**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**WASHINGTON,      D. C. 20549**

**FORM      10-Q**

**____________________________________**

| [                  x                  ] | QUARTERLY                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                                            |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                                    | SECURITIES                  EXCHANGE ACT OF 1934 for the quarterly period ended **June                  30, 2005**  |
| OR                                      |
| [                     ]  | TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE                                                 |
|                                    | SECURITIES                  EXCHANGE ACT OF 1934                                                                    |

|   | **Commission                File No. 000-50426** |   |
|--------|--------------------------------------------------|--------|

|                                                                                      |
|--------------------------------------------------------------------------------------|
| (Exact                Name of Registrant as Specified in its                Charter) |

| Pennsylvania                                                             |   | 38-3681905                                          |
|-------------------------------------------------------------------------------|--------|-----------------------------------------------------|
| (State                or Other Jurisdiction of Incorporation or Organization) |   | (I.R.S.                Employer Identification No.) |

| **90                  Highland Avenue, Bethlehem, PA**   |   | **18017**                   |
|----------------------------------------------------------|--------|-----------------------------|
| (Address                  of Principal Executive Office) |   | (Zip                  Code) |

**610-861-5000**

| YES |  X |   |  NO |   |   |
|-----|---------|--------|----------|--------|--------|

| YES |  X |   |  NO |   |   |
|-----|---------|--------|----------|--------|--------|

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**INDEX**

|                                              |                   |                                                                                 | Page   |
|---------------------------------------------------|------------------------|--------------------------------------------------------------------------------------|--------|
| **PART                I - FINANCIAL INFORMATION** |
|                                              |                   |                                                                                 |   |
|                                              | Item                1. | Financial                Statements                                                  | 1      |
|                                              |                   | Consolidated                Balance Sheets                                           | 1      |
|                                              |                   | Consolidated                Statements of Income                                     | 2      |
|                                              |                   | Consolidated                Statement of Changes in Shareholders’ Equity       | 3      |
|                                              |                   | Consolidated                Statements of Cash Flows                                 | 4      |
|                                              |                   | Notes                to Interim Consolidated Financial Statements                    | 5      |
|                                              |                   |                                                                                 |   |
|                                              | Item                2. | Management’s                Discussion and Analysis of Financial Condition and |   |
|                                              |                   | Results                of Operations                                                 | 16     |
|                                              |                   |                                                                                 |   |
|                                              | Item                3. | Quantitative                and Qualitative Disclosures about Market Risk            | 28     |
|                                              |                   |                                                                                 |   |
|                                              | Item                4. | Controls                and Procedures                                               | 28     |
|                                              |                   |                                                                                 |   |
| **PART                II - OTHER INFORMATION**    |
|                                              |                   |                                                                                 |   |
|                                              | Item                1. | Legal                Proceedings                                                     | 28     |
|                                              |                   |                                                                                 |   |
|                                              | Item                2. | Unregistered                Sales of Equity Securities and Use of Proceeds           | 28     |
|                                              |                   |                                                                                 |   |
|                                              | 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                                                                             | 29     |
|                                              |                   |                                                                                 |   |
| **Signatures**                                    | 30                     |
|                                              |                   |                                                                                 |   |
| **Certifications**                                | 31                     |

----

**PART      I. **

**Item      1.     Financial Statements**

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS**

|                                                                          |   | June                  30,                           |      | December                  31, |   |
|-------------------------------------------------------------------------------|--------|-----------------------------------------------------|-----------|-------------------------------|--------|
|                                                                          |   | 2005                                                |      | 2004                          |   |
|                                                                          |   | (unaudited)                                         |      |                          |   |
|                                                                          |   | (dollars                  in thousands)   |      |
|                                                                          |   |                                                |      |                          |   |
| ASSETS                                                                        |   |                                                |      |                          |   |
| Cash                  and due from banks                                      |   | $                                                   | 44,970    |                          | $      | 30,218 |   |
| Interest-bearing                  deposits with banks                         |   |                                                | 33,716    |                          |   | 56,002 |   |
| Cash                  and cash equivalents                                    |   |                                                | 78,686    |                          |   | 86,220 |   |
| Investment                  securities available-for-sale                     |   |                                                | 1,236,867 |                          |   | 1,057,109 |   |
| Investment                  securities held to maturity                       |   |                                                | 52,447    |                          |   | 56,586 |   |
| (Fair                  value of $52,827 at June 30, 2005 and                  |   |                                                |      |                          |   |   |   |
| $57,034                  at December 31, 2004)                                |   |                                                |      |                          |   |   |   |
| Federal                  Home Loan Bank of Pittsburgh stock                   |   |                                                | 47,029    |                          |   | 36,456 |   |
| Mortgage                  loans held-for-sale                                 |   |                                                | 2,109     |                          |   | 718 |   |
| Loans                                                                         |   |                                                | 1,433,985 |                          |   | 1,013,202 |   |
| Less:                  Allowance for loan losses                              |   |                                                | (15,760   | )                             |   | (10,461 | ) |
| Net                  loans                                                    |   |                                                | 1,418,225 |                          |   | 1,002,741 |   |
| Bank                  owned life insurance                                    |   |                                                | 73,514    |                          |   | 60,501 |   |
| Premises                  and equipment, net                                  |   |                                                | 47,560    |                          |   | 40,790 |   |
| Accrued                  interest receivable                                  |   |                                                | 11,638    |                          |   | 9,509 |   |
| Goodwill                                                                      |   |                                                | 103,568   |                          |   | 36,876 |   |
| Other                  intangible assets                                      |   |                                                | 33,758    |                          |   | 16,379 |   |
| Other                  assets                                                 |   |                                                | 11,485    |                          |   | 11,218 |   |
| TOTAL                  ASSETS                                                 |   | $                                                   | 3,116,886 |                          | $      | 2,415,103 |   |
|                                                                          |   |                                                |      |                          |   |   |   |
| LIABILITIES                                                                   |   |                                                |      |                          |   |   |   |
| Non-interest-bearing                  deposits                                |   | $                                                   | 183,265   |                          | $      | 128,498 |   |
| Interest-bearing                  deposits                                    |   |                                                | 1,585,784 |                          |   | 1,194,555 |   |
| Total                  deposits                                               |   |                                                | 1,769,049 |                          |   | 1,323,053 |   |
| Securities                  sold under agreements to repurchase               |   |                                                | 72,036    |                          |   | 22,643 |   |
| Advances                  from the Federal Home Loan Bank                     |   |                                                | 821,165   |                          |   | 660,674 |   |
| Subordinated                  debt                                            |   |                                                | 39,096    |                          |   | 15,464 |   |
| Accrued                  interest payable                                     |   |                                                | 8,277     |                          |   | 5,811 |   |
| Other                  liabilities                                            |   |                                                | 2,837     |                          |   | 10,104 |   |
| TOTAL                  LIABILITIES                                            |   |                                                | 2,712,460 |                          |   | 2,037,749 |   |
|                                                                          |   |                                                |      |                          |   |   |   |
| SHAREHOLDERS'                  EQUITY                                         |   |                                                |      |                          |   |   |   |
| Preferred                  stock, par value $0.01 per share                   |   |                                                |      |                          |   |   |   |
| Authorized:                  20,000,000 shares, none issued                   |   |                                                | -         |                          |   | - |   |
| Common                  stock, par value $0.01 a share                        |   |                                                | 330       |                          |   | 297 |   |
| Authorized:                  100,000,000 shares                               |   |                                                |      |                          |   |   |   |
| Issued:                                                                       |   |                                                |      |                          |   |   |   |
| 33,901,020                  shares at June 30, 2005                           |   |                                                |      |                          |   |   |   |
| 30,656,840                  shares at December 31, 2004                       |   |                                                |      |                          |   |   |   |
| Additional                  paid-in capital                                   |   |                                                | 342,032   |                          |   | 296,403 |   |
| Retained                  earnings                                            |   |                                                | 120,631   |                          |   | 113,748 |   |
| Treasury                  stock, at cost; 2,364,600 and 650,000 shares at     |   |                                                |      |                          |   |   |   |
| June                  30, 2005 and December 31, 2004, respectively            |   |                                                | (37,258   | )                             |   | (11,179 | ) |
| Unallocated                  common stock held                                |   |                                                |      |                          |   |   |   |
| by                  Employee Stock Ownership Plan                             |   |                                                | (14,771   | )                             |   | (15,176 | ) |
| Unearned                  common stock held                                   |   |                                                |      |                          |   |   |   |
| by                  Management Recognition and Retention Plan                 |   |                                                | (8,198    | )                             |   | (9,107 | ) |
| Accumulated                  other comprehensive income, net                  |   |                                                | 1,660     |                          |   | 2,368 |   |
| TOTAL                  SHAREHOLDERS' EQUITY                                   |   |                                                | 404,426   |                          |   | 377,354 |   |
|                                                                          |   |                                                |      |                          |   |   |   |
| TOTAL                  LIABILITIES AND SHAREHOLDERS' EQUITY                   |   | $                                                   | 3,116,886 |                          | $      | 2,415,103 |   |
|                                                                          |   |                                                |      |                          |   |   |   |
| See                  accompanying notes to consolidated financial statements. |   |                                                |      |                          |   |   |   |

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF INCOME**

|                                                                            |   |  Three                    Months Ended June 30,                                                                |   | Six                    Months Ended June 30,    |   |
|---------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                                                            |   |  2005                                                                                                                    |   | 2004                                                      |   | 2005 |   | 2004 |   |
|                                                                            |   |  (dollars                    in thousands, except per share                    data)       |   |
|                                                                            |   |  (unaudited)                                                                               |   |
|                                                                            |   |                                                                                                                     |   |                                                      |   |   |   |   |   |
| INTEREST                    INCOME                                              |   |                                                                                                                     |   |                                                      |   |   |   |   |   |
| Loans,                    including fees                                        |   | $                                                                                                                             | 18,162 |                                                      | $      | 14,479 |   | $ | 33,054 |   | $ | 28,572 |   |
| Investment                    securities                                        |   |                                                                                                                          | 12,907 |                                                      |   | 8,580 |   |   | 24,635 |   |   | 16,696 |   |
| Other                    interest                                               |   |                                                                                                                          | 542    |                                                      |   | 136 |   |   | 888 |   |   | 278 |   |
| Total                    interest income                                        |   |                                                                                                                          | 31,611 |                                                      |   | 23,195 |   |   | 58,577 |   |   | 45,546 |   |
|                                                                            |   |                                                                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| INTEREST                    EXPENSE                                             |   |                                                                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Deposits                                                                        |   |                                                                                                                          | 6,349  |                                                      |   | 4,357 |   |   | 11,448 |   |   | 8,892 |   |
| Securities                    sold under agreements to repurchase               |   |                                                                                                                          | 308    |                                                      |   | 42 |   |   | 359 |   |   | 77 |   |
| Advances                    from the FHLB and other borrowings                  |   |                                                                                                                          | 6,461  |                                                      |   | 2,740 |   |   | 11,905 |   |   | 4,864 |   |
| Subordinated                    debt                                            |   |                                                                                                                          | 433    |                                                      |   | 179 |   |   | 666 |   |   | 360 |   |
| Total                    interest expense                                       |   |                                                                                                                          | 13,551 |                                                      |   | 7,318 |   |   | 24,378 |   |   | 14,193 |   |
|                                                                            |   |                                                                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| NET                    INTEREST INCOME                                          |   |                                                                                                                          | 18,060 |                                                      |   | 15,877 |   |   | 34,199 |   |   | 31,353 |   |
| Provision                    for loan losses                                    |   |                                                                                                                          | 534    |                                                      |   | 971 |   |   | 1,268 |   |   | 2,471 |   |
| Net                    interest income after provision                          |   |                                                                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| for                    loan losses                                              |   |                                                                                                                          | 17,526 |                                                      |   | 14,906 |   |   | 32,931 |   |   | 28,882 |   |
|                                                                            |   |                                                                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| NON-INTEREST                    INCOME                                          |   |                                                                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Trust                    revenue                                                |   |                                                                                                                          | 420    |                                                      |   | 372 |   |   | 818 |   |   | 725 |   |
| Brokerage                    services revenue                                   |   |                                                                                                                          | 568    |                                                      |   | 117 |   |   | 1,116 |   |   | 277 |   |
| Caruso                    benefit group revenue                                 |   |                                                                                                                          | 1,518  |                                                      |   | - |   |   | 1,518 |   |   | - |   |
| Insurance                    services revenue                                   |   |                                                                                                                          | 315    |                                                      |   | - |   |   | 315 |   |   | - |   |
| Deposit                    service charges                                      |   |                                                                                                                          | 1,321  |                                                      |   | 1,009 |   |   | 2,426 |   |   | 2,320 |   |
| Lending                    fees                                                 |   |                                                                                                                          | 545    |                                                      |   | 281 |   |   | 858 |   |   | 579 |   |
| Check                    card/ATM card fees                                     |   |                                                                                                                          | 679    |                                                      |   | 550 |   |   | 1,227 |   |   | 1,036 |   |
| Bank                    owned life insurance                                    |   |                                                                                                                          | 712    |                                                      |   | 655 |   |   | 1,364 |   |   | 1,322 |   |
| Net                    gains on sale of investment securities                   |   |                                                                                                                          | 24     |                                                      |   | 20 |   |   | 456 |   |   | 12 |   |
| Net                    gains on sale of residential mortgage loans              |   |                                                                                                                          | 263    |                                                      |   | 12 |   |   | 481 |   |   | 171 |   |
| Net                    gains on sale of credit card loans                       |   |                                                                                                                          | -      |                                                      |   | - |   |   | - |   |   | 298 |   |
| Net                    (losses) gains on sale of assets                         |   |                                                                                                                          | (61    | )                                                         |   | 213 |   |   | (72 | ) |   | 213 |   |
| Net                    gains (losses) on sale of other real estate owned        |   |                                                                                                                          | 3      |                                                      |   | 25 |   |   | (14 | ) |   | 69 |   |
| Other                    non-interest operating income                          |   |                                                                                                                          | 249    |                                                      |   | 184 |   |   | 505 |   |   | 383 |   |
| Total                    non-interest income                                    |   |                                                                                                                          | 6,556  |                                                      |   | 3,438 |   |   | 10,998 |   |   | 7,405 |   |
|                                                                            |   |                                                                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| NON-INTEREST                    EXPENSES                                        |   |                                                                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Compensation                    and employee benefits                           |   |                                                                                                                          | 9,479  |                                                      |   | 7,309 |   |   | 17,327 |   |   | 14,554 |   |
| Net                    occupancy and equipment expense                          |   |                                                                                                                          | 2,476  |                                                      |   | 1,962 |   |   | 4,589 |   |   | 3,787 |   |
| Professional                    fees                                            |   |                                                                                                                          | 756    |                                                      |   | 239 |   |   | 1,183 |   |   | 811 |   |
| Advertising                                                                     |   |                                                                                                                          | 249    |                                                      |   | 340 |   |   | 471 |   |   | 493 |   |
| Data                    processing                                              |   |                                                                                                                          | 482    |                                                      |   | 478 |   |   | 915 |   |   | 1,009 |   |
| Telecommunication                                                               |   |                                                                                                                          | 243    |                                                      |   | 242 |   |   | 421 |   |   | 551 |   |
| Office                    supplies and postage                                  |   |                                                                                                                          | 547    |                                                      |   | 498 |   |   | 975 |   |   | 1,003 |   |
| Impairment                    of mortgage servicing rights                      |   |                                                                                                                          | 114    |                                                      |   | 154 |   |   | 198 |   |   | 212 |   |
| Amortization                    of intangible assets                            |   |                                                                                                                          | 782    |                                                      |   | 546 |   |   | 1,329 |   |   | 1,093 |   |
| Other                    operating expenses                                     |   |                                                                                                                          | 1,842  |                                                      |   | 1,249 |   |   | 2,987 |   |   | 2,009 |   |
| Total                    non-interest expenses                                  |   |                                                                                                                          | 16,970 |                                                      |   | 13,017 |   |   | 30,395 |   |   | 25,522 |   |
|                                                                            |   |                                                                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Income                    before income taxes                                   |   |                                                                                                                          | 7,112  |                                                      |   | 5,327 |   |   | 13,534 |   |   | 10,765 |   |
| Income                    taxes                                                 |   |                                                                                                                          | 1,874  |                                                      |   | 1,019 |   |   | 3,466 |   |   | 2,342 |   |
| NET                    INCOME                                                   |   | $                                                                                                                             | 5,238  |                                                      | $      | 4,308 |   | $ | 10,068 |   | $ | 8,423 |   |
|                                                                            |   |                                                                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| PER                    SHARE DATA                                               |   |                                                                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net                    income - basic                                           |   | $                                                                                                                             | 0.18   |                                                      | $      | 0.15 |   | $ | 0.35 |   | $ | 0.29 |   |
| Net                    income - diluted                                         |   | $                                                                                                                             | 0.18   |                                                      | $      | 0.15 |   | $ | 0.35 |   | $ | 0.28 |   |
| Cash                    dividends paid per common share                         |   | $                                                                                                                             | 0.06   |                                                      | $      | 0.05 |   | $ | 0.11 |   | $ | 0.05 |   |
|                                                                            |   |                                                                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| See                    accompanying notes to consolidated financial statements. |   |                                                                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

|                                                                                |   | Six                    Months Ended June 30, 2005                    (unaudited)                   |                                                                                                                                                                                                                                                     |
|-------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                |   | (dollars                    in                    thousands)                                       |                                                                                                                                                                                                                                                     |
|                                                                                |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |   |
|                                                                                |   | Common                                                                                                                                                                                       |                                                                                                                                                                                                                                                     | Treasury |   | Common |   | Add'l |   |   |   | Unallocated |   | Unearned |   | Other |   |   |   |   |   |
|                                                                                |   | Stock                                                                                                                                                                                        |                                                                                                                                                                                                                                                     | Stock |   | Stock |   | Paid                    In |   | Retained |   | ESOP |   | Compensation |   | Comprehensive |   | Treasury |   |   |   |
|                                                                                |   | Shares                                                                                                                                                                                       |                                                                                                                                                                                                                                                     | Shares |   | Value |   | Capital |   | Earnings |   | Shares |   | MRRP |   | Income |   | Stock |   | Total |   |
| Balance                    January 1, 2005                                          |   |                                                                                                                                                                                         | 29,764,319                                                                                                                                                                                                                                               |   |   | (650,000 | ) | $ | 297 |   | $ | 296,403 |   | $ | 113,748 |   | $ | (15,176 | ) | $ | (9,107 | ) | $ | 2,368 |   | $ | (11,179 | ) | $ | 377,354 |   |
|                                                                                |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                    income                                             |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    income                                                       |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   | 10,068 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 10,068 |   |
| Other                    comprehensive loss net of taxes                            |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                    reclassification adjustments                                 |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (708 | ) |   |   |   |   | (708 | ) |
| Total                    comprehensive Income                                       |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 9,360 |   |
| Cash                    dividends                                                   |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   | (3,185 | ) |   |   |   |   |   |   |   |   |   |   |   |   |   | (3,185 | ) |
| Unallocated                    ESOP shares committed to employees                   |   |                                                                                                                                                                                         | 23,801                                                                                                                                                                                                                                                   |   |   |   |   |   |   |   |   | (49 | ) |   |   |   |   | 405 |   |   |   |   |   |   |   |   |   |   |   | 356 |   |
| Shares                    issued upon exercise of stock options                     |   |                                                                                                                                                                                         | 17,449                                                                                                                                                                                                                                                   |   |   |   |   |   |   |   |   | 86 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 86 |   |
| Acquisition                    of Northeast Pennsylvania Financial Corp             |   |                                                                                                                                                                                         | 3,226,731                                                                                                                                                                                                                                                |   |   |   |   |   | 33 |   |   | 45,432 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 45,465 |   |
| Purchases                    of treasury stock                                      |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   | (1,714,600 | ) |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (26,079 | ) |   | (26,079 | ) |
| Amortization                    of compensation of advisory directors options  |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   | 9 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 9 |   |
| Establishment                    of a Management Recognition Program (MRRP)         |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   | 151 |   |   |   |   |   |   |   |   | (151 | ) |   |   |   |   |   |   |   | - |   |
| Amortization                    of compensation related to MRRP                     |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1,060 |   |   |   |   |   |   |   |   | 1,060 |   |
| Balance                    at June 30, 2005                                         |   |                                                                                                                                                                                         | 33,032,300                                                                                                                                                                                                                                               |   |   | (2,364,600 | ) | $ | 330 |   | $ | 342,032 |   | $ | 120,631 |   | $ | (14,771 | ) | $ | (8,198 | ) | $ | 1,660 |   | $ | (37,258 | ) | $ | 404,426 |   |
|                                                                                |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                |   |                                                                                                                                                                                         | Six                    Months Ended June 30, 2004                    (unaudited)                             |   |
|                                                                                |   |                                                                                                                                                                                         | (dollars                    in                    thousands)                                                 |   |
|                                                                                |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Accumulated  |   |   |   |   |   |   |   |
|                                                                                |   |                                                                                                                                                                                         | Common                                                                                                                                                                                                                                              |   |   | Treasury |   |   | Common |   |   | Add'l |   |   |   |   |   | Unallocated |   |   | Unearned |   |   | Other |   |   |   |   |   |   |   |
|                                                                                |   |                                                                                                                                                                                         | Stock                                                                                                                                                                                                                                               |   |   | Stock |   |   | Stock |   |   | Paid                    In |   |   | Retained |   |   | ESOP |   |   | Compensation |   |   | Comprehensive |   |   | Treasury |   |   |   |   |
|                                                                                |   |                                                                                                                                                                                         | Shares                                                                                                                                                                                                                                              |   |   | Shares |   |   | Value |   |   | Capital |   |   | Earnings |   |   | Shares |   |   | MRRP |   |   | Income |   |   | Stock |   |   | Total |   |
| Balance                    January 1, 2004                                          |   |                                                                                                                                                                                         | 29,479,275                                                                                                                                                                                                                                               |   |   |   |   | $ | 295 |   | $ | 297,887 |   | $ | 100,570 |   | $ | (15,987 | ) |   |   |   | $ | 6,315 |   |   |   |   | $ | 389,080 |   |
|                                                                                |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                    income (loss)                                      |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    income                                                       |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   | 8,423 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 8,423 |   |
| Other                    comprehensive loss net of taxes                            |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                    reclassification adjustments                                 |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (8,111 | ) |   |   |   |   | (8,111 | ) |
| Total                    comprehensive loss                                         |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 312 |   |
| Cash                    dividends                                                   |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   | (1,481 | ) |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,481 | ) |
| Purchase                    of Stock for Management Recognition                     |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                    Retention Plan (MRRP)                                        |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   | (13,281 | ) |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (13,281 | ) |
| Unallocated                    ESOP shares committed to employees                   |   |                                                                                                                                                                                         | 23,801                                                                                                                                                                                                                                                   |   |   |   |   |   |   |   |   | (3 | ) |   |   |   |   | 405 |   |   |   |   |   |   |   |   |   |   |   | 402 |   |
| Shares                    issued upon exercise of stock options                     |   |                                                                                                                                                                                         | 158,691                                                                                                                                                                                                                                                  |   |   |   |   |   | 2 |   |   | 832 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 834 |   |
| Establishment                    of a MRRP                                          |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   | 10,659 |   |   |   |   |   |   |   |   | (10,659 | ) |   |   |   |   |   |   |   | - |   |
| Amortization                    of compensation related to MRRP                     |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 356 |   |   |   |   |   |   |   |   | 356 |   |
| Balance                    at June 30, 2004                                         |   |                                                                                                                                                                                         | 29,661,767                                                                                                                                                                                                                                               |   |   | 0 |   | $ | 297 |   | $ | 296,094 |   | $ | 107,512 |   | $ | (15,582 | ) | $ | (10,303 | ) | $ | (1,796 | ) | $ | 0 |   | $ | 376,222 |   |
|                                                                                |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                |   |                                                                                                                                                                                         |                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**
** **

|                                                                                                        |   | Six                    Months Ended June 30,    |     |
|-------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|----------|
|                                                                                                        |   | 2005                                                      |     | 2004 |   |
|                                                                                                        |   | (dollars                    in thousands)       |     |
| **OPERATING                    ACTIVITIES:**                                                                |   |                                                      |     |   |   |
| Net                    income                                                                               |   | $                                                         | 10,068   |   | $ | 8,423 |   |
| Adjustments                    to reconcile net income to net cash                                          |   |                                                      |     |   |   |   |   |
| Provided                    by operating activities:                                                        |   |                                                      |     |   |   |   |   |
| Provision                    for possible loan losses                                                       |   |                                                      | 1,268    |   |   | 2,471 |   |
| Depreciation                    and amortization                                                            |   |                                                      | 3,310    |   |   | 2,758 |   |
| Compensation                    expense stock option plan                                                   |   |                                                      | 9        |   |   | 4 |   |
| Management                    Recognition and Retention Plan expense                                        |   |                                                      | 1,060    |   |   | 356 |   |
| ESOP                    expense                                                                             |   |                                                      | 356      |   |   | 401 |   |
| Amortization                    and accretion of securities premiums and discounts, net                     |   |                                                      | 915      |   |   | 1,316 |   |
| (Gain)                    Loss on sale of other real estate owned                                           |   |                                                      | 14       |   |   | (69 | ) |
| Net                    (Gain) on sales of investment securities                                             |   |                                                      | (456     | ) |   | (12 | ) |
| Gain                    on sale of credit card portfolio                                                    |   |                                                      | -        |   |   | (298 | ) |
| (Gain)                    Loss on sale of other assets                                                      |   |                                                      | 72       |   |   | (213 | ) |
| Gain                    on sale of mortgage loans                                                           |   |                                                      | (481     | ) |   | (171 | ) |
| Mortgage                    loans originated for sale                                                       |   |                                                      | (29,207  | ) |   | (15,135 | ) |
| Mortgage                    loan sales                                                                      |   |                                                      | 30,467   |   |   | 16,462 |   |
| Changes                    in assets and liabilities:                                                       |   |                                                      |     |   |   |   |   |
| Increase                    in Bank Owned Life Insurance                                                    |   |                                                      | (1,363   | ) |   | (1,322 | ) |
| Decrease                    (Increase) in accrued interest receivable                                       |   |                                                      | 745      |   |   | (1,396 | ) |
| Decrease                    (Increase) in other assets                                                      |   |                                                      | (257     | ) |   | 947 |   |
| Increase                    (Decrease) in other liabilities and accrued interest                    payable |   |                                                      | (657     | ) |   | 732 |   |
| Net                    cash provided by operating activities                                                |   |                                                      | 15,863   |   |   | 15,254 |   |
|                                                                                                        |   |                                                      |     |   |   |   |   |
| **INVESTING                    ACTIVITIES:**                                                                |   |                                                      |     |   |   |   |   |
| Proceeds                    from calls and maturities of securities available-for-sale                      |   |                                                      | 85,620   |   |   | 91,115 |   |
| Proceeds                    from calls and maturities of securities held-to maturity                        |   |                                                      | 2,521    |   |   | - |   |
| Proceeds                    from sales of securities available-for-sale                                     |   |                                                      | 56,600   |   |   | 351 |   |
| Purchase                    of securities available-for-sale                                                |   |                                                      | (25,289  | ) |   | (261,466 | ) |
| Purchase                    of securities held to maturity                                                  |   |                                                      | -        |   |   | (59,751 | ) |
| Purchase                    of Federal Home Loan Bank of Pittsburgh stock                                   |   |                                                      | (414     | ) |   | (12,203 | ) |
| Redemption                    of Federal Home Loan Bank of Pittsburgh stock                                 |   |                                                      | 1,891    |   |   | - |   |
| Proceeds                    from the sale of credit card loans                                              |   |                                                      | -        |   |   | 1,831 |   |
| Net                    (Increase) in loans                                                                  |   |                                                      | (42,076  | ) |   | (85,994 | ) |
| Cash                    paid for acquisitions                                                               |   |                                                      | (65,452  | ) |   | - |   |
| Cash                    and cash equivalents obtained through acquisitions                                  |   |                                                      | 52,021   |   |   | - |   |
| Purchase                    of premises & equipment                                                     |   |                                                      | (1,544   | ) |   | (7,100 | ) |
| Proceeds                    from the sale of other assets                                                   |   |                                                      | 1,029    |   |   | 418 |   |
| Proceeds                    from the sale of other real estate owned                                        |   |                                                      | 202      |   |   | 336 |   |
| Net                    cash provided by (used in) investing activities                                      |   |                                                      | 65,109   |   |   | (332,463 | ) |
|                                                                                                        |   |                                                      |     |   |   |   |   |
| **FINANCING                    ACTIVITIES:**                                                                |   |                                                      |     |   |   |   |   |
| Net                    increase (decrease) in deposits                                                      |   |                                                      | (3,479   | ) |   | 21,572 |   |
| Net                    increase in repurchase agreements                                                    |   |                                                      | 9,177    |   |   | 6,526 |   |
| Proceeds                    from long -term debt                                                            |   |                                                      | 49,500   |   |   | 262,562 |   |
| Payments                    on long -term debt                                                              |   |                                                      | (114,526 | ) |   | (36,287 | ) |
| Purchase                    of treasury stock                                                               |   |                                                      | (26,079  | ) |   | - |   |
| Proceeds                    from the exercise of stock options                                              |   |                                                      | 86       |   |   | 834 |   |
| Purchase                    of Stock for the Management Recognition and Retention Plan                      |   |                                                      | -        |   |   | (13,281 | ) |
| Cash                    dividends paid                                                                      |   |                                                      | (3,185   | ) |   | (1,481 | ) |
| Net                    cash provided by financing activities                                                |   |                                                      | (88,506  | ) |   | 240,445 |   |
| Increase                    (Decrease) in cash and cash equivalents                                         |   |                                                      | (7,534   | ) |   | (76,764 | ) |
| Cash                    and cash equivalents January 1,                                                     |   |                                                      | 86,220   |   |   | 138,977 |   |
| Cash                    and cash equivalents June 30,                                                       |   | $                                                         | 78,686   |   | $ | 62,213 |   |
|                                                                                                        |   |                                                      |     |   |   |   |   |
| Supplemental                    disclosure of cash flow information                                         |   |                                                      |     |   |   |   |   |
| Cash                    paid during the period for                                                          |   |                                                      |     |   |   |   |   |
| Income                    taxes                                                                             |   | $                                                         | 900,000  |   | $ | 22 |   |
| Interest                    on deposits, advances and other borrowed money                                  |   | $                                                         | 24,158   |   | $ | 13,585 |   |
| Supplemental                    disclosure of non-cash activities                                           |   |                                                      |     |   |   |  |   |
| Reclassification                    of loans receivable to other real estate owned                          |   | $                                                         | 1,739    |   | $ | 152 |   |
|                                                                                                        |   |                                                      |     |   |   |   |   |
| See                    accompanying notes to consolidated financial statements.                             |   |                                                      |     |   |   |   |   |

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**NOTES      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS **

**NOTE      A - BASIS OF PRESENTATION**

**NOTE      B - BASIS OF CONSOLIDATION**

----

**NOTE      C - CONVERSION AND ACQUISITIONS**

**Oakwood      Financial Corp.**

**Caruso      Benefits Group, Inc.**

**Northeast      Pennsylvania Financial Corp.**

----

|                                                          |   | At                      May 19, 2005        |    |
|---------------------------------------------------------------|--------|---------------------------------------------|---------|
|                                                          |   | (dollars                      in thousands) |    |
|                                                          |   |                                        |    |
| Assets:                                                       |   |                                        |    |
| Cash                      and cash equivalents                |   | $                                           | 51,078  |   |
| Investment                      securities available for sale |   |                                        | 301,751 |   |
| Loans                                                         |   |                                        | 379,397 |   |
| Less:                      allowance for loan losses          |   |                                        | (5,281  | ) |
| Net                      loans                                |   |                                        | 374,116 |   |
| Other                      assets                             |   |                                        | 58,763  |   |
| Total                      assets                             |   |                                        | 785,708 |   |
|                                                          |   |                                        |    |   |
| Liabilities:                                                  |   |                                        |    |   |
| Non-interest                      bearing deposits            |   |                                        | 47,281  |   |
| Interest-bearing                      deposits                |   |                                        | 403,130 |   |
| FHLB                      advances and other borrowings       |   |                                        | 290,154 |   |
| Other                      liabilities                        |   |                                        | 7,104   |   |
| Total                      liabilities                        |   |                                        | 747,669 |   |
|                                                          |   |                                        |    |   |
| Net                      assets acquired                      |   | $                                           | 38,039  |   |
|                                                          |   |                                        |    |   |

| (dollars                    in thousands)                                                                |   |   |   |
|----------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                                     |   |   |   |
| Purchase                    price :                                                                      |   |   |   |
| Purchase                    price for shares exchanged for common stock                                  |   | $      | 45,465 |   |
| Purchase                    Price for shares exchanged for cash                                          |   |   | 45,452 |   |
| Total                    purchase price                                                                  |   |   | 90,917 |   |
| Net                    assets acquired:                                                                  |   |   |   |   |
| Seller's                    shareholders' equity, net of intangible assets                               |   |   | 38,039 |   |
| Excess                    purchase price                                                                 |   |   | 52,878 |   |
|                                                                                                     |   |   |   |   |
| Estimated                    adjustments to reflect assets acquired at fair value:                       |   |   |   |   |
| Investments                    (amortized over the actual life of the securities)                        |   |   | (77    | ) |
| Loans                    (five year weighted average life)                                               |   |   | (78    | ) |
| Core                    deposit intangible (ten year amortization)                                       |   |   | (7,825 | ) |
| Premises                    (twenty year amortization)                                                   |   |   | 2,778  |   |
| Estimated                    adjustments to reflect liabilities acquired at fair value:                  |   |   |   |   |
| Deposits                    (amortized over a five year weighted average life)                           |   |   | 938    |   |
| FHLB                    advances (amortized over an eight year weighted average                    life) |   |   | 3,908  |   |
| Other                    borrowings                                                                      |   |   | 2,967  |   |
| Deferred                    taxes                                                                        |   |   | (2,629 | ) |
| Goodwill                    impact of purchase accounting adjustments                                    |   |   | (18    | ) |
| Goodwill                    resulting from merger                                                        |   | $      | 52,860 |   |
|                                                                                                     |   |   |   |   |

----

|                                         |   | For                    the six              |   |
|----------------------------------------------|--------|-------------------------------------------------------|--------|
|                                         |   | months                    ended June 30,    |   |
|                                         |   | 2004                                                  |   | 2005 |   |
|                                         |   | (dollars                    in thousands)             |   |   |   |
|                                         |   |                                                  |   |   |   |
| Interest                    income           |   | $                                                     | 66,414 |   | $ | 72,463 |   |
| Interest                    expense          |   |                                                  | 23,256 |   |   | 31,754 |   |
| Net                    interest income       |   |                                                  | 43,158 |   |   | 40,709 |   |
|                                         |   |                                                  |   |   |   |   |   |
| Provision                    for loan losses |   |                                                  | 3,865  |   |   | 1,268 |   |
| Non-interest                    income       |   |                                                  | 16,963 |   |   | 14,712 |   |
| Non-interest                    expense      |   |                                                  | 38,438 |   |   | 5,668 |   |
|                                         |   |                                                  |   |   |   |   |   |
| Net                    income (loss)         |   | $                                                     | 13,286 |   | $ | (1,647 | ) |

**NOTE          D - EARNINGS PER SHARE**

| For                    the three months ended June 30,       |   | 2005                                                                                                                                               |                                                                                                                                                                                | 2004          |   |
|--------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|--------|
|                                                         |   | Net                                                                                                                                                |                                                                                                                                                                                | Average       |   |   |   | Net |   | Average |   |   |   |
|                                                         |   | Income                                                                                                                                             |                                                                                                                                                                                | Shares        |   | Per                    Share |   | Income |   | Shares |   | Per                    Share |   |
|                                                         |   | (numerator)                                                                                                                                        |                                                                                                                                                                                | (denominator) |   | Amount |   | (numerator) |   | (denominator) |   | Amount |   |
|                                                         |   | (dollars                    in thousands, except per share                    amounts)           |                                                                                                                                                                                |
| Basic                    earnings per share                  |   |                                                                                                                                               |                                                                                                                                                                                |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                    available to common shareholders   |   | $                                                                                                                                                  | 5,238                                                                                                                                                                               |          |   | 29,358,352 |   | $ | 0.18 |   | $ | 4,308 |   |   | 29,232,941 |   | $ | 0.15 |   |
| Effect                    of dilutive securities             |   |                                                                                                                                               |                                                                                                                                                                                |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock                    options                             |   |                                                                                                                                               |                                                                                                                                                                                |          |   | 196,804 |   |   | - |   |   |   |   |   | 412,754 |   |   | - |   |
| Management                    Recognition and Retention Plan |   |                                                                                                                                               |                                                                                                                                                                                |          |   | 75,569 |   |   | - |   |   |   |   |   | 9,568 |   |   | - |   |
| Total                    effect of dilutive securities       |   |                                                                                                                                               |                                                                                                                                                                                |          |   | 272,373 |   |   | - |   |   |   |   |   | 422,322 |   |   | - |   |
| Diluted                    earnings per share                |   |                                                                                                                                               |                                                                                                                                                                                |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                    available to common shareholders   |   |                                                                                                                                               |                                                                                                                                                                                |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| plus                    assumed exercise of options          |   | $                                                                                                                                                  | 5,238                                                                                                                                                                               |          |   | 29,630,725 |   | $ | 0.18 |   | $ | 4,308 |   |   | 29,655,263 |   | $ | 0.15 |   |
|                                                         |   |                                                                                                                                               |                                                                                                                                                                                |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| For                    the six months ended June 30,         |   |                                                                                                                                               | 2005                                                                                                                                                  |          |   | 2004       |   |
|                                                         |   |                                                                                                                                               | Net                                                                                                                                                                            |          |   | Average |   |   |   |   |   | Net |   |   | Average |   |   |   |   |
|                                                         |   |                                                                                                                                               | Income                                                                                                                                                                         |          |   | Shares |   |   | Per                    Share |   |   | Income |   |   | Shares |   |   | Per                    Share |   |
|                                                              |   |                                                                                                                                               | (numerator)                                                                                                                                                                    |          |   | (denominator) |   |   | Amount |   |   | (numerator) |   |   | (denominator) |   |   | Amount |   |
|                                                              |   |                                                                                                                                               | (dollars                    in thousands, except per share                    data)                 |          |
| Basic                    earnings per share                  |   |                                                                                                                                               |                                                                                                                                                                                |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                    available to common shareholders   |   | $                                                                                                                                                  | 10,068                                                                                                                                                                              |          |   | 28,795,321 |   | $ | 0.35 |   | $ | 8,423 |   |   | 29,394,090 |   | $ | 0.29 |   |
| Effect                    of dilutive securities             |   |                                                                                                                                               |                                                                                                                                                                                |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock                    options                             |   |                                                                                                                                               |                                                                                                                                                                                |          |   | 205,262 |   |   | - |   |   |   |   |   | 509,844 |   |   | - |   |
| Management                    Recognition and Retention Plan |   |                                                                                                                                               |                                                                                                                                                                                |          |   | 100,715 |   |   | - |   |   |   |   |   | 28,533 |   |   | - |   |
| Total                    effect of dilutive securities       |   |                                                                                                                                               |                                                                                                                                                                                |          |   | 305,977 |   |   | - |   |   |   |   |   | 538,377 |   | $ | (0.01 | ) |
| Diluted                    earnings per share                |   |                                                                                                                                               |                                                                                                                                                                                |          |   |   |   |   | - |   |   |   |   |   |   |   |   | - |   |
| Income                    available to common shareholders   |   |                                                                                                                                               |                                                                                                                                                                                |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| plus                    assumed exercise of options          |   | $                                                                                                                                                  | 10,068                                                                                                                                                                              |          |   | 29,101,298 |   | $ | 0.35 |   | $ | 8,423 |   |   | 29,932,467 |   | $ | 0.28 |   |

----

**NOTE      E - INVESTMENT SECURITIES**

|                                                   |   | At                    June 30, 2005                    (unaudited)       |      |
|--------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------|-----------|
|                                                   |   |                                                                                                   |      | Gross |   | Gross |   |   |   |
|                                                   |   | Amortized                                                                                              |      | Unrealized |   | Unrealized |   | Fair |   |
|                                                   |   | Cost                                                                                                   |      | Gains |   | Losses |   | Value |   |
|                                                   |   |   (dollars                    in thousands)                              |      |
| Held                    to maturity:                   |   |                                                                                                   |      |   |   |   |   |   |   |
| U.S.                    Government and agencies        |   | $                                                                                                      | 298       |   | $ | - |   | $ | - |   | $ | 298 |   |
| Obligations                    of states and political |   |                                                                                                   |      |   |   |   |   |   |   |   |   |   |   |
| subdivisions                                           |   |                                                                                                   | 5,504     |   |   | 103 |   |   | - |   |   | 5,607 |   |
| Mortgage-backed                    securities          |   |                                                                                                   |      |   |   |   |   |   |   |   |   |   |   |
| FNMA                                                   |   |                                                                                                   | 23,635    |   |   | 97 |   |   | - |   |   | 23,732 |   |
| CMOs                                                   |   |                                                                                                   | 23,010    |   |   | 180 |   |   | - |   |   | 23,190 |   |
| Total                    mortgage-backed securities    |   |                                                                                                   | 46,645    |   |   | 277 |   |   | - |   |   | 46,922 |   |
| Total                    held to maturity              |   |                                                                                                   | 52,447    |   |   | 380 |   |   | - |   |   | 52,827 |   |
|                                                   |   |                                                                                                   |      |   |   |   |   |   |   |   |   |   |   |
| Available                    for sale:                 |   |                                                                                                   |      |   |   |   |   |   |   |   |   |   |   |
| U.S.                    Government and agencies        |   |                                                                                                   | 152,607   |   |   | 884 |   |   | (769 | ) |   | 152,722 |   |
| Obligations                    of states and political |   |                                                                                                   |      |   |   |   |   |   |   |   |   |   |   |
| subdivisions                                           |   |                                                                                                   | 105,176   |   |   | 2,808 |   |   | (33 | ) |   | 107,951 |   |
| Asset-managed                    funds                 |   |                                                                                                   | 4,904     |   |   | - |   |   | (127 | ) |   | 4,777 |   |
| Federated                    Liquid Cash Trust         |   |                                                                                                   | 36        |   |   | - |   |   | - |   |   | 36 |   |
| Mortgage-backed                    securities          |   |                                                                                                   |      |   |   |   |   |   |   |   |   |   |   |
| GNMA                                                   |   |                                                                                                   | 2,914     |   |   | 63 |   |   | - |   |   | 2,977 |   |
| FHLMC                                                  |   |                                                                                                   | 150,132   |   |   | 538 |   |   | (546 | ) |   | 150,124 |   |
| FNMA                                                   |   |                                                                                                   | 439,457   |   |   | 2,625 |   |   | (1,435 | ) |   | 440,647 |   |
| CMOs                                                   |   |                                                                                                   | 296,305   |   |   | 245 |   |   | (2,852 | ) |   | 293,698 |   |
| Total                    mortgage-backed securities    |   |                                                                                                   | 888,808   |   |   | 3,471 |   |   | (4,833 | ) |   | 887,446 |   |
| Corporate                    and other debt securities |   |                                                                                                   | 66,683    |   |   | 889 |   |   | (14 | ) |   | 67,558 |   |
| Equity                    securities                   |   |                                                                                                   | 16,137    |   |   | 746 |   |   | (506 | ) |   | 16,377 |   |
| Total                    available for sale            |   |                                                                                                   | 1,234,351 |   |   | 8,798 |   |   | (6,282 | ) |   | 1,236,867 |   |
|                                                   |   |                                                                                                   |      |   |   |   |   |   |   |   |   |   |   |
| Total                    investment securities         |   | $                                                                                                      | 1,286,798 |   | $ | 9,178 |   | $ | (6,282 | ) | $ | 1,289,694 |   |

----

|                                                   |   | At                    December 31, 2004                     |      |
|--------------------------------------------------------|--------|-------------------------------------------------------------|-----------|
|                                                   |   |                                                        |      | Gross |   | Gross |   |   |   |
|                                                   |   | Amortized                                                   |      | Unrealized |   | Unrealized |   | Fair |   |
|                                                   |   | Cost                                                        |      | Gains |   | Losses |   | Value |   |
|                                                   |   | (dollars                    in thousands)    |      |
| Held                    to maturity:                   |   |                                                        |      |   |   |   |   |   |   |
| Obligations                    of states and political |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |
| subdivisions                                           |   | $                                                           | 5,510     |   | $ | 39 |   | $ | (4 | ) | $ | 5,545 |   |
| Mortgage-backed                    securities          |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |
| FNMA                                                   |   |                                                        | 25,893    |   |   | 100 |   |   | - |   |   | 25,993 |   |
| CMOs                                                   |   |                                                        | 25,183    |   |   | 313 |   |   |   |   |   | 25,496 |   |
| Total                    mortgage-backed securities    |   |                                                        | 51,076    |   |   | 413 |   |   | - |   |   | 51,489 |   |
| Total                    held to maturity              |   |                                                        | 56,586    |   |   | 452 |   |   | (4 | ) |   | 57,034 |   |
|                                                   |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |
| Available                    for sale:                 |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |
| U.S.                    Government and agencies        |   |                                                        | 174,864   |   |   | 1,562 |   |   | (777 | ) |   | 175,649 |   |
| Obligations                    of states and political |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |
| subdivisions                                           |   |                                                        | 104,476   |   |   | 2,249 |   |   | (151 | ) |   | 106,574 |   |
| Asset-managed                    funds                 |   |                                                        | 4,904     |   |   | - |   |   | (93 | ) |   | 4,811 |   |
| Federated                    Liquid Cash Trust         |   |                                                        | 35        |   |   | - |   |   | - |   |   | 35 |   |
| Mortgage-backed                    securities          |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |
| GNMA                                                   |   |                                                        | 1,416     |   |   | 44 |   |   | - |   |   | 1,460 |   |
| FHLMC                                                  |   |                                                        | 104,476   |   |   | 524 |   |   | (346 | ) |   | 104,654 |   |
| FNMA                                                   |   |                                                        | 308,923   |   |   | 2,975 |   |   | (1,257 | ) |   | 310,641 |   |
| CMOs                                                   |   |                                                        | 277,485   |   |   | 522 |   |   | (2,125 | ) |   | 275,882 |   |
| Total                    mortgage-backed securities    |   |                                                        | 692,300   |   |   | 4,065 |   |   | (3,728 | ) |   | 692,637 |   |
| Corporate                    and other debt securities |   |                                                        | 9,029     |   |   | 168 |   |   | - |   |   | 9,197 |   |
| Equity                    securities                   |   |                                                        | 67,914    |   |   | 1,093 |   |   | (801 | ) |   | 68,206 |   |
| Total                    available for sale            |   |                                                        | 1,053,522 |   |   | 9,137 |   |   | (5,550 | ) |   | 1,057,109 |   |
|                                                   |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |
| Total                    investment securities         |   | $                                                           | 1,110,108 |   | $ | 9,589 |   | $ | (5,554 | ) | $ | 1,114,143 |   |

**NOTE      F - STOCK-BASED COMPENSATION**

----

|                                                              |   | Three                    months ended                                                                            |   | Six                    months ended    |   |
|-------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|
|                                                              |   | June                    30,                                                                                      |   | June                    30,            |   |
|                                                              |   | 2005                                                                                                                       |   | 2004                                             |   | 2005 |   | 2004 |   |
|                                                              |   | (dollars                    in thousands, except per share                    amounts)       |   |
| Net                    Income                                     |   |                                                                                                                       |   |                                             |   |   |   |   |   |
| As                    reported                                    |   | $                                                                                                                          | 5,238  |                                             | $      | 4,308 |   | $ | 10,068 |   |   | 8423 |   |
| Add:                    Stock-based employee compensation expense |   |                                                                                                                       |   |                                             |   |   |   |   |   |   |   |   |   |
| included                    in reported net income, net           |   |                                                                                                                       |   |                                             |   |   |   |   |   |   |   |   |   |
| of                    related tax effects                         |   |                                                                                                                       | 6      |                                             |   | 4 |   |   | 12 |   |   | 4 |   |
| Less:                    Stock-based compensation cost determined |   |                                                                                                                       |   |                                             |   |   |   |   |   |   |   |   |   |
| under                    fair value method for all awards, net    |   |                                                                                                                       |   |                                             |   |   |   |   |   |   |   |   |   |
| of                    related tax effects                         |   |                                                                                                                       | 167    |                                             |   | 92 |   |   | 327 |   |   | 92 |   |
| Pro-forma                                                         |   | $                                                                                                                          | 5,077  |                                             | $      | 4,220 |   | $ | 9,753 |   | $ | 8,335 |   |
|                                                              |   |                                                                                                                       |   |                                             |   |   |   |   |   |   |   |   |   |
| Earnings                    per share (Diluted)                   |   |                                                                                                                       |   |                                             |   |   |   |   |   |   |   |   |   |
| As                    reported                                    |   | $                                                                                                                          | 0.18   |                                             | $      | 0.15 |   | $ | 0.35 |   | $ | 0.28 |   |
| Pro-forma                                                         |   | $                                                                                                                          | 0.17   |                                             | $      | 0.14 |   | $ | 0.34 |   | $ | 0.28 |   |
|                                                              |   |                                                                                                                       |   |                                             |   |   |   |   |   |   |   |   |   |
| Earnings                    per share (Basic)                     |   |                                                                                                                       |   |                                             |   |   |   |   |   |   |   |   |   |
| As                    reported                                    |   | $                                                                                                                          | 0.18   |                                             | $      | 0.15 |   | $ | 0.35 |   | $ | 0.29 |   |
| Pro-forma                                                         |   | $                                                                                                                          | 0.17   |                                             | $      | 0.14 |   | $ | 0.34 |   | $ | 0.28 |   |

*Share-Based      Payment Statement 123(R)*
*FASB      No.123, Accounting for Stock-Based Compensation*
*Accounting      for Stock Issued to Employees*

----

*Share-Based      Payment*

----

**NOTE      G - LOANS**

|                                                 |   | June                    30,               |      | December                    31, |   |
|------------------------------------------------------|--------|-------------------------------------------|-----------|---------------------------------|--------|
|                                                 |   | 2005                                      |      | 2004                            |   |
|                                                 |   | (unaudited)                               |      |                            |   |
|                                                 |   | (dollars                    in thousands) |      |
| Real                    estate                       |   |                                      |      |                            |   |
| Residential                                          |   | $                                         | 435,270   |                            | $      | 326,552 |   |
| Construction                                         |   |                                      | 104,728   |                            |   | 106,361 |   |
| Commercial                                           |   |                                      | 312,921   |                            |   | 231,132 |   |
| Total                    real estate                 |   |                                      | 852,919   |                            |   | 664,045 |   |
|                                                 |   |                                      |      |                            |   |   |   |
| Consumer                    loans                    |   |                                      | 488,690   |                            |   | 297,935 |   |
| Commercial                    (non-real estate)      |   |                                      | 93,841    |                            |   | 50,691 |   |
| States                    and political subdivisions |   |                                      | 1,036     |                            |   | 1,170 |   |
| Total                    gross loans                 |   |                                      | 1,436,486 |                            |   | 1,013,841 |   |
|                                                 |   |                                      |      |                            |   |   |   |
| Less:                                                |   |                                      |      |                            |   |   |   |
| Mortgage                    loans held-for-sale      |   |                                      | (2,109    | )                               |   | (718 | ) |
| Deferred                    fees                     |   |                                      | (392      | )                               |   | 79 |   |
| Total                    loans                       |   |                                      | 1,433,985 |                            |   | 1,013,202 |   |
|                                                 |   |                                      |      |                            |   |   |   |
| Less:                    Allowance for loan losses   |   |                                      | (15,760   | )                               |   | (10,461 | ) |
| Total                    net loans                   |   | $                                         | 1,418,225 |                            | $      | 1,002,741 |   |

|                                                                          |   | At                    June 30,                        |   | At                    Dec. 31, |   |
|-------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|--------------------------------|--------|
|                                                                          |   | 2005                                                  |   | 2004                           |   |
|                                                                          |   | (unaudited)                                           |   |                           |   |
|                                                                          |   | (dollars                    in thousands)   |   |
|                                                                          |   |                                                  |   |                           |   |
| Non-accrual                    loans                                          |   | $                                                     | 5,702  |                           | $      | 4,544 |   |
| Accruing                    loans 90 days or more past due                    |   |                                                  | 1,218  |                           |   | 511 |   |
| Total                    non-performing loans                                 |   |                                                  | 6,920  |                           |   | 5,055 |   |
|                                                                          |   |                                                  |   |                           |   |   |   |
| Other                    real estate owned                                    |   |                                                  | 319    |                           |   | 71 |   |
| Total                    non-performing assets                                |   | $                                                     | 7,239  |                           | $      | 5,126 |   |
|                                                                          |   |                                                  |   |                           |   |   |   |
| Total                    non-performing loans                                 |   |                                                  |   |                           |   |   |   |
| as                    a percentage of loans, net                              |   |                                                  | 0.49   | %                              |   | 0.50 | % |
|                                                                          |   |                                                  |   |                           |   |   |   |
| Total                    non-performing loans                                 |   |                                                  |   |                           |   |   |   |
| as                    a percentage of total assets                            |   |                                                  | 0.22   | %                              |   | 0.21 | % |
|                                                                          |   |                                                  |   |                           |   |   |   |
| Total                    non-performing assets                                |   |                                                  |   |                           |   |   |   |
| as                    a percentage of total assets                            |   |                                                  | 0.23   | %                              |   | 0.21 | % |
|                                                                          |   |                                                  |   |                           |   |   |   |
| Interest                    on non-accrual loans which would have been        |   |                                                  |   |                           |   |   |   |
| recorded                    at the original rate                              |   | $                                                     | 74     |                           | $      | 125 |   |
|                                                                          |   |                                                  |   |                           |   |   |   |
| Interest                    on non-accrual loans that was reflected in income |   |                                                  | -      |                           |   | - |   |
| Net                    decrease in interest income                            |   | $                                                     | (74    | )                              | $      | (125 | ) |

----

|                                                         |   | At                  or for the               |   | At                  or for the             |   |
|--------------------------------------------------------------|--------|----------------------------------------------|--------|--------------------------------------------|--------|
|                                                         |   | Three                  Months Ended June 30, |   | Six                  Months Ended June 30, |   |
|                                                         |   | 2005                                         |   | 2004                                       |   | 2005 |   | 2004 |   |
|                                                         |   | (dollars                  in thousands)      |   |
|                                                         |   | (unaudited)                   |   |
|                                                         |   |                                         |   |                                       |   |   |   |   |   |
| Balance,                  beginning of period                |   | $                                            | 10,450 |                                       | $      | 9,000 |   | $ | 10,461 |   | $ | 7,910 |   |
| Reserve                  received in merger                  |   |                                         | 5,281  |                                       |   | - |   |   | 5,281 |   |   | - |   |
| Provision                  charged to operations             |   |                                         | 534    |                                       |   | 971 |   |   | 1,268 |   |   | 2,471 |   |
| Charge-offs:                                                 |   |                                         |   |                                       |   |   |   |   |   |   |   |   |   |
| One-to-four                  family residential              |   |                                         | (30    | )                                          |   | (15 | ) |   | (45 | ) |   | (15 | ) |
| Multi-family                                                 |   |                                         | -      |                                       |   | - |   |   | - |   |   | - |   |
| Commercial                  real estate                      |   |                                         | -      |                                       |   | - |   |   | - |   |   | - |   |
| Construction                  and land development           |   |                                         | (4     | )                                          |   | - |   |   | (4 | ) |   | - |   |
| Commercial                  business                         |   |                                         | -      |                                       |   | - |   |   | - |   |   | - |   |
| Consumer                                                     |   |                                         | (624   | )                                          |   | (551 | ) |   | (1,372 | ) |   | (1,043 | ) |
| Total                  charge offs                           |   |                                         | (658   | )                                          |   | (566 | ) |   | (1,421 | ) |   | (1,058 | ) |
| Recoveries                  of loans previously charged off: |   |                                         |   |                                       |   |   |   |   |   |   |   |   |   |
| One-to-four                  family residential              |   |                                         | 7      |                                       |   | 49 |   |   | 8 |   |   | 74 |   |
| Commercial                  business                         |   |                                         | 60     |                                       |   | 1 |   |   | 62 |   |   | 2 |   |
| Consumer                                                     |   |                                         | 86     |                                       |   | 64 |   |   | 101 |   |   | 120 |   |
| Total                  recoveries                            |   |                                         | 153    |                                       |   | 114 |   |   | 171 |   |   | 196 |   |
| Net                  loans charged-off                       |   |                                         | (505   | )                                          |   | (452 | ) |   | (1,250 | ) |   | (862 | ) |
|                                                         |   |                                         |   |                                       |   |   |   |   |   |   |   |   |   |
| Balance,                  end of period                      |   | $                                            | 15,760 |                                       | $      | 9,519 |   | $ | 15,760 |   | $ | 9,519 |   |

**NOTE      H - RETIREMENT PLANS**

*1.        Defined Benefit Plans *

----

*2.          Directors’ Deferred Plan*

|                                                               |   | June                    30,                           |   |
|--------------------------------------------------------------------|--------|-------------------------------------------------------|--------|
|                                                               |   | 2005                                                  |   | 2004 |   |
|                                                               |   | (dollars                    in thousands)   |   |
|                                                               |   |                                                  |   |   |   |
| Service                    cost                                    |   | $                                                     | -      |   | $ | - |   |
| Interest                    cost                                   |   |                                                  | 21     |   |   | 13 |   |
| Expected                    return on plan assets                  |   |                                                  | -      |   |   | - |   |
| Amortization                    of unrecognized net                |   |                                                  |   |   |   |   |   |
| transition                    asset or obligation                  |   |                                                  | -      |   |   | - |   |
| Amortization                    of unrecognized prior service cost |   |                                                  | -      |   |   | - |   |
| Amortization                    of unrecognized net gain or loss   |   |                                                  | -      |   |   | - |   |
|                                                               |   |                                                  |   |   |   |   |   |
| Net                    periodic benefit expense                    |   | $                                                     | 21     |   | $ | 13 |   |

**NOTE      I - NEW ACCOUNTING PRONOUNCEMENTS**

*Accounting      for Loans or Certain Debt Securities Acquired in a Transfer*

**NOTE      J - RECLASSIFICATIONS**

**NOTE K      - INCOME      TAXES**

*Accounting for        Income Taxes*

----

| **Item                2.** | **Management's                Discussion and Analysis of****Financial                Condition and **Results                of                Operations**** |
|----------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

**CAUTIONARY      STATEMENT REGARDING FORWARD LOOKING INFORMATION**

**http://www.sec.gov**

**Critical      Accounting Policies, Judgments and Estimates**

----

----

**Comparison      of Financial Condition as of June 30, 2005 and December 31,      2004**

**Assets.       **

**Non-Performing      Assets. **

** **

**Allowance      for Loan Losses. **

----

**Liabilities.      **

----

**Shareholders’      Equity. **

|                                             |   | At                    June 30, 2005                                                                                                                              |                                                                                                                          |
|--------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|
|                                             |   |                                                                                                                                                             |                                                                                                                          |   |   | Required |   | To                    Be Well Capitalized |   |
|                                             |   |                                                                                                                                                             |                                                                                                                          |   |   | For                    Capital |   | Under                    Prompt Corrective |   |
|                                             |   | Actual                                                                                                                                                           |                                                                                                                          | Adequacy                    Purposes |   | Action                    Provisions |   |
|                                             |   | Amount                                                                                                                                                           |                                                                                                                          | Ratio |   | Amount |   | Ratio |   | Amount |   | Ratio |   |
| Total                    Capital                 |   | (dollars                    in thousands)                                                                                                                   |                                                                                                                          |
| (To                    risk-weighted assets)     |   |                                                                                                                                                             |                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Company                    (consolidated)        |   | $                                                                                                                                                                | 324,329                                                                                                                       |   |   | 17.52 | % | $ | 148,134 |   |   | 8.00 | % |   | N/A |   |   | N/A |   |
| Bank                                             |   | $                                                                                                                                                                | 292,685                                                                                                                       |   |   | 15.86 | % | $ | 147,657 |   |   | 8.00 | % | $ | 184,571 |   |   | 10.00 | % |
| Tier                    I Capital                |   |                                                                                                                                                             |                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (To                    risk-weighted assets)     |   |                                                                                                                                                             |                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Company                    (consolidated)        |   | $                                                                                                                                                                | 308,367                                                                                                                       |   |   | 16.65 | % | $ | 74,067 |   |   | 4.00 | % |   | N/A |   |   | N/A |   |
| Bank                                             |   | $                                                                                                                                                                | 276,925                                                                                                                       |   |   | 15.00 | % | $ | 73,828 |   |   | 4.00 | % | $ | 110,743 |   |   | 6.00 | % |
| Tier                    I Capital                |   |                                                                                                                                                             |                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (To                    average assets, leverage) |   |                                                                                                                                                             |                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Company                    (consolidated)        |   | $                                                                                                                                                                | 308,367                                                                                                                       |   |   | 9.17 | % | $ | 74,067 |   |   | 4.00 | % |   | N/A |   |   | N/A |   |
| Bank                                             |   | $                                                                                                                                                                | 276,925                                                                                                                       |   |   | 9.92 | % | $ | 73,828 |   |   | 4.00 | % | $ | 92,285 |   |   | 5.00 | % |
|                                             |   |                                                                                                                                                             |                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |   |  At                    December 31,                    2004                 |                                                                                                                          |
|                                                  |   |                                                                                                                                                             |                                                                                                                          |   |   |   |   |   | Required  |   |   | To                    Be Well Capitalized |   |
|                                                  |   |                                                                                                                                                             |                                                                                                                          |   |   |   |   |   | For                    Capital  |   |   | Under                    Prompt Corrective |   |
|                                                  |   |                                                                                                                                                             | Actual                                                                                                                        |   |   | Adequacy                    Purposes |   |   | Action                    Provisions    |   |
|                                             |   |                                                                                                                                                             | Amount                                                                                                                   |  |   | Ratio |   |   | Amount |   |   | Ratio |   |   | Amount |   |   | Ratio |   |
| Total                    Capital                 |   |                                                                                                                                                             | (dollars                    in thousands)               |   |
| (To                    risk-weighted assets)     |   |                                                                                                                                                             |                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Company                    (consolidated)        |   | $                                                                                                                                                                | 355,857                                                                                                                       |   |   | 25.64 | % | $ | 111,042 |   |   | 8.00 | % |   | N/A |   |   | N/A |   |
| Bank                                             |   | $                                                                                                                                                                | 264,159                                                                                                                       |   |   | 19.17 | % | $ | 110,233 |   |   | 8.00 | % | $ | 137,792 |   |   | 10.00 | % |
| Tier                    I Capital                |   |                                                                                                                                                             |                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (To                    risk-weighted assets)     |   |                                                                                                                                                             |                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Company                    (consolidated)        |   | $                                                                                                                                                                | 345,396                                                                                                                       |   |   | 24.88 | % | $ | 55,521 |   |   | 4.00 | % |   | N/A |   |   | N/A |   |
| Bank                                             |   | $                                                                                                                                                                | 253,698                                                                                                                       |   |   | 18.41 | % | $ | 55,117 |   |   | 4.00 | % | $ | 82,675 |   |   | 6.00 | % |
| Tier                    I Capital                |   |                                                                                                                                                             |                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (To                    average assets, leverage) |   |                                                                                                                                                             |                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Company                    (consolidated)        |   | $                                                                                                                                                                | 345,396                                                                                                                       |   |   | 14.66 | % | $ | 55,521 |   |   | 4.00 | % |   | N/A |   |   | N/A |   |
| Bank                                             |   | $                                                                                                                                                                | 253,698                                                                                                                       |   |   | 12.17 | % | $ | 55,117 |   |   | 4.00 | % | $ | 68,896 |   |   | 5.00 | % |

----

**Liquidity.      **

**“GAP”      Analysis. **

----

|                                                                                                                                       |   | At                      June 30, 2005                                                                                                    |    |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------|---------|
|                                                                                                                                       |   |                                                                                                                                     |    | More                      than |   | More                      than |   | More                      than |   | More                      than |   |   |   |   |   |
|                                                                                                                                       |   | 3                      Months                                                                                                            |    | 3                      Months |   | 6                      Months |   | 1                      Year |   | 3                      Years |   | More                      than |   |   |   |
|                                                                                                                                       |   | or                      Less                                                                                                             |    | to                      6 Months |   | to                      1 Year |   | to                      3 Years |   | to                      5 Years |   | 5                      Years |   | Total |   |
|                                                                                                                                       |   | (dollars                      in                      thousands)             |    |
| Interest-earning                      assets (1):                                                                                          |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                      at other institutions                                                                                        |   | $                                                                                                                                        | 33,716  |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   | $ | 33,716 |   |
| Loans                      receivable (2)                                                                                                  |   |                                                                                                                                     | 227,967 |   |   | 104,373 |   |   | 162,929 |   |   | 438,883 |   |   | 257,198 |   |   | 244,744 |   |   | 1,436,094 |   |
| Investment                      securities, debt                                                                                           |   |                                                                                                                                     | 135,338 |   |   | 64,717 |   |   | 133,905 |   |   | 432,129 |   |   | 256,323 |   |   | 250,525 |   |   | 1,272,937 |   |
| Investment                      securities, equity                                                                                         |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 63,406 |   |   | 63,406 |   |
| Total                      interest-earning                                                                                                |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| assets                                                                                                                                     |   | $                                                                                                                                        | 397,021 |   | $ | 169,090 |   | $ | 296,834 |   | $ | 871,012 |   | $ | 513,521 |   | $ | 558,675 |   | $ | 2,806,153 |   |
| Cumulative                      total interest-                                                                                            |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| earning                      assets                                                                                                        |   | $                                                                                                                                        | 397,021 |   | $ | 566,111 |   | $ | 862,945 |   | $ | 1,733,957 |   | $ | 2,247,478 |   | $ | 2,806,153 |   | $ | 2,806,153 |   |
| Interest-bearing                                                                                                                           |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities:                                                                                                                               |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings                      deposits                                                                                                      |   | $                                                                                                                                        | -       |   | $ | 11,836 |   | $ | 11,836 |   | $ | 15,744 |   | $ | 19,764 |   | $ | 236,725 |   | $ | 295,905 |   |
| Interest-bearing                      checking deposits                                                                                    |   |                                                                                                                                     | -       |   |   | 14,161 |   |   | 9,440 |   |   | 9,441 |   |   | 4,720 |   |   | 198,250 |   |   | 236,012 |   |
| Money                      market deposits                                                                                                 |   |                                                                                                                                     | 30,177  |   |   | 36,212 |   |   | 24,141 |   |   | 40,235 |   |   | 20,118 |   |   | 150,882 |   |   | 301,765 |   |
| Certificates                      of deposit                                                                                               |   |                                                                                                                                     | 85,205  |   |   | 101,337 |   |   | 210,277 |   |   | 305,380 |   |   | 49,698 |   |   | 205 |   |   | 752,102 |   |
| FHLB                      advances and other                                                                                               |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| borrowings                                                                                                                                 |   |                                                                                                                                     | 193,438 |   |   | 109,758 |   |   | 86,315 |   |   | 294,462 |   |   | 156,390 |   |   | 91,934 |   |   | 932,297 |   |
| Total                      interest-bearing                                                                                                |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                                                                                                                                |   | $                                                                                                                                        | 308,820 |   | $ | 273,304 |   | $ | 342,009 |   | $ | 665,262 |   | $ | 250,690 |   | $ | 677,996 |   | $ | 2,518,081 |   |
| Cumulative                      total interest-                                                                                            |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| bearing                      liabilities                                                                                                   |   | $                                                                                                                                        | 308,820 |   | $ | 582,124 |   | $ | 924,133 |   | $ | 1,589,395 |   | $ | 1,840,085 |   | $ | 2,518,081 |   | $ | 2,518,081 |   |
| Interest-earning                      assets                                                                                               |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| less                      interest-bearing                                                                                                 |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                                                                                                                                |   | $                                                                                                                                        | 88,201  |   | $ | (104,214 | ) | $ | (45,175 | ) | $ | 205,750 |   | $ | 262,831 |   | $ | (119,321 | ) | $ | 288,072 |   |
| Cumulative                      interest-rate                                                                                              |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| sensitivity                      gap (3)                                                                                                   |   | $                                                                                                                                        | 88,201  |   | $ | (16,013 | ) | $ | (61,188 | ) | $ | 144,562 |   | $ | 407,393 |   | $ | 288,072 |   |   |   |   |
| Cumulative                      interest-rate gap as a                                                                                     |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| percentage                      of total assets at                                                                                         |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| June                      30, 2005                                                                                                         |   |                                                                                                                                     | 2.83    | % |   | (0.51 | %) |   | (1.96 | %) |   | 4.64 | % |   | 13.08 | % |   | 9.25 | % |   |   |   |
| Cumulative                      interest-earning assets                                                                                    |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| as                      a percentage of                                                                                                    |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| cumulative                      interest-bearing                                                                                           |   |                                                                                                                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                      at June 30, 2005                                                                                          |   |                                                                                                                                     | 128.56  | % |   | 97.25 | % |   | 93.38 | % |   | 109.10 | % |   | 122.14 | % |   | 111.44 | % |   |   |   |
|                         |

| (1) | Interest-earning                      assets are included in the period                      in which the balances are expected to be redeployed and/or                      repriced as                      a                      result of anticipated prepayments, scheduled rate adjustment                      or                      contractual                      maturity.                      |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | For                      purposes of the Gap analysis, loans receivable                      includes non-performing loans, gross of the allowance for loan                      losses,                      undisbursed                      loan funds and deferred loan                      fees.                                                                                                         |

| (3) | Interest-rate                      sensitivity gap represents the difference between                      total interest-earning assets and total interest-bearing                      liabilities.                      |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Comparison      of Operating Results for the Three and Six Months Ended June 30, 2005 and      2004**

**General.**

**Analysis      of Net Interest Income.**

**Average      Balances, Net Interest Income, and Yields Earned and Rates      Paid.**

----

|                                                                 |   | For                      the Three Months Ended June                      30,           |      |
|----------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|-----------|
|                                                                 |   | 2005                                                                                                                                      |      | 2004 |   |
|                                                                 |   |                                                                                                                                      |      | Interest |   | Average |   |   |   | Interest |   | Average |   |
|                                                                 |   | Average                                                                                                                                   |      | Income/ |   | Yield/ |   | Average |   | Income/ |   | Yield/ |   |
|                                                                 |   | Balance                                                                                                                                   |      | Expense |   | Rate |   | Balance |   | Expense |   | Rate |   |
| Assets                                                               |   | (dollars                      in thousands)                                             |      |
| Interest-earning                      assets                         |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                      balances with banks            |   | $                                                                                                                                         | 79,509    |   | $ | 542 |   |   | 2.73 | % | $ | 31,649 |   | $ | 136 |   |   | 1.72 | % |
| Investment                      securities                           |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                      (1)                                     |   |                                                                                                                                      | 1,101,397 |   |   | 11,746 |   |   | 4.27 | % |   | 768,551 |   |   | 7,393 |   |   | 3.85 | % |
| Non-taxable                      (2)                                 |   |                                                                                                                                      | 108,715   |   |   | 1,760 |   |   | 6.48 | % |   | 110,002 |   |   | 1,798 |   |   | 6.54 | % |
| Loans                      receivable (2) (3)                        |   |                                                                                                                                      | 1,220,113 |   |   | 18,221 |   |   | 5.97 | % |   | 951,846 |   |   | 14,488 |   |   | 6.09 | % |
| Allowance                      for loan losses                       |   |                                                                                                                                      | (12,953   | ) |   |   |   |   |   |   |   | (9,124 | ) |   |   |   |   |   |   |
| Net                      loans                                       |   |                                                                                                                                      | 1,207,160 |   |   | 18,221 |   |   | 6.04 | % |   | 942,722 |   |   | 14,488 |   |   | 6.15 | % |
| Total                      interest-earning assets                   |   |                                                                                                                                      | 2,496,781 |   |   | 32,269 |   |   | 5.17 | % |   | 1,852,924 |   |   | 23,815 |   |   | 5.14 | % |
| Non-interest-earning                      assets                     |   |                                                                                                                                      | 268,035   |   |   | - |   |   |   |   |   | 217,296 |   |   | - |   |   |   |   |
| Total                      assets, interest income                   |   | $                                                                                                                                         | 2,764,816 |   |   | 32,269 |   |   |   |   | $ | 2,070,220 |   |   | 23,815 |   |   |   |   |
| Liabilities                                                          |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                      liabilities                    |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                      deposits                       |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                      deposits                                 |   | $                                                                                                                                         | 207,076   |   |   | 96 |   |   | 0.19 | % | $ | 171,152 |   |   | 68 |   |   | 0.16 | % |
| Money                      market deposits                           |   |                                                                                                                                      | 276,281   |   |   | 1,114 |   |   | 1.61 | % |   | 254,073 |   |   | 570 |   |   | 0.90 | % |
| Savings                      deposits                                |   |                                                                                                                                      | 252,721   |   |   | 267 |   |   | 0.42 | % |   | 226,276 |   |   | 273 |   |   | 0.48 | % |
| Certificates                      of deposit                         |   |                                                                                                                                      | 656,412   |   |   | 4,872 |   |   | 2.97 | % |   | 533,766 |   |   | 3,446 |   |   | 2.58 | % |
| Total                      interest-bearing deposits                 |   |                                                                                                                                      | 1,392,490 |   |   | 6,349 |   |   | 1.82 | % |   | 1,185,267 |   |   | 4,357 |   |   | 1.47 | % |
|                                                                 |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities                      sold under agreements                |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                      repurchase                                   |   |                                                                                                                                      | 43,754    |   |   | 308 |   |   | 2.82 | % |   | 24,127 |   |   | 42 |   |   | 0.70 | % |
| FHLB                      advances and other borrowings              |   |                                                                                                                                      | 749,132   |   |   | 6,461 |   |   | 3.45 | % |   | 328,562 |   |   | 2,740 |   |   | 3.34 | % |
| Other                      debt                                      |   |                                                                                                                                      | 26,523    |   |   | 433 |   |   | 6.53 | % |   | 15,464 |   |   | 179 |   |   | 4.63 | % |
| Total                      interest-bearing liabilities              |   |                                                                                                                                      | 2,211,899 |   |   | 13,551 |   |   | 2.45 | % |   | 1,553,420 |   |   | 7,318 |   |   | 1.88 | % |
|                                                                 |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing                      liabilities                |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing                      deposits                   |   |                                                                                                                                      | 149,867   |   |   | - |   |   | - |   |   | 117,570 |   |   | - |   |   | - |   |
| Other                      liabilities                               |   |                                                                                                                                      | 11,257    |   |   | - |   |   | - |   |   | 12,964 |   |   | - |   |   | - |   |
| Total                      liabilities                               |   |                                                                                                                                      | 2,373,024 |   |   | 13,551 |   |   |   |   |   | 1,683,954 |   |   | 7,318 |   |   |   |   |
| Shareholders'                      equity                            |   |                                                                                                                                      | 391,792   |   |   | - |   |   | - |   |   | 386,266 |   |   | - |   |   | - |   |
| Total                      liabilities and shareholders'             |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| equity,                      interest expense                        |   | $                                                                                                                                         | 2,764,816 |   |   | 13,551 |   |   |   |   | $ | 2,070,220 |   |   | 7,318 |   |   |   |   |
|                                                                 |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                      interest income on tax equivalent basis (2) |   |                                                                                                                                      |      |   |   | 18,718 |   |   |   |   |   |   |   |   | 16,497 |   |   |   |   |
| Net                      interest spread on                          |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                      basis (4)                        |   |                                                                                                                                      |      |   |   |   |   |   | 2.72 | % |   |   |   |   |   |   |   | 3.26 | % |
| Effect                      of interest-free sources                 |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| used                      to fund earning assets                     |   |                                                                                                                                      |      |   |   |   |   |   | 0.11 | % |   |   |   |   |   |   |   | 0.30 | % |
| Net                      interest margin                             |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                      basis (5)                        |   |                                                                                                                                      |      |   |   |   |   |   | 3.00 | % |   |   |   |   |   |   |   | 3.56 | % |
| Tax-exempt                      adjustment                           |   |                                                                                                                                      |      |   |   | 658 |   |   |   |   |   |   |   |   | 620 |   |   |   |   |
|                                                                 |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                      interest income and margin (5)              |   |                                                                                                                                      |      |   | $ | 18,060 |   |   | 2.89 | % |   |   |   | $ | 15,877 |   |   | 3.43 | % |
| Average                      interest-earning assets                 |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                      average interest-bearing liabilities         |   |                                                                                                                                      |      |   |   |   |   |   | 112.88 | % |   |   |   |   |   |   |   | 119.28 | % |
|                                                                 |   |                                                                                                                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| (1) | Includes                      Federal Home Loan Bank                      stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The                      indicated interest income and average yields are presented                      on a                      tax-equivalent basis. The tax-equivalent adjustments                      included above are $658,000 and $620,000 for the three months                      ended June                      30, 2005 and 2004, espectively. The                      effective tax rate used for the tax-equivalent adjustment was                      34%.                                                                                                              |
| (3) | Loan                      (expenses) fees of ($187,000) and $741,000 for the three months                      ended June                      30, 2005 and 2004, respectively, are included                      in interest income. Average loan balances include non-accruing                      loans of                      $4.9 million and $4.0 million and average                      loans held-for-sale of $707,000 and $3.7 million for the three                      months                      ended June 30, 2005 and 2004,                      respectively.           |
| (4) | Net                      interest                      spread is the arithmatic difference between yield on interest-earning                      assets and the rate paid on interest-bearing                      liabilities.                                                                                                                                                                                                                                                                                                                                                              |
| (5) | Net                      interest                      margin is computed by dividing net interest income by average                      interest-earning                      assets.                                                                                                                                                                                                                                                                                                                                                                                                       |

----

|                                                                 |   | For                      the Six Months Ended June                      30,           |      |
|----------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|-----------|
|                                                                 |   | 2005                                                                                                                                    |      | 2004 |   |
|                                                                 |   |                                                                                                                                    |      | Interest |   | Average |   |   |   | Interest |   | Average |   |
|                                                                 |   | Average                                                                                                                                 |      | Income/ |   | Yield/ |   | Average |   | Income/ |   | Yield/ |   |
|                                                                 |   | Balance                                                                                                                                 |      | Expense |   | Rate |   | Balance |   | Expense |   | Rate |   |
| Assets                                                               |   | (dollars                      in thousands)                                                |      |
| Interest-earning                      assets                         |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                      balances with banks            |   | $                                                                                                                                       | 70,101    |   | $ | 888 |   |   | 2.53 | % | $ | 34,020 |   | $ | 278 |   |   | 1.63 | % |
| Investment                      securities                           |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                      (1)                                     |   |                                                                                                                                    | 1,059,786 |   |   | 22,312 |   |   | 4.21 | % |   | 735,237 |   |   | 14,264 |   |   | 3.88 | % |
| Non-taxable                      (2)                                 |   |                                                                                                                                    | 108,629   |   |   | 3,520 |   |   | 6.48 | % |   | 111,793 |   |   | 3,685 |   |   | 6.59 | % |
| Loans                      receivable (2) (3)                        |   |                                                                                                                                    | 1,121,178 |   |   | 33,141 |   |   | 5.91 | % |   | 931,605 |   |   | 28,591 |   |   | 6.14 | % |
| Allowance                      for loan losses                       |   |                                                                                                                                    | (11,678   | ) |   |   |   |   |   |   |   | (8,601 | ) |   |   |   |   |   |   |
| Net                      loans                                       |   |                                                                                                                                    | 1,109,500 |   |   | 33,141 |   |   | 5.97 | % |   | 923,004 |   |   | 28,591 |   |   | 6.20 | % |
| Total                      interest-earning assets                   |   |                                                                                                                                    | 2,348,016 |   |   | 59,861 |   |   | 5.10 | % |   | 1,804,054 |   |   | 46,818 |   |   | 5.19 | % |
| Non-interest-earning                      assets                     |   |                                                                                                                                    | 235,654   |   |   | - |   |   |   |   |   | 220,661 |   |   | - |   |   |   |   |
| Total                      assets, interest income                   |   | $                                                                                                                                       | 2,583,670 |   |   | 59,861 |   |   |   |   | $ | 2,024,715 |   |   | 46,818 |   |   |   |   |
| Liabilities                                                          |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                      liabilities                    |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                      deposits                       |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                      deposits                                 |   | $                                                                                                                                       | 191,894   |   |   | 168 |   |   | 0.18 | % | $ | 174,626 |   |   | 132 |   |   | 0.15 | % |
| Money                      market deposits                           |   |                                                                                                                                    | 262,005   |   |   | 1,906 |   |   | 1.45 | % |   | 246,224 |   |   | 1,112 |   |   | 0.90 | % |
| Savings                      deposits                                |   |                                                                                                                                    | 231,225   |   |   | 516 |   |   | 0.45 | % |   | 225,155 |   |   | 536 |   |   | 0.48 | % |
| Certificates                      of deposit                         |   |                                                                                                                                    | 610,791   |   |   | 8,858 |   |   | 2.90 | % |   | 535,151 |   |   | 7,112 |   |   | 2.66 | % |
| Total                      interest-bearing deposits                 |   |                                                                                                                                    | 1,295,915 |   |   | 11,448 |   |   | 1.77 | % |   | 1,181,156 |   |   | 8,892 |   |   | 1.51 | % |
|                                                                 |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities                      sold under agreements                |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                      repurchase                                   |   |                                                                                                                                    | 31,338    |   |   | 359 |   |   | 2.29 | % |   | 23,712 |   |   | 77 |   |   | 0.65 | % |
| FHLB                      advances and other borrowings              |   |                                                                                                                                    | 700,952   |   |   | 11,905 |   |   | 3.40 | % |   | 288,516 |   |   | 4,864 |   |   | 3.37 | % |
| Other                      debt                                      |   |                                                                                                                                    | 21,087    |   |   | 666 |   |   | 6.32 | % |   | 15,464 |   |   | 360 |   |   | 4.66 | % |
| Total                      interest-bearing liabilities              |   |                                                                                                                                    | 2,049,292 |   |   | 24,378 |   |   | 2.38 | % |   | 1,508,848 |   |   | 14,193 |   |   | 1.88 | % |
|                                                                 |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing                      liabilities                |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing                      deposits                   |   |                                                                                                                                    | 136,872   |   |   | - |   |   | - |   |   | 116,748 |   |   | - |   |   | - |   |
| Other                      liabilities                               |   |                                                                                                                                    | 12,611    |   |   | - |   |   | - |   |   | 9,287 |   |   | - |   |   | - |   |
| Total                      liabilities                               |   |                                                                                                                                    | 2,198,775 |   |   | 24,378 |   |   |   |   |   | 1,634,883 |   |   | 14,193 |   |   |   |   |
| Shareholders'                      equity                            |   |                                                                                                                                    | 384,895   |   |   | - |   |   | - |   |   | 389,832 |   |   | - |   |   | - |   |
| Total                      liabilities and shareholders'             |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| equity,                      interest expense                        |   | $                                                                                                                                       | 2,583,670 |   |   | 24,378 |   |   |   |   | $ | 2,024,715 |   |   | 14,193 |   |   |   |   |
|                                                                 |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                      interest income on tax equivalent basis (2) |   |                                                                                                                                    |      |   |   | 35,483 |   |   |   |   |   |   |   |   | 32,625 |   |   |   |   |
| Net                      interest spread on                          |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                      basis (4)                        |   |                                                                                                                                    |      |   |   |   |   |   | 2.72 | % |   |   |   |   |   |   |   | 3.31 | % |
| Effect                      of interest-free sources                 |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| used                      to fund earning assets                     |   |                                                                                                                                    |      |   |   |   |   |   | 0.11 | % |   |   |   |   |   |   |   | 3.10 | % |
| Net                      interest margin                             |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                      basis (5)                        |   |                                                                                                                                    |      |   |   |   |   |   | 3.02 | % |   |   |   |   |   |   |   | 3.62 | % |
| Tax-exempt                      adjustment                           |   |                                                                                                                                    |      |   |   | 1,284 |   |   |   |   |   |   |   |   | 1,272 |   |   |   |   |
|                                                                 |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                      interest income and margin (5)              |   |                                                                                                                                    |      |   | $ | 34,199 |   |   | 2.91 | % |   |   |   | $ | 31,353 |   |   | 3.48 | % |
| Average                      interest-earning assets                 |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                      average interest-bearing liabilities         |   |                                                                                                                                    |      |   |   |   |   |   | 114.58 | % |   |   |   |   |   |   |   | 119.56 | % |
|                                                                 |   |                                                                                                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| (1) | Includes                    Federal Home Loan Bank                    stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The                    indicated interest income and average yields are presented on                    a                    tax-equivalent basis. The tax-equivalent adjustments                    included above are $1.3 million for both the six months ended                    June 30,                    2005 and 2004, respectively. The                    effective tax rate used for the tax-equivalent adjustment was                    34%.                                                                                                                                 |   |
| (3) | Loan                    (expenses) fees of $(211,000) and $465,000 for the six months                    ended June                    30, 2005 and 2004, respectively, are included                    in interest income. Average loan balances include non-accruing                    loans of                    $4.4 million and $4.0 million and average                    loans held-for-sale of $1.1 million and $3.5 million for the                    six months                    ended June 30, 2005 and                    2004,                    respectively.          |   |
| (4) | Net                    interest                    spread is the arithmatic difference between yield on interest-earning                    assets and the rate paid on interest-earing                    liabilities.                                                                                                                                                                                                                                                                                                                                                                     |   |
| (5) | Net                    interest                    margin is computed by dividing net interest income by average                    interest-earning                    assets.                                                                                                                                                                                                                                                                                                                                                                                                             |   |

----

**Rate      Volume Analysis. **

|                                                    |   | Three                      Months Ended June 30, 2005    |   | Six                      Months Ended June 30, 2005                 |   |
|---------------------------------------------------------|--------|--------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|
|                                                    |   | Compared                      to                                   |   | Compared                      to                                    |   |
|                                                    |   | Three                      Months Ended June 30, 2004              |   | Six                      Months Ended June 30, 2004                 |   |
|                                                    |   | Increase                      (Decrease)                           |   | Total                                                               |   | Increase                      (Decrease) |   | Total |   |
|                                                    |   | Due                      to                                        |   | Increase                                                            |   | Due                      to |   | Increase |   |
|                                                    |   | Rate                                                               |   | Volume                                                              |   | (Decrease) |   | Rate |   | Volume |   | (Decrease) |   |
|                                                    |   | (dollars                      in thousands)                        |   | (dollars                      in thousands)     |   |
| Interest                      Income:                   |   |                                                               |   |                                                                |   |   |   |   |   |   |   |   |   |
| Cash                      and cash equivalents          |   | $                                                                  | 200    |                                                                | $      | 206 |   | $ | 406 |   | $ | 315 |   | $ | 295 |   | $ | 610 |   |
| Investment                      securities              |   |                                                               | 846    |                                                                |   | 3,469 |   |   | 4,315 |   |   | 1,074 |   |   | 6,809 |   |   | 7,883 |   |
| Loans                      receivable, net              |   |                                                               | (331   | )                                                                   |   | 4,064 |   |   | 3,733 |   |   | (1,227 | ) |   | 5,777 |   |   | 4,550 |   |
| Total                      interest-earning assets      |   |                                                               | 715    |                                                                |   | 7,739 |   |   | 8,454 |   |   | 162 |   |   | 12,881 |   |   | 13,043 |   |
|                                                    |   |                                                               |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                      Expense:                  |   |                                                               |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                      deposits                    |   | $                                                                  | 14     |                                                                | $      | 14 |   |   | 28 |   | $ | 23 |   | $ | 13 |   |   | 36 |   |
| Money                      market deposits              |   |                                                               | 494    |                                                                |   | 50 |   |   | 544 |   |   | 723 |   |   | 71 |   |   | 794 |   |
| Savings                      deposits                   |   |                                                               | (38    | )                                                                   |   | 32 |   |   | (6 | ) |   | (34 | ) |   | 14 |   |   | (20 | ) |
| Certificates                      of deposit            |   |                                                               | 634    |                                                                |   | 792 |   |   | 1,426 |   |   | 741 |   |   | 1,005 |   |   | 1,746 |   |
| Total                      interest-bearing deposits    |   |                                                               | 1,104  |                                                                |   | 888 |   |   | 1,992 |   |   | 1,454 |   |   | 1,102 |   |   | 2,556 |   |
|                                                    |   |                                                               |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities                      sold under agreements   |   |                                                               |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                      repurchase                      |   | $                                                                  | 232    |                                                                | $      | 34 |   |   | 266 |   | $ | 257 |   | $ | 25 |   |   | 282 |   |
| FHLB                      advances                      |   |                                                               | 214    |                                                                |   | 3,507 |   |   | 3,721 |   |   | 89 |   |   | 6,952 |   |   | 7,041 |   |
| Other                      debt                         |   |                                                               | 126    |                                                                |   | 128 |   |   | 254 |   |   | 175 |   |   | 131 |   |   | 306 |   |
| Total                      interest-bearing liabilities |   |                                                               | 1,676  |                                                                |   | 4,557 |   |   | 6,233 |   |   | 1,975 |   |   | 8,210 |   |   | 10,185 |   |
|                                                    |   |                                                               |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Increase                      (decrease) in net         |   |                                                               |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| interest                      income (1)                |   | $                                                                  | (961   | )                                                                   | $      | 3,182 |   | $ | 2,221 |   | $ | (1,813 | ) | $ | 4,671 |   | $ | 2,858 |   |
|                                                    |   |                                                               |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| (1) | The                      indicated increase (decrease) in net interest income is presented                      on a                      tax-equivalent basis. The tax-equivalent adjustment for the                      increase                      (decrease) in net interest income for the three month comparison                      periods                      ending June 30, 2005 and June 2004 was $38,000 and $12,000                      for the six                      month comparison period ending June 30, 2005 and June 30,                      2004.                    |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Provision          for Loan Losses. **

** **

----

**Non-Interest      Income. **

**Non-Interest      Expense.**

**Income      Tax Expense.**

----

**Item      3.**
**Quantitative      and Qualitative Disclosures About Market Risk**

**Item      4.**
**Controls      and Procedures**

**Evaluation      of Disclosure Controls and Procedures. **

**Changes      in Internal Control Over Financial Reporting.**

**PART      II -**
**      OTHER INFORMATION**

**Item      1.     Legal Proceedings**

**Item      2.**
**Unregistered      Sales of Equity Securities and Use of Proceeds**

| Period                                |   | Total                    Number of Shares Purchased |   | Average                    Price PaidPer                    Share |   | Total                    Number of Shares Purchased as Part of Publicly Announced Plans                    or                    Programs |   | Maximum                    Number of Shares that may yet be Purchased Under the Plan or                    Program(s)                    (1) |
|---------------------------------------|--------|-----------------------------------------------------|--------|-------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
| April                    1 - 30, 2005 |   | -                                                   |   | -                                                                 |   | 964,000                                                                                                                                   |   | 2,098,486                                                                                                                                    |
| May                    1 - 31, 2005   |   | 83,000                                              |   | $14.36                                                            |   | 1,047,000                                                                                                                                 |   | 2,015,486                                                                                                                                    |
| June                    1 - 30, 2005  |   | 1,317,600                                           |   | $15.07                                                            |   | 2,364,600                                                                                                                                 |   | 697,886                                                                                                                                      |
| Total                                 |   | 1,400,600                                           |   | $14.99                                                            |   |                                                                                                                                      |   |                                                                                                                                         |
|                                  |   |                                                |   |                                                              |   |                                                                                                                                      |   |                                                                                                                                         |

| (1)  | On                  October                  27, 2004, the Board of Directors authorized the repurchase of up                  to                  3,062,486 shares or approximately 10% of KNBT's outstanding                  shares.       |
|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Item      3.**
**Defaults      Upon Senior Securities**

**Item      4.     Submission of Matters to a Vote of Security      Holders**

|   | 1.     | The                    following directors were elected by the requisite plurality of                    the votes                    cast to serve on the Company’s Board of Directors: |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                           |   |   |   |
|   |   |                                                                                                                                                                                           | For | Withheld |   |
|   |   |                                                                                                                                                                                           |   |   |   |
|   |   | Scott                    V. Fainor                                                                                                                                                             | 26,062,261 | 887,599 |   |
|   |   | Jeffrey                    P. Feather                                                                                                                                                          | 25,463,288 | 1,486,572 |   |
|   |   | Charles                    J. Peischl                                                                                                                                                          | 26,522,884 | 426,976 |   |
|   |   |                                                                                                                                                                                           |   |   |   |
|   |   |                                                                                                                                                                                           | For | Against | Abstain |
|   | 2.     | To                    ratify the appointment of                                                                                                                                                |   |   |   |
|   |   | Grant                    Thornton LLP as                                                                                                                                                       |   |   |   |
|   |   | independent                    auditors for the                                                                                                                                                |   |   |   |
|   |   | year                    ended December 31, 2005.                                                                                                                                               | 26,713,900 | 158,624 | 77,336 |
|   |   |                                                                                                                                                                                           |   |   |   |

**Item      5.      Other Information**

**Item      6.      Exhibits**

|   | (a)    | List                of exhibits: |
|--------|--------|----------------------------------|
|   |   | 4.0                              | Instruments                defining the rights of security holders, including indentures.                *(1)* |
|   |   | 31.1                             | Section                302 Certification of the Chief Executive Officer |
|   |   | 31.2                             | Section                302 Certification of the Chief Financial Officer |
|   |   | 32.1                             | Certification                Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section                906 of                the Sarbanes-Oxley Act of 2002. |
|   |   |                             |   |
|   |   |                             | *(1)                The Company has no instruments defining the rights of holders of                its                long-term debt where the amount of securities authorized under any                such                instrument exceeds 10% of the total assets of the Company and its                subsidiaries on a consolidated basis. The Company hereby agrees to                furnish                a copy of any such instrument to the SEC upon                request* |

----

**SIGNATURES**

|                                               | **KNBT                BANCORP, INC.** |
|----------------------------------------------------|---------------------------------------|
|                                               |                                  |   |
|                                               |                                  |   |
| DATE:                August                9, 2005 | BY:                                   |  /S/                Scott V. Fainor |
|                                               |                                  | Scott                V. Fainor |
|                                               |                                  | President                and Chief Executive Officer |
|                                               |                                  |   |
|                                               |                                  |   |
| DATE:                August                9, 2005 | BY:                                   |  /S/                Eugene T. Sobol |
|                                               |                                  | Eugene                T. Sobol |
|                                               |                                  | Senior                Executive Vice President, |
|                                               |                                  | Chief                Financial Officer and Treasurer |
|                                               |                                  |   |
|                                               |                                  |   |

----