UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

|X|   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

      For the quarterly period ended June 30, 2004

                                       or

|_|   Transition Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

      For the transition period from             to             .
                                     -----------    ------------

                                    000-50330
                             Commission File Number

                         EAST PENN FINANCIAL CORPORATION
              (Exact name of registrant as specified in it charter)

          Pennsylvania                                         65-1172823
(State or other jurisdiction of                     (IRS Employer Identification
incorporation or organization)                       Number)

                 731 Chestnut Street, Emmaus, Pennsylvania 18049
                    (Address of principal executive offices)

                   Registrant's telephone number: 610-965-5959

      Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES |X|         NO |_|

      Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

YES |_|         NO |X|

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

      Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

6,299,460 shares of common stock, par value $0.625 per share, outstanding as of
July 30, 2004.

<PAGE>

                         EAST PENN FINANCIAL CORPORATION
                                      INDEX
                          QUARTERLY REPORT ON FORM 10-Q

                                                                            Page
Part I.  FINANCIAL INFORMATION

         Item 1. Financial Statements

                 Consolidated Balance Sheets                                  3
                    June 30, 2004 (Unaudited) and December 31, 2003

                 Consolidated Statements of Income (Unaudited)                4
                    Three and six months ended June 30, 2004 and
                    June 30, 2003

                 Consolidated Statements of Stockholders' Equity              5
                    (Unaudited) Three and six months ended June 30,
                    2004 and June 30, 2003

                 Consolidated Statements of Cash Flows (Unaudited)            6
                    Six months ended June 30, 2004 and June 30, 2003

                 Notes to Interim Consolidated Financial Statements
                    (Unaudited)                                               7

         Item 2. Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                        10

         Item 3. Quantitative and Qualitative Disclosures About Market
                  Risk                                                       19

         Item 4. Controls and Procedures                                     19

Part II. OTHER INFORMATION

         Item 1. Legal Proceedings                                           19

         Item 2. Changes in Securities and Use of Proceeds and Issuer
                  Purchases of Equity Securities                             19

         Item 3. Defaults Upon Senior Securities                             20

         Item 4. Submission of Matters to a Vote of Security Holders         20

         Item 5. Other Information                                           21

         Item 6. Exhibits and Reports on Form 8-K                            21

SIGNATURES                                                                   23

EXHIBIT INDEX                                                                24


                                     Page 2
<PAGE>

ITEM 1. FINANCIAL STATEMENTS

                         EAST PENN FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                          June 30,         December 31,
(In thousands, except per share data)                      2004                2003
                                                        (Unaudited)         (Audited)
                                                        -----------        ------------
<S>                                                      <C>                <C>
  ASSETS
  Cash and due from banks                                $   7,206          $   7,526
  Interest bearing deposits                                    138                333
  Federal funds sold                                            --                734
                                                         ---------          ---------
      Cash and cash equivalents                              7,344              8,593
  Interest bearing time deposits                                --                200
  Securities available for sale                             96,336            106,230
  Securities held to maturity                                1,050              1,051
                                                         ---------          ---------
     Total securities                                       97,386            107,281
  Mortgages held for sale                                    1,063                956
  Loans, net of unearned income                            227,104            207,016
    Less: allowance for loan losses                         (2,654)            (2,403)
                                                         ---------          ---------
      Total net loans                                      224,450            204,613

  Bank premises and equipment, net                           7,398              6,181
  Other real estate owned                                       16                276
  Bank owned life insurance                                  7,077              5,426
  Accrued interest receivable and other assets               5,484              4,413
                                                         ---------          ---------

         Total assets                                    $ 350,218          $ 337,939
                                                         =========          =========

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
  Deposits:
     Noninterest bearing                                 $  43,867          $  36,961
     Interest bearing                                      247,189            242,937
                                                         ---------          ---------
     Total deposits                                        291,056            279,898
  Federal funds purchased and securities
   sold under agreements to repurchase                       5,626              4,512
  Long-term debt                                            25,000             25,000
  Junior subordinated debentures                             8,248                 --
  Mandatory redeemable capital debentures                       --              8,000
  Accrued interest payable and other liabilities               966                986
                                                         ---------          ---------

         Total liabilities                                 330,896            318,396

STOCKHOLDERS' EQUITY
  Preferred stock, no par value; authorized
     16,000,000 shares; none issued                             --                 --
 Common stock, par value $0.625 per share
     authorized 40,000,000 shares; issued 2004
     6,607,752 shares; 2003 6,607,452 shares;
     outstanding 2004  6,299,460 shares; 2003
     6,299,160 shares                                        4,130              4,130
  Surplus                                                    9,220              9,218
  Retained earnings                                          8,702              7,645
  Accumulated other comprehensive income (loss)               (880)               400
  Less: Treasury stock - at cost, 308,292 shares            (1,850)            (1,850)
                                                         ---------          ---------

         Total stockholders' equity                         19,322             19,543
                                                         ---------          ---------

         Total liabilities and
            stockholders' equity                         $ 350,218          $ 337,939
                                                         =========          =========
</TABLE>

See Notes to Consolidated Financial Statements


                                     Page 3
<PAGE>

                                    EAST PENN
                              FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME
            Three Months and Six Months Ended June 30, 2004 and 2003
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                     Three Months Ended     Six Months Ended
                                                     ------------------     -----------------
(In thousands, except per share data)                  2004       2003       2004       2003
                                                      ------     ------     ------     ------
<S>                                                   <C>        <C>        <C>        <C>
Interest income
  Interest and fee income on loans                    $3,048     $2,876     $5,997     $5,727
  Securities:
     Taxable                                             903        564      1,892      1,118
     Tax-exempt                                          132        143        259        279
  Other                                                    6         34         11         64
                                                      ------     ------     ------     ------
         Total interest income                         4,089      3,617      8,159      7,188

Interest expense
  Deposits                                               898      1,112      1,843      2,285
  Federal funds purchased and securities
    sold under agreements to repurchase                    9          9         22         18
  Other borrowed funds                                   199         --        397         --
  Junior subordinated debentures                         136         --        272         --
                                                      ------     ------     ------     ------
         Total interest expense                        1,242      1,121      2,534      2,303
                                                      ------     ------     ------     ------

         Net interest income                           2,847      2,496      5,625      4,885

  Provision for loan losses                              129        114        283        228
                                                      ------     ------     ------     ------

         Net interest income after
           provision for loan losses                   2,718      2,382      5,342      4,657

Other income
  Customer service fees                                  239        239        460        452
  Mortgage banking activities, net                       102        113        210        211
  Net realized gains on sale of securities                 8          5         25          5
  Income from investment in life insurance                75         68        151        134
  Net realized gains on sale of other real estate         61         --         61         --
  Other income                                            67         55        154        129
                                                      ------     ------     ------     ------
         Total other income                              552        480      1,061        931

Other expense
  Salaries and wages                                     881        836      1,789      1,655
  Employee benefits                                      282        260        560        531
  Occupancy                                              180        159        357        326
  Equipment                                              181        171        355        334
  Other operating expenses                               679        567      1,296      1,097
                                                      ------     ------     ------     ------
         Total other expense                           2,203      1,993      4,357      3,943
                                                      ------     ------     ------     ------

  Income before income taxes                           1,067        869      2,046      1,645

  Federal income taxes                                   257        218        485        406
                                                      ------     ------     ------     ------

         Net income                                   $  810     $  651     $1,561     $1,239
                                                      ======     ======     ======     ======

Basic and diluted earnings per share                  $ 0.13     $ 0.10     $ 0.25     $ 0.19

Cash dividends per common share                       $ 0.00     $ 0.10     $ 0.08     $ 0.10
</TABLE>

See Notes to Consolidated Financial Statements


                                     Page 4
<PAGE>

                         EAST PENN FINANCIAL CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                            For the Six Months Ended
                         June 30, 2004 and June 30, 2003
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                  Accumulated
                                                                                     Other
                                          Common                     Retained    Comprehensive    Treasury
(In thousands, except per share data)      Stock       Surplus       Earnings       Income          Stock          Total
--------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>          <C>           <C>            <C>            <C>            <C>
Balance, December 31, 2002                $4,842       $12,402       $ 5,497        $   849        ($3,926)       $ 19,664
                                                                                                                  --------
 Comprehensive income:
 Net income                                   --            --         1,239             --             --           1,239
 Changes in net unrealized gains
   on securities available
   for sale, net of tax effect                --            --            --            607             --             607
                                                                                                                  --------

     Total comprehensive income                                                                                      1,846
                                                                                                                  --------

Exercise of 1,600 stock options                1             8            --             --             --               9

Cash dividend ($0.10 per share)               --            --          (661)            --             --            (661)
                                          --------------------------------------------------------------------------------

  Balance, June 30, 2003                  $4,843       $12,410       $ 6,075        $ 1,456        ($3,926)       $ 20,858
                                          ================================================================================

Balance, December 31, 2003                $4,130       $ 9,218       $ 7,645        $   400        ($1,850)       $ 19,543
 Comprehensive income:
 Net income                                   --            --         1,561             --             --           1,561
 Changes in net unrealized gains
   (losses) on securities available
   for sale, net of tax effect                --            --            --         (1,280)            --          (1,280)
                                                                                                                  --------

     Total comprehensive income                                                                                        281
                                                                                                                  --------

Exercise of 300 common stock
   options                                    --             2            --             --             --               2

Cash dividends ($0.08  per share)             --            --          (504)            --             --            (504)
                                          --------------------------------------------------------------------------------

  Balance, June 30, 2004                  $4,130       $ 9,220       $ 8,702        ($  880)       ($1,850)       $ 19,322
                                          ================================================================================
</TABLE>

See Notes to Consolidated Financial Statements


                                     Page 5
<PAGE>

                         EAST PENN FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     Six Months Ended June 30, 2004 and 2003
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                             Six Months Ended June 30,
(In thousands)                                                  2004          2003
                                                              --------      --------
<S>                                                           <C>           <C>
CASH FLOWS from OPERATING ACTIVITIES
  Net income                                                  $  1,561      $  1,239
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
  Provision for loan losses                                        283           228
  Provision for depreciation and amortization                      318           271
  Net amortization of securities premiums and discounts            160           212
  Net realized gain on sale of foreclosed real estate              (61)           --
  Net realized gain on sale of securities                          (25)           (5)
  Proceeds from sale of mortgage loans                          15,918        24,531
  Net gain on sale of loans                                       (292)         (388)
  Loans originated for sale                                    (15,733)      (25,624)
  Earnings on investment in life insurance                        (151)         (134)
  Increase in accrued interest receivable
     and other assets                                             (164)         (177)
  Decrease in accrued interest payable
     and other liabilities                                         (20)          (29)
                                                              --------      --------

         Net cash provided by operating activities               1,794           124
                                                              --------      --------

CASH FLOWS from INVESTING ACTIVITIES
  Maturities of interest bearing time deposits                     200            --
  Purchases of available for sale securities                    (7,316)      (33,057)
  Proceeds from maturities of and principal repayments
     on available for sale securities                           10,796        11,575
  Proceeds from sale of securities                               4,340         4,422
  Proceeds from maturities of and principal repayments
     on held to maturity securities                                  1           750
  Proceeds from the sale of other real estate owned                321            82
  Net increase in loans                                        (20,120)      (11,741)
  Purchases of bank premises and equipment                      (1,535)         (416)
  Purchase of life insurance                                    (1,500)           --
                                                              --------      --------

         Net cash used in investing activities                 (14,813)      (28,385)
                                                              --------      --------

CASH FLOWS from FINANCING ACTIVITIES
  Net increase in deposits                                      11,158        24,799
  Net increase (decrease) in federal funds purchased and
     securities sold under agreements  to repurchase             1,114        (1,789)
  Proceeds from the exercise of stock options                        2             9
  Dividends paid                                                  (504)         (661)
                                                              --------      --------

         Net cash provided by financing activities              11,770        22,358
                                                              --------      --------

         Increase (decrease) in cash and cash equivalents       (1,249)       (5,903)

  Cash and cash equivalents:
    Beginning of period                                          8,593        15,605
                                                              --------      --------

    End of period                                             $  7,344      $  9,702
                                                              ========      ========

SUPPLEMENTAL DISCLOSURES of CASH FLOW INFORMATION
  Cash payments for:
    Interest                                                  $  2,603      $  2,436
                                                              ========      ========

    Federal income taxes                                      $    591      $    380
                                                              ========      ========
</TABLE>

See Notes to Consolidated Financial Statements


                                     Page 6
<PAGE>

                         EAST PENN FINANCIAL CORPORATION
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2004
                                   (Unaudited)

1.    Basis of Presentation

            East Penn Financial Corporation (the "Company") was incorporated on
      January 27, 2003 for the purpose of forming a bank holding company. On
      July 1, 2003, the Company completed the reorganization and merger with
      East Penn Bank (the "Bank") and its wholly owned subsidiary, East Penn
      Mortgage Company, into the holding company form of ownership. In the
      reorganization, the Bank became a wholly owned banking subsidiary of the
      Company. On July 31, 2003, the Company formed East Penn Statutory Trust I
      (the "Trust"), a Connecticut statutory business trust, for the purpose of
      issuing $8 million in capital pass-through securities to investors.

            The consolidated financial statements include the accounts of the
      Company, and its wholly owned subsidiary, the Bank. All significant
      intercompany accounts and transactions have been eliminated.

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

            Operating results for the six-month period ended June 30, 2004, are
      not necessarily indicative of the results that may be expected for the
      year ended December 31, 2004. For further information, refer to the
      financial statements and footnotes thereto included in the Company's
      Annual Report on Form 10-K for the year ended December 31, 2003.

2.    Investment in Bank

      On September 23, 2003, the Company purchased 141,300 shares of the common
      shares outstanding of a newly formed state chartered de novo bank, named
      Berkshire Bank, located in Wyomissing, Pennsylvania. The amount of the
      investment was $1,413,000, at September 30, 2003. On October 22, 2003, the
      Company purchased an additional 12,123 shares, for $121,230, of Berkshire
      Bank for a total investment of $1,534,230. Pursuant to Crown X Commitments
      entered into by the Company in August 2003 and approved by the Federal
      Reserve Bank of Philadelphia in September 2003, the Company currently owns
      19.9% of Berkshire Bank common stock, but is authorized to go up to 24.9%.
      This passive investment in Berkshire Bank is recorded in other assets and
      is accounted for under the cost method of accounting.

3.    Earnings per Share

            The following table sets forth the computation of basic and diluted
      earnings per share:

<TABLE>
<CAPTION>
                                                                  Six Months Ended               Three Months Ended
                                                             --------------------------      --------------------------
                                                              June 30,        June 30,        June 30,        June 30,
                                                                2004            2003            2004            2003
                                                             --------------------------      --------------------------
<S>                                                          <C>             <C>             <C>             <C>
      Net income applicable to common stock                  $1,561,000      $1,239,000      $  810,000      $  651,000
                                                             ==========================      ==========================
      Weighted-average common shares outstanding              6,299,315       6,602,738       6,299,460       6,602,922
      Effect of dilutive securities, stock options               18,041           6,692          19,490          11,790
                                                             --------------------------      --------------------------
      Weighted-average common shares outstanding
           used to calculate diluted earnings per share       6,317,356       6,609,430       6,318,950       6,614,712
                                                             ==========================      ==========================
      Basic and diluted earnings per share                   $     0.25      $     0.19      $     0.13      $     0.10
                                                             ==========================      ==========================
</TABLE>


                                     Page 7
<PAGE>

4.    Comprehensive Income

            The components of other comprehensive income and related tax effects
      for the three and six months ended June 30, 2004 and 2003 are as follows:

<TABLE>
<CAPTION>
                                                        Six Months Ended         Three Months Ended
                                                      ---------------------     ---------------------
                                                      June 30,     June 30,     June 30,     June 30,
                                                        2004         2003         2004         2003
                                                      ---------------------     ---------------------
<S>                                                   <C>           <C>         <C>           <C>
      (In thousands)

      Unrealized holding gains (losses) on
           available for sale securities              ($1,914)      $ 925       ($3,114)      $ 582

      Less reclassification adjustments for
           gains (losses) included in net income           25           5             8           5
                                                      ---------------------------------------------

      Net unrealized gains (losses)                    (1,939)        920        (3,122)        577
      Tax effect                                         (659)       (313)       (1,061)       (196)
                                                      ---------------------------------------------

               Net of tax amount                      ($1,280)      $ 607       ($2,061)      $ 381
                                                      =============================================
</TABLE>

5.    Stock Option Plan

            The Company has adopted the disclosure-only provisions of Statement
      of Financial Accounting Standards (SFAS) No. 123, "Accounting for
      Stock-Based Compensation". Accordingly, no compensation costs have been
      recognized for options granted in 2004 and 2003. Had compensation costs
      for stock options granted been determined based on the fair value at the
      grant date for awards under the plan consistent with the provisions of
      SFAS No. 123, the Company's net income and earnings per share for the
      quarters ended June 30, 2004 and 2003, would have been reduced to the pro
      forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                Six Months Ended             Three Months Ended
                                                            ------------------------      ------------------------
                                                             June 30,       June 30,       June 30,       June 30,
                                                               2004           2003           2004           2003
                                                            ------------------------      ------------------------
                                                                   (In Thousands, except Per Share Amounts)
<S>                                                         <C>            <C>            <C>            <C>
      Net income as reported                                $   1,561      $   1,239      $     810      $     651
      Total stock-based compensation cost, net of tax,
               that would have been included in the
               determination of net income if the fair
               value based method had been applied
               to all awards                                        3              2              3              2
                                                            ------------------------      ------------------------

      Pro forma net income                                  $   1,558      $   1,237      $     807      $     649
                                                            ========================      ========================

      Basic earnings per share:
               As reported                                  $    0.25      $    0.19      $    0.13      $    0.10
               Pro forma                                    $    0.25      $    0.19      $    0.13      $    0.10
      Diluted earnings per share:
               As reported                                  $    0.25      $    0.19      $    0.13      $    0.10
               Pro forma                                    $    0.25      $    0.19      $    0.13      $    0.10
</TABLE>

6.    Guarantees

            The Company does not issue any guarantees that would require
      liability recognition or disclosure, other than its standby letters of
      credit. Standby letters of credit that are written are conditional
      commitments issued by the Company to guarantee the performance of a
      customer to a third party. Generally, all letters of credit, when issued,
      have expiration dates within one year. The credit risk involved in issuing
      letters of credit is essentially the same as those that are involved in
      extending loan facilities to customers. The Company, generally, holds
      collateral and/or personal guarantees supporting these commitments. The
      Company had $569,000 of standby letters of credit as of June 30, 2004.
      Management believes that the proceeds obtained through liquidation of
      collateral and the enforcement of guarantees would be sufficient to cover
      the potential amount of


                                     Page 8
<PAGE>

      future payments required under the corresponding guarantees. The current
      amount of the liability as of June 30, 2004 for guarantees under standby
      letters of credit is not material.

7.    New Accounting Standards

            In January 2003, the Financial Accounting Standards Board issued
      FASB Interpretation No. 46 ("FIN46"), "Consolidation of Variable Interest
      Entities, an Interpretation of ARB No. 51", which was revised in December
      2003. This Interpretation provides guidance for the consolidation of
      variable interest entities (VIEs). The Trust qualifies as a variable
      interest entity under FIN 46. The Trust issued mandatory redeemable
      preferred securities, "Trust Preferred Securities", to third party
      investors and loaned the proceeds to the Company. The Trust holds, as its
      sole asset, subordinated debentures issued by the Company.

            FIN 46 required the Company to deconsolidate the Trust from the
      consolidated financial statements as of March 31, 2004. There has been no
      restatement of prior periods. The impact of this deconsolidation was to
      increase junior subordinated debentures or long-term debt by $8,248,000
      and reduce the mandatory redeemable capital debenture line item by
      $8,000,000, which had represented the Trust Preferred Securities of the
      Trust. The Company's equity interest in the Trust subsidiary of $248,000,
      which had previously been eliminated in the consolidation, is now reported
      in "other assets". For regulatory reporting purposes, the Federal Reserve
      Board has indicated that the Trust Preferred Securities will continue to
      qualify as Tier I Capital subject to previously specified limitations,
      until further notice. If regulators make a determination that Trust
      Preferred Securities can no longer be considered in regulatory capital,
      the securities become callable and the Company may redeem them. The
      adoption of FIN 46 did not have an impact on the Company's results of
      operations or liquidity.


                                     Page 9
<PAGE>

ITEM 2

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS
                                  June 30, 2004

      The following is management's discussion and analysis of the significant
changes in the consolidated results of operations, capital resources and
liquidity presented in the accompanying unaudited consolidated financial
statements for the Company. This discussion should be read in conjunction with
the preceding consolidated financial statements and related footnotes, as well
as, the Company's December 31, 2003 Annual Report on Form 10-K. Current
performance does not guarantee and may not be indicative of similar performance
in the future.

      In addition to historical information, this quarterly report on Form 10-Q
contains forward-looking statements. The forward-looking statements contained in
this report are subject to certain risks, assumptions and uncertainties. Because
of the possibility of change in the underlying assumptions, actual results could
differ materially from those projected in the forward-looking statements.
Additional factors that might cause actual results to differ materially from
those expressed in the forward-looking statements include, but are not limited
to:

      -     operating, legal and regulatory risks,

      -     economic, political and competitive forces affecting the Company's
            services, and

      -     the risk that management's analyses of these risks could be
            incorrect and/or that the strategies developed to address them could
            be unsuccessful.

      The Company's forward-looking statements are relevant only as of the date
on which the statements are made. By making forward-looking statements, the
Company assumes no duty to update them to reflect new, changing or unanticipated
events or circumstances. Readers should carefully review the risk factors
described in other periodic reports and public documents that the Company files
from time to time with the Securities and Exchange Commission.

CRITICAL ACCOUNTING POLICIES

      Disclosure of the Company's significant accounting policies is included in
Note 1 to the consolidated financial statements of the Company's Annual Report
on Form 10-K for the year ended December 31, 2003. Some of these policies are
particularly sensitive requiring significant judgments, estimates and
assumptions to be made by management. Additional information is contained on
pages 11 and 14 of this report for the provision and allowance for loan losses.

OVERVIEW

      Net income for the six months ended June 30, 2004 and 2003 was $810,000
and $651,000. The increase of $159,000, or 24.4%, is due in part to an increase
of 15.1% in net interest income and a 14% increase in the Company's other
income, primarily due to an increase in customer service fees, income from
investment in life insurance, a $20,000 additional gain on sale of securities
and a $61,000 gain on sale of other real estate. On a basic and diluted per
share basis, net income for the six months ended June 30, 2004 was $0.25,
respectively, as compared with $0.19 for the six months ended June 30, 2003. Net
income as a percentage of average assets on an annualized basis, also known as
return on average assets, increased to 0.92% for the first six months of 2004
from 0.88% for the first six months of 2003 as a result of increased net income
which offset the 22% increase in total average assets. Net income as a
percentage of total average stockholders' equity on an annualized basis, also
known as return on average equity, was 15.6% and 12.4% for the first six months
of 2004 and 2003, respectively.

      During the first six months of 2004, the Company's assets grew
$12,279,000, or 3.6%, to $350,218,000 as of June 30, 2004 from $337,939,000 as
of December 31, 2003. This increase is primarily


                                    Page 10
<PAGE>

attributable to gross loans, which increased to $227,104,000 as of June 30, 2004
from $207,016,000 as of December 31, 2003, offset by a decline of $9,895,000, or
9.2%, in the investment securities portfolio, the proceeds of which were
reinvested in funding loans. Total deposits increased by $11,158,000, or 4%,
during the first six months of 2004 to $291,056,000 as of June 30, 2004 from
$279,898,000 as of December 31, 2003. This compares to an increase of
$24,799,000, or 10.2%, to $268,439,000 at June 30, 2003. The increase in total
deposits during the first half of 2004 was less than the increase in deposits
during the same period in 2003 as a result of customers continued hesitation to
invest in deposits due to the uncertainty in this low interest rate environment.

RESULTS OF OPERATIONS

Net Interest Income

      For the three months ended June 30, 2004, total interest income increased
by $472,000, or 13%, to $4,089,000 compared to $3,617,000 for the three months
ended June 30, 2003. This increase is due to growth of $57,228,000, or 21.9%, in
average interest earning assets, primarily attributed to loan growth.

      Total interest expense increased by $121,000, or 10.8%, to $1,242,000 for
the three months ended June 30, 2004 from $1,121,000 for the three months ended
June 30, 2003. Interest expense increased due to the increased volume in average
interest bearing liabilities.

      Net interest income increased by $351,000, or 14.1%, to $2,847,000 for the
three months ended June 30, 2004 from $2,496,000 for the three months ended June
30, 2003.

      For the six months ended June 30, 2004, total interest income increased by
$971,000, or 13.5%, to $8,159,000, compared with $7,188,000 for the six months
ended June 30, 2003. This increase is the result of a 21.9% increase in average
interest-earning assets, which grew $57,228,000, to $318,069,000 for the first
six months of 2004, compared with $260,841,000 for the first six months of 2003.
The growth in average interest-earning assets was due to an increase in loans,
which were funded primarily from the growth in deposits and cash flow from the
investment securities portfolio. While the yield on average interest-earning
assets decreased to 5.16% for the six months ended June 30, 2004 from 5.56% for
the same period in 2003 as a result of historically low interest rates, the
overall growth in average interest-earning assets helped to minimize the impact
of the low interest rate environment.

      Total interest expense increased by $231,000, or 10%, to $2,534,000 for
the six months ended June 30, 2004, from $2,303,000 for the six months ended
June 30, 2003. This increase is attributable to the growth of average interest
bearing liabilities, which increased $56,207,000, or 24.8%, to $283,166,000 for
the first six months of 2004 from $226,959,000 for the first six months of 2003.
Growth in deposits and long-term debt contributed to the increase in average
interest bearing liabilities. While cost of funds decreased to 1.80% for the
first six months of 2004 as compared with 2.05% for the same period in 2003, the
decline was somewhat limited by the added interest expense incurred as a result
of the issuance of $8.2 million in junior subordinated debentures or "trust
preferred securities", which carry an annual cost of 6.8%.

      Net interest income increased by $740,000, or 15.1%, to $5,625,000 for the
six months ended June 30, 2004 from $4,885,000 for the six months ended June 30,
2003. This increase was primarily attributable to the growth in the volume of
interest sensitive assets and liabilities, as oppose to the net interest rate
spread, which decreased to 3.36% for the first six months of 2004 from 3.51% for
the first six months in 2003. The net interest margin decreased to 3.56% from
3.78% for the six-month periods ending June 30, 2004 and 2003. Although interest
rates remained at their historic lows in 2004, the Company strived to minimize
the deterioration of its net interest rate spread and net interest margin,
considering the growth of its interest sensitive assets and liabilities.

Provision for Loan Losses

      The provision for loan losses was $129,000 for the three months ended June
30, 2004 compared


                                    Page 11
<PAGE>

with $114,000 for the six months ended June 30, 2003.

      For the six months ended June 30, 2004, the provision for loan losses was
$283,000, an increase of $55,000, or 24.2%, compared with $228,000 for the six
months ended June 30, 2003. The increase in the provision was the result of the
growth in the loan portfolio, as well as an increase in loans accorded
non-accrual status during the first six months of 2004.

      The allowance for loans losses represented 1.17% of total loans at June
30, 2004, compared with 1.16% as of December 31, 2003 and 1.25% as of June 30,
2003. Management performs ongoing assessments of the loan loss reserve in
relation to loan portfolio growth, credit exposure to individual borrowers,
overall trends in the loan portfolio and other relevant factors, and believes
the reserve is reasonable and adequate for the periods presented.

Other Income

      For the three months ended June 30, 2004, other income was $552,000, an
increase of $72,000, or 15%, compared with $480,000 for the six months ended
June 30, 2003. The increase was primarily due to a $61,000 gain realized from
the sale of other real estate.

      Other income for the first six months ended June 30, 2004 increased
$130,000, or 14%, to $1,061,000 from $931,000 for the first six months ended
June 30, 2003. This increase was due to an $8,000 increase in customer service
fees, a $20,000 increase from the gain on sale of investment securities, a
$17,000 increase in income from the investment in life insurance, a $61,000
increase from the sale of other real estate, a $15,000 increase from mortgages
sold services retained, and an increase of $10,000 in other miscellaneous
income, offset by a decline of $1,000 in mortgage banking fees.

Other Expenses

      Other expenses, which include salary, occupancy, equipment and all other
expenses incidental to the operation of the Company, increased to $2,203,000 for
the second quarter of 2004 from $1,993,000 for the second quarter of 2003. The
$210,000, or 10.5% increase is the result of the Company's continued growth.

      Salaries and employee benefit expenses, which make up the largest
component of other expenses, increased $67,000, or 6.1%, to $1,163,000 for the
second quarter of 2004 from $1,096,000 for the second quarter in 2003. The
increase is primarily attributable to the increase in normal salary and medical
benefit costs.

      Occupancy expenses increased $21,000, or 13.2%, to $180,000 for the three
months ended June 30, 2004 from $159,000 for the three months ended June 30,
2003. The increase was due to the cost associated with the purchase of a 3-story
brick building located at 18 South 2nd Street, Emmaus, Pennsylvania, which will
be use to house operational, administrative and executive departments of the
Company.

      Equipment expense increased $10,000, or 5.8%, to $181,000 for the three
months ended June 30, 2004 from $171,000 for the three months ended June 30,
2003. This increase is the result of additional costs and depreciation
associated with equipment purchased to accommodate the Company's growth.

      Other operating expenses during the second quarter of 2004 increased
$112,000, or 19.8%, to $679,000 from $567,000 during the second quarter of 2003.
The increase is associated with the continued growth of the Company.

      For the six months ended June 30, 2004, total other expenses increased
$414,000, or 10.5%, to $4,357,000 from $3,943,000 for the six months ended June
30, 2003. The impact of the increase was minimized as a result of management's
ongoing efforts to control non-interest expenses as the Company continues to
grow.


                                    Page 12
<PAGE>

      Salary expenses and related employee benefits were $2,349,000 for the six
months ended June 30, 2004, an increase of $163,000, or 7.5%, compared with
$2,186,000 for the six months ended June 30, 2003. The increase is attributable
to staff additions and increases in normal salary and benefit related expenses.

      Occupancy expenses for the first six months of 2004 increased to $357,000
from $326,000 for the first six months of 2003. The increase of $31,000, or
9.5%, is particularly attributable to taxes and depreciation costs associated
with the purchase of a building that will be used for operational and
administrative purposes.

      Equipment expenses increased $21,000, or 6.3%, to $355,000 for the first
six months of 2004 from $334,000 for the first six months of 2003. The increase
in this expense category was due to the added depreciation expense from the
additions made to equipment to support the growth of the Company.

      Other operating expenses increased $199,000, or 18.1%, to $1,296,000 for
the six months ended June 30, 2004 from $1,097,000 for the six months ended June
30, 2003. This increase was the result of the Company's growth as well as the
additional expenses associated with the formation of the holding company and the
issuance of junior subordinated debentures, or "trust preferred securities".

Income Taxes

      Income tax expense was $257,000 for the three months ended June 30, 2004,
an increase of $39,000, or 17.9%, compared with $218,000 for the three months
ended June 30, 2003. This increase is due to a higher level of pre-tax income.

      For the six months ended June 30, 2004, the tax provision was $485,000
compared with $406,000 for the six months ended June 30, 2003. This increase of
$79,000, or 19.5%, is the result of achieving a higher level of pre-tax net
income with a level amount of tax-exempt income.

Net Income

      Net income for the three months ended June 30, 2004 was $810,000, an
increase of $159,000, or 24.4%, compared with $651,000 for the three months
ended June 30, 2003. This increase in net income is the result of increases of
$351,000 in net interest income and $72,000 in other income, which offset the
increases of $15,000 in the provision for loan losses, $210,000 in other
expenses and $39,000 in taxes. Basic and diluted earnings per share for the
three months ended June 30, 2004 were each $0.13 compared with $0.10 for the
three months ended June 30, 2003.

      Net income for the first six months of 2004 was $1,561,000, an increase of
$322,000, or 26%, compared with $1,239,000 for the first six months of 2003.
This increase in net income was the result of increases of $740,000 in net
interest income and $130,000 in other income, which offset the increases of
$55,000 in the provision for loan losses, $414,000 in other operating expenses
and $79,000 in federal income tax expense. The increase in net income was
attributable to the historically low interest rate environment, where the
Company's cost of funds associated with interest sensitive liabilities decreased
more than the decline in yield derived from interest sensitive assets. Net
income was also appositively affected along with an increase in other income,
primarily derived from increased customer service fees, mortgage banking
activities and gains on sale of investment securities. Basic and diluted
earnings per share for the six months ended June 30, 2004 was $0.25 compared
with $0.19 for the six months ended June 30, 2003.

FINANCIAL CONDITION

Securities

      The Company's securities portfolio is comprised of securities, which not
only provide interest income, including tax-exempt income, but also provide a
source of liquidity, diversify the earning assets portfolio, allow for the
management of risk and tax liability, and provide collateral for repurchase


                                    Page 13
<PAGE>

agreements and public fund deposits. Policies are in place to address various
aspects of managing the portfolio, including but not limited to, concentrations,
liquidity, credit quality, interest rate sensitivity and regulatory guidelines.
Adherence to these policies is monitored by the Company's Asset/Liability
Committee on a monthly basis.

      Although the Company generally intends to hold its investment securities
to maturity, a significant portion of the securities portfolio is classified as
available for sale, with new purchases generally categorized as available for
sale. Securities in the available for sale category are accounted for at fair
value with unrealized appreciation or depreciation, net of tax, reported as a
separate component of stockholders' equity. Securities in the held to maturity
category are accounted for at amortized cost. The Company invests in securities
for the yield they produce and not to profit from trading. The Company holds no
trading securities in its portfolio.

      The securities portfolio at June 30, 2004 was $97,386,000, compared to
$107,281,000 at December 31, 2003, a decrease of $9,895,000, or 9.2%. The
decline was principally attributable to prepayments of principal and to a lesser
degree, the sale of investment securities. A portion of the proceeds from the
sale of securities, in the amount of $1,500,000, was used to purchase additional
bank owned life insurance ("BOLI"), which yields tax-exempt income for the Bank.
The remaining cash flow generated from the portfolio was used to fund loan
demand. Securities available for sale decreased to $96,336,000 at June 30, 2004
from $106,230,000 at December 31, 2003, while securities held to maturity were
$1,050,000 at June 30, 2004 as compared with $1,051,000 at December 31, 2003.

      The carrying value of the available for sale portion of the portfolio at
June 30, 2004 includes an unrealized loss of $1,333,000 (reflected as
accumulated other comprehensive loss of $880,000 in stockholders' equity, net of
deferred income tax asset of $453,000). This compares with an unrealized gain at
December 31, 2003 of $606,000 (reflected as accumulated other comprehensive
income of $400,000 in stockholders' equity, net of deferred income tax liability
of $206,000).

Loans

      The loan portfolio comprises the major component of the Company's earning
assets and generally is the highest yielding category of asset. Gross loans
receivable, net of unearned fees and origination costs, increased $20,088,000,
or 9.7%, to $227,104,000 at June 30, 2004 from $207,016,000 at December 31,
2003. This increase is attributed to increased commercial loan and revolving
line of credit demand. Gross loans represented 78% of total deposits at June 30,
2003 as compared to 74% at December 31, 2003, since loan growth outpaced deposit
growth.

Credit Risk and Loan Quality

      The Company continues to be prudent in its efforts to minimize credit
risk. The Bank's written lending policy requires underwriting, loan
documentation and credit analysis standards to be met prior to the approval and
funding of any loan. In accordance with that policy, the internal loan review
process monitors the loan portfolio on an ongoing basis. The Credit
Administration area then prepares an analysis of the allowance for loan losses
on a quarterly basis, which is then submitted to the board of directors for its
assessment as to the adequacy of the allowance. The allowance for loan losses is
an accumulation of expenses that has been charged against past and present
earnings in anticipation of potential losses in the loan portfolio.

      The allowance for loan losses at June 30, 2004 and December 31, 2003 was
$2,654,000 and $2,403,000, respectively, compared to $2,359,000 at June 30,
2003. The increase in the allowance was attributable, in part, to the growth of
the loan portfolio and the shift in the loan mix, where there was continued
growth in commercial loans, which generally carry a higher level of credit risk.
At June 30, 2004, the allowance for loan losses represented 1.17% of the gross
loan portfolio, compared with 1.16% at December 31, 2003. This compares to 1.25%
at June 30, 2003. At June 30, 2004, management believes the allowance for loan
loss reserve to be reasonable and adequate to meet potential losses.


                                    Page 14
<PAGE>

      Table 1 - "Analysis of Allowance for Loan Loss" - details the activity,
which occurred in the allowance over the first six months of 2004 and 2003.

      Table 1 - Analysis of Allowance for Loan Loss (1)

      ----------------------------------------------------------------------
      (in thousands)
                                                        2004          2003
                                                      -------       -------
      Balance, beginning of year                      $ 2,403       $ 2,167

      Provision charged to operating  expense             283           228
      Charge-offs:

        Commercial                                          0             0

        Real estate                                         0             0

        Consumer                                          (42)          (40)
                                                      -------       -------

        Total charge-offs                                 (42)          (40)

      Recoveries:

        Commercial                                          3             0

        Consumer                                            7             4
                                                      -------       -------

        Total recoveries                                   10             4

      Net (charge-offs)                                   (32)          (36)
                                                      -------       -------
                                                      $ 2,654       $ 2,359
                                                      =======       =======

      Net (charge-offs) recoveries to average net
               loans                                    (0.02)%       (0.02)%

      (1)   Bank's loan portfolio is entirely domestic
      ----------------------------------------------------------------------

      The Bank's lending policy is executed through the assignment of tiered
loan limit authorities to individual officers of the Bank, the Officer's Loan
Committee, the Board Loan Committee and the Board of Directors. Although the
Bank maintains sound credit policies, certain loans may deteriorate for a
variety of reasons. The Bank's policy is to place all loans on a non-accrual
status upon becoming 90 days delinquent in their payments, unless there is a
documented, reasonable expectation of the collection of the delinquent amount.
Loans are reviewed monthly as to their status, and on a quarterly basis, a Watch
List of potentially troubled loans is prepared and presented to the board of
directors. Management is not aware of any material potential loan problems that
have not been disclosed in this report.

      Table 2 - "Asset Quality Ratios" - summarizes pertinent asset quality
ratios at June 30, 2004 and December 31, 2003.

      Table 2 -Asset Quality Ratios

      --------------------------------------------------------------------------
                                                             6/30/04    12/31/03
                                                             -------    --------

      Non-accrual loans/Total loans                            0.45%       0.19%

      Non-performing assets (1) /Total loans                   0.54%       0.34%

      Net charge-offs/Average loans                            0.02%       0.09%

      Allowance/Total loans                                    1.17%       1.16%

      Allowance/Non-accrual  loans                           259.94%     608.35%

      Allowance/Non-performing loans (1)                     220.07%     553.69%

      (1) - Includes non-accrual loans.
      --------------------------------------------------------------------------

      At June 30, 2004, the Company had other real estate owned as acquired
through foreclosure, in the amount of $16,000, which decreased $260,000, from
$276,000 at December 31, 2003, as a result of the sale of two residential
property loans. The disposition of these properties resulted in a $61,000 gain ,
recorded as other income. The Company expects to dispose of the remaining
properties with minimal or no loss.

      Loan concentrations are considered to exist when the total amount of loans
to any one or a multiple number of borrowers engaged in similar activities or
having similar characteristics exceeds 10% of loans outstanding in any one
category. The majority of the Bank's lending is made within its primary market


                                    Page 15
<PAGE>

area, which includes Emmaus and the East Penn community in Lehigh County,
Pennsylvania.

Bank Owned Life Insurance

      The Company has BOLI for a chosen group of employees, namely officers,
where the Bank is the owner and beneficiary of the policies. The Bank's deposits
and proceeds from the sale of investment securities funded the BOLI. Earnings
from the BOLI are recognized as other income. The BOLI is profitable from the
appreciation of the cash surrender values of the pool of insurance, and its tax
advantage to the Company. This profitability is used to offset a portion of
current and future employee benefit costs and a Nonqualified Supplemental
Executive Retirement Plan for the Company's Chief Executive Officer.

      The Company had $7,077,000 and $5,426,000 in BOLI, as of June 30, 2004 and
December 31, 2003. Although the BOLI is an asset that may be liquidated, it is
the Company's intention to hold this pool of insurance because it provides
tax-exempt income that lowers the Company's tax liability, while enhancing its
overall capital position. Because of the benefits derived from investing in
BOLI, an additional $1,500,000 BOLI investment was made during the first quarter
of 2004.

Investment in Bank

      During the fourth quarter of 2003, the Company purchased 153,423 shares
for $1,534,230 of common stock outstanding of a newly formed state chartered de
novo bank, named Berkshire Bank, located in Wyomissing, Berks County,
Pennsylvania. The investment, which represents 18.3% of the de novo bank's
outstanding common shares, is carried at cost and included in the other assets
category on the balance sheet.

Deposits

      Deposits are the major source of the Company's funds for lending and
investment purposes. Total deposits at June 30, 2004 were $291,056,000, an
increase of $11,158,000, or 4%, from total deposits of $279,898,000 at December
31, 2003. The increase in deposits was due to increases of $5,632,000 in
interest bearing demand deposit accounts, $4,232,000 in savings accounts and
$6,906,000 in non-interest bearing demand deposit accounts, offset by a decline
of $5,612,000 in certificates of deposit. The reduction in certificates of
deposit was due to run-off of higher costing deposits into lower costing
deposits as a result of customers continued hesitation to invest in term
deposits in this uncertain interest rate environment. This resulted in reducing
the Bank's overall cost of funds to 1.80% at June 30, 2004 from 1.94% at
December 31, 2003 and 2.05% at June 30, 2003.

Federal Funds Purchased and Securities Sold under Agreements to Repurchase

      There was an outstanding balance of $862,000 in federal funds purchased at
June 30, 2004 as compared with none at December 31, 2003. The Bank has a
$5,000,000 federal funds line of credit with its main correspondent bank,
Atlantic Central Bankers Bank, Camp Hill, Pennsylvania ("ACBB").

      Securities sold under agreements to repurchase were $4,764,000 at June 30,
2004, compared to $4,512,000 at December 31, 2003. Securities sold under
agreements to repurchase generally mature in one business day and roll over
under a continuing contract.

Long-Term Debt and Borrowing Capacity

      The Bank has a maximum borrowing capacity of approximately $155,657,000
with the Federal Home Loan Bank of Pittsburgh ("FHLB"), out of which $25 million
was outstanding at June 30, 2004 and December 31, 2003, resulting in an unused
borrowing capacity of $130,657,000. The $25 million borrowing is comprised of
the following fixed rate borrowings:


                                    Page 16
<PAGE>

                 Maturity                          Amount      Rate
            -----------------                     -------      -----
            November 28, 2005                     $ 5,000      2.20%
            November 28, 2006                       6,000      2.80%
            November 28, 2007                       7,000      3.43%
            November 28, 2008                       7,000      3.78%
                                                  -------      ----

                   Total                          $25,000      3.13%
                                                  =======      ====

Asset/Liability Management

      The management of interest rate risk involves measuring and analyzing the
maturity and repricing of interest-earning assets and interest bearing
liabilities at specific points in time. The imbalance between interest-earning
assets and interest bearing liabilities is commonly referred to as the interest
rate gap. The interest rate gap is one measure of the risk inherent in the
existing balance sheet as it relates to potential changes in net interest
income. Maintaining an appropriate balance between interest-earning assets and
interest bearing liabilities is a means of monitoring and possibly avoiding
material fluctuations in the net interest margin during periods of changing
interest rates.

      The Company's overall sensitivity to interest rate risk is low due to its
non-complex balance sheet. The Company manages its balance sheet with the intent
of stabilizing net interest income and net economic value under a broad range of
interest rate environments. The Company has the ability to effect various
strategies to manage interest rate risk, which include, but are not limited to,
selling newly originated residential mortgage loans, controlling the volume mix
of fixed/variable rate commercial loans and securities, increasing/ decreasing
deposits via interest rate changes, borrowing from the FHLB, and buying/selling
securities. Adjustments to the mix of assets and liabilities are made
periodically in an effort to give the Company dependable and steady growth in
net interest income, while at the same time, managing the related risks.

Liquidity

      Liquidity represents the Company's ability to efficiently manage cash
flows at reasonable rates to support possible commitments to borrowers or the
demands of depositors. Liquidity is essential to compensate for fluctuations in
the balance sheet and provide funds for growth and normal operating
expenditures. Liquidity needs may be met by converting assets into cash or
obtaining sources of additional funding.

      Liquidity from asset categories is provided through cash, amounts due from
banks, interest-bearing deposits with banks and federal funds sold, which were
$7,344,000 at June 30, 2004, compared to $8,593,000 at December 31, 2003.
Additional asset liquidity sources include principal and interest payments from
securities in the Company's investment portfolio and cash flow from its
amortizing loan portfolio. Longer-term liquidity needs may be met by selling
securities available for sale, selling loans or raising additional capital. At
June 30, 2004, management indicated that there was $80,973,000 in liquid
securities as compared with $90,642,000 at December 31, 2003.

      Liability liquidity sources include attracting deposits at competitive
rates. Deposits at June 30, 2004 were $291,056,000, compared to $279,898,000 at
December 31, 2003. In addition, the Bank has federal fund lines of credit with
its main correspondent bank, ACBB, and with the FHLB, which are reliable sources
for short and long-term funds.

      The Company's financial statements do not reflect various off-balance
sheet commitments that are made in the normal course of business, which may
involve some liquidity risk. Off-balance sheet arrangements are discussed in
detail below.

      Management is of the opinion that its liquidity position, at June 30,
2004, is adequate to respond to fluctuations "on" and "off" the balance sheet.
In addition, management knows of no trends, demands, commitments, events or
uncertainties that may result in, or that are reasonably likely to result in the


                                    Page 17
<PAGE>

Company's inability to meet anticipated or unexpected liquidity needs.

Off-Balance Sheet Arrangements

      The Company's financial statements do not reflect various off-balance
sheet arrangements that are made in the normal course of business. These
commitments consist mainly of loans approved but not yet funded, unused lines of
credit and letters of credit made in accordance with the same standards as
on-balance sheet instruments. Unused commitments at June 30, 2004 were
$68,864,000, which consisted of $59,804,000 in unfunded commitments to existing
loans, $8,491,000 to grant new loans and $569,000 in letters of credit. Because
these instruments have fixed maturity dates, and because many of them will
expire without being drawn upon, they do not generally present a significant
liquidity risk to the Company. Management believes that any amounts actually
drawn upon can be funded in the normal course of operations. The Company has no
investment in or financial relationship with any unconsolidated entities that
are reasonably likely to have a material effect on liquidity or the availability
of capital resources.

Capital

      The following Table 3 presents the risk-based and leverage capital amounts
and ratios at June 30, 2004 for the Company and the Bank.

<TABLE>
<CAPTION>
                                                                                                          To be Well
                                                                                                         Capitalized
                                                                                                         under Prompt
                                                                          For Capital Adequacy         Corrective Action
                                                        Actual                  Purposes                  Provisions
                                                 --------------------     --------------------       --------------------
                                                  Amount        Ratio       Amount       Ratio        Amount        Ratio
                                                 -------        -----     ---------      -----       --------      ------
                                                                         (Dollars in Thousands)
<S>                                              <C>            <C>       <C>            <C>         <C>           <C>
As of June 30, 2004:
     Total capital (to risk-weighted assets):
         Consolidated                            $30,855        12.62%    $>=19,566      >=8.0%        N/A            N/A%
         East Penn Bank                           28,954        11.94      >=19,396      >=8.0       >=24,246      >=10.0
     Tier 1 capital (to risk-weighted assets):
         Consolidated                             26,936        11.01       >=9,783      >=4.0         N/A            N/A
         East Penn Bank                           26,301        10.85       >=9,698      >=4.0       >=14,547      >= 6.0
     Tier 1 capital (to average assets):
         Consolidated                             26,936         7.80      >=13,805      >=4.0         N/A            N/A
         East Penn Bank                           26,301         7.67      >=13,723      >=4.0       >=17,153      >= 5.0
</TABLE>

      These capital ratios continue to remain at levels, which are considered to
be "well-capitalized" as defined by regulatory guidelines.

      Banking laws and regulations limit the amount of cash dividends that may
be paid without prior approval from the Company's regulatory agencies. In
abidance with such requirements, on January 15, 2004, the Board of Directors
authorized and declared its first semi-annual cash dividend for 2004 in the
amount of $0.08 per share, paid on February 28, 2004 to all shareholders of
record as of January 31, 2004. The payment of this semi-annual cash dividend
decreased retained earnings by $504,000. In addition, on July 26, 2004, the
Board authorized and declared a cash dividend for the second half of 2004 of
$0.08 per share, payable on August 31, 2004 to all shareholders of record as of
August 4, 2004. This is the first year that the Company paid a dividend two
times in a year as compared with prior years' cash dividend payments, which were
paid once a year.

      Restrictions under the Pennsylvania Banking Code of 1965 are placed on the
size of a Bank's investment in fixed assets as a percentage of equity.
Presently, the Bank exceeds the allowable limit of 25% of equity, as defined by
the Pennsylvania Department of Banking. The Bank's fixed assets as a percentage
of equity increased to 36.6% at June 30, 2004, as compared with 29.6% at June
30, 2003. This increase was primarily the result of the purchase of a
three-story, 20,000 square foot brick office building that was purchased for
$1,440,000 on February 27, 2004 to house administrative and operational offices.
Generally,


                                    Page 18
<PAGE>

the Bank contacts the Department of Banking prior to the acquisition of material
dollar fixed asset additions to obtain the Department's approval. On an ongoing
basis, compliance with this section of the Banking Code is expected to occur
through normal depreciation adjustments and retention of earnings.

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

      In the normal course of conducting business activities, the Company is
exposed to market risk, principally interest risk. Interest risk arises from
market driven fluctuations in interest rates that affect cash flows, income,
expense and values of financial instruments. The asset/liability committee,
using policies and procedures approved by the board of directors, is responsible
for managing the rate sensitivity position.

      No material changes in the market risk strategy occurred during the
current period. No material changes have been noted in the Company's equity
value at risk. A detailed discussion of market risk is provided in the Form 10-K
for the period ended December 31, 2003.

ITEM 4

Controls and Procedures

      (a)   Evaluation of disclosure controls and procedures

            As of June 30, 2004, the Company carried out an evaluation, under
            the supervision and with the participation of the Company's
            management, including the Company's Chief Executive Officer and
            Chief Financial Officer, of the effectiveness of the design and
            operation of the Company's disclosure controls and procedures
            pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation,
            the Chief Executive Officer and Chief Financial Officer concluded
            that the Company's disclosure controls and procedures are effective
            in timely alerting them to material information relating to the
            Company (including its consolidated subsidiary) required to be
            included in the Company's periodic filings.

      (b)   Changes in internal controls.

            The Company made no significant changes in its internal controls or
            in other factors that could significantly affect these controls
            during the quarter ended June 30, 2004, including any corrective
            actions with regard to significant deficiencies and material
            weaknesses.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

                  In the opinion of the Company, after review with legal
            counsel, there are no proceedings pending to which the Company is a
            party or to which its property is subject, which, if determined
            adversely to the Company, would be material in relation to the
            Company's financial condition. There are no proceedings pending
            other than ordinary, routine litigation incident to the business of
            the Company. In addition, no material proceedings are pending or are
            known to be threatened or contemplated against the Company by
            governmental authorities.

Item 2. Changes in Securities and Use of Proceeds and Issuer Purchases of Equity
Securities

                  Nothing to report.


                                    Page 19
<PAGE>

Item 3. Defaults upon Senior Securities

                  Nothing to report.

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

                  The bank held its annual meeting of stockholders on May 6,
                  2004 at the Allen Organ Company located at 3370 Route 100,
                  Macungie, PA 18062. The Judges of Election reported that the
                  results of the balloting revealed that holders of 5,072,282
                  shares of common stock, representing 80.52% of the total
                  number of shares outstanding, were represented in person or by
                  proxy at the 2004 annual meeting of shareholders.

                  The following outlines the items voted on at the meeting as
                  well as the votes cast for, against and non-vote for each
                  item.

                  I.    Election of Class A directors to serve for a one-year
                        term expiring 2005.

                                                                        Withhold
                                                           For         Authority
                                                        ---------      ---------

                  Gordon K. Schantz                     5,052,697        19,585

                  Donald R. Schneck                     5,037,780        34,502

                  Konstantinos A. Tantaros              5,051,737        20,545

                  Dr. F. Geoffrey Toonder               5,054,934        17,348

                        Election of Class B directors to serve for a two-year
                        term expiring 2006.

                                                                        Withhold
                                                           For         Authority
                                                        ---------      ---------

                  Dale A. Dries                         5,037,553        34,729

                  Thomas R. Gulla                       5,055,353        16,929

                  Linn H. Schantz                       5,052,662        19,620

                  Donald S. Young                       5,056,088        16,194

                        Election of Class C directors to serve for a three-year
                        term expiring 2007.

                                                                        Withhold
                                                           For         Authority
                                                        ---------      ---------

                  Allen E. Kiefer                       4,870,072       202,210

                  Brent L. Peters                       5,040,252        32,030

                  Forrest A. Rohrbach                   5,040,252        32,030

                  Peter L. Shaffer                      4,857,145       215,137


                                    Page 20
<PAGE>

                  II.   Ratification of the selection of Beard Miller Company,
                        LLP, Certified Public Accountants, as independent
                        auditors of the Company for 2004.

                           For               Against           Abstain
                        ---------            -------           -------
                        5,036,985            29,826             5,471

Item 5. Other Information

                  Nothing to report.

Item 6.

Exhibits and Reports on Form 8-K

            (a)   Exhibits:

                  3(i)  Registrant's Articles of Incorporation, as amended, are
                        incorporated herein by reference to Annex B to the
                        Registrant's Registration Statement on Form S-4
                        (Registration No. 333-103673) as filed with the
                        Securities and Exchange Commission on March 7, 2003.

                  3(ii) Registrant's By-Laws are incorporated herein by
                        reference to Annex C to the Registrant's Registration
                        Statement on Form S-4 (Registration No. 333-103673) as
                        filed with the Securities and Exchange Commission on
                        March 7, 2003.

                  10.1  East Penn Financial Corporation's 1999 Stock Incentive
                        Plan for the benefit of officers and key employees is
                        incorporated by reference to Exhibit 10.3 to the
                        Registrant's Registration Statement on Form S-4
                        (Registration No. 333-103673) as filed with the
                        Securities and Exchange Commission on March 7, 2003.

                  10.2  East Penn Financial Corporation's 1999 Independent
                        Directors Stock Option Plan for the benefit of
                        non-employee directors is incorporated by reference to
                        Exhibit 10.2 to the Registrant's Registration Statement
                        on Form S-4 (Registration No. 333-103673) as filed with
                        the Securities and Exchange Commission on March 7, 2003.

                  10.3  Executive Employment Agreement between East Penn Bank
                        and Brent L. Peters, dated April 12, 2001, is
                        incorporated by reference to Exhibit 10.1 to the
                        Registrant's Registration Statement on Form S-4
                        (Registration No. 333-103673) as filed with the
                        Securities and Exchange Commission on March 7, 2003.

                  10.4  The Supplemental Executive Retirement Plan ("SERP")
                        between East Penn Bank and Brent L. Peters, dated May
                        31, 2001, is incorporated herein by reference to Exhibit
                        10.4 to the Registrant's Registration Statement on Form
                        S-4 (Registration No. 333-103673) as filed with the
                        Securities and Exchange Commission on March 7, 2003.

                  10.5  East Penn Financial Corporation's Dividend Reinvestment
                        and Stock Purchase Plan is incorporated by reference to
                        the Registrant's Registration Statement on Form S-3
                        (Registration No. 333-116754) as filed with the
                        Securities and Exchange Commission on June 23, 2004.

                  11    Statement re: Computation of per share earnings is
                        incorporated by reference herein to Note 3 on page 7 of
                        this Form 10-Q.


                                    Page 21
<PAGE>

                  31.1  Certification of Chief Executive Officer pursuant to
                        Rule 13a-15(e)/15d-15(e).

                  31.2  Certification of Chief Financial Officer pursuant to
                        Rule 13a-15(e)/15d-15(e).

                  32.1  Certification of Chief Executive Officer pursuant to
                        Section 1350 of the Sarbanes Oxley Act of 2002.

                  32.2  Certification of Chief Financial Officer pursuant to
                        Section 1350 of the Sarbanes Oxley Act of 2002.

            (b)   Reports on Form 8-K

                  No Form 8-K's were "filed" during the second quarter of 2004.


                                    Page 22
<PAGE>

SIGNATURES

      Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                        EAST PENN FINANCIAL CORPORATION
                                         (Registrant)


                                        By /s/ Brent L. Peters
                                           -------------------------------
                                           Brent L. Peters
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)

                                        Date: August 10, 2004


                                        By /s/ Theresa M. Wasko
                                           -------------------------------
                                           Theresa M. Wasko
                                           Treasurer and Chief Financial Officer
                                           (Principal Financial and Accounting
                                            Officer)

                                        Date: August 10, 2004


                                    Page 23
<PAGE>

                                  Exhibit Index

3(i)  Registrant's Articles of Incorporation, as amended, are incorporated by
      reference to Annex B to the Registrant's Registration Statement on Form
      S-4 (Registration No. 333-103673) as filed with the Securities and
      Exchange Commission on March 7, 2003.

3(ii) Registrant's By-Laws are incorporated by reference to Annex C to the
      Registrant's Registration Statement on Form S-4 (Registration No.
      333-103673) as filed with the Securities and Exchange Commission on March
      7, 2003.

10.1  East Penn Financial Corporation's 1999 Stock Incentive Plan for the
      benefit of officers and key employees is incorporated by reference to
      Exhibit 10.3 to the Registrant's Registration Statement on Form S-4
      (Registration No. 333-103673) as filed with the Securities and Exchange
      Commission on March 7, 2003.

10.2  East Penn Financial Corporation's 1999 Independent Directors Stock Option
      Plan for the benefit of non-employee directors is incorporated by
      reference to Exhibit 10.2 to the Registrant's Registration Statement on
      Form S-4 (Registration No. 333-103673) as filed with the Securities and
      Exchange Commission on March 7, 2003.

10.3  Executive Employment Agreement between East Penn Bank and Brent L. Peters,
      dated April 12, 2001, is incorporated by reference to Exhibit 10.1 to the
      Registrant's Registration Statement on Form S-4 (Registration No.
      333-103673) as filed with the Securities and Exchange Commission on March
      7, 2003.

10.4  Supplemental Executive Retirement Plan ("SERP") between East Penn Bank and
      Brent L. Peters, dated May 31, 2001, is incorporated by reference to
      Exhibit 10.4 to the Registrant's Registration Statement on Form S-4
      (Registration No. 333-103673) as filed with the Securities and Exchange
      Commission on March 7, 2003.

10.5  East Penn Financial Corporation's Dividend Reinvestment and Stock Purchase
      Plan is incorporated by reference to the Registrant's Registration
      Statement on Form S-3 (Registration No. 333-116754) as filed with the
      Securities and Exchange Commission on June 23, 2004.

11    Statement re: Computation of per share earnings is incorporated by
      reference herein to Note 3 on page 7 of this Form 10-Q.

31.1  Certification of Chief Executive Officer pursuant to Rule
      13a-15(e)/15d-15(e).

31.2  Certification of Chief Financial Officer pursuant to Rule
      13a-15(e)/15d-15(e).

32.1  Certification of Chief Executive Officer pursuant to Section 1350 of the
      Sarbanes Oxley Act of 2002.

32.2  Certification of Chief Financial Officer pursuant to Section 1350 of the
      Sarbanes Oxley Act of 2002.


                                    Page 24