method over the contractual lives of the loans. 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 Company’s past loan loss experience, known and inherent losses in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payments delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.

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 previously accrued interest on these loans, and income is subsequently recognized thereafter 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 resumes on a contractual basis in which case the loan is returned to accrual status.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed to be adequate by management to absorb probable losses inherent in the loan lease portfolio. The determination of the allowance requires significant judgment reflecting management’s best estimate of probable loan losses related to specifically identified impaired loans as well as probable losses in the remainder of the various loan portfolios. The methodology for assessing the appropriateness of the allowance consists of several key elements, which include: specific reserves for impaired loans, percentage allocations for special attention loans not deemed impaired (classified loans and internal watch list credits), formula reserves for each portfolio and reserves for pooled homogenous loans. Part of management’s review includes risk ratings of commercial loans, and the engagement of an external loan review of all loans over $400,000, insider loans and delinquent loans. Modifications to the methodology used in the allowance for loan losses evaluation may be necessary in the future based on further deterioration in economic and real estate market conditions, new information obtained regarding known problem loans, regulatory guidelines and examinations, the identification of additional problem loans, and other factors. Management’s evaluation is based upon a continuing review of these portfolios, estimates of customer performance, collateral values and dispositions, and assessments of economic and regional events, all of which are subject to judgment and will change.

Specific reserves are established for certain credits based on a regular analysis of special attention loans and leases. This analysis is performed by the Senior Lending Officer and reviewed by the Chief Executive Officer prior to presentation to the Board of Directors. The specific reserves are based on an analysis of underlying collateral values, cash flow considerations and, if applicable, guarantor capacity.

The formula reserves determined for each portfolio are calculated quarterly by applying loss factors to outstanding loans and leases and certain unfunded commitments based upon a review of historical loss experience and qualitative factors, which include but are not limited to, economic trends, current market risk assessment by industry, recent loss experience in particular segments of the portfolios, concentrations of credit, delinquencies, trends in volume, and the effects of changes in lending policies and practices, including changes in quality of the loan and lease origination, servicing and risk management processes. Special attention loans and leases without specific reserves receive a higher percentage allocation ratio than credits not considered special attention.

Pooled loans are smaller credits and are homogenous in nature, such as consumer credits and residential mortgages. Pooled loan and lease loss reserves are based on historical net charge-offs, adjusted for delinquencies, the effects of lending practices and programs and current economic conditions, and current trends in the geographic markets which we serve.

A comprehensive analysis of the reserve is performed by management on a quarterly basis by reviewing all loans and leases over a fixed dollar amount where the internal credit rating is at or below a predetermined classification. Although management determines the amount of each element of the reserve separately and relies on this process as an important credit management tool, the entire reserve is available for the entire loan and lease portfolio. The actual amount of losses incurred can vary significantly from the estimated amounts both positively and negatively. Management’s methodology includes several factors intended to minimize the difference between estimated and actual losses. These factors allow management to adjust our estimate of losses based on the most recent information available.

Loans, which are deemed uncollectible or have a low likelihood of collection, are charged off and deducted from the reserve, while recoveries of amounts previously charged off, are credited to the reserve. A (recovery of) provision for loan and lease losses is credited or charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

Mortgage Partnership Finance Program

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

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

The credit enhancement feature of the MPF Program is accounted for by the Bank as a financial guarantee in accordance with FASB ASC 460-10 Guarantees (FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others) and reported on the balance sheet at its initial fair value. Subsequent changes in the recorded guarantee amount would result from termination of any portion or all of the guarantee, additional guarantees being issued or increases in the expected losses resulting from the guarantee. Such changes in recorded amounts are recognized in the consolidated statements of income or as an increase in the offsetting guarantee fees receivable account in the case of additional guarantees being issued.

Loan Servicing

The Company generally retains the right to service mortgage loans sold to others. The cost allocated to the mortgage servicing rights retained has been recognized as a separate asset and is being amortized in proportion to and over the period of estimated net servicing income.

Mortgage servicing rights are periodically evaluated for impairment based on the fair value of those rights. Fair values are estimated using discounted cash flows based on current market rates of interest and current expected future prepayment rates. For purposes of measuring impairment, the rights must be stratified by one or more predominant risk characteristics of the underlying loans. The Company stratifies its capitalized mortgage servicing rights based on the term of the underlying loans. The amount of impairment recognized is the amount, if any, by which the amortized cost of the rights for each stratum, exceed their fair value.

Premises and Equipment

The Company operates from one leased and four owned facilities. Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Provision for depreciation, computed on the straight-line method and accelerated method, is charged to operating expenses over the estimated useful lives of the assets. Maintenance and repairs are charged to operating expense as incurred.

The estimated useful lives used to compute depreciation are as follows:

	Years
Buildings		19 – 39
Furniture and equipment		5 – 10

Foreclosed Real Estate

Foreclosed real estate is carried at the lower of cost or fair value at the time of foreclosure. Management periodically performs valuations and a loss is recognized by a charge to operations if the carrying value of a property exceeds its net realizable value. Additional costs associated with holding the properties are expensed as incurred. The balance of foreclosed real estate was $929,000 and $88,000 at December 31, 2010 and 2009, respectively. The increase was the addition of a business property that the Company expects to recoup most of its remaining investment.

Bank Owned Life Insurance

The Company invests in Bank Owned Life Insurance (BOLI) with split-dollar life provisions. Purchases of BOLI provide life insurance coverage on certain employees with the Company being the owner and beneficiary of the policies.

Treasury Stock

Stock held in treasury is accounted for using the cost method which treats stock held in treasury as a reduction to total stockholders’ equity. The cost basis for subsequent sales of treasury shares is determined using a first-in, first-out method.

Postretirement Employee Benefits

The Company provides postretirement benefits in the form of term life insurance and health insurance coverage for a limited period of time. The costs are funded as incurred and are not significant to the accompanying consolidated financial statements.

Stock Based Compensation

The Company sponsors a stock option plan (see Note 10). Compensation cost is recognized for stock options to employees based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation expense is recognized over the requisite service period.

Accumulated Other Comprehensive Income

The Company is required to present accumulated other comprehensive income in a full set of general-purpose financial statements for all periods presented. Accumulated other comprehensive income is comprised of net unrealized holding gains on the available for sale investment securities portfolio. The Company has elected to report the effects of other comprehensive income as part of the Consolidated Statement in Changes in Stockholders’ Equity.

Advertising Expenses

Advertising costs are expensed as incurred. Advertising expense for the year ended December 31, 2010 were $32,000 compared to $43,000 for the year ended December 31, 2009.

Income Taxes

The provision for income taxes is based on the results of operations, adjusted primarily for tax-exempt income. Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. Deferred tax assets and liabilities are determined based on the differences between the consolidated financial statement and income tax bases of assets and liabilities measured by using the enacted tax rates and laws expected to be in effect when the timing differences are expected to reverse. Deferred tax expense or benefit is based on the difference between deferred tax asset or liability from period to period.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategies in making this assessment. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company and the Bank are subject to U.S. federal income tax and Commonwealth of Pennsylvania tax. The Company is no longer subject to examination by Federal or State taxing authorities for the years before 2007. At December 31, 2010 and 2009 the Company did not have any unrecognized tax benefits. The Company does not expect the amount of any unrecognized tax benefits to significantly increase in the next twelve months. The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other noninterest expense. At December 31, 2010 and December 31, 2009, the Company does not have any amounts accrued for interest and/or penalties.

Cash Flows

For purposes of the Statements of Cash Flows, cash and due from banks include cash on hand, demand deposits at other financial institutions (including cash items in process of clearing) and federal funds sold. Cash flows from loans and deposits are reported net.

The Company may, from time to time, maintain correspondent bank balances in excess of $250,000 each. Management is not aware of any evidence that would indicate that such deposits are at risk.

Earnings Per Share

Basic earnings per share is computed on the weighted average number of common shares outstanding during each year, adjusted for shares of the ESOP committed to be released, 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 and stock awards (Note 10) as follows:

December 31, 2010	Income (Numerator)		Shares (Denominator)		Per-Share Amount
Basic EPS
Net income	$	714,000		1,338,686	$	0.53
Options and stock awards includable		-		44,600		(0.01	)
Diluted EPS	$	714,000		1,383,286	$	0.52

December 31, 2009	Income (Numerator)		Shares (Denominator)		Per-Share Amount
Basic EPS
Net income	$	787,000		1,376,069	$	0.57
Options and stock awards includable		-		7,125		-
Diluted EPS	$	787,000		1,383,194	$	0.57

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.

Note 2 - Pending Acquisition

Under the terms of the Merger Agreement, each outstanding share of North Penn common stock will be converted into either the right to receive $19.12 in cash or 0.6829 shares of Norwood Financial common stock. In addition, the elections of the Company’s stockholders will be subject to the requirement that $12,194,000 of the merger consideration (which includes amounts paid in cancellation of existing stock options) be paid in cash and that the remainder be paid in Norwood Financial common stock. All of the Company’s stock options, whether or not vested, will be canceled at the effective time of the merger in exchange for a cash payment equal to the difference between $19.12 and the exercise price of the stock option.

Note 3 - Investment Securities

The amortized cost and fair value of investment securities at December 31 are as follows (in thousands):

	2010
	Amortized Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Available-for-sale
U.S. Agency securities	$	-	$	-	$	-	$	-
Mortgage-backed securities		1,056		60		-		1,116
State & political subdivisions		7,559		65		66		7,558
Other bonds		4,495		238		-		4,733
Total debt securities		13,110		363		66		13,407
Equity securities		1,303		46		176		1,173
Total available-for-sale	$	14,413	$	409	$	242	$	14,580

	2009
	Amortized Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Available-for-sale
U.S. Agency securities	$	1,500	$	18	$	-	$	1,518
Mortgage-backed securities		2,662		89		-		2,751
State & political subdivisions		8,719		142		6		8,855
Other bonds		4,969		164		43		5,090
Total debt securities		17,850		413		49		18,214
Equity securities		1,591		15		422		1,184
Total available-for-sale	$	19,441	$	428	$	471	$	19,398

The amortized cost and fair value of debt securities at December 31, 2010, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Securities Available for Sale
	Amortized Cost		Fair Value
Due in one year or less	$	-	$	-
Due after one year through five years		4,068		4,195
Due after five years through ten years		4,905		5,078
Due after ten years		4,137		4,134
Total debt securities	$	13,110	$	13,407

There were no aggregate investments with a single issuer (excluding the U.S. Government and its agencies) which exceeded ten percent of consolidated shareholders’ equity at December 31, 2010. The quality rating of the obligations of state and political subdivisions are generally investment grade, as rated by Moody’s or Standard and Poors. The typical exceptions may be local issues which may not be rated, but would be secured by the full faith and credit obligations of the communities that would issue these securities. The state and political subdivision investments are actively traded in a liquid market.

Proceeds from sales of available-for-sale securities totaled $319,000 and $76,000 during 2010 and 2009, respectively.

Securities available-for-sale with amortized costs and fair values of $13,110,000 and $13,407,000 at December 31, 2010 and $11,312,000 and $11,030,000, at December 31, 2009 were pledged as collateral on public deposits with the FHLBank of Pittsburgh.

The gross fair value and unrealized losses of the Company’s investments, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2010 and 2009 are as follows (in thousands):

December 31, 2010	Less than 12 months				12 months or more				Totals
	Fair Value		Unrealized losses		Fair Value		Unrealized losses		Fair Value		Unrealized losses
Mortgage-backed securities	$	-		-			$	-	$	-		-
State & political subdivisions		3,257		66		-		-		3,257		66
Other bonds		-		-		-		-		-		-
Equity securities		122		12		629		164		751		176
Total	$	3,379	$	78	$	629	$	164	$	4,008	$	242

December 31, 2009	Less than 12 months				12 months or more				Totals
	Fair Value		Unrealized losses		Fair Value		Unrealized losses		Fair Value		Unrealized losses
U.S. Agency securities	$	-	$	-	$	-	$	-	$	-	$	-
Mortgage-backed securities		-		-		-		-		-		-
State & political subdivisions		293		6		-		-		293		6
Other bonds						921		43		921		43
Equity securities		354		114		575		308		929		422
Total	$	647	$	120	$	1,496	$	351	$	2,143	$	471

The table at December 31, 2010 includes 11 securities that have losses for less than twelve months and 24 securities that have been in an unrealized loss position for twelve or more months.

Mortgage-Backed Securities There were no unrealized losses on the Company’s investments in federal agency mortgage-backed securities at December 31, 2010.

State & Political Subdivisions There were unrealized losses in seven state and municipal subdivision securitities for less than twelve months at December 31, 2010.

Other Bonds There were no unrealized losses in other bonds for twelve months or more at December 31, 2010.

Equity Securities At December 31, 2010, there were unrealized losses in 4 equity securities for the less than twelve month category and unrealized losses in 24 equity securities for twelve months or more.

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 35 securities in an unrealized position as of December 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.

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 320 (SFAS No. 115) 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 judgment 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 bank stocks. 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 review, we concluded that two securities were impaired. OTTI losses of $23,000 on these securities were recognized during 2010 as compared with $38,000 for 2009. In accordance, with FASB ASC 320, the impairment was deemed credit related and run entirely through the statement of income.

Note 4 - Loans Receivable

Loans receivable consist of the following at December 31, 2010 and 2009 (in thousands):

	2010			2009
Real estate mortgages
Construction and land development	$	338		$	327
Residential, 1 – 4 family		42,785			47,428
Residential, multi-family		857			908
Commercial		72,448			60,269
Total real estate mortgages		116,428			108,932
Commercial		3,149			3,368
Consumer		2,185			3,719
Total loans		121,762			116,019
Add: deferred loan costs & fees, net		49			11
Less: allowance for loan losses		(1,531	)		(1,484	)
Total loans, net	$	120,280		$	114,546

The Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds. At December 31, 2010, the loans-to-one-borrower limitation was $2,935,800. At December 31, 2010, there were no loans outstanding or committed to any one borrower that individually or in the aggregate exceeds that limit.

The Bank lends primarily to customers in its local market area. Most loans are mortgage loans, which include loans secured by commercial and residential real estate and construction loans. Accordingly, lending activities could be affected by changes in the general economy, the regional economy, or real estate values. Mortgage loans represent 95.6% of total gross loans at December 31, 2010 and 93.9% of total gross loans at December 31, 2009.

From time to time, the Company may agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. Loans modified in a troubled debt restructuring are placed on non-accrual status until the Company determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms of six months. At both December 31, 2010 an 2009, there were no loans classified as troubled debt restructurings.

The following table presents the classes of loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within our internal risk rating system as of December 31,

			Special
December 31, 2010	Pass		Mention		Substandard		Doubtful		Loss		Total

Commercial Real Estate Loans	$	66,648	$	2,236	$	4,421	$	-	$	-	$	73,305
Commercial Loans		3,149		-		-		-		-		3,149
Total	$	69,797	$	2,236	$	4,421	$	-	$	-	$	76,454

			Special
December 31, 2009	Pass		Mention		Substandard		Doubtful		Loss		Total

Commercial Real Estate Loans	$	54,620	$	3,427	$	3,130	$	-	$	-	$	61,177
Commercial Loans		3,340		-		-		28		-		3,368
Total	$	57,960	$	3,427	$	3,130	$	28	$	-	$	64,545

For the residential real estate loans, construction loans and consumer loans, the company evaluates credit quality based on the performance of the individual loans. The following table presents the recorded investment in the loan classes as of December 31,

December 31, 2010	Performing		Nonperforming		Total

Residential real estate loans	$	41,832	$	953	$	42,785
Construction loans		338		-		338
Consumer loans		2,167		18		2,185
Total	$	44,337	$	971	$	45,308

December 31, 2009	Performing		Nonperforming		Total

Residential real estate loans	$	46,660	$	768	$	47,428
Construction loans		327		-		327
Consumer loans		3,715		4		3,719
Total	$	50,702	$	772	$	51,474

The tables below present the recorded investment of loans and leases with delinquency aging and nonaccrual status as of December 31.

							Greater than 90 Days
							Past				Total Past
			31-60 Days		61-90 Days		Due and still		Non-		Due and Non-		Total
December 31, 2010	Current		Past Due		Past Due		accruing		Accrual		Accrual		Loans
Real Estate Loans:
Residential	$	40,519	$	493	$	820	$	-	$	953	$	2,266	$	42,785
Construction		338		-		-		-		-		-		338
Commercial		72,689		296		27		-		293		616		73,305

Commercial Loans		3,149		-		-		-		-		-		3,149
Consumer Loans		2,010		86		71		-		18		175		2,185
Total	$	118,705	$	875	$	918	$	-	$	1,264	$	3,057	$	121,762

							Greater than 90 Days
							Past				Total Past
			31-60 Days		61-90 Days		Due and still		Non-		Due and Non-		Total
December 31, 2009	Current		Past Due		Past Due		accruing		Accrual		Accrual		Loans
Real Estate Loans:
Residential	$	44,851	$	1,680	$	129	$	-	$	768	$	2,577	$	47,428
Construction		327		-		-		-		-		-		327
Commercial		59,622		561		34		-		960		1,555		61,177

Commercial Loans		3,326		-		-		-		42		42		3,368
Consumer Loans		3,517		190		8		-		4		202		3,719
Total	$	111,643	$	2,431	$	171	$	-	$	1,774	$	4,376	$	116,019

Note 5 — Reserve for Loan Losses

The following table sets forth the year-end balances of and changes in the allowance for loan losses, as well as certain related ratios, as of December 31 for the year indicated:

(Dollars in thousands)	2010			2009			2008
Balance at beginning of period	$	1,484		$	1,170		$	1,171
Charge-offs:
Commercial		203			146			-
Real estate mortgages		169			-			3
Consumer		2			25			47
TOTAL		374			171			50
Recoveries:
Commercial		-			-			-
Real estate mortgages		36			-			-
Consumer		1			10			18
TOTAL		37			10			18
Net charge-offs		337			161			32
Provision charged to operations		384			475			31
Balance at end of period	$	1,531		$	1,484		$	1,170

Average loans outstanding, December 31		120,448		$	109,740		$	101,543
Loan reserve ratios:
Net loan charge-offs to average loans		0.28	%		0.15	%		0.03	%
Allowance as a percentage of total loans		1.26	%		1.28	%		1.09	%

The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable. Also, presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the periods the loans were impaired.

			Real Estate Loans
December 31, 2010							Commercial		Consumer
	Residential		Commercial		Construction		Loans		Loans		Total
Total Loans	$	42,785	$	73,305	$	338	$	3,149	$	2,185	$	121,762

Individually evaluated for impairment		1,012		6,860		-		-		12		7,884
Collectively evaluated for impairment	$	41,773	$	66,445	$	338	$	3,149	$	2,173	$	113,878

			Real Estate Loans
December 31, 2009							Commercial		Consumer
	Residential		Commercial		Construction		Loans		Loans		Total

Total Loans	$	47,428	$	61,177	$	327	$	3,368	$	3,719	$	116,019

Individually evaluated for impairment		664		5,875		-		28		19		6,586
Collectively evaluated for impairment	$	46,764	$	55,302	$	327	$	3,340	$	3,700	$	109,433

The following table sets forth the breakdown of the allowance for loan losses by loan category as of December 31 for the year indicated:

	2010					2009					2008
(Dollars in thousands)	Amount		% of Total Loans			Amount		% of Total Loans			Amount		% of Total Loans
Construction and land development	$	-		0.3	%	$	-		0.3	%	$	-		0.5	%
Residential, 1-4 family		330		35.2	%		476		40.9	%		313		41.9	%
Residential, multi-family		-		0.7	%		-		0.8	%		-		1.1	%
Commercial real estate		1,002		59.4	%		952		51.9	%		651		49.9	%
Commercial		55		1.7	%		-		2.9	%		-		1.7	%
Consumer		34		4.9	%		45		3.2	%		92		4.9	%
Unallocated		110		0.0	%		11		0.0	%		114		0.0	%
Total	$	1,531		100.0	%	$	1,484		100.0	%	$	1,170		100.0	%

Nonaccrual loans represent loans, which are ninety days or more in arrears or in the process of foreclosure. At December 31, 2010 and 2009, non-accrual loans, substantially all of which are collateralized, were $1.3 million and $1.8 million respectively. Interest income for the years ending December 31, 2010 and 2009 would have increased by approximately $111,000 and $45,000 respectively, if these loans had earned interest at their full contract rate. The allowance for loan losses allocated to impaired loans was $253,000 and $345,000 at December 31, 2010 and 2009, respectively

The following table illustrates information related to the Bank’s nonperforming assets at the dates indicated. The Bank had no troubled debt restructurings or accruing loans past due 90 or more days at the dates presented.

	At December 31,
(Dollars in thousands)	2010			2009			% Change
Nonaccrual loans	$	1,264		$	1,774			(28.7	)%
Other real estate owned		929			88			955.7	%

Total nonperforming assets	$	2,193		$	1,862			17.8	%
Total nonperforming loans to total loans		1.80	%		1.60	%		12.5	%
Total nonperforming loans to total assets		0.77	%		1.13	%		(31.9	)%
Total nonperforming assets to total assets		1.34	%		1.19	%		12.6	%

The table below presents impaired loans and the corresponding reserve for impaired loans at December 31,

			Unpaid				Average		Interest
	Recorded		Principal		Associated		Recorded		Income
December 31, 2010	Investment		Balance		Allowance		Investment		Recognized

With no specific allowance recorded:
Real Estate Loans:
Residential	$	160	$	160	$	-	$	427	$	2
Construction		-		-		-		-		-
Commercial		6,080		6,080		-		5,503		98
Commercial Loans		-		-		-		-		-
Consumer Loans		12		12		-		45		-
Total		6,252		6,252		-		5,975		100

With an allowance recorded:
Real Estate Loans:
Residential		852		852		123		647		6
Construction		-		-		-		-		-
Commercial		780		780		130		1,055		8
Commercial Loans		-		-		-		8		-
Consumer Loans		-		-		-		12		-
Total		1,632		1,632		253		1,722		14

Total:
Real Estate Loans:
Residential		1,012		1,012		123		1,074		8
Construction		-		-		-		-		-
Commercial		6,860		6,860		130		6,558		106
Commercial Loans		-		-		-		8		-
Consumer Loans		12		12		-		57		-
Total Impaired Loans	$	7,884	$	7,884	$	253	$	7,697	$	114

			Unpaid				Average		Interest
	Recorded		Principal		Associated		Recorded		Income
December 31, 2009	Investment		Balance		Allowance		Investment		Recognized

With no specific allowance recorded:
Real Estate Loans:
Residential	$	206	$	206	$	-	$	340	$	2
Construction		-		-		-		-		-
Commercial		5,137		5,137		-		2,132		79

Commercial Loans		-		-		-		18		-
Consumer Loans		-		-		-		19		-
Total		5,343		5,343		-		2,509		81

With an allowance recorded:
Real Estate Loans:
Residential		458		458		85		452		4
Construction		-		-		-		-		-
Commercial		738		738		227		395		14

Commercial Loans		28		28		28		41		-
Consumer Loans		19		19		5		64		-
Total		1,243		1,243		345		952		18

Total:
Real Estate Loans:
Residential		664		664		85		792		6
Construction		-		-
Commercial		5,875		5,875		227		2,527		93

Commercial Loans		28		28		28		59		-
Consumer Loans		19		19		5		83		-
Total Impaired Loans	$	6,586	$	6,586	$	345	$	3,461	$	99

Note 6 – Loan Servicing

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others was $6,160,000 at December 31, 2010 and $4,176,000 at December 31, 2009.

Note 7 - Premises and Equipment, Net

Premises and equipment at December 31, 2010 and 2009 are summarized as follows (in thousands):

	2010		2009
Land and improvements	$	1,273	$	1,273
Building and improvements		5,399		5,399
Furniture and equipment		1,965		1,928
		8,637		8,600
Less: Accumulated depreciation and amortization		4,826		4,635
Premises and equipment, net	$	3,811	$	3,965

Depreciation expense was $191,000 and $232,000 for the years ended December 31, 2010 and 2009, respectively.

Note 8 - Deposits

Deposits consist of the following major classifications at December 31, 2010 and 2009 (dollars in thousands):

	2010					2009
	Amount		% of total deposits			Amount		% of total deposits
Non-interest checking	$	6,832		4.9	%	$	8,785		7.1	%
Interest checking		12,204		9.0			7,916		6.4
Money market		14,010		10.3			7,598		6.1
Savings		47,659		35.0			33,837		27.2
Time deposits		55,606		40.8			65,919		53.2
Total	$	136,311		100	%	$	124,055		100	%

Time deposit accounts of $100,000 and over totaled approximately $18,323,000 at December 31, 2010. Time deposit accounts of $100,000 and over totaled approximately $16,844,000 at December 31, 2009.

At December 31, 2010 and 2009, scheduled maturities of time deposits were as follows:

Maturing in:	2010		2009
One Year	$	24,273	$	53,529
Two Years		14,331		6,624
Three Years		5,376		2,323
Four Years		2,945		841
Five Years		8,681		2,602
Thereafter		-		-
Total	$	55,606	$	65,919

Interest expense on deposits consisted of the following for the years ended December 31, 2010 and 2009:

	2010		2009
Interest checking	$	113	$	129
Money market		138		102
Savings		466		449
Time deposits		1,263		1,815
	$	1,980	$	2,495

Note 9 – Other Borrowings

Short-Term Borrowings

The Company has a line of credit 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 both December 31, 2010 and 2009, the Company had no overnight funds. During 2009, the Company’s maximum overnight borrowing outstanding at any month-end during the year was $3,985,000. The average amount outstanding for the year ended December 31, 2010 amounted to $909,000 and the average interest rate was 1.08%.

Term Borrowings

The Company has one term loan from the FHLB in the principal amount of $7 million that matures in July 2015. The interest rate is fixed at 4.3% however, the FHLB has the option to convert it to an adjustable rate if the related index reaches the strike rate of 8.00% (0.11% as of December 31, 2010). Interest is due quarterly and the principal is due at maturity. The borrowing is secured by the Company’s mortgage loans.

During 2010, the Company paid off a $5 million term loan at a fixed rate of 6.19%, which matured July of 2010.

The Company’s collateralized maximum borrowing capacity with FHLBank of Pittsburgh was $68,843,200 as of December 31, 2010.

Note 10 – 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 $20,000 and $48,000 respectively. The required contribution for Plan year ending June 30, 2011 is $41,000.

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. Employer contributions to the Plan amounted to $61,000 and $45,000 for the years ended December 31, 2010 and 2009, respectively.

Employee Stock Ownership Plan

In connection with its initial public offering, the Company adopted an employee stock ownership plan for eligible employees of North Penn Bank effective June 1, 2005. Eligible employees who are 21 years old and employed by the Bank as of the effective date of the offering begin participating in the plan as of that date. Thereafter, new employees of the Bank who are 21 years old and have been credited with at least one year of service with North Penn Bank are eligible to participate in the employee stock ownership plan as of the first entry date following their completion of the plan’s eligibility requirements. The ESOP used $545,000 in proceeds from a term loan obtained from the Company to purchase 58,106 shares of the Company’s common stock. The term loan principal is payable in fifteen equal annual installments. Interest is at prime plus .5% and payable quarterly. Each year, the Bank intends to make discretionary contributions to the ESOP which will be equal to the required principal and interest payments on the term loan. The loan is further paid down by the amount of dividends paid, if any, on the common stock owned by the ESOP.

As part of the Company’s second step conversion, a second ESOP loan in the amount of $680,000 was obtained by North Penn Bank from North Penn Bancorp to purchase an additional 68,000 shares of common stock. The loan is payable in twenty, equal, annual installments. Interest is at 7.75% and payable quarterly. The loan is further paid down by the amount of dividends paid, if any, on the common stock owned by the ESOP.

Shares purchased with the loan proceeds are initially pledged as collateral for the term loan and are held in a suspense account for future allocation among participants. Contributions to the ESOP and shares released from the suspense account will be allocated among participants on the basis of compensation.

The ESOP is accounted for in accordance with FASB ASC 718-40 Compensation – Stock Compensation –Employee Stock Purchase Plans and SOP 93-6, Employers’ Accounting for Employee Stock Ownership Plans. The shares pledged as collateral are deducted from stockholders’ equity as unearned ESOP shares in the accompanying consolidated balance sheets. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for EPS computations.

For the year ended December 31, 2010, compensation expense amounted to $96,000. At December 31, 2010, total ESOP shares amounted to 123,571, with 38,100 shares allocated and 85,471 shares unearned. The fair value of unearned shares amounted to $1,496,000 at December 31, 2010.

For the year ended December 31, 2009, compensation expense amounted to $82,000. At December 31, 2009, total ESOP shares amounted to 125,830, with 32,962 shares allocated and 92,868 shares unearned. The fair value of unearned shares amounted to $859,000 at December 31, 2009.

Supplemental Executive Retirement Plan

Effective July 1, 2004, the Company established an unfunded supplemental executive retirement plan to provide certain officers with additional benefits upon termination or retirement. The Company expensed $60,000 and $56,000 for the years ended December 31, 2010 and 2009, respectively, in the accompanying consolidated financial statements.

Note 11- Omnibus Stock Option Plan

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

On May 26, 2009, the Company’s stockholders approved the 2009 Equity Incentive Plan. The Board of Directors has reserved a total of 119,000 shares 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 grants totaling 5,323 shares were awarded on September 26, 2006 having a fair value of $54,000. The grants vest over five years. The market value as of the grant date of the restricted stock grants is charged to expense as the grants vest. During 2010, 874 shares vested at fair value of $8,900.

Restricted stock grants totaling 21,229 shares were awarded on May 28, 2008 having a fair value of $175,000. The grants vest over five years. During 2010, 4,075 shares vested at a fair value of $34,000.

On May 9th, 2009, restricted stock grants totaling 500 shares were awarded having a fair value of $4,300. All of these restricted stock grants were forfeited.

Restricted stock grants totaling 17,611 shares were awarded on November 4, 2009, having a fair value of $158,000. The grants vest over five years. During 2010, 3,472 shares vested at a fair value of $31,000.

Restricted stock grants totaling 750 shares were awarded on May 4, 2010, having a fair value of $7,100. The grants vest over five years.

On August 24, 2010, restricted stock grants totaling 19,774 shares were awarded having a fair value of $189,000. The grants vest over five years.

Compensation expense for all stock grants was $88,000 in 2010.

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

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

Dividend Yield (per share)		1.20	%
Volatility (%)		3.76	%
Risk-free Interest Rate (%)		4.76	%
Expected Life	10 years

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

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

Dividend Yield (per share)		1.20	%
Volatility (%)		19.00	%
Risk-free Interest Rate (%)		4.01	%
Expected Life	10 years

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

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

Dividend Yield (per share)		1.20	%
Volatility (%)		29.24	%
Risk-free Interest Rate (%)		1.89	%
Expected Life	10 years

An additional set of stock options covering 1,000 shares were awarded on May 11, 2009. The option awards were granted with an exercise price equal to the average price of the last trade date. The stock options vest and therefore become exercisable on a pro rata basis annually over five years from the date awarded, commencing May 11, 2010. The options are available to be exercised for a period of ten years after the date awarded.

Dividend Yield (per share)		1.20	%
Volatility (%)		29.24	%
Risk-free Interest Rate (%)		1.89	%
Expected Life	10 years

This group of options was forfeited at December 31, 2009.

An additional set of stock options covering 41,872 shares were awarded on November 4, 2009. The option awards were granted with an exercise price equal to the average price of the last trade date. The stock options vest and therefore become exercisable on a pro rata basis annually over five years from the date awarded, commencing November 4, 2010. The options are available to be exercised for a period of ten years after the date awarded.

The fair value of each option grant was estimated to be $2.79 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)		1.20	%
Volatility (%)		29.24	%
Risk-free Interest Rate (%)		1.89	%
Expected Life	6.25 years

On March 4, 2010, the Company issued stock options covering 1,500 shares. The option awards were granted with an exercise price equal to the average price on the last trade date. The stock options vest and therefore become exercisable on a pro rata basis annually over five years from the date awarded, commencing March 4, 2011. The options are available to be exercised for a period of ten years after the date awarded.

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

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

On August 24, 2010, the Company issued stock options covering 1,500 shares. The option awards were granted with an exercise price equal to the average price on the last trade date. The stock options vest and therefore become exercisable on a pro rata basis annually over five years from the date awarded, commencing March 4, 2011. The options are available to be exercised for a period of ten years after the date awarded. There were no stock options awarded for the three month ended September 30, 2009.

Dividend Yield (per share)		1.68	%
Volatility (%)		28.84	%
Risk-free Interest Rate (%)		1.73	%
Expected Life	6.5 years

Exercise prices of options outstanding at December 31, 2010 ranged from $8.25 to $10.22. The outstanding options at December 31, 2009 have an intrinsic value, which is the amount of the underlying stock exceeds the exercise price, of $55,000

During the year ended December 31, 2009, the Company recorded options expense of $81,000 included in “Salaries and employee benefits” on the accompanying consolidated financial statements. As of December 31, 2010, there was approximately $678,000 of total unrecognized compensation cost related to unvested options and grants. That cost is expected to be recognized over a period of 4.7 years. The Company plans on obtaining shares to be issued upon exercise of stock options through authorized common stock.

	Number of Shares		Weighted -Average Exercise Price		Weighted –Average Remaining Contractual Term
Outstanding, January 1, 2010		104,251	$	9.15		-
Granted		52,995	$	9.55		-
Exercised		-		-		-
Forfeited or expired		-		-		-
Outstanding, December 31, 2010		157,246	$	9.29		8.5
Exercisable, December 31, 2010		44,226	$	9.45		7.1

	Stock Options					Restricted Stock
Nonvested shares	Number of Shares			Weighted-Average Grant-Date Fair Value		Number of Shares			Weighted-Average Grant-Date Fair Value
Nonvested, January 1, 2010		80,876		$	3.40		35,404		$	8.81
Granted		52,995		$	2.46		20,524		$	9.55
Vested		(20,851	)	$	3.26		(8,421	)	$	8.90
Forfeited		-					-			-
Nonvested, December 31, 2010		113,020		$	2.81		47,507		$	9.10

Note 12 - Income Taxes

The Company and its subsidiary file a consolidated Federal income tax return. North Penn Bancorp, Inc. and Norpenco, Inc. each file a Pennsylvania corporate tax report and North Penn Bank files a Pennsylvania Mutual Thrift Earnings Report.

Retained earnings at December 31, 2010 and 2009, included approximately $1.2 million representing accumulated bad debt reserves in excess of actual experience, for which no provision for Federal income taxes has been made, in accordance with FASB ASC 740-10-25 Income Taxes – Recognition and Accounting Principles Board Statement No. 23, Accounting for Income Taxes – Special Areas. These amounts represent an allocation of income to bad debt deductions for tax purposes only. If anything other than tax bad debt losses are charged to this accumulated bad debt reserve, taxable income would be created at the then-current corporate tax rates. The unrecorded deferred income tax liability related to this at 34% was $418,000 at December 31, 2010 and 2009. The Company’s liquidity and capital position causes management to believe that these tax restrictions will not be violated.

Total income tax expense (benefit) for the years ended December 31, 2010 and 2009, is as follows (in thousands):

	2010			2009
Federal:
Currently payable	$	221		$	234
Deferred tax benefit		(85	)		(240	)
Total Federal taxes		136			(6	)

State:
Currently payable		83			96
Deferred tax expense		(5	)		(5	)
Total State taxes		78			91
Total income tax expense	$	214		$	85

A reconciliation of income taxes at statutory rates (34% for both years) to the actual income tax provision reported in the Consolidated Statements of Income is as follows (in thousands):

	2010			2009
Tax expense at statutory rate on pretax income	$	316		$	296
Tax effect bank owned life insurance income		(49	)		(51	)
Tax effect state income taxes		78			91
Tax effect tax exempt interest income		(113	)		(111	)
Tax effect of deferred compensation asset		-			(90	)
Tax effect merger related expense		56			-
Tax effect of other items, net		(74	)		(50	)
Applicable income tax expense	$	214		$	85
Effective tax rate		23	%		10	%

Significant deferred tax assets and liabilities at December 31, 2010 and 2009 are as follows (dollars in thousands):

	2010			2009
Deferred tax assets:
Allowance for loan losses	$	496		$	480
Contribution carryover		-			94
Deferred compensation		122			90
AMT credits		37			79
Unrealized security losses		14			41
Other		73			66
		742			850
Less valuation allowance		(37	)		(145	)
Total	$	705		$	705

In 2009, the Company had provided valuation allowances of $66,000 on contribution carryforwards and $79000, on AMT credit carryforwards to reduce the total amount that management believes will ultimately be realized. In 2010, the contribution carryforwards expired and AMT credit of $42,000 was utilized resulting in a carryforward of $37,000 Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry forwards are expected to be available to reduce taxable income.

Note 13 – Accumulated Other Comprehensive Income

Accumulated other comprehensive income of $121,000 and $458,000 for years ended December 31, 2010 and 2009, respectively, consisted entirely of unrealized gains and losses on available-for-sale securities, net of tax.

A reconciliation of other comprehensive income(loss) for the years ended December 31, 2010 and 2009, are as follows (dollars in thousands):

	2010
	Before-Tax Amount			Tax Benefit (Expense)			Net-of-Tax Amount
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the year	$	155		$	65		$	90
Less: Reclassification adjustment for net losses realized in income		(54	)		24			31
Net unrealized gains	$	210		$	(89	)	$	121

	2009
	Before-Tax Amount			Tax Benefit (Expense)			Net-of-Tax Amount
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the year	$	625		$	(187	)	$	438
Less: Reclassification adjustment for net Gains realized in income		(30	)		(10	)		(20	)
Net unrealized gains	$	655		$	(197	)	$	458

Note 14 - Guarantees

FASB ASC 460-10 Guarantees FIN 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 Statement No. 5, Accounting for Contingencies (FAS 5) and also requires a guarantor to make significant new disclosures even when the likelihood of making any payments under the guarantee is remote.

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

Note 15 - Commitments and Contingencies

Financial Instruments With Off-Balance-Sheet Risk

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit to meet the financing needs of its customers. Such commitments have been made in the normal course of business and at current prevailing market terms. The commitments, once funded, are principally to originate commercial loans and other loans secured by real estate. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Company does not anticipate any losses as a result of these transactions. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets.

Commitments issued to potential borrowers of the Bank at December 31, 2010 and 2009 were as follows (dollars in thousands):

	2010		2009
Fixed-rate commitments	$	223	$	30
Variable/adjustable-rate commitments		6,424		1,674
Total	$	6,647	$	1,704

Interest rates range from 4.875% to 5.250% for fixed rate commitments at December 31, 201009.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments include loans-in-process, available borrowings under commercial line of credit agreements and available borrowings under home equity agreements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Operating lease

The Company has an operating lease for commercial space for its Abington Branch. The lease commenced upon occupancy in April 1999 for a ten year period with five options to renew for three years each. The annual lease cost is composed of minimum rent per square foot, plus a proportionate share of certain operating costs and a flat fee for the drive-up/ATM area, plus cost of living adjustments at renewal. The Company has been granted a limited right of first refusal for purchase.

The future minimum rental commitments under this lease at December 31, 2010 are as follows:

2011			49
Total		$	49

Note 16 - Fair Value Disclosures

Fair Value Measurements

Effective January 1, 2008, the Company adopted FASB ASC 820 Fair Value Measures and Disclosures SFAS No. 157, Fair Value Measurements, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. This standard 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 in the standard 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. Loans held for sale are recorded at fair value on a nonrecurring basis 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-to-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 value of all loans is 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 reflect the Bank’s current market pricing. The discount rates used for nonmaturity deposits are the current book rate of the deposits.

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

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

Off-balance-sheet instruments: Commitments to extend credit are generally short-term and are priced to market at the time of funding. Therefore, the estimated fair value of these financial instruments is nominal prior to funding.

The following table presents the assets reported on the consolidated balance sheets at their fair value as of December 31, 2010 by level within the fair value hierarchy. As required by FASB ASC 820 Fair value Measures and Disclosures, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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

	December 31, 2010
	Level I		Level II		Level III	Total
Assets:
Securities available-for-sale	$	1,172	$	13,408	$	$	14,580

	December 31, 2009
	Level I		Level II		Level III		Total
Assets:
Securities available-for-sale	$	1,187	$	18,211	$	-	$	19,398

Fair Value of Financial Instruments

The estimated fair value of the Company’s financial instruments at December 31, 2009 and 2008 was as follows (in thousands):

	2010				2009
	Carrying Amount		Estimated Fair value		Carrying Amount		Estimated Fair value
Financial assets:
Cash and cash equivalents	$	18,195		18,195	$	11,912		11,912
Investments available for sale		14,580		14,580		19,398		19,398
Restricted equity securities		1,087		1,087		1,143		1,143
Loans (gross)		121,916		122,594		116,030		114,483
Accrued interest receivable		580		580		665		665
Total financial assets	$	156,358		157,036	$	149,148		147,601
Financial liabilities:
Deposits	$	136,311		134,148	$	124,055		122,608
Other borrowings		7,147		7,638		12,000		12,378
Accrued interest payable		226		226		1,002		1,002
Total financial liabilities	$	143,684		142,012	$	137,057		135,988
Off-balance sheet liabilities:
Commitments to extend credit	$	5,251		5,251	$	5,251		5,251

Note 17 - 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 years ended December 31, 2010 and 2009 (dollars in thousands):

	2010			2009
Beginning balance	$	1,067		$	1,327
Additions		-			-
Collections		(90	)		(260	)
Ending balance	$	977		$	1,067

Note 18 - Litigation

At December 31, 2010, the Company was neither engaged in any existing nor aware of any pending legal proceedings. From time to time, the Company is a party to legal proceedings within the normal course of business wherein it enforces its security interest in loans made by it, and other maters of a similar nature.

Note 19 - Dividend Policy

Company

Payments of cash dividends to our stockholders may be dependent on the payment of a cash dividend from the Bank to the Company. The payment of cash dividends by the Bank to the Company is limited by regulations of the FDIC and the Pennsylvania Department of Banking. The Company’s future dividend policy is subject to the discretion of the Board of Directors and will depend upon a number of factors including future earnings, financial conditions, cash needs, and general business conditions. Holders of common stock will be entitled to receive dividends as and when declared by the board of directors out of funds legally available for that purpose.

Bank

The amount of dividends that may be paid by the Bank depends upon the Bank’s earnings and capital position. The Bank may not make a distribution that would constitute a return of capital during the three-year term of the business plan submitted in connection with the stock offering. The Bank may not make a capital distribution if, after making the distribution, it would be under capitalized.

Any payment of dividends by the Bank that would be deemed to be drawn out of its bad debt reserves would require the Bank to pay federal income taxes at the then current tax rate on the amount deemed distributed. We do not contemplate any distribution by the Bank that would result in this type of tax liability.

As a state bank subject to the regulations of the FDIC, the Bank must obtain approval for any dividend if the total of all dividends declared in any calendar year would exceed the total of its net profits, as defined by applicable regulations, for that year, combined with its retained net profits for the preceding two years, less any required transfers to surplus. In addition, the Bank may not pay a dividend in an amount greater than its retained earnings then on hand after deducting its losses and bad debts. For this purpose, bad debts are generally defined to include the principal amount of loans which are in arrears with respect to interest by six months or more unless such loans are fully secured and in the process of collection. Moreover, for purposes of this limitation, the Bank is not permitted to add the balance in its allowance for loan loss account to its undivided profits then on hand; however, it may net the sum of its bad debts as so defined against the balance in its allowance for loan loss account and deduct from undivided profits only bad debts as so defined in excess of that amount.

In addition, the FDIC is authorized to determine under certain circumstances relating to the financial condition of a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The payment of dividends that deplete a bank’s capital base could be deemed to constitute such an unsafe or unsound practice.

Note 20 - Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possible additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2010, the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2010, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios at December 31, 2010 and 2009 are presented in the following table (dollars in thousands):

At December 31, 2010:
Total Capital (to Risk-Weighted Assets):
North Penn Bank	$	18,982		14.75	%	>$10,298	>8.0%	>$12,873	>10.0%
Tier 1 Capital (to Risk-Weighted Assets):
North Penn Bank	$	17,450		13.56	%	>$ 5,149	>4.0%	>$ 7,724	>6.0%
Tier 1 Capital (to Average Assets):
North Penn Bank	$	17,450		10.68	%	>$ 5,370	>4.0%	>$ 6,713	>5.0%
Risk-Weighted Assets:	$	128,725
Average Assets:	$	163,322
Reconciliation of GAAP Capital to Regulatory Capital
Total Equity Capital December 31, 2010			$	17,704
Plus: Unrealized Gain/Loss on Investments				(249	)
Less: Disallowed Servicing Rights				(5	)
Total Tier Capital December 31, 2010			$	17,450
Plus: Allowance for loan losses				1,532
Total Risk-based Capital December 31, 2010			$	18,982

	Actual					For capital adequacy purposes		To be well capitalized under prompt corrective action provisions
	Amount		Ratio			Amount	Ratio	Amount	Ratio
At 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:	$	120,425
Average Assets:	$	146,866
Reconciliation of GAAP Capital to Regulatory Capital
Total Equity Capital December 31, 2009			$	16,670
Plus: Unrealized Gain/Loss on Investments				(2	)
Less: Disallowed Servicing Rights				(1	)
Total Tier Capital December 31, 2009			$	16,667
Plus: Allowance for loan losses				1,484
Total Risk-based Capital December 31, 2009			$	18,151

Note 21 - Parent Company Financial Information

Condensed financial information of North Penn Bancorp, Inc. (parent company only) was as follows:

BALANCE SHEETS

(Amounts in thousands)

	December 31,
Assets	2010			2009
Cash	$	170		$	848
Investment in subsidiary		17,588			16,671
Bank premises, net		1,101			1,155
Deferred income taxes		-			27
Due from subsidiary bank		731			684
Other assets		140			69
Total assets	$	19,730		$	19,454

Liabilities and Stockholders’ Equity
Accrued income taxes and other liabilities	$	158		$	184
Total liabilities		158			184
Preferred Stock		-			-
Common stock		158			158
Additional paid-in-capital		13,698			13,580
Retained earnings		8,995			8,541
Unearned ESOP shares		(836	)		(907	)
Accumulated other comprehensive loss		119			(2	)
Treasury stock- at cost		(2,562	)		(2,100	)
Total stockholders’ equity		19,572			19,270
Total Liabilities and Stockholders’ Equity	$	19,730		$	19,454

STATEMENTS OF INCOME

(Amounts in thousands)

	2010			2009
Income
Interest income	$	60		$	66
Other income		56			61
Total income		116			127
Expenses
Occupancy and equipment expense-depreciation		54			61
Other expenses		283			106
Total expenses		337			167
Loss before income tax benefit and equity in
undistributed earnings of subsidiary		(221	)		(40	)
Income tax benefit		(18	)		-
Loss before equity in undistributed earnings
of subsidiary		(203	)		(40	)
Equity in undistributed earnings of subsidiary		917			827
Net income	$	714		$	787

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

Operating activities:	2010			2009
Net income	$	714		$	787
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation expense		54			61
Deferred income tax provision		27			38
Undistributed income of subsidiary		(917	)		(827	)
Changes in other assets		50			(61	)
Changes in due from bank-operating		196			(221	)
Changes in other liabilities		(79	)		34
Net cash provided by (used in) operating activities		45			(189	)

Investing activities:		-			-


Financing activities:
Cash dividends paid		(207	)		(151	)
Purchase of treasury stock		(516	)		(1,446	)
Net cash used in financing activities		(723	)		(1,393	)

Net decrease in cash and cash equivalents		(678	)		(1,635	)

Cash and cash equivalents January 1		848			2,483
Cash and cash equivalents December 31	$	170		$	848

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On August 13, 2009, McGrail Merkel Quinn and Associates resigned as North Penn Bancorp, Inc’s (the “Company”) independent registered public accounting firm. McGrail Merkel Quinn & Associates’ report on the Company’s consolidated financial statements for the two fiscal years ended December 31, 2008 and 2007 did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.

During the fiscal years ended December 31, 2008 and 2007, as well as the interim period preceding the resignation of McGrail Merkel Quinn & Associates, there were no disagreements or reportable events of the kind described in Item 304 (a)(1)(v) of Regulation S-K of the Securities and Exchange Commission (the “Commission”) between the Company and McGrail Merkel Quinn & Associates on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of McGrail Merkel Quinn & Associates would cause McGrail Merkel Quinn and Associates to make a reference to the subject matter of the disagreement or reportable event in connection with the issuance of its audit reports.

ITEM 9A.

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 are 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.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, and management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 based upon the criteria set forth in a report entitled Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, the Company’s management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2010.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

There have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors

The Company’s Board of Directors consists of seven members. The Board is divided into three classes, as nearly equal in number as possible. Information regarding the members of the Board of Directors is provided below. Unless otherwise stated, each individual has held his or her current occupation for the last five years. The age indicated for each individual is as of March 31, 2011. The indicated period of service as a director includes the period of service as a director of North Penn Bank.

Directors with Terms Ending in 2013

Gordon S. Florey is a retired real estate appraiser and President of Ariel Landowners. His knowledge of real estate, particularly in West Scranton, has been a valuable asset to the Board. He is active in a number of civic and charitable organizations in Lackawanna County and has been a Director since 1979. Age 85.

Virginia D. McGregor is active in developing business in our market. She sits on the Board of Directors of McGregor Industries, Inc., a family-owned business, and is Vice-Chairman of the Board of Community Medical Center. Ms. McGregor has extensive knowledge of the local business environment and is involved in a number of community organizations. Director since 2007. Age 48.

James W. Reid, Esq. is an attorney and partner in Oliver Price & Rhodes, a large law firm in Lackawanna County. Mr. Reid provides expertise in commercial and residential real estate transactions and has been a valuable legal resource to the Board. He is involved in a number of civic and charitable organizations within the Bank’s market area. Director since 2001. Age 59.

Directors with Terms Ending in 2012

Herbert C. Kneller is a Project Engineer for Hanson Aggregates Pennsylvania, Inc., where he has been involved in local investment, including commercial and government projects in Northeastern Pennsylvania. His familiarity with the demographics and communities in Monroe County has been a valuable asset to the Board. Director since 1975. Age 66.

Frank H. Mechler is a retired President of North Penn Bank and is currently the Corporate Secretary of North Penn Bancorp and North Penn Bank. Mr. Mechler is valued by the Board for his executive management experience and knowledge of financial industry issues. Director since 1979. Age 91.

Directors with Terms Ending in 2011

Frederick L. Hickman is the President and Chief Executive Officer of North Penn Bancorp and North Penn Bank. His experience in the local banking industry affords the Board valuable insight regarding the business and operation of the Bank. Mr. Hickman’s knowledge of the Company’s and the Bank’s business and history, combined with his success and strategic vision, position him well to continue to serve as our President and Chief Executive Officer. Director since 2000. Age 55.

Kevin M. Lamont is the Chairman of the Board of North Penn Bancorp and North Penn Bank. He is also President of Millennium Health Services, Inc. and President of Lamont Development Company, Inc. Mr. Lamont developed, owned and operated two major assisted living communities in Northeast Pennsylvania. Mr. Lamont has been a licensed Nursing Home Administrator in Pennsylvania since 1980 and has extensive experience in all aspects of business management and finance. Director since 2004. Age 52.

Executive Officers Who are Not Also Directors

Information about the executive officers of the Company is included in Item 1 of this report and is incorporated herein by reference.

Audit Committee

The Company has a separately designated Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The directors serving on the Audit Committee are Kevin M. Lamont, Herbert C. Kneller, and Frank H. Mechler. The Board of Directors has determined that the Audit Committee does not have a member who is an “audit committee financial expert” as such term is defined by the rules and regulations of the Securities and Exchange Commission. While the Board recognizes that no individual Board member meets the qualifications required of an “audit committee financial expert,” the Board believes that appointment of a new director to the Board of Directors and to the Audit Committee at this time is not necessary as the level of financial knowledge and experience of the current members of the Audit Committee, including the ability to read and understand fundamental financial statements, is cumulatively sufficient to discharge adequately the Audit Committee’s responsibilities.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s officers and directors, and persons who own more than 10% of the Company’s common stock, to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Executive officers, directors and greater than 10% shareholders are required by regulation to furnish the Company with copies of all Section 16(a) reports they file.

Based solely on the Company’s review of the copies of the reports it has received and written representations provided to it from the individuals required to file the reports, the Company believes that each of its executive officers and directors has complied with applicable reporting requirements for transactions in the Company’s common stock during the year ended December 31, 2010, except that Thomas J. Dziak filed one late Form 4 in which one transaction was not reported on a timely basis.

Code of Ethics

The Company has adopted a Code of Ethics that applies to directors, officers and employees of the Company and the Bank. A copy of the Code of Ethics is posted on the Company’s Web site at www.northpennbank.com. The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of its Code of Ethics by posting such information on its Web site.

ITEM 11.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table provides information concerning total compensation earned or paid to the Chief Executive Officer and the two other most highly compensated executive officers of the Company who served in such capacities at December 31, 20. These three officers are referred to as the named executive officers in this report:

Name and Principal Position	Year	Salary ($)		Bonus ($)		Stock Awards ($)(1)		Option Awards ($)(2)		Fees Earned or Paid In Cash(3)		All Other Compen-sation ($)		Total ($)
Frederick L. Hickman	2010	$	187,460	$	35,000	$	69,467	$	40,413	$	21,010	$	39,785	$	393,135
President and CEO	2009	$	182,000	$	34,000	$	73,656	$	58,858	$	18,200	$	39,280	$	405,994

Thomas J. Dziak	2010	$	96,243	$	-	$	-	$	-	$	-	$	20,117	$	116,360
Exec. Vice President	2009	$	95,290	$	4,000	$	-	$	-	$	-	$	19,571	$	118,861

Thomas A. Byrne	2010	$	98,550	$	20,000	$	11,938	$	12,250	$	-	$	17,244	$	159,982
Sr. Vice President	2009	$	95,680	$	20,000	$	13,500	$	10,532	$	-	$	15,169	$	154,881

(1)

Reflects the aggregate grant date fair value for restricted stock awards granted during the year computed in accordance with ASC Topic 718. Assumptions used in the calculations of these amounts are included in Note 11 to the Company’s audited financial statements for the fiscal year ended December 31, 2010. When shares become vested and are distributed from the trust in which they are held, the recipient will also receive an amount equal to accumulated cash and stock dividends (if any) paid with respect thereto, plus earnings thereon

(2)	Reflects the aggregate grant date fair value for stock options granted during the year computed in accordance with ASC Topic 718. Assumptions used in the calculations of these amounts are included in Note 11 to the Company’s audited financial statements for the fiscal year ended December 31, 2010.

(3)	Reflects the fees paid for Board of Director service.

Outstanding Equity Awards at Fiscal Year-End

The following table provides information concerning unexercised options and stock awards that have not vested for each named executive officer outstanding as of December 31, 2009.

	Option Awards									Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable			Number of Securities Underlying Unexercised Options (#) Unexercis-able			Option Exercise Price ($)		Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested (#)			Market Value of Shares or Units of Stock That Have Not Vested ($)(1)
Frederick L. Hickman		9,608	(2)		2,402	(2)	$	10.21	9/26/2016		329	(2)	$	5,758
		600	(3)		400	(3)	$	9.95	10/23/2017
		6,000	(4)		9,000	(4)	$	8.25	5/28/2018		5,589	(4)	$	97,808
		4,219	(5)		16,876	(5)	$	9.00	11/04/2019		6,548	(5)	$	114,590
					16,495	(6)	$	9.55	8/24/2020		7,274	(6)	$	127,295

Thomas J. Dziak		6,116	(2)		1,529	(2)	$	10.21	9/26/2016		273	(2)	$	4,778
		33	(3)		22	(3)	$	9.95	10/23/2017
		2,400	(4)		3,600	(4)	$	8.25	5/28/2018		2,235	(4)	$	39,113

Thomas A. Byrne		4,368	(2)		1,092	(2)	$	10.21	9/26/2016		273	(2)	$	4,778
		162	(3)		108	(3)	$	9.95	10/23/2017
		1,600	(4)		2,400	(4)	$	8.25	5/28/2018		1,491	(4)	$	23,888
		755	(5)		3,020	(5)	$	9.00	11/04/2019		1,200	(5)	$	21,000
					5,000	(6)	$	9.55	8/24/2020		1,250	(6)	$	21,875

(1)	Based upon the Company’s closing stock price of $17.50 on December 31, 2010.

(2)	These grants vest at the rate of 20% per year beginning on September 26, 2007.

(3)	These stock options vest at the rate of 20% per year beginning on October 23, 2008.

(4)	These grants vest at the rate of 20% per year beginning on May 28, 2009.

(5)	These stock options vest at the rate of 20% per year beginning on November 4, 2010.

(6)	These grants vest at the rate of 20% per year beginning on August 24, 2011.

Potential Payments Upon Termination or Change in Control

Employment Agreements. The Company and the Bank entered into amended and restated employment agreements with Frederick L. Hickman on May 28, 2008 and with Thomas J. Dziak and Thomas A. Byrne on January 4, 2008. The employment agreements with Messrs. Hickman and Dziak provide for three-year terms, while Mr. Byrne entered an agreement for a two-year term. The Board of Directors annually reviews the employment agreements and may renew the terms of the agreements for an additional year and adjust the executives’ base salaries based upon the results of its review. In addition to base salaries, the employment agreements provide for bonus payments, benefit plan participation, perquisites and business expense reimbursement.

The employment agreements enable the Company and the Bank to terminate the executives’ employment for cause, as defined in the employment agreements, at any time. If any named executive officer is terminated for cause, he will receive his base salary through the date of termination and retain the rights to any vested benefits subject to the terms of the plan or agreement under which those benefits are provided.

If the Company or the Bank terminates the executive’s employment for reasons other than for cause, or if the executive resigns from the Company or the Bank under specified circumstances that constitute constructive termination, the executive or, if he dies, his beneficiary, receives an amount equal to his base salary for the remaining term of the agreement, plus his average bonus paid over the term of the employment agreement and the contributions that would have been made on his behalf to any employee benefit plans of the Company and the Bank during the remaining term of the employment agreement. The Bank also provides continued life, medical and dental coverage for the remaining term of the employment agreements.

The employment agreements for the named executive officers provide that if they become disabled and their employment is terminated, they will be entitled to disability pay equal to 100% of their bi-weekly base salary in effect at the date of termination. They would continue to receive disability payments until the earlier of: (1) the date they return to full employment with us, (2) their death, (3) attainment of age 65, or (4) the date their employment agreements would have terminated had their employment not terminated because of disability. All disability payments would be reduced by the amount of any disability benefits payable under our disability plans. In addition, each named executive officer would be continue to be covered to the greatest extent possible under all benefit plans in which they participated before their disability as if they were actively employed by us.

Under their employment agreements, the executives’ estates are entitled to receive the compensation due to them through the end of the month in which their death occurs.

The employment agreements provide that an executive is entitled to change in control compensation if a change in control has occurred and the executive’s employment is terminated within two years following the change in control due to (i) the executive’s dismissal or (ii) the executive’s voluntary resignation following any material demotion; loss of title, office or significant authority or responsibility; material reduction in annual compensation or benefits; or relocation of his principal place of employment by more than 25 miles from its location immediately prior to the change in control. The executive would not be entitled to change in control compensation if his termination is because of his death, disability, retirement or for cause.

Under the employment agreements, if an executive’s employment is terminated following a change in control under the terms described above, the executive will be entitled to receive a cash payment equal to 2.99 times (in the case of Mr. Hickman and Mr. Dziak) or two times (in the case of Mr. Byrne) the executive’s average annual taxable compensation for the five most recent taxable years that the executive has been employed by North Penn. In addition, North Penn would also be obligated to continue and/or pay for the former executive’s life, medical and dental coverage for three years (in the case of Mr. Hickman and Mr. Dziak) or two years (in the case of Mr. Byrne).

Mr. Hickman is also entitled to receive an additional tax indemnification payment (a “gross-up” payment) if payments under his employment agreement or any other payments trigger liability under Sections 280G and 4999 of the Internal Revenue Code for an excise tax on “excess parachute payments.” Under applicable law, the excise tax is triggered by change in control-related payments that equal or exceed three times the executive’s average annual taxable compensation over the five taxable years preceding the change in control. The excise tax equals 20% of the amount of the payment in excess of the executive’s average taxable compensation over the preceding five taxable year periods. North Penn (or its successor) is not able to take a federal tax deduction for excess parachute payments. Such gross-up payments would be in addition to his change in control severance payments noted above.

With respect to the agreements with Mr. Dziak and Mr. Byrne, in the event payments and benefits under their respective employment agreement, together with other payments and benefits the executive may receive, would constitute an excess parachute payment under Section 280G of the Internal Revenue Code, these payments to the executive will be reduced by the minimum amount necessary to avoid the payments constituting excess parachute payments.

Addendums to Employment Agreements. In connection with the execution of the merger agreement with Norwood, Mr. Hickman, Mr. Dziak and Mr. Byrne each entered into an addendum to his employment agreement. In the event that the merger agreement is terminated prior to completion of the merger, each of the addendums would terminate and be of no further force and effect. In the addendum to his employment agreement, Mr. Hickman agreed that the maximum change in control severance benefit under his employment agreement will be $597,344, that additional income generated by the exercise of stock options or the disposition of shares acquired upon the exercise of stock options would not be taken into account in calculating any change in control severance compensation, and that he would execute a full release of claims shortly before completion of the merger.

In the addendum to his employment agreement, Mr. Dziak agreed that he would not compete with Norwood or any of its subsidiaries for a period beginning on the effective date of the merger and ending on the later of four months following the date of the merger or three months following his termination of employment with Norwood, that additional income generated by the exercise of stock options or the disposition of shares acquired upon the exercise of stock options would not be taken into account in calculating any change in control severance compensation, and that he would execute a full release of claims shortly before completion of the merger.

In the addendum to his employment agreement, Mr. Byrne agreed that if he is an employee in good standing with Norwood as of the date that is one month following the effective date of the merger he would receive $50,000 and if he is an employee in good standing with Norwood as of the date that is 12 months following the effective date of the merger he would receive an additional $30,000, that he would not compete with Norwood or any of its subsidiaries for a period beginning on the effective date of the merger and ending on the later of one year following the date of the merger or three months following his termination of employment with Norwood, that Norwood would continue to provide certain country club and automobile perquisites following the merger, and that additional income generated by the exercise of stock options or the disposition of shares acquired upon the exercise of stock options would not be taken into account in calculating any change in control severance compensation.

Supplemental Executive Retirement Agreements. North Penn Bank has entered into supplemental executive retirement agreements with Mr. Hickman, Mr. Dziak and Mr. Byrne. Under these agreements, upon their separation from service on or after the normal retirement age of 65, Mr. Hickman, Mr. Dziak and Mr. Byrne will receive benefits of $83,000, $46,000 and $43,000 per year, respectively, for 10 years. No benefits are payable under the supplemental executive retirement agreements following termination for cause. If the executive voluntarily terminates employment before his normal retirement age, he will receive an annual retirement benefit based on the liability for the normal retirement benefit accrued by the Bank through the most recent plan year and as is reflected in a schedule to the supplemental executive retirement agreement. In the event the executive is terminated involuntarily before his normal retirement age or terminates employment following a change in control before his normal retirement age, the Bank (or its successor) will pay the executive an annual benefit determined by vesting the executive in the present value of the normal retirement benefit, discounted using a 4.0% discount rate. The completion of the merger with Norwood will constitute a change in control for purposes of North Penn’s supplemental executive retirement agreements.

In connection with the execution of the merger agreement with Norwood, Mr. Hickman entered into an addendum to his supplemental executive retirement agreement that eliminated the change in control benefit and provided that if he remains employed until the closing of the merger and receives a change in control severance payment under his employment agreement, he will remain entitled to receive the voluntary early termination benefit under the supplemental executive retirement agreement and not the involuntary early termination benefit.

Equity-Based Awards

Upon termination due to disability, outstanding stock options granted pursuant to our 2006 Omnibus Stock Option Plan and 2009 Equity Incentive Plan automatically vest and remain exercisable until the earlier of one year from the date of termination due to disability or the expiration date of the stock options. Restricted stock awards granted to the executives under the plans also vest in full upon termination due to disability.

Upon termination due to death, outstanding stock options automatically vest and remain exercisable until the earlier of one year from the date of termination due to death or the expiration date of the stock options. Restricted stock awards granted to the executives under the plans also vest in full upon termination due to death.

In the event of a change in control of the Company or the Bank, outstanding stock options automatically vest and, if the option holder is terminated other than for cause within twelve months of the change in control, will remain exercisable until the expiration date of the stock options. Restricted stock awards granted to these officers under these plans also vest in full upon a change in control.

Directors’ Compensation

The following table sets forth the compensation received by non-employee directors for their service on our Board of Directors during 2010.

Name	Fees Earned or Paid in Cash ($)		Stock Awards ($)(1)		Option Awards ($)(2)		Total ($)
Gordon S. Florey		17,860		5,730		3,675		27,265
Herbert C. Kneller		22,690		5,730		3,675		32,095
Kevin M. Lamont		29,060		47,750		24,500		101,310
Virginia D. McGregor		18,070		5,730		3,675		27,475
Frank H. Mechler		19,330		5,730		3,675		28,735
James W. Reid		22,060		5,730		3,675		31,465

(1)

Reflects the aggregate grant date fair value for restricted stock awards granted during the year computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 – Share Based Payment (“ASC Topic 718”). The amounts were calculated based upon the stock price of $9.55 on the date of grant. When shares become vested and are distributed from the trust in which they are held, the recipient will also receive an amount equal to accumulated cash and stock dividends (if any) paid with respect thereto, plus earnings thereon. At December 31, 2010, the non-employee directors had unvested shares of restricted stock as follows: Mr. Florey, 1,112 shares; Mr. Kneller, 1,090 shares; Mr. Lamont, 9,480 shares; Ms. McGregor, 1,225 shares; Mr. Mechler, 1,287 shares; and Mr. Reid, 1,116 shares.

(2)

Reflects the aggregate grant date fair value for stock options granted during the year computed in accordance with ASC Topic 718. Assumptions used in the calculations of these amounts are included in Note 11 to the Company’s audited financial statements for the fiscal year ended December 31, 2010. These amounts reflect the aggregate grant date fair value for these options over their five year vesting period, computed in accordance with ASC Topic 718, and do not correspond to the actual value that may be recognized by the named director. At December 31, 2010, the non-employee directors had unvested stock options as follows: Mr. Florey, 2,521; Mr. Kneller, 2,500; Mr. Lamont, 20,594; Ms. McGregor, 2,847; Mr. Mechler, 2,873; and Mr. Reid, 2,532.

Cash Retainer and Meeting Fees for Directors. The following table sets forth the applicable retainers and fees that were paid to our directors for their service on our Board of Directors during 2010.

Monthly Retainer	$	600
Board Meeting Fees	$	750
Board Meeting Fees (Chairman only)	$	1,100
Committee Meeting Fees	$	210
Audit Committee Meeting Fees (Chairman only)	$	420

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

The following table provides information as of January 31, 2011 about the persons known to the Company to be the beneficial owners of more than 5% of the Company’s outstanding common stock. A person may be considered to beneficially own any shares of common stock over which he or she has, directly or indirectly, sole or shared voting or investment power.

Name and Address	Number of Shares Beneficially Owned			Percent of Outstanding Common Stock Beneficially Owned
North Penn Bank Employee Stock Ownership Plan 216 Adams Avenue Scranton, Pennsylvania 18503		124,794			9.4	%
Kevin M. Lamont 216 Adams Avenue Scranton, Pennsylvania 18503		103,756			7.8	%
Frederick L. Hickman 216 Adams Avenue Scranton, Pennsylvania 18503		102,463			7.6	%
Philip V. Oppenheimer Carl K. Oppenheimer 119 West 57th Street, Suite 1515 New York, NY 10019		82,665	(2)		6.2	%

(2)

Based on information filed in Schedule 13G with the Securities and Exchange Commission on March 18, 2010 and included shares held by each of P. Oppenheimer Investment Partnership, L.P., Oppenheimer-Spence Financial Services Partnership L.P., Oppenheimer-Close International, Ltd., Oppvest II, LLC and Oppvest, LLC.

The following table provides information as of January 31, 2011 about the shares of North Penn common stock that may be considered to be beneficially owned by each director, each executive officer named in the summary compensation table in Item 11 of this report and all directors and executive officers of the Company as a group. A person may be considered to beneficially own any shares of common stock over which he or she has, directly or indirectly, sole or shared voting or investment power. Unless otherwise indicated, each of the named individuals has sole voting power and sole investment power with respect to the number of shares shown.

Name of Beneficial Owner	Amount and Nature of Beneficial Ownership(1)			Number of Shares That May be Acquired Within 60 Days by Exercising Options		Percent of Class(2)
Thomas A. ByrnAe		16,337	(3)		6,885		1.7	%
Thomas J. Dziak		15,969	(4)		8,549		1.8	%
Gordon S. Florey		3,263	(5)		294		*
Frederick L. Hickman		82,035	(6)		20,428		7.6	%
Herbert C. Kneller		2,942	(7)		299		*
Virginia D. McGregor		5,562	(8)		536		*
Frank H. Mechler		6,977	(9)		439		*
Kevin M. Lamont		98,578	(10)		5,178		7.7	%
James W. Reid		3,453	(11)		296		*
Executive Officers and Directors as a group (10 persons)		236,366			44,404		20.3	%

*	Less than 1%.

(1)	Excludes shares that may be acquired upon the exercise of stock options.

(2)	Based on 1,336,136 shares of North Penn common stock outstanding and entitled to vote as of January 31, 2011, plus, for each person, the number of shares that such person may acquire within 60 days by exercising stock options.

(3)	Includes 2,879 shares owned by Mr. Byrne held in 401(k) Plan, 3,649 shares owned by Mr. Byrne held in ESOP, 2,778 shares owned by spouse’s IRA and 4,214 shares of unvested stock.

(4)	Includes 2,010 shares owned by Mr. Dziak held in 401(k) Plan, 3,451 shares owned by Mr. Dziak held in ESOP, 5,418 shares held by Mr. Dziak in an IRA and 2,508 shares of unvested restricted stock.

(5)	Includes 2,000 shares owned by Mr. Florey held in IRA and 1,109 shares of unvested restricted stock.

(6)

Includes 14,720 shares owned by Mr. Hickman held in 401(k) Plan, 6,399 shares owned by Mr. Hickman held in ESOP, 109 shares owned by Mr. Hickman’s wife, 109 shares held by Mr. Hickman as custodian for his son and 109 shares held by Mr. Hickman as custodian for his daughter and 19,739 shares of unvested restricted stock.

(7)	Includes 1,093 shares of unvested restricted stock.

(8)	Includes 1,224 shares of unvested restricted stock.

(9)	Includes 5,460 shares owned by Mr. Mechler as trustee for Judith Mechler Trust and 1,285 shares of unvested restricted stock.

(10)	Includes 9,478 shares of unvested restricted stock.

(11)	Includes 1,117 shares of unvested restricted stock.

Management of the Company knows of no arrangements, including any pledge by any person or securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.

The following table sets forth information as of December 31, 2010 about North Penn common stock that may be issued upon the exercise of options under the Company’s equity incentive plans.

Plan Category	Number of securities to be issued upon the exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by security holders		157,246	$	9.28		0

Equity compensation plans not approved by security holders		—		—		—

Total

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Director Independence

The Company’s Board of Directors currently consists of seven members, all of whom are independent under the listing standards of the Nasdaq Stock Market, except for Frederick L. Hickman, who is President and Chief Executive Officer of the Company and the Bank. In determining the independence of its directors, the Board considered transactions, relationships and arrangements between the Company and its directors that are not required to be disclosed in this report, including loans or lines of credit that the Bank has directly or indirectly made to Directors Hickman, Kneller and Lamont.

Transactions with Related Persons

Except as described below, all existing loans or lines of credit that the Bank has directly or indirectly made to related persons have been (1) made in the ordinary course of business, (2) made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the lender, and (3) did not involve more than the normal risk of collectibility or present other unfavorable features.

The Bank maintains a program that enables all employees to obtain residential mortgage loans and auto loans at a reduction of 2% from the rates available to the public. Mr. Hickman has a mortgage loan from the Bank that was made under this program at a rate of 3.65%. The largest amount of principal outstanding during 2010 on this loan was approximately $89,648 and the outstanding balance at February 28, 2011 was $68,950. The total principal and interest paid on this loan during 2010 was approximately $20,950 and $3,050, respectively.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the fees billed to the Company for the fiscal years ending December 31, 2010 and 2009. For 2009, the amounts include fees billed for services performed by McGrail Merkel Quinn & Associates for the period between January 1, 2009 and August 13, 2009 and for the services performed by J.H. Williams & Co., LLP for the period between October 7, 2009 and December 31, 2009.

	2010			2009(1)
Audit fees	$	68,500		$	59,000
Audit related fees				—
Tax fees(2)		11,500		$	8,000
All other fees		2,000	(3)		—

(1)	McGrail Merkel Quinn & Associates billed $7,000 for audit fees in 2009. The remainder of the fees in 2009 was billed by J.H. Williams & Co., LLP.

(2)	Tax fees consist of compliance fees for the preparation of original tax returns. Tax service fees also include fees relating to other tax advice, tax consulting and planning.

(3)	McGrail Merkel Quinn & Associates billed $2,000, in 2010, for re-certifying their opinion for the 200910-K.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

2.1		Agreement and Plan of Merger, dated December 14, 2010, by and among Norwood Financial Corp., Wayne Bank, North Penn Bancorp, Inc. and North Penn Bank (incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-k filed On December 17, 2010 (File No. 0-52839)).

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

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

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

10.1		*Amended and Restated Employment Agreement between North Penn Bancorp, Inc., North Penn Bank and Frederick L. Hickman incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 30, 2008. (file no. 000-52839)

10.2		*Amended and Restated Employment Agreement between North Penn Bancorp, Inc., North Penn Bank and Thomas J. Dziak incorporated herein by reference to Exhibit 10.2 to the Company’s Form 10-KSB for the quarter ended December 31, 2007. (file no. 000-52839)

10.3		*Amended and Restated Employment Agreement between North Penn Bancorp, Inc., North Penn Bank and Thomas A. Byrne incorporated herein by reference to Exhibit 10.3 to the Company’s Form 10-KSB for the quarter ended December 31, 2007. (file no. 000-52839)

10.4		*North Penn Bancorp, Inc. 2006 Omnibus Stock Option Plan (Incorporated herein by reference to Appendix A to Schedule 14A Definitive Proxy Statement of North Penn Bancorp, Inc. filed on March 31, 2006 (File No. 000-51234))

10.5		*North Penn Bancorp, Inc. 2009 Equity Incentive Plan (Incorporated herin by reference to Appendix A to Schedule 14A Definitive Proxy Statement of Northe Penn Bancorp, Inc. filed on April 20, 2009 (File No. 000-52839)

10.6		*Supplemental Executive Retirement Agreement dated December 14, 2004 between North Penn Bank and Frederick L. Hickman (Incorporated herein by reference to Exhibit 10.7 to Form 10-K of North Penn Bancorp, Inc. for the year ended December 31, 2006 (File No. 000-51234))

10.7		*Supplemental Executive Retirement Agreement dated December 14, 2004 between North Penn Bank and Thomas J. Dziak (Incorporated herein by reference to Exhibit 10.8 to the Company’s Registration Statement on Form SB-2 (File No. 333-143601))

10.8		*Supplemental Executive Retirement Agreement dated April 1, 2005 between North Penn Bank and Thomas A. Byrne (Incorporated herein by reference to Exhibit 10.9 to the Company’s Registration Statement on Form SB-2 (File No. 333-143601))

10.9		*Addendum to the North Penn Bank and North Penn Bancorp, Inc. Amended and Restated Employment Agreement by and among Frederick L. Hickman, North Penn Bancorp, Inc. and North Penn Bank (Incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-k filed on December 17, 2010 (File No. 0-52839)).

10.10		*Addendum to the North Penn Bank and North Penn Bancorp, Inc. Amended and Restated Employment Agreement by and among Thomas J. Dziak, North Penn Bancorp, Inc. and North Penn Bank (Incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-k filed on December 17, 2010 (File No. 0-52839))

10.11		*Addendum to the North Penn Bank and North Penn Bancorp, Inc. Amended and Restated Employment Agreement by and among Thomas A. Byrne, North Penn Bancorp, Inc. and North Penn Bank (Incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-k filed on December 17, 2010 (File No. 0-52839))

10.12		*Addendum to the North Penn Amended and Restated Supplemental Executive Retirement Agreement by and among Frederick L. Hickman, North Penn Bank (Incorporated herein by reference to Exhibit 10.4 of the Company’s 8-k filed on December 17, 2010 (File No. 0-52839

21		List of Subsidiaries

23		Consent of Independent Registered Public Accounting Firm

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

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

32.1		Section 1350 Certification

32.2		Section 1350 Certification

* Management contract or compensatory plan contract or arrangement filed pursuant to Item 601(b)(10)(ii)(A) of Regulation S-B.

SIGNATURES

In accordance with Section 13 or 15(d) 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. (Registrant)

Date March 31, 2011	By:	/s/ Frederick L. Hickman
		Frederick L. Hickman
		President and Chief Executive Officer Principal Executive Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Gordon S. Florey			March 31, 2011
Gordon S. Florey, Director			Date

/s/ Frederick L. Hickman			March 31, 2011
Frederick L. Hickman			Date
President, Chief Executive Officer and Director

/s/ Herbert C. Kneller			March 31, 2011
Herbert C. Kneller, Director			Date

/s/ Virginia D. McGregor			March 31, 2011
Virginia D. McGregor, Director			Date

/s/ Frank H. Mechler			March 31, 2011
Frank H. Mechler, Director			Date

/s/ James W. Reid			March 31, 2011
James W. Reid, Director			Date

/s/ Kevin M. Lamont			March 31, 2011
Kevin M. Lamont, Chairman of the Board and Director			Date

Attached files

North Penn Bancorp Inc Reports

Also read