**EXHIBIT
      10.1  FORM OF 2006 PERFORMANCE SHARE AWARD**





**PERFORMANCE
      SHARE AWARD AGREEMENT**


**2004
      RECOGNITION AND RETENTION PLAN**


**AND
      TRUST AGREEMENT**


**KNBT
      BANCORP, INC.**








**THIS
      AGREEMENT** is made
      as of this __ day of ______ 2006 (hereinafter referred to as the “Date of
      Grant”) by and between KNBT Bancorp, Inc. (the “Corporation”) and _________ (the
“Recipient”). Defined terms, unless otherwise defined herein, shall have the
      same meaning as set forth in the Plan (as hereinafter defined), as amended
      from
      time to time.





**WHEREAS** ,
      the
      Corporation has adopted the 2004 Recognition and Retention Plan and Trust
      Agreement (the “Plan”) which is hereby incorporated in its entirety by reference
      herein; and





**WHEREAS** ,
      the
      Corporation desires to grant to the Recipient a Performance Share Award, as
      described in the Plan.





**NOW,
      THEREFORE** ,
      in
      consideration of the mutual covenants hereinafter set forth and for other good
      and valuable consideration, the Corporation and the Recipient agree as
      follows:





1.  Plan
      Share Award .
      The
      Corporation hereby grants to Recipient a Performance Share Award consisting
      of a
      total of _______ shares of common stock, $0.01 par value per share (“Common
      Stock”), subject to increase as provided herein, upon the terms and conditions
      set forth herein.





2.  Vesting
      of Performance Share Award .





(a)
            (i)
            The
                Performance Share Award shall vest over a period of five years from
                the
                Date of Grant, except as provided otherwise in the Plan or herein.
                Sixty
                percent of the shares subject to this Performance Share Award will
                vest on
                the third anniversary of the Date of Grant if the Performance Targets
                set
                forth in Annex A hereto are achieved. If the Performance Targets
                set forth
                on Annex A are achieved and the Recipient remains in the service
                of the
                Corporation or any Subsidiary Company (as defined in the Plan) on
                each of
                the fourth and fifth anniversary dates of the Date of Grant, then
                on each
                such anniversary dates 20% of the shares covered by the Performance
                Share
                Award will vest. No distribution shall occur, subject to the provision
                of
                Section 2(b) hereof, unless the Committee (as defined in the Plan)
                certifies in writing that the Performance Targets to which this
                Performance Share Award is subject have been achieved.






(ii)
            In
                the event that the Enhanced Performance Targets set forth in Annex
                A are
                achieved, the number of shares covered by this Performance Share
                Award
                will be increased by _______ shares, said shares to vest in accordance
                with the same schedule set forth above and subject to the same continued
                service requirement (60% on the third anniversary of the Date of
                Grant and
                20% on each of the fourth and fifth anniversary dates of the Date
                of
                Grant).


1


(b)  Notwithstanding
      the general rule set forth above, all shares of Common Stock subject to the
      Performance Share Award held by the Recipient whose service to the Corporation
      or any Subsidiary terminates due to death or Disability (as defined in Section
      3.10 of the Plan) shall be deemed earned and become fully vested as of the
      Recipient’s last day of service with the Corporation or any Subsidiary Company
      (provided, however, no such accelerated vesting shall occur if the Recipient
      continues to serve as a Director (including, for purposes hereof, service as
      an
      Advisory Director) of at least one member of the Employer Group (as defined
      in
      Section 3.13 of the Plan)) and shall be distributed as soon as practicable
      thereafter. However, notwithstanding the provisions of Section 7.01(b) of the
      Plan, no shares of Common Stock subject to this Performance Share Award held
      by
      the Recipient which remain unearned as of the effective date of a Change in
      Control of the Corporation (as defined in Section 3.05 of the Plan) shall be
      deemed earned as of the effective date of such Change in Control. The Recipient
      understands and acknowledges the foregoing and agrees that such provision will
      supersede the provisions of Section 7.01(b) of the Plan and will be controlling
      with respect to this Performance Share Award.





3.  Terms
      and Conditions .
      The
      terms and conditions included in the Plan are incorporated herein by reference,
      and to the extent that any conflict may exist between the terms and conditions
      included in the Plan and the terms of this Agreement, the terms and conditions
      included in the Plan shall control except with respect to the provisions of
      Section 2(b) with respect to the treatment of unearned shares subject to this
      Performance Share Award in the event a Change in Control of the Corporation
      occurs, in which situation the provisions of Section 2(b) hereof
      control.





4.  Withholding. The
      Corporation, in its discretion, may withhold from any cash payment or Common
      Stock distribution made to the Recipient under the Plan sufficient amounts
      to
      cover any applicable withholding and employment taxes, and if the amount of
      a
      cash payment is insufficient, the Corporation may require the Recipient or
      the
      Recipient = s
      beneficiary to pay to the Corporation the amount required to be withheld as
      a
      condition of delivering the shares of Common Stock.





5.  Transferability. The
      Performance Share Award granted to the Recipient may not be sold, assigned,
      transferred, pledged, or otherwise encumbered or disposed of prior to the time
      that it is earned and distributed pursuant to the terms of the
      Plan.




6.  Administration .
      The
      authority to manage and control the operation and administration of this
      Agreement shall be vested in the Committee, and the Committee shall have all
      powers with respect to this Agreement as it has with respect to the Plan. Any
      interpretation of the Agreement by the Committee and any decision made by it
      with respect to the Agreement is final and binding in the absence of action
      by
      the Board.





7.  Not
      an
      Employment Contract .
      The
      grant of the Performance Share Award will not confer on the Recipient any right
      with respect to continuance of employment or other service with the Corporation
      or any Subsidiary Company, nor will it interfere in any way with any right
      the
      Corporation or any Subsidiary Company would otherwise have to terminate or
      modify the terms of the Recipient’s employment or other service at any
      time.





8.  Notices .
      Any
      written notices provided for in this Agreement or the Plan shall be in writing
      and shall be deemed sufficiently given if either hand delivered or if sent
      by
      fax or overnight courier, or by postage paid first class mail. Notices sent
      by
      mail shall be deemed received three business days after mailing but in no event
      later than the date of actual receipt. Notices shall be directed, if to the
      Recipient, at the Recipient’s address indicated by the Corporation’s records, or
      if to the Corporation, at the Corporation’s executive office.





9.  No
      Rights As Shareholder .
      The
      Recipient shall not have any rights of a shareholder with respect to the shares
      of Common Stock subject to the Performance Share Award until a stock certificate
      has been duly issued following vesting of the Performance Share Award. Any
      dividends, cash or stock, related to unvested shares subject to this Performance
      Share Award shall be held by the Trust for the benefit of the Recipient and
      will
      be paid out in accordance with the provisions of Section 7.02 of the Plan as
      soon as practicable after such shares have been earned.


2


10.  Delivery
      of Stock .
      Whenever shares of Common Stock subject to the Performance Share Award are
      released from restriction, the Recognition and Retention Plan Trust (the
“Trust”) shall, subject to the implementation of an arrangement between the
      Corporation and the Recipient to effectuate all necessary tax withholding,
      issue
      a certificate to the Recipient for such unrestricted shares. Such certificate
      may, however, reflect any applicable restrictions under federal securities
      laws.
      The Trust shall follow all requisite procedures to deliver such certificates
      to
      Recipient; provided, however, that such delivery may be postponed to enable
      the
      Corporation and the Trust to comply with any applicable procedures, regulations
      or listing requirements of any governmental agency, stock exchange or regulatory
      agency.





11.  Amendment .
      This
      Agreement may be amended by written agreement of the Recipient and the
      Corporation, without the consent of any other person. Notwithstanding the
      foregoing, if the Corporation determines, after a review of the final
      regulations issued under Section 409A of the Internal Revenue Code of 1986,
      as
      amended (the “Code”), and all applicable Internal Revenue Service guidance, that
      this Performance Share Award should be further amended to avoid triggering
      the
      tax and interest penalties imposed by Section 409A of the Code, the Corporation
      may amend this Performance Share Award to the extent necessary to avoid
      triggering the tax and interest penalties imposed by Section 409A of the Code
      without consent of the Recipient.








**IN
      WITNESS WHEREOF** ,
      the
      Corporation has caused this Agreement to be executed by its duly authorized
      officers, and the Recipient has hereunto set his or her hand, all as of the
      day
      first above written.





**ATTEST**:
              **KNBT
                  BANCORP, INC.**______________________________
              By:_________________________________Michele
                  A. Linsky
              Jeffrey
                  P. FeatherSecretary
              Chairman
                  of the Board**KNBT
                  BANCORP, INC.**By:_________________________________Scott
                  V. FainorPresident
                  and Chief Executive Officer**(Seal)**
              **[NAME
                  OF RECIPIENT]**_________________________________**[Name]**




3


**Annex
      A**





**Performance
      Targets**








Both
      of
      the following two performance targets must be achieved in order for the shares
      subject to the Performance Share Award to vest in accordance with the provisions
      of Section 2(a)(i) of the Agreement:





(a)
            For
                the fiscal year ending December 31, 2008 (“Fiscal Year 2008”), the
                Corporation has a return on average equity (“ROAE”) (as calculated in
                accordance with generally accepted accounting principles used in
                the
                United States (“GAAP”)) of ____% or higher;
                and





(b)
            The
                Corporation has for Fiscal Year 2008 diluted earnings per share (“EPS”)
                (as calculated in accordance with GAAP) of $___ or
                higher.





**Enhanced
      Performance Targets**





In
      the
      event both of the enhanced performance targets set forth below are achieved,
      the
      number of shares subject to the Performance Share Award will be increased as
      provided by Section 2(a)(ii) of the Agreement:





(a)
            The
                Corporation has for Fiscal Year 2008 a ROAE as calculated in accordance
                with GAAP of ____% or higher; and





(b)
            The
                Corporation has for Fiscal Year 2008 EPS (as calculated in accordance
                with
                GAAP) of $_____ or higher.






4