**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, DC 20549**

**FORM 10-Q**

| (Mark One) |
|------------|
|       |   |   |
| ****       |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT** |
|       |   | **OF 1934** |
|       |   |   |
|       |   | For the quarterly period ended December 31, 2004 |
|       |   | OR |
|       |   |   |
| ****       | **** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT** |
|       |   | **OF 1934** |

For the transition period from __________________to_________________

Commission File Number 0-49952 

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

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrantwas 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 3,980,220 of Common Stock outstanding as of February 11, 2004. 

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**TABLE OF CONTENTS**

| Item                                                       |                                                             | Page   |   |
|------------------------------------------------------------|------------------------------------------------------------------|--------|--------|
| No.                                                        |                                                             | Number |   |
|                                                            |                                                             |        |   |
|                                                       |                                                             |   |   |
| **PART****I - CONSOLIDATED         FINANCIAL INFORMATION** |                                                             |   |
|                                                       |                                                             |   |   |
| Item 1                                                     | CONSOLIDATED FINANCIAL STATEMENTS                                |   |   |
|                                                       |                                                             |   |   |
|                                                       | Consolidated Statements of Financial Condition at                |        |   |
|                                                       | December 31, 2004 and September 30, 2004 (unaudited)             | 3      |   |
|                                                       |                                                             |   |   |
|                                                       | Consolidated Statements of Operations for the Three Months       |        |   |
|                                                       | Ended December 31, 2004 and 2003 (unaudited)                     | 4      |   |
|                                                       |                                                             |   |   |
|                                                       | Consolidated Statements of Cash Flows for the Three Months Ended |        |   |
|                                                       | December 31, 2004 and 2003 (unaudited)                           | 5      |   |
|                                                       |                                                             |   |   |
|                                                       | Notes to Consolidated Financial Statements (unaudited)           | 7      |   |
|                                                       |                                                             |   |   |
| Item 2                                                     | Management Discussion and Analysis of Financial Condition        |        |   |
|                                                            | and Results of Operations                                        | 19     |   |
|                                                       |                                                             |   |   |
| Item 3                                                     | Quantitative and Qualitative Disclosures About Market Risk       | 24     |   |
|                                                       |                                                             |   |   |
| Item 4                                                     | Controls and Procedures                                          | 24     |   |
|                                                       |                                                             |   |   |
| **Part II – OTHER INFORMATION**                       |                                                             |   |
|                                                       |                                                             |   |   |
| Item 1                                                     | Legal Proceedings                                                | 25     |   |
|                                                       |                                                             |   |   |
| Item 2                                                     | Unregistered Sales of Equity Securities and Use of Proceeds      | 25     |   |
|                                                       |                                                             |   |   |
| Item 3                                                     | Defaults Upon Senior Securities                                  | 25     |   |
|                                                       |                                                             |   |   |
| Item 4                                                     | Submission of Matters to a Vote of Security Holders              | 25     |   |
|                                                       |                                                             |   |   |
| Item 5                                                     | Other Information                                                | 25     |   |
|                                                       |                                                             |   |   |
| Item 6                                                     | Exhibits                                                         | 25     |   |
|                                                       |                                                             |   |
| Signatures                                                 | 27                                                               |   |

 

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

|                                                                  |   | **December 31,**                         |   | **September 30,** |    |
|-----------------------------------------------------------------------|--------|------------------------------------------|--------|-------------------|---------|
|                                                                  |   | **2004**                                 |   | **2004**          |    |
|                                                                  |   |                                          |   |                   |    |
|                                                                  |   | **(in thousands except per share data)** |   |
| ASSETS                                                                |   |                                     |   |              |    |   |
| Cash and cash equivalents                                             | $      | 41,975                                   |   | $                 | 26,938  |   |
| Investment securities    available-for-sale                           |   | 341,932                                  |   |              | 357,223 |   |
| Investment securities    held-to-maturity (estimated market value of  |   |                                     |   |              |    |   |
| $1,014 at December    31, 2004 and $1,015 at September 30, 2004)      |   | 998                                      |   |              | 998     |   |
| Loans held for sale                                                   |   | 308                                      |   |              | -       |   |
| Loans (less allowance    for loan loss of $8,248 at December 31, 2004 |   |                                     |   |              |    |   |
| and $8,446 at September    30, 2004)                                  |   | 401,550                                  |   |              | 403,584 |   |
| Accrued interest receivable                                           |   | 2,891                                    |   |              | 2,731   |   |
| Assets acquired through    foreclosure                                |   | 343                                      |   |              | 315     |   |
| Property and equipment,    net                                        |   | 10,719                                   |   |              | 10,820  |   |
| Goodwill                                                              |   | 3,255                                    |   |              | 3,255   |   |
| Intangible assets                                                     |   | 6,906                                    |   |              | 7,129   |   |
| Bank-owned life insurance                                             |   | 11,478                                   |   |              | 11,362  |   |
| Other assets                                                          |   | 11,345                                   |   |              | 11,680  |   |
|                                                                  |        |                                          |   |                   |         |   |
| TOTAL ASSETS                                                          | $      | 833,700                                  |   | $                 | 836,035 |   |
|                                                                  |   |                                          |        |              |         |  |   |
|                                                                  |   |                                     |   |              |    |   |   |
| LIABILITIES                                                           |   |                                     |   |              |    |   |
| Deposits                                                              |   | 482,004                                  |   |              | 483,441 |   |
| Federal Home Loan    Bank advances                                    |   | 223,467                                  |   |              | 243,867 |   |
| Trust-preferred debt                                                  |   | 22,681                                   |   |              | 22,681  |   |
| Other borrowings                                                      |   | 40,422                                   |   |              | 20,426  |   |
| Advances from borrowers    for taxes and insurance                    |   | 1,734                                    |   |              | 1,178   |   |
| Accrued interest payable                                              |   | 1,286                                    |   |              | 1,380   |   |
| Other liabilities                                                     |   | 3,961                                    |   |              | 4,604   |   |
|                                                                  |        |                                          |   |                   |         |   |
| TOTAL LIABILITIES                                                     |   | 775,555                                  |   |              | 777,577 |   |
|                                                                  |   |                                          |        |              |         |  |   |
|                                                                  |   |                                     |   |              |    |   |   |
| 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                                         |   | 62,481                                   |   |              | 62,307  |   |
| Common stock acquired    by stock benefit plans                       |   | (2,193                                   | )      |              | (2,668  | ) |
| Retained earnings – substantially    restricted                  |   | 32,661                                   |   |              | 33,245  |   |
| Accumulated other    comprehensive income, net                        |   | (534                                     | )      |              | (99     | ) |
| Treasury stock, at    cost (2,451,551 shares at December 31, 2004     |   |                                     |   |              |    |   |
| and 2,451,551 shares    at September 30, 2004)                        |   | (34,334                                  | )      |              | (34,391 | ) |
|                                                                  |        |                                          |   |                   |         |   |
| TOTAL STOCKHOLDER’S    EQUITY                                    |   | 58,145                                   |   |              | 58,458  |   |
|                                                                  |   |                                          |        |              |         |  |   |
|                                                                  |   |                                     |   |              |    |   |   |
| TOTAL LIABILITIES    AND STOCKHOLDERS’ EQUITY                    | $      | 833,700                                  |   | $                 | 836,035 |   |
|                                                                  |   |                                          |        |              |         |  |   |

See accompanying notes to the unaudited consolidated financial statements. 

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

|                                                                                      |                                              | **Three Months Ended** |   |
|-------------------------------------------------------------------------------------------|---------------------------------------------------|------------------------|--------|
|                                                                                      |                                              | **December 31,**       |   |
|                                                                                      |                                              | **2004**               |   |   | **2003** |   |
|                                                                                      |                                                   |                        |   |  |  |   |
|                                                                                      | **(dollars in thousands, except per share data)** |                   |
| INTEREST INCOME                                                                           |                                              |                   |   |   |   |   |
|       Interest and fees on loans                            | $                                                 | 6,273                  |   | $ | 7,581 |   |
|       Mortgage-related securities                           |                                              | 3,085                  |   |   | 1,931 |   |
|       Investment securities:                                |                                              |                   |   |   |   |   |
|          Taxable                             |                                              | 319                    |   |   | 1,011 |   |
|          Tax-exempt                          |                                              | 63                     |   |   | 206 |   |
|                                                                                      |                                                   |                        |   |  |  |   |
|       Total interest income                                 |                                              | 9,740                  |   |   | 10,729 |   |
|                                                                                      |                                                   |                        |   |  |  |   |
|                                                                                      |                                              |                   |   |   |   |   |
| INTEREST EXPENSE                                                                          |                                              |                   |   |   |   |   |
|       Deposits                                              |                                              | 1,902                  |   |   | 2,229 |   |
|       Federal Home Loan Bank advances and other borrowings  |                                              | 2,832                  |   |   | 2,976 |   |
|       Trust-preferred debt                                  |                                              | 315                    |   |   | 265 |   |
|                                                                                      |                                                   |                        |   |  |  |   |
|          Total interest expense              |                                              | 5,049                  |   |   | 5,470 |   |
|                                                                                      |                                                   |                        |   |  |  |   |
|                                                                                      |                                              |                   |   |   |   |   |
| NET INTEREST INCOME                                                                       |                                              | 4,691                  |   |   | 5,259 |   |
|                                                                                      |                                              |                   |   |   |   |   |
| Provision for loan losses                                                                 |                                              | -                      |   |   | 677 |   |
|                                                                                      |                                                   |                        |   |  |  |   |
| NET INTEREST INCOME AFTER                                                                 |                                              |                   |   |   |   |   |
|    PROVISION FOR LOAN LOSSES                                               |                                              | 4,691                  |   |   | 4,582 |   |
|                                                                                      |                                                   |                        |   |  |  |   |
|                                                                                      |                                              |                   |   |   |   |   |
| NONINTEREST INCOME                                                                        |                                              |                   |   |   |   |   |
|       Service charges and other fees                        |                                              | 687                    |   |   | 879 |   |
|       Insurance premium income                              |                                              | 877                    |   |   | 866 |   |
|       Trust income                                          |                                              | 223                    |   |   | 217 |   |
|       Gain on sale of:                                      |                                              |                   |   |   |   |   |
|          Assets acquired through foreclosure |                                              | (22                    | )      |   | - |   |
|          Loans                               |                                              | 57                     |   |   | 464 |   |
|          Available for sale securities       |                                              | -                      |   |   | - |   |
|       Other                                                 |                                              | 211                    |   |   | 259 |   |
|                                                                                      |                                                   |                        |   |  |  |   |
|          Total       noninterest income      |                                              | 2,033                  |   |   | 2,685 |   |
|                                                                                      |                                                   |                        |   |  |  |   |
|                                                                                      |                                              |                   |   |   |   |   |
| NONINTEREST EXPENSE                                                                       |                                              |                   |   |   |   |   |
|       Salaries and employee benefits                        |                                              | 4,069                  |   |   | 3,042 |   |
|       Occupancy costs                                       |                                              | 674                    |   |   | 678 |   |
|       Amortization of intangibles                           |                                              | 228                    |   |   | 244 |   |
|       Data processing costs                                 |                                              | 272                    |   |   | 311 |   |
|       Advertising                                           |                                              | 118                    |   |   | 158 |   |
|       Professional fees                                     |                                              | 969                    |   |   | 435 |   |
|       Federal Home Loan Bank and other charges              |                                              | 221                    |   |   | 237 |   |
|       Other                                                 |                                              | 745                    |   |   | 893 |   |
|                                                                                      |                                                   |                        |   |  |  |   |
|          Total noninterest expense           |                                              | 7,296                  |   |   | 5,998 |   |
|                                                                                      |                                                   |                        |   |  |  |   |
| Income (loss) before income taxes                                                         |                                              | (572                   | )      |   | 1,269 |   |
| Income taxes (benefit)                                                                    |                                              | (223                   | )      |   | 230 |   |
|                                                                                      |                                                   |                        |   |  |  |   |
|                                                                                      |                                              |                   |   |   |   |   |
| NET INCOME (LOSS)                                                                         | $                                                 | (349                   | )      | $ | 1,039 |   |
|                                                                                      |                                                   |                        |   |  |  |   |
|                                                                                      |                                              |                   |   |   |   |   |
| EARNINGS (LOSS) PER SHARE:                                                                |                                              |                   |   |   |   |   |
|       Basic                                                 | $                                                 | (0.09                  | )      | $ | 0.27 |   |
|       Diluted                                               |                                              | (0.09                  | )      |   | 0.25 |   |

See accompanying notes to the unaudited consolidated financial statements. 

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

|                                                                                                                                                                    |   | **Three Months Ended** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                                                                                                    |   | **December 31,**       |   |
|                                                                                                                                                                    |   | **2004**               |   |   | **2003** |   |
|                                                                                                                                                                    |        |                        |   |  |  |   |
|                                                                                                                                                                    |   | **(in thousands)**     |   |
| OPERATING ACTIVITIES                                                                                                                                                    |   |                   |   |   |   |   |
| Net income (loss)                                                                                                                                                       | $      | (349                   | )      | $ | 1,039 |   |
|       Adjustments to reconcile net income to net cash provided by                                                                         |   |                   |   |   |   |   |
|          operating activities:                                                                                             |   |                   |   |   |   |   |
|             Provision for loan losses                                                                       |   | -                      |   |   | 677 |   |
|             Provision for assets acquired through foreclosure                                               |   | -                      |   |   | 254 |   |
|             Depreciation                                                                                    |   | 274                    |   |   | 312 |   |
|             Amortization of intangibles                                                                     |   | 228                    |   |   | 244 |   |
|             Deferred income tax benefit                                                                     |   | (612                   | )      |   | (818 | ) |
|             ESOP shares committed to be released                                                            |   | 186                    |   |   | 186 |   |
|             Stock award expense                                                                             |   | 43                     |   |   | - |   |
|             Bank-owned life insurance income                                                                |   | (116                   | )      |   | (127 | ) |
|             Origination of loans held for sale                                                              |   | (1,814                 | )      |   | (8,556 | ) |
|             Proceeds from loans sold                                                                        |   | 2,536                  |   |   | 25,699 |   |
|             Amortization and accretion on:                                                                  |   |                   |   |   |   |   |
|                Held-to-maturity securities                                                   |   | -                      |   |   | (5 | ) |
|                Available-for-sale securities                                                 |   | 210                    |   |   | 385 |   |
|             Amortization of deferred loan fees                                                              |   | (98                    | )      |   | (154 | ) |
|             Write-down on assets      acquired through foreclosure                                          |   | 22                     |   |   | - |   |
|             (Gain) loss on sale of:                                                                         |   |                   |   |   |   |   |
|                   Loans                                                       |   | (57                    | )      |   | (464 | ) |
|                   Disposal of property and equipment                          |   | 2                      |   |   | 12 |   |
|       Changes in assets and liabilities:                                                                                                  |   |                   |   |   |   |   |
|             Increase in accrued interest receivable                                                         |   | (160                   | )      |   | (101 | ) |
|             Decrease (increase) in other assets                                                             |   | 1,257                  |   |   | (6,021 | ) |
|             Decrease in accrued interest payable                                                            |   | (94                    | )      |   | (197 | ) |
|             Decrease in other liabilities                                                                   |   | (897                   | )      |   | (1,861 | ) |
|                                                                                                                                                                    |        |                        |   |  |  |   |
|                      Net cash provided by operating activities |   | 561                    |   |   | 10,504 |   |
|                                                                                                                                                                    |        |                        |   |  |  |   |
|                                                                                                                                                                    |   |                   |   |   |   |   |
| INVESTING ACTIVITIES                                                                                                                                                    |   |                   |   |   |   |   |
| Net decrease in loans                                                                                                                                                   | $      | 1,087                  |   | $ | 11,288 |   |
| Proceeds from sale of:                                                                                                                                                  |   |                   |   |   |   |   |
|    Available-for-sale securities                                                                                                                         |   | -                      |   |   | 1,442 |   |
|    Assets acquired through foreclosure                                                                                                                   |   | 22                     |   |   | 311 |   |
| Proceeds from repayments of held-to-maturity securities                                                                                                                 |   | -                      |   |   | 845 |   |
| Proceeds from repayments of available-for-sale securities                                                                                                               |   | 16,645                 |   |   | 18,139 |   |
| Purchase of:                                                                                                                                                            |   |                   |   |   |   |   |
|    Available-for-sale securities                                                                                                                         |   | (2,000                 | )      |   | (4,935 | ) |
|    Office properties and equipment                                                                                                                       |   | (175                   | )      |   | (71 | ) |
|    Federal Home Loan Bank stock                                                                                                                          |   | (314                   | )      |   | (525 | ) |
|                                                                                                                                                                    |        |                        |   |  |  |   |
|                   Net cash provided by investing activities                   | $      | 15,265                 |   | $ | 26,494 |   |
|                                                                                                                                                                    |        |                        |   |  |  |   |

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

|                                                                                                             |   | **Three Months Ended** |   |
|------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                                             |   | **December 31,**       |   |
|                                                                                                             |   | **2004**               |   |   | **2003** |   |
|                                                                                                             |        |                        |   |  |  |   |
|                                                                                                             |   | **(in thousands)**     |   |
| FINANCING ACTIVITIES                                                                                             |   |                   |   |   |   |   |
|       Net decrease in deposit accounts                                             | $      | (1,437                 | )      | $ | (2,929 | ) |
|       Net decrease in Federal Home Loan Bank short-term advances                   |   | (20,000                | )      |   | (52,500 | ) |
|       Net increase (decrease) in Federal Home Loan Bank long-term advances         |   | (4                     | )      |   | 34,994 |   |
|       Net increase in advances from borrowers for taxes and insurance              |   | 556                    |   |   | 597 |   |
|       Net increase (decrease) in other borrowings                                  |   | 19,996                 |   |   | (56 | ) |
|       Stock issued for purchase of Higgins Insurance Associates, Inc.              |   | 100                    |   |   | 101 |   |
|       Cash dividend on common stock                                                |   | (238                   | )      |   | (501 | ) |
|       Stock options exercised                                                      |   | 238                    |   |   | 248 |   |
|                                                                                                             |        |                        |   |  |  |   |
|             Net cash used for financing activities   |   | (789                   | )      |   | (20,046 | ) |
|                                                                                                             |        |                        |   |  |  |   |
|                                                                                                             |   |                   |   |   |   |   |
|             Increase in cash and cash equivalents    |   | 15,037                 |   |   | 16,952 |   |
|                                                                                                             |   |                   |   |   |   |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                                     |   | 26,938                 |   |   | 20,142 |   |
|                                                                                                             |        |                        |   |  |  |   |
|                                                                                                             |   |                   |   |   |   |   |
| CASH AND CASH EQUIVALAENTS, END OF PERIOD                                                                        | $      | 41,975                 |   | $ | 37,094 |   |
|                                                                                                             |        |                        |   |  |  |   |
|                                                                                                             |   |                   |   |   |   |   |
| SUPPLEMENTAL INFORMATION                                                                                         |   |                   |   |   |   |   |
|    Cash paid during the period for:                                                               |   |                   |   |   |   |   |
|          Interest on deposits and borrowings                        | $      | 4,725                  |   | $ | 5,005 |   |
|          Income taxes                                               |   | 250                    |   |   | 56 |   |
|    Supplemental disclosures – non-cash and financing information:                            |   |                   |   |   |   |   |
|          Transfer from loans to assets acquired through foreclosure |   | 72                     |   |   | 932 |   |
|          Net change in other comprehensive income                   |   | (435                   | )      |   | (792 | ) |

See accompanying notes to the unaudited consolidated financial statements.

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**Northeast Pennsylvania FinancialCorp. Notes to Consolidated Financial Statements (unaudited)**

**1.** **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Business******

Northeast Pennsylvania Financial Corp. (the “Company”) is a thrift holding company organized under the laws of the state of Delaware. The Company’s principal subsidiary, First Federal Bank (“First Federal” orthe “Bank”), is a savings bank organized under the laws of the United States. The Bank provides a wide range of financial products and services to individual and corporate customers through its community offices in Northeastern and CentralPennsylvania. Such products include checking accounts, savings accounts, certificates of deposit, and commercial, consumer, real estate and home equity loans. The Bank is subject to competition from other financial institutions and other companiesthat provide financial services. The Company and the Bank are subject to the regulations of the Office of Thrift Supervision and undergo periodic examinations by that regulatory authority.

**Principles of Consolidation and Presentation**

The accompanying financial statements of the Company include the accounts of the Bank, Abstractors, Inc., Northeast Pennsylvania Trust Co. (the “Trust Co.”), Higgins Insurance Associates, Inc. (“Higgins”) and NEPCapital Trust I and II, all of which are wholly-owned subsidiaries of Northeast Pennsylvania Financial Corp. Abstractors, Inc. is a title insurance agency. The Trust Co. offers trust, estate and asset management services and products. Higginsprovides insurance and investment products to individuals and businesses. NEP Capital Trust I and NEP Capital Trust II are subsidiaries established in connection with trust preferred offerings. All material inter-company balances and transactionshave been eliminated in consolidation. Prior period amounts are reclassified, when necessary, to conform with the current period’s presentation. 

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

These financial statements do not contain all necessary disclosuresrequired by GAAP and therefore shouldbereadinconjunctionwiththeaudited financial statements and the notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended September 30, 2004. These financialstatements do contain all adjustments which management believes were necessaryin order to conform them to GAAP. TheresultsforthethreemonthsendedDecember31,2004arenotnecessarilyindicativeof the results that may be expected for the year ended September 30, 2005. 

**Risks and Uncertainties******

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

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

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**Stock Options******

The Company maintains stock option plans for officers, employees and directors. When the exercise price of the Company’s stock options is greater than or equal to the market price of the underlying stock on the date of the grant, nocompensation expense has been recognized in the Company’s financial statements.

In December 2004, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123R, *Share-Based Payment*, thataddresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’sequity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic value method under Accounting Principles Board(“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*, and generally would require instead that such transactions be accounted for using a fair-value-based method. SFAS 123R will beeffective for the Company beginning in its fourth quarter of fiscal year 2005. 

The Company, as currently permitted, has elected not to adopt the fair-value accounting provisions of SFAS No. 123 before the mandatory effective date, and has instead continued to apply APB Opinion No. 25 and related interpretations inaccounting for the plans and to provide the required proforma disclosures of SFAS No. 123; accordingly, no expense is recognized in the Consolidated Statement of Operations.

Pro forma net income and earnings per share are presented in the following table to reflect the impact of the stock option plans had the Company applied the fair-value recognition provisions of SFAS No. 123 to stock-based employeecompensation for the applicable periods:

|                                                 | **Three Months Ended**                            |     |
|------------------------------------------------------|---------------------------------------------------|----------|
|                                                 | **December 31,**                                  |     |
|                                                 |                                              | **2004** |   |   | **2003** |   |
|                                                 |                                                   |          |   |  |  |   |
|                                                 | **(dollars in thousands, except per share data)** |     |
|                                                 |                                              |     |   |   |   |   |
| Net income (loss), as reported:                      | $                                                 | (349     | ) | $ | 1,039 |   |
| Less: proforma expense related                       |                                              |     |   |   |   |   |
|       to stock options | $                                                 | 44       |   | $ | 68 |   |
|                                                 |                                                   |          |   |  |  |   |
|                                                 |                                              |     |   |   |   |   |
| Proforma net income (loss)                           | $                                                 | (393     | ) | $ | 971 |   |
|                                                 |                                                   |          |   |  |  |   |
|                                                 |                                              |     |   |   |   |   |
| Basic net income (loss) per common share:            |                                              |     |   |   |   |   |
|       As reported      | $                                                 | (0.09    | ) | $ | 0.27 |   |
|       Pro forma        |                                              | (0.10    | ) |   | 0.25 |   |
|                                                 |                                              |     |   |   |   |   |
| Diluted net income (loss) per common share:          |                                              |     |   |   |   |   |
|       As reported      | $                                                 | (0.09    | ) | $ | 0.25 |   |
|       Pro forma        |                                              | (0.10    | ) |   | 0.24 |   |

The effects on pro forma net income (loss) and diluted earningsper share of applying the disclosure requirement of SFAS No. 123 in past yearsmaynotbe representative of the future pro forma effects on net income (loss) and EPSdue to the vesting provisions of the options and future awards that are availableto be granted.

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**2. ACQUISITION**

On December 8, 2004, KNBT Bancorp, Inc. (“KNBT”), the parent company of Keystone Nazareth Bank & Trust Company, and the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant towhich the Company will merge with and into KNBT. Concurrently with the merger, it is expected that First Federal will merge with Keystone Nazareth Bank & Trust Company. 

Under the terms of the Merger Agreement, the Company’s stockholdersmay elect to receive either $23.00 of KNBT common stock or $23.00 in cash inexchange for their shares of common stock, subject to an overall requirementthat 50%  of the total outstanding Company common stock be exchanged for KNBTcommon stock and 50% for cash. To the extent they receive shares of KNBT, thetransaction is expected to be tax-free to the Company’s stockholders. 

The number of shares of KNBT common stock into which each Companyshare will be exchanged will be based on the price of KNBT common stock overa measurementperiod prior to closing. 

In addition, each director of the Company entered into a Shareholder Agreement with KNBT, pursuant to which each such person agreed, among other things, to vote his or her shares of common stock in favor of the Merger Agreement at ameeting of stockholders to be called to consider and approve the Merger Agreement. The merger is subject to appropriate regulatory and stockholder approvals. Additionally, the Merger Agreement contains certain operating restrictions on the Companyfrom the date of the Merger Agreement until the closing.****

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**3.** **EARNINGS (LOSS) PER SHARE**

Earnings (loss) per share (“EPS”), basic and diluted,were $(0.09) and $(0.09), respectively, for the three months ended December 31,2004comparedto $0.27 and $0.25, respectively, for the three months ended December 31, 2003.

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

|                                                                   | **Three Months Ended** |       |
|------------------------------------------------------------------------|------------------------|------------|
|                                                                   | **December 31,**       |       |
|                                                                   |                   |       |   |   |   |   |
|                                                                   |                   | **2004**   |   |   | **2003** |   |
|                                                                   |                        |            |   |  |  |   |
|                                                                   |                   |       |   |   |   |   |
| Net income (loss)                                                      | $                      | (349       | ) | $ | 1,039 |   |
|                                                                   |                        |            |   |  |  |   |
|                                                                   |                   |       |   |   |   |   |
| Weighted-average common shares outstanding                             |                   | 6,427,350  |   |   | 6,427,350 |   |
|                                                                   |                   |       |   |   |   |   |
| Average treasury stock shares                                          |                   | (2,451,551 | ) |   | (2,250,700 | ) |
|                                                                   |                   |       |   |   |   |   |
| Average common stock acquired by stock benefit plans:                  |                   |       |   |   |   |   |
|       Stock employee compensation trust  |                   | (38,810    | ) |   | (55,103 | ) |
|       Stock awards unallocated, net      |                   | (15,209    | ) |   | (46,092 | ) |
|       ESOP shares unallocated, net       |                   | (162,686   | ) |   | (256,536 | ) |
|                                                                   |                        |            |   |  |  |   |
|                                                                   |                   |       |   |   |   |   |
| Weighted-average common shares used                                    |                   |       |   |   |   |   |
|    to calculate basic earnings (loss) per       share   |                   | 3,759,094  |   |   | 3,818,919 |   |
|                                                                   |                   |       |   |   |   |   |
| Dilutive effect of stock awards                                        |                   | -          |   |   | 44,693 |   |
|                                                                   |                   |       |   |   |   |   |
| Dilutive effect of outstanding stock options                           |                   | -          |   |   | 220,962 |   |
|                                                                   |                        |            |   |  |  |   |
|                                                                   |                   |       |   |   |   |   |
| Weighted-average common shares used                                    |                   |       |   |   |   |   |
|    to calculate diluted earnings (loss) per       share |                   | 3,759,094  |   |   | 4,084,574 |   |
|                                                                   |                        |            |   |  |  |   |
|                                                                   |                   |       |   |   |   |   |
| Earnings (loss) per share-basic                                        | $                      | (0.09      | ) | $ | 0.27 |   |
| Earnings (loss) per share-diluted                                      | $                      | (0.09      | ) | $ | 0.25 |   |

Diluted earnings per share include the dilutive effect of the Company’sweighted-average stock options/awards outstanding using the Treasury Stock methodfor the three months ended December 31, 2003. Due to the loss for the three monthsended December 31, 2004 there was no dilutive effect on the calculation.The Company had anti-dilutive common stock options outstanding of 23,000 and 32,000 for the three months ended December 31, 2004 and 2003, respectively.Anti-dilutive shares are those stock options with weighted average exercise pricesin excess of the weighted average current market value for the three months endedDecember31, 2004 and 2003. These options are not included in the calculation of dilutedearnings (loss) per share for the periods presented.

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**4. SECURITIES**

The following table summarizes the estimated fair value of securities with gross unrealized losses at December 31, 2004, segregated between securities that have been in a continuous unrealized loss position for less than twelve monthsand those that have been in a continuous unrealized loss position for twelve months or longer. 

|                                                      | **Less Than**      |    | **Twelve Months** |           |           |   |
|-----------------------------------------------------------|--------------------|---------|-------------------|----------------|----------------|--------|
|                                                      | **Twelve Months**  |    | **Or Longer**     |           | **Total**      |   |
|                                                      |                    |    |                   |           |                |   |
|                                                      |               |    |              | **Unrealized** |           |   |   |   | **Unrealized** |   |   |   |   | **Unrealized** |   |
|                                                      | **Fair Value**     |    | **Losses**        |           | **Fair Value** |   | **Losses** |   | **Fair Value** |   | **Losses** |   |
|                                                      |                    |    |                   |                |           |        |   |  |  |   |  |   |  |   |
|                                                      | **(in thousands)** |    |
|    Municipal securities                    | $                  | 635     |              | $              | (4             | )      | $ | 683 |   | $ | (1 | ) | $ | 1,318 |   | $ | (5 | ) |
|    Obligations of U.S. Government agencies |               | 10,285  |              |           | (83            | )      |   | - |   |   | - |   |   | 10,285 |   |   | (83 | ) |
|    Mortgage-related securities             |               | 173,050 |              |           | (2,132         | )      |   | 31,492 |   |   | (456 | ) |   | 204,542 |   |   | (2,588 | ) |
|                                                      |                    |         |              |                |                |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Total debt securities                                     |               | 183,970 |              |           | (2,219         | )      |   | 32,175 |   |   | (457 | ) |   | 216,145 |   |   | (2,676 | ) |
|                                                      |               |    |              |           |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    FNMA Stock                              |               | 1,980   |              |           | (20            | )      |   | - |   |   | - |   |   | 1,980 |   |   | (20 | ) |
|    Other equity securities                 |               | -       |              |           | -              |   |   | 12 |   |   | (5 | ) |   | 12 |   |   | (5 | ) |
|                                                      |                    |         |              |                |                |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Total equity securities                                   |               | 1,980   |              |           | (20            | )      |   | 12 |   |   | (5 | ) |   | 1,992 |   |   | (25 | ) |
|                                                      |                    |         |              |                |                |   |  |  |   |  |  |   |  |  |   |  |  |   |
|       Total                 | $                  | 185,950 |              | $              | (2,239         | )      | $ | 32,187 |   | $ | (462 | ) | $ | 218,137 |   | $ | (2,701 | ) |
|                                                      |                    |         |              |                |                |   |  |  |   |  |  |   |  |  |   |  |  |   |

Management does not believe any individual unrealized loss as of December 31, 2004 represents an other-than-temporary impairment. The temporary impairment is directly related to changes in market interest rates. In general, as interestrates rise, the fair value of fixed-rate securities will decrease and, as interest rates fall, the fair value of fixed-rate securities will increase. The severity of the impairment as a percent of the total investment position is nominal and theduration of the impairment to date is short. The impairments are deemed temporary based on the direct relationship of the decline in fair value to movements in interest rates, as well as the relatively short duration of the investments and theirhigh credit quality. 

Securities that have been impaired greater than twelve months include primarily mortgage-related securities. The decline in the market value of these securities was deemed temporary due to positive factors supporting the recoverabilityof these investments. Positive factors considered include timely principal and interest payments and the financial health of the issuer.

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Securities are summarized as follows: 

|                                                        |          |    | **December 31, 2004** |   |           |   |
|-------------------------------------------------------------|---------------|---------|-----------------------|--------|----------------|--------|
|                                                        |          |    | **(in thousands)**    |   |           |   |
|                                                        |          |    | **Gross**             |   | **Gross**      |   | **Estimated** |   |
|                                                        | **Amortized** |    | **Unrealized**        |   | **Unrealized** |   | **Market** |   |
| **Available-for-sale securities:**                          | **Cost**      |    | **Gains**             |   | **Losses**     |   | **Value** |   |
|                                                        |               |    |                       |   |                |   |  |   |
|                                                        |          |    |                  |   |           |   |   |   |   |   |   |   |
|                                                        |          |    |                  |   |           |   |   |   |   |   |   |   |
|    Municipal securities                      | $             | 4,765   |                  | $      | 50             |   | $ | (5 | ) | $ | 4,810 |   |
|    Obligations of U.S. Government agencies   |          | 12,361  |                  |   | 7              |   |   | (83 | ) |   | 12,285 |   |
|    Mortgage-related securities               |          | 310,737 |                  |   | 1,283          |   |   | (2,588 | ) |   | 309,432 |   |
|                                                        |               |         |                  |        |                |   |  |  |   |  |  |   |
| Total debt securities                                       |          | 327,863 |                  |   | 1,340          |   |   | (2,676 | ) |   | 326,527 |   |
|                                                        |          |    |                  |   |           |   |   |   |   |   |   |   |
|    FHLB Stock                                |          | 13,323  |                  |   | -              |   |   | - |   |   | 13,323 |   |
|    FNMA Stock                                |          | 2,000   |                  |   | -              |   |   | (20 | ) |   | 1,980 |   |
|    Other equity securities                   |          | 79      |                  |   | 28             |   |   | (5 | ) |   | 102 |   |
|                                                        |               |         |                  |        |                |   |  |  |   |  |  |   |
| Total equity securities                                     |          | 15,402  |                  |   | 28             |   |   | (25 | ) |   | 15,405 |   |
|                                                        |          |    |                  |   |           |   |   |   |   |   |   |   |
|       Total                   | $             | 343,265 |                  | $      | 1,368          |   | $ | (2,701 | ) | $ | 341,932 |   |
|                                                        |               |         |                  |        |                |   |  |  |   |  |  |   |
|                                                        |          |    |                  |   |           |   |   |   |   |   |   |   |
| **Held-to-maturity securities:**                            |          |    |                  |   |           |   |   |   |   |   |   |   |
|                                                        |          |    |                  |   |           |   |   |   |   |   |   |   |
|    Municipal securities                      |          | 998     |                  |   | 16             |   |   | - |   |   | 1,014 |   |
|                                                        |               |         |                  |        |                |   |  |  |   |  |  |   |
|          Total | $             | 998     |                  | $      | 16             |   | $ | - |   | $ | 1,014 |   |
|                                                        |               |         |                  |        |                |   |  |  |   |  |  |   |

|                                                        |          |    | **September 30, 2004** |   |           |   |
|-------------------------------------------------------------|---------------|---------|------------------------|--------|----------------|--------|
|                                                        |          |    |                        |   |           |   |
|                                                        |          |    | **(in thousands)**     |   |           |   |
|                                                        |          |    | **Gross**              |   | **Gross**      |   | **Estimated** |   |
|                                                        | **Amortized** |    | **Unrealized**         |   | **Unrealized** |   | **Market** |   |
| **Available-for-sale securities:**                          | **Cost**      |    | **Gains**              |   | **Losses**     |   | **Value** |   |
|                                                        |               |    |                        |   |                |   |  |   |
|                                                        |          |    |                   |   |           |   |   |   |   |   |   |   |
|                                                        |          |    |                   |   |           |   |   |   |   |   |   |   |
|    Municipal securities                      | $             | 4,767   |                   | $      | 47             |   | $ | (2 | ) | $ | 4,812 |   |
|    Obligations of U.S. Government agencies   |          | 10,384  |                   |   | -              |   |   | (63 | ) |   | 10,321 |   |
|    Mortgage-related securities               |          | 327,568 |                   |   | 1,716          |   |   | (2,303 | ) |   | 326,981 |   |
|                                                        |               |         |                   |        |                |   |  |  |   |  |  |   |
| Total debt securities                                       |          | 342,719 |                   |   | 1,763          |   |   | (2,368 | ) |   | 342,114 |   |
|                                                        |          |    |                   |   |           |   |   |   |   |   |   |   |
|    FHLB Stock                                |          | 13,009  |                   |   | -              |   |   | - |   |   | 13,009 |   |
|    FNMA Stock                                |          | 2,000   |                   |   | 5              |   |   | - |   |   | 2,005 |   |
|    Other equity securities                   |          | 79      |                   |   | 23             |   |   | (7 | ) |   | 95 |   |
|                                                        |               |         |                   |        |                |   |  |  |   |  |  |   |
| Total equity securities                                     |          | 15,088  |                   |   | 28             |   |   | (7 | ) |   | 15,109 |   |
|                                                        |          |    |                   |   |           |   |   |   |   |   |   |   |
|       Total                   | $             | 357,807 |                   | $      | 1,791          |   | $ | (2,375 | ) | $ | 357,223 |   |
|                                                        |               |         |                   |        |                |   |  |  |   |  |  |   |
|                                                        |          |    |                   |   |           |   |   |   |   |   |   |   |
| **Held-to-maturity securities:**                            |          |    |                   |   |           |   |   |   |   |   |   |   |
|                                                        |          |    |                   |   |           |   |   |   |   |   |   |   |
|    Municipal securities                      |          | 998     |                   |   | 17             |   |   | - |   |   | 1,015 |   |
|                                                        |               |         |                   |        |                |   |  |  |   |  |  |   |
|          Total | $             | 998     |                   | $      | 17             |   | $ | - |   | $ | 1,015 |   |
|                                                        |               |         |                   |        |                |   |  |  |   |  |  |   |

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**5.** **LOANS**

Loans are summarized as follows:****

|                                                                                                                                                                                             | **December 31,**   |    | **September 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------|---------|-------------------|--------|
|                                                                                                                                                                                             |                    |    |                   |   |
|                                                                                                                                                                                             | **2004**           |    | **2004**          |   |
|                                                                                                                                                                                             |                    |    |                   |   |
|                                                                                                                                                                                             | **(in thousands)** |    |
|                                                                                                                                                                                             |               |    |              |   |
|          **Real Estate Loans:**                                                                                                                     |               |    |              |   |   |   |
|             One-to-four family                                                                                                       | $                  | 108,798 |              | $      | 112,186 |   |
|             Multi-family and commercial                                                                                              |               | 71,164  |              |   | 71,138 |   |
|             Construction                                                                                                             |               | 5,234   |              |   | 4,899 |   |
|                                                                                                                                                                                             |               |         |              |   |  |   |
|                                                                                                                                                                                             |               |    |              |   |   |   |
|             Total real estate loans                                                                                                  |               | 185,196 |              |   | 188,223 |   |
|                                                                                                                                                                                             |               |         |              |   |  |   |
|                                                                                                                                                                                             |               |    |              |   |   |   |
|          **Consumer Loans:**                                                                                                                        |               |    |              |   |   |   |
|                Home equity loans and lines of credit                                                                  |               | 71,580  |              |   | 69,400 |   |
|                Automobile                                                                                             |               | 91,414  |              |   | 101,148 |   |
|                Unsecured lines of credit                                                                              |               | 4,337   |              |   | 4,424 |   |
|                   Other                                                                                |               | 15,774  |              |   | 9,387 |   |
|                                                                                                                                                                                             |               |         |              |   |  |   |
|                         Total consumer loans                             |               | 183,105 |              |   | 184,359 |   |
|                                                                                                                                                                                             |               |         |              |   |  |   |
|          **Commercial Loans**                                                                                                                       |               | 42,408  |              |   | 40,473 |   |
|                                                                                                                                                                                             |               |         |              |   |  |   |
|                         Total Loans                                      |               | 410,709 |              |   | 413,055 |   |
|                                                                                                                                                                                             |               |    |              |   |   |   |
|                         Less:                                            |               |    |              |   |   |   |
|                            Allowance for loan losses      |               | (8,248  | )                 |   | (8,446 | ) |
|                            Deferred loan origination fees |               | (911    | )                 |   | (1,025 | ) |
|                                                                                                                                                                                             |               |         |              |   |  |   |
|                                                                                                                                                                                             |               |    |              |   |   |   |
|                      **Total loans, net**                                               | $                  | 401,550 |              | $      | 403,584 |   |
|                                                                                                                                                                                             |                    |         |              |        |  |   |

|                                                                        |               |               |               |   |   |   |
|-----------------------------------------------------------------------------|--------------------|--------------------|--------------------|--------|--------|--------|
| The activity in the allowance for loan losses is as follows (in thousands): |               |               |               |   |   |   |
|                                                                        |               |               |               |   |   |   |
|                                                                        | **At and for the** |               |               |   |
|                                                                        | **Three Months**   |               | **At and for the** |   |
|                                                                        | **Ended**          |               | **Year Ended**     |   |
|                                                                        | **December 31,**   |               | **September 30,**  |   |
|                                                                        | **2004**           |               | **2004**           |   |
|                                                                        |                    |               |                    |   |
|                                                                        |               | **(in thousands)** |               |
|                                                                        |               |               |               |   |   |   |
| Balance, beginning                                                          | $                  | 8,446              |               | $      | 10,196 |   |
|    Transfer due to sale of direct automobile loans           |               | -                  |               |   | (1,557 | )      |
|       Provisions charged to income            |               | -                  |               |   | 1,444  |   |
|       Charge-offs                             |               | (334               | )                  |   | (2,106 | )      |
|       Recoveries                              |               | 136                |               |   | 469    |   |
|                                                                        |                    |                    |               |        |        |   |
|                                                                        |               |               |               |   |   |   |
| Balance, ending                                                             | $                  | 8,248              |               | $      | 8,446  |   |
|                                                                        |                    |                    |               |        |        |   |

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**6.** **ASSET SECURITIZATION**

In June 2002, the Bank sold $50.0 million in automobile loan receivables through a securitization transaction.  In the transaction, automobile loan receivables were transferred to an independent trust (the “Trust”) that issuedcertificates 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 forfinancial reporting purposes to the extent of the investors’ interest in the Trust.  Accordingly, the receivables associated with the investors’ interests are not reflected on the Consolidated Statement of Financial Condition. Inconnection with this transaction, the Bank enhanced the credit protection of the certificate holders by funding a cash reserve account. 

At the time of the transaction, the Bank also recognized a retained interest related to the loan sale, which includes an Interest-Only Strip and cash reserve account. The cash reserve account is subject to liens by the providers of thecredit enhancement facilities for the securitization.

As of December 31, 2004, the balance of automobile loan receivables in the Trust was $8.7 million.  Because the historical performance of the receivables met the established criteria as of September 30, 2003, the balance of the cashreserve account was reduced from 4.75% to 3.00% of the original balance at that time. The aggregate balance of the retained interest totaled approximately $1.4 million at December 31, 2004. 

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

| Retained interest                                                | **December 31, 2004** |   |
|------------------------------------------------------------------|-----------------------|--------|
|                                                             |                       |   |
|    Average annual repayment rate                  | 1.5                   | %      |
|    Average annual expected default rate           | 3.0                   | %      |
|    Discount rate                                  | 10.0                  | %      |
|    Weighted average life of underlying automobile |                  |   |
|       loans                        | 24 months             |   |

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

|                                                                       | **December 31, 2004** |   |
|----------------------------------------------------------------------------|-----------------------|--------|
|                                                                       |                       |   |
|                                                                       | **(in thousands)**    |   |
|                                                                       |                  |   |   |
| Fair value of retained interest                                            | $                     | 1,437  |   |
|                                                                       |                  |   |   |
| Weighted-average repayment rate assumption:                                |                  |   |   |
|    Pre-tax decrease to earnings due to a 10% adverse change | $                     | 10     |   |
|    Pre-tax decrease to earnings due to a 20% adverse change | $                     | 9      |   |
|                                                                       |                  |   |   |
| Weighted-average expected default rate:                                    |                  |   |   |
|    Pre-tax decrease to earnings due to a 10% adverse change | $                     | 11     |   |
|    Pre-tax decrease to earnings due to a 20% adverse change | $                     | 23     |   |
|                                                                       |                  |   |   |
| Weighted-average discount rate:                                            |                  |   |   |
|    Pre-tax decrease to earnings due to a 10% adverse change | $                     | 9      |   |
|    Pre-tax decrease to earnings due to a 20% adverse change | $                     | 18     |   |

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 adversevariation 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 mayresult in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities. 

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**7.** **DEPOSITS**

Deposits consist of the following major classifications: 

|                             |           |   | **December 31, 2004** |    | **September 30, 2004** |   |
|----------------------------------|----------------|--------|-----------------------|---------|------------------------|--------|
|                             |           |   |                       |    |                        |   |
|                             |           |   |                  |    | **Percent**            |   |   |   | **Percent** |   |
|                             |           |   | **Amount**            |    | **of Total**           |   | **Amount** |   | **of Total** |   |
|                             |           |   |                       |    |                        |   |  |   |  |   |
|                             |           |   | **(in thousands)**    |    |
|                             |           |   |                  |    |                   |   |   |   |   |   |   |   |
| Noninterest-bearing              |           | $      | 41,785                |    | 8.67                   | %      | $ | 36,676 |   | 7.59 | % |
|                             |           |   |                  |    |                   |   |   |   |   |   |   |
| Interest bearing:                |           |   |                  |    |                   |   |   |   |   |   |   |
| Savings                          |           |   | 90,344                |    | 18.74                  | %      |   | 92,626 |   | 19.16 | % |
| NOW accounts                     |           |   | 84,595                |    | 17.55                  | %      |   | 81,150 |   | 16.78 | % |
| Money market                     |           |   | 68,872                |    | 14.29                  | %      |   | 75,164 |   | 15.55 | % |
|                             |           |        |                       |    |                        |   |  |  |   |  |   |
|                             |           |   |                  | 285,596 |                   | 59.25  | % |   | 285,616 |   | 59.08 | % |
|                             |           |   |                       |         |                   |        |   |  |  |   |  |   |
|                             |           |   |                  |    |                   |   |   |   |   |   |   |   |
| Brokered CD’s               |           |   | 10,000                |    | 2.07                   | %      |   | 10,000 |   | 2.07 | % |
| Certificates of deposit $100,000 |           |   |                  |    |                   |   |   |   |   |   |   |
|    or greater     |           |   | 26,366                |    | 5.47                   | %      |   | 26,046 |   | 5.39 | % |
| Certificates of deposit less     |           |   |                  |    |                   |   |   |   |   |   |
|    than $100,000  |           |   | 160,042               |    | 33.21                  | %      |   | 161,779 |   | 33.46 | % |
|                             |           |   |                       |         |                   |        |   |  |  |   |  |   |
|                             |           |   |                  | 196,408 |                   | 40.75  | % |   | 197,825 |   | 40.92 | % |
|                             |           |   |                       |         |                   |        |   |  |  |   |  |   |
|                             | Total deposits |   | $                     | 482,004 |                   | 100.00 | % | $ | 483,441 |   | 100.00 | % |
|                             |           |   |                       |         |                   |        |   |  |  |   |  |   |

**8.** **FEDERAL HOME LOAN BANK ADVANCES**

Under terms of its collateral agreement with the Federal Home Loan Bank of Pittsburgh (the “FHLB”), the Bank maintains otherwise unencumbered qualifying assets (principally one-to-four family residential mortgage loans andU.S. Government and Agency notes and bonds) in the amount of at least as much as its advances from the FHLB. The Bank’s FHLB stock is also pledged to secure these advances. Advances from the FHLB with fixed rates ranging from 2.00% to 6.71% atDecember 31, 2004 are due as follows: 

|                                      |   |             |   | **December 31,**     |    |
|-------------------------------------------|--------|------------------|--------|----------------------|---------|
|                                      |   | **Weighted**     |   | **2004**             |    |
| **   Due by December 31,** |   | **Average Rate** |   | **Amount**           |    |
|                                           |   |                  |   |                      |    |
|                                      |   |             |   | **($ in thousands)** |    |
|                                      |   |             |   |                 |    |   |
| 2005                                      |   | 4.67             | %      | $                    | 107,000 |   |
| 2006                                      |   | 2.46             |   |                 | 27,079  |   |
| 2007                                      |   | 3.26             |   |                 | 40,000  |   |
| 2008                                      |   | 4.89             |   |                 | 10,000  |   |
| 2009                                      |   | -                |   |                 | -       |   |
| Thereafter                                |   | 5.40             |   |                 | 39,388  |   |
|                                      |   |                  |   |                      |         |   |
|                                      |   |             |   |                 |    |   |
| Total FHLB advances                       |   | 4.29             | %      | $                    | 223,467 |   |
|                                      |   |                  |   |                      |         |   |

|                                       |   |             |   | **September 30,**    |    |
|--------------------------------------------|--------|------------------|--------|----------------------|---------|
|                                       |   | **Weighted**     |   | **2004**             |    |
| **   Due by September 30,** |   | **Average Rate** |   | **Amount**           |    |
|                                            |   |                  |   |                      |    |
|                                       |   |             |   | **($ in thousands)** |    |
|                                       |   |             |   |                 |    |   |
| 2005                                       |   | 6.34             | %      | $                    | 52,000  |   |
| 2006                                       |   | 3.50             |   |                 | 102,000 |   |
| 2007                                       |   | 3.26             |   |                 | 40,080  |   |
| 2008                                       |   | 4.89             |   |                 | 10,000  |   |
| 2009                                       |   | -                |   |                 | -       |   |
| Thereafter                                 |   | 5.40             |   |                 | 39,787  |   |
|                                       |   |                  |   |                      |         |   |
|                                       |   |             |   |                 |    |   |
| Total FHLB advances                        |   | 4.43             | %      | $                    | 243,867 |   |
|                                       |   |                  |   |                      |         |   |

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**9.** **TRUST PREFERRED SECURITIES**

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

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

A summary of the trust securities issued and outstanding at December 31, 2004 is as follows: 

|                 |   |            |   |     |   | **Prepayment** |   |         |   | **Distribution** |
|----------------------|--------|-----------------|--------|----------|--------|----------------|--------|--------------|--------|------------------|
|                 |   | **Amount**      |   |     |   | **Option**     |   |         |   | **Payment**      |
| **Name**             |   | **Outstanding** |   | **Rate** |   | **Date**       |   | **Maturity** |   | **Frequency**    |
|                      |   |                 |   |          |   |                |   |              |   |                  |
|                 |   |            |   |     |   |           |   |         |   |             |
| NEP Capital Trust I  | $      | 7,217,000       |   | 6.00     | %      | 4/22/2007      |   | 4/22/2032    |   | Semi-annually    |
| NEP Capital Trust II | $      | 15,464,000      |   | 5.74     | %      | 11/7/2007      |   | 11/7/2032    |   | Quarterly        |

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**10. GOODWILL AND OTHER INTANGIBLE ASSETS**

A summary of goodwill is as follows: 

|                                                                                           | **At December 31, 2004 and September 30, 2004** |   |
|------------------------------------------------------------------------------------------------|-------------------------------------------------|--------|
|                                                                                           |                                                 |   |
|                                                                                           | **Gross**                                       |   | **Net** |   |   |   |
|                                                                                           | **Carrying**                                    |   | **Accumulated** |   | **Carrying** |   |
|                                                                                           | **Amount**                                      |   | **Amortization** |   | **Amount** |   |
|                                                                                           |                                                 |   |  |   |  |   |
| Acquisition of:                                                                                | **(in thousands)**                              |   |
|       Abstractors                                                | $                                               | 248    |   | $ | (160 | ) | $ | 88 |   |
|          Security Savings Association of Hazleton |                                            | 571    |   |   | (28 | ) |   | 543 |   |
|          Higgins Insurance Associates, Inc.       |                                            | 2,519  |   |   | (95 | ) |   | 2,424 |   |
|          Schuylkill Savings and Loan Association  |                                            | 200    |   |   | - |   |   | 200 |   |
|                                                                                           |                                                 |        |   |  |  |   |  |  |   |
|                                                                                           |                                            |   |   |   |   |   |   |   |   |
|    Total goodwill                                                               | $                                               | 3,538  |   | $ | (283 | ) | $ | 3,255 |   |
|                                                                                           |                                                 |        |   |  |  |   |  |  |   |

At December 31, 2004 and September 30, 2004, $75,000 of the Company’s acquired intangible assets were considered to be indefinite lived and not subject to amortization. This intangible represents title plant related to theacquisition of Abstractors. The components for intangible assets were as follows: 

|                                                                                   |               |   | **December 31, 2004** |   | **September 30, 2004** |   |
|----------------------------------------------------------------------------------------|--------------------|--------|-----------------------|--------|------------------------|--------|
|                                                                                   |               |   |                  |   |                   |   |   |   |   |   |   |   |
|                                                                                   | **Gross**          |   |                  |   | **Net**                |   | **Gross** |   |   |   | **Net** |   |
|                                                                                   | **Carrying**       |   | **Accumulated**       |   | **Carrying**           |   | **Carrying** |   | **Accumulated** |   | **Carrying** |   |
| **Other Intangible Assets**                                                            | **Amount**         |   | **Amortization**      |   | **Amount**             |   | **Amount** |   | **Amortization** |   | **Amount** |   |
|                                                                                   |                    |   |                       |   |                        |   |  |   |  |   |  |   |
|                                                                                   | **(in thousands)** |   | **(in thousands)**    |   |
|                                                                                   |               |   |                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Security Savings Association of                                      |               |   |                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|          Hazleton core deposit intangible | $                  | 9,086  |                  | $      | (2,852                 | )      | $ | 6,234 |   | $ | 9,086 |   | $ | (2,684 | ) | $ | 6,402 |   |
|    Schuylkill Savings and Loan                                          |               |   |                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       Association core deposit intangible                |               | 255    |                  |   | (80                    | )      |   | 175 |   |   | 255 |   |   | (74 | ) |   | 181 |   |
|    Other intangibles                                                    |               | 942    |                  |   | (520                   | )      |   | 422 |   |   | 942 |   |   | (471 | ) |   | 471 |   |
|                                                                                   |                    |        |                  |        |                        |   |  |  |   |  |  |   |  |  |   |  |  |   |
|                                                                                   |               |   |                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Total amortizing intangibles                                         |               | 10,283 |                  |   | (3,452                 | )      |   | 6,831 |   |   | 10,283 |   |   | (3,229 | ) |   | 7,054 |   |
|    Nonamortizing intangible assets                                      |               |   |                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|          Other intangible assets          |               | 75     |                  |   | -                      |   |   | 75 |   |   | 75 |   |   | - |   |   | 75 |   |
|                                                                                   |                    |        |                  |        |                        |   |  |  |   |  |  |   |  |  |   |  |  |   |
|                                                                                   |               |   |                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Total other intangible assets                                        | $                  | 10,358 |                  | $      | (3,452                 | )      | $ | 6,906 |   | $ | 10,358 |   | $ | (3,229 | ) | $ | 7,129 |   |
|                                                                                   |                    |        |                  |        |                        |   |  |  |   |  |  |   |  |  |   |  |  |   |

Amortization expense of other amortizing intangible assets for the three months ended December 31, 2004 and December 31, 2003 is as follows: 

|                         | **For the Three Months Ended** |   |
|------------------------------|--------------------------------|--------|
|                         | **December 31,**               |   |
|                         | **2004**                       |   | **2003** |   |
|                         |                                |   |  |   |
|                         | **(in thousands)**             |   |
|                         |                           |   |   |   |   |   |
| Core deposit intangibles     | $                              | 174    |   | $ | 111 |   |
| Other amortizing intangibles |                           | 54     |   |   | 133 |   |
|                         |                                |        |   |  |  |   |
|                         |                           |   |   |   |   |   |
| Total amortizing intangibles | $                              | 228    |   | $ | 244 |   |
|                         |                                |        |   |  |  |   |

There were no intangible assets acquired during the three months ended December 31, 2004. 

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**11. DERIVATIVE FINANCIAL INSTRUMENTS**

First Federal uses interest rate swaps to hedge the impact of changing interest rates on market values of certain fixed rate FHLB borrowings. Under the terms of the swaps, First Federal receives fixed-rate payments and paysvariable-rate payments based on 3 month LIBOR. The fixed-rate swap payments received by First Federal equal the amounts payable to the FHLB, effectively converting the FHLB borrowings to a variable rate. Changes in the fair value of the swaps arehighly effective in offsetting changes in the fair value of the FHLB borrowings, since the structure of the critical terms of the swaps match the FHLB borrowings. 

The following table summarizes First Federal’s derivative financial instruments as of December 31, 2004: 

| **Notional** |   |   | **Market** |   |         |               | **Receive** |    |             |
|--------------|--------|--------|------------|--------|--------------|--------------------|-------------|---------|------------------|
| **Amount**   |   |   | **Value**  |   | **Maturity** |               | **Fixed**   |    | **Pay Floating** |
|              |   |   |            |   |              |               |             |    |                  |
|         |   |   |       |   |         | **(in thousands)** |        |    |             |   |
|         |   |   |       |   |         |               |        |         |             |   |
| $            | 5,000  |   | $          | (85    | )            | 2/23/2011          |        | 5.1800% |             | 3 month LIBOR + 1.74% |
|         | 5,000  |   |       | (126   | )            | 2/23/2011          |        | 4.9900% |             | 3 month LIBOR + 1.74% |
|         | 10,000 |   |       | (235   | )            | 4/23/2014          |        | 5.4050% |             | 3 month LIBOR + 1.73% |
|         | 20,000 |   |       | (461   | )            | 5/21/2014          |        | 5.6000% |             | 3 month LIBOR + 1.87% |
|              |        |   |            |        |         |               |        |         |             |   |
| $            | 40,000 |   | $          | (907   | )            |               |        |         |             |   |
|              |        |   |            |        |         |               |        |         |             |   |

Since the terms of the interest rate swap mirror those of the FHLB advances, i.e. the hedged items, First Federal has adopted the short cut method of accounting for these transactions. Therefore, no hedge ineffectiveness was recognizedin earnings related to these fair value hedges. 

**12. COMPREHENSIVE INCOME (LOSS)**

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

|                                                       |               | **December 31,** |   |   |     |   |
|------------------------------------------------------------|--------------------|------------------|--------|--------|----------|--------|
|                                                       |               | **2004**         |   |   | **2003** |   |
|                                                       |               |                  |   |   |          |   |
|                                                       | **(in thousands)** |             |
|                                                       |               |             |   |   |     |   |
| Net income (loss)                                          | $                  | (349             | )      | $      | 1,039    |   |
| Other comprehensive loss, net of tax                       |               |             |   |   |     |   |
|    Unrealized holding losses arising during |               |             |   |   |     |   |
|       the period             |               | (435             | )      |   | (792     | )      |
|                                                       |                    |                  |   |        |          |   |
|                                                       |               |             |   |   |     |   |
|    Other comprehensive loss                 |               | (435             | )      |   | (792     | )      |
|                                                       |                    |                  |   |        |          |   |
|                                                       |               |             |   |   |     |   |
| Comprehensive income (loss)                                | $                  | (784             | )      | $      | 247      |   |
|                                                       |                    |                  |   |        |          |   |

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**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 ofthe 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 futureresults to vary from current management expectations include, but are not limited to, changes in general economic conditions, legislative and regulatory changes, changes in the monetary and fiscal policies of the federal government, changes in taxpolicies, 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 ofthe 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, servicesand prices. These factors should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law and regulation, the Company does not undertake and specificallydisclaims any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated orunanticipated events.*

**A. 	General**

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

**Agreement and Plan of Merger**

On December 8, 2004, KNBT Bancorp, Inc. (“KNBT”), the parent company of Keystone Nazareth Bank & Trust Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which the Companywill merge with and into KNBT. Concurrently with the merger, it is expected that the Bank will merge with and into Keystone Nazareth Bank & Trust Company.

Under the terms of the Agreement, the Company’s stockholders may elect to receive either $23.00 of KNBT common stock or $23.00 in cash in exchange for their shares of Company common stock, subject to an overall requirement that 50%of the total outstanding Company common stock be exchanged for KNBT common stock and 50% for cash. To the extent they receive shares of KNBT, the transaction is expected to be tax-free to the Company’s stockholders. 

The number of shares of KNBT common stock into which each Company share will be exchanged will be based on the price of KNBT common stock over a measurement period prior to the closing. 

In addition, each director of Northeast Pennsylvania entered into a Shareholder Agreement with KNBT, pursuant to which each person agreed, among other things, to vote his or her shares of Company common stock in favor of the MergerAgreement at a meeting of shareholders of the Company to be called to consider and approve the Merger Agreement. 

The transaction is expected to close in the second calendar quarterof2005. It is subject to certain conditions, including the approval of stockholdersandthe receipt of regulatory approval. 

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**B. Management Strategy**

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

**C. Critical Accounting Policies**

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

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

**D. Nonperforming Assets**

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

The following table presents information regarding the Bank’s nonperforming loans, real estate owned and other repossessed assets at the dates indicated: 

|                                                                                            | **December 31,** |                       | **September 30,** |   |
|-------------------------------------------------------------------------------------------------|------------------|----------------------------|-------------------|--------|
|                                                                                            |  **2004**   |                       | **2004**          |   |
|                                                                                            |                  |                            |              |        |   |
|                                                                                            |             | **(dollars in thousands)** |              |
| Nonperforming assets:                                                                           |             |                       |              |   |   |   |
|    Nonaccruing loans                                                             | $                | 4,935                      |              | $      | 6,869 |   |
|    Real estate owned and other repossessed assets                                |             | 343                        |              |   | 315 |   |
|                                                                                            |                  |                            |              |        |  |   |
|                                                                                            |             |                       |              |   |   |   |
|       Total nonperforming assets                                  |             | 5,278                      |              |   | 7,184 |   |
|                                                                                            |             |                       |              |   |   |   |
|    Troubled debt restructurings                                                  |             | -                          |              |   | - |   |
|                                                                                            |                  |                            |              |        |  |   |
|                                                                                            |             |                       |              |   |   |   |
|       Total nonperforming assets and troubled debt restructurings | $                | 5,278                      |              | $      | 7,184 |   |
|                                                                                            |                  |                            |              |        |  |   |
|                                                                                            |             |                       |              |   |   |   |
|    Total nonperforming loans as a percentage of total loans (1)                  |             | 1.20                       | %                 |   | 1.66 | % |
|    Total nonperforming assets as a percentage of total assets                    |             | 0.63                       | %                 |   | 0.86 | % |

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

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As of December 31, 2004, nonperforming assets totaled $5.3 million, or 0.63% of total assets, compared to $7.2 million, or 0.86% of total assets, at September 30, 2004. The $1.9 million reduction in nonperforming assets during the threemonths ended December 31, 2004 was primarily the result of cash collections and paydowns on several large nonperforming 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 deposit outflows as well as maintain flexibility to take advantage of lending and investmentopportunities. The Bank’s primary sources of funds are operating earnings, deposits, principal and interest payments on loans, proceeds from loan sales, sales and maturities of mortgage-backed and investment securities, and FHLB advances. TheBank uses the funds generated to support its lending and investment activities as well as any other demands for liquidity such as deposit outflows. While maturities and scheduled amortization of loans and securities are predictable sources of funds,deposit flows, mortgage prepayments, loan and security sales and the exercise of call features are greatly influenced by general interest rates, economic conditions and competition.

In accordance with Thrift Bulletin 77, the Office of Thrift Supervision (the “OTS”) requires institutions, such as the Bank, to maintain adequate liquidity to assure safe and sound operation. The Bank’s liquidity ratio ofcash and qualified assets to net withdrawable deposits and borrowings due within one year was 15.48% at December 31, 2004, compared to 15.83% at September 30, 2004. Management monitors liquidity daily and maintains funding sources to meet unforeseenchanges in cash requirements. In addition to its primary funding sources, the Bank’s liquidity requirements can be satisfied through the use of its borrowing capacity from the FHLB of Pittsburgh and other sources, the sale of certain securitiesand the pledging of certain loans for other lines of credit. Management believes these sources are sufficient to maintain the required and prudent levels of liquidity. 

The primary sources of funding for the Company are dividend payments from the Bank, sales and maturities of investment securities, borrowings and, to a lesser extent, earnings on investments and deposits of the Company. Dividendpayments 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 distributionsto the Company is generally limited by the regulations of the OTS. Additionally, the OTS may prohibit the payment of dividends, which are otherwise permissible by regulation for safety and soundness reasons. 

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) torisk-weighted assets (as defined), and of Tier I capital and tangible capital (as defined) to total assets (as defined). At December 31, 2004, the Bank was in compliance with regulatory capital requirements and was deemed a “*well-capitalized*” institution. To be categorized as well-capitalized, the Bank must maintain minimum ratios as set forth in the table below. 

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The Bank’s actual capital amounts and ratios at December 31, 2004 and September 30, 2004 are presented in the following table:

|                                      |   |       |   |         |                  | **As of December 31, 2004** |            |                  |                        |   |                       |   |         |
|-------------------------------------------|--------|------------|--------|--------------|-----------------------|-----------------------------|-----------------|-----------------------|-----------------------------|--------|----------------------------|--------|--------------|
|                                      |   |       |   |         |                  |                             |            |                  |                        |   |                       |   |         |
|                                      |   |       |   |         |                  | **(dollars in thousands)**  |            |                  |                        |   |                       |   |         |
|                                      |   |       |   |         |                  |                        |            |                  |                        |   | **To be Well Capitalized** |   |
|                                      |   |       |   |         |                  |                        | **For Capital** |                  | **under prompt corrective** |   |
|                                      |   | **Actual** |   |         | **Adequacy Purposes** |                        |            | **Action Provisions** |                        |
|                                      |   |            |   |              |                       |                        |                 |                       |                        |
|                                      |   | **Amount** |   | **Ratio(1)** |                  |                        | **Amount**      |                  | **Ratio(1)**                |   | **Amount**                 |   | **Ratio(1)** |   |
|                                      |        |            |   |              |                  |                             |                 |                  |                             |   |                            |   |              |   |
| Risk-based Capital                        |   |       |   |         |                  |                        |            |                  |                        |   |                       |   |         |   |   |   |   |
| (Total Capital to risk-weighted assets)   | $      | 66,059     |   | 15.18        | %                     | $                           | 34,822          |                  | >                        | 8.00   | %                          | $      | 43,528       |   | > | 10.00 | % |
| Tier I Capital                            |   |       |   |         |                  |                        |            |                  |                        |   |                       |   |         |   |   |   |   |
| (to risk-weighted assets)                 |   | 60,583     |   | 13.92        | %                     |                        | 17,411          |                  | >                        | 4.00   | %                          |   | 26,117       |   | > | 6.00 | % |
| Core Capital                              |   |       |   |         |                  |                        |            |                  |                        |   |                       |   |         |   |   |   |   |
| (Tier I Capital to adjusted total assets) |   | 61,558     |   | 7.47         | %                     |                        | 32,952          |                  | >                        | 4.00   | %                          |   | 41,190       |   | > | 5.00 | % |
| Tangible Capital                          |   |       |   |         |                  |                        |            |                  |                        |   |                       |   |         |   |   |   |   |
| (Tangible capital to tangible assets)     |   | 61,558     |   | 7.47         | %                     |                        | 12,357          |                  | >                        | 1.50   | %                          |   | N/A          |   |   | N/A |   |

|                                      |       |       |         |                  |   | **As of September 30, 2004** |   |                        |   |   |       |   |         |
|-------------------------------------------|------------|------------|--------------|-----------------------|--------|------------------------------|--------|-----------------------------|--------|--------|------------|--------|--------------|
|                                      |       |       |         |                  |   |                              |   |                        |   |   |       |   |         |
|                                      |       |       |         |                  |   | **(dollars in thousands)**   |   |                        |   |   |       |   |         |
|                                      |       |       |         |                  |   |                         |   | **To be Well Capitalized**  |   |
|                                      |       |       |         |                  |   | **For Capital**              |   | **under prompt corrective** |   |
|                                      |       | **Actual** |         | **Adequacy Purposes** |   | **Action Provisions**        |   |
|                                      |            |            |         |                       |        |                         |        |                             |   |
|                                      | **Amount** |       | **Ratio(1)** |                  |   | **Amount**                   |   | **Ratio(1)**                |   |   | **Amount** |   | **Ratio(1)** |   |
|                                      |            |       |              |                  |        |                              |   |                             |   |        |            |   |              |   |
| Risk-based Capital                        |       |       |         |                  |   |                         |   |                        |   |   |       |   |         |   |   |   |   |
| (Total Capital to risk-weighted assets)   | $          | 65,827     |         | 15.07                 | %      | $                            | 34,936 |                        | >   | 8.00   | %          | $      | 43,670       |   | > | 10.00 | % |
| Tier I Capital                            |       |       |         |                  |   |                         |   |                        |   |   |       |   |         |   |   |   |   |
| (to risk-weighted assets)                 |       | 60,331     |         | 13.82                 | %      |                         | 17,468 |                        | >   | 4.00   | %          |   | 26,202       |   | > | 6.00 | % |
| Core Capital                              |       |       |         |                  |   |                         |   |                        |   |   |       |   |         |   |   |   |   |
| (Tier I Capital to adjusted total assets) |       | 61,331     |         | 7.40                  | %      |                         | 33,136 |                        | >   | 4.00   | %          |   | 41,420       |   | > | 5.00 | % |
| Tangible Capital                          |       |       |         |                  |   |                         |   |                        |   |   |       |   |         |   |   |   |   |
| (Tangible capital to tangible assets)     |       | 61,331     |         | 7.40                  | %      |                         | 12,426 |                        | >   | 1.50   | %          |   | N/A          |   |   | N/A |   |

(1) For the periods presented the components of tangible capital were the same as those of core capital. Tangible and core capital are computed as a percentage of adjusted total assets and tangible assetsof $823 million and $828 million at December 31, 2004 and September 30, 2004, respectively. Risk-based capital and Tier I capital are computed as a percentage of risk-weighted assets of $435 million and $437 million at December 31, 2004 andSeptember 30, 2004, respectively. Tier I capital is reduced by the amount of low-level recourse and residual interests to compute Tier I capital.

**F.	Comparison of Financial Condition at December 31, 2004 and September 30, 2004**

Total assets decreased $2.3 million from $836.0 million at September30, 2004 to $833.7 million at December 31, 2004. Total loans decreased by $1.7million from September 30, 2004. The decrease was primarily due to a decreasein  originations in the indirect auto portfolio as well as one-to-four familyresidential loans offset by an increase in other consumer, which was relatedto the purchase of a $9.1 million manufactured homes loan portfolio. Investmentsecuritiesavailablefor sale decreased $15.3 million, or 4.3%, from $357.2 million at September 30,2004 to $341.9 million at December 31, 2004 since the Company is no longer purchasingsuch securities in anticipation of its merger with KNBT. The proceeds from the securities that matured during the period were invested in cash equivalents,whichincreased$15.1million, or 55.8%, from $26.9 million at September 30, 2004 to $42.0 millionat December 31, 2004.

Total liabilities decreased $2.0 million from $777.6 million atSeptember 30, 2004 to $775.6 million at December 31, 2004, due primarily to a$1.4 million decrease in certificates of deposit. FHLB advances decreased $20.4million from  $243.9 million at September 30, 2004 to $223.5 million at December31, 2004 due to an advance maturing. This maturing advance was replaced withother borrowings of $20.0 million since this structured repurchase agreementrepresents a lower fundingcost than the maturing advance.

**G.	Comparison of Operating Results for the Three Months ended December 31, 2004 and December 31, 2003.**

**General.**The Company reported a net loss of $349,000 and net income of $1.0 million for the three months ended December 31, 2004 and December 31, 2003, respectively. Basic and diluted earnings (loss) per sharedecreased to $(0.09) and $(0.09) per share, 

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respectively, for the three months ended December 31, 2004 compared to $0.27 and $0.25 per share, respectively, for the same period in fiscal 2004.

The net loss for the three-month period ended December 31, 2004 was primarily due to the recognition of certain merger related charges incurred by the Company upon execution of the Agreement and Plan of Merger with KNBT. Suchexpenditures include an $880,000 payment of severance to certain executive officers and approximately $659,000 of professional fees paid to the Company’s investment banking, legal and accounting advisors related to the due diligence,negotiations and completion of the Agreement and Plan of Merger with KNBT. 

**Interest Income**. Total interest income decreased $1.0 million, or 9.2%, from $10.7 million for the three months ended December 31, 2003, to $9.7 million for the three months ended December 31, 2004, primarilydue to a $31.7 million decline in earning assets. Additionally the tax-equivalent yield on earning assets declined by 33 basis points to 4.93% for the three months ended December 31, 2004 as compared to 5.26% for the three-month period endedDecember 31, 2003. Interest income on loans decreased $1.3 million primarily due to a $74.9 million decrease in the average balance of loans, combined with a 14 basis point decrease in the overall yield. Interest income on mortgage-relatedsecurities increased $1.2 million due to an increase of $110.7 million in the average balance and a 17 basis point increase in the average yield on such securities. The Bank has invested in mortgage related securities with higher yields as a way toutilize excess liquidity from loan and investment sales as repayments of loans and mortgage-backed securities have occurred.

**Interest Expense.**Interest expense decreased $421,000, or 7.7%, from $5.5 million for the three months ended December 31, 2003 to $5.0 million for the three months ended December 31, 2004. The decrease ininterest expense was primarily attributable to a 67 basis point decline in the average rate paid on FHLB advances and other borrowings to 4.26% for the three months ended December 31, 2004 as compared to 4.93% for the three months ended December 31,2003, offset in part by a $23.5 million increase in average balances. As previously discussed, the Bank entered into several derivative contacts in November 2003 which swapped the fixed rates the Bank pays on $40.0 million of FHLB advances tovariable rates. The effect of this transaction was to reduce the average rate the Bank is paying on these borrowings from approximately 5.50% to 3.85% during the quarter. While this transaction added interest rate volatility, the overallasset/liability position of the Bank remains within acceptable risk parameters. Additionally the interest expense on deposits decreased by $327,000, or 14.7%, due to a $60.5 million decline in the average balance of such deposits, particularlyhigher yielding certificates of deposit.

**Provision for Loan Losses.**The Company records a provision for loan losses in order to maintain the allowance for loan losses at a level which management considers its best estimate of known and probableinherent losses. Management’s evaluation is based upon a continuing review of the portfolio and requires significant management judgment. The Bank’s provision for loan losses for the three months ended December 31, 2004 decreased $677,000 to $0when compared to the comparable 2003 fiscal period. The decrease was primarily due to significant reductions in the levels of nonperforming loans, classified assets and charge-offs and reflects, among other things, reductions in loan balances andchanges in the composition of the portfolio during the quarter.  The loan portfolio saw reductions in higher risk indirect vehicle, construction and commercial loans during the three-month period ended December 31, 2004. See the Nonperforming Assetssection of Management’s Discussion and Analysis for a further analysis of asset quality.  Net loan charge-offs were $198,000 for the quarter ended December 31, 2004, compared to net loan charge-offs of $645,000 for the quarter ended December 31,2003.

**Noninterest Income.**Noninterest incomedecreased $652,000, or 24.3%, from $2.7 million for the three months ended December31, 2003 to $2.0 million for the three months ended December 31, 2004. This decrease was due primarily to the gain on sale of loans recognized in the December 31,2003 quarter of $464,000, which included a pre-tax gain of approximately $268,000,related to the one-time sale of modified fixed-rate residential mortgage loans,comparedto a gain of $57,000 in the current quarter. Service charge and other fee incomealso decreased $192,000, or 21.8%, from $879,000 for the three months ended December31, 2003 to $687,000 for the three months ended December 31, 2004. This decrease was largely due to a change in the process for assessing fees on checking accountoverdrafts between periods. 

**Noninterest Expense.**  Total noninterest expense increased $1.3 million, or 21.6%, from $6.0 million for the three months ended December 31, 2003 to $7.3 million for the three months ended December 31, 2004.This increase was due to the previously discussed merger related expenses including severance in the amount of approximately $880,000 and increased professional fees of $659,000, offset by a decrease in other expenses of $148,000. 

**Income Taxes**. The Company had an incometax benefit of $223,000 for the three months ended December 31, 2004, comparedto a provision of $230,000 for the three months ended December 31, 2003. Theeffective tax  rate was (39.0)% and 18.1% for the quarterly periods ended December31, 2004 and 2003, respectively. The change in effective tax rates was due tothe pre-tax net loss as well as the determination that certain merger relatedexpenditures may not bedeductible for federal tax purposes. The effective tax rate during the threemonth period ended December 31, 2003 included a determination that certain previousnon-deductible expenses were currently deductible. 

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**Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

For a discussion of the Company’s quantitative and qualitative disclosures about market risk as well as the potential impact of interest rate changes upon the market value of the Company’s portfolio equity, see Item 7A in theCompany’s Annual Report on Form 10-K for the year ended September 30, 2004 and Footnote 10 to the Notes to Consolidated Financial Statements contained in this Form 10-Q. Management, as part of its regular practices, performs periodic reviews ofthe impact of interest rate changes upon the market value of the Company’s portfolio equity. Based on, among other factors, such reviews, management believes that there are no material changes in the market risk of the Company since September30, 2004. 

**Item 4. CONTROLS AND PROCEDURES**

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

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such termis defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of theend of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under theExchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to theCompany’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  In addition, based on that evaluation, no change in the Company’s internalcontrol over financial reporting occurred during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 

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Part II – OTHER INFORMATION 

| Item 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Legal Proceedings                                           |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
| The Company is not a party to any pending legal    proceedings. Periodically, there have been various claims and lawsuits involving    the Bank, such as claims to enforce liens, condemnation proceedings on properties    in which the Bank holds security interests, claims involving the making and    servicing of real property loans and other issues incident to the Bank’s business.The    Bank is not a party to any pending legal proceedings that it believes would    have a material adverse effect on the financial condition or operations of    the Company. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
| Item 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Unregistered Sales of Equity Securities and Use of Proceeds |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
| The Company did not repurchase any of its common       stock during the quarter ended December 31, 2004.Further, the Company       agreed to postpone any future repurchases of its common stock    on December 8, 2004 when it executed the Agreement and Plan of Merger with    KNBT Bancorp, Inc.                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
| Item 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Defaults Upon Senior Securities                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | None.                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
| Item 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Submission of Matters to a Vote of Security Holders         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | None                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
| Item 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Other Information                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | None                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
| Item 6.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Exhibits                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 2.1                                                         | Agreement and Plan of Merger, dated December 8, 2004, by and between KNBT Bancorp, Inc. and |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        | Northeast Pennsylvania Financial Corp.* |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 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.** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 10.1                                                        | Form of Shareholder Agreement between KNBT Bancorp, Inc. and the directors of Northeast Pennsylvania |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        | Financial Corp.* |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 10.2                                                        | Termination and Release Agreement, dated December 8, 2004, by and among Northeast Pennsylvania |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        | Financial Corp., First Federal Bank and KNBT Bancorp, Inc.       and Thomas L. Kennedy. * |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 10.3                                                        | Termination and Release Agreement, dated December 8, 2004, by and among Northeast Pennsylvania |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        | Financial Corp., First Federal Bank and KNBT Bancorp, Inc.       and Thomas M. Petro.* |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 10.4                                                        | Termination and Release Agreement, dated December 8, 2004, by and among Northeast Pennsylvania |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        | Financial Corp., First Federal Bank and KNBT Bancorp, Inc.       and Jerry D. Holbrook. * |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 10.5                                                        | Amendment Number 2 to the Employment Agreement between Higgins Insurance Associates, Inc. and |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        | Joseph P. Schlitzer. **** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                        |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 11.0                                                        | Statement regarding Computation of Per Share Earnings (See Notes to Consolidated Financial Statements) |

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|   | 31.1   | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|--------|--------|-------------------------------------------------------------------|
|   |   |                                                              |
|   | 31.2   | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|   |   |                                                              |
|   | 32.0   | Section 1350 Certification                                        |

| *      | Incorporated herein by reference into this document from the exhibits to the Form 8-K/A as filed with the Securities and |
|--------|--------------------------------------------------------------------------------------------------------------------------|
|   | Exchange Commission on December 16, 2004.                                                                                |
| **     | 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.                                                                              |
| ****   | Incorporated herein by reference into this document from the exhibit to the Form 8-K as filed with the Securities and    |
|   | Exchange Commission on January 3, 2005.                                                                                  |

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**SIGNATURES**

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

|   |              | NORTHEAST PENNSYLVANIA                |
|--------|-------------------|---------------------------------------|
|   |              | FINANCIAL CORP.                       |
|   |              |                                  |
| Date:  | February 14, 2005 | By: /S/ Thomas M. Petro               |
|   |              |                                       |
|   |              | Thomas M. Petro                       |
|   |              | President and Chief Executive Officer |
|   |              |                                  |
|   |              |                                  |
| Date:  | February 14, 2005 | By: /S/ Jerry D. Holbrook             |
|   |              |                                       |
|   |              | Jerry D. Holbrook                     |
|   |              | Chief Financial Officer               |

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