UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q

(Mark One)

`[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                                    For the quarterly period ended March 31, 2003

                                                         or

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



`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
(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     X       No
                                                                    ---------      -------`

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

`Yes     -       No   X
                                                                    ---------      -------`

The Registrant had  4,176,594 shares of Common Stock outstanding as of May 15, 2003.

`Item
No.
---
                                                                                        Page
                                                                                        Number
PART  I - CONSOLIDATED FINANCIAL INFORMATION

Item 1   CONSOLIDATED FINANCIAL STATEMENTS

         Consolidated Statements of Financial Condition at
         March 31, 2003 and September 30, 2002 (unaudited)............................... 1

         Consolidated Statements of Operations for the Three and Six Months
         Ended March 31, 2003 and 2002 (unaudited)....................................... 2

         Consolidated Statements of Comprehensive Income for the Three and Six
         Months Ended March 31, 2003 and 2002 (unaudited)................................ 3

         Consolidated Statements of Changes in Equity for the Year Ended
         September 30, 2002 and the Six Months Ended
         March 31, 2003 (unaudited)...................................................... 4

         Consolidated Statements of Cash Flows for the Six Months Ended
         March 31, 2003 and 2002 (unaudited)............................................. 5

         Notes to Consolidated Financial Statements (unaudited).......................... 7

Item 2   Management Discussion and Analysis of Financial Condition
         and Results of Operations.......................................................21

Item 3   Quantitative and Qualitative Disclosures about Market Risk......................26

Item 4   Controls and Procedures.........................................................26

Part II - OTHER INFORMATION

1        Legal Proceedings...............................................................27

2        Changes in Securities and Use of Proceeds.......................................27

3        Defaults Upon Senior Securities.................................................27

4        Submission of Matters to a Vote of Security Holders.............................27

5        Other Information...............................................................27

6        Exhibits and Reports on Form 8 - K..............................................28

Signatures

Certifications`

`March 31,      September 30,
                                                                                        2003              2002
                                                                                 -------------------------------
                                                                                        (in thousands)
ASSETS
     Cash and cash equivalents                                                   $     42,024       $     25,302
     Investment securities available for sale                                         309,749            327,886
     Investment securities held to maturity (estimated
       market value of $3,610 and $3,707)                                               3,554              3,652

     Loans                                                                            498,016            494,822
     Less allowance for loan losses                                                     5,270              5,449
                                                                              ----------------  -----------------
            Net loans                                                                 492,746            489,373

     Accrued interest receivable                                                        8,262              7,632
     Assets acquired through foreclosure                                                  609                547
     Property and equipment                                                            12,752             12,840
     Goodwill                                                                           3,755              3,655
     Intangible assets                                                                  9,051              9,093
     Bank-owned life insurance                                                         10,616             10,303
     Other assets                                                                      13,063             15,226
                                                                              ----------------  -----------------

            TOTAL ASSETS                                                         $    906,181       $    905,509
                                                                              ================  =================

LIABILITIES
     Deposits                                                                    $    597,823       $    606,412
     Federal Home Loan Bank advances                                                  208,411            208,421
     Other borrowings                                                                   1,062              3,184
     Trust-preferred debt                                                              22,000              7,000
     Advances from borrowers for taxes and insurance                                    1,534                852
     Accrued interest payable                                                           1,600              1,458
     Other liabilities                                                                  6,425              9,797
                                                                              ----------------  -----------------
            TOTAL LIABILITIES                                                         838,855            837,124
                                                                              ----------------  -----------------

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                 64
     Additional paid-in capital                                                        61,963             62,047
     Retained earnings - substantially restricted                                      39,922             38,672
     Accumulated other comprehensive income, net                                        1,545              3,443
     Common stock acquired by stock benefit plans                                      (5,256)            (4,847)
     Treasury stock, at cost (2,250,756 shares at March 31, 2003
       And 2,301,566 shares at September 30, 2002)                                    (30,912)           (30,994)
                                                                              ----------------  -----------------
            TOTAL STOCKHOLDERS' EQUITY                                                 67,326             68,385
                                                                              ----------------  -----------------

            TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                           $    906,181       $    905,509
                                                                              ================  =================

See accompanying notes to the unaudited consolidated financial statements.`

`Three Months Ended                    Six Months Ended
                                                                March 31,                            March 31,
                                                         2003              2002               2003              2002
                                                    ----------------  ----------------   ---------------   ----------------
                                                                    (in thousands, except per share date)
INTEREST INCOME
     Interest and fees on loans                      $   8,798         $   9,912           $  18,022         $   19,950
     Mortgage-related securities                         1,646             2,172               3,681              4,029
     Investment securities:
          Taxable                                        1,272             1,491               2,455              3,058
          Tax-exempt                                       234               233                 467                475
                                                    ----------------  ----------------   ---------------   ----------------
                   Total interest income                11,950            13,808              24,625             27,512
                                                    ----------------  ----------------   ---------------   ----------------

INTEREST EXPENSE
     Deposits                                            3,209             4,250               6,920              8,654
     Federal Home Loan Bank advances                     2,939             2,924               5,944              5,811
     Other borrowings                                       10                14                  12                 34
     Trust-preferred debt                                  281                 -                 517                  -
                                                    ----------------  ----------------   ---------------   ----------------
                   Total interest expense                6,439             7,188              13,393             14,499
                                                    ----------------  ----------------   ---------------   ----------------

NET INTEREST INCOME                                      5,511             6,620              11,232             13,013

Provision for loan losses                                  610               605                 980              1,242
                                                    ----------------  ----------------   ---------------   ----------------

NET INTEREST INCOME AFTER
   PROVISION FOR LOAN LOSSES                             4,901             6,015              10,252             11,771
                                                    ----------------  ----------------   ---------------   ----------------

NONINTEREST INCOME
     Service charges and other fees                        618               494               1,273              1,003
     Insurance commissions                                 902               724               1,826              1,443
     Trust fees                                            214               195                 446                348
     Gain (loss) on sale of:
          Assets acquired through foreclosure               50               (11)                 60                (21)
          Loans                                            359                87                 603                239
          Available for sale securities                  1,131                23               1,142                (11)
     Other                                                 388               105                 831                186
                                                    ----------------  ----------------   ---------------   ----------------
                    Total noninterest income             3,662             1,617               6,181              3,187
                                                    ----------------  ----------------   ---------------   ----------------

NONINTEREST EXPENSE
     Salaries and employee benefits                      3,252             2,966               6,476              5,821
     Occupancy costs                                       852               752               1,656              1,417
     Amortization of intangibles                           257               234                 517                513
     Data processing costs                                 197               167                 378                332
     Advertising                                           264               144                 528                272
     Professional fees                                     412               371                 976                695
     Federal Home Loan Bank and other charges              233               245                 462                483
     Other                                               1,105               765               2,124              1,565
                                                    ----------------  ----------------   ---------------   ----------------
                    Total noninterest expense            6,572             5,644              13,117             11,098
                                                    ----------------  ----------------   ---------------   ----------------

Income before income taxes                               1,991             1,988               3,316              3,860
Income taxes                                               702               758               1,084              1,352
                                                    ----------------  ----------------   ---------------   ----------------

NET INCOME                                           $   1,289         $   1,230           $   2,232         $    2,508
                                                    ================  ================   ===============   ================

EARNINGS PER SHARE:
        Basic                                        $    0.34         $    0.31           $    0.59         $     0.59
        Diluted                                           0.33              0.29                0.56               0.56

See accompanying notes to the unaudited consolidated financial statements.`

`Three Months Ended                Six Months Ended
                                                                               March 31,                       March 31,
                                                                         2003              2002           2003            2002
                                                                    ---------------    -------------   ------------    -----------
                                                                                           (in thousands)
Net income
                                                                  $         1,289    $       1,230   $      2,232    $     2,508
                                                                    ---------------    -------------   ------------    -----------
Other comprehensive income, net of tax
     Unrealized losses on securities and on retained
       interest on asset securitization:
     Unrealized holding gains (losses) arising during the period             (890)          (1,552)        (1,197)        (2,333)
     Less:  Reclassification adjustment for gains (losses)
       included in net income                                                 694               15            701            (7)
                                                                    ---------------    -------------   ------------    -----------
     Other comprehensive income (loss)                                     (1,584)          (1,567)        (1,898)        (2,326)

Comprehensive income (loss)                                       $          (295)   $        (337)  $        334   $        182
                                                                    ===============    =============   ============    ===========



See accompanying notes to the unaudited consolidated financial statements.`

`Common
                                                                                                  Accumulated        Stock
                                                              Additional                           Other          Acquired by                        Total
                                               Common          Paid-in          Retained         Comprehensive       Stock         Treasury      Stockholders'
                                               Stock           Capital          Earnings         Income (Loss)    Benefit Plans     Stock           Equity
                                            -------------   ---------------   --------------   ---------------- ----------------- ------------   --------------

Balance, September 30, 2001                  $     64        $   62,142        $  36,136          $   894         $ (5,213)     $ (18,186)        $  75,837

Net income                                                                         4,498                                                              4,498
ESOP shares committed to be released                                243                                                515                              758
Stock awards                                                        (46)                                               542                              496
Stock employee compensation trust
      (45,041 shares)                                                                                                 (701)                            (701)
Stock compensation tax benefit                                      110                                                                                 110
Stock options exercised (38,714 shares)                            (402)                                                10            816               424
Purchase of  stock                                                                                                                (13,720)          (13,720)
Treasury stock reissuance (6,568 shares)                                                                                               96                96
Net changes in gains on
      securities available for sale, net of tax                                                     2,439                                             2,439
Net change in gains on retained interest
      on asset securitization, net of tax                                                             110                                               110
Cash dividends ($.70 per share)                                                   (1,962)                                                            (1,962)
                                            -------------   ---------------   --------------   --------------    --------------  -------------   --------------
Balance, September 30, 2002                        64            62,047           38,672            3,443           (4,847)       (30,994)           68,385

Net income                                                                         2,232                                                              2,232
ESOP shares committed to be released                                (79)                                               514                              435
Stock awards                                                        (11)                                               125                              114
Stock employee compensation trust                                                                                   (1,096)                          (1,096)
      (69,133 shares)
Stock options exercised (3,000 shares)                              (12)                                                48                               36
Treasury stock reissuance (6,369 shares)                             18                                                                82               100
Net changes in gains on                                                                            (1,986)                                           (1,986)
      securities available for sale, net of tax
Net change in gains on retained interest                                                               88                                                88
      on asset securitization, net of tax
Cash dividends ($.24 per share)                                                     (982)                                                              (982)
                                            -------------   ---------------   --------------   --------------    --------------  -------------   --------------
Balance, March 31, 2003                      $     64        $   61,963        $  39,922          $ 1,545         $ (5,256)     $ (30,912)        $  67,326
                                            =============   ===============   ==============   ==============    ==============  =============   ==============

See accompanying notes to the unaudited consolidated financial statements.`

`Six Months Ended
                                                                                                          March 31,
                                                                                           2003                         2002
                                                                                    -------------------           -----------------
OPERATING ACTIVITIES
     Net income                                                                       $    2,232                    $    2,508
     Adjustments to reconcile net income to
       net cash provided by operating activities:
              Provision for loan losses                                                      980                         1,242
              Provision for assets acquired
                through foreclosure                                                          243                           581
              Depreciation                                                                   711                           718
              Amortization of intangibles                                                    517                           513
              Deferred income taxes                                                       (3,727)                        3,105
              ESOP expense                                                                   435                           456
              Stock award expense                                                            114                           255
              Amortization and accretion on:
                Held to maturity securities                                                   (1)                           (9)
                Available for sale securities                                              3,136                           281
              Amortization of deferred loan fees                                            (723)                         (301)
              (Gain) loss on sale of:
                Assets acquired through foreclosure                                          (60)                           21
                Loans                                                                       (603)                         (239)
                Available for sale securities                                             (1,142)                           11
                Proceeds from sales of loans                                              22,026                        11,024
                Originations of loans held for sale                                      (21,423)                      (10,705)

Changes in assets and liabilities:
              Increase in accrued interest receivable                                       (630)                         (319)
              Increase in other assets                                                    (1,377)                       (1,208)
              Increase (decrease) in accrued interest payable                                142                          (276)
              Increase (decrease) in accrued taxes payable                                 3,084                        (2,089)
              Increase in other liabilities                                                1,706                            26
                                                                                    -------------------           -----------------
                    Net cash provided by operating activities                              5,640                         5,595
                                                                                    -------------------           -----------------

INVESTING ACTIVITIES
     Investment securities available for sale:
              Proceeds from repayments and maturities                                    100,088                        36,759
              Purchases                                                                 (148,285)                     (101,153)
              Proceeds from sales                                                         62,132                        16,787
     Investment securities held to maturity:
              Proceeds from repayments and maturities                                         99                        14,199
     Increase in loans, net                                                               (4,496)                       (3,039)
     Purchase of regulatory stock                                                         (1,041)                         (250)
     Purchase of premises and equipment                                                     (642)                       (1,308)
     Proceeds from assets acquired through foreclosure                                       620                           522
     Net proceeds from acquisition of Schuylkill
       Savings and Loan Association                                                            -                           161
     Increase in Bank-owned life insurance                                                  (312)                            -
                                                                                    -------------------           -----------------
                  Net cash provided for (used for) investing activities               $    8,163                    $  (37,322)
                                                                                    -------------------           -----------------`

`Six Months Ended
                                                                                            March 31,
                                                                                     2003                  2002
                                                                                --------------       --------------
FINANCING ACTIVITIES
     Net increase (decrease )in deposits                                          $   (8,589)          $   49,017
     Decrease in Federal Home Loan Bank
       short-term advances                                                               (10)              (6,000)
     Borrowings of Federal Home Loan Bank
       long-term advances                                                                  -               10,000
     Repayments of Federal Home Loan Bank
       long-term advances                                                                  -                  (10)
     Net increase in advances from borrowers for
       taxes and insurance                                                               682                  369
     Proceeds from other borrowings                                                        -                  650
     Repayment of other borrowings                                                    (2,122)                   -
     Proceeds from issuance of trust-preferred securities                             15,000                    -
     Purchase of treasury stock                                                            -               (8,932)
     Purchase of stock for stock employee
       compensation trust                                                             (1,096)                   -
     Exercise of stock options                                                            36                  350
     Cash dividends                                                                     (982)                (975)
                                                                                --------------       --------------
                  Net cash provided by financing activities                            2,919               44,469
                                                                                --------------       --------------

                  Increase in cash
                    and cash equivalents                                              16,722               12,742

CASH AND CASH EQUIVALENTS
   AT BEGINNING OF YEAR                                                               25,302                9,060
                                                                                --------------       --------------

CASH AND CASH EQUIVALENTS
   AT END OF YEAR                                                                 $   42,024           $   21,802
                                                                                ==============       ==============

SUPPLEMENTAL INFORMATION
   Cash paid during the year for:
         Interest on deposits and borrowings                                      $   13,251           $   14,775
         Income taxes                                                                  1,043                  324
Supplemental disclosures - non-cash and financing information:
     Transfer from loans to assets acquired
       through foreclosure                                                               866                1,181

     Net change in unrealized losses on securities
       available for sale, net of tax                                                  2,876                2,326


See accompanying notes to the unaudited consolidated financial statements.`

Northeast Pennsylvania
Financial Corp. (the Company), through its subsidiaries, provides a
wide range of financial products and services to individual, corporate, and
municipal customers through its offices in Northeastern and Central
Pennsylvania. These products and services from our Banking, Insurance,
Investment and Trust lines of business. Banking products, which are offered
through the Companys subsidiary, First Federal Bank (the
Bank), include checking accounts (interest and non-interest
bearing), savings accounts, certificates of deposit, commercial and consumer
loans, real estate loans and home equity loans. The Bank also serves its loan
customers through a loan production office located in Monroe County,
Pennsylvania. Insurance products, which are offered through the Companys
subsidiary, Higgins Insurance Associates, Inc. (Higgins), include
property and casualty, life, long-term care and employee benefit programs.
Investment products are offered through licensed Bank employees, Higgins agents
and Smith Barney financial consultants who rent space from the Bank. Trust
services, which are offered by the Companys subsidiary Northeast
Pennsylvania Trust Co. (the Trust Co.), include estate management
and trustee services. The Company provides title insurance through Abstractors,
Inc., its wholly-owned title agency. The Company 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
regulatory agencies and undergoes periodic examinations by those regulatory
authorities. The Trust Co. is subject to state regulation.

The accompanying
consolidated financial statements were prepared in accordance with instructions
to Form 10-Q, and therefore, do not include information or footnotes necessary
for a complete presentation of financial position, results of operations and
cash flows in conformity with accounting principles generally accepted in the
United States of America (GAAP). However, all normal recurring
adjustments that, in the opinion of management, are necessary for a fair
presentation of the financial statements, have been included. 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
period ended September 30, 2002. The results for the six months ended March 31,
2003 are not necessarily indicative of the results that may be expected for the
year ended September 30, 2003.

The accompanying financial
statements of the Company include the accounts of the Bank, Higgins,
Abstractors, Inc., Trust Co., FIDACO, Inc., NEP Capital Trust I and NEP Capital
Trust II. The Bank, Higgins, Abstractors, Inc. and the Trust Co. are
wholly-owned subsidiaries of the Company. NEP Capital Trust I and NEP Capital
Trust II are statutory trusts all of the voting securities of which are owned by
the Company, which were created under the laws of the state of Delaware in
connection with two issuances of trust-preferred securities on April 10 and
October 29, 2002, respectively. FIDACO, Inc. is an inactive subsidiary of the
Bank with the only major asset being an investment in Hazleton Community
Development Corporation. All material inter-company balances and transactions
have been eliminated in consolidation. Prior period amounts are reclassified,
when necessary, to conform with the current years presentation.

The Company follows
accounting principles and reporting practices which are in accordance with 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 the determination of the allowance
for loan losses, the evaluation of deferred taxes and the evaluation of other
than temporary impairment for certain investments.

In June 2001, the Financial
Accounting Standards Board (FASB) issued Statement No. 143, Accounting for
Asset Retirement Obligations. This Statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. It applies
to legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. As
used in this Statement, a legal obligation is an obligation that a party is
required to settle as a result of an existing or enacted law, statute, ordinance
or written or oral contract or by legal construction of a contract under the
doctrine of promissory estoppel. This Statement requires that the fair value of
a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. This Statement amends FASB Statement No. 19,
Financial Accounting and Reporting by Oil and Gas Producing
Companies, and it applies to all entities. It is effective for financial
statements issued for fiscal years beginning after June 15, 2002. Earlier
application is encouraged. The adoption of this Statement on October 1, 2002 did
not have an impact on the Companys earnings, financial condition or
equity.

In August 2001, the FASB
issued Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This Statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. However, the Statement retains the
fundamental provisions of Statement 121 for (a) recognition and measurement of
the impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. This Statement supersedes the
accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. However, this
Statement retains the requirement of Opinion No. 30 to report discontinued
operations separately from continuing operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, by abandonment
or in distribution to owners) or is classified as held for sale. This Statement
also amends ARB No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidation for a temporarily-controlled
subsidiary. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with earlier application encouraged.
The adoption of this Statement on October 1, 2002 did not have an impact on the
Companys earnings, financial condition or equity.

In April 2002, the FASB
issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections. This
Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB Statement No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, along
with rescinding FASB Statement No. 44, Accounting for Intangible Assets of Motor
Carriers and amending FASB Statement No. 13, Accounting for Leases. This
Statement (1) eliminates an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions, (2) eliminates the extraordinary item treatment of reporting gains
and losses from extinguishments of debt, and (3) makes certain other technical
corrections.

The provisions of this
Statement related to the rescission of Statement 4 shall be applied in fiscal
years beginning after May 15, 2002. Any gain or loss on extinguishments of debt
that was classified as an extraordinary item in prior periods presented that
does not meet the criteria in Opinion 30 for classification as an extraordinary
item shall be reclassified. Early application of the provisions of this
Statement related to the rescission of Statement 4 is encouraged. The provisions
of this Statement related to Statement 13 shall be effective for transactions
occurring after May 15, 2002. All other provisions of this Statement shall be
effective for financial statements issued on or after May 15, 2002. The adoption
of this statement did not have an impact on the Companys earnings,
financial condition or equity.

In June 2002, the FASB
issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. This Statement addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring).

The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The adoption of this
Statement did not have an impact on its earnings, financial condition or equity.

On October 1, 2002, the
FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions, effective for all business combinations initiated after
October 1, 2002. This Statement addresses the financial accounting and reporting
for the acquisition of all or part of a financial institution, except for a
transaction between two or more mutual enterprises. This Statement removes
acquisitions of financial institutions, other than transactions between two or
more mutual enterprises, from the scope of SFAS No. 72, Accounting for
Certain Acquisitions of Banking or Thrift Institutions, and FASB
Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method. The acquisition of all
or part of a financial institution that meets the definition of a business
combination shall be accounted for by the purchase method in accordance with
SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 was adopted on
October 1, 2001. This Statement also provides guidance on the accounting for the
impairment or disposal of acquired long-term customer-relationship intangible
assets (such as depositor- and borrower-relationship intangible assets and
credit cardholder intangible assets), including those acquired in transactions
between two or more mutual enterprises. Upon early adoption of this statement,
as of October 1, 2001, the carrying amount of the previously recognized
unidentifiable intangible asset related to the Schuylkill Savings branch
acquisitions that was reclassified to goodwill was $200,000, while the related
2002 amortization expense that was reversed was $81,000, pre-tax. The Company
will continue to review the remaining goodwill on an annual basis for
impairment. However, $10.9 million in core deposit intangible will continue to
be amortized and reviewed for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.

In December 2002, the FASB
issued Statement No. 148, Accounting for Stock-Based
CompensationTransition and Disclosurean amendment of FASB Statement
No. 123. This statement amends FASB Statement No.123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. The Statement also amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement is effective for fiscal years ending after December 15, 2002, except
for financial reports containing condensed financial statements for interim
periods for which disclosure is effective for periods beginning after December
15, 2002. This Statement announces, in the near future, the Board plans to
consider whether it should propose changes to the U.S. standards on accounting
for stock-based compensation.

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

`Three Months Ended March 31,            Six Months Ended March 31,
                                               2003               2002                2003               2002
                                         -----------------  -----------------   -----------------  -----------------
                                                    (Dollars in thousands, except per share data)

Net income, as reported:                   $    1,289         $    1,230          $    2,232          $   2,508
Less: proforma expense related
  To stock options                                 99                 98                 195                218
                                         -----------------  -----------------   -----------------  -----------------
Proforma net income                             1,190              1,132               2,037              2,290
                                         =================  =================   =================  =================

Basic net income per common share:
     As reported                           $     0.34         $     0.31          $     0.59          $    0.59
     Pro forma                                   0.32               0.28                0.54               0.54
Diluted net income per common share:
     As reported                           $     0.33         $     0.29          $     0.56          $    0.56
     Pro forma                                   0.30               0.27                0.52               0.51`

In April 2003, the FASB
issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. This statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133. The amendments
set forth in SFAS No. 149 require that contracts with comparable characteristics
be accounted for similarly. In particular, this statement clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative as discussed in SFAS No. 133. In addition, it clarifies when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. SFAS No. 149 amends certain other existing
pronouncements. Those changes will result in more consistent reporting of
contracts that are derivatives in their entirety or that contain embedded
derivatives that warrant separate accounting. This statement is effective for
contracts entered into or modified after June 30, 2003, except as stated below
and for hedging relationships designated after June 30, 2003. The guidance
should be applied prospectively. The provisions of this statement that relate to
SFAS No. 133 Implementation Issues that have been effective for fiscal quarters
that began prior to June 15, 2003, should continue to be applied in accordance
with their respective effective dates. In addition, certain provisions relating
to forward purchases or sales of when-issued securities or other securities that
do not yet exist, should be applied to existing contracts as well as new
contracts entered into after June 30, 2003. The adoption of this statement is
not expected to have a material effect on the Companys financial position
or results of operations.

In November 2002, the FASB
issued Interpretation No. 45, Guarantors Accounting and Disclosure
requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. This interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. This interpretation clarifies that
a guarantor is required to disclose (a) the nature of the guarantee, including
the approximate term of the guarantee, how the guarantee arose, and the events
or circumstances that would require the guarantor to perform under the
guarantee; (b) the maximum potential amount of future payments under the
guarantee; (c) the carrying amount of the liability, if any, for the
guarantors obligations under the guarantee; and (d) the nature and extent
of any recourse provisions or available collateral that would enable the
guarantor to recover the amounts paid under the guarantee. This interpretation
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken in issuing the
guarantee, including its ongoing obligation to stand ready to perform over the
term of the guarantee in the event that the specified triggering events or
conditions occur. The objective of the initial measurement of that liability is
the fair value of the guarantee at its inception. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantors fiscal year-end. The disclosure
requirements in this interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of this
interpretation did not have a material effect on the Companys financial
position or results of operations.

In January 2003, the FASB
issued Interpretation No. 46, Consolidation of Variable Interest Entities,in an effort to expand upon and strengthen existing accounting guidance that
addresses when a company should include in its financial statements the assets,
liabilities

and activities of another
entity. The objective of this interpretation is not to restrict the use of
variable interest entities but to improve financial reporting by companies
involved with variable interest entities. Until now, one company generally has
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. This interpretation changes that
by requiring a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of the entitys
residual returns or both. The consolidation requirements of this interpretation
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The adoption of
this interpretation has not and is not expected to have a material effect on the
Companys financial position or results of operations.

Earnings per share
(EPS), basic and diluted, were $0.34 and $0.33, respectively, for
the three months ended March 31, 2003 compared to $0.31 and $0.29, respectively,
for the three months ended March 31, 2002. EPS, basic and diluted, were $0.59
and $0.56, respectively, for both the six months ended March 31, 2003 and March
31, 2002.

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

`Three Months Ended                   Six Months Ended
                                                          March 31,                           March 31,
                                                   2003              2002              2003              2002
                                              ----------------  ----------------  ----------------  ----------------
                                                           (Dollars in thousands, except per share data)

Net income                                        $ 1,289           $ 1,230           $ 2,232           $ 2,508
                                              ================  ================  ================  ================

Weighted-average common shares
  Outstanding                                   6,427,350         6,427,350         6,427,350         6,427,350

Average treasury stock shares                  (2,253,162)       (1,984,049)       (2,255,165)       (1,778,464)

Average common stock acquired by stock benefit plans:

    Stock employee compensation trust             (87,098)                -           (76,864)                -
    Stock awards unallocated, net                 (75,636)         (117,814)          (75,636)         (117,814)
    ESOP shares unallocated, net                 (250,663)         (302,083)         (257,090)         (308,510)
                                              ----------------  ----------------  ----------------  ----------------

Weighted-average common shares used
  To calculate basic earnings per share         3,760,791         4,023,404         3,762,595         4,222,562

Dilutive effect of stock awards                    10,203            26,114            12,128            26,430

Dilutive effect of outstanding
  stock options                                   178,824           211,577           177,757           199,043
                                              ----------------  ----------------  ----------------  ----------------

Weighted-average common shares used
  To calculate diluted earnings per share       3,949,818         4,261,095         3,952,480         4,448,035
                                              ================  ================  ================  ================

Earnings per share-basic                         $   0.34          $   0.31          $   0.59          $   0.59
Earnings per share-diluted                       $   0.33          $   0.29          $   0.56          $   0.56`

Diluted earnings per share
include the dilutive effect of the Companys weighted-average stock
options/awards outstanding using the Treasury Stock method. The Company had
10,485 and 9,535 anti-dilutive common stock options outstanding as of March 31,
2003 and 2002, respectively. These options are not included in the calculation
of diluted earnings per share for the periods presented.

The amortized cost and estimated market values of investment securities are summarized as follows:

`March 31, 2003
                                         ---------------------------------------------------------------------------
                                                                       (in thousands)
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
Available-for-sale securities:                 Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------

     U.S. Government agency
        securities                         $   33,115          $     370           $    (14)         $   33,471
     Municipal securities                      16,650                130                 (8)             16,772
     Corporate securities                      41,031              1,311                (60)             42,282
     Trust Preferred securities                12,769                 87               (657)             12,199
     Mortgage-backed securities               183,317              1,744               (379)            184,682
                                         -----------------  -----------------   -----------------  -----------------
         Total debt securities                286,882              3,642             (1,118)            289,406

     FHLB Stock                                12,012                  -                  -              12,012
     Freddie Mac stock                          2,241                  -               (309)              1,932
     Fannie Mae stock                           6,000                 85                (40)              6,045
     Other equity securities                      284                106                (36)                354
                                         -----------------  -----------------   -----------------  -----------------
         Total equity securities               20,537                191               (385)             20,343

              Total                        $  307,419          $   3,833           $ (1,503)         $  309,749
                                         =================  =================   =================  =================



                                                                       March 31, 2003
                                         ---------------------------------------------------------------------------
                                                                       (in thousands)
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
Held-to-maturity securities:                   Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------

     Municipal securities                  $    3,554          $      56           $       -         $    3,610
                                         -----------------  -----------------   -----------------  -----------------

                       Total               $    3,554          $      56           $       -         $    3,610
                                         =================  =================   =================  =================`

`September 30, 2002
                                         ---------------------------------------------------------------------------
                                                                       (in thousands)
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
Available-for-sale securities:                 Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------

     U.S. Government agency
        securities                         $   24,032          $     414           $       -         $   24,446
     Municipal securities                      16,247                197                   -             16,444
     Corporate securities                      32,545              1,442                (18)             33,969
     Trust Preferred securities                12,604                336               (511)             12,429
     Mortgage-backed securities               221,383              4,047               (143)            225,287
                                         -----------------  -----------------   -----------------  -----------------
         Total debt securities                306,811              6,436               (672)            312,575

     FHLB Stock                                10,971                  -                  -              10,971
     Freddie Mac stock                          2,241                151               (324)              2,068
     Fannie Mae stock                           2,000                100               (108)              1,992
     Other equity securities                      284                 24                (28)                280
                                         -----------------  -----------------   -----------------  -----------------
         Total equity securities               15,496                275               (460)             15,311

              Total                        $  322,307          $   6,711           $ (1,132)         $  327,886
                                         =================  =================   =================  =================


                                                                     September 30, 2002
                                         ---------------------------------------------------------------------------
                                                                       (in thousands)
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
Held-to-maturity securities:                   Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------


     Municipal securities                  $    3,553          $      55           $       -         $   3,608
     Certificates of deposit                       99                  -                   -                99
                                         -----------------  -----------------   -----------------  -----------------

                       Total               $    3,652          $      55           $       -         $    3,707
                                         =================  =================   =================  =================`

Loans consists of the following:

`March 31,          September 30,
                                                                                      2003                 2002
                                                                                -----------------  -----------------
                                                                                          (in thousands)

     Real Estate Loans:
       One-to four-family                                                         $      174,861     $      198,307
       Multi-family and commercial                                                        79,207             75,912
       Construction                                                                        6,234              7,157
                                                                                -----------------  -----------------
         Total real estate loans                                                         260,302            281,376
                                                                                -----------------  -----------------

     Consumer Loans:
       Home equity loans and lines of credit                                              75,128             79,253
       Automobile                                                                        105,490             80,035
       Unsecured lines of credit                                                           2,668              2,297
       Other                                                                               9,999             10,376
                                                                                -----------------  -----------------
         Total consumer loans                                                            193,285            171,961
                                                                                -----------------  -----------------
     Commercial Loans
                                                                                          46,011             43,014
                                                                                -----------------  -----------------
         Total loans                                                                     499,598            496,351

     Less:
       Deferred loan fees, net                                                             1,582              1,529
       Allowance for loan losses                                                           5,270              5,449
                                                                                -----------------  -----------------
               Net loans                                                          $      492,746     $      489,373
                                                                                =================  =================


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


                                                            Six Months                            Six Months
                                                              Ended            Year Ended           Ended
                                                            March 31,        September 30,        March 31,
                                                               2003               2002               2002
                                                         -----------------  -----------------  -----------------
                                                                             (in thousands)

Balance, Beginning of Period                                $     5,449        $    4,497         $   4,497
Add:
     Provisions charged to
       operation                                                    980             2,766             1,242
     Recoveries                                                     226               179                22
Less loans charged off                                            1,385             1,993               724
                                                         -----------------  -----------------  -----------------
Balance, End of Period                                      $     5,270        $    5,449         $   5,037
                                                         =================  =================  =================`

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 balance sheet. In connection with this
transaction, the Bank enhanced the credit protection of the certificateholders
by funding a cash reserve account.

In connection with this
June 2002 transaction, the Bank recorded a pre-tax gain on the sale of
automobile loans of $854,000, which was included in gain on sale of loans in the
consolidated statement of operations. The Bank has recognized a retained
interest related to the loan sale, which, in aggregate, totaled $3.2 million at
March 31, 2003. The retained interest 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.

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

`March 31,           June 30,
                                                                                           2003                2002
                                                                                    -----------------   -----------------

Retained interest
     Average annual repayment rate                                                           1.5 %               1.5 %
     Average annual expected default rate                                                    1.5                 1.5
     Discount rate                                                                          15.0                18.0
     Weighted average life of underlying automobile loans (in months)                         41                  48`

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:

`March 31, 2003
                                                                           (dollars in thousands)

    Fair value of retained
    interest                                                             $                  3,207

    Weighted-average repayment rate assumption:
          Pre-tax decrease to earnings due to a 10% adverse change       $                     51
          Pre-tax decrease to earnings due to a 20% adverse change       $                    100

    Weighted-average expected default rate:
          Pre-tax decrease to earnings due to a 10% adverse change       $                     58
          Pre-tax decrease to earnings due to a 20% adverse change       $                    116

    Weighted-average discount rate:
          Pre-tax decrease to earnings due to a 10% adverse change       $                     56
          Pre-tax decrease to earnings due to a 20% adverse change       $                    110`

As of March 31, 2003, the
weighted-average life of the underlying automobile loans in the Trust was 41
months. The terms of the transaction included provisions related to the
performance of the underlying receivables and other specific conditions that
could result in an early payout of invested amounts to the certificateholders.

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.

Deposits consist of the following major classifications:

`March 31, 2003                          September 30, 2002
                                      -------------------------------------     ------------------------------------
                                                              Percent                                  Percent
                                           Amount            of Total                Amount            of Total
                                      -----------------  ------------------     -----------------  -----------------
                                                                     (in thousands)

Noninterest-bearing                        $    35,703                5.97 %          $   32,428               5.35 %
                                      -----------------  ------------------     -----------------  -----------------
Interest-bearing:
     Savings                                    99,448               16.64                95,779              15.78
     NOW checking                               95,493               15.97                78,684              12.98
     Money market                              108,107               18.08               100,274              16.54
                                      -----------------  ------------------     -----------------  -----------------
                                               303,048               50.69               274,737              45.30
                                      -----------------  ------------------     -----------------  -----------------

Certificates of deposit greater
  than $100,000:                                51,083                8.55                71,379              11.77
Certificates of deposit less
  than $100,000:                               207,989               34.79               227,868              37.58
                                      -----------------  ------------------     -----------------  -----------------
                                               259,072               43.34               299,247              49.35
                                      -----------------  ------------------     -----------------  -----------------
               Total                       $   597,823              100.00 %          $  606,412            100.00  %
                                      =================  ==================     =================  =================`

Under terms of its
collateral agreement with the Federal Home Loan Bank of Pittsburgh
(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. At March 31, 2003 and September 30, 2002, such advances mature as
follows:

`March 31,
                                                            Weighted                  2003
           Due by March 31,                               Average Rate           (in thousands)
     -----------------------------                      -----------------       -----------------

                 2004                                         5.63%                $  56,000
                 2005                                         5.72                    25,000
                 2006                                         5.91                    72,000
                 2007                                         5.05                     5,087
                 2008                                            -                         -
              Thereafter                                      5.29                    50,324
                                                        -----------------       -----------------
     Total FHLB advances                                      5.64%                $ 208,411
                                                                                =================


                                                                                 September 30,
                                                            Weighted                  2002
         Due by September 30,                             Average Rate           (in thousands)
     -----------------------------                      -----------------       -----------------

                 2003                                            - %               $       -
                 2004                                         5.60                    59,000
                 2005                                         6.34                    52,000
                 2006                                         5.33                    42,000
                 2007                                         5.05                     5,089
              Thereafter                                      5.29                    50,332
                                                        -----------------       -----------------
     Total FHLB advances                                      5.64%                $ 208,421
                                                                                =================`

On March 25, 2002, the
Company sponsored the creation of NEP Capital Trust I, a Delaware statutory
business trust. The Company is the owner of all of the common securities of the
Trust. On April 10, 2002, the 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 capital contribution
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 capital securities is variable and
adjustable semi-annually at 3.70% over the six-month LIBOR, with an initial rate
of 6.02%. The Company has, through the Trust agreement establishing the Trust,
the Guarantee Agreement, the notes and the related Indenture, taken together,
fully irrevocably and unconditionally guaranteed all of the trusts
obligations under the capital securities.

The stated maturity of the
debentures is April 22, 2002. 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 Debentures are also subject to redemption prior to April 22, 2007 after the
occurrence of certain events that would either have a negative tax effect on the
Trust or the Company or would result in the trust being treated as an investment
company that is required to be registered under the Investment Company Act of
1940. Upon repayment of the Debentures at their stated maturity or following
their redemption, the Trust will use the proceeds of such repayment to redeem an
equivalent amount of outstanding trust preferred securities and trust common
securities.

The Company has the right,
at one or more times, to defer interest payments on the Debentures for up to ten
consecutive semi-annual periods. All deferrals will end on an interest payments
date and will not extend beyond April 22, 2032, the stated maturity ate of the
Debentures. If the Company defers interest payments on the Debentures, the Trust
will also defer distributions on the capital securities. During any deferral
period, each installment of interest that would otherwise have been due and
payable will bear additional interest (to the extent payment of such interest
would be legally enforceable) at the applicable distribution rate, compounded
quarterly. Furthermore in 2002, the Company recognized an amortizable intangible
asset with a value of $220,000 relating to the issuance of these trust preferred
securities.

On October 15, 2002, the Company  sponsored the creation of NEP Capital Trust II, a Delaware  statutory  business  trust.  The
Company is the owner of all of the common  securities  of the Trust.  On October 29, 2002,  the Trust issued $15.0  million in the form
of floating rate capital  securities  through a pooled trust  preferred  securities  offering.  The proceeds from this issuance,  along
with the company's  $464,000  capital  contribution  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 is variable and adjustable  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  2007.  The  Company  has,  through  the Trust  agreement  establishing  the Trust,  the  Guarantee
Agreement,  the notes and the related Indenture,  taken together,  fully irrevocably and unconditionally  guaranteed all of the trust's
obligations under the capital securities.

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 Debentures are also subject to redemption after the occurrence of certain
events that would either have a negative tax effect on the Trust or the Company
would result in the trust being treated as an investment company that is
required to be registered under the Investment Company Act of 1940. Upon
repayment of the Debentures at their stated maturity or following their
redemption, the Trust will use the proceeds of such repayment to redeem an
equivalent amount of outstanding trust preferred securities and trust common
securities.

The Company has the right,
at one or more times, to defer interest payments on the Debentures for up to
twenty consecutive quarterly periods. All deferrals will end on an interest
payment date and will not extend beyond November 7, 2032, the stated maturity
date of the Debentures. If the Company defers interest payments on the
Debentures, the Trust will also defer distributions on the capital securities.
During any deferral period, each installment of interest that would otherwise
have been due and payable will bear additional interest (to the extent payment
of such interest would be legally enforceable) at the applicable distribution
rate, compounded quarterly. The Company recognized an amortizable intangible
asset with a value of $450,000 relating to the issuance of these trust preferred
securities.

A summary of the trust securities issued and outstanding is as follows:

`Amount
                             Outstanding at                   Prepayment                            Distribution
                               March 31,                        Option                                Payment
Name                              2003           Rate            Date              Maturity          Frequency
-------------------------   -----------------  ---------   -----------------   -----------------  -----------------

NEP Capital Trust I      $         7,000,000      5.32%       4/22/2007               4/22/2032    Semi-annually
NEP Capital Trust II     $        15,000,000      4.79%        8/7/2007               11/7/2032      Quarterly`

A summary of goodwill and intangible assets is as follows:

`At March 31, 2003
                                                            -----------------------------------------------------------
                                                                 Gross                                      Net
                                                                Carrying           Accumulated           Carrying
     Goodwill                                                    Amount            Amortization           Amount
     ----------------------------------                     -----------------------------------------------------------
                                                                                  (in thousands)
     Acquisition of:
       Abstractors                                             $     248            $   (160)             $   88
       Security Savings Association of Hazleton                      571                 (28)                543
       Higgins Insurance Associates, Inc.                          2,619                 (95)              2,524
       Schuylkill Savings and Loan Association                       200                   -                 200
       DeAndrea Association                                          400                   -                 400
                                                            -------------------   -----------------  ------------------
     Total goodwill                                            $   4,038            $   (283)             $3,755
                                                            ===================   =================  ==================

                                                                   Gross                                    Net
                                                                 Carrying            Accumulated          Carrying
     Other Intangible Assets                                      Amount            Amortization           Amount
     -----------------------------------------------------  -------------------   -----------------  ------------------
                                                                                  (in thousands)
     Amortizing:
       Omega core deposit intangible                           $   1,537             $   (881)            $    656
       Security Savings Association of Hazleton
         core deposit intangible                                   9,086               (1,772)               7,314
       Schuylkill Savings and Loan Association
         core deposit intangible                                     255                  (37)                 218
       Other intangibles                                             929                 (141)                 788

     Nonamortizing intangible assets
       Other intangible assets                                        75                     -                  75
                                                            -----------------     -----------------  ------------------

     Total intangible assets                                   $  11,882             $ (2,831)            $  9,051
                                                            =================     =================  ==================`

Nonamortizing intangible assets consist of title plant of $75,000 at March 31, 2003 and 2002.

Amortization expense of
other amortizing intangible assets for the six and three months ended March 31,
2003 and March 31, 2002 is as follows:

`For the Three Months Ended              For the Six Months Ended
                                                      March 31,                              March 31,
                                               2003               2002                2003               2002
                                         -----------------  -----------------   -----------------  -----------------
                                                                   (Dollars in thousands)

     Core deposit intangibles              $     205          $     234           $     415          $      477
     Other amortizing intangibles                 52                                    102                  36
                                         -----------------  -----------------   -----------------  -----------------

     Total amortizing intangibles          $     257          $     234           $     517          $      513
                                         =================  =================   =================  =================`

The estimated amortization expense of amortizing intangible assets for each of the five succeeding fiscal years is as follows:

`Core                Other              Total
                                                                      Deposit           Amortizing         Amortizing
                                                                    Intangibles         Intangibles        Intangibles
                                                                 -----------------   -----------------  -----------------
                                                                                      (in thousands)
     Estimated Annual Amortization Expense
     -------------------------------------------------------
     For the year ended September 30, 2003                          $    849           $     176         $    1,025
     For the year ended September 30, 2004                               750                 176                926
     For the year ended September 30, 2005                               644                 176                820
     For the year ended September 30, 2006                               586                 145                731
     For the year ended September 30, 2007                               558                  90                648`

Intangible assets acquired during the six months ended March 31, 2003 are as follows:

`Weighted
                                                                                                        Average
                                                                                                     Amortization
                                                                 Amount             Residual            Period
                                                                Assigned              Value            in Years
                                                            -----------------   -----------------  -----------------
                                                                             (dollars in thousands)

     Other intangibles                                          $  450                  -                 5`

The adoption of SFAS No. 142 and SFAS No. 147 as of October 1, 2001 had no impact on March 31, 2003 or 2002 results.

|Item 2. | 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, general economic conditions, legislative and regulatory
changes, 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. The Company does not undertake  and specifically
disclaims any obligation  to publicly revise any forward  looking
statements to reflect events or circumstances after the date of the statements
to reflect the occurrence of anticipated or unanticipated events. Further
description of the risks and uncertainties to the business are included in
detail in Section B, Management Strategy, Section C, Critical Accounting
Policies, and Section E, Liquidity and Capital Resources.

|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, non-interest 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 non-interest expense. The Companys non-interest
expense principally consists of compensation and employee benefits, office
occupancy and equipment expense, data processing, professional fees, and
advertising and business promotion 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.

On January 2, 2002, the
Company purchased three banking offices from Schuylkill Savings and Loan
Association of Schuylkill Haven, Pa. The Company purchased $11.4 million of
loans and assumed $12.8 million of deposits from these offices.

On January 8, 2002, Higgins acquired the DeAndrea Agency, which specializes in personal and commercial insurance.

On September 4, 2002, the
Bank formed a relationship with Smith Barney under which Smith Barney Investment
Centers will provide retail brokerage products and services at all of the First
Federal offices. This is Smith Barneys first relationship with a bank in
the Commonwealth of Pennsylvania. Smith Barney, an independent, registered
broker-dealer, is not affiliated with the Bank.

|B. | Management Strategy
|-- | -------------------

The Companys
operating strategy is that of a community-based financial services company,
offering a wide variety of financial products to its retail customers, while
concentrating on residential and consumer lending and, to a lesser extent,
multi-family and commercial real estate lending, construction lending and small
business and municipal commercial lending. In order to promote long-term
financial strength and profitability, the Company has focused on: (i)
maintaining strong asset quality by originating one- to four-family loans
located in its market area; (ii) emphasizing higher yielding consumer loans,
specifically indirect automobile loans, and commercial loans, primarily to small
businesses and municipalities; (iii) managing its interest rate risk by
emphasizing shorter-term, fixed-rate, one- to four-family loans, in addition to
consumer and commercial loans; limiting its retention of newly originated
longer-term fixed-rate one- to four-family loans; soliciting longer-term
deposits; utilizing longer-term advances from the Federal Home Loan Bank of
Pittsburgh (the FHLB); and investing in investment and
mortgage-related securities having shorter estimated durations; (iv) meeting the
financial needs of its customers through expanded products, such as personal and
business insurance from Higgins, trust and investment management services from
the Trust Co., title insurance from Abstractors, Inc., all with improved
delivery systems through technological advances and integration of products; and
(v) maintaining a strong regulatory capital position.

As a result of its policy
to limit its retention of newly originated longer-term, fixed-rate one- to
four-family loans to 25% of total loan originations during a fiscal year, and in
light of the low interest rate environment, the Company is selling conforming
mortgage loan originations with interest rate adjustments of fifteen years or
greater. These loan products are sold at origination in the secondary market.
The Company also offers nonconforming one- to four-family loans.

|C. | Critical Accounting Policies
|-- | ----------------------------

Other Investment.
The Company has a $1.5 million net investment in the preferred stock of
BuildersFirst Holdings, Inc., which makes loans to and provides services to
builders in the Eastern United States. The Company is utilizing the cost method
of accounting for this investment. BuildersFirst continues to experience losses.
At this time, BuildersFirst is seeking additional capital to allow it to expand
its funding of builders and thereby achieve greater efficiency of scale. If
BulidersFirst cannot obtain such additional capital and achieve greater
efficiency in its operations, the Company may be required to write off its
investment. The Company periodically evaluates the current value of the
investment.

Allowances for Loan
Losses. The allowance for loan losses is maintained at a level representing
managements best estimate of known and inherent losses in the portfolio,
based upon managements evaluation of the portfolios collectibility.
Managements evaluation is based upon an analysis of the portfolio, past
loss experience, current economic conditions and other relevant factors. While
management uses the best information available to make evaluations, such
evaluations are highly subjective, and future adjustments to the allowance may
be necessary if conditions differ substantially from the assumptions used in
making the evaluations. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Companys
allowance for losses on loans. Such agencies may require the Company to
recognize additions to the allowance. The allowance is increased by the
provision for loan losses, which is charged to operations. Loan losses are
charged directly against the allowance, and recoveries on previously charged-off
loans are added to the allowance.

Loans are deemed to be
impaired if upon managements assessment of the relevant facts
and circumstances, it is probable that the Company will be unable to collect all
proceeds due according to the contractual terms of the loan agreement. For
purposes of applying the measurement criteria for impaired loans, the Company
excludes large groups of smaller balance homogeneous loans, primarily consisting
of residential real estate and consumer loans, as well as commercial loans with
balances of less than $100,000. The uncollected portion of Impaired loans are
charged off when the Company determines that foreclosure is probable, and the
fair value of the collateral is less than the recorded investment of the
impaired loan or in the case of unsecured loans, management determines the loan
to be uncollectable.

Intangible Assets.Intangible assets include core deposit intangibles and certain other
miscellaneous intangibles. The core deposit intangibles are being amortized to
expense over a 10- to 31-year life on an accelerated basis and other intangible
assets are being amortized to expense on an accelerated basis over a period of
3.7- to 5 years. The recoverability of the carrying value of intangible assets
is evaluated on an ongoing basis, and permanent declines in value, if any, are
charged to expense.

Goodwill. Goodwill is the excess of cost over the fair value of assets  acquired in  connection  with  business  acquisitions  and was
being amortized on the straight-line  method over 5, 6 and 20 years,  prior to October 1, 2001. On October 1, 2001, the Company adopted
SFAS No. 142,  Goodwill and Other Intangible  Assets,  which eliminated the regularly  scheduled  amortization of goodwill and replaced
this method with a two-step  process for testing the  impairment  of goodwill on at least an annual basis.  This  approach  could cause
more  volatility in the Company's  reported net income  because  impairment  losses,  if any,  could occur  irregularly  and in varying
amounts. The Company, upon adoption of this Statement,  stopped amortizing existing goodwill of $3.0 million. In addition,  the Company
performed  its initial  impairment  analysis of goodwill and other  intangible  assets and  determined  that the  estimated  fair value
exceeded the carrying amount.

Income Taxes. The
Company accounts for income taxes under the asset/liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, as well as
operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is established against deferred tax assets when in the
judgment of management, it is more likely than not that such deferred tax assets
will not become available. Because the judgment about the level of future
taxable income is dependent to a great extent on matters that may, at least in
part go beyond the Companys control, it is at least reasonably possible
that managements judgment about the need for a valuation allowance for
deferred taxes could change in the near term.

|D. | Non-Performing Assets and Impaired Loans
|-- | ----------------------------------------

The following table
presents information regarding the Banks non-performing loans, real estate
owned and other repossessed assets at the dates indicated (unaudited):

`March 31,         September 30,
                                                                                     2003                2002
                                                                               -----------------   -----------------
                                                                                      (dollars in thousands)

Nonperforming loans:
     Non-accrual loans plus other impaired loans                             $            4,346 $             4,200
     Real estate owned and other repossessed assets
                                                                                            609                 547
                                                                               -----------------   -----------------
         Total non-performing assets                                                      4,955               4,747
     Troubled debt restructurings                                                             -                  55
                                                                               -----------------   -----------------
         Troubled debt restructurings and total non-performing assets        $            4,955 $             4,802
                                                                               =================   =================
     Total non-performing loans as a percentage of total loans                             0.87%               0.85%
     Total non-performing assets as a percentage of total assets                           0.55                0.53`

The increase in non-performing assets was primarily the result of additional delinquencies associated with commercial loans.

|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 depositors as well as maintaining
flexibility to take advantage of lending and investment opportunities. The
Banks primary sources of funds on a long-term and short-term basis are
deposits, principal and interest payments on loans, 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 and the exercise of call features are
greatly influenced by general interest rates, economic conditions and
competition.

The Banks most liquid
assets are cash and cash equivalents and its investment and mortgage-related
securities available-for-sale. The levels of these assets are dependent on the
Banks operating, financing, lending and investing activities during any
given period. At March 31, 2003, cash and cash equivalents and investment and
mortgage-related securities available-for-sale totaled $351.8 million, or 38.8%
of total assets.

The Bank has other sources
of liquidity if a need for additional funds arises, including FHLB advances. At
March 31, 2003, the Bank had $208.4 million in advances outstanding from the
FHLB under its overall borrowing capacity from the FHLB of $288.5 million. The
Bank plans to use the proceeds from the sale of current investments to pay the
$56.0 million fixed rate FHLB borrowings that will mature within the next twelve
months. Depending on market conditions, the pricing of deposit products and FHLB
advances, the Bank may continue to rely on FHLB borrowings to fund asset growth.
In addition to these traditional funding sources, the Bank began utilizing
alternative funding sources such as the sale and securitization of automobile
loans.

At March 31, 2003, the Bank
had commitments to originate and purchase loans and unused outstanding lines of
credit and undisbursed proceeds of construction mortgages totaling $110.2
million. The Bank anticipates that it will have sufficient funds available to
meet these commitments. Certificate accounts, including Individual Retirement
Account (IRA) and KEOGH accounts, which are scheduled to mature in
less than one year from March 31, 2003 totaled $100.7 million. Based on past
experience, the Bank expects that substantially all of these maturing
certificate accounts, with the exception of jumbo certificates of deposit, will
be retained by the Bank at maturity. At March 31, 2003, the Bank had $22.7
million in jumbo certificates, the majority of which are deposits from local
school districts and municipalities.

The primary sources of
funding for the Company are dividend payments from the Bank, sales and
maturities of investment securities, the issuance of trust-preferred securities
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 Office of Thrift Supervision. During April 2002, the
Company obtained $7.0 million through a trust-preferred offering, and in October
2002, the Company obtained an additional $15.0 million through a trust-preferred
offering. Of the total trust-preferred proceeds, $10.0 million was used to
purchase bank-owned life insurance, $5.0 million was used to further capitalize
the Bank, and the remaining amount at the Company level was used for general
corporate purposes, as well as to fund the trust established to purchase the
Companys stock. To date, the Company has contributed $1.8 million to the
trust, which has used such funds to purchase 114,174 shares of common stock.

At March 31, 2003, the Bank
exceeded all of its regulatory capital requirements with a tangible capital
level of $59.7 million, or 6.8% of total adjusted assets, which is above the
required level of $13.2 million, or 1.5%; a core capital level of $59.7 million,
or 6.8% of total adjusted assets, which is above the required level of $26.5
million, or 3.0%; and a risk-based capital of $65.0 million, or 11.5% of
risk-weighted assets, which is above the required level of $45.1 million, or
8.0%.

At March 31, 2003, the Bank
had total equity, determined in accordance with generally accepted accounting
principles, of $70.3 million, or 7.9%, of total assets, which approximated the
Banks regulatory tangible capital at that date of 6.5% of assets. An
institution with a ratio of tangible capital to total assets of greater than or
equal to 5% is considered to be well-capitalized pursuant to OTS
regulations.

|F. | Comparison of Financial Condition at March 31, 2003 and September 30, 2002
|-- | --------------------------------------------------------------------------

Total assets increased
$672,000 from $905.5 million at September 30, 2002 to $906.2 million at March
31, 2003. The growth was generated by a $16.7 million increase in cash and cash
equivalents that was primarily funded by a $60.3 million sale of mortgage-backed
securities and a $15.0 million trust-preferred offering, offset by security
purchases and loan originations. As discussed previously, the Company
anticipates continuing to utilize these additional funds for general corporate
purposes and to purchase stock for the stock option trust. Securities classified
as available-for-sale decreased $18.2 million, from $327.9 million at September
30, 2002 to $309.7 million at March 31, 2003. The decrease was attributable to
the sale of $60.3 million of mortgage-backed securities with an average yield of
2.89% and an average life of 1.18 years, with a portion of the proceeds
reinvested in securities with average lives of 4.5 years and an average yield of
3.48%. The reinvestment had not been completed as of March 31, 2003. This
restructuring was done to minimize the effect of prepayments of mortgage-backed
securities in the lower market interest rate environment.

Net loans increased $3.3
million from September 30, 2002. Consumer loans increased $21.3 million due to a
$25.5 million increase in indirect automobile loan originations within the
Companys market area offset by a decrease in other consumer loan balances.
Commercial loans increased during the six month period by $3.0 million. Total
real estate loans decreased $21.1 million due to the $23.4 million decrease in
one- to four- family loans as a result of prepayments of mortgages due to the
lower market interest rate environment.

Total liabilities increased
$1.7 million from $837.1 million at September 30, 2002 to $838.9 million at
March 31, 2003, due primarily to the issuance of $15.0 million in
trust-preferred securities, offset by an $8.6 million decrease in deposits, a
$3.4 million decrease in other liabilities and a $2.1 million decrease in other
borrowings. Other liabilities decreased due to a $3.7 million decrease in
deferred taxes as a result of a decrease in unrealized gain on securities. Other
borrowings decreased as a result of a decrease in overnight sweep accounts.

Deposits decreased $8.6
million from $606.4 million as of September 30, 2002 to $597.8 million at March
31, 2003. The largest decrease was in certificates of deposit, which decreased
$40.2 million as a result of matured certificates being rolled into checking and
other interest-bearing accounts as well as municipalities and local school
districts withdrawing funds for use in operations.

In October 2002, the
Company issued an additional $15.0 million of trust-preferred securities. The
interest rate on the trust-preferred securities is variable based on three month
LIBOR and adjusts quarterly with a rate as of March 31, 2003 of 4.79%, with a
rate cap of 12.5% through November 7, 2007.

Total equity decreased
slightly primarily due to a $1.9 million decrease in accumulated other
comprehensive income as a result of a decrease in unrealized gains on
securities. Because of interest rate volatility, accumulated other comprehensive
income could materially fluctuate from period to period depending on economic
and interest rate conditions. Equity also decreased due to the purchase of
69,133 shares for the stock employee compensation trust at a cost of $1.1
million and dividend payments of $982,000. These decreases were offset by net
income for the six months of $2.2 million, the release of shares under the
employee stock ownership plan and the vesting of previously granted shares of
restricted stock.

|G. | Comparison of Operating Results for the Three Months ended March 31, 2003 and March 31, 2002
|-- | --------------------------------------------------------------------------------------------

General.  The Company had net income of  approximately  $1.3  million and $1.2  million for the three  months  ended March 31, 2003 and
March 31, 2002,  respectively.  Basic and diluted  earnings per share  increased  to $0.34 and $0.33 per share,  respectively,  for the
three months ended March 31, 2003 as compared to $0.31 and $0.29 per share, respectively, for the same period in 2002.

Interest Income.
Total interest income decreased $1.8 million, or 13.5%, from $13.8 million for
the three months ended March 31, 2002 to $12.0 million for the three months
ended March 31, 2003. This decrease was primarily due to a 125 basis point
decline on the tax-equivalent yield on earning assets to 5.72% for the three
months ended March 31, 2003 as compared to 6.97% for the same period ended 2002.
Interest income on loans decreased $1.1 million primarily due to a 77 basis
point decrease in the yield, combined with a $6.9 million decrease in the
average balance of loans. Interest income on mortgage related securities
decreased $526,000 as the yield on such securities declined 165 basis points,
while the average balance increased $34.4 million. Interest income on taxable
investment securities decreased $219,000 as a result of a 175 basis point
decline. Rapid repayment of mortgage-backed securities has resulted in
reinvestment options at substantially lower rates than the previous year.

Interest Expense.
Interest expense decreased $749,000, or 10.4%, from $7.2 million for the three
months ended March 31, 2002 to $6.4 million for the three months ended March 31,
2003. The decrease in interest expense was primarily attributable to a declining
interest rate environment that resulted in the cost of deposits decreasing to
2.31% for the three months ended March 31, 2003 as compared to 3.28% for the
same period ended 2002. Offsetting the declining rates was an increase in the
average balance of interest-bearing liabilities of $56.2 million to $794.9
million for the three months ended March 31, 2003. The decrease in interest
expense on deposits of $1.0 million was primarily due to a $1.2 million decrease
in interest expense on certificates of deposit, which was the result of a 104
basis point decrease in interest rates and a $44.6 million decrease in the
average balance, offset by a $77.4 million increase in the average balance on
checking accounts. Interest expense on trust-preferred debt increased $281,000
due to the $22.0 million trust-preferred securities which the Company did not
have during the second quarter of 2002.

Provision for Loan
Losses. The provision for loan losses increases the allowance for loan
losses. The Banks provision for loan losses for the three months ended
March 31, 2003 increased $5,000 compared to the comparable 2002 period. The
increase was due to increased mortgage and consumer charge offs, offset by a
decrease in non-accrual loans. During the quarter, the Company enhanced its loan
servicing function to ensure the speedy resolution of delinquencies and employed
a new collections manager and a new recovery manager to address the risk of
deterioration in loan quality. As a result, total delinquencies for mortgage and
consumer loans were reduced during the quarter to .40% and .05% of total loans,
respectively, at March 31, 2003, from .50% and .09% at March 31, 2002. The Bank
also completed a full review of its mortgage and consumer loan portfolios and
charged-off loans where the fair value of assets fell below the book value. This
analysis led to net loan charge-offs of $515,000 for the quarter ended March 31,
2003, compared to net loan charge-offs of $422,000 for the quarter ended March
31, 2002. This increased level of charge-offs is expected to be a one-time
event. Net loan charge-offs, as a percentage of total loans for the current
quarter, were 10 basis points. During the March 2003 quarter, $208,000 of the
addition to provision for loan losses was due to two commercial real estate
loans having specific reserves established and one commercial loan borrower who
declared bankruptcy affecting a loan that was current at December 31, 2002. At
March 31, 2003, delinquent commercial loans were .42% of total loans, a slight
increase from the .41% level at March 31, 2002, due to the change in this
commercial loan.

The allowance is maintained
at a level that represents managements best estimate of known and inherent
estimated losses based upon an evaluation of the loan portfolio. Loan losses,
other than those incurred on loans held for sale, are charged directly against
the allowance and recoveries on previously charged-off loans are added to the
allowance. Managements evaluation is based upon, among other things,
delinquency trends, the volume of non-performing loans, prior loss experience of
the portfolio, current economic conditions, and other relevant factors. Although
management believes it has used the best information available to it in making
such determinations, and that the allowance for loan losses is adequate, future
adjustments to the allowance may be necessary, and net income may be adversely
affected if circumstances differ substantially from the assumptions used in
determining the level of the allowance. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Banks allowance for losses on loans. Such agencies may require the
Bank to recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.

Non-interest Income.
Non-interest income increased $2.1 million, or 126.5% from $1.6 million for the
three months ended March 31, 2002 to $3.7 million for the three months ended
March 31, 2003. Gain on sale of available securities increased $1.1 million due
primarily to the $1.1 million gain on the sale of $60.3 million in
mortgage-backed securities as part of the expanding staff in business lines
restructuring of the investment portfolio. Gain-on-sale of loans increased
$272,000 as originations of fixed-rate mortgages, in excess of the Banks
retention policy, were sold. Other income, for the three months ended March 31,
2003 increased $283,000 as a result of $156,000 of income from bank-owned life
insurance and $148,000 from income on the retained interest associated with the
sale and securitization of $50.0 million of automobile loans in June 2002.
Insurance commission income increased $178,000, due to continued growth in
insurance related services. Service charges and other fees increased $124,000
due to a larger customer base that partially resulted from the acquisition of
three additional branches of another community financial institution during
2002. Trust fee income increased $19,000 as a result of growth in assets under
management.

Non-interest
Expense. Total non-interest expense increased $928,000, or 16.4%, from $5.6
million for the three months ended March 31, 2002 to $6.6 million for the three
months ended March 31, 2003. This increase was due primarily to an increase in
compensation and employee benefits of $286,000 for new staff associated with the
acquisitions of three additional branches as well as additional employees to
staff expanding business lines in 2002. Other non-interest expense increased
$340,000 due to costs associated with foreclosed properties combined with
general increases in operating expenses such as supplies and telephone and other
incremental increases that resulted from operating a larger organization. Given
the change in the loan servicing function, it is not expected that the level of
expenses for OREO will continue. Telephone costs will be reduced beginning in
April 2003, due to a change in long distance carriers and installation of a new
phone system by June 30, 2003. These changes are expected to result in pre-tax
cost savings of $150,000 for the first year following the changes, and $125,000
per year thereafter. Advertising costs increased to $120,000 over the previous
year quarter as the Company continued the promotion of a new branding campaign.
Occupancy expenses increased $100,000 due to seasonal operating expenses such as
utilities and maintenance. In late March 2003, First Federal decided to close
three retail offices, sell the buildings occupied by two of these offices and
reduce the office hours at a fourth office. These actions are expected to result
in savings of $330,000 per year beginning with the fourth fiscal quarter of
2003. Deposit services will be provided by nearby First Federal offices. The
Company also determined to build a new Schuylkill County regional office that
will replace an existing office inside a nearby mall. When the new office is
completed and occupied in late 2003 or early 2004, it is expected to reduce the
cost of serving this community.

Income Taxes. The
Company had an income tax provision of $702,000 for the three months ended March
31, 2003, compared to a provision of $758,000 for the three months ended March
31, 2002, resulting in effective tax rates of 35.3%, and 38.1%, respectively.
This decrease, despite pre-tax income remaining relatively constant, was due to
income generated from bank-owned life insurance, which is excludable for income
tax purposes. Included in the income tax provision for both the three months
ended March 31, 2003 and March 31, 2002 was an approximately $60,000 increase to
a deferred tax asset valuation allowance related to the charitable contribution
carryforward. The contribution carryforward will expire September 30, 2003, if
not utilized.

|H. | Comparison of Operating Results for the Six Months ended March 31, 2003 and March 31, 2002
|-- | ------------------------------------------------------------------------------------------

General. The Company  had net income of  approximately  $2.2  million  and $2.5  million  for the six months  ended March 31, 2003 and
March 31,  2002,  respectively.  Basic and diluted  earnings per share were $0.59 and $0.56 per share,  respectively,  for both the six
months ended March 31, 2003 and March 31, 2002.

Interest Income.
Total interest income decreased $2.9 million, or 10.5%, from $27.5 million for
the six months ended March 31, 2002 to $24.6 million for the six months ended
March 31, 2003. This decrease was primarily due to a 123 basis point decline on
the tax-equivalent yield on earning assets to 5.83% for the six months ended
March 31, 2003 as compared to 7.06% for the same period ended 2002. Interest
income on loans decreased $1.9 million primarily due to a 69 basis point
decrease in the yield. Interest income on taxable investment securities
decreased $603,000 as a result of a 173 basis point decline. Interest income on
mortgage related securities decreased $348,000 as the yield on such securities
declined 155 basis points, offset by an increase in average balance of $63.4
million. Rapid repayment of mortgage-backed securities has resulted in
reinvestment options at substantially lower rates than the previous year.

Interest Expense.
Interest expense decreased $1.1 million, or 7.6%, from $14.5 million for the six
months ended March 31, 2002 to $13.4 million for the six months ended March 31,
2003. The decrease in interest expense was primarily attributable to a declining
interest rate environment that resulted in the cost of deposits decreasing to
2.43% for the six months ended March 31, 2003 as compared to 3.40% for the same
period ended 2002. Offsetting the declining rates was an increase in the average
balance of interest-bearing liabilities of $80.6 million to $800.8 million for
the six months ended March 31, 2003. In particular, the average balance of
transaction accounts increased $80.4 million to $198.2 million. This increase
was the result of the addition of three branch offices in 2002, as well as the
competitively priced products being marketed throughout the Companys
market area. Deposit growth also was driven by a general shift in customer
preference away from the equity markets and into insured bank deposits. The
decrease in interest expense on deposits of $1.7 million, was primarily due to a
$2.2 million decrease in interest expense on certificates of deposit, which was
the result of a 111 basis point decrease in interest rates, offset by an
increase in the average balance on transaction accounts of $80.4 million.
Interest expense on trust-preferred debt increased $517,000 as a result of the
$22.0 million trust-preferred securities which the Company did not have during
the six months ended March 31, 2002.

Provision for Loan
Losses. The Companys provision for loan losses for the six months
ended March 31, 2003 decreased $262,000 compared to the comparable 2002 period.
The Banks success in maintaining asset quality was the basis for reduction
of the loan loss provision. Non-performing assets at March 31, 2003 were reduced
to $5.0 million, or .55% of total assets, from $5.3 million, or .58% of total
assets as of March 31, 2002. The Company enhanced its loan servicing function to
ensure the speedy resolution of delinquencies and employed a new collections
manager and a new recovery manager to address the risk of deterioration in loan
quality. As a result, total delinquencies for mortgage and consumer loans were
reduced to .40% and .05% of total loans, respectively, at March 31, 2003, from
..50% and .09% at March 31, 2002. The Bank also completed a full review of its
mortgage and consumer loan portfolios and charged-off loans where the fair value
of assets fell below the book value. This analysis led to net loan charge-offs
of $1.2 million for the six months ended March 31, 2003, compared to net loan
charge-offs of $702,000 for the six months ended March 31, 2002. This increased
level of charge-offs is expected to be a one-time event. Net loan charge-offs,
as a percentage of total loans for the fiscal year-to-date were 18 basis points.
For the six months ended March 31, 2003, $286,000 of the addition to provision
for loan losses was due to two commercial real estate loans having specific
reserves established and one commercial loan borrower who declared bankruptcy
affecting a loan that was current at December 31, 2002. At 2003, delinquent
commercial loans were .42% of total loans, a slight increase from the .41% level
at March 31, 2002.

Non-interest Income.
Non-interest income increased $3.0 million, or 93.9% from $3.2 million for the
six months ended March 31, 2002 to $6.2 million for the six months ended March
31, 2003. During the six months ended March 31, 2003 there was a $60.3 million
sale of mortgage-backed securities, which resulted in gains on sale of
securities of $1.1 million. Other income for the six months ended March 31, 2003
increased $645,000 as a result of $312,000 of income from bank-owned life
insurance and $294,000 from income on the retained interest associated with the
sale and securitization of $50.0 million of automobile loans in June 2002.
Insurance commission income increased $383,000 due to continued growth in
insurance related services. Gain-on-sale of loans increased $364,000 as $21.9
million of originations of fixed-rate mortgages, in excess of the Banks
retention policy were sold in the six months ended March 31, 2003 compared to
$7.6 million of such loans sold in the same period in 2002. During the current
period, gains totaled $603,000, as compared to a gain of only $239,000 in the
comparable prior year period. Service charges and other fees increased $270,000
due to a larger customer base that partially resulted from the acquisition of
three additional branches of another community financial institution during
2002. Trust fee income increased $98,000 from prior year and the Trust assets
under management increased to $147.0 million as of March 31, 2003, with over 350
accounts under management.

Non-interest
Expense. Total non-interest expense increased $2.0 million, or 35.8% from
$11.1 million for the six months ended March 31, 2002 to $13.1 million for the
six months ended March 31, 2003. This increase was due primarily to an increase
in compensation and employee benefits of $655,000 for increased hospitalization
costs and new employees to staff the growth in the Companys business
lines. Other non-interest expense increased $559,000 due to costs associated
with foreclosed properties combined with general increases in operating expenses
such as supplies and telephone and other incremental increases that resulted
from operating a larger organization. Professional fees increased $281,000 as a
result of accounting fees related to fiscal 2002 audit matters coupled with an
increase in consulting services during the continued transition between chief
financial officers. Advertising costs increased to $256,000 over the previous
year quarter as the Company continued the promotion of a new branding campaign.
Occupancy expenses increased $239,000 due to Company expansion.

Income Taxes. The
Company had an income tax provision of $1.1 million for the six months ended
March 31, 2003, compared to a provision of $1.4 million for the six months ended
March 31, 2002 resulting in effective tax rates of 32.7%, and 35.0%,
respectively. The decline in income tax expense was primarily attributable to a
decrease in taxable income, along with an increase in tax-exempt income from
bank-owned life insurance. Included in the income tax provision for the six
months ended March 31, 2003, was a $99,000 increase to a deferred tax asset
valuation allowance related to the charitable contribution carryforward. As of
March 31, 2003, the Company had $184,000 of net deferred tax assets resulting
from the charitable contribution carryforward related to the creation of the
First Federal Foundation in 1998. This carry forward will expire at the end of
fiscal year 2003, if not utilized.

|Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | As
of March 31, 2003, there have been no material changes in the quantative and
qualitative disclosures about market risks presented in the Companys
Annual Report on Form 10-K for the fiscal year ended September 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Item 4. | CONTROLS AND PROCEDURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | (a)Evaluation of disclosure  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.  Based upon her  evaluation of those  controls and procedures  performed
                  within 90 days of the filing date of this report,  the chief executive officer and the chief financial officer of the
                  Company concluded that the Company's disclosure controls and procedures were adequate.
(b)Changes in internal  controls.The Company  made no  significant  changes in its internal  controls or in other  factors that
                  could  significantly  affect these  controls  subsequent to the date of the evaluation of those controls by the chief
                  executive officer.

Part II - OTHER INFORMATION

|Item 1. | Legal Proceedings                                                                                                                                                                                                                                                                                          
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | The
Company is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such routine
legal proceedings, in the aggregate, are believed by management to be immaterial
to the Companys financial condition or results of operation.
|        |                                                                                                                                                                                                                                                                                                            
|Item 2. | Changes in Securities and Use of Proceeds                                                                                                                                                                                                                                                                  
|        | Not applicable.                                                                                                                                                                                                                                                                                            
|        |                                                                                                                                                                                                                                                                                                            
|Item 3. | Defaults Upon Senior Securities                                                                                                                                                                                                                                                                            
|        | Not applicable.                                                                                                                                                                                                                                                                                            
|        |                                                                                                                                                                                                                                                                                                            
|Item 4. | Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                        
|        | The
Annual Meeting of the Stockholders of the Company was held on January 29, 2003.
The results of the vote were as follows:                                                                                                                                                                               

`1.       The following individuals were elected as directors, each for a three-year term:

                                                              VOTES FOR                 VOTES WITHHELD
                                                              ---------                 --------------

                  Paul L. Conard                              3,506,705                          104,214

                  John P. Lavelle                             3,506,017                          104,902

                  Michael J. Leib                             3,510,298                          100,621

                  2.       The appointment of KPMG LLP as independent auditors of Northeast Pennsylvania Financial
                           Corp. for the fiscal year ended September 30, 2003 was ratified by the stockholders by
                           the following vote:

                  FOR                       AGAINST           ABSTAIN                   BROKER NON-VOTES
                  ---                       -------           -------                   ----------------

                  3,538,940                 57,303            14,676                           1`

|Item 5. | Other information
|------- | -----------------
|        | Not applicable.  

|Item 6. | Exhibits and Reports on Form 8-K                                                                                                                                  
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | Not applicable.                                                                                                                                                   
|        |                                                                                                                                                                   
|(A)     | Exhibits                                                                                                                                                          
|        |                                                                                                                                                                   
|3.1     | Certificate of Incorporation of Northeast Pennsylvania Financial Corp.*                                                                                           
|        |                                                                                                                                                                   
|3.2     | Bylaws of Northeast Pennsylvania Financial Corp.*                                                                                                                 
|        |                                                                                                                                                                   
|4.0     | Form of Stock Certificate of Northeast Pennsylvania Financial Corp.*                                                                                              
|        |                                                                                                                                                                   
|11.0    | Statement regarding Computation of Per Share Earnings (See Notes to Consolidated Financial Statements)                                                            
|        |                                                                                                                                                                   
|99.1    | Chief Executive Officer and Chief Financial Officer Certification Pursuant to Section 906, of the Sarbanes-Oxley Act of 2002                                      
|        |                                                                                                                                                                   
|*       | Incorporated herein by reference into this document from the Exhibits to Form
S-1, Registration Statement, and any amendments thereto, Registration No.
333-43281.
|        |                                                                                                                                                                   
|**      | Incorporated herein by reference into this document from the Exhibits to the
Form 10-K/A as filed with the Securities and Exchange Commission on January 8,
2003. 

|(B) | Reports on Form 8-K
|--- | -------------------
|    | None.              

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:    May 15, 2003 | By: /s/ E. Lee Beard
E. Lee Beard
President, Chief Executive
Officer, and chief financial officer

I, E. Lee Beard, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Northeast Pennsylvania Financial Corp.;
2. Based on my knowledge, the quarterly report does not contain any untrue statement of a material fact or omit to state a
         material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
         not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly
         present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
         for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
         procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:designed such disclosure controls and procedures to ensure that material information relating to the registrant, including
                  its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
                  in which this quarterly report is being prepared;evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the
                  filing date of this quarterly report (the "Evaluation Date"); andpresented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;
5. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including
                  its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
                  in which this quarterly report is being prepared;
6. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the
                  filing date of this quarterly report (the "Evaluation Date"); and
7. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;
8. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's
         auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function);all significant deficiencies in the design or operation of the internal controls which could adversely affect the
                  registrant's ability to record process, summarize and report financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; andany fraud, whether or not material, that involves management or other employees who have a significant role in the
                  registrant's internal controls; and
9. all significant deficiencies in the design or operation of the internal controls which could adversely affect the
                  registrant's ability to record process, summarize and report financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and
10. any fraud, whether or not material, that involves management or other employees who have a significant role in the
                  registrant's internal controls; and
11. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were
         significant changes in internal controls or in other factors that could significantly affect the internal controls
         subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
         deficiencies and material weaknesses.