KNBT BANCORP, INC.

Executive Annual Incentive Plan

I. Purpose

The Board of Directors of KNBT Bancorp, Inc. (the “Company”) has established
this Executive Annual Incentive Plan (“AIP” or “Plan”) to advance the interests
of the Company. The purpose of the AIP is to drive performance to meet and
exceed goals and to promote a culture of achievement. Through payment of
incentive compensation beyond base salaries, the AIP provides rewards for
meeting and exceeding Company goals for participants. Its primary objectives
include:

a. Support Recruitment and Retention

i) Provide superior earnings opportunities for superior results

ii) Attract and keep entrepreneurial attitudes

iii) Optimize retention of executives through periods of growth and strategic
change

b. Promote an Energetic, Innovative, Entrepreneurial Culture

i) Emphasize variable, performance-based compensation

  ii)   Maintain an incentive to provide meaningful portion of total cash
earnings opportunity for participating executives

II. Effective Date

a. The Executive AIP will be effective as of January 1, 2005.

III. Definitions

a. Board of Directors (“Board”): The Board of Directors of the Company

  b.   CEO: Chief Executive Officer of the Company as designated by its bylaws,
and any other title bestowed upon him or her by the Board.

  c.   CFO: Chief Financial Officer and Treasurer of the Company as designated
by its bylaws and any other title bestowed upon him or her by the Board.

  d.   Company-Wide Plan Targets: Targets made up of quantitative Measures and
Goals used to determine the amounts of bonuses paid. Quantitative measures may
be:

i) Profit related, as in Net Income or Earnings Per Share,

     
ii)
iii)
iv)
  Profitability related, such as Return on Equity, Return on Assets or Net
Interest Margin,
Productivity related, such as Efficiency Ratio,
Growth related, such as Loan Growth, Asset Growth or Deposit Growth,

v) Capital structure related, as Capital Ratio or Capital Adequacy, or

  vi)   Asset quality related, such as Non-Performing Loan Percentage or Loan
Loss Provisions,

all as defined in this AIP or in the Performance Agreement between the
Participant and the Company.

e. Committee: The Compensation Committee of the Board.

  f.   Incentive Opportunity Range: The Range of Incentive Opportunity will be
from 50% at Threshold performance to 150% at Superior performance, of the
Incentive Opportunity Target.

  g.   Incentive Opportunity Target: The Incentive Opportunity Target will be a
percentage, established by the Committee of the Participant’s base salary at the
beginning of the Company’s fiscal year.

  h.   Performance Agreement: The annual contract between the Participant and
the Company specifying the Measures, Weights, Goals, Reward Opportunities and
Terms and Conditions for each year’s incentive program.

  i.   Performance Goals (“Goals”): Those objectives, which are required to be
achieved to activate distribution of awards under this Plan and include Target,
Threshold and Superior performance levels.

  j.   Performance Matrix: A table, which contains each year’s Measures, Goals,
Weights and Incentive Opportunities, which shall be attached to and made a part
of the Participant’s Performance Agreement.

  k.   Performance Measures (“Measures”): These include the quantitative
measures used to determine the amounts of bonuses paid. Quantitative measures
initially include:

  i)   Efficiency Ratio: The percentage of total non-interest expenses to total
pre-tax income.

  ii)   Net Income: The dollar amount of net after-tax earnings of the Company
as reported on the audited year-end income statement, with the following
adjustments:

  (1)   Operating profits of businesses acquired during the year and not
included in the annual business plan shall be excluded;

  (2)   Operating profits of businesses divested during the period and not
included in the annual business plan as divestments or planned divestments will
only be included through the date of divestment.

  iii)   Return on Average Equity (“ROE”): The percentage of year-end Net Income
divided by the average of end-of-quarter total shareholders’ equity for the
year.

  l.   Performance Weights (Weights”): The relative importance or value of each
Measure to the total value of all Measures of 100%.

  m.   Plan Participant (“Participant”): The CEO and CFO and other executives of
the Company who are designated from time to time by the Committee.

n. Plan Year: A calendar year, the same as the Company’s fiscal year.

IV. How the Plan Works

  a.   Establishing the Performance Matrix: The AIP follows an annual,
fiscal-year cycle. The cycle begins with the determination of annual business
goals based on the strategic plan. During the annual budgeting process, the CEO
recommends Measures, Goals and Weights to the Committee. The Committee approves
the Target, Threshold and Superior Performance Goals, as well as Measures and
Weights. These are then converted to the Performance Matrix and made a part of
the Performance Agreement with the Participant.

  b.   Individual Awards: The incentive award or payout to each Participant is
based on Company performance for each Measure.

  i)   The Incentive Opportunity Target for each Measure is the product of
(x) the Measure’s Weight percentage, (y) the Participant’s total Incentive
Opportunity Target percentage, and (z) the Participant’s annual gross base
salary on the first day of the Plan Year. The Incentive Opportunity Range is 50%
of Target for Threshold performance and 150% of Target for Superior performance.

  ii)   The Committee may establish a minimum level of Net Income performance
below which no Measures are rewards, regardless of how well the Measure is
performed. For example, if Net Income falls below the minimum requirement (which
would normally be below the Threshold Goal), but Efficiency Ratio was achieved
at Target, there would be no reward for Efficiency Ratio performance.

  iii)   Other than in the circumstance of Net Income performance being below
minimum, each Measure is calculated independently. If performance falls between
Threshold and Superior, that level is interpolated and applied to the Incentive
Opportunity Range. This calculation determines the dollar value of the award for
that measure to the Participant.

  iv)   Performance below the Threshold Goal for a specific Measure results in
no award for that Measure. The award for performance above the Superior Goal, is
limited to the Superior incentive amount for that Measure.

  v)   The Committee in its sole discretion reserves the right to reduce the
actual incentive award below the amount calculated on the above formulas.

  c.   Incentive Distributions: Incentive awards will be distributed after the
final, but may be unaudited results have been approved by the Board and publicly
announced, but no later than 74 days after the end of the fiscal year.

V. Effect of Change in Employment Status

  a.   Voluntary Resignation: If a Participant resigns from the Company during a
Plan Year, the Participant loses eligibility for any potential award related to
that year. If a Participant resigns after a Plan Year but before the award
distribution for that year, the Participant shall be entitled to receive an
incentive award.

  b.   Involuntary Termination for Cause: If a Participant is terminated by the
Company for Cause as defined in the Participant’s employment or severance
agreement, the Participant loses eligibility for any potential award related to
that year.

  c.   Involuntary Termination without Cause: If a Participant is terminated by
the Company without Cause, the Participant is entitled to a portion of the
incentive award for the number of full quarters of participation, as calculated
after the end of the fiscal year.

  d.   New Participant or Other Status Change, including Death, Disability,
Retirement and Leave of Absence: Pro-rated bonus awards shall be considered for
the number of full quarters of participation for all other employment status
changes.

VI. Plan Administration

  a.   Authorities: The AIP shall be administered by the Committee. The AIP may
be altered or discontinued at any time during or following a Plan Year, with the
approval of the full Board. The decisions of the Committee with respect to any
issues concerning individuals selected for participation, the amount, terms,
form and time of payment of awards, and interpretation of any Plan guidelines or
requirements shall be final and binding.

  b.   Employment Rights: The receipt of an award or the entry into a
Performance Agreement shall not give a Participant any right to continued
employment, and the right and power to dismiss any employee is specifically
reserved to the Company. The receipt of an award shall not entitle a Participant
to an award with respect to any subsequent Plan Year.

  c.   Delegation: The Committee may delegate certain administrative
responsibilities to the CEO except that:

i) The Committee must approve any actions affecting the CEO and CFO;

  ii)   The Committee shall approve Company incentive Goals within the first
quarter of the Plan Year; and

iii) The Committee shall approve all definitions and terms for financial
Measures.

Governing Law: Except to the extent pre-empted under federal law, the provisions
of the Plan shall be construed, administered, and enforced in accordance with
the domestic internal law of the Commonwealth of Pennsylvania.