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

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**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 March 31, 2004

OR  

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

For the transitionperiod 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’stelephone number, including area code) 

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

----

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

| Yes   |   | No           |
|-----------------|--------|------------------------|

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

| Yes   |   | No         |
|-----------------|--------|----------------------|

The Registrant  had 4,181,800 of Common Stock outstanding as of May 13, 2004. 

|  |
|--|
|  |
|  |

| **TABLE      OF CONTENTS** |
|----------------------------|
|                       |   |   |
| Item                       |   | Page |
| No.                        |   | Number |
|                            |   |  |
|                       |   |   |
| **PART      I —**     | **CONSOLIDATED FINANCIAL INFORMATION** |   |
|                       |   |   |
| Item 1                     | CONSOLIDATED      FINANCIAL STATEMENTS |   |
|                       |   |   |
|                       | Consolidated      Statements of Financial Condition at |   |
|                       | March      31, 2004 and September 30, 2003 (unaudited) | 3 |
|                       |   |   |
|                       | Consolidated      Statements of Operations for the Three and Six Months |   |
|                       | Ended      March 31, 2004 (unaudited) and 2003 (unaudited, as restated) | 4 |
|                       |   |   |
|                       | Consolidated      Statements of Comprehensive Income for the Three and Six |   |
|                       | Months      Ended March 31, 2004 (unaudited) and 2003 (unaudited, as restated) | 5 |
|                       |   |   |
|                       | Consolidated      Statements of Cash Flows for the Six Months Ended |   |
|                       | March      31, 2004 (unaudited) and 2003 (unaudited, as restated) | 6 |
|                       |   |   |
|                       | Notes      to Consolidated Financial Statements (unaudited) | 8 |
|                       |   |   |
| Item      2                | Management      Discussion and Analysis of Financial Condition |   |
|                       | and      Results of Operations | 20 |
|                       |   |   |
| Item      3                | Quantitative      and Qualitative Disclosures About Market Risk | 27 |
|                       |   |   |
| Item      4                | Controls      and Procedures | 28 |
|                       |   |   |
| **Part      II —**    | **OTHER      INFORMATION** |   |
|                       |   |   |
| Item      1                | Legal      Proceedings | 29 |
|                       |   |   |
| Item      2                | Changes      in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 29 |
|                       |   |   |
| Item      3                | Defaults      Upon Senior Securities | 29 |
|                       |   |   |
| Item      4                | Submission      of Matters to a Vote of Security Holders | 29 |
|                       |   |   |
| Item      5                | Other      Information | 29 |
|                       |   |   |
| Item      6                | Exhibits      and Reports on Form 8-K | 30 |
|                       |   |   |
| Signatures                 | 31 |

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    ** NORTHEASTPENNSYLVANIA FINANCIAL CORP.CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(Unaudited)**

|                                                                                                                          | **March 31,**                            |    | **September 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------|------------------------------------------|---------|-------------------|--------|
|                                                                                                                          | **2004**                                 |    | **2003**          |   |
|                                                                                                                          |                                          |    |                   |   |
|                                                                                                                          | **(in thousands except per share data)** |
| ASSETS                                                                                                                        |                                     |    |              |   |   |   |
|    Cash and    cash equivalents                                                                                | $                                        | 18,421  |              | $      | 20,142 |   |
|    Investment securities available-for-sale                                                                    |                                     | 358,490 |              |   | 326,626 |   |
|    Investment securities held-to-maturity (estimated market value of                                           |                                     |    |              |   |   |   |
|       $2,767 at March 31, 2004 and $3,622 at September 30, 2003)                                |                                     | 2,715   |              |   | 3,555 |   |
|    Loans held for sale                                                                                         |                                     | 1,066   |              |   | 1,073 |   |
|    Loans (less allowance for loan loss of $10,178 at March 31, 2004                                            |                                     |    |              |   |   |   |
|       and $10,196 at September 30, 2003)                                                        |                                     | 446,529 |              |   | 489,986 |   |
|    Accrued interest receivable                                                                                 |                                     | 3,250   |              |   | 3,892 |   |
|    Assets acquired through foreclosure                                                                         |                                     | 488     |              |   | 1,022 |   |
|    Property and equipment, net                                                                                 |                                     | 10,975  |              |   | 12,152 |   |
|    Goodwill                                                                                                    |                                     | 3,216   |              |   | 3,216 |   |
|    Intangible    assets                                                                                        |                                     | 7,598   |              |   | 8,595 |   |
|    Bank-owned life insurance                                                                                   |                                     | 11,128  |              |   | 10,875 |   |
|    Other    assets                                                                                             |                                     | 13,701  |              |   | 15,161 |   |
|                                                                                                                          |                                          |         |              |        |  |   |
|             TOTAL ASSETS                                          | $                                        | 877,577 |              | $      | 896,295 |   |
|                                                                                                                          |                                          |         |              |        |  |   |
|                                                                                                                          |                                     |    |              |   |   |   |
| LIABILITIES                                                                                                                   |                                     |    |              |   |   |   |
|    Deposits                                                                                                    |                                     | 534,543 |              |   | 547,305 |   |
|    Federal Home Loan Bank advances                                                                             |                                     | 229,255 |              |   | 258,901 |   |
|    Trust-preferred debt                                                                                        |                                     | 22,681  |              |   | 22,000 |   |
|    Other    borrowings                                                                                         |                                     | 20,787  |              |   | 529 |   |
|    Advances from borrowers for taxes and insurance                                                             |                                     | 2,273   |              |   | 1,239 |   |
|    Accrued interest payable                                                                                    |                                     | 1,565   |              |   | 1,318 |   |
|    Other liabilities                                                                                           |                                     | 4,382   |              |   | 6,646 |   |
|                                                                                                                          |                                          |         |              |        |  |   |
|             TOTAL LIABILITIES                                     |                                     | 815,486 |              |   | 837,938 |   |
|                                                                                                                          |                                          |         |              |        |  |   |
|                                                                                                                          |                                     |    |              |   |   |   |
| 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                                                                                  |                                     | 62,173  |              |   | 61,879 |   |
|    Common stock acquired by stock benefit plans                                                                |                                     | (3,156  | )                 |   | (3,772 | ) |
|    Retained earnings – substantially restricted                                                           |                                     | 31,744  |              |   | 29,368 |   |
|    Accumulated other comprehensive income, net                                                                 |                                     | 2,110   |              |   | 1,730 |   |
|    Treasury stock, at cost (2,245,551 shares at March 31, 2004                                                 |                                     |    |              |   |   |   |
|       and 2,250,756 shares at September 30, 2003)                                               |                                     | (30,844 | )                 |   | (30,912 | ) |
|                                                                                                                          |                                          |         |              |        |  |   |
|             TOTAL STOCKHOLDERS’    EQUITY                    |                                     | 62,091  |              |   | 58,357 |   |
|                                                                                                                          |                                          |         |              |        |  |   |
|             TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  | $                                        | 877,577 |              | $      | 896,295 |   |
|                                                                                                                          |                                          |         |              |        |  |   |

 

See accompanying notes to the unaudited consolidated financial statements.

3

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**NORTHEAST PENNSYLVANIAFINANCIAL CORP.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

|                                           |                                     |                                                                      | **Three Months Ended****March 31,**       |   |                       | **Six Months Ended****March 31,** |    |
|------------------------------------------------|------------------------------------------|---------------------------------------------------------------------------|-------------------------------------------|--------|----------------------------|-----------------------------------|---------|
|                                                |                                          |
| **2004**                                       |                                     | **As Restated****2003**                                                   | **2004**                                  |   | **As    Restated****2003** |
|                                                |                                          |                                                                      |                                           |        |                            |                                   |    |  |  |
|                                           |                                     |                                                                      | **(in thousands, except per share data)** |   |
| INTEREST INCOME                                |                                     |                                                                      |                                      |   |                       |                              |    |   |   |   |   |   |
|                                           | Interest    and fees on loans            | $                                                                         | 7,025                                     |   | $                          | 8,346                             |    | $ | 14,606 |   | $ | 17,131 |   |
|                                           | Mortgage-related    securities           |                                                                      | 2,108                                     |   |                       | 1,646                             |    |   | 4,039 |   |   | 3,681 |   |
|                                           | Investment    securities:                |                                                                      |                                      |   |                       |                              |    |   |   |   |   |   |   |
|                                           |                                     | Taxable                                                                   |                                      | 932    |                       |                              | 1,272   |   |   | 1,943 |   |   | 2,455 |   |
|                                           |                                     | Tax-exempt                                                                |                                      | 140    |                       |                              | 234     |   |   | 346 |   |   | 467 |   |
|                                           | Other    interest income                 |                                                                      | 4                                         |   |                       | —                           |    |   | 4 |   |   | — |   |
|                                           |                                     |                                                                      |                                           |        |                       |                                   |         |   |  |  |   |  |  |   |
|                                           |                                     |         Total interest income     |                                      | 10,209 |                       |                              | 11,498  |   |   | 20,938 |   |   | 23,734 |   |
|                                           |                                     |                                                                      |                                           |        |                       |                                   |         |   |  |  |   |  |  |   |
| INTEREST EXPENSE                               |                                     |                                                                      |                                      |   |                       |                              |    |   |   |   |   |   |
|                                           | Deposits                                 |                                                                      | 2,089                                     |   |                       | 3,209                             |    |   | 4,318 |   |   | 6,920 |   |
|                                           | Federal Home Loan Bank advances          |                                                                      | 2,381                                     |   |                       | 2,949                             |    |   | 5,357 |   |   | 5,956 |   |
|                                           | Trust-preferred    debt                  |                                                                      | 263                                       |   |                       | 281                               |    |   | 528 |   |   | 517 |   |
|                                           |                                     |                                                                      |                                           |        |                       |                                   |         |   |  |  |   |  |  |   |
|                                           |                                     |         Total interest expense    |                                      | 4,733  |                       |                              | 6,439   |   |   | 10,203 |   |   | 13,393 |   |
|                                           |                                     |                                                                      |                                           |        |                       |                                   |         |   |  |  |   |  |  |   |
| NET INTEREST INCOME                            |                                     | 5,476                                                                     |                                      |   | 5,059                      |                              |    | 10,735 |   |   | 10,341 |   |
|                                           |                                     |                                                                      |                                      |   |                       |                              |    |   |   |   |   |   |   |   |
| Provision for loan losses                      |                                     | 485                                                                       |                                      |   | 610                        |                              |    | 1,162 |   |   | 980 |   |
|                                           |                                     |                                                                      |                                           |        |                       |                                   |         |   |  |  |   |  |  |   |
| NET INTEREST INCOME AFTER                      |                                     |                                                                      |                                      |   |                       |                              |    |   |   |   |   |   |
|   PROVISION    FOR LOAN LOSSES  |                                     | 4,991                                                                     |                                      |   | 4,449                      |                              |    | 9,573 |   |   | 9,361 |   |
|                                           |                                     |                                                                      |                                           |        |                       |                                   |         |   |  |  |   |  |  |   |
| NONINTEREST INCOME                             |                                     |                                                                      |                                      |   |                       |                              |    |   |   |   |   |   |
|                                           | Service    charges and other fees        |                                                                      | 686                                       |   |                       | 618                               |    |   | 1,565 |   |   | 1,273 |   |
|                                           | Insurance    premium income              |                                                                      | 842                                       |   |                       | 902                               |    |   | 1,708 |   |   | 1,826 |   |
|                                           | Trust    fees                            |                                                                      | 220                                       |   |                       | 214                               |    |   | 437 |   |   | 446 |   |
|                                           | Gain    on sale of:                      |                                                                      |                                      |   |                       |                              |    |   |   |   |   |   |   |
|                                           |                                     | Branch                                                                    |                                      | 798    |                       |                              | — |   |   | 798 |   |   | — |   |
|                                           |                                     | Assets acquired through foreclosure                                       |                                      | 30     |                       |                              | 50      |   |   | 30 |   |   | 60 |   |
|                                           |                                     | Loans                                                                     |                                      | 199    |                       |                              | 359     |   |   | 663 |   |   | 603 |   |
|                                           |                                     | Available    for sale securities                                          |                                      | 872    |                       |                              | 1,131   |   |   | 872 |   |   | 1,142 |   |
|                                           |  Other                              |                                                                      | 263                                       |   |                       | 454                               |    |   | 522 |   |   | 996 |   |
|                                           |                                     |                                                                      |                                           |        |                       |                                   |         |   |  |  |   |  |  |   |
|                                           |                                     |         Total noninterest income  |                                      | 3,910  |                       |                              | 3,728   |   |   | 6,595 |   |   | 6,346 |   |
|                                           |                                     |                                                                      |                                           |        |                       |                                   |         |   |  |  |   |  |  |   |
| NONINTEREST EXPENSE                            |                                     |                                                                      |                                      |   |                       |                              |    |   |   |   |   |   |
|                                           | Salaries    and employee benefits        |                                                                      | 3,255                                     |   |                       | 3,444                             |    |   | 6,297 |   |   | 6,747 |   |
|                                           | Occupancy    costs                       |                                                                      | 708                                       |   |                       | 852                               |    |   | 1,386 |   |   | 1,656 |   |
|                                           | Amortization    of intangibles           |                                                                      | 197                                       |   |                       | 257                               |    |   | 441 |   |   | 517 |   |
|                                           | Data    processing costs                 |                                                                      | 218                                       |   |                       | 197                               |    |   | 529 |   |   | 378 |   |
|                                           | Advertising                              |                                                                      | 97                                        |   |                       | 247                               |    |   | 255 |   |   | 511 |   |
|                                           | Professional    fees                     |                                                                      | 380                                       |   |                       | 412                               |    |   | 815 |   |   | 909 |   |
|                                           | Federal Home Loan Bank and other charges |                                                                      | 260                                       |   |                       | 233                               |    |   | 497 |   |   | 462 |   |
|                                           | Other                                    |                                                                      | 871                                       |   |                       | 1,105                             |    |   | 1,764 |   |   | 2,191 |   |
|                                           |                                     |                                                                      |                                           |        |                       |                                   |         |   |  |  |   |  |  |   |
|                                           |                                     |         Total noninterest expense |                                      | 5,986  |                       |                              | 6,747   |   |   | 11,984 |   |   | 13,371 |   |
|                                           |                                     |                                                                      |                                           |        |                       |                                   |         |   |  |  |   |  |  |   |
| Income before income taxes                     |                                     | 2,915                                                                     |                                      |   | 1,430                      |                              |    | 4,184 |   |   | 2,336 |   |
| Income taxes                                   |                                     | 825                                                                       |                                      |   | 510                        |                              |    | 1,055 |   |   | 747 |   |
|                                           |                                     |                                                                      |                                           |        |                       |                                   |         |   |  |  |   |  |  |   |
|                                           |                                     |                                                                      |                                      |   |                       |                              |    |   |   |   |   |   |   |   |
| NET INCOME                                     | $                                        | 2,090                                                                     |                                      | $      | 920                        |                              | $       | 3,129 |   | $ | 1,589 |   |
|                                           |                                     |                                                                      |                                           |        |                       |                                   |         |   |  |  |   |  |  |   |
| EARNINGS PER SHARE:                            |                                     |                                                                      |                                      |   |                       |                              |    |   |   |   |   |   |
|                                           | Basic                                    |                                                                      | 0.53                                      |   |                       | 0.24                              |    |   | 0.80 |   |   | 0.42 |   |
|                                           | Diluted                                  |                                                                      | 0.51                                      |   |                       | 0.23                              |    |   | 0.76 |   |   | 0.40 |   |

See accompanying notes to the unaudited consolidated financial statements.

 	 4

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**NORTHEAST PENNSYLVANIAFINANCIAL CORP.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Unaudited)**

|                                   |                                                                                          | **Three Months Ended****March 31,** |     |  **Six Months Ended****March 31,** |                           |
|----------------------------------------|-----------------------------------------------------------------------------------------------|-------------------------------------|----------|-----------------------------------------|-------------------------------------|
|                                        |                                                                                               |
|  **2004**                         |                                                                                          |  **As Restated****2003**       | **2004** |                                    |  **As Restated** **2003** |
|                                        |                                                                                               |                                |          |                                         |                                     |  |   |  |  |
| **(in thousands)**                     |
| Net Income                             | $                                                                                             | 2,090                               |     | $                                       | 920                                 |   | $ | 3,129 |   | $ | 1,589 |   |
| Other comprehensive income, net of tax |                                                                                          |                                |     |                                    |                                |   |   |   |   |   |   |   |
|                                   | Unrealized       gains (losses) on securities and on retainedinterest on asset securitization |                                | —  |                                    |                                | — |   |   | — |   |   | — |   |
|                                   | Unrealized    holding gains (losses) arising duringthe    period                              |                                | 1,707    |                                    |                                | (890 | ) |   | 915 |   |   | (1,197 | ) |
|                                   | Less: Reclassification    adjustment for gains (losses) included in net income                |                                | 535      |                                    |                                | 694 |   |   | 535 |   |   | 701 |   |
|                                   |                                                                                          |                                     |          |                                    |                                     |  |   |  |  |   |  |  |   |
|                                   | Other comprehensive income (loss)                                                             |                                | 1,172    |                                    |                                | (1,584 | ) |   | 380 |   |   | (1,898 | ) |
|                                   |                                                                                          |                                     |          |                                    |                                     |  |   |  |  |   |  |  |   |
| Comprehensive income                   | $                                                                                             | 3,262                               |     | $                                       | (664                                | ) | $ | 3,509 |   | $ | (309 | ) |
|                                   |                                                                                          |                                     |          |                                    |                                     |  |   |  |  |   |  |  |   |

See accompanying notes to the unaudited consolidated financial statements.

5

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

|                                                              |                                                                                 |                                                  |                                                 | **Six Months Ended****March 31,** |         |
|-------------------------------------------------------------------|--------------------------------------------------------------------------------------|-------------------------------------------------------|------------------------------------------------------|-----------------------------------|--------------------------------------------|
|                                                                   |
| **2004**                                                          |                                                                  | **As Restated****2003**                               |
|                                                                   |                                                                                      |                                                  |                                                 |                                   |
| OPERATING      ACTIVITIES                                         |                                                                                 |                                                  |                                                 |                              |                                       |
|                                                              |                                                                                 |                                                  |                                                 |                              | **(in      thousands)**               |
| Net income                                                        | $                                                                                    | 3,129                                                 |                                                 | $                                 | 1,589                                      |   |
|                                                              | Adjustments    to reconcile net income to net cash provided by operating activities: |                                                  |                                                 |                              |                                       |   |   |
|                                                              |                                                                                 | Provision for loan losses                             |                                                 | 1,162                             |                                       |   | 980 |   |
|                                                              |                                                                                 | Provision for assets acquired through foreclosure     |                                                 | —                           |                                       |   | 243 |   |
|                                                              |                                                                                 | Depreciation                                          |                                                 | 608                               |                                       |   | 711 |   |
|                                                              |                                                                                 | Amortization of intangibles                           |                                                 | 441                               |                                       |   | 517 |   |
|                                                              |                                                                                 | Deferred income tax provision (benefit)               |                                                 | (1,496                            | )                                          |   | (3,727 | ) |
|                                                              |                                                                                 | ESOP shares committed to be released                  |                                                 | 186                               |                                       |   | 435 |   |
|                                                              |                                                                                 | Stock award expense                                   |                                                 | 5                                 |                                       |   | 114 |   |
|                                                              |                                                                                 | Bank-owned life insurance income                      |                                                 | (253                              | )                                          |   | (312 | ) |
|                                                              |                                                                                 | Origination of loans held for sale                    |                                                 | (11,537                           | )                                          |   | (21,423 | ) |
|                                                              |                                                                                 | Proceeds from loans sold                              |                                                 | 35,793                            |                                       |   | 22,026 |   |
|                                                              |                                                                                 | Deconsolidation of capital trusts                     |                                                 | 681                               |                                       |   | — |   |
|                                                              |                                                                                 | Amortization and accretion on:                        |                                                 |                              |                                       |   |   |   |
|                                                              |                                                                                 | Held-to-maturity securities                           |                                                 | (5                                | )                                          |   | (1 | ) |
|                                                              |                                                                                 | Available-for-sale securities                         |                                                 | 1,835                             |                                       |   | 3,136 |   |
|                                                              |                                                                                 | Amortization of deferred loan fees                    |                                                 | (259                              | )                                          |   | (723 | ) |
|                                                              |                                                                                 | (Gain) loss on sale of:                               |                                                 |                              |                                       |   |   |   |
|                                                              |                                                                                 |                                                  | Assets acquired    through foreclosure               |                              | (30                                        | ) |   | (60 | ) |
|                                                              |                                                                                 |                                                  | Loans                                                |                              | (663                                       | ) |   | (603 | ) |
|                                                              |                                                                                 |                                                  | Available-for-sale securities                        |                              | (872                                       | ) |   | (1,142 | ) |
|                                                              |                                                                                 |                                                  | Disposal of fixed assets                             |                              | 12                                         |   |   | — |   |
|                                                              |                                                                                 |                                                  | Branch                                               |                              | (798                                       | ) |   | — |   |
|                                                              | Change in assets and liabilities:                                                    |                                                  |                                                 |                              |                                       |   |   |
|                                                              |                                                                                 | Decrease    (increase) in accrued interest receivable |                                                 | 643                               |                                       |   | (36 | ) |
|                                                              |                                                                                 | Decrease (increase) in other assets                   |                                                 | 4,796                             |                                       |   | (1,487 | ) |
|                                                              |                                                                                 | Increase in accrued interest payable                  |                                                 | 247                               |                                       |   | 142 |   |
|                                                              |                                                                                 | Increase in accrued taxes payable                     |                                                 | —                           |                                       |   | 3,084 |   |
|                                                              |                                                                                 | Increase (decrease) in other liabilities              |                                                 | (1,819                            | )                                          |   | 1,865 |   |
|                                                              |                                                                                 |                                                  |                                                 |                                   |                                            |   |  |  |   |
|                                                              |                                                                                 |                                                  | Net cash provided by operating activities            |                              | 31,806                                     |   |   | 5,328 |   |
|                                                              |                                                                                 |                                                  |                                                 |                                   |                                            |   |  |  |   |
| INVESTING ACTIVITIES                                              |                                                                                 |                                                  |                                                 |                              |                                       |   |
| Net decrease (increase) in loans                                  | $                                                                                    | 17,763                                                |                                                 | $                                 | (4,496                                     | ) |
| Proceeds from sale of:                                            |                                                                                 |                                                  |                                                 |                              |                                       |   |
|                                                              | Available-for-sale      securities                                                   |                                                  | 30,906                                               |                              |                                       | 62,132 |   |
|                                                              | Assets acquired through foreclosure                                                  |                                                  | 1,619                                                |                              |                                       | 620 |   |
| Proceeds from repayments of held-to-maturity securities           |                                                                                 | 29,222                                                |                                                 |                              | 99                                         |   |
| Proceeds from repayments of available-for-sale securities         |                                                                                 | 18,139                                                |                                                 |                              | 100,088                                    |   |
| Proceeds from sale of branch real estate and transfer of deposits |                                                                                 | (8,244                                                | )                                                    |                              | —                                    |   |
| Purchase of:                                                      |                                                                                 |                                                  |                                                 |                              |                                       |   |
|                                                              | Available-for-sale      securities                                                   |                                                  | (105,432                                             | )                                 |                                       | (148,285 | ) |
|                                                              | Office properties and equipment                                                      |                                                  | (229                                                 | )                                 |                                       | (642 | ) |
|                                                              | Regulatory stock                                                                     |                                                  | (4,183                                               | )                                 |                                       | (1,041 | ) |
|                                                              |                                                                                 |                                                  |                                                 |                                   |                                            |   |  |  |   |
|                                                              |                                                                                 |                                                  | Net cash provided by (used for) investing activities | $                                 | (20,439                                    | ) | $ | 8,475 |   |
|                                                              |                                                                                 |                                                  |                                                 |                                   |                                            |   |  |  |   |

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

|                                                                                                                         |   | **Six    Months Ended    March 31,** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                         |        |                                      |   |
|                                                                                                                         |   | **2004**                             |   |   | **As    Restated    2003** |   |
|                                                                                                                         |        |                                      |   |  |  |   |
|                                                                                                                         |   | **(in thousands)**                   |   |
| FINANCING ACTIVITIES                                                                                                         |   |                                 |   |   |   |   |
|       Net (decrease) in deposit accounts                                                       | $      | (2,418                               | )      | $ | (8,589 | ) |
|       Net (decrease) in Federal Home Loan Bank short-term advances                             |   | (106,500                             | )      |   | (10 | ) |
|       Net increase in Federal Home Loan Bank long-term advances                                |   | 74,989                               |   |   | — |   |
|       Net increase in advances from borrowers for taxes and insurance                          |   | 1,034                                |   |   | 682 |   |
|       Net increase (decrease) in other borrowings                                              |   | 20,258                               |   |   | (2,122 | ) |
|       Proceeds from issuance of trust-preferred securities                                     |   | —                              |   |   | 15,000 |   |
|       Purchase of stock for stock employee compensation trust                                  |   | —                              |   |   | (1,096 | ) |
|       Cash dividend on common stock                                                            |   | (753                                 | )      |   | (982 | ) |
|       Stock options exercised                                                                  |   | 302                                  |   |   | 36 |   |
|                                                                                                                         |        |                                      |   |  |  |   |
|             Net cash provided by (used for) financing activities |   | (13,088                              | )      |   | 2,919 |   |
|                                                                                                                         |        |                                      |   |  |  |   |
|             Increase (decrease) in cash and cash equivalents     |   | (1,721                               | )      |   | 16,722 |   |
|                                                                                                                         |   |                                 |   |   |   |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                                                 |   | 20,142                               |   |   | 25,302 |   |
|                                                                                                                         |        |                                      |   |  |  |   |
| CASH AND CASH EQUIVALAENTS, END OF PERIOD                                                                                    | $      | 18,421                               |   | $ | 42,024 |   |
|                                                                                                                         |        |                                      |   |  |  |   |
| SUPPLEMENTAL INFORMATION                                                                                                     |   |                                 |   |   |   |   |
|    Cash paid during the period for:                                                                           |   |                                 |   |   |   |   |
|          Interest on deposits and borrowings                                    | $      | 9,693                                |   | $ | 13,251 |   |
|          Income taxes                                                           |   | 90                                   |   |   | 1,043 |   |
|    Supplemental disclosures – non-cash and financing information:                                        |   |                                 |   |   |   |   |
|          Transfer from loans to assets acquired through foreclosure             |   | 1,205                                |   |   | 866 |   |
|          Net change in other comprehensive income                               |   | 380                                  |   |   | 2,876 |   |
|                                                                                                                         |   |                                 |   |   |   |   |

See accompanying    notes to the unaudited consolidated financial statements.

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

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

**Business**

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

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

These financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report for the year ended September 30, 2003. The results for the three and six months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ended September 30, 2004. 

The        Company follows accounting principles and reporting practices which are        generally accepted    in the United States of America (“GAAP”). The preparation of financial statements    in conformity with GAAP requires management to make estimates and assumptions    that affect the reported amounts of assets and liabilities and disclosure of    contingent assets and liabilities at the date of the financial statements and    the reported amounts of revenues and expenses during the reporting period.    Actual results could differ significantly from those estimates. Material estimates    that are particularly susceptible to significant change in the near-term relate    to determination of the allowance for loan losses, the evaluation and realizability    of deferred taxes and the evaluation of other than temporary impairment for    investments.

**Risks and Uncertainties**

In the normal courseof its business, the Company encounters two significant types of risk: economicand regulatory. There are three main components of economic risk: interest raterisk, credit risk and market risk. The Company is subject to interest rate riskto the degree that its interest-bearing liabilities mature or reprice at differentspeeds, or on different bases from its interest-earning assets. The Company’sprimary credit risk is the risk of defaults in the Company’s loan portfolio thatresult from borrowers inability or unwillingness to make contractually requiredpayments. The Company’s lending activities are concentrated in Pennsylvania.The largest concentration of the Company’s loan portfolio is located in NortheasternPennsylvania. The ability of the Company’s borrowers to repay amounts owed isdependent on several factors, including the economic conditions in the borrowers’geographic regions and the borrowers’ financial conditions. Market risk reflectschanges in the value of the collateral underlying loans, the valuation of realestate held by the Company, and the valuation of loans held for sale, securities,mortgage servicing assets and other investments.

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

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**Stock Options******

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

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

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

|                                                 |   | **Three Months Ended**                            |   |            | **Six Months Ended** |   |
|------------------------------------------------------|--------|---------------------------------------------------|--------|-----------------|----------------------|--------|
|                                                 |   | **March 31,**                                     |   |            | **March 31,**        |   |
|                                                 |        |                                                   |   |                 |                      |   |
|                                                 |   |                                              |   | **As Restated** |                 |   |   |   | **As Restated** |   |
|                                                 |   | **2004**                                          |   | **2003**        |                 |   | **2004** |   |   | **2003** |   |
|                                                 |        |                                                   |   |                 |                 |        |  |   |  |  |   |
|                                                 |   | **(Dollars in thousands, except per share data)** |   |
|                                                 |   |                                              |   |            |                 |   |   |   |   |   |   |   |
| Net income, as reported:                             | $      | 2,090                                             |   | $               | 920                  |   | $ | 3,129 |   | $ | 1,589 |   |
| Less: proforma expense related                       |   |                                              |   |            |                 |   |   |   |   |   |   |   |
|       to stock options | $      | 51                                                |   | $               | 317                  |   | $ | 119 |   | $ | 401 |   |
|                                                 |        |                                                   |   |                 |                      |   |  |  |   |  |  |   |
|                                                 |   |                                              |   |            |                 |   |   |   |   |   |   |   |
| Proforma net income                                  | $      | 2,039                                             |   | $               | 603                  |   | $ | 3,010 |   | $ | 1,188 |   |
|                                                 |        |                                                   |   |                 |                      |   |  |  |   |  |  |   |
| Basic net income per common share:                   |   |                                              |   |            |                 |   |   |   |   |   |   |   |
|    As reported                        | $      | 0.53                                              |   | $               | 0.24                 |   | $ | 0.80 |   | $ | 0.42 |   |
|    Pro forma                          |   | 0.52                                              |   |            | 0.16                 |   |   | 0.78 |   |   | 0.32 |   |
|                                                 |   |                                              |   |            |                 |   |   |   |   |   |   |   |
| Diluted net income per common share:                 |   |                                              |   |            |                 |   |   |   |   |   |   |   |
|    As reported                        | $      | 0.51                                              |   | $               | 0.23                 |   | $ | 0.76 |   | $ | 0.40 |   |
|    Pro forma                          |   | 0.49                                              |   |            | 0.15                 |   |   | 0.73 |   |   | 0.30 |   |

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

| **2.** | **EFFECTS    OF RESTATEMENT** |
|--------|-------------------------------|

The Consolidated Financial Statements as presented for the three and six month periods ended March 31, 2003 have been restated to reflect the correction of accounting errors for the Company’s indirect automobile, mortgage and consumer loan portfolios. Such errors were discovered in July 2003 and were primarily the result of computer coding errors and did not impact any loan customers.

In September 2003, the Company completed a review of its accounting records and discovered additional accounting errors. As such, the Company further restated its financials for the three and six month periods ended March 31, 2003 to reflect the correction of additional accounting errors related to an underaccrual in the Company’s health and welfare benefit plans and an overaccrual in advertising costs.  Such errors resulted in an increase in salaries and employee benefits and a reduction in advertising costs.

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

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

|                                                                | **Three Months**                                                  |   | **Six Months** |   |
|---------------------------------------------------------------------|-------------------------------------------------------------------|--------|----------------|--------|
| **Ended**                                                           | **Ended**                                                         |
| **March 31,**                                                       | **March 31,**                                                     |
| **2003**                                                            | **2003**                                                          |
|                                                                     |                                                                   |
| Net income prior to restatements                                    | $                                                                 | 1,289  |           | $      | 2,232 |   |
| Adjustment for interest and fees on loans, net of tax benefit       |                                                              | (302   | )              |   | (594 | ) |
| Adjustment for gain on sale of loans, net of tax expense            |                                                              | 44     |           |   | 110 |   |
|                                                                |                                                                   |        |           |        |  |   |
| Net income after 1st restatement                                    |                                                              | 1,031  |           |   | 1,748 |   |
| Adjustment for salaries and employee benefits, net of tax benefit   |                                                              | (122   | )              |   | (170 | ) |
| Adjustment for advertising, net of tax expense                      |                                                              | 11     |           |   | 11 |   |
|                                                                |                                                                   |        |           |        |  |   |
| NET INCOME, AS ADJUSTED, AFTER 2ND RESTATEMENT                      | $                                                                 | 920    |           | $      | 1,589 |   |
|                                                                |                                                                   |        |           |        |  |   |
| EARNINGS PER SHARE (EPS)                                            |                                                              |   |           |   |   |   |
| Basic EPS prior to restatements                                     | $                                                                 | 0.34   |           | $      | 0.59 |   |
|                                                                | Adjustment for interest and fees on loans, net of tax benefit     |   | (0.08          | )      |   | (0.16 | ) |
|                                                                | Adjustment for gains on sale of loans, net of tax expense         |   | 0.02           |   |   | 0.04 |   |
|                                                                |                                                              |        |                |   |  |  |   |
|                                                                | Basic EPS after 1st restatement                                   | $      | 0.28           |   | $ | 0.47 |   |
|                                                                | Adjustment for salaries and employee benefits, net of tax benefit |   | (0.04          | )      |   | (0.05 | ) |
|                                                                |                                                              |        |                |   |  |  |   |
| Basic EPS, as adjusted, net of tax benefit, after 2nd restatement   | $                                                                 | 0.24   |           | $      | 0.42 |   |
|                                                                |                                                                   |        |           |        |  |   |
| Diluted EPS prior to restatements                                   | $                                                                 | 0.33   |           | $      | 0.57 |   |
|                                                                | Adjustment for interest and fees on loans, net of tax benefit     |   | (0.08          | )      |   | (0.15 | ) |
|                                                                | Adjustment for gain on sale of loans, net of tax expense          |   | 0.01           |   |   | 0.02 |   |
|                                                                |                                                              |        |                |   |  |  |   |
|                                                                | Diluted EPS after 1st restatement                                 |   | 0.26           |   |   | 0.44 |   |
|                                                                | Adjustment for salaries and employee benefits, net of tax benefit |   | (0.03          | )      |   | (0.04 | ) |
|                                                                |                                                              |        |                |   |  |  |   |
| Diluted EPS, as adjusted, net of tax benefit, after 2nd restatement | $                                                                 | 0.23   |           | $      | 0.40 |   |
|                                                                |                                                                   |        |           |        |  |   |
|                                                                |                                                              |   |           |   |   |   |   |
| **3.**                                                              | **EARNINGS PER SHARE**                                            |   |           |   |   |   |   |

Earnings per share (“EPS”), basic and diluted, were $0.53 and $0.51, respectively, for the three months ended March 31, 2004 compared to $0.24 and $0.23, respectively, for the three months ended March 31, 2003. EPS, basic and diluted, were $0.80 and $0.76, respectively, for the six months ended March 31, 2004 compared to $0.42 and $0.40, respectively, for the six months ended March 31, 2003.

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

|                                | **Three Months Ended**                     |      |   **Six Months Ended** |     |
|-------------------------------------|--------------------------------------------|--------------------------|----------------------------------|----------|
| **March 31,**                       | **March 31,**                              |
|                                     |                                            |                          |                                  |          |  |  |  |
|                                |                                  | **As Restated**          |                   |     | **As Restated** |
| **2004**                            | **2003**                                   | **2004**                 |                             | **2003** |
|                                     |                                            |                     |                                  |          |  |   |  |
| Net income                          | $                                          | 2,090                    |                             | $        | 920 |   | $ | 3,129 |   | $ | 1,589 |   |
|                                |                                            |                          |                             |          |  |   |  |  |   |  |  |   |
| Weighted-average common shares      |                                       |                     |                             |     |   |   |   |   |   |   |   |   |
|                                | outstanding                                |                     | 6,427,350                        |     |   | 6,427,350 |   |   | 6,427,350 |   |   | 6,427,350 |   |
| Average treasury stock shares       |                                       | (2,245,551               | )                                |     | (2,253,162 | ) |   | (2,248,140 | ) |   | (2,255,165 | ) |
| Average common stock acquired by    |                                       |                     |                             |     |   |   |   |   |   |   |   |   |
|                                | stock benefit    plans:                    |                     |                             |     |   |   |   |   |   |   |   |   |   |
|                                | Stock employee    compensation trust       |                     | (50,747                          | )        |   | (87,098 | ) |   | (52,937 | ) |   | (76,864 | ) |
|                                | Stock awards    unallocated, net           |                     | (13,313                          | )        |   | (75,636 | ) |   | (29,061 | ) |   | (75,636 | ) |
|                                | ESOP shares    unallocated, net            |                     | (197,761                         | )        |   | (250,663 | ) |   | (227,309 | ) |   | (257,090 | ) |
|                                |                                            |                          |                             |          |  |   |  |  |   |  |  |   |
| Weighted-average common shares used |                                       |                     |                             |     |   |   |   |   |   |   |   |   |
|                                | to calculate    basic earnings per share   |                     | 3,919,978                        |     |   | 3,760,791 |   |   | 3,869,903 |   |   | 3,762,595 |   |
| Dilutive effect of stock awards     |                                       | 2,521                    |                             |     | 10,203 |   |   | 10,058 |   |   | 12,128 |   |
| Dilutive effect of outstanding      |                                       |                     |                             |     |   |   |   |   |   |   |   |   |
|                                | stock options                              |                     | 214,895                          |     |   | 178,824 |   |   | 218,580 |   |   | 177,757 |   |
|                                |                                            |                          |                             |          |  |   |  |  |   |  |  |   |
| Weighted-average common shares used |                                       |                     |                             |     |   |   |   |   |   |   |   |   |
|                                | to calculate    diluted earnings per share |                     | 4,137,394                        |     |   | 3,949,818 |   |   | 4,098,541 |   |   | 3,952,480 |   |
|                                |                                            |                          |                             |          |  |   |  |  |   |  |  |   |
| Earnings per share-basic            | $                                          | 0.53                     |                             | $        | 0.24 |   | $ | 0.80 |   | $ | 0.42 |   |
| Earnings per share-diluted          | $                                          | 0.51                     |                             | $        | 0.23 |   | $ | 0.76 |   | $ | 0.40 |   |

Diluted earnings per share include the dilutive effect of the Company’s weighted-average stock options/awards outstanding using the Treasury Stock method. The Company had anti-dilutive common stock options outstanding of 33,000 for the three months ended March 31, 2004 and 2003, respectively, and 10,485 for the six months ended March 31, 2004 and 2003, respectively. These options are not included in the calculation of diluted earnings per share for the periods presented.

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| **4.** | **INVESTMENT    SECURITIES**             |
|--------|------------------------------------------|
|   |                                     |
|   | Securities    are summarized as follows: |

|                                              |                    |                        |          |    | **March 31, 2004** |   |   |    |   |
|---------------------------------------------------|-------------------------|-----------------------------|---------------|---------|--------------------|--------|--------|---------|--------|
|                                                   |                         |
| **(in thousands)**                                |
| **Gross**                                         |                    |    **Gross** | **Estimated** |
| **Amortized**                                     | **Unrealized**          | **Unrealized**              | **Market**    |
| **Cost**                                          | **Gains**               | **Losses**                  | **Value**     |
|                                                   |                         |                             |               |         |                    |        |        |
| **Available-for-sale    securities:**             |                    |                        |          |    |               |   |   |    |   |   |   |   |
| Obligations of U.S.                               |                    |                        |          |    |               |   |   |    |   |   |   |   |
|      government agencies | $                       | 12,461                      |          | $       | 140                |   | $      | — |   | $ | 12,601 |   |
| Municipal securities                              |                    | 7,973                       |          |    | 105                |   |   | (3      | )      |   | 8,075 |   |
| Corporate securities                              |                    | 15,568                      |          |    | 860                |   |   | — |   |   | 16,428 |   |
| Trust Preferred securities                        |                    | 4,205                       |          |    | 348                |   |   | — |   |   | 4,553 |   |
| Mortgage-backed    securities                     |                    | 297,439                     |          |    | 2,806              |   |   | (656    | )      |   | 299,589 |   |
|                                              |                    |                        |          |         |                    |   |        |         |   |  |  |   |  |  |   |
|                                              | Total debt securities   |                        | 337,646       |    |               | 4,259  |   |    | (659   | ) |   | 341,246 |   |
|                                              |                    |                        |          |         |                    |   |        |         |   |  |  |   |  |  |   |
| FHLB Stock                                        |                    | 12,309                      |          |    | —            |   |   | — |   |   | 12,309 |   |
| FHLMC stock                                       |                    | 2,242                       |          |    | —            |   |   | (230    | )      |   | 2,012 |   |
| FNMA stock                                        |                    | 3,000                       |          |    | 10                 |   |   | (180    | )      |   | 2,830 |   |
| Other equity securities                           |                    | 78                          |          |    | 19                 |   |   | (4      | )      |   | 93 |   |
|                                              |                    |                        |          |         |                    |   |        |         |   |  |  |   |  |  |   |
|                                              | Total equity securities |                        | 17,629        |    |               | 29     |   |    | (414   | ) |   | 17,244 |   |
|                                              |                    |                        |          |         |                    |   |        |         |   |  |  |   |  |  |   |
|                                              |                    | Total                       | $             | 355,275 |               | $      | 4,288  |    | $      | (1,073 | ) | $ | 358,490 |   |
|                                              |                    |                        |          |         |                    |   |        |         |   |  |  |   |  |  |   |
| **Held-to-maturity securities:**                  |                    |                        |          |    |               |   |   |    |   |   |   |   |
| Municipal securities                              | $                       | 2,715                       |          | $       | 52                 |   | $      | — |   | $ | 2,767 |   |
|                                              |                    |                        |               |         |               |        |        |    |        |  |   |  |  |   |
|                                              |                    | Total                       | $             | 2,715   |               | $      | 52     |    | $      | — |   | $ | 2,767 |   |
|                                              |                    |                        |          |         |                    |   |        |         |   |  |  |   |  |  |   |
|                                              |                    |                        |          |    |               |   |   |    |   |   |   |   |   |   |   |

|                                              |                    |           | **September 30, 2003** |    |    |   |
|---------------------------------------------------|-------------------------|----------------|------------------------|---------|---------|--------|
|                                                   |                         |
| **(in thousands)**                                |
| **Gross**                                         |                    | **Gross**      | **Estimated**          |
| **Amortized**                                     | **Unrealized**          | **Unrealized** | **Market**             |
| **Cost**                                          | **Gains**               | **Losses**     | **Value**              |
|                                                   |                         |                |                        |         |         |        |  |
| **Available-for-sale    securities:**             |                    |           |                   |    |    |   |   |   |   |   |   |   |
| Obligations of U.S.                               |                    |           |                   |    |    |   |   |   |   |   |   |   |
|      government agencies | $                       | 26,089         |                   | $       | 204     |   | $ | (4 | ) | $ | 26,289 |   |
| Municipal securities                              |                    | 14,983         |                   |    | 151     |   |   | — |   |   | 15,134 |   |
| Corporate securities                              |                    | 38,769         |                   |    | 1,814   |   |   | (12 | ) |   | 40,571 |   |
| Trust Preferred securities                        |                    | 12,754         |                   |    | 474     |   |   | (429 | ) |   | 12,799 |   |
| Mortgage-backed securities                        |                    | 210,144        |                   |    | 1,652   |   |   | (831 | ) |   | 210,965 |   |
|                                              |                    |           |                        |         |    |        |  |   |  |  |   |  |  |   |
|                                              | Total debt securities   |           | 302,739                |    |    | 4,295  |   |   | (1,276 | ) |   | 305,758 |   |
|                                              |                    |           |                        |         |    |        |  |   |  |  |   |  |  |   |
| FHLB Stock                                        |                    | 12,987         |                   |    | — |   |   | — |   |   | 12,987 |   |
| FHLMC stock                                       |                    | 2,241          |                   |    | — |   |   | (304 | ) |   | 1,937 |   |
| FNMA stock                                        |                    | 6,000          |                   |    | 20      |   |   | (170 | ) |   | 5,850 |   |
| Other equity securities                           |                    | 78             |                   |    | 22      |   |   | (6 | ) |   | 94 |   |
|                                              |                    |           |                        |         |    |        |  |   |  |  |   |  |  |   |
|                                              | Total equity securities |           | 21,306                 |    |    | 42     |   |   | (480 | ) |   | 20,868 |   |
|                                              |                    |           |                        |         |    |        |  |   |  |  |   |  |  |   |
|                                              |                    |           |                   |    |    |   |   |   |   |   |   |   |   |   |
|                                              |                    | Total          | $                      | 324,045 |    | $      | 4,337 |   | $ | (1,756 | ) | $ | 326,626 |   |
|                                              |                    |           |                        |         |    |        |  |   |  |  |   |  |  |   |

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**Held-to-maturitysecurities:**

|      Municipal    securities | $      | 3,555  |   | $      | 67     |   | $      | — |    | $      | 3,622  |   |
|-------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|---------|---------|--------|--------|--------|
|                                                  |   |   |        |        |   |        |        |    |         |        |   |        |  |   |
|                                                  | Total  | $      | 3,555  |   | $      | 67     |   | $       | — |   | $      | 3,622  |   |
|                                                  |   |   |        |        |   |        |        |    |         |        |   |        |  |   |
|                                                  |   |   |   |   |   |   |   |    |    |   |   |   |   |   |

| **5.** | **LOANS** |
|--------|-----------|

|                                |                   |                                     |                                    |    |    |    |    |                                 |         |         |                 |   |
|-------------------------------------|------------------------|------------------------------------------|-----------------------------------------|---------|---------|---------|---------|--------------------------------------|--------------|--------------|----------------------|--------|
| Loans are    summarized as follows: |                   |                                     |                                    |    |    |    |
|                                |                   |                                     |                                    |    |    |    |    |                                 |         |         |                 |   |
|                                |                   |                                     |                                    |    |    |    |    | **March 31,**                        |    |    | **September    30,** |   |
| **2004**                            | **2003**               |
|                                |                   |                                     |                                    |    |    |    |         |                                      |         |              |                      |   |
|                                |                   |                                     |                                    |    |    |    |    | **(in thousands)**    |         |
|                                | **Real Estate Loans:** |                                     |                                    |    |    |    |    |
|                                |                   | One-to    four-family                    | $                                       | 121,909 |    | $       | 149,741 |                                 |
|                                |                   | Multi-family    and commercial           |                                    | 66,495  |    |    | 64,343  |                                 |
|                                |                   | Construction                             |                                    | 11,117  |    |    | 22,384  |                                 |
|                                |                   |                                     |                                    |    |    |    |         |                                      |         |              |                      |   |
|                                |                   |                                     | Total real estate loans                 |    | 199,521 |    |    | 236,468                              |         |
|                                |                   |                                     |                                    |    |    |    |         |                                      |         |              |                      |   |
|                                | **Consumer Loans:**    |                                     |                                    |    |    |    |    |
|                                |                   | Home equity    loans and lines of credit |                                    | 70,063  |    |    | 73,036  |                                 |
|                                |                   | Automobile                               |                                    | 135,346 |    |    | 136,182 |                                 |
|                                |                   | Unsecured lines of credit                |                                    | 3,927   |    |    | 3,455   |                                 |
|                                |                   | Other                                    |                                    | 8,416   |    |    | 9,421   |                                 |
|                                |                   |                                     |                                    |    |    |    |         |                                      |         |              |                      |   |
|                                |                   |                                     | Total consumer loans                    |    | 217,752 |    |    | 222,094                              |         |
|                                |                   |                                     |                                    |    |    |    |         |                                      |         |              |                      |   |
|                                | **Commercial Loans**   |                                     | 40,650                                  |    |    | 43,203  |    |
|                                |                   |                                     |                                    |    |    |    |         |                                      |         |              |                      |   |
|                                | Total loans            |                                     | 457,923                                 |    |    | 501,765 |    |
|                                |                   |                                     |                                    |    |    |    |    |                                 |         |         |                 |   |
|                                |                   | Less:                                    |                                    |    |    |    |    |                                 |
|                                |                   |                                     | Deferred     loan origination fees, net |    | (1,216  | )       |    | (1,583                               | )            |
|                                |                   |                                     | Allowance for loan losses               |    | (10,178 | )       |    | (10,196                              | )            |
|                                |                   |                                     |                                    |    |    |    |         |                                      |         |              |                      |   |
|                                |                   |                                     |                                    |    |    |    |    |                                 |         |         |                 |   |
|                                |                   |                                     | **Total loans, net**                    | $       | 446,529 |    | $       | 489,986                              |         |
|                                |                   |                                     |                                    |    |    |    |         |                                      |         |              |                      |   |

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

|                                           |                    | **Six    Months**   |   |   |                  |   |   | **Six       Months** |   |
|------------------------------------------------|-------------------------|---------------------|--------|--------|-----------------------|--------|--------|----------------------|--------|
| **Ended**                                      | **Year       Ended**    | **Ended**           |
| **March    31,**                               | **September       30,** | **March       31,** |
| **2004**                                       | **2003**                | **2003**            |
|                                           |                         |                |        |   |                       |   |
|                                           |                    |                |   |   | **(in    thousands)** |   |   |                 |   |
|                                           |                    |                |   |   |                  |   |   |                 |   |
| Balance, beginning                             | $                       | 10,196              |   | $      | 5,449                 |   | $      | 5,449                |   |
|    Provisions charged to income |                    | 1,162               |   |   | 6,852                 |   |   | 980                  |   |
|    Charge-offs                  |                    | (1,484              | )      |   | (2,251                | )      |   | (1,385               | )      |
|    Recoveries                   |                    | 304                 |   |   | 146                   |   |   | 226                  |   |
|                                           |                         |                     |   |        |                       |   |        |                      |   |
| Balance, end                                   | $                       | 10,178              |   | $      | 10,196                |   | $      | 5,270                |   |
|                                           |                         |                     |   |        |                       |   |        |                      |   |

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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 issued certificates representing ownership interests in the Trust, primarily to institutional investors. Although the Bank continues to service the underlying accounts and maintain the customer relationships, this transaction is treated as a sale for financial reporting purposes to the extent of the investors’ interest in the Trust. Accordingly, the receivables associated with the investors’ interests are not reflected on the Consolidated Statement of Financial Condition. In connection with this transaction, the Bank enhanced the credit protection of the certificateholders by funding a cash reserve account. 

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

As of March 31, 2004, the balance of automobile loan receivables in the Trust was $16.5 million.  Because the historical performance of the receivables met the established criteria as of September 30, 2003, the balance of the cash reserve account was reduced from 4.75% to 3.00% of the original balance at that time.  The aggregate balance of the retained interest totaled approximately $1.4 million at March 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 | **March 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 | 30 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: 

|                                        |                                                     | **March 31, 2004** |   |
|---------------------------------------------|----------------------------------------------------------|--------------------|--------|
|                                        |                                                     |                    |   |
|                                        |                                                     | **(in thousands)** |   |
|                                        |                                                     |               |   |   |
| Fair value of retained interest             | $                                                        | 1,412              |   |
|                                        |                                                     |               |   |   |
| Weighted-average repayment rate assumption: |                                                     |               |   |
|                                        | Pre-tax decrease to earnings due to a 10% adverse change | $                  | 2      |   |
|                                        | Pre-tax decrease to earnings due to a 20% adverse change | $                  | 7      |   |
|                                        |                                                     |               |   |   |
| Weighted-average expected default rate:     |                                                     |               |   |
|                                        | Pre-tax decrease to earnings due to a 10% adverse change | $                  | 33     |   |
|                                        | Pre-tax decrease to earnings due to a 20% adverse change | $                  | 68     |   |
|                                        |                                                     |               |   |   |
| Weighted-average discount rate:             |                                                     |               |   |
|                                        | Pre-tax decrease to earnings due to a 10% adverse change | $                  | 15     |   |
|                                        | Pre-tax decrease to earnings due to a 20% adverse change | $                  | 33     |   |

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

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| **7.** | **DEPOSITS** |
|--------|--------------|
|   |         |

Deposits consistof the following major classifications:

|                                           |         |           | **March 31, 2004** |         | **September 30, 2003** |         |
|------------------------------------------------|--------------|----------------|--------------------|--------------|------------------------|--------------|
|                                           |         |           |                    |         |                        |         |
|                                           |         |           |               |    | **Percent**            |    |    |    |  **Percent** |   |
| **Amount**                                     | **of Total** | **Amount**     | **of Total**       |
|                                           |         |           |                    |         |                        |         |  |   |  |   |
|                                           |         |           | **(in thousands)** |         |
|                                           |         |           |               |         |                   |         |   |   |   |   |   |   |   |   |
| Noninterest-bearing                            | $            | 37,772         |               |         | 7.07                   | %            | $ | 36,451 |   |   | 6.66 | % |
| Interest-bearing:                              |         |           |               |         |                   |         |   |   |   |   |   |   |
|                                           | Savings      |           | 95,386             |         |                   | 17.84        | % |   | 97,499 |   |   | 17.81 | % |
|                                           | NOW accounts |           | 82,132             |         |                   | 15.36        | % |   | 88,130 |   |   | 16.10 | % |
|                                           | Money market |           | 85,236             |         |                   | 15.95        | % |   | 95,972 |   |   | 17.54 | % |
|                                           |         |           |                    |              |                   |              |  |   |  |  |   |  |  |   |
|                                           |         |           |               | 262,754      |                   |         | 49.15 | % |   | 281,601 |   |   | 51.45 | % |
|                                           |         |           |                    |              |                   |              |  |   |  |  |   |  |  |   |
|                                           |         |           |               |         |                   |         |   |   |   |   |   |   |   |   |
| Brokered CD’s                             |         | 33,000         |               |         | 6.17                   | %            |   | — |   |   | — |   |
| Certificates    of deposit $100,000 or greater |         | 29,149         |               |         | 5.45                   | %            |   | 33,584 |   |   | 6.14 | % |
| Certificates    of deposit less than $100,000  |         | 171,868        |               |         | 32.16                  | %            |   | 195,669 |   |   | 35.75 | % |
|                                           |         |           |                    |              |                   |              |  |   |  |  |   |  |  |   |
|                                           |         |           |               | 234,017      |                   |         | 43.78 | % |   | 229,253 |   |   | 41.89 | % |
|                                           |         |           |                    |              |                   |              |  |   |  |  |   |  |  |   |
|                                           |         | Total deposits | $                  | 534,543      |                   |         | 100.00 | % | $ | 547,305 |   |   | 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 and U.S. Government and Agency notes and bonds) in the amount of at least as much as its advances from the FHLB. The Bank’s FHLB stock is also pledged to secure these advances. Advances from the FHLB with fixed rates ranging from 2.00% to 6.71% at March 31, 2004 are due as follows: 

|                 |             | **Weighted** |   |                 |    |   |
|----------------------|------------------|--------------|--------|----------------------|---------|--------|
| **Due by March 31,** | **Average Rate** | **Amount**   |
|                      |             |              |   |                      |    |
|                 |             |         |   | **($ in thousands)** |    |
|                 |             |         |   |                 |    |   |
| 2005                 |             | 5.72         | %      | $                    | 25,000  |   |
| 2006                 |             | 4.26         | %      |                 | 127,000 |   |
| 2007                 |             | 3.07         | %      |                 | 25,083  |   |
| 2008                 |             | —      |   |                 | — |   |
| 2009                 |             | 4.89         | %      |                 | 10,000  |   |
| Thereafter           |             | 5.40         | %      |                 | 42,172  |   |
|                 |             |         |   |                      |         |   |
| Total FHLB advances  |             |         |   | $                    | 229,255 |   |
|                 |             |         |   |                      |         |   |

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| **9.** | **TRUST    PREFERRED SECURITIES** |
|--------|-----------------------------------|

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

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

In December 2003,the FASB revised Financial Interpretation No. (“FIN”) 46, Consolidationof Variable Interest Entities, an interpretation of Accounting Research BulletinNo. 51 (the Interpretation). The Interpretation requires the consolidation ofentities in which an enterprise absorbs a majority of the entity’s expectedlosses, receives a majority of the entity’s expected residual returns, orboth, as a result of ownership, contractual or other financial interests in theentity. Previously, entities were generally consolidated by an enterprise whenit has a controlling financial interest through ownership of a majority votinginterest in the entity. Application of this Interpretation is required in financialstatements of public entities that have interests in variable interest entitiesor potential variable interest entities commonly referred to as special purposeentities for periods ending after December 15, 2003. Application by public entitiesfor all other types of entities is required in financial statements for periodsending after March 15, 2004. As a result of the adoption of FIN 46, the Companydeconsolidated its Capital Trusts in the first quarter of 2004. The result wasan increase in the junior debt of $681,000. 

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

| **Name**             |   |   | **Amount    Outstanding** |   | **Rate** |   | **Prepayment     Option    Date** |   | **Maturity** |   | **Distribution     Payment    Frequency** |
|----------------------|--------|--------|---------------------------|--------|----------|--------|-----------------------------------|--------|--------------|--------|-------------------------------------------|
|                      |   |        |                           |   |          |   |                                   |   |              |   |                                           |
| NEP Capital Trust I  |   | $      | 7,217,000                 |   | 4.92     | %      | 4/22/2007                         |   | 4/22/2032    |   | Semi-annually                             |
| NEP Capital Trust II |   | $      | 15,464,000                |   | 4.57     | %      | 11/7/2007                         |   | 11/7/2032    |   | Quarterly                                 |

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| **10.** | **GOODWILL    AND OTHER INTANGIBLE ASSETS** |
|---------|---------------------------------------------|

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

|                                                          |   | **At    March 31, 2004 and September 30, 2003** |       |
|---------------------------------------------------------------|--------|-------------------------------------------------|------------|
|                                                          |   |                                                 |            |  |  |  |  |  |  |   |
|                                                          |   | **Gross**                                       | ** ** | ** ** | ** ** | **Net** |   |
|                                                          |   | **Carrying**                                    | ** ** | **Accumulated** | ** ** | **Carrying** |   |
| **Goodwill**                                                  |   | **Amount**                                      | ** ** | **Amortization** | ** ** | **Amount** |   |
|                                                               |   |                                                 |            | ** ** |  |  | ** ** |  |  |   |
|                                                          |   | **(in    thousands)**                           |       |
| Acquisition    of:                                            |   |                                            |       |   |   |   |   |   |   |   |
|    Abstractors                                 |   | $                                               | 248        |   | $ | (160 | ) | $ | 88 |   |
|    Security    Savings Association of Hazleton |   |                                            | 571        |   |   | (28 | ) |   | 543 |   |
|    Higgins    Insurance Associates, Inc.       |   |                                            | 2,519      |   |   | (134 | ) |   | 2,385 |   |
|    Schuylkill    Savings and Loan Association  |   |                                            | 200        |   |   | — |   |   | 200 |   |
|                                                          |   |                                                 |            |   |  |  |   |  |  |   |
| Total goodwill                                                |   | $                                               | 3,538      |   | $ | (322 | ) | $ | 3,216 |   |
|                                                          |   |                                                 |            |   |  |  |   |  |  |   |

 

| ** **                                                   | ** ** | **At March 31,    2004** | ** ** | **At September       30, 2003** |               |
|--------------------------------------------------------------|------------|--------------------------|------------|---------------------------------|--------------------|
| ** **                                                   | ** ** |                          |            |                                 |                    |  |  |  |  | ** ** |  |  |  |  |  |  |  |   |
| ** **                                                   | ** ** | **Gross**                | ** ** | ** **                      | ** **         | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** |   |
| ** **                                                   | ** ** | **Carrying**             | ** ** | **Accumulated**                 | ** **         | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** |   |
| **Other Intangible Assets**                                  | ** ** | **Amount**               | ** ** | **Amortization**                | ** **         | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** |   |
|                                                              | ** ** |                          |            | ** **                      |                    |  | ** ** |  |  | ** ** |  |  | ** ** |  |  | ** ** |  |  |   |
|                                                         | ** ** | ** **               | ** ** | ** **                      | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |   |
| Amortizing:                                                  |       |                     |       |                            |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Omega core deposit                         |       |                     |       |                            |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       intangible (1)           |       | $                        | —     |                            | $                  | — |   | $ | — |   | $ | 1,537 |   | $ | (950 | ) | $ | 587 |   |
|    Security Savings Association               |       |                     |       |                            |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       of Hazleton core deposit |       |                     |       |                            |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       intangible               |       |                     | 9,086      |                            |               | (2,194 | ) |   | 6,892 |   |   | 9,086 |   |   | (1,977 | ) |   | 7,109 |   |
|    Schuylkill Savings and Loan                |       |                     |       |                            |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       Association core deposit |       |                     |       |                            |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       intangible               |       |                     | 255        |                            |               | (62 | ) |   | 193 |   |   | 255 |   |   | (50 | ) |   | 205 |   |
|    Other intangibles                          |       |                     | 959        |                            |               | (521 | ) |   | 438 |   |   | 959 |   |   | (340 | ) |   | 619 |   |
|                                                         |       |                     |       |                            |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonamortizing intangible assets                              |       |                     |       |                            |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Other intangible assets                    |       |                     | 75         |                            |               | — |   |   | 75 |   |   | 75 |   |   | — |   |   | 75 |   |
|                                                         |       |                          |            |                            |                    |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Total other intangible assets                                |       | $                        | 10,375     |                            | $                  | (2,777 | ) | $ | 7,598 |   | $ | 11,912 |   | $ | (3,317 | ) | $ | 8,595 |   |
|                                                         |       |                          |            |                            |                    |  |   |  |  |   |  |  |   |  |  |   |  |  |   |

|                                                                                                                                                                     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                          |
| (1)   In        January 2004, the Bank sold its Danville branch and charged the remaining        Omega    intangible to gain on sale of the branch.  |

Nonamortizing intangible assets consist of title plant of $75,000 at March 31, 2004 and 2003. 

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

|                         | **For the Three Months Ended** | ** ** | **For the Six Months Ended** |       |
|------------------------------|--------------------------------|------------|------------------------------|------------|
|                         | **March 31,**                  | ** ** | **March 31,**                |       |
|                         |                                |            |                              | ** ** |  |  |  |   |
|                         | **2004**                       | ** ** | **2003**                     | ** ** | **2004** | ** ** | **2003** |   |
|                         |                                |            | ** **                   |            |  | ** ** |  |  | ** ** |  |  |   |
|                         | **(in thousands)**             | ** ** | **(in thousands)**           |       |
|                         |                           |       |                         |       |   |   |   |   |   |   |   |   |
| Core deposit intangibles     | $                              | 88         |                         | $          | 205 |   | $ | 260 |   | $ | 415 |   |
| Other amortizing intangibles |                           | 109        |                         |       | 52 |   |   | 181 |   |   | 102 |   |
|                         |                                |            |                         |            |  |   |  |  |   |  |  |   |
| Total amortizing intangibles | $                              | 197        |                         | $          | 257 |   | $ | 441 |   | $ | 517 |   |
|                         |                                |            |                         |            |  |   |  |  |   |  |  |   |

There were no intangible assets acquired during the six months ended March 31, 2004.

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| **11.** | **DERIVATIVE    INSTRUMENTS AND HEDGING ACTIVITIES** |
|---------|------------------------------------------------------|

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

In November 2003, the Bank entered into receive fixed-pay variable interest rate swaps with a notional amount of $40 million that have been designated to hedge changes in the fair value of certain FHLB advances. The Bank includes all components of each derivative’s fair value in the assessment of hedge effectiveness. For the three and six month periods ended March 31, 2004, no gain or loss was required to be recognized in earnings associated with these fair value hedges.  Additionally, no hedge ineffectiveness was noted as of March 31, 2004. 

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

|                                                                         | **At    March 31, 2004    (in thousands)** |   |
|------------------------------------------------------------------------------|--------------------------------------------|--------|
|                                                                         |                                       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
|                                                                         |                                       |   |   |   |   |   |   |   | **Weighted Average** |   |
|                                                                         |                                       |   |   |   |   |   |   |  |  |  |  |  |  |  |  |   |
|                                                                         |                                       |   | **Notional    Amount** |   |   | **Asset** |   |   | **Receive    Rate** |   |   | **Pay    Rate** |   |   | **Life    (Years)** |   |
|                                                                         |                                       |        |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Fair Value Hedges:                                                           |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      Receive fixed-pay variable interest rate swaps |                                       | $      | 40,000 |   | $ | 1,865 |   |   | 5.42 | % |   | 2.92 | % |   | 9.3 |   |
|                                                                         |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| **12.** | **SUBSEQUENT    EVENTS**  |
|---------|--------------------------------|

On May 4, 2004,    the Bank announced that it has executed a definitive agreement to sell approximately    $19.6 million of its lower credit quality indirect vehicle loans to another    financial institution. This represents substantially all of the Company’s    lower credit quality indirect vehicle loans. This transaction closed on May    12, 2004 and resulted in a reduction in the allowance for loan losses of approximately    $1.7 million, which was associated with the loans sold. The transaction did    not have a significant effect on the Bank’s capital or results of operations    for the quarterly period ended June 30, 2004. This sale was undertaken to    reduce the levels of lower credit quality performing loans in the Bank’s    loan portfolio. As previously disclosed, the Bank ceased originating such    non-prime indirect vehicle loans in October 2003. 

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**Item 2.   MANAGEMENT  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*In addition to historicalinformation, this Form 10-Q includes certain forward-looking statements basedon current management expectations. These forward-looking statements are generallyidentified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” orsimilar expressions. The Company intends such forward-looking statements to becovered by the safe harbor provisions of the Private Securities Reform Act of1995 and is including this statement for purposes of such safe harbor provisions.The Company’s actual results could differ materially from those managementexpectations. Factors that could cause future results to vary from current managementexpectations include, but are not limited to, changes in general economic conditions,legislative and regulatory changes, changes in the monetary and fiscal policiesof the federal government, changes in tax policies, rates and regulations offederal, state and local tax authorities, changes in interest rates, depositflows, the cost of funds, demand for loan products, demand for financial services,competition, changes in the quality or composition of the Bank’s loan andinvestment portfolios, changes in accounting principles, policies or guidelines,and other economic, competitive, governmental and technological factors affectingthe Company’s operations, markets, products, services and prices. Thesefactors should be considered in evaluating forward-looking statements and unduereliance should not be placed on such statements. Except as required by applicablelaw and regulation, the Company does not undertake and specifically disclaimsany obligation to publicly release the result of any revisions which may be madeto any forward-looking statements to reflect events or circumstances after thedate of such statements or to reflect the occurrence of anticipated or unanticipatedevents.*

| **A.** | **General** |
|--------|-------------|

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

The Company’sresults of operations have been restated for the three and six month periodsended March 31, 2003, to reflect the correction of accounting errors relatedto the Company’s indirect automobile, mortgage and consumer loan portfolios, an underaccrual in an employee health and welfare benefit plan and an overaccrual in advertising costs.  The net effect of such restatements was to reduce interest income, increase operating expenses and reduce retained earnings.  See Footnote 2 to the unaudited Consolidated Financial Statements for a description of the effects on the periods presented in this current report on Form 10-Q. 

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

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

In September 2003,the Board of Directors initiated several management and operational changes includingappointing two seasoned bank executives to lead the Company. In connection withthese changes, the Company began a process to reposition the balance sheet andimprove earnings. During the first quarter of 2004, these activities includeddivesting $16.2 million of longer-term fixed-rate residential mortgage loansand entering into approximately $40 million of derivative contracts to convertcertain long-term fixed-rate FHLB borrowings to a variable rate.

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

The Bank sold $650,000 of real estate and equipment and transferred $10.3 million of deposits at its Danville, Pennsylvania branch in January 2004 to The First National Bank of Berwick, Berwick, Pennsylvania. This sale resulted in a gain of $798,000. 

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

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

The Company has established various accounting policies that govern the application of principles generally accepted in the United States in the preparation of its financial statements. Significant accounting policies are described in the Footnotes to the Consolidated Financial Statements. The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of the Consolidated Financial Statements. Although the Company believes it uses the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors.

| **D.** | **Nonperforming    Assets** |
|--------|-----------------------------|

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

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

|                  |                                                             |                                                           |   |    | **March    31,           2004** | ** ** | **September    30,    2003** |   |
|-----------------------|------------------------------------------------------------------|----------------------------------------------------------------|--------|---------|---------------------------------|------------|------------------------------|--------|
|                  |                                                             |                                                           |   |         |                                 |       |                              |        |   |
|                  |                                                             |                                                           |   |    | **(dollars in thousands)**      |       |
| Nonperforming assets: |                                                             |                                                           |   |    |                            |       |                         |
|                  | Nonaccruing loans                                                |                                                           | $      | 9,827   |                            | $          | 12,479                       |   |
|                  | Real estate owned and other repossessed assets                   |                                                           |   | 488     |                            |       | 1,022                        |   |
|                  |                                                             |                                                           |   |         |                                 |       |                              |        |   |
|                  |                                                             | Total nonperforming assets                                     |   |    | 10,315                          |       |                         | 13,501 |   |
|                  | Troubled debt restructurings                                     |                                                           |   | — |                            |       | —                      |   |
|                  |                                                             |                                                           |   |         |                                 |       |                              |        |   |
|                  |                                                             | Total nonperforming    assets and troubled debt restructurings |   | $       | 10,315                          |       | $                            | 13,501 |   |
|                  |                                                             |                                                           |   |         |                                 |       |                              |        |   |
|                  | Total      nonperforming loans as a percentage of total loans(1) |                                                           |   | 2.15    | %                               |       | 2.49                         | %      |
|                  | Total nonperforming assets as a percentage of total assets       |                                                           |   | 1.18    | %                               |       | 1.51                         | %      |

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

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As of March 31, 2004, nonperforming assets totaled $10.3 million, or 1.18% of total assets, compared to $13.5 million, or 1.51% of total assets, at September 30, 2003. The $3.2 million reduction in nonperforming assets during the six months ended March 31, 2004 was primarily the result of the balances on several nonaccruing commercial loans being reduced due to cash collections, a $535,000 reduction in the levels of foreclosed assets and workout strategies. The reduction in foreclosed assets was due to the sale of several one-to-four family properties.  To continue reducing nonperforming assets, the Bank has established workout strategies for its large commercial nonaccruing loans which are designed to prudently exit or collect on such loans within a reasonable timeframe.

| **E.** | **Liquidity    and Capital Resources** |
|--------|----------------------------------------|

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

The Bank’s most liquid assets are cash and cash equivalents and its investment and mortgage-related securities available-for-sale.  The levels of these assets are dependent on the Bank’s operating, financing, lending and investing activities during any given period.  At March 31, 2004, cash and cash equivalents and investment and mortgage-related securities available-for-sale totaled $376.9 million, or 43.0% of total assets.

The Bank has other sources of liquidity if a need for additional funds arises, including FHLB advances, brokered certificates of deposit and federal funds lines of credit. At March 31, 2004, the Bank had approximately $216.4 million in available liquidity. Depending on market conditions, the pricing of deposit products and FHLB advances, the Bank may continue to use FHLB borrowings, brokered certificates of deposit and other borrowings to fund assets.

At March 31, 2004, the Bank had commitments to originate and purchase loans and unused outstanding lines of credit and undisbursed proceeds of construction mortgages totaling $61.9 million. The Bank anticipates that it will have sufficient funds available to meet these commitments.  Certificate accounts, including Individual Retirement Account and KEOGH accounts, which are scheduled to mature in less than one year from March 31, 2004 totaled $65.0 million. Based on past experience, the Bank expects that many of these maturing certificate accounts, with the exception of jumbo certificates of deposit, will be retained by the Bank at maturity. At March 31, 2004, the Bank had $29.1 million in jumbo certificates, the majority of which are deposits from local school districts and municipalities that mature in less than one year.

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

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

Quantitative    measures established by regulation to ensure capital adequacy require the    Bank to maintain minimum amounts and ratios (set forth in the table below)    of total and Tier I capital (as defined in the regulations) to risk-weighted    assets (as defined), and of Tier I capital and tangible capital (as defined)    to total assets (as defined). Management believes, as of March 31, 2004,    that the Bank meets all capital adequacy requirements to which it is subject.    As of March 31, 2004, the most recent notification from the Office of Thrift    Supervision categorized the Bank as well capitalized under the regulatory    framework for prompt corrective action. To be categorized as well capitalized,    the Bank must maintain minimum ratios as set forth in the table below. There    are no conditions or events since that notification that management believes  have changed the institution’s category.

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The Bank’s actual capital amounts and ratios at March 31, 2004 and September 30, 2003 are presented in the following table:

|                                      |       |       |         |   |   |                                    |       | **As    of March 31, 2004****(dollars in thousands)** |   |                                                                                          |   |   |       |   |         |   |
|-------------------------------------------|------------|------------|--------------|--------|--------|-----------------------------------------|------------|-------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|--------|--------|------------|--------|--------------|--------|
|                                      |       | **Actual** |         |   |   | **For    Capital    Adequacy Purposes** |       |                                                  |   | **To         be Well Capitalized     under    prompt corrective    Action****Provisions****** |   |
|                                      |            |            |         |   |        |                                         |       |                                                  |        |                                                                                               |   |        |            |   |
|                                      | **Amount** |       | **Ratio(1)** |   |   |                                    | **Amount** |                                                  |   | **Ratio(1)**                                                                                  |   |   | **Amount** |   | **Ratio(1)** |   |
|                                      |            |            |         |        |   |                                    |            |                                                       |   |                                                                                          |        |   |       |        |              |   |  |  |   |
| Risk-based Capital                        |       |       |         |   |   |                                    |       |                                                  |   |                                                                                          |   |   |       |   |         |   |   |   |   |
| (Total Capital to risk-weighted assets)   | $          | 63,950     |         | 12.96  | %      |                                    | $          | 39,466                                                |   | >                                                                                          | 8.00   | %      |       | $      | 49,332       |   | > | 10.00 | % |
| Tier I Capital                            |       |       |         |   |   |                                    |       |                                                  |   |                                                                                          |   |   |       |   |         |   |   |   |   |
| (to risk-weighted assets)                 |       | 57,734     |         | 11.70  | %      |                                    |       | 19,733                                                |   | >                                                                                          | 4.00   | %      |       |   | 29,599       |   | > | 6.00 | % |
| Core Capital                              |       |       |         |   |   |                                    |       |                                                  |   |                                                                                          |   |   |       |   |         |   |   |   |   |
| (Tier I Capital to adjusted total assets) |       | 59,025     |         | 6.84   | %      |                                    |       | 34,529                                                |   | >                                                                                          | 4.00   | %      |       |   | 43,161       |   | > | 5.00 | % |
| Tangible Capital                          |       |       |         |   |   |                                    |       |                                                  |   |                                                                                          |   |   |       |   |         |   |   |   |   |
| (Tangible capital to tangible assets)     |       | 59,025     |         | 6.84   | %      |                                    |       | 12,948                                                |   | >                                                                                          | 1.50   | %      |       |   | N/A          |   |   | N/A |   |
|                                      |       |       |         |   |   |                                    |       |                                                  |   |                                                                                          |   |   |       |   |         |   |   |   |   |

|                                      |       |       |         |   |   |                                             |   | **As         of September 30, 2003****(dollars    in thousands)** |         |                                                                                        |   |       |   |         |   |   |
|-------------------------------------------|------------|------------|--------------|--------|--------|--------------------------------------------------|--------|-------------------------------------------------------------------|--------------|---------------------------------------------------------------------------------------------|--------|------------|--------|--------------|--------|--------|
|                                      |       | **Actual** |         |   |   | **For         Capital     Adequacy    Purposes** |   |                                                              |         | **To         be Well Capitalized     under         prompt corrective    Action Provisions** |   |
|                                      |            |            |         |   |        |                                                  |   |                                                              |              |                                                                                             |   |            |        |         |
|                                      | **Amount** |       | **Ratio(1)** |   |   |  **Amount**                                 |   |                                                              | **Ratio(1)** |                                                                                        |   | **Amount** |   | **Ratio(1)** |   |
|                                      |            |            |         |        |   |                                             |        |                                                                   |         |                                                                                        |        |       |   |              |        |   |  |  |   |
| Risk-based Capital                        |       |       |         |   |   |                                             |   |                                                              |         |                                                                                        |   |       |   |         |   |   |   |   |   |
| (Total Capital to risk-weighted assets)   | $          | 59,441     |         | 10.52  | %      |                                             | $      | 45,205                                                            |         | >                                                                                        | 8.00   | %          |   | $            | 56,506 |   | > | 10.00 | % |
| Tier I Capital                            |       |       |         |   |   |                                             |   |                                                              |         |                                                                                        |   |       |   |         |   |   |   |   |   |
| (to risk-weighted assets)                 |       | 52,406     |         | 9.27   | %      |                                             |   | 22,602                                                            |         | >                                                                                        | 4.00   | %          |   |         | 33,904 |   | > | 6.00 | % |
|                                      |       |       |         |   |   |                                             |   |                                                              |         |                                                                                        |   |       |   |         |   |   |   |   |   |
| Core Capital                              |       |       |         |   |   |                                             |   |                                                              |         |                                                                                        |   |       |   |         |   |   |   |   |   |
| (Tier I Capital to adjusted total assets) |       | 54,053     |         | 6.17   | %      |                                             |   | 35,045                                                            |         | >                                                                                        | 4.00   | %          |   |         | 43,806 |   | > | 5.00 | % |
|                                      |       |       |         |   |   |                                             |   |                                                              |         |                                                                                        |   |       |   |         |   |   |   |   |   |
| Tangible Capital                          |       |       |         |   |   |                                             |   |                                                              |         |                                                                                        |   |       |   |         |   |   |   |   |   |
| (Tangible capital to tangible assets)     |       | 54,053     |         | 6.17   | %      |                                             |   | 13,142                                                            |         | >                                                                                        | 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 assets of $863 million and $876        million at March 31, 2004 and September 30, 2003, respectively. Risk-based        capital and Tier I capital are computed as a percentage of risk-weighted        assets of $493 million and $565 million at March 31, 2004 and September        30, 2003, respectively. Tier I capital is reduced by the amount of low-level    recourse and residual interests to compute Tier I capital. |
|   |   |

| **F.** | **Comparison    of Financial Condition at March 31, 2004 and September 30, 2003** |
|--------|-----------------------------------------------------------------------------------|
|   |                                                                              |

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Total liabilities    decreased $22.4 million from $837.9 million at September 30, 2003 to $815.5    million at March 31, 2004, due primarily to a $29.7 million decrease in FHLB    advances. Deposits decreased $12.8 million from $547.3 million as of September    30, 2003 to $534.5 million at March 31, 2004. The decrease in deposits was    largely due to a $10.3 million transfer of deposits from the Bank’s    Danville branch to another financial institution in January 2004. The Bank’s    strategy is to offer competitive interest rate deposit products to retail    customers while providing core transaction account products to businesses    and individuals. The reduction in FHLB advances was due to maturing advances    of $55.0 million during December, of which $35.0 million was extended for    a two-year term at lower market rates. The Bank also began using other borrowing    sources such as repurchase agreements and brokered certificates of deposit    in the six months ended March 31, 2004. As of March 31, 2004, the Bank had    $33.0 million of brokered certificates of deposit that mature in July 2004.

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

**General.   **The Company reported net income of $2.1 million and $920,000 for the three months ended March 31, 2004 and March 31, 2003, respectively. Basic and diluted earnings per share increased to $0.53 and $0.51 per share, respectively, for the three months ended March 31, 2004 compared to $0.24 and $0.23 per share, respectively, for the same period in fiscal 2003.

**Interest      Income**.   Total      interest income decreased $1.3 million, or 11.2%, from $11.5 million for      the three months ended March 31, 2003, to $10.2 million for the three months      ended March 31, 2004. This decrease was primarily due to a 37 basis point      decline on the tax-equivalent yield on earning assets to 5.14% for the      three months ended March 31, 2004 as compared to 5.51% for the same three-month      period ended March 31, 2003. Average market rates were lower in the quarter      ended March 31, 2004 when compared to the same period in 2003. Additionally,      the Bank is originating higher credit quality loans with lower yields than      in prior periods. Interest income on loans decreased $1.3 million primarily      due to a 68 basis point decrease in the yield due to lower rates, combined      with a $31.8 million decrease in the average balance of loans. Interest      income on mortgage-related securities increased $462,000 due to an increase      of $30.5 million in the average balance and a 37 basis point increase in      the average yield on such securities. The Bank has invested in mortgage      related securities with higher yields as a way to utilize excess liquidity      from loan and investment sales as repayments of loans and mortgage-backed      securities have occurred. Interest income on taxable investment securities      decreased $340,000 due to a $34.9 million decrease in average balances      due to the previously discussed sales that occurred during the three month      period ended March 31, 2004.

**Interest Expense.   **Interest expense decreased $1.7 million, or 26.5%, from $6.4 million for the three months ended March 31, 2003 to $4.7 million for the three months ended March 31, 2004. The decline in interest expense was primarily attributable to declining interest rates as the average rate paid on deposits decreased in the quarter ended March 31, 2004 to 1.69% from 2.31% in the quarter ended March 31, 2003. Also as previously discussed, the Bank entered into several derivative contacts in November 2003 which swapped the fixed rates the Bank pays on $40.0 million of FHLB advances to variable rates. The effect of this transaction was to reduce the average rate the Bank is paying on these borrowings from approximately 5.51% to 3.00% during the quarter. While this transaction added interest rate volatility, the overall asset/liability position of the Bank remains within acceptable risk parameters. Also during the first six months of fiscal 2004, approximately $55.0 of long-term fixed rate advances with an average rate of 5.67% matured and were replaced with two and three-year fixed rate advances with an average rate of 2.32%.  These transactions resulted in a 142 basis point decrease in the average rate on FHLB advances and other borrowings between comparable quarters, offset by a $21.3 million increase in average balances of such borrowings.

**Provision for Loan Losses.   **The Company records a provision for loan losses in order to maintain the allowance for loan losses at a level which management considers its best estimate of known and probable inherent losses.  Management’s evaluation is based upon a continuing review of the portfolio and requires significant management judgment. The Bank’s provision for loan losses for the three months ended March 31, 2004 decreased $125,000 to $485,000 when compared to the comparable 2003 fiscal period. The decrease was primarily due to reductions in the levels of nonperforming loans, classified assets and charge-offs and reflect, among other things, reductions in loan balances and changes 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 March 31, 2004.  See the Nonperforming Assets section of Management’s Discussion and Analysis for a further analysis of asset quality. Net loan charge-offs were $535,000 for the quarter ended March 31, 2004, compared to net loan charge-offs of $615,000 for the quarter ended March 31, 2003.

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**Noninterest Income.**Noninterest income increased $182,000, or 4.9%, from $3.7 million for the three months ended March 31, 2003 to $3.9 million for the three months ended March 31, 2004. This increase was due to the sale of the Danville branch for a $798,000 gain and increased service charges and other fee income of $68,000. These increases were offset by lower gains on sales of investment securities and residential mortgage loans and, to a lesser extent, reductions in insurance premium income of $60,000. The reductions in gains on investments and loans were due to less sales activity in fiscal 2004 than in comparable periods in fiscal 2003. Increased service charge income was the result of changes in the fees the Bank charges for certain deposit products. Other income was also lower due to reduced yields on Bank-owned life insurance.

**Noninterest Expense.**Total noninterest expense decreased $761,000, or 11.2%, from $6.7 million for the three months ended March 31, 2003 to $6.0 million for the three months ended March 31, 2004. The majority of this decrease was due to reductions in salaries and employee benefits ($189,000) and occupancy cost ($144,000) as the Company reduced staff in June 2003 when it closed three banking offices and sold its Danville branch in January 2004.  Certain staff reductions were also undertaken in September 2003 as the Bank reduced staff to better align the Bank’s operational processes with its product offerings.  The Company had 261 employees as of March 31, 2004 compared to 300 as of December 31, 2002. Advertising costs decreased by $150,000 between the comparable three month periods as the Company reduced its level of brand awareness advertising. 

**Income Taxes**. The Company had an income tax provision of $825,000 for the three months ended March 31, 2004, compared to a provision of $510,000 for the three months ended March 31, 2003. The effective tax rate was 28.3% and 35.7% for the quarterly periods ended March 31, 2004 and 2003, respectively.  The decrease in effective tax rates between quarterly periods was due to the recognition of income tax benefits of approximately $159,000 related to a disallowed tax deduction for compensation expense from a prior period. A determination was made in the period ended March 31, 2004 that such a deduction can now be claimed on the Company’s tax returns.  The Company expects its tax rate to normalize to a rate similar to prior periods. 

| **H.** | **Comparison          of Operating Results for the Six Months Ended March 31, 2004 and March    31, 2003** |
|--------|------------------------------------------------------------------------------------------------------------|

**General.**  The Company had net income of approximately $3.1 million and $1.6 million for the six months ended March 31, 2004 and March 31, 2003, respectively. Basic and diluted earnings per share were $0.80 and $0.76 per share, respectively, for the six months ended March 31, 2004 and $0.42 and $0.40, respectively, for the six months ended March 31, 2003. 

**Interest    Income.**Total    interest income decreased $2.8 million, or 11.8%, from $23.7 million for the    six months ended March 31, 2003 to $20.9 million for the six months ended    March 31, 2004. This decrease was primarily due to a 43 basis point decline    on the tax-equivalent yield on earning assets to 5.20% for the six months    ended March 31, 2004 as compared to 5.63% for the same period ended in 2003.    Interest income on loans decreased $2.5 million due to a 77 basis point decrease    in the yield and a $20.4 million decrease in the average balance of loans.    Interest income on mortgage-related securities increased $358,000 as the yield    on such securities increased by 24 basis points. The Bank has invested in    mortgage related securities with higher yields as a way to utilize excess    liquidity from loan and investment sales and as repayments of loans and mortgage-backed    securities have occurred. Interest income on taxable investment securities    decreased $512,000 as a result of a 26 basis point decline and a $18.8 million    reduction in the average balances of such securities. 

**Interest Expense**. Interest expense decreased $3.2 million, or 23.8%, from $13.4 million for the six months ended March 31, 2003 to $10.2 million for the six months ended March 31, 2004. The decrease in interest expense was due to a declining interest rate environment that resulted in the cost of deposits decreasing to 1.74% for the six months ended March 31, 2004 compared to 2.43% for the same period in 2003 and a reduction in the average balances of deposits of $72.7 million. The decline in the rates paid on and balances of average deposits was due to the Bank reducing its reliance on institutional deposits.

As previously discussed, the Bank entered into several derivative contacts which swapped the fixed rates the Bank pays on $40.0 million of FHLB advances to variable rates. The effect of this transaction was to reduce the average rate the Bank was paying on these borrowings from approximately 5.51% for the six-months ended March 31, 2003 to 3.72% for the six month period ended March 31, 2004.  Also during the six-months ended March 31, 2004, certain long-term, fixed-rate, higher average balance advances matured and were replaced with lower rate borrowings with similar terms. The Bank also began using alternate funding sources such as reverse repurchase agreements and brokered certificates of deposit in 2004 to expand its liquidity sources and reduce its reliance on higher costing borrowings.  These transactions resulted in a 109 basis point decrease in the average rate on FHLB advances and other borrowings between comparable six-month periods.

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**Provision for Loan Losses**. The Company’s provision for loan losses for the six months ended March 31, 2004 increased $182,000 compared to the comparable 2003 period. Nonperforming assets at March 31, 2004 were $10.3 million, or 1.18% of total assets compared to $13.5 million, or 1.51% of total assets at September 30, 2003 and $4.8 million, or .53% of total assets as of March 31, 2003. The increased provision for the six-month period reflects the high levels of nonperforming assets and higher charge-offs.  Net loan charge-offs were $1.2 million for the six-months ended March 31, 2004, compared to net loan charge-offs of $1.2 million for the six-months ended March 31, 2003.      See the Nonperforming Assets section of Management’s Discussion and Analysis for a further analysis of asset quality.

**Noninterest Income.**Noninterest income increased $249,000, or 3.9%, from $6.3 million for the six months ended March 31, 2003 to $6.6 million for the six months ended March 31, 2004. Service charges and other fees increased $292,000 due to a larger customer base and the rates on such fees increasing between periods. Gains-on-sale of investment securities decreased between periods by $270,000 as the Bank sold approximately $25 million of investment securities in the six month period ended March 31, 2004 and recognized a gain of $872,000. During the six-month period ended March 31, 2003, the Bank also sold securities as part of a reduction of its investment portfolio and recorded a gain of $1.1 million. The reduction in other income was largely due to decreased yields on the income the Bank derives on its investment in Bank-owned life insurance. 

**NoninterestExpense.** Totalnoninterest expense decreased $1.4 million, or 10.3%, from $13.4 million forthe six months ended March 31, 2003 to $12.0 million for the six months endedMarch 31, 2004. This decrease was due primarily to reductions in salaries andemployee benefits of $450,000 and a reduction in occupancy costs of $270,000.As previously discussed, the Bank closed three branches in June 2003 and soldits Danville branch in January 2004. Certain staff reductions were also undertakenin September 2003 as the Bank reduced staff to better align the Bank’s operationalprocesses with its product offerings. Advertising costs decreased by $256,000from $511,000 for the six months ended March 31, 2003, to $255,000 for the sixmonths ended March 31, 2004. The decrease was the result of the Company decreasingits branding awareness advertising campaign.

**IncomeTaxes.** TheCompany had an income tax provision of $1.1 million for the six months endedMarch 31, 2004 compared to a provision of $747,000 for the six months ended March31, 2003. The increase in taxes between periods was primarily due to the increasedlevel of pre-tax income offset in part by a reduction in the effective tax ratefrom approximately 32.0% in 2003 to 25.2% in 2004. The decrease in effectivetax rates between periods was due to the recognition of income tax benefits ofapproximately $320,000 related to a disallowed tax deduction for compensationexpense from a prior period. A determination was made during the current periodthat such deduction can now be claimed on the Company’s tax returns. 

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

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

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**Item 4.   CONTROLSAND PROCEDURES**

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

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

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

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**Part II – OTHER INFORMATION**

| Item      1. | Legal Proceedings |
|--------------|-------------------|

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

| Item      2. | Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities                                                 |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                              |
|         | The Company did not repurchase any of its common shares during the quarter ended March 31, 2004.                                  |
|         |                                                                                                                              |
| Item      3. | Defaults Upon Senior Securities                                                                                                   |
|         |                                                                                                                              |
|         | None.                                                                                                                             |
|         |                                                                                                                              |
| Item      4. | Submission of Matters to a Vote of Security Holders                                                                               |
|         |                                                                                                                              |
|         | The Annual      Meeting of Stockholders of the Company was held on February 19, 2004. The    results of the vote were as follows: |

|   |                 |                                                                                                                     |   |           |   |                |   |
|--------|----------------------|--------------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|---------------------|--------|
|   | 1.    | The      following individuals were elected as directors, each for a three-year term:                                    |
|   |                 |                                                                                                                     |   |           |   |                |   |
|   |                 |                                                                                                                     |   | VOTES      FOR |   | VOTES      WITHHELD |   |
|   |                 |                                                                                                                     |   |                |   |                     |   |
|   |                 | George J.      Hayden                                                                                                    |   | 3,580,765      |   | 170,888             |   |
|   |                 | Thomas L.      Kennedy                                                                                                   |   | 3,542,782      |   | 208,871             |   |
|   |                 | Thomas M.      Petro                                                                                                     |   | 3,593,009      |   | 158,644             |   |
|   |                 | Barbara      M. Ecker                                                                                                    |   | 3,558,063      |   | 193,590             |   |
|   |                 |                                                                                                                     |   |           |   |                |   |
|   |                 |                                                                                                                     |   |           |   |                |   |
|   | 2.    | The      Northeast Pennsylvania Financial Corp. 2004 Stock Plan was approved by stockholders      by the following vote: |
|   |                 |                                                                                                                     |   |           |   |                |   |

|   | FOR                  |                                                                                                                                                                                                            | AGAINST |   | ABSTAIN |   | BROKER      NON-VOTES |   |
|--------|----------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|--------|---------|--------|-----------------------|--------|
|   |                      |                                                                                                                                                                                                            |         |   |         |   |                       |   |
|   | 2,481,469            |                                                                                                                                                                                                            | 509,700 |   | 10,107  |   | 750,377               |   |
|   |                 |                                                                                                                                                                                                            |    |   |    |   |                  |   |
|   |                 |                                                                                                                                                                                                            |    |   |    |   |                  |   |
|   | 3.    | The      appointment of KPMG LLP as independent auditors of Northeast Pennsylvania      Financial Corp. for the fiscal year ended September 30, 2004 was ratified    by the stockholders by the following vote: |
|   |                 |                                                                                                                                                                                                            |    |   |    |   |                  |   |
|   | FOR                  |                                                                                                                                                                                                            | AGAINST |   | ABSTAIN |   |                  |   |
|   |                      |                                                                                                                                                                                                            |         |   |         |   |                  |   |
|   | 3,543,954            |                                                                                                                                                                                                            | 186,716 |   | 20,983  |   |                  |   |
|   |                 |                                                                                                                                                                                                            |    |   |    |   |                  |   |
|   |                 |                                                                                                                                                                                                            |    |   |    |   |                  |   |

| Item      5. | Other    Information |
|--------------|----------------------|
|         |                 |
|         | None.                |

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| Item 6.               | Exhibits      andReports on Form 8-K |
|-----------------------|--------------------------------------|
|                  |                                 |   |
| (A)    |  Exhibits                       |
|                  |                                 |   |
|                  | 3.1                                  | Certificate of Incorporation of Northeast Pennsylvania Financial Corp.* |
|                  |                                 |   |
|                  | 3.2                                  | Bylaws of Northeast Pennsylvania Financial Corp.** |
|                  |                                 |   |
|                  | 4.0                                  | Form of Stock Certificate of Northeast Pennsylvania Financial Corp.* |
|                  |                                 |   |
|                  | 10.1                                 | Northeast Pennsylvania Financial Corp. 2004 Stock Plan*** |
|                  |                                 |   |
|                  | 11.0                                 | Statement regarding Computation of Per Share Earnings (See Notes to Consolidated Financial |
|                  |                                 | Statements) |
|                  |                                 |   |
|                  | 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 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 appendices to the Proxy Statement as filed with the Securities and Exchange Commission on January 16, 2004.                                                                                                                                                                       |
|                  |                                                                                                                                                                                                                                                                                                                                           |
| (B)    | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                            |
|                  |                                                                                                                                                                                                                                                                                                                                           |
|                  | On      February 6, 2004, the Company furnished a Form 8-K in which it announced      (1) its financial results for the quarter and year ended September 30,      2003 and (2) the declaration of a $0.06 cash dividend. A press release      announcing these financial results and the declaration of the dividend    were filed by exhibit. |
|                  |                                                                                                                                                                                                                                                                                                                                           |
|                  | On      February 19, 2004, the Company furnished a Form 8-K containing remarks      made by Thomas M. Petro, President and Chief Executive Officer, at the      Company’s Annual Meeting of Stockholders. The text of these remarks    was filed by exhibit.                                                                              |

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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:      May 14, 2004 | By:      /s/ Thomas M. Petro                     |
|                    |                                                  |
|                    | Thomas      M. Petro                             |
|                    | President,      Chief Executive Officer          |
|                    |                                             |
| Date:      May 14, 2004 | By:                                              | /s/ Jerry D. Holbrook |
|                    |                                                  |
|                    |                                             | Jerry      D. Holbrook |
|                    |                                             | Chief      Financial Officer |

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