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UNITED STATES  SECURITIES AND EXCHANGE COMMISSION  WASHINGTON, DC 20549





FORM 10-Q


(Mark  One)





|                                                                          | 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 _________________
|                                                                         
|Commission File Number 0-49952                                           




|NORTHEAST    PENNSYLVANIA FINANCIAL CORP.                
|---------------------------------------------------------
|                                                         
|(Exact    name of registrant as specified in its charter)




|DELAWARE                                                          |  | 06-1504091                             
|----------------------------------------------------------------- |  | ---------------------------------------
|                                                                  |  |                                        
|(State or    other jurisdiction of incorporation or organization) |  | (I.R.S.    Employer Identification No.)




|12 E. BROAD STREET, HAZLETON,    PENNSYLVANIA |  | 18201-6591
|--------------------------------------------- |  | ----------
|                                              |  |           
|(Address    of principal executive offices)   |  | (Zip Code)




|(570) 459-3700                                         
|-------------------------------------------------------
|                                                       
|(Registrants    telephone number, including area code)




|Not Applicable                                                                       
|-------------------------------------------------------------------------------------
|                                                                                     
|(Former    name, former address and former fiscal year, if changed since last report)




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    No





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


Yes    No





The Registrant had 3,976,799 of Common
    Stock outstanding as of August 12, 2004.





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TABLE OF CONTENTS





|Item    No.                                  |                                                                                                                                             | Page    Number
|-------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | --------------
|                                             |                                                                                                                                             |               
|PART  I - CONSOLIDATED FINANCIAL INFORMATION |                                                                                                                                            
|                                             |                                                                                                                                             |               
|Item 1                                       | CONSOLIDATED FINANCIAL STATEMENTS                                                                                                           |               
|                                             |                                                                                                                                             |               
|                                             | Consolidated Statements of Financial    Condition at June 30, 2004 and September 30, 2003 (unaudited)                                       | 3             
|                                             |                                                                                                                                             |               
|                                             | Consolidated Statements of Operations    for the Three and Nine Months Ended June 30, 2004 (unaudited) and 2003    (unaudited, as restated) | 4             
|                                             |                                                                                                                                             |               
|                                             | Consolidated Statements of Cash Flows for    the Nine Months Ended June 30, 2004 (unaudited) and 2003 (unaudited, as    restated)           | 5             
|                                             |                                                                                                                                             |               
|                                             | Notes to Consolidated Financial    Statements (unaudited)                                                                                   | 7             
|                                             |                                                                                                                                             |               
|Item 2                                       | Management Discussion and Analysis of    Financial Condition and Results of Operations                                                      | 19            
|                                             |                                                                                                                                             |               
|Item 3                                       | Quantitative and Qualitative    Disclosures About Market Risk                                                                               | 26            
|                                             |                                                                                                                                             |               
|Item 4                                       | Controls and Procedures                                                                                                                     | 26            
|                                             |                                                                                                                                            
|Part II  OTHER    INFORMATION               |                                                                                                                                            
|                                             |                                                                                                                                             |               
|Item 1                                       | Legal Proceedings                                                                                                                           | 27            
|                                             |                                                                                                                                             |               
|Item 2                                       | Changes in Securities, Use of    Proceeds and Issuer Purchases of Equity Securities                                                         | 27            
|                                             |                                                                                                                                             |               
|Item 3                                       | Defaults Upon Senior Securities                                                                                                             | 27            
|                                             |                                                                                                                                             |               
|Item 4                                       | Submission of Matters to a Vote of    Security Holders                                                                                      | 27            
|                                             |                                                                                                                                             |               
|Item 5                                       | Other Information                                                                                                                           | 27            
|                                             |                                                                                                                                             |               
|Item 6                                       | Exhibits and Reports on Form 8K                                                                                                            | 28            
|                                             |                                                                                                                                             |               
|Signatures                                   |                                                                                                                                            




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NORTHEAST PENNSYLVANIA  FINANCIAL CORP.  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION  (Unaudited)





|                                                                                                                                  |  | June 30,    2004                        |         | September    30,    2003 |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | ------------------------ | -
|                                                                                                                                  |  |                                         |         |                          |  
|                                                                                                                                  |  | (in    thousands except per share data) |        
|ASSETS                                                                                                                            |  |                                         |         |                          |  
|Cash and cash    equivalents                                                                                                      |  | $                                       | 11,900  |                          | $
|Investment securities    available-for-sale                                                                                       |  |                                         | 400,393 |                          |  
|Investment securities    held-to-maturity (estimated market value of $2,714 at June 30, 2004 and    $3,622 at September 30, 2003) |  |                                         | 2,716   |                          |  
|Loans held for sale                                                                                                               |  |                                         | 1,100   |                          |  
|Loans (less allowance    for loan loss of $8,630 at June 30, 2004 and $10,196 at September 30, 2003)                              |  |                                         | 413,703 |                          |  
|Accrued interest    receivable                                                                                                    |  |                                         | 3,114   |                          |  
|Assets acquired through    foreclosure                                                                                            |  |                                         | 269     |                          |  
|Property and equipment,    net                                                                                                    |  |                                         | 10,774  |                          |  
|Goodwill                                                                                                                          |  |                                         | 3,255   |                          |  
|Intangible assets                                                                                                                 |  |                                         | 7,371   |                          |  
|Bank-owned life    insurance                                                                                                      |  |                                         | 11,246  |                          |  
|Other assets                                                                                                                      |  |                                         | 14,697  |                          |  
|                                                                                                                                  |  |                                         |         |                          |  
|TOTAL ASSETS                                                                                                                      |  | $                                       | 880,538 |                          | $
|                                                                                                                                  |  |                                         |         |                          |  
|LIABILITIES                                                                                                                       |  |                                         |         |                          |  
|Deposits                                                                                                                          |  |                                         | 527,007 |                          |  
|Federal Home Loan Bank    advances                                                                                                |  |                                         | 244,182 |                          |  
|Trust-preferred debt                                                                                                              |  |                                         | 22,681  |                          |  
|Other borrowings                                                                                                                  |  |                                         | 20,417  |                          |  
|Advances from borrowers    for taxes and insurance                                                                                |  |                                         | 1,908   |                          |  
|Accrued interest    payable                                                                                                       |  |                                         | 1,349   |                          |  
|Other liabilities                                                                                                                 |  |                                         | 5,561   |                          |  
|                                                                                                                                  |  |                                         |         |                          |  
|TOTAL LIABILITIES                                                                                                                 |  |                                         | 823,105 |                          |  
|                                                                                                                                  |  |                                         |         |                          |  
|STOCKHOLDERS EQUITY                                                                                                              |  |                                         |         |                          |  
|Preferred stock ($.01    par value; 2,000,000 authorized shares; none issued                                                      |  |                                         |        |                          |  
|Common stock ($.01 par    value; 16,000,000 shares authorized, 6,427,350 shares issued                                            |  |                                         | 64      |                          |  
|Additional paid-in    capital                                                                                                     |  |                                         | 62,227  |                          |  
|Common stock acquired    by stock benefit plans                                                                                   |  |                                         | (2,867  | )                        |  
|Retained earnings     substantially restricted                                                                                   |  |                                         | 32,546  |                          |  
|Accumulated other    comprehensive income, net                                                                                    |  |                                         | (3,517  | )                        |  
|Treasury stock, at cost    (2,255,551 shares at June 30, 2004 and 2,250,756 shares at September 30,    2003)                      |  |                                         | (31,020 | )                        |  
|                                                                                                                                  |  |                                         |         |                          |  
|TOTAL STOCKHOLDERS    EQUITY                                                                                                     |  |                                         | 57,433  |                          |  
|                                                                                                                                  |  |                                         |         |                          |  
|TOTAL LIABILITIES AND    STOCKHOLDERS EQUITY                                                                                     |  | $                                       | 880,538 |                          | $
|                                                                                                                                  |  |                                         |         |                          |  




See accompanying notes to the unaudited consolidated financial  statements.





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NORTHEAST PENNSYLVANIA  FINANCIAL CORP.  CONSOLIDATED STATEMENTS OF OPERATIONS  (unaudited)





|                                                    |  | Three    Months Ended    June 30,        |        | Nine    Months Ended    June 30, |  
|--------------------------------------------------- |  | ---------------------------------------- | ------ | -------------------------------- | -
|                                                    |  |                                          |        |                                  |  
|                                                    |  | 2004                                     |        | As    Restated 2003              |  
|                                                    |  |                                          |        |                                  |  
|                                                    |  | (in    thousands, except per share data) |       
|INTEREST INCOME                                     |  |                                          |        |                                  |  
|Interest and fees on    loans                       |  | $                                        | 6,562  |                                  | $
|Mortgage-related    securities                      |  |                                          | 2,958  |                                  |  
|Investment securities:                              |  |                                          |        |                                  |  
|Taxable                                             |  |                                          | 355    |                                  |  
|Tax-exempt                                          |  |                                          | 120    |                                  |  
|Other interest income                               |  |                                          | 14     |                                  |  
|                                                    |  |                                          |        |                                  |  
|Total interest income                               |  |                                          | 10,009 |                                  |  
|                                                    |  |                                          |        |                                  |  
|INTEREST EXPENSE                                    |  |                                          |        |                                  |  
|Deposits                                            |  |                                          | 1,990  |                                  |  
|Federal Home Loan Bank    advances                  |  |                                          | 2,464  |                                  |  
|Trust-preferred debt                                |  |                                          | 262    |                                  |  
|                                                    |  |                                          |        |                                  |  
|Total interest expense                              |  |                                          | 4,716  |                                  |  
|                                                    |  |                                          |        |                                  |  
|NET INTEREST INCOME                                 |  |                                          | 5,293  |                                  |  
|Provision for loan losses                           |  |                                          | 232    |                                  |  
|                                                    |  |                                          |        |                                  |  
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |  |                                          | 5,061  |                                  |  
|                                                    |  |                                          |        |                                  |  
|NONINTEREST INCOME                                  |  |                                          |        |                                  |  
|Service charges and    other fees                   |  |                                          | 660    |                                  |  
|Insurance premium    income                         |  |                                          | 983    |                                  |  
|Trust fees                                          |  |                                          | 217    |                                  |  
|Gain on sale of:                                    |  |                                          |        |                                  |  
|Branch                                              |  |                                          |       |                                  |  
|Assets acquired through    foreclosure              |  |                                          | 32     |                                  |  
|Loans                                               |  |                                          | 88     |                                  |  
|Available-for-sale    securities                    |  |                                          | 343    |                                  |  
|Impairment loss on    equity investment             |  |                                          |       |                                  |  
|Other                                               |  |                                          | 205    |                                  |  
|                                                    |  |                                          |        |                                  |  
|Total noninterest income                            |  |                                          | 2,528  |                                  |  
|                                                    |  |                                          |        |                                  |  
|NONINTEREST EXPENSE                                 |  |                                          |        |                                  |  
|Salaries and employee    benefits                   |  |                                          | 3,203  |                                  |  
|Occupancy costs                                     |  |                                          | 690    |                                  |  
|Amortization of    intangibles                      |  |                                          | 205    |                                  |  
|Data processing costs                               |  |                                          | 295    |                                  |  
|Advertising                                         |  |                                          | 116    |                                  |  
|Professional fees                                   |  |                                          | 271    |                                  |  
|Federal Home Loan Bank    and other charges         |  |                                          | 220    |                                  |  
|Other                                               |  |                                          | 824    |                                  |  
|                                                    |  |                                          |        |                                  |  
|Total noninterest    expense                        |  |                                          | 5,824  |                                  |  
|                                                    |  |                                          |        |                                  |  
|Income (loss) before income taxes                   |  |                                          | 1,765  |                                  |  
|Income taxes                                        |  |                                          | 738    |                                  |  
|                                                    |  |                                          |        |                                  |  
|NET INCOME (LOSS)                                   |  | $                                        | 1,027  |                                  | $
|                                                    |  |                                          |        |                                  |  
|EARNINGS (LOSS) PER SHARE:                          |  |                                          |        |                                  |  
|Basic                                               |  | $                                        | 0.26   |                                  | $
|Diluted                                             |  |                                          | 0.25   |                                  |  




See accompanying notes to the unaudited consolidated financial  statements.





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NORTHEAST PENNSYLVANIA  FINANCIAL CORP.  CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)





|                                                                                     |  | Nine    Months Ended    June 30, |         
|------------------------------------------------------------------------------------ |  | -------------------------------- | --------
|                                                                                     |  |                                  |         
|                                                                                     |  | 2004                             |         
|                                                                                     |  |                                  |         
|                                                                                     |  | (in    thousands)                |         
|OPERATING ACTIVITIES                                                                 |  |                                  |         
|Net income                                                                           |  | $                                | 4,156   
|Adjustments to    reconcile net income to net cash provided by operating activities: |  |                                  |         
|Provision for loan    losses                                                         |  |                                  | 1,394   
|Provision for assets    acquired through foreclosure                                 |  |                                  |        
|Depreciation                                                                         |  |                                  | 893     
|Amortization of    intangibles                                                       |  |                                  | 645     
|Deferred income tax    benefit                                                       |  |                                  |        
|ESOP shares committed    to be released                                              |  |                                  | 186     
|Stock award expense                                                                  |  |                                  | 70      
|Bank-owned life    insurance income                                                  |  |                                  | (371    
|Origination of loans    held for sale                                                |  |                                  | (14,418 
|Proceeds from loans    sold                                                          |  |                                  | 61,015  
|Deconsolidation of    capital trusts                                                 |  |                                  | 682     
|Amortization and    accretion on:                                                    |  |                                  |         
|Held-to-maturity    securities                                                       |  |                                  | (5      
|Available-for-sale    securities                                                     |  |                                  | 2,931   
|Amortization of    deferred loan fees                                                |  |                                  | (553    
|(Gain) loss on sale of:                                                              |  |                                  |         
|Assets acquired through    foreclosure                                               |  |                                  | (54     
|Loans                                                                                |  |                                  | (751    
|Available-for-sale    securities                                                     |  |                                  | (1,220  
|Disposal of fixed    assets                                                          |  |                                  | 12      
|Branch                                                                               |  |                                  | (798    
|Impairment loss on    equity investment                                              |  |                                  |        
|Change in assets and liabilities:                                                    |  |                                  |         
|Decrease in accrued    interest receivable                                           |  |                                  | 778     
|Decrease (increase) in    other assets                                               |  |                                  | 1,948   
|Increase in accrued    interest payable                                              |  |                                  | 31      
|Increase in accrued    taxes payable                                                 |  |                                  |        
|Decrease (increase) in    other liabilities                                          |  |                                  | (596    
|                                                                                     |  |                                  |         
|Net cash provided by    operating activities                                         |  |                                  | 55,975  
|                                                                                     |  |                                  |         
|INVESTING ACTIVITIES                                                                 |  |                                  |         
|Net decrease (increase) in loans                                                     |  | $                                | 28,282  
|Proceeds from sale of:                                                               |  |                                  |         
|Available-for-sale    securities                                                     |  |                                  | 37,517  
|Assets acquired through    foreclosure                                               |  |                                  | 1,944   
|Proceeds from repayments of held-to-maturity    securities                           |  |                                  | 845     
|Proceeds from repayments of available-for-sale    securities                         |  |                                  | 71,838  
|Proceeds from sale of branch real estate and    transfer of deposits                 |  |                                  | (8,244  
|Purchase of:                                                                         |  |                                  |         
|Available-for-sale    securities                                                     |  |                                  | (187,304
|Office properties and    equipment                                                   |  |                                  | (313    
|Regulatory stock                                                                     |  |                                  | (5,752  
|                                                                                     |  |                                  |         
|Net cash used for    investing activities                                            |  | $                                | (61,187 
|                                                                                     |  |                                  |         




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NORTHEAST PENNSYLVANIA  FINANCIAL CORP.  CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)





|                                                                        |  | Nine    Months Ended    June 30, |         
|----------------------------------------------------------------------- |  | -------------------------------- | --------
|                                                                        |  |                                  |         
|                                                                        |  | 2004                             |         
|                                                                        |  |                                  |         
|                                                                        |  | (in    thousands)                |         
|FINANCING ACTIVITIES                                                    |  |                                  |         
|Net (decrease) in    deposit accounts                                   |  | $                                | (9,954  
|Net decrease in Federal    Home Loan Bank short-term advances           |  |                                  | (108,000
|Net increase (decrease)    in Federal Home Loan Bank long-term advances |  |                                  | 94,984  
|Net increase in    advances from borrowers for taxes and insurance      |  |                                  | 669     
|Net increase (decrease)    in other borrowings                          |  |                                  | 19,888  
|Proceeds from issuance    of trust-preferred securities                 |  |                                  |        
|Purchase of stock for    stock employee compensation trust              |  |                                  |        
|Cash dividend on common    stock                                        |  |                                  | (1,004  
|Stock options exercised                                                 |  |                                  | 387     
|                                                                        |  |                                  |         
|Net cash used for    financing activities                               |  |                                  | (3,030  
|                                                                        |  |                                  |         
|Increase (decrease) in    cash and cash equivalents                     |  |                                  | (8,242  
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                            |  |                                  | 20,142  
|                                                                        |  |                                  |         
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                |  | $                                | 11,900  
|                                                                        |  |                                  |         
|SUPPLEMENTAL INFORMATION                                                |  |                                  |         
|Cash paid during the    period for:                                     |  |                                  |         
|Interest on deposits    and borrowings                                  |  | $                                | 14,083  
|Income taxes                                                            |  |                                  | 1,434   
|Supplemental    disclosures  non-cash and financing information:       |  |                                  |         
|Transfer from loans to    assets acquired through foreclosure           |  |                                  | 1,287   
|Net change in other    comprehensive income                             |  |                                  | (5,247  




See accompanying notes to the unaudited consolidated financial  statements.





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Northeast Pennsylvania  Financial Corp.  Notes to Consolidated Financial Statements (unaudited)





1.     SUMMARY OF SIGNIFICANT  ACCOUNTING POLICIES





Business





Northeast Pennsylvania Financial Corp. (the Company) is a thrift holding  company organized under the laws of the state of Delaware. The Companys  principal subsidiary, First Federal Bank (the Bank), is a savings bank  organized under the laws of the United States. The Bank provides a wide range  of financial products and services to individual and corporate customers  through its community offices in Northeastern and Central Pennsylvania. Such  products include checking accounts, savings accounts, certificates of deposit,  and commercial, consumer, real estate and home equity loans. The Bank is  subject to competition from other financial institutions and other companies  that provide financial services. The Company is subject to the regulations of  certain federal bank regulatory agencies and undergoes periodic examinations by  those regulatory authorities.





Principles of Consolidation and  Presentation





The accompanying financial statements of the Company include the  accounts of the Bank, Abstractors, Inc., NEP Trust Co. (the Trust Co. ),  Higgins Insurance Associates, Inc. (Higgins) and NEP Capital Trust I and II  all of which are wholly-owned subsidiaries of Northeast Pennsylvania Financial  Corp. Abstractors, Inc. is a title insurance agency. The Trust Co. offers  trust, estate and asset management services and products. Higgins provides  insurance and investment products to individuals and businesses.  All material inter-company balances and  transactions have been eliminated in consolidation. Prior period amounts are  reclassified, when necessary, to conform with the current periods  presentation. Such reclassifications had no effect on net income or  stockholders equity and do not relate to the restatements described in  Footnote 2.





These financial statements should be read in conjunction with the  audited financial statements and the notes thereto included in the Companys  Annual Report for the year ended September 30, 2003.  The results for the three and nine months ended June 30, 2004 are  not necessarily indicative of the results that may be expected for the year  ended September 30, 2004.





The Company follows accounting principles and reporting practices which  are generally accepted in the United States of America (GAAP). The  preparation of financial statements in conformity with GAAP 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 revenues and expenses  during the reporting period. Actual results could differ significantly from  those estimates. Material estimates that are particularly susceptible to  significant change in the near-term relate to determination of the allowance  for loan losses, the evaluation and realizability of deferred taxes and the  evaluation of other than temporary impairment for investments.





Risks and Uncertainties





In the normal course of its business, the Company encounters two  significant types of risk: economic and regulatory. There are three main  components of economic risk: interest rate risk, credit risk and market risk.  The Company is subject to interest rate risk to the degree that its  interest-bearing liabilities mature or reprice at different speeds, or on  different bases from its interest-earning assets. The Companys primary credit  risk is the risk of defaults in the Companys loan portfolio that result from  borrowers inability or unwillingness to make contractually required payments.  The Companys lending activities are concentrated in Pennsylvania. The largest  concentration of the Companys loan portfolio is located in Northeastern  Pennsylvania. The ability of the Companys borrowers to repay amounts owed is  dependent on several factors, including the economic conditions in the  borrowers geographic regions and the
borrowers financial conditions. Market  risk reflects changes in the value of the collateral underlying loans, the  valuation of real estate held by the Company, and the valuation of loans held  for sale, securities, mortgage servicing assets and other investments.





The Bank is subject to the regulations of various government agencies.  These regulations can and do change significantly from period to period. The  Bank also undergoes periodic examinations by the regulatory agencies that may  subject it to further changes with respect to asset valuations, amounts of  required loss allowances and operating restrictions resulting from the  regulators judgments based on information available to them at the time of  their examination.





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Stock Options





The Company maintains stock option plans for officers, employees, and  directors. When the exercise price of the Companys stock options is greater  than or equal to the market price of the underlying stock on the date of the grant,  no compensation expense is recognized in the Companys financial statements.  Pro forma net income and earnings per share are presented to reflect the impact  of the stock option plans assuming compensation expense had been recognized  based on the fair value of the stock options granted under the plans.





In October 1995, the Financial Accounting Standards Board (the FASB)  issued Statement of Financial Accounting Standard (SFAS) No. 123, Accounting  for Stock-Based Compensation. This Statement encourages, but does not require,  the adoption of fair-value accounting for stock-based compensation to  employees. The Company, as permitted, has elected not to adopt the fair-value  accounting provisions of SFAS No. 123, and has instead continued to apply  Accounting Principles Board (APB) Opinion No. 25 and related interpretations in  accounting for the plans and to provide the required proforma disclosures of  SFAS No. 123; accordingly, no expense is recognized in the Consolidated  Statement of Operations.





The following table represents the effect on net income (loss) and  earnings (loss) per share had the Company applied the fair-value recognition  provisions of SFAS No. 123 to stock-based employee compensation:





|                                                |  | Three    Months Ended    June 30,                |       | Nine    Months Ended    June 30, |  
|----------------------------------------------- |  | ------------------------------------------------ | ----- | -------------------------------- | -
|                                                |  |                                                  |       |                                  |  
|                                                |  | 2004                                             |       | As    Restated    2003           |  
|                                                |  |                                                  |       |                                  |  
|                                                |  | (Dollars    in thousands, except per share data) |      
|Net income (loss), as reported:                 |  | $                                                | 1,027 |                                  | $
|Less: proforma expense related to stock options |  | $                                                | 51    |                                  | $
|                                                |  |                                                  |       |                                  |  
|Proforma net income (loss)                      |  | $                                                | 976   |                                  | $
|                                                |  |                                                  |       |                                  |  
|Basic net income (loss) per common share:       |  |                                                  |       |                                  |  
|As reported                                     |  | $                                                | 0.26  |                                  | $
|Pro forma                                       |  |                                                  | 0.25  |                                  |  
|Diluted net income (loss) per common share:     |  |                                                  |       |                                  |  
|As reported                                     |  | $                                                | 0.25  |                                  | $
|Pro forma                                       |  |                                                  | 0.24  |                                  |  




The effects on pro forma net income
    (loss) and basic and diluted earnings (loss) per share of applying the disclosure
    requirement of SFAS No. 123 in past years may not be representative of the
    future pro
    forma effects on net income and EPS due to the vesting provisions of the
    options and future awards that are available to be granted.





2.     EFFECTS  OF RESTATEMENT





The Consolidated Financial Statements as presented for the three and  nine month periods ended June 30, 2003 have been restated to reflect the  correction of accounting errors for the Companys indirect automobile, mortgage  and consumer loan portfolios. Such errors were discovered in July 2003 and were  primarily the result of computer coding errors and did not impact any loan  customers.





In September 2003, the Company completed a review of its accounting  records and discovered additional accounting errors. As such, the Company  further restated its financials for the three and nine month periods ended June  30, 2003 to reflect the correction of additional accounting errors related to  an underaccrual in the Companys health and welfare benefit plans and an  overaccrual in advertising costs.  Such  errors resulted in an increase in salaries and employee benefits and a  reduction in advertising costs.





These errors had no material effect on the Companys cash flows for  operating, investing or financing activities.





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The cumulative effect of these accounting errors reduced the Companys  aggregate net earnings as follows for the periods presented:





|                                                                       |  | Three    Months    Ended    June 30,    2003 |        | Nine Months    Ended    June 30,    2003 |  
|---------------------------------------------------------------------- |  | -------------------------------------------- | ------ | ---------------------------------------- | -
|                                                                       |  |                                              |        |                                          |  
|Net income (loss) prior to    restatements                             |  | $                                            | (1,104 | )                                        | $
|Adjustment for interest and    fees on loans, net of tax benefit       |  |                                              |       |                                          |  
|Adjustment for gain on sale    of loans, net of tax expense            |  |                                              |       |                                          |  
|                                                                       |  |                                              |        |                                          |  
|Net income (loss) after 1st    restatement                             |  |                                              | (1,104 | )                                        |  
|Adjustment for salaries and    employee benefits, net of tax benefit   |  |                                              | (100   | )                                        |  
|Adjustment for advertising,    net of tax expense                      |  |                                              | 11     |                                          |  
|                                                                       |  |                                              |        |                                          |  
|NET INCOME (LOSS), AS    ADJUSTED, AFTER 2ND RESTATEMENT               |  | $                                            | (1,193 | )                                        | $
|                                                                       |  |                                              |        |                                          |  
|EARNINGS (LOSS) PER SHARE    (EPS)                                     |  |                                              |        |                                          |  
|Basic EPS prior to    restatements                                     |  | $                                            | (0.29  | )                                        | $
|Adjustment    for interest and fees on loans, net of tax benefit       |  |                                              |       |                                          |  
|Adjustment    for gains on sale of loans, net of tax expense           |  |                                              |       |                                          |  
|                                                                       |  |                                              |        |                                          |  
|Basic    EPS after 1st restatement                                     |  | $                                            | (0.29  | )                                        | $
|Adjustment    for salaries and employee benefits, net of tax benefit   |  |                                              | (0.03  | )                                        |  
|                                                                       |  |                                              |        |                                          |  
|Basic EPS, as adjusted, net    of tax benefit, after 2nd restatement   |  | $                                            | (0.32  | )                                        | $
|                                                                       |  |                                              |        |                                          |  
|Diluted EPS prior to    restatements                                   |  | $                                            | (0.29  | )                                        | $
|Adjustment    for interest and fees on loans, net of tax benefit       |  |                                              |       |                                          |  
|Adjustment    for gain on sale of loans, net of tax expense            |  |                                              |       |                                          |  
|                                                                       |  |                                              |        |                                          |  
|Diluted    EPS after 1st restatement                                   |  |                                              | (0.29  | )                                        |  
|Adjustment    for salaries and employee benefits, net of tax benefit   |  |                                              | (0.03  | )                                        |  
|                                                                       |  |                                              |        |                                          |  
|Diluted EPS, as adjusted,    net of tax benefit, after 2nd restatement |  | $                                            | (0.32  | )                                        | $
|                                                                       |  |                                              |        |                                          |  




3.     EARNINGS  (LOSS) PER SHARE





Earnings (loss) per share (EPS), basic and diluted, were $0.26 and  $0.25, respectively, for the three months ended June 30, 2004 compared to  $(0.32) and $(0.32), respectively, for the three months ended June 30, 2003.  EPS, basic and diluted, were $1.06 and  $1.01, respectively, for the nine months ended June 30, 2004 compared to $0.10  and $0.10, respectively, for the nine months ended June 2003.





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The following table presents the reconciliation of the numerators and  denominators of the basic and diluted EPS computations.





|                                                                               |  | Three    Months Ended    June 30, |            | Nine    Months Ended    June 30, |  
|------------------------------------------------------------------------------ |  | --------------------------------- | ---------- | -------------------------------- | -
|                                                                               |  |                                   |            |                                  |  
|                                                                               |  | 2004                              |            | As    Restated    2003           |  
|                                                                               |  |                                   |            |                                  |  
|Net income (loss)                                                              |  | $                                 | 1,027      |                                  | $
|                                                                               |  |                                   |            |                                  |  
|Weighted-average common shares outstanding                                     |  |                                   | 6,427,350  |                                  |  
|Average treasury stock shares                                                  |  |                                   | (2,245,551 | )                                |  
|Average common stock acquired by stock benefit    plans:                       |  |                                   |            |                                  |  
|Stock employee    compensation trust                                           |  |                                   | (44,658    | )                                |  
|Stock awards    unallocated, net                                               |  |                                   | (22,538    | )                                |  
|ESOP shares    unallocated, net                                                |  |                                   | (188,395   | )                                |  
|                                                                               |  |                                   |            |                                  |  
|Weighted-average common shares used to calculate    basic earnings per share   |  |                                   | 3,926,208  |                                  |  
|Dilutive effect of stock awards                                                |  |                                   |           |                                  |  
|Dilutive effect of outstanding stock options                                   |  |                                   | 192,160    |                                  |  
|                                                                               |  |                                   |            |                                  |  
|Weighted-average common shares used to calculate    diluted earnings per share |  |                                   | 4,118,368  |                                  |  
|                                                                               |  |                                   |            |                                  |  
|Earnings (loss) per share-basic                                                |  | $                                 | 0.26       |                                  | $
|Earnings (loss) per share-diluted                                              |  | $                                 | 0.25       |                                  | $




Diluted earnings (loss) per share include the dilutive effect of the  Companys weighted-average stock options/awards outstanding using the Treasury  Stock method.  The Company had  anti-dilutive common stock equivalents outstanding of 141,856 and 190,239 for  the three months ended June 30, 2004 and 2003, respectively, and 23,013 and  10,485 for the nine months ended June 2004 and 2003, respectively.  These anti-dilutive stock options are not  included in the calculation of diluted earnings (loss) per share for the  periods presented.





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4.     INVESTMENT SECURITIES





Securities are summarized as follows:





|                                           |  |                   |         |                              | June 30,    2004  |                               |  |                              |       
|------------------------------------------ |  | ----------------- | ------- | ---------------------------- | ----------------- | ----------------------------- |  | ---------------------------- | ------
|                                           |  |                   |         |                              |                   |                               |  |                              |       
|                                           |  |                   |         |                              | (in    thousands) |                               |  |                              |       
|                                           |  | Amortized    Cost |         | Gross    Unrealized    Gains |                   | Gross    Unrealized    Losses |  | Estimated    Market    Value |       
|                                           |  |                   |         |                              |                   |                               |  |                              |       
|Available-for-sale    securities:          |  |                   |         |                              |                   |                               |  |                              |       
|Obligations of U.S.    government agencies |  | $                 | 12,431  |                              | $                 | 3                             |  | $                            | (192  
|Municipal securities                       |  |                   | 5,179   |                              |                   | 39                            |  |                              | (40   
|Corporate securities                       |  |                   | 14,537  |                              |                   | 524                           |  |                              |      
|Mortgage-backed    securities              |  |                   | 356,957 |                              |                   | 618                           |  |                              | (6,195
|                                           |  |                   |         |                              |                   |                               |  |                              |       
|Total debt securities                      |  |                   | 389,104 |                              |                   | 1,184                         |  |                              | (6,427
|                                           |  |                   |         |                              |                   |                               |  |                              |       
|FHLB stock                                 |  |                   | 12,852  |                              |                   |                              |  |                              |      
|FHLMC stock                                |  |                   | 1,000   |                              |                   |                              |  |                              | (200  
|FNMA stock                                 |  |                   | 3,000   |                              |                   | 5                             |  |                              | (220  
|Other equity securities                    |  |                   | 79      |                              |                   | 21                            |  |                              | (5    
|                                           |  |                   |         |                              |                   |                               |  |                              |       
|Total equity securities                    |  |                   | 16,931  |                              |                   | 26                            |  |                              | (425  
|                                           |  |                   |         |                              |                   |                               |  |                              |       
|Total                                      |  | $                 | 406,035 |                              | $                 | 1,210                         |  | $                            | (6,852
|                                           |  |                   |         |                              |                   |                               |  |                              |       
|Held-to-maturity securities:               |  |                   |         |                              |                   |                               |  |                              |       
|Municipal securities                       |  | $                 | 2,716   |                              | $                 | 6                             |  | $                            | (8    
|                                           |  |                   |         |                              |                   |                               |  |                              |       
|Total                                      |  | $                 | 2,716   |                              | $                 | 6                             |  | $                            | (8    
|                                           |  |                   |         |                              |                   |                               |  |                              |       
|                                           |  |                   |         |                              |                   |                               |  |                              |       




|                                  |  |                   |         |                              | September    30, 2003 |                               |  |                              |       
|--------------------------------- |  | ----------------- | ------- | ---------------------------- | --------------------- | ----------------------------- |  | ---------------------------- | ------
|                                  |  |                   |         |                              |                       |                               |  |                              |       
|                                  |  |                   |         |                              | (in    thousands)     |                               |  |                              |       
|                                  |  | Amortized    Cost |         | Gross    Unrealized    Gains |                       | Gross    Unrealized    Losses |  | Estimated    Market    Value |       
|                                  |  |                   |         |                              |                       |                               |  |                              |       
|Available-for-sale    securities: |  |                   |         |                              |                       |                               |  |                              |       
|Obligations of U.S.               |  |                   |         |                              |                       |                               |  |                              |       
|government agencies               |  | $                 | 26,089  |                              | $                     | 204                           |  | $                            | (4    
|Municipal securities              |  |                   | 14,983  |                              |                       | 151                           |  |                              |      
|Corporate securities              |  |                   | 38,769  |                              |                       | 1,814                         |  |                              | (12   
|Trust Preferred    securities     |  |                   | 12,754  |                              |                       | 474                           |  |                              | (429  
|Mortgage-backed    securities     |  |                   | 210,144 |                              |                       | 1,652                         |  |                              | (831  
|                                  |  |                   |         |                              |                       |                               |  |                              |       
|Total debt securities             |  |                   | 302,739 |                              |                       | 4,295                         |  |                              | (1,276
|                                  |  |                   |         |                              |                       |                               |  |                              |       
|FHLB stock                        |  |                   | 12,987  |                              |                       |                              |  |                              |      
|FHLMC stock                       |  |                   | 2,241   |                              |                       |                              |  |                              | (304  
|FNMA stock                        |  |                   | 6,000   |                              |                       | 20                            |  |                              | (170  
|Other equity securities           |  |                   | 78      |                              |                       | 22                            |  |                              | (6    
|                                  |  |                   |         |                              |                       |                               |  |                              |       
|Total equity securities           |  |                   | 21,306  |                              |                       | 42                            |  |                              | (480  
|                                  |  |                   |         |                              |                       |                               |  |                              |       
|Total                             |  | $                 | 324,045 |                              | $                     | 4,337                         |  | $                            | (1,756
|                                  |  |                   |         |                              |                       |                               |  |                              |       
|Held-to-maturity securities:      |  |                   |         |                              |                       |                               |  |                              |       
|Municipal securities              |  | $                 | 3,555   |                              | $                     | 67                            |  | $                            |      
|                                  |  |                   |         |                              |                       |                               |  |                              |       
|Total                             |  | $                 | 3,555   |                              | $                     | 67                            |  | $                            |      
|                                  |  |                   |         |                              |                       |                               |  |                              |       
|                                  |  |                   |         |                              |                       |                               |  |                              |       




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5.     LOANS





Loans are summarized as follows:





|                                         |  | June 30,    2004  |         | September    30,    2003 |  
|---------------------------------------- |  | ----------------- | ------- | ------------------------ | -
|                                         |  |                   |         |                          |  
|                                         |  | (in    thousands) |        
|Real    Estate Loans:                    |  |                   |         |                          |  
|One-to-four family                       |  | $                 | 115,269 |                          | $
|Multi-family and    commercial           |  |                   | 67,330  |                          |  
|Construction                             |  |                   | 9,256   |                          |  
|                                         |  |                   |         |                          |  
|Total real estate loans                  |  |                   | 191,855 |                          |  
|                                         |  |                   |         |                          |  
|Consumer    Loans:                       |  |                   |         |                          |  
|Home equity loans and    lines of credit |  |                   | 67,666  |                          |  
|Automobile                               |  |                   | 110,103 |                          |  
|Unsecured lines of    credit             |  |                   | 4,235   |                          |  
|Other                                    |  |                   | 10,321  |                          |  
|                                         |  |                   |         |                          |  
|Total consumer loans                     |  |                   | 192,325 |                          |  
|                                         |  |                   |         |                          |  
|Commercial Loans                         |  |                   | 39,271  |                          |  
|                                         |  |                   |         |                          |  
|Total Loans                              |  |                   | 423,451 |                          |  
|Less:                                    |  |                   |         |                          |  
|Deferred loan    origination fees, net   |  |                   | (1,118  | )                        |  
|Allowance for loan    losses             |  |                   | (8,630  | )                        |  
|                                         |  |                   |         |                          |  
|Total    loans, net                      |  | $                 | 413,703 |                          | $
|                                         |  |                   |         |                          |  




The activity in the allowance for loan losses is as follows (in thousands):





|                                                      |  | Nine    Months    Ended    June 30,    2004 |        | Nine    Months    Ended    June 30,    2003 |  
|----------------------------------------------------- |  | ------------------------------------------- | ------ | ------------------------------------------- | -
|                                                      |  |                                             |        |                                             |  
|                                                      |  | (in    thousands)                           |       
|Balance, beginning                                    |  | $                                           | 10,196 |                                             | $
|Provisions charged to    income                       |  |                                             | 1,394  |                                             |  
|Transfer for the sale    of indirect automobile loans |  |                                             | (1,557 | )                                           |  
|Charge-offs                                           |  |                                             | (1,811 | )                                           |  
|Recoveries                                            |  |                                             | 408    |                                             |  
|                                                      |  |                                             |        |                                             |  
|Balance, end                                          |  | $                                           | 8,630  |                                             | $
|                                                      |  |                                             |        |                                             |  




6.     ASSET SECURITIZATION





In June 2002, the Bank sold $50.0 million in automobile loan  receivables through a securitization transaction.  In the transaction, automobile loan receivables were transferred  to an independent trust (the Trust) that issued certificates representing  ownership interests in the Trust, primarily to institutional investors.  Although the Bank continues to service the  underlying accounts and maintain the customer relationships, this transaction  is treated as a sale for financial reporting purposes to the extent of the  investors interest in the Trust.   Accordingly, the receivables associated with the investors interests  are not reflected on the Consolidated Statement of Financial Condition.  In connection with this transaction, the  Bank enhanced the credit protection of the certificate holders by funding a  cash reserve account.





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In connection with this June 2002 transaction, the Bank originally  recorded a pre-tax gain on the sale of auto loans of $854,000, which was  included in gain on sale of loans in the Consolidated Statement of  Operations.  In July 2003, the Company  discovered that computer coding errors related to the indirect automobile loan  portfolio also impacted the original gains related to this securitization.  As such, the Company has retroactively  adjusted the original gain, as well as key assumptions, to collectively reflect  a pre-tax gain of $407,000.  At the time  of the transaction, the Bank also recognized a retained interest related to the  loan sale, which includes an Interest-Only Strip and cash reserve account.  The cash reserve account is subject to liens  by the providers of the credit enhancement facilities for the securitizations.





As of June 30, 2004, the balance of automobile loan receivables in the  Trust was $13.5 million.  Because the  historical performance of the receivables met the established criteria as of  September 30, 2003, the balance of the cash reserve account was reduced from  4.75% to 3.00% of the original balance at that time.





The key assumptions used in measuring the fair value of the retained  interest and cash collateral account for the transaction is shown in the  following table:





|                                                        |  | June 30,    2004 |          
|------------------------------------------------------- |  | ---------------- | ---------
|                                                        |  |                  |          
|Retained interest                                       |  |                  |          
|Average annual    repayment rate                        |  |                  | 1.5      
|Average annual expected    default rate                 |  |                  | 3.0      
|Discount rate                                           |  |                  | 10.0     
|Weighted average life    of underlying automobile loans |  |                  | 28 months




The key economic assumptions and the sensitivity of the fair value of  the retained interest asset to an immediate adverse change of 10% and 20% to  those assumptions are as follows for the period indicated:





|                                                            |  | June 30, 2004  |      
|----------------------------------------------------------- |  | -------------- | -----
|                                                            |  |                |      
|                                                            |  | (in thousands) |      
|Fair value of retained interest                             |  | $              | 1,417
|Weighted-average repayment rate assumption:                 |  |                |      
|Pre-tax decrease to    earnings due to a 10% adverse change |  | $              | 9    
|Pre-tax decrease to    earnings due to a 20% adverse change |  | $              | 6    
|Weighted-average expected default rate:                     |  |                |      
|Pre-tax decrease to    earnings due to a 10% adverse change |  | $              | 25   
|Pre-tax decrease to    earnings due to a 20% adverse change |  | $              | 51   
|Weighted-average discount rate:                             |  |                |      
|Pre-tax decrease to    earnings due to a 10% adverse change |  | $              | 15   
|Pre-tax decrease to    earnings due to a 20% adverse change |  | $              | 29   




Changes in fair value based on a 10% adverse variation in assumptions  generally cannot be extrapolated because the relationship of the change in  assumption to the change in fair value may not be linear.  Also, the effect of an adverse variation on  a particular assumption on the fair value of the retained interest is  calculated without changing any other assumption.  However, changes in one factor may result in changes in another  (for example, increases in market interest rates may result in lower  prepayments and increased credit losses), which might magnify or counteract the  sensitivities.





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7.     DEPOSITS





Deposits consist of the following major classifications:





|                                            |  | June 30,    2004  |         | September    30, 2003 | 
|------------------------------------------- |  | ----------------- | ------- | --------------------- | 
|                                            |  |                   |         |                       | 
|                                            |  | Amount            |         | Percent of Total      | 
|                                            |  |                   |         |                       | 
|                                            |  | (in    thousands) |        
|Noninterest-bearing                         |  | $                 | 38,750  |                       | 
|Interest bearing:                           |  |                   |         |                       | 
|Savings                                     |  |                   | 93,918  |                       | 
|NOW accounts                                |  |                   | 74,551  |                       | 
|Money market                                |  |                   | 81,452  |                       | 
|                                            |  |                   |         |                       | 
|                                            |  |                   | 249,921 |                       | 
|                                            |  |                   |         |                       | 
|Brokered CDs                               |  |                   | 43,000  |                       | 
|Certificates of deposit $100,000 or greater |  |                   | 28,970  |                       | 
|Certificates of deposit less than $100,000  |  |                   | 166,366 |                       | 
|                                            |  |                   |         |                       | 
|                                            |  |                   | 238,336 |                       | 
|                                            |  |                   |         |                       | 
|Total deposits                              |  | $                 | 527,007 |                       | 
|                                            |  |                   |         |                       | 




8.     FEDERAL  HOME LOAN BANK ADVANCES





Under terms of its collateral agreement with the Federal Home Loan Bank  of Pittsburgh (the FHLB), the Bank maintains otherwise unencumbered  qualifying assets (principally one-to-four family residential mortgage loans  and U.S. Government and Agency notes and bonds) in the amount of at least as  much as its advances from the FHLB.  The  Banks FHLB stock is also pledged to secure these advances. Advances from the  FHLB with fixed rates ranging from 1.61% to 6.71% at June 30, 2004 are due as  follows:





|Due by    June 30,  |  | Weighted    Average Rate |      | Amount |                    
|------------------- |  | ------------------------ | ---- | ------ | -------------------
|                    |  |                          |      |        |                    
|                    |  |                          |      |        | ($ in    thousands)
|2005                |  |                          | 6.20 | %      | $                  
|2006                |  |                          | 3.50 | %      |                    
|2007                |  |                          | 3.26 | %      |                    
|2008                |  |                          |     |        |                    
|2009                |  |                          | 4.89 | %      |                    
|Thereafter          |  |                          | 5.40 | %      |                    
|                    |  |                          |      |        |                    
|Total FHLB advances |  |                          |      |        | $                  
|                    |  |                          |      |        |                    




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9.     TRUST  PREFERRED SECURITIES





On April 10, 2002, NEP Capital Trust I, a Delaware statutory business  trust, issued $7.0 million of floating rate capital securities through a pooled  trust preferred securities offering.   The proceeds from this issuance, along with the Companys $217,000  payment for the Trusts common securities, were used to acquire $7.2 million  aggregate principal amount of the Companys floating rate junior subordinated  deferrable interest debentures due April 22, 2032 (the Debentures), which  constitute the sole asset of the Trust.   The interest rate on the Debentures and the distribution rate on the  capital securities are variable and adjust semi-annually at 3.70% over the  six-month LIBOR, with an initial rate of 6.02%.  A rate cap of 11% is effective through April 11, 2007.  The stated maturity of the Debentures is  April 22, 2032.  In addition, the  Debentures are subject to redemption at par at the option of
the Company,  subject to prior regulatory approval, in whole or in part on any interest  payment date after April 22, 2007.  The  Company recognized an amortizable intangible asset with a value of $220,000  relating to the issuance costs of these trust preferred securities.





On October 29, 2002, NEP Capital Trust II, a  Delaware statutory business trust, issued $15.0 million of floating rate  capital securities through a pooled trust preferred securities offering.  The proceeds from this issuance, along with  the Companys $464,000 payment for the Trusts common securities, were used to  acquire $15.5 million aggregate principal amount of the Companys floating rate  junior subordinated deferrable interest debentures due November 7, 2032 (the  Debentures), which constitute the sole asset of the Trust.  The interest rate on the Debentures and the  distribution rate on the capital securities are variable and adjust quarterly  at 3.45% over the three-month LIBOR, with an initial rate of 5.27%.  A rate cap of 12.5% is effective through  November 7, 2007.  The stated maturity  of the Debentures is November 7, 2032.   In addition, the Debentures are subject to redemption at par at the
 option of the Company, subject to prior regulatory approval, in whole or in  part on any interest payment date after August 7, 2007.  The Company recognized an amortizable  intangible asset with a value of $450,000 relating to the issuance costs of  these trust preferred securities.





In December 2003, the FASB revised Financial Interpretation No. (FIN)  46, Consolidation of Variable Interest Entities, an interpretation of  Accounting Research Bulletin No. 51 (the Interpretation).  The Interpretation requires the  consolidation of entities in which an enterprise absorbs a majority of the  entitys expected losses, receives a majority of the entitys expected residual  returns, or both, as a result of ownership, contractual or other financial  interests in the entity.  Previously,  entities were generally consolidated by an enterprise when it has a controlling  financial interest through ownership of a majority voting interest in the  entity.  Application of this  Interpretation is required in financial statements of public entities that have  interests in variable interest entities or potential variable interest entities  commonly referred to as special purpose entities for periods ending
after  December 15, 2003.  Application by  public entities for all other types of entities is required in financial  statements for periods ending after March 15, 2004.  As a result of the adoption of FIN 46, the Company deconsolidated  its capital trusts in the first quarter of 2004.  The result was an increase in the trust preferred debt as  reported on the balance sheet of $681,000.





A summary of the trust securities issued and  outstanding at June 30, 2004 is as follows:





|Name                 |  | Amount    Outstanding |            | Rate |  | Prepayment    Option    Date |   | Maturity  |  | Distribution    Payment    Frequency | 
|-------------------- |  | --------------------- | ---------- | ---- |  | ---------------------------- | - | --------- |  | ------------------------------------ | 
|                     |  |                       |            |      |  |                              |   |           |  |                                      | 
|NEP Capital Trust I  |  | $                     | 7,217,000  |      |  | 5.07                         | % | 4/22/2007 |  | 4/22/2032                            | 
|NEP Capital Trust II |  | $                     | 15,464,000 |      |  | 4.70                         | % | 11/7/2007 |  | 11/7/2032                            | 




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10.     GOODWILL AND OTHER  INTANGIBLE ASSETS





A summary of goodwill and other intangible assets  is as follows:





|                                            |  | At June    30, 2004 and September 30, 2003 |      
|------------------------------------------- |  | ------------------------------------------ | -----
|                                            |  |                                            |      
|Goodwill                                    |  | Gross    Carrying    Amount                |      
|                                            |  |                                            |      
|                                            |  | (in    thousands)                          |      
|Acquisition of:                             |  |                                            |      
|Abstractors                                 |  | $                                          | 248  
|Security Savings    Association of Hazleton |  |                                            | 571  
|Higgins Insurance    Associates, Inc.       |  |                                            | 2,519
|Schuylkill Savings and    Loan Association  |  |                                            | 200  
|                                            |  |                                            |      
|Total goodwill                              |  | $                                          | 3,538
|                                            |  |                                            |      




|                                                                    |  | At June    30, 2004         |        | At    September 30, 2003    |  
|------------------------------------------------------------------- |  | --------------------------- | ------ | --------------------------- | -
|                                                                    |  |                             |        |                             |  
|Other Intangible Assets                                             |  | Gross    Carrying    Amount |        | Accumulated    Amortization |  
|                                                                    |  |                             |        |                             |  
|                                                                    |  | (in    thousands)           |        | (in    thousands)           |  
|Amortizing:                                                         |  |                             |        |                             |  
|Omega core deposit    intangible (1)                                |  | $                           |       |                             | $
|Security Savings    Association of Hazleton core deposit intangible |  |                             | 9,086  |                             |  
|Schuylkill Savings and    Loan Association core deposit intangible  |  |                             | 255    |                             |  
|Other intangibles                                                   |  |                             | 981    |                             |  
|Nonamortizing intangible assets Other intangible    assets          |  |                             | 75     |                             |  
|                                                                    |  |                             |        |                             |  
|Total other intangible assets                                       |  | $                           | 10,397 |                             | $
|                                                                    |  |                             |        |                             |  




(1)In  January 2004, the Bank sold its Danville branch and charged the remaining Omega  intangible to gain on sale of the branch.   The amortization for the nine month period ended June 30, 2004 relating  to this transaction was $32,000.





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Amortization expense of other amortizing  intangible assets for the three and nine months ended June 30, 2004 and June  30, 2003 is as follows:





|                             |  | For the    Three Months Ended    June 30, |     | For the    Nine Months Ended    June 30 |  
|---------------------------- |  | ----------------------------------------- | --- | --------------------------------------- | -
|                             |  |                                           |     |                                         |  
|                             |  | 2004                                      |     | 2003                                    |  
|                             |  |                                           |     |                                         |  
|                             |  | (in    thousands)                         |     | (in    thousands)                       |  
|Core deposit intangibles     |  | $                                         | 151 |                                         | $
|Other amortizing intangibles |  |                                           | 54  |                                         |  
|                             |  |                                           |     |                                         |  
|Total amortizing intangibles |  | $                                         | 205 |                                         | $
|                             |  |                                           |     |                                         |  




11.     DERIVATIVE  INSTRUMENTS AND HEDGING ACTIVITIES





In the quarter ended December 31, 2003, the Bank began using derivative  instruments to mitigate the impact of interest rate movements on the value of  certain liabilities.  These instruments  consist of interest rate swaps that have underlying interest rates based on key  benchmark indices.  The nature and  volume of derivative instruments used to manage interest rate risk depend on  the level and type of liabilities on the balance sheet and the risk management  strategies for the current and anticipated interest rate environment.





In November 2003, the Bank entered into receive fixed-pay variable  interest rate swaps with a notional amount of $40 million that have been  designated to hedge changes in the fair value of certain FHLB advances.  The Bank includes all components of each  derivatives fair value in the assessment of hedge effectiveness.  For the three and nine month periods ended  June 30, 2004, no gain or loss was required to be recognized in earnings  associated with these fair value hedges.   Additionally, no hedge ineffectiveness was noted as of June 30, 2004.





Following is a summary of the derivatives designated as hedges under  SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,  as amended:





|                                                  |  | At June    30, 2004    (in thousands) |                   
|------------------------------------------------- |  | ------------------------------------- | ------------------
|                                                  |  |                                       |                   
|                                                  |  |                                       |                   
|                                                  |  |                                       |                   
|                                                  |  |                                       | Notional    Amount
|                                                  |  |                                       |                   
|Fair Value Hedges:                                |  |                                       |                   
|Receive fixed-pay    variable interest rate swaps |  | $                                     | 40,000            




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12.     COMPREHENSIVE  INCOME





The following schedule reconciles net income to total comprehensive income  as required by SFAS No. 130:





|                                                                                            |  | Three    Months Ended    June 30 |        | Nine    Months Ended    June 30 |  
|------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | -
|                                                                                            |  |                                  |        |                                 |  
|                                                                                            |  | 2004                             |        | As    Restated    2003          |  
|                                                                                            |  |                                  |        |                                 |  
|                                                                                            |  | (in    thousands)                |       
|Net Income (loss)                                                                           |  | $                                | 1,027  |                                 | $
|Other comprehensive income, net of tax                                                      |  |                                  |        |                                 |  
|Unrealized gains    (losses) on securities and on retained interest on asset securitization |  |                                  |       |                                 |  
|Unrealized holding    gains (losses) arising during the period                              |  |                                  | (5,417 | )                               |  
|Less: Reclassification    adjustment for gains (losses) included in net income              |  |                                  | 210    |                                 |  
|                                                                                            |  |                                  |        |                                 |  
|Other comprehensive    income (loss)                                                        |  |                                  | (5,627 | )                               |  
|                                                                                            |  |                                  |        |                                 |  
|Comprehensive income (loss)                                                                 |  | $                                | (4,600 | )                               | $
|                                                                                            |  |                                  |        |                                 |  




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Item2.     MANAGEMENT  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





In  addition to historical information, this Form 10-Q includes certain  forward-looking statements based on current management expectations.  These forward-looking statements are  generally identified by use of the words believe, expect, intend, anticipate,  estimate, project or similar expressions.   The Company intends such forward-looking statements to be covered by the  safe harbor provisions of the Private Securities Reform Act of 1995 and is  including this statement for purposes of such safe harbor provisions.  The Companys actual results could differ  materially from those management expectations.   Factors that could cause future results to vary from current management  expectations include, but are not limited to, changes in general economic conditions,  legislative and regulatory changes, changes in the monetary and fiscal policies  of the federal
government, changes in tax policies, rates and regulations of  federal, state and local tax authorities, changes in interest rates, deposit  flows, the cost of funds, demand for loan products, demand for financial  services, competition, changes in the quality or composition of the Banks loan  and investment portfolios, changes in accounting principles, policies or  guidelines, and other economic, competitive, governmental and technological  factors affecting the Companys operations, markets, products, services and  prices.  These factors should be  considered in evaluating forward-looking statements and undue reliance should  not be placed on such statements. Except as required by applicable law and regulation,  the Company does not undertake and specifically disclaims any obligation to  publicly release the result of any revisions which may be made to any  forward-looking statements to reflect events or circumstances after the date of  such statements or to reflect the occurrence of
anticipated or unanticipated  events.





A.     General





The Companys results of operations are dependent  primarily on the results of operation of the Bank and thus are dependent to a  significant extent on net interest income, which is the difference between the  income earned on its loan and investment portfolios and its cost of funds,  consisting of the interest paid on deposits and borrowings.  However, noninterest income has become a  meaningful component of the Companys operations mainly due to fees earned by  non-bank subsidiaries. Results of operations are also affected by the Companys  provision for loan losses, loan and security sales activities, service charges  and other fee income, and noninterest expense.   The Companys noninterest expense principally consists of compensation  and employee benefits, office occupancy and equipment expense, data processing,  professional fees, and advertising expenses. Results of operations are also  significantly affected by general
economic and competitive conditions,  particularly changes in interest rates, government policies and actions of  regulatory authorities.





The Companys results of operations have been  restated for the three and nine month periods ended June 30, 2003, to reflect  the correction of accounting errors related to the Companys indirect  automobile, mortgage and consumer loan portfolios, an underaccrual in an  employee health and welfare benefit plan and an overaccrual in advertising  costs.  The net effect of such  restatements was to reduce interest income, increase operating expenses and  reduce retained earnings.  See Footnote  2 to the unaudited Consolidated Financial Statements for a description of the  effects on the periods presented in this current report on Form 10-Q.





B.     Management  Strategy





The long-term strategy of the Company is to become a high-performing  financial service company focusing on its customer needs for high-quality  financial products and services. The Bank provides residential and commercial  real estate, commercial and consumer lending services, as well as retail  deposit and cash management services.   Lending activities are funded primarily with retail deposits and  borrowings.  To promote long-term  financial strength and profitability, the Companys operating strategy is  focused on originating high-quality consumer and small-business commercial  loans and deposit relationships.  The  Company also manages an investment portfolio of high-quality mortgage-related  securities which are funded with long-term Federal Home Loan Bank advances and  deposits.  The Company currently sells  substantially all newly originated fixed-rate residential mortgages in the  secondary market.





In September 2003, the Board of Directors initiated several management  and operational changes including appointing two seasoned bank executives to  lead the Company.  In connection with  these changes, the Company began a process to reposition the balance sheet and  improve earnings.  During the first  fiscal quarter of 2004, these activities included divesting $16.2 million of  longer-term fixed-rate residential mortgage loans and entering into  approximately $40 million of derivative contracts to convert certain long-term  fixed-rate FHLB borrowings to a variable rate.





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During the second fiscal quarter of 2004, the Company continued its  repositioning of the balance sheet by selling approximately $25.0 million of  investment securities, including $15.0 million of corporate bonds that were  scheduled to mature within the next 20 months.   That sale was undertaken since the gain realized on the sale was greater  than the income the Company would have earned if it continued to hold such  bonds until maturity.  This sale  resulted in a gain of approximately $872,000 during the second fiscal quarter  of 2004.  The proceeds from the sale  were used to repay certain maturing borrowings, fund the transfer of branch  deposits and invest in similar assets that are interest-rate sensitive. The  Bank sold $650,000 of real estate and equipment and transferred $10.3 million  of deposits at its Danville, Pennsylvania branch in January 2004 to The First  National Bank of Berwick, Berwick, Pennsylvania.  This sale
resulted in a gain of $798,000.





During the third fiscal quarter, the Company continued its  restructuring activities by selling approximately $19.2 million of lower credit  quality automobile loans and $4.0 million of investment securities.  The sale of indirect automobile loans was undertaken  to improve asset quality and did not have a significant affect on capital or  results of operations since the loss on the sale was offset by a $1.6 million  reduction in the allowance for loan losses associated with such loans. The $4.0  million sale of investment securities included certain fixed rate corporate  securities with long durations and resulted in a gain of $343,000.  The proceeds from these activities were  reinvested in high-quality shorter duration investment securities.





Other management initiatives include instituting pricing discipline in  each of the Companys product lines, improving credit policy, decreasing the  levels of nonperforming assets and increasing core deposits and business  lending in the Companys local market area.





C.     Critical  Accounting Policies





The Company follows accounting principles and reporting practices which  are generally accepted in the United States of America (GAAP). The  preparation of financial statements in conformity with GAAP 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 revenues and expenses  during the reporting period. Actual results could differ significantly from  those estimates. Material estimates that are particularly susceptible to  significant change in the near-term relate to determination of the allowance  for loan losses, the evaluation and realizability of deferred taxes and the  evaluation of other than temporary impairment for investments.





The Company believes the allowance for loan losses is a critical  accounting policy that requires the most significant judgments and estimates  used in the preparation of the Consolidated Financial Statements. Although the  Company believes it uses the best information available to establish the  allowance for loan losses, future additions to the allowance may be necessary  based on estimates that are susceptible to change as a result of changes in  economic conditions and other factors.





D.Nonperforming  Assets





Nonperforming assets, which include nonaccruing loans, real estate  owned and repossessed assets and troubled debt restructurings can negatively  affect the Companys results of operations. Nonaccruing loans are those on  which the accrual of interest has ceased. Loans are placed on nonaccrual status  immediately if, in the opinion of management, collection is doubtful, or when  principal or interest is past due 90 days or more and the value of the  collateral is insufficient to cover principal and interest. Interest accrued  but not collected at the date a loan is placed on nonaccrual status is reversed  and charged against interest income. In addition, the amortization of net  deferred loan fees is suspended when a loan is placed on nonaccrual status.  Subsequent cash receipts are applied either to the outstanding principal  balance or recorded as interest income, depending on managements assessment of  the ultimate collectibility of principal
and interest. Past due loans are loans  contractually past due 90 days or more as to principal or interest payments but  which remain in accrual status because they are considered well secured and in  the process of collection.





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The following table presents information regarding the Banks  nonperforming assets and troubled debt restructurings at the dates indicated:





|                                                                |  | June 30,    2004          |       | September    30,    2003 |  
|--------------------------------------------------------------- |  | ------------------------- | ----- | ------------------------ | -
|                                                                |  |                           |       |                          |  
|                                                                |  | (dollars    in thousands) |      
|Nonperforming assets:                                           |  |                           |       |                          |  
|Nonaccruing loans                                               |  | $                         | 7,643 |                          | $
|Assets acquired through    foreclosure                          |  |                           | 269   |                          |  
|                                                                |  |                           |       |                          |  
|Total nonperforming    assets                                   |  |                           | 7,912 |                          |  
|Troubled debt    restructurings                                 |  |                           |      |                          |  
|                                                                |  |                           |       |                          |  
|Total nonperforming    assets and troubled debt restructurings  |  | $                         | 7,912 |                          | $
|                                                                |  |                           |       |                          |  
|Total nonperforming loans as a percentage of total    loans (1) |  |                           | 1.80  | %                        |  
|Total nonperforming assets as a percentage of total    assets   |  |                           | 0.90  | %                        |  




(1)Total loans excludes the allowance for loan losses  and deferred loan fees.





As of June 30, 2004, nonperforming assets totaled $7.9 million, or  0.90% of total assets, compared to $13.5 million, or 1.51% of total assets, at  September 30, 2003.  The $5.6 million  reduction in nonperforming assets during the nine months ended June 30, 2004  was primarily the result of the balances on several nonaccruing commercial  loans being reduced due to cash collections, a $753,000 reduction in the levels of  foreclosed assets and the successful execution of various workout strategies.  The reduction in foreclosed assets was  primarily due to the sale of several one-to-four family properties.  To continue reducing nonperforming assets,  the Bank has established workout strategies for its large commercial  nonaccruing loans which are designed to prudently exit or collect on such loans  within a reasonable timeframe.





E.     Liquidity  and Capital Resources





Liquidity is the ability to meet current and future financial  obligations.  The Bank further defines  liquidity as the ability to respond to deposit outflows as well as maintain  flexibility to take advantage of lending and investment opportunities. The  Banks primary sources of funds are operating earnings, deposits, principal and  interest payments on loans, proceeds from loan sales, sales and maturities of  mortgage-backed and investment securities, and FHLB advances.  The Bank uses the funds generated to support  its lending and investment activities as well as any other demands for  liquidity such as deposit outflows.   While maturities and scheduled amortization of loans and securities are  predictable sources of funds, deposit flows, mortgage prepayments, loan and  security sales and the exercise of call features are greatly influenced by  general interest rates, economic conditions and competition.





In accordance with Thrift Bulletin 77, the Office of Thrift Supervision  (the OTS) requires institutions, such as the Bank, to maintain adequate  liquidity to assure safe and sound operation.   The Banks liquidity ratio of cash and qualified assets to net  withdrawable deposits and borrowings due within one year was 7.27% at June 30,  2004, compared to 12.99% at March 31, 2004.   Management monitors liquidity daily and maintains funding sources to  meet unforeseen changes in cash requirements. In addition to its primary  funding sources, the Banks liquidity requirements can be satisfied through the  use of its borrowing capacity from the FHLB of Pittsburgh and other sources,  the sale of certain securities and the pledging of certain loans for other  lines of credit.  Management believes  these sources are sufficient to maintain the required and prudent levels of  liquidity.





The primary sources of funding for the Company are dividend payments  from the Bank, sales and maturities of investment securities, borrowings and,  to a lesser extent, earnings on investments and deposits of the Company.  Dividend payments by the Bank have primarily  been used to fund the Companys repurchase of its stock, to pay cash dividends,  and to pay interest on the trust-preferred securities.  The Banks ability to pay dividends and  other capital distributions to the Company is generally limited by the  regulations of the OTS.  Additionally,  the OTS may prohibit the payment of dividends which are otherwise permissible  by regulation for safety and soundness reasons.





The Bank is subject to various regulatory capital requirements  administered by 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 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 Banks 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 and tangible capital  (as defined) to total assets (as defined).   At June 30, 2004, the Bank was in compliance with regulatory capital  requirements and was deemed a well-capitalized  institution.  To be categorized as  well-capitalized, the Bank must maintain minimum ratios as set forth in the  table below.





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The Banks actual capital amounts and ratios at June 30, 2004 and September  30, 2003 are presented in the following table:





|                                             |  | As of June    30, 2004    |       
|-------------------------------------------- |  | ------------------------- | ------
|                                             |  |                           |       
|                                             |  | (dollars    in thousands) |       
|                                             |  | Actual                    |       
|                                             |  |                           |       
|                                             |  | Amount                    |       
|                                             |  |                           |       
|Risk-based Capital                           |  |                           |       
|(Total capital to    risk-weighted assets)   |  | $                         | 64,963
|Tier I Capital                               |  |                           |       
|(to risk-weighted assets)                    |  |                           | 58,997
|Core Capital                                 |  |                           |       
|(Tier I capital to adjusted    total assets) |  |                           | 60,036
|Tangible Capital                             |  |                           |       
|(Tangible capital to    tangible assets)     |  |                           | 60,036




|                                             |  | As of    September 30, 2003 |       
|-------------------------------------------- |  | --------------------------- | ------
|                                             |  |                             |       
|                                             |  | (dollars    in thousands)   |       
|                                             |  | Actual                      |       
|                                             |  |                             |       
|                                             |  | Amount                      |       
|                                             |  |                             |       
|Risk-based Capital                           |  |                             |       
|(Total capital to    risk-weighted assets)   |  | $                           | 59,441
|Tier I Capital                               |  |                             |       
|(to risk-weighted assets)                    |  |                             | 52,406
|Core Capital                                 |  |                             |       
|(Tier I capital to adjusted    total assets) |  |                             | 54,053
|Tangible Capital                             |  |                             |       
|(Tangible capital to    tangible assets)     |  |                             | 54,053




(1)For the periods  presented the components of tangible capital were the same as those of core  capital. Tangible and core capital are computed as a percentage of adjusted  total assets and tangible assets of $878 million and $876 million at June 30,  2004 and September 30, 2003, respectively. Risk-based capital and Tier I  capital are computed as a percentage of risk-weighted assets of $475 million  and $565 million at June 30, 2004 and September 30, 2003, respectively. Tier I  capital is reduced by the amount of low-level recourse and residual interests  to compute Tier I capital.





F.     Comparison  of Financial Condition at June 30, 2004 and September 30, 2003





Total assets decreased $15.8 million from $896.3 million at September  30, 2003 to $880.5 million at June 30, 2004.   Total loans decreased by $76.3 million from September 30, 2003.  The decrease was primarily due to the sale  of $16.2 million of modified fixed-rate one-to-four family mortgages and the  sale of $19.2 million of indirect automobile loans.  The sale of one-to-four family mortgages was completed as part of  the process to reposition the Banks balance sheet and improve earnings and interest-rate  sensitivity.  The sale of indirect  automobile loans was undertaken to reduce the levels of lower quality loans in  the Banks loan portfolio.  The Bank  ceased originating non-prime indirect automobile loans in October 2003.  At June 30, 2004, indirect automobile loans  totaled $103.4 million, compared to $131.1 million at September 30, 2003.  The Company expects the levels of indirect  automobile loan
balances to continue decreasing in fiscal 2004 due to lower  originations and prepayments.  Other  decreases in loans were due to repayments and maturities of commercial,  consumer and residential loans.   Investment securities available-for-sale increased by $73.8 million due  to the Company investing the proceeds from the loan sales and loan repayments  into high quality mortgaged-backed securities.





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Total liabilities decreased $14.8 million from $837.9 million at  September 30, 2003 to $823.1 million at June 30, 2004.   Deposits decreased $20.3 million from  $547.3 million as of September 30, 2003 to $527.0 million at June 30,  2004.  The decrease in deposits was  largely due to a $10.3 million transfer of deposits from the Banks Danville  branch to another financial institution in January 2004.  Deposits have decreased, however, it is the  Banks strategy to increase deposits by offering competitive interest rate  deposit products to retail customers while providing core transaction account  products to businesses and individuals.   FHLB advances decreased by $14.7 million due to maturing advances of $55.0  million during December, of which  $35.0  million was extended for a two-year term at lower market rates.  The Bank also began using other borrowing  sources such as repurchase agreements and brokered
certificates of deposit in  the nine months ended June 30, 2004 as alternative funding sources to  higher-rate FHLB advances.  As of June  30, 2004, the Bank had $43.0 million of brokered certificates of deposit, of  which $33.0 million mature in July 2004.





G.     Comparison of Operating Results for the Three  Months ended June 30, 2004 and June 30, 2003.





General.The  Company reported net income of $1.0 million and a net loss of $1.2 million for  the three months ended June 30, 2004 and June 30, 2003, respectively.  Basic and diluted earnings per share increased  to $0.26 and $0.25 per share, respectively, for the three months ended June 30,  2004 compared to a net loss of $0.32 per share on a basic and diluted basis,  for the same period in fiscal 2003.





Interest  Income.     Total interest income  decreased $1.1 million, or 9.6%, from $11.1 million for the three months ended  June 30, 2003, to $10.0 million for the three months ended June 30, 2004.  This decrease was primarily due to a 37  basis point decline on the tax-equivalent yield on earning assets to 4.97% for  the three months ended June 30, 2004 as compared to 5.34% for the same  three-month period ended June 30, 2003.    Average market rates were lower in the quarter ended June 30, 2004 when  compared to the same period in 2003.   Additionally, the Bank is originating higher credit quality loans with  lower yields than in prior periods.   Interest income on loans decreased $1.6 million primarily due to a $56.3  million reduction in average real estate loan balances between periods.  Interest income on mortgage-related  securities increased $1.4 million due to an increase of $121.8
million in the  average balances and a 63 basis point increase in the average yield on such  securities. The Bank has invested in mortgage related securities with higher  yields as a way to utilize excess liquidity from loan and investment sales and  as repayments of loans and mortgage-backed securities have occurred.  Interest income on taxable investment  securities decreased $811,000 due to a $76.3 million decrease in average  balances due to the previously discussed sales that occurred during the three  month periods ended June 30, 2004 and March 31, 2004.





Interest  Expense.Interest expense  decreased $1.4 million, or 22.9%, from $6.1 million for the three months ended  June 30, 2003 to $4.7 million for the three months ended June 30, 2004.  The decline in interest expense was  primarily attributable to declining interest rates as the average rate paid on  deposits decreased in the quarter ended June   30, 2004 to 1.65% from 2.08% in the quarter ended June 30, 2003.  Also as previously discussed, the Bank  entered into several derivative contacts in November 2003 which swapped the  fixed rates the Bank pays on $40.0 million of FHLB advances to variable rates.  The effect of this transaction was to reduce  the average rate the Bank is paying on these borrowings from approximately  5.51% to 3.06% during the quarter. While this transaction added interest rate  volatility, the overall asset/liability position of the Bank remains within  acceptable risk
parameters.  Also during  the first nine months of fiscal 2004, approximately $55.0 of long-term fixed  rate advances with an average rate of 5.67% matured and were replaced with two  and three-year fixed rate advances with an average rate of 2.32%.  These transactions resulted in a 170 basis  point decrease in the average rate on FHLB advances and other borrowings  between comparable quarters, offset by a $47.4 million increase in the average  balances of such borrowings.





Provision for  Loan Losses.The Company records  a provision for loan losses in order to maintain the allowance for loan losses  at a level which management considers its best estimate of known and probable  inherent losses.  Managements  evaluation is based upon a continuing review of the portfolio and requires  significant management judgment. The Banks  provision for loan losses for the three months ended June 30, 2004 decreased  $618,000 to $232,000 when compared to the comparable 2003 fiscal period.  The decrease was primarily due to reductions  in the levels of nonperforming loans, classified assets and charge-offs and  reflect, among other things, reductions in loan balances, the sale of  $19.2 million of lower credit quality indirect automobile loans and other  changes in the composition of the loan portfolio during the quarter.  The loan portfolio experienced reductions in  higher risk
indirect automobile, construction and commercial loans during the  three-month period ended June 30, 2004.   See the Nonperforming Assets section of Managements Discussion and  Analysis for a further analysis of asset quality.  Net loan charge-offs were  $223,000 for the quarter ended June 30, 2004, compared to net loan charge-offs  of $672,000 for the quarter ended June 30, 2003.





Noninterest  Income.Noninterest income  increased $814,000, or 47.5%, from $1.7 million for the three months ended June  30, 2003 to $2.5 million for the three months ended June 30, 2004.  This increase was primarily due to a $1.5  million impairment loss that was recorded in the June 2003 quarter, offset by  higher levels of originations and gains on the sales of residential mortgage  loans in 2003.  Other income was also  lower due to reduced yields on bank-owned life insurance.





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Insurance premium income and gains on the sales of loans were lower in  the three months ended June 30, 2004 largely due to lower levels of mortgage  loan closings.  The Company anticipates  that such income will remain at lower levels as interest rates rise and  residential mortgage originations slow.





Noninterest  Expense.Total noninterest  expense decreased $1.1 million, or 16.2%, from $7.0 million for the three  months ended June 30, 2003 to $5.8 million for the three months ended June 30,  2004.  The majority of this decrease was  due to reductions in salaries and employee benefits ($374,000) and occupancy  cost ($107,000) as the Company reduced staff in June 2003 when it closed three  banking offices and sold its Danville branch in January 2004.  Certain staff reductions were also  undertaken in September 2003 as the Bank reduced staff to better align the  Banks operational processes with its product offerings.  The Company had 268 employees as of June 30,  2004 compared to 310 employees as of March 31, 2003.  Advertising costs decreased by $122,000 between the comparable  three month periods as the Company reduced its level of brand awareness  advertising.  Data processing costs
increased between periods due to the Bank outsourcing its data processing to a  third-party vendor in November 2003.





Income  Taxes.     The Company had an income  tax provision of $738,000 for the three months ended June 30, 2004, compared to  a provision of $65,000 for the three months ended June 30, 2003. The effective  tax rate was 41.8% and (5.8)% for the quarterly periods ended June 30, 2004 and  2003, respectively.  The effective tax  rate for the three months ended June 30, 2004 was adversely affected by the  filing of the Companys tax returns for prior periods, which resulted in a  reduction in previously estimated tax benefits, along with a reduction in  tax-exempt income from bank-owned life insurance and investment  securities.  The effective tax rate for  the three months ended June 30, 2003 was affected by a change in the deferred  tax asset valuation allowance related to the Companys inability to use a  charitable contribution carryforward.   Additionally, during the June 2003 quarter, the Company was
unable to  recognize a tax benefit on a $1.5 million impairment loss.  The Company expects its effective tax rate  to normalize to 30-35% in future periods.





H.  Comparison of Operating Results for the Nine  Months Ended June 30, 2004 and June 30, 2003





General.The  Company had net income of approximately $4.2 million and $395,000 for the nine  months ended June 30, 2004 and June 30, 2003, respectively.  Basic and diluted earnings per share were  $1.06 and $1.01 per share, respectively, for the nine months ended June 30,  2004 and $0.10 per share on a basic and diluted basis for the nine months ended  June 30, 2003.





Interest  Income.Total interest income  decreased $3.9 million, or 11.1%, from $34.8 million for the nine months ended  June 30, 2003 to $30.9 million for the nine months ended June 30, 2004. This  decrease was primarily due to a 41 basis point decline on the tax-equivalent  yield on earning assets to 5.12% for the nine months ended June 30, 2004 as  compared to 5.53% for the same period ended in 2003, primarily due to the lower  rate environment.  Interest income on  loans decreased $4.1 million due to a 69 basis point decrease in the yield and  a $33.6 million decrease in the average balance of loans.   Interest income on mortgage-related  securities increased $1.8 million as the yield on such securities increased by  38 basis points.  The Bank has invested  in mortgage related securities with higher yields as a way to utilize excess  liquidity from loan and investment sales and as repayments of loans
and  mortgage-backed securities have occurred.   Interest income on taxable investment securities decreased $1.3 million  as a result of a 35 basis point decline and a $37.9 million reduction in the  average balances of such securities.





Interest Expense.     Interest  expense decreased $4.6 million, or 23.5%, from $19.5 million for the nine  months ended June 30, 2003 to $14.9 million for the nine months ended June 30,  2004. The decrease in interest expense was due to a declining interest rate  environment that resulted in the cost of deposits decreasing to 1.69% for the  nine months ended June 30, 2004 compared to 2.31% for the same period in 2003  and a reduction in the average balances of deposits of $66.5 million. The  decline in the rates paid on and balances of average deposits was primarily due  to the Bank reducing its reliance on higher-rate institutional deposits.





As previously discussed, the Bank entered into several derivative  contacts which swapped the fixed rates the Bank pays on $40.0 million of FHLB  advances to variable rates. The effect of this transaction was to reduce the  average rate the Bank was paying on these borrowings from approximately 5.51%  for the nine-months ended June 30, 2003 to 3.49% for the nine month period  ended June 30, 2004.  Also during the  nine-months ended June 30, 2004, certain long-term, fixed-rate, higher average  balance advances matured and were replaced with lower rate borrowings with  similar terms.  The Bank also began  using alternate funding sources such as reverse repurchase agreements and  brokered certificates of deposit in 2004 to expand its liquidity sources and reduce  its reliance on higher costing borrowings.   These transactions resulted in a 130 basis point decrease in the average  rate on FHLB advances and other borrowings between comparable
nine-month  periods.





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Provision for Loan Losses.     The
    Companys provision for loan losses for the nine months ended June 30,
    2004 decreased $436,000 compared to the comparable 2003 period.  Nonperforming
    assets at June 30, 2004  were $7.9 million, or 0.90% of total assets
    compared to $13.5 million, or 1.51% of total assets at September 30, 2003
    and $6.9 million, or 0.78% of total assets as of June 30, 2003.  The
    reduced provision for the nine-month period reflects the lower levels of
    nonperforming assets since September 2003, lower charge-offs, the sale of
    $19.2 million of lower credit quality indirect automobile loans and other
    changes in the composition of the loan portfolio.  Net loan charge-offs
    were $1.4 million for the nine-months ended June 30, 2004, compared to net
    loan charge-offs of $1.2 million for the nine-months ended June 30, 2003.    See
    the Nonperforming Assets section of
Managements Discussion and Analysis for a  further analysis of asset quality.





Noninterest  Income.Noninterest income  increased $1.0 million, or 13.2%, from $8.1 million for the nine months ended  June 30, 2003 to $9.1 million for the nine months ended June 30, 2004. Service  charges and other fees increased $268,000 due to the rates on such fees  increasing between periods. Gains on sales of loans were lower in 2004 as the  levels of residential mortgage loan closings fell during the nine months ended  June 30, 2004.  Additionally, the Bank  recorded a $798,000 gain on the sale of a branch in January 2004.  In June 2003, the Company recorded a $1.5  million impairment loss on an equity investment in a start-up entity.  The reduction in other income was largely  due to decreased yields on the income the Bank derives on its investment in  bank-owned life insurance.  Insurance  premium income was lower for the nine-month period ended June 30, 2004 due to  lower levels of title
insurance premiums on residential loan closings and lower  levels of premiums on insurance annuity products.





Noninterest  Expense.Total noninterest  expense decreased $2.5 million, or 12.4%, from $20.3 million for the nine  months ended June 30, 2003 to $17.8 million for the nine months ended June 30,  2004. This decrease was due primarily to reductions in salaries and employee  benefits of $786,000 and a reduction in occupancy costs of $377,000.  As previously discussed, the Bank closed  three branches in June 2003 and sold its Danville branch in January 2004.  Certain staff reductions were also  undertaken in September 2003 as the Bank reduced staff to better align the  Banks operational processes with its product offerings.  Advertising costs decreased by $378,000 from  $749,000 for the nine months ended June 30, 2003, to $371,000 for the nine  months ended June 30, 2004.  The  decrease was the result of the Company decreasing its branding awareness  advertising campaign.  Data processing  costs
increased for the nine-month period ended June 30, 2004 due to the Bank  outsourcing its data processing to a third-party vendor in November 2003.





Income  Taxes.The Company had an income  tax provision of $1.8 million for the nine months ended June 30, 2004 compared  to a provision of $813,000 for the nine months ended June 30, 2003. The  increase in taxes between periods was primarily due to the increased level of  pre-tax income offset in part by a reduction in the effective tax rate from  approximately 67.3% in 2003 to 30.1% in 2004.    The high effective tax rate for the  2003 period is the result of a $1.5 million impairment loss that is a capital  loss for tax purposes and did not result in a tax deduction for the  Company.  The effective tax rate for the  for 2003 period exclusive of the impairment loss disallowance was 25.4%.  The effective tax rate for the nine months ended  June 30, 2004 increased to 30.1% due to a reduction in tax-exempt income from  bank-owned life insurance and investment securities.





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Item  3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK





For a discussion of the Companys  quantitative and qualitative disclosures about market risk as well as the  potential impact of interest rate changes upon the market value of the  Companys portfolio equity, see Item 7A in the Companys Annual Report on Form  10-K for the year ended September 30, 2003 and Footnote 11 to the Notes to  Consolidated Financial Statements contained in this Form 10-Q.  Management, as part of its regular  practices, performs periodic reviews of the impact of interest rate changes  upon the market value of the Companys portfolio equity.  Based on, among other factors, such reviews,  management believes that there are no material changes in the market risk of  the Company since September 30, 2003.





Item  4.     CONTROLS AND PROCEDURES





The Company maintains controls and procedures designed to ensure that  information required to be disclosed in the reports that the Company files or  submits under the Securities Exchange Act of 1934 is recorded, processed,  summarized and reported within the time periods specified in the rules and  forms of the Securities and Exchange Commission.





During the initial preparation and review of the Form 10-Q for the June  30, 2003 period, the Registrant discovered that its financial statements for  its fiscal years 1998 through 2002 and for the December 2002 and March 2003  quarters required restatement. The Company believes that it maintained  effective controls and procedures designed to ensure that information required  to be disclosed in its reports filed under the Securities Exchange Act of 1934  with respect to those prior periods, except that the individuals responsible  for implementing such controls and procedures, including reviewing the work  performed and authorizing the final results, failed to detect material errors,  including a computer coding error related to the Companys indirect automobile  loan portfolio, which required the restatement. Consequently, the Companys  management conducted an exhaustive analysis of the Companys accounting  records. This review discovered
additional accounting errors, which were  included in the restatements. Subsequent to the discovery of these errors in  June and September, management implemented staffing, system and procedural  changes designed to improve the training of the individuals involved in  implementing and reviewing the controls and procedures to strengthen the review  and authorization process so that such errors do not occur in the future.





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





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Part II  OTHER INFORMATION





Item 1.            Legal Proceedings





The Company is not a party to any pending legal proceedings.  Periodically, there have been various claims  and lawsuits involving the Bank, such as claims to enforce liens, condemnation  proceedings on properties in which the Bank holds security interests, claims  involving the making and servicing of real property loans and other issues  incident to the Banks business.  The  Bank is not a party to any pending legal proceedings that it believes would  have a material adverse effect on the financial condition or operations of the  Company.





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





The following table lists purchases of Treasury Stock during the  Companys third fiscal quarter ended June 30, 2004:





|                                             |  | Total    Number of Shares    Purchased |        | Average    Price Paid    per Share |   | Total    Number of Shares    Purchased    as Part of Publicly    Announced Plans    or Programs |  | Maximum    Number    of Shares that May    Yet Be Purchased    Under the Plans |       
|-------------------------------------------- |  | -------------------------------------- | ------ | ---------------------------------- | - | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------ | ------
|                                             |  |                                        |        |                                    |   |                                                                                                 |  |                                                                                |       
|April 1 to April 30, 2004                    |  |                                        |       |                                    |   |                                                                                                |  |                                                                                |      
|May 1 to May 31, 2004                        |  |                                        |       |                                    |   |                                                                                                |  |                                                                                |      
|June 1 to June 30, 2004                      |  |                                        | 10,000 |                                    | $ | 17.55                                                                                           |  |                                                                                | 10,000
|                                             |  |                                        |        |                                    |   |                                                                                                 |  |                                                                                |       
|Total for the quarter ended    June 30, 2004 |  |                                        | 10,000 |                                    | $ | 17.55                                                                                           |  |                                                                                | 10,000
|                                             |  |                                        |        |                                    |   |                                                                                                 |  |                                                                                |       




On May 26, 2004, the Board of Directors authorized the repurchase of 5%  of the Companys outstanding shares, or approximately 209,000 shares, from time  to time, subject to market conditions.   This plan will continue until it is completed or terminated by the Board  of Directors.





|Item 3. | Defaults Upon Senior Securities                    
|------- | ---------------------------------------------------
|        |                                                    
|        | None.                                              
|        |                                                    
|Item 4. | Submission of Matters to a Vote of Security Holders
|        |                                                    
|        | None.                                              
|        |                                                    
|Item 5. | Other Information                                  
|        |                                                    
|        | None.                                              




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|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------
|        |                                 
|        | (A)                             
|        |                                 
|        |                                 
|        |                                 
|        |                                 
|        |                                 
|        |                                 
|        |                                 
|        |                                 
|        |                                 
|        |                                 
|        |                                 
|        |                                 
|        |                                 
|        |                                 
|        |                                 
|        | *                               
|        |                                 
|        | **                              
|        |                                 
|        | (B)                             
|        |                                 
|        |                                 
|        |                                 
|        |                                 




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SIGNATURES





Pursuant to  the requirements 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.





|                      | NORTHEAST PENNSYLVANIA    FINANCIAL CORP.
|--------------------- | -----------------------------------------
|                      |                                          
|Date: August 13, 2004 | By:                                      
|                      |                                          
|                      |                                          
|                      |                                          
|Date: August 13, 2004 | By:                                      
|                      |                                          
|                      |                                          




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