**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 **March                31, 2006** |
| 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                [  ] |   |
|--------|--------|--------------|--------|-----------------------------|--------|

| Large                accelerated filer [  ] |   | Accelerated                filer [X] |   | Non-accelerated                filer [  ] |   |
|--------------------------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|

|   |   | YES [                 ] |   | NO                [X] |   |
|--------|--------|-----------------------------------|--------|-----------------------|--------|

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**INDEX**

| **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 | 15 |
|                                              |   |   |   |
|                                              | Item                3. | Quantitative                and Qualitative Disclosures about Market                Risk | 26 |
|                                              |   |   |   |
|                                              | Item                4. | Controls                and Procedures | 27 |
|                                              |   |   |   |
| **PART                II - OTHER INFORMATION**    |
|                                              |   |   |   |
|                                              | Item                1. | Legal                Proceedings | 27 |
|                                              |   |   |   |
|                                              | Item                1A. | Risk                Factors | 27 |
|                                              |   |   |   |
|                                              | Item                2. | Unregistered                Sales of Equity Securities and Use of                Proceeds | 27 |
|                                              |   |   |   |
|                                              | Item                3. | Defaults                Upon Senior Securities | 28 |
|                                              |   |   |   |
|                                              | Item                4. | Submission                of Matters to a Vote of Security                Holders | 28 |
|                                              |   |   |   |
|                                              | Item                5. | Other                Information | 28 |
|                                              |   |   |   |
|                                              | Item                6. | Exhibits | 28 |
|                                              |   |   |   |
| **Signatures**                                    | 29 |
|                                              |   |   |   |
| **Certifications**                                | 30 |

----

**PART      I. **

**Item      1.**    **Financial      Statements**

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS**

|                                                                                                         |         | March                  31,      |                | December                  31, |   |
|--------------------------------------------------------------------------------------------------------------|--------------|---------------------------------|---------------------|-------------------------------|--------|
|                                                                                                         |    | 2006                            |      | 2005                          |   |
|                                                                                                         |         | (unaudited)                     |                |                          |   |
|                                                                                                         |         | (in                  thousands) |                |
| ASSETS                                                                                                       |         |                            |                |                          |   |
| Cash                  and due from banks                                                                     |         | $                               | 43,366              |                          | $      | 47,989 |   |
| Interest-bearing                  deposits with banks                                                        |         |                            | 30,089              |                          |   | 58,270 |   |
| Cash                  and cash equivalents                                                                   |         |                            | 73,455              |                          |   | 106,259 |   |
| Investment                  securities available-for-sale                                                    |         |                            | 1,061,022           |                          |   | 1,119,273 |   |
| Investment                  securities held to maturity                                                      |         |                            |                |                          |   |   |   |
| (Fair                  value of $44,405 at March 31, 2006 and $47,074 at December 31,                  2005) |         |                            | 45,050              |                          |   | 47,368 |   |
| Federal                  Home Loan Bank of Pittsburgh stock                                                  |         |                            | 36,409              |                          |   | 40,239 |   |
| Mortgage                  loans held-for-sale                                                                |         |                            | -                   |                          |   | 556 |   |
| Loans                                                                                                        |         |                            | 1,490,121           |                          |   | 1,481,728 |   |
| Less:                  Allowance for loan losses                                                             |         |                            | (15,963             | )                             |   | (15,964 | ) |
| Net                  loans                                                                                   |         |                            | 1,474,158           |                          |   | 1,465,764 |   |
| Bank                  owned life insurance                                                                   |         |                            | 75,861              |                          |   | 75,087 |   |
| Premises                  and equipment, net                                                                 |         |                            | 46,794              |                          |   | 47,104 |   |
| Accrued                  interest receivable                                                                 |         |                            | 10,958              |                          |   | 11,252 |   |
| Goodwill                                                                                                     |         |                            | 104,654             |                          |   | 101,496 |   |
| Other                  intangible assets, net                                                                |         |                            | 30,824              |                          |   | 30,840 |   |
| Other                  assets                                                                                |         |                            | 42,819              |                          |   | 36,572 |   |
| TOTAL                  ASSETS                                                                                |         | $                               | 3,002,004           |                          | $      | 3,081,810 |   |
|                                                                                                         |         |                            |                |                          |   |   |   |
| LIABILITIES                                                                                                  |         |                            |                |                          |   |   |   |
| Non-interest-bearing                  deposits                                                               |         | $                               | 202,572             |                          | $      | 194,549 |   |
| Interest-bearing                  deposits                                                                   |         |                            | 1,672,787           |                          |   | 1,657,702 |   |
| Total                  deposits                                                                              |         |                            | 1,875,359           |                          |   | 1,852,251 |   |
| Securities                  sold under agreements to repurchase                                              |         |                            | 36,887              |                          |   | 76,932 |   |
| Advances                  from the Federal Home Loan Bank                                                    |         |                            | 659,615             |                          |   | 705,125 |   |
| Subordinated                  debt                                                                           |         |                            | 38,758              |                          |   | 38,872 |   |
| Accrued                  interest payable                                                                    |         |                            | 10,910              |                          |   | 9,659 |   |
| Other                  liabilities                                                                           |         |                            | 20,702              |                          |   | 22,419 |   |
| TOTAL                  LIABILITIES                                                                           |         |                            | 2,642,231           |                          |   | 2,705,258 |   |
|                                                                                                         |         |                            |                |                          |   |   |   |
| 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                 |                          |   | 330 |   |
| Authorized:                  100,000,000 shares                                                              |         |                            |                |                          |   |   |   |
| Issued:                                                                                                      |         |                            |                |                          |   |   |   |
| 33,926,269                  shares at March 31, 2006                                                         |         |                            |                |                          |   |   |   |
| 33,925,529                  shares at December 31, 2005                                                      |         |                            |                |                          |   |   |   |
| Additional                  paid-in capital                                                                  |         |                            | 335,812             |                          |   | 342,144 |   |
| Retained                  earnings                                                                           |         |                            | 130,945             |                          |   | 127,471 |   |
| Treasury                  stock, at cost; 4,798,900 and 3,861,000 shares at                                  |         |                            |                |                          |   |   |   |
| March                  31, 2006 and December 31, 2005, respectively                                          |         |                            | (77,245             | )                             |   | (61,999 | ) |
| Unallocated                  common stock held                                                               |         |                            |                |                          |   |   |   |
| by                  Employee Stock Ownership Plan                                                            |         |                            | (14,164             | )                             |   | (14,366 | ) |
| Unearned                  common stock held                                                                  |         |                            |                |                          |   |   |   |
| by                  Management Recognition and Retention Plan                                                |         |                            | -                   |                          |   | (7,130 | ) |
| Accumulated                  other comprehensive (loss), net                                                 |         |                            | (15,905             | )                             |   | (9,898 | ) |
| TOTAL                  SHAREHOLDERS' EQUITY                                                                  |         |                            | 359,773             |                          |   | 376,552 |   |
|                                                                                                         |         |                            |                |                          |   |   |   |
| TOTAL                  LIABILITIES AND SHAREHOLDERS' EQUITY                                                  |         | $                               | 3,002,004           |                          | $      | 3,081,810 |   |
|                                                                                                         |         |                            |                |                          |   |   |   |
| See                  accompanying notes to consolidated financial statements.                                |         |                            |                |                          |   |   |   |

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF INCOME**

|                                                                          |               |  Three                  Months Ended March 31,          |               |
|-------------------------------------------------------------------------------|--------------------|--------------------------------------------------------------|--------------------|
|                                                                          |     |  2006                                                   |     | 2005 |   |
|                                                                          |               |  (in                  thousands, except per share data) |               |
|                                                                          |               |  (unaudited)                                            |               |
| INTEREST                  INCOME                                              |               |                                                    |               |   |   |
| Loans,                  including fees                                        |               | $                                                            | 22,599             |   | $ | 14,892 |   |
| Investment                  securities                                        |               |                                                         | 13,447             |   |   | 11,728 |   |
| Other                  interest                                               |               |                                                         | 225                |   |   | 346 |   |
| Total                  interest income                                        |               |                                                         | 36,271             |   |   | 26,966 |   |
|                                                                          |               |                                                         |               |   |   |   |   |
| INTEREST                  EXPENSE                                             |               |                                                         |               |   |   |   |   |
| Deposits                                                                      |               |                                                         | 9,789              |   |   | 5,099 |   |
| Securities                  sold under agreements to repurchase               |               |                                                         | 595                |   |   | 51 |   |
| Advances                  from the FHLB and other borrowings                  |               |                                                         | 6,514              |   |   | 5,444 |   |
| Subordinated                  debt                                            |               |                                                         | 638                |   |   | 233 |   |
| Total                  interest expense                                       |               |                                                         | 17,536             |   |   | 10,827 |   |
|                                                                          |               |                                                         |               |   |   |   |   |
| NET                  INTEREST INCOME                                          |               |                                                         | 18,735             |   |   | 16,139 |   |
| Provision                  for loan losses                                    |               |                                                         | 750                |   |   | 734 |   |
| Net                  interest income after provision                          |               |                                                         |               |   |   |   |   |
| for                  loan losses                                              |               |                                                         | 17,985             |   |   | 15,405 |   |
|                                                                          |               |                                                         |               |   |   |   |   |
| NON-INTEREST                  INCOME                                          |               |                                                         |               |   |   |   |   |
| Trust                  revenue                                                |               |                                                         | 1,063              |   |   | 398 |   |
| Brokerage                  services revenue                                   |               |                                                         | 857                |   |   | 548 |   |
| Benefit                  services revenue                                     |               |                                                         | 1,277              |   |   | - |   |
| Insurance                  services revenue                                   |               |                                                         | 648                |   |   | - |   |
| Deposit                  service charges                                      |               |                                                         | 1,400              |   |   | 1,105 |   |
| Lending                  fees                                                 |               |                                                         | 270                |   |   | 104 |   |
| Check                  card/ATM card fees                                     |               |                                                         | 786                |   |   | 548 |   |
| Bank                  owned life insurance                                    |               |                                                         | 774                |   |   | 652 |   |
| Net                  gains on sales of investment securities                  |               |                                                         | 138                |   |   | 432 |   |
| Net                  gains on sales of residential mortgage loans             |               |                                                         | 48                 |   |   | 218 |   |
| Net                  (losses) on sale of assets                               |               |                                                         | -                  |   |   | (11 | ) |
| Net                  (losses) on sale of other real estate owned              |               |                                                         | (7                 | ) |   | (17 | ) |
| Net                  gains on extinguishment of debt                          |               |                                                         | 1,179              |   |   | - |   |
| Other                  non-interest operating income                          |               |                                                         | 491                |   |   | 465 |   |
| Total                  non-interest income                                    |               |                                                         | 8,924              |   |   | 4,442 |   |
|                                                                          |               |                                                         |               |   |   |   |   |
| NON-INTEREST                  EXPENSES                                        |               |                                                         |               |   |   |   |   |
| Compensation                  and employee benefits                           |               |                                                         | 10,674             |   |   | 7,848 |   |
| Net                  occupancy and equipment expense                          |               |                                                         | 3,107              |   |   | 2,113 |   |
| Professional                  fees                                            |               |                                                         | 762                |   |   | 427 |   |
| Advertising                                                                   |               |                                                         | 414                |   |   | 222 |   |
| Data                  processing                                              |               |                                                         | 613                |   |   | 433 |   |
| Telecommunication                                                             |               |                                                         | 344                |   |   | 178 |   |
| Office                  supplies and postage                                  |               |                                                         | 587                |   |   | 428 |   |
| Amortization                  of mortgage servicing rights                    |               |                                                         | 100                |   |   | 84 |   |
| Amortization                  of intangible assets                            |               |                                                         | 892                |   |   | 547 |   |
| Other                  operating expenses                                     |               |                                                         | 1,864              |   |   | 1,145 |   |
| Total                  non-interest expenses                                  |               |                                                         | 19,357             |   |   | 13,425 |   |
|                                                                          |               |                                                         |               |   |   |   |   |
| Income                  before income taxes                                   |               |                                                         | 7,552              |   |   | 6,422 |   |
| Income                  taxes                                                 |               |                                                         | 2,072              |   |   | 1,592 |   |
| NET                  INCOME                                                   |               | $                                                            | 5,480              |   | $ | 4,830 |   |
|                                                                          |               |                                                         |               |   |   |   |   |
| PER                  SHARE DATA                                               |               |                                                         |               |   |   |   |   |
| Net                  income - basic                                           |               | $                                                            | 0.20               |   | $ | 0.17 |   |
| Net                  income - diluted                                         |               | $                                                            | 0.19               |   | $ | 0.17 |   |
| Cash                  dividends per common share                              |               | $                                                            | 0.07               |   | $ | 0.05 |   |
|                                                                          |          |                                                         |               |   |   |   |   |
| See                  accompanying notes to consolidated financial statements. |               |                                                         |               |   |   |   |   |

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

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

|                                                            |   | Three                  Months Ended March 31, 2006 (unaudited) |
|-----------------------------------------------------------------|--------|----------------------------------------------------------------|
|                                                            |   | (in                  thousands)                                |
|                                                            |        | Common                  Stock Number of Shares                 |   | Treasury                  Stock Number of Shares |   | Common                  Stock Value |   | Add'l                  Paid In Capital |   | Retained                  Earnings |   | Unallocated                  ESOP Shares |   | Unearned                  MRRP Shares |   | Accumulated                  Other Comprehensive Income (Loss) |   | Treasury                  Stock |   | Total |   |
| Balance                  January 1, 2006                        |   |                                                           | 33,080,609 |   |   | (3,861,000 | ) | $ | 330 |   | $ | 342,144 |   | $ | 127,471 |   |   | ($14,366 | ) |   | ($7,130 | ) |   | ($9,898 | ) |   | ($61,999 | ) | $ | 376,552 |   |
|                                                            |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                  (loss)                           |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income                                     |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   | 5,480 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 5,480 |   |
| Other                  comprehensive loss net of taxes          |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                  reclassification adjustments               |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (6,007 | ) |   |   |   |   | (6,007 | ) |
| Total                  comprehensive (loss)                     |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (527 | ) |
| Reclass                  of unearned compensation upon          |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| adoption                  of SFAS 123(R)                        |   |                                                           |   |   |   |   |   |   |   |   |   | (7,130 | ) |   |   |   |   |   |   |   | 7,130 |   |   |   |   |   |   |   |   |   |   |
| Cash                  dividends paid                            |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   | (2,006 | ) |   |   |   |   |   |   |   |   |   |   |   |   |   | (2,006 | ) |
| Unallocated                  ESOP shares committed to employees |   |                                                           | 11,900 |   |   |   |   |   |   |   |   | (17 | ) |   |   |   |   | 202 |   |   |   |   |   |   |   |   |   |   |   | 185 |   |
| Shares                  issued upon exercise of stock options   |   |                                                           | 740 |   |   |   |   |   |   |   |   | 5 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 5 |   |
| Purchases                  of treasury stock                    |   |                                                           |   |   |   | (937,900 | ) |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (15,246 | ) |   | (15,246 | ) |
| Stock-based                  compensation expense               |   |                                                           |   |   |   |   |   |   |   |   |   | 277 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 277 |   |
| Amortization                  of compensation related to MRRP   |   |                                                           |   |   |   |   |   |   |   |   |   | 533 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 533 |   |
| Balance                  at March 31, 2006                      |   |                                                           | 33,093,249 |   |   | (4,798,900 | ) | $ | 330 |   | $ | 335,812 |   | $ | 130,945 |   |   | ($14,164 | ) |   | - |   |   | ($15,905 | ) |   | ($77,245 | ) | $ | 359,773 |   |
|                                                            |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                            |   |                                                           | Three                  Months Ended March 31, 2005 (unaudited)  |
|                                                            |   |                                                           | (in                  thousands, except per share data)  |
|                                                            |        |                                                           | Common                  Stock Number of Shares  |   |   | Treasury                  Stock Number of Shares |   |   | Common                  Stock Value |   |   | Add'l                  Paid-In Capital |   |   | Retained                  Earnings |   |   | Unallocated                  ESOP Shares |   |   | Unearned                  MRRP Shares |   |   | Accumulated                  Other Comprehensive Income (Loss) |   |   | Treasury                  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                                     |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   | 4,830 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,830 |   |
| Other                  comprehensive loss net of taxes          |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                  reclassification adjustments               |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (7,755 | ) |   |   |   |   | (7,755 | ) |
| Total                  comprehensive (loss)                     |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ($2,925 | ) |
| Cash                  dividends paid                            |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   | (1,456 | ) |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,456 | ) |
| Unallocated                  ESOP shares                        |   |                                                           | 11,900 |   |   |   |   |   |   |   |   | (15 | ) |   |   |   |   | 202 |   |   |   |   |   |   |   |   |   |   |   | 187 |   |
| Shares                  issued upon exercise of stock options   |   |                                                           | 8,021 |   |   |   |   |   |   |   |   | 45 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 45 |   |
| Purchases                  of treasury stock                    |   |                                                           |   |   |   | (314,000 | ) |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (5,086 | ) |   | (5,086 | ) |
| Amortization                  of compensation related to MRRP   |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 531 |   |   |   |   |   |   |   |   | 531 |   |
| Balance                  at March 31, 2005                      |   |                                                           | 29,784,240 |   |   | (964,000 | ) | $ | 297 |   | $ | 296,433 |   | $ | 117,122 |   |   | ($14,974 | ) |   | ($8,576 | ) |   | ($5,387 | ) |   | ($16,265 | ) | $ | 368,650 |   |

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

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

|                                                                                                    |   | Three                  months ended March 31, |    |
|---------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                                                    |   | 2006                                          |    | 2005 |   |
|                                                                                                    |   | (in                  thousands)               |    |
| **OPERATING                  ACTIVITIES:**                                                              |   |                                          |    |   |   |   |   |
| Net                  income                                                                             |   | $                                             | 5,480   |   | $ | 4,830 |   |
| Adjustments                  to reconcile net income to net cash                                        |   |                                          |    |   |   |   |   |
| provided                  by operating activities:                                                      |   |                                          |    |   |   |   |   |
| Provision                  for loan losses                                                              |   |                                          | 750     |   |   | 734 |   |
| Depreciation                  and amortization                                                          |   |                                          | 2,277   |   |   | 1,782 |   |
| Share                  based compensation expense                                                       |   |                                          | 277     |   |   | 6 |   |
| Management                  Recognition and Retention Plan expense                                      |   |                                          | 533     |   |   | 525 |   |
| ESOP                  expense                                                                           |   |                                          | 185     |   |   | 187 |   |
| Amortization                  and accretion of securities premiums and discounts, net                   |   |                                          | (40     | ) |   | 551 |   |
| Loss                  on sale of other real estate owned                                                |   |                                          | 7       |   |   | 17 |   |
| Net                  gains on sales of investment securities                                            |   |                                          | (138    | ) |   | (432 | ) |
| Gains                  on sale of other assets                                                          |   |                                          | -       |   |   | 11 |   |
| Gains                  on sales of mortgage loans                                                       |   |                                          | (48     | ) |   | (218 | ) |
| Gains                  on extinguishment of debt                                                        |   |                                          | (1,179  | ) |   | - |   |
| Mortgage                  loans originated for sale                                                     |   |                                          | (5,138  | ) |   | (13,336 | ) |
| Mortgage                  loan sales                                                                    |   |                                          | 5,742   |   |   | 13,790 |   |
| Changes                  in assets and liabilities:                                                     |   |                                          |    |   |   |   |   |
| Increase                  in Bank Owned Life Insurance                                                  |   |                                          | (774    | ) |   | (652 | ) |
| Decrease                  (Increase) in accrued interest receivable                                     |   |                                          | 294     |   |   | 111 |   |
| Decrease                  (Increase) in other assets                                                    |   |                                          | (2,051  | ) |   | 5,157 |   |
| Increase                  (Decrease) in other liabilities and accrued interest                  payable |   |                                          | (556    | ) |   | 2,823 |   |
| Net                  cash provided by operating activities                                              |   |                                          | 5,621   |   |   | 15,886 |   |
|                                                                                                    |   |                                          |    |   |   |   |   |
| **INVESTING                  ACTIVITIES:**                                                              |   |                                          |    |   |   |   |   |
| Proceeds                  from calls and maturities of securities available-for-sale                    |   |                                          | 44,555  |   |   | 39,067 |   |
| Proceeds                  from calls and maturities of securities held-to maturity                      |   |                                          | 2,356   |   |   | 1,774 |   |
| Proceeds                  from sales of securities available-for-sale                                   |   |                                          | 9,940   |   |   | 22,334 |   |
| Purchase                  of securities available-for-sale                                              |   |                                          | (5,712  | ) |   | (24,374 | ) |
| Purchase                  of securities held to maturity                                                |   |                                          | -       |   |   | (148 | ) |
| Purchase                  of Federal Home Loan Bank of Pittsburgh stock                                 |   |                                          | (342    | ) |   | (89 | ) |
| Redemption                  of Federal Home Loan Bank of Pittsburgh stock                               |   |                                          | 4,172   |   |   | 1,446 |   |
| Net                  increase in loans                                                                  |   |                                          | (9,144  | ) |   | (18,585 | ) |
| Cash                  paid for acquisitions                                                             |   |                                          | (5,300  | ) |   | - |   |
| Cash                  and cash equivalants obtained through acquisitions                                |   |                                          | 1,249   |   |   | - |   |
| Purchase                  of premises & equipment                                                   |   |                                          | (1,041  | ) |   | (642 | ) |
| Proceeds                  from the sale of other assets                                                 |   |                                          | 527     |   |   | 57 |   |
| Proceeds                  from the sale of other real estate owned                                      |   |                                          | 58      |   |   | 103 |   |
| Net                  cash provided by investing activities                                              |   |                                          | 41,318  |   |   | 20,943 |   |
|                                                                                                    |   |                                          |    |   |   |   |   |
| **FINANCING                  ACTIVITIES:**                                                              |   |                                          |    |   |   |   |   |
| Net                  increase (decrease) in deposits                                                    |   |                                          | 23,108  |   |   | 21,327 |   |
| Net                  increase (decrease) in repurchase agreements                                       |   |                                          | 45      |   |   | 1,853 |   |
| Payment                  on extinguishment of debt, net                                                 |   |                                          | (49,595 | ) |   | - |   |
| Proceeds                  from long-term debt                                                           |   |                                          | 38,000  |   |   | 22,000 |   |
| Payments                  on long-term debt                                                             |   |                                          | (74,054 | ) |   | (35,822 | ) |
| Purchase                  of treasury stock                                                             |   |                                          | (15,246 | ) |   | (5,086 | ) |
| Proceeds                  from the exercise of stock options                                            |   |                                          | 5       |   |   | 45 |   |
| Cash                  dividends paid                                                                    |   |                                          | (2,006  | ) |   | (1,456 | ) |
| Net                  cash provided by (used in) financing activities                                    |   |                                          | (79,743 | ) |   | 2,861 |   |
| Increase                  (Decrease) in cash and cash equivalents                                       |   |                                          | (32,804 | ) |   | 39,690 |   |
| Cash                  and cash equivalents January 1,                                                   |   |                                          | 106,259 |   |   | 86,220 |   |
| Cash                  and cash equivalents March 31,                                                    |   | $                                             | 73,455  |   | $ | 125,910 |   |
|                                                                                                    |   |                                          |    |   |   |   |   |
| Supplemental                  disclosure of cash flow information                                       |   |                                          |    |   |   |   |   |
| Cash                  paid during the period for                                                        |   |                                          |    |   |   |   |   |
| Income                  taxes                                                                           |   | $                                             | -       |   | $ | 1,100,000 |   |
| Interest                  on deposits, advances and other borrowed money                                |   | $                                             | 16,285  |   | $ | 10,131 |   |
| Supplemental                  disclosure of non-cash activities                                         |   |                                          |    |   |   |   |   |
| Reclassification                  of loans receivable to other real estate owned                        |   | $                                             | 130     |   | $ | 765 |   |
|                                                                                                    |   |                                          |    |   |   |   |   |
| See                  accompanying notes to consolidated financial statements.                           |   |                                          |    |   |   |   |   |

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**NOTES      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS **

**NOTE      A - PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION**

**NOTE      B - ACQUISITIONS**

**The      Trust Company of Lehigh Valley**

----

**Northeast      Pennsylvania Financial Corp.**

**Caruso      Benefits Group, Inc.**

----

**NOTE      C - EARNINGS PER SHARE**

|                                                     |   | For                the Three Months Ended March 31,             |   |
|----------------------------------------------------------|--------|-----------------------------------------------------------------|--------|
|                                                     |   | 2006                                                            |   | 2005 |   |
|                                                     |   | 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   |   | $                                                               | 5,480  |   |   | 28,045,012 |   | $ | 0.20 |   | $ | 4,830 |   |   | 28,226,025 |   | $ | 0.17 |   |
| Effect                of dilutive securities             |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock                options                             |   |                                                            |   |   |   | 148,669 |   |   | - |   |   |   |   |   | 217,581 |   |   | - |   |
| Management                Recognition and Retention Plan |   |                                                            |   |   |   | 232,053 |   |   | - |   |   |   |   |   | 94,162 |   |   | - |   |
| Total                effect of dilutive securities       |   |                                                            |   |   |   | 380,722 |   |   | (0.01 | ) |   |   |   |   | 311,743 |   |   | - |   |
| Diluted                earnings per share                |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                available to common shareholders   |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| plus                assumed exercise of options          |   | $                                                               | 5,480  |   |   | 28,425,734 |   | $ | 0.19 |   | $ | 4,830 |   |   | 28,537,768 |   | $ | 0.17 |   |

----

**NOTE      D - INVESTMENT SECURITIES**

|                                                 |   | At                  March 31, 2006 (unaudited) |      |
|------------------------------------------------------|--------|------------------------------------------------|-----------|
|                                                 |   |                                           |      | Gross |   | Gross |   |   |   |
|                                                 |   | Amortized                                      |      | Unrealized |   | Unrealized |   | Fair |   |
|                                                 |   | Cost                                           |      | Gains |   | Losses |   | Value |   |
|                                                 |   | (in                  thousands)                |      |
| Held                  to maturity:                   |   |                                           |      |   |   |   |   |   |   |
| U.S.                  Government and agencies        |   | $                                              | 477       |   | $ | - |   | $ | - |   | $ | 477 |   |
| Obligations                  of states and political |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| subdivisions                                         |   |                                           | 5,494     |   |   | 163 |   |   | - |   |   | 5,657 |   |
| Mortgage-backed                  securities          |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| FNMA                                                 |   |                                           | 19,201    |   |   | - |   |   | (428 | ) |   | 18,773 |   |
| CMOs                                                 |   |                                           | 19,878    |   |   |  - |   |   | (380 | ) |   | 19,498 |   |
| Total                  mortgage-backed securities    |   |                                           | 39,079    |   |   | - |   |   | (808 | ) |   | 38,271 |   |
| Total                  held to maturity              |   |                                           | 45,050    |   |   | 163 |   |   | (808 | ) |   | 44,405 |   |
|                                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| Available                  for sale:                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| U.S.                  Government and agencies        |   |                                           | 153,898   |   |   | 7 |   |   | (2,036 | ) |   | 151,869 |   |
| Obligations                  of states and political |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| subdivisions                                         |   |                                           | 59,174    |   |   | 1,608 |   |   | (55 | ) |   | 60,727 |   |
| Asset-managed                  funds                 |   |                                           | 4,904     |   |   |  - |   |   | (167 | ) |   | 4,737 |   |
| Mortgage-backed                  securities          |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| GNMA                                                 |   |                                           | 2,203     |   |   | 24 |   |   | (1 | ) |   | 2,226 |   |
| FHLMC                                                |   |                                           | 138,959   |   |   | 41 |   |   | (3,929 | ) |   | 135,071 |   |
| FNMA                                                 |   |                                           | 383,449   |   |   | 219 |   |   | (11,396 | ) |   | 372,272 |   |
| CMOs                                                 |   |                                           | 262,581   |   |   | 28 |   |   | (9,630 | ) |   | 252,979 |   |
| Total                  mortgaged-backed securities   |   |                                           | 787,192   |   |   | 312 |   |   | (24,956 | ) |   | 762,548 |   |
| Corporate                  and other debt securities |   |                                           | 73,566    |   |   | 239 |   |   | (347 | ) |   | 73,458 |   |
| Equity                  securities                   |   |                                           | 6,757     |   |   | 1,017 |   |   | (91 | ) |   | 7,683 |   |
| Total                  available for sale            |   |                                           | 1,085,491 |   |   | 3,183 |   |   | (27,652 | ) |   | 1,061,022 |   |
|                                                 |   |                                           |      |   |   |   |   |   |   |   |   |   |   |
| Total                  investment securities         |   | $                                              | 1,130,541 |   | $ | 3,346 |   | $ | (28,460 | ) | $ | 1,105,427 |   |

|                                                 |   | At                  December 31, 2005 |      |
|------------------------------------------------------|--------|---------------------------------------|-----------|
|                                                 |   |                                  |      | Gross |   | Gross |   |   |   |
|                                                 |   | Amortized                             |      | Unrealized |   | Unrealized |   | Fair |   |
|                                                 |   | Cost                                  |      | Gains |   | Losses |   | Value |   |
|                                                 |   | (in                  thousands)       |      |
| Held                  to maturity:                   |   |                                  |      |   |   |   |   |   |   |   |   |   |   |
| U.S.                  Government and agencies        |   | $                                     | 472       |   | $ | - |   | $ | - |   | $ | 472 |   |
| Obligations                  of states and political |   |                                  |      |   |   |   |   |   |   |   |   |   |   |
| subdivisions                                         |   |                                  | 5,497     |   |   | 210 |   |   | - |   |   | 5,707 |   |
| Mortgaged-backed                  securities         |   |                                  |      |   |   |   |   |   |   |   |   |   |   |
| FNMA                                                 |   |                                  | 20,603    |   |   | - |   |   | (287 | ) |   | 20,316 |   |
| CMOs                                                 |   |                                  | 20,796    |   |   | - |   |   | (217 | ) |   | 20,579 |   |
| Total                  mortgage-backed securities    |   |                                  | 41,399    |   |   | - |   |   | (504 | ) |   | 40,895 |   |
| Total                  held to maturity              |   |                                  | 47,368    |   |   | 210 |   |   | (504 | ) |   | 47,074 |   |
|                                                 |   |                                  |      |   |   |   |   |   |   |   |   |   |   |
| Available                  for sale:                 |   |                                  |      |   |   |   |   |   |   |   |   |   |   |
| U.S.                  Government and agencies        |   |                                  | 158,819   |   |   | 203 |   |   | (1,614 | ) |   | 157,408 |   |
| Obligations                  of states and political |   |                                  |      |   |   |   |   |   |   |   |   |   |   |
| subdivisions                                         |   |                                  | 63,181    |   |   | 2,015 |   |   | (31 | ) |   | 65,165 |   |
| Asset-managed                  funds                 |   |                                  | 4,904     |   |   | - |   |   | (157 | ) |   | 4,747 |   |
| Mortgaged-backed                  securities         |   |                                  |      |   |   |   |   |   |   |   |   |   |   |
| GNMA                                                 |   |                                  | 2,365     |   |   | 28 |   |   | (1 | ) |   | 2,392 |   |
| FHLMC                                                |   |                                  | 139,425   |   |   | 64 |   |   | (2,628 | ) |   | 136,861 |   |
| FNMA                                                 |   |                                  | 402,354   |   |   | 357 |   |   | (7,349 | ) |   | 395,362 |   |
| CMOs                                                 |   |                                  | 275,713   |   |   | 41 |   |   | (6,955 | ) |   | 268,799 |   |
| Total                  mortgaged-backed securities   |   |                                  | 819,857   |   |   | 490 |   |   | (16,933 | ) |   | 803,414 |   |
| Corporate                  and other debt securities |   |                                  | 73,605    |   |   | 452 |   |   | (76 | ) |   | 73,981 |   |
| Equity                  securities                   |   |                                  | 13,904    |   |   | 805 |   |   | (151 | ) |   | 14,558 |   |
| Total                  available for sale            |   |                                  | 1,134,270 |   |   | 3,965 |   |   | (18,962 | ) |   | 1,119,273 |   |
|                                                 |   |                                  |      |   |   |   |   |   |   |   |   |   |   |
| Total                  investment securities         |   | $                                     | 1,181,638 |   | $ | 4,175 |   | $ | (19,466 | ) | $ | 1,166,347 |   |

----

**NOTE      E - STOCK BASED COMPENSATION**

|                                     |   | For                  the Three Months |
|------------------------------------------|--------|---------------------------------------|
|                                     |   | Ended                  March 31,      |
|                                     |   | 2006                                  |   | 2005 |
|                                     |   |                                  |   |   |
| Expected                  dividend yield |   | 2.50%                                 |   | 2.00% |
| Expected                  volatility     |   | 22.63%                                |   | 25.00% |
| Risk-free                  interest rate |   | 4.34%                                 |   | 3.97% |
| Expected                  option life    |   | 6.5                  years            |   | 7.7                  years |
| Fair                  Value of Option    |   | $                  3.84               |   | $                  4.41 |

----

|                                                            |                                                            | March                  31, 2005 |   |
|-----------------------------------------------------------------|-----------------------------------------------------------------|---------------------------------|--------|
|                                                            |  (in                  thousands, except per share amounts) |
| Net                  Income                                     |                                                            |                            |   |   |
| As                  reported                                    |                                                            | $                               | 4,830  |   |
| Add:                  stock-based employee compensation expense |                                                            |                            |   |   |
| included                  in reported net income, net           |                                                            |                            |   |   |
| of                  related tax effects                         |                                                            |                            | 6      |   |
| Less:                  stock-based compensation cost determined |                                                            |                            |   |   |
| under                  fair value method for all awards, net    |                                                            |                            |   |   |
| of                  related tax effects                         |                                                            |                            | 167    |   |
| Pro-forma                                                       |                                                            | $                               | 4,669  |   |
|                                                            |                                                            |                            |   |   |
| Earnings                  per share (diluted)                   |                                                            |                            |   |   |
| As                  reported                                    |                                                            | $                               | 0.17   |   |
| Pro-forma                                                       |                                                            | $                               | 0.16   |   |
|                                                            |                                                            |                            |   |   |
| Earnings                  per share (basic)                     |                                                            |                            |   |   |
| As                  reported                                    |                                                            | $                               | 0.17   |   |
| Pro-forma                                                       |                                                            | $                               | 0.17   |   |

|                                             |   | For                  the Three Months Ended March 31, 2006 |      |
|--------------------------------------------------|--------|------------------------------------------------------------|-----------|
|                                             |   | Shares                                                     |      | Weighted                  Average Exercise Price |   | Weighted                  Average Remaining Contractual Term (in years) |   | Aggregate                  Intrinsic Value |   |
| Outstanding                  as of 1/1/2006      |   |                                                       | 1,796,338 |   | $ | 13.58 |   |   |   |   |   |   |   |
| Issued                                           |   |                                                       | 217,400   |   |   | 16.51 |   |   |   |   |   |   |   |
| Exercised                                        |   |                                                       | (740      | ) |   | 6.44 |   |   |   |   |   |   |   |
| Forfeited                                        |   |                                                       | (5,000    | ) |   | 16.37 |   |   |   |   |   |   |   |
| Expired                                          |   |                                                       | -         |   |   | - |   |   |   |   |   |   |   |
| Outstanding                  as of 3/31/2006     |   |                                                       | 2,007,998 |   | $ | 13.89 |   |   | 7.78 |   | $ | 4,939,675 |   |
|                                             |   |                                                       |      |   |   |   |   |   |   |   |   |   |   |
| Shares                  exercisable at 3/31/2006 |   |                                                       | 678,378   |   | $ | 8.98 |   |   | 6.38 |   | $ | 4,999,646 |   |

|                                        |   | For                  the Three Months Ended March 31, 2006 |      |
|---------------------------------------------|--------|------------------------------------------------------------|-----------|
|                                        |   | Options                  Outstanding                       |      | Options                  Exercisable |   |
| Range                    of Exercise Prices |   | Stock                    Options Outstanding               |      | Weighted                    Average Remaining Contractual Life |   | Weighted                    Average Exercise Price |   | Stock                    Options Exercisable |   | Weighted                    Average Exercise Price |   |
| $3.03                  - $4.35              |   |                                                       | 57,743    |   |   | 4.61 |   | $ | 4.16 |   |   | 57,743 |   | $ | 4.16 |   |
| $4.36                  - $6.37              |   |                                                       | 331,805   |   |   | 5.60 |   | $ | 5.65 |   |   | 331,805 |   | $ | 5.65 |   |
| $6.38                  - $8.36              |   |                                                       | 77,650    |   |   | 5.97 |   | $ | 6.67 |   |   | 77,650 |   | $ | 6.67 |   |
| $11.35                  - $16.56            |   |                                                       | 1,540,800 |   |   | 8.46 |   | $ | 16.40 |   |   | 211,180 |   | $ | 16.38 |   |
|                                        |   |                                                       | 2,007,998 |   |   |   |   |   |   |   |   | 678,378 |   |   |   |   |

----

----

**NOTE      F - LOANS**

|                                               |   | March                  31,      |      | December                  31, |   |
|----------------------------------------------------|--------|---------------------------------|-----------|-------------------------------|--------|
|                                               |   | 2006                            |      | 2005                          |   |
|                                               |   | (unaudited)                     |      |                          |   |
|                                               |   | (in                  thousands) |      |
| Real                  Estate                       |   |                            |      |                          |   |   |   |
| Residential                                        |   | $                               | 460,080   |                          | $      | 454,393 |   |
| Construction                                       |   |                            | 54,916    |                          |   | 71,631 |   |
| Commercial                                         |   |                            | 356,794   |                          |   | 336,480 |   |
| Total                  real estate                 |   |                            | 871,790   |                          |   | 862,504 |   |
|                                               |   |                            |      |                          |   |   |   |
| Consumer                  loans                    |   |                            | 489,508   |                          |   | 491,615 |   |
| Commercial                  (non-real estate)      |   |                            | 127,718   |                          |   | 126,122 |   |
| States                  and political subdivisions |   |                            | 829       |                          |   | 2,017 |   |
| Total                  gross loans                 |   |                            | 1,489,845 |                          |   | 1,482,258 |   |
|                                               |   |                            |      |                          |   |   |   |
| Less:                                              |   |                            |      |                          |   |   |   |
| Mortgage                  loans held-for-sale      |   |                            | -         |                          |   | (556 | ) |
| Deferred                  fees                     |   |                            | 276       |                          |   | 26 |   |
| Total                  loans                       |   |                            | 1,490,121 |                          |   | 1,481,728 |   |
|                                               |   |                            |      |                          |   |   |   |
| Less:                  Allowance for loan losses   |   |                            | (15,963   | )                             |   | (15,964 | ) |
| Total                  net loans                   |   | $                               | 1,474,158 |                          | $      | 1,465,764 |   |

|                                                                        |   | March                  31,              |   | December                  31, |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------------|--------|-------------------------------|--------|
|                                                                        |   | 2006                                    |   | 2005                          |   |
|                                                                        |   | (unaudited)                             |   |                          |   |
|                                                                        |   | (dollars                  in thousands) |   |
|                                                                        |   |                                    |   |                          |   |
| Non-accrual                  loans                                          |   | $                                       | 6,951  |                          | $      | 6,839 |   |
| Accruing                  loans 90 days or more past due                    |   |                                    | 1,258  |                          |   | 2,167 |   |
| Total                  non-performing loans                                 |   |                                    | 8,209  |                          |   | 9,006 |   |
|                                                                        |   |                                    |   |                          |   |   |   |
| Other                  real estate owned                                    |   |                                    | 242    |                          |   | 162 |   |
| Total                  non-performing assets                                |   | $                                       | 8,451  |                          | $      | 9,168 |   |
|                                                                        |   |                                    |   |                          |   |   |   |
| Total                  non-performing loans                                 |   |                                    |   |                          |   |   |   |
| as                  a percentage of loans, net                              |   |                                    | 0.56   | %                             |   | 0.61 | % |
|                                                                        |   |                                    |   |                          |   |   |   |
| Total                  non-performing loans                                 |   |                                    |   |                          |   |   |   |
| as                  a percentage of total assets                            |   |                                    | 0.27   | %                             |   | 0.29 | % |
|                                                                        |   |                                    |   |                          |   |   |   |
| Total                  non-performing assets                                |   |                                    |   |                          |   |   |   |
| as                  a percentage of total assets                            |   |                                    | 0.28   | %                             |   | 0.30 | % |
|                                                                        |   |                                    |   |                          |   |   |   |
| Interest                  on non-accrual loans which would have been        |   |                                    |   |                          |   |   |   |
| recorded                  at the original rate                              |   | $                                       | 382    |                          | $      | 301 |   |
|                                                                        |   |                                    |   |                          |   |   |   |
| Interest                  on non-accrual loans that was reflected in income |   |                                    | -      |                          |   | - |   |
| Net                  decrease in interest income                            |   | $                                       | (382   | )                             | $      | (301 | ) |

----

|                                                            |   | For                  the Three Months |   |
|-----------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                            |   | Ended                  March 31,      |   |
|                                                            |   | (unaudited)                           |   |
|                                                            |   | 2006                                  |   | 2005 |   |
|                                                            |   | (in                  thousands)       |   |
|                                                            |   |                                  |   |   |   |
| Allowance                  for loan losses, beginning of period |   | $                                     | 15,964 |   | $ | 10,461 |   |
| Provision                  for loan losses                      |   |                                  | 750    |   |   | 734 |   |
| Charge-offs:                                                    |   |                                  |   |   |   |   |   |
| One-to-four                  family residential                 |   |                                  | (39    | ) |   | (15 | ) |
| Commercial                  business                            |   |                                  | (4     | ) |   | - |   |
| Consumer                                                        |   |                                  | (793   | ) |   | (748 | ) |
| Total                  charge offs                              |   |                                  | (836   | ) |   | (763 | ) |
| Recoveries                  on loans previously charged off:    |   |                                  |   |   |   |   |   |
| One-to-four                  family residential                 |   |                                  | 19     |   |   | 1 |   |
| Commercial                  business                            |   |                                  | 15     |   |   | 2 |   |
| Consumer                                                        |   |                                  | 51     |   |   | 15 |   |
| Total                  recoveries                               |   |                                  | 85     |   |   | 18 |   |
| Net                  loans charged-off                          |   |                                  | (751   | ) |   | (745 | ) |
|                                                            |   |                                  |   |   |   |   |   |
| Allowance                  for loan losses, at period end       |   | $                                     | 15,963 |   | $ | 10,450 |   |

|                                   |   | For                  the Three Months Ended |   |
|----------------------------------------|--------|---------------------------------------------|--------|
|                                   |   | March                  31, 2006             |   |
|                                   |   | (in                  thousands)             |   |
|                                   |   |                                        |   |
| Outstanding                  balance   |   | $                                           | 1,129  |   |
| Allowance                              |   |                                        | (239   | ) |
| Carrying                  amount (net) |   |                                        | 890    |   |

----

|                                       |   | For                  the Three Months Ended   |   |
|--------------------------------------------|--------|---------------------------------------------------------|--------|
|                                       |   | March                  31, 2006                    |   |
|                                       |   | (in                  thousands)                    |   |
|                                       |   |                                                    |   |
| Loans                  aquired during 2005 |   | $                                                       | 1,595  |   |
| Loans                  at end of quarter   |   |                                                    | 890    |   |

**NOTE      G - RETIREMENT PLANS**

*1.           *
*Defined          Benefit Plans *

*2.       *
*Directors’      Deferred Plan. *

|                                                   |   | March                  31,      |   |
|--------------------------------------------------------|--------|---------------------------------|--------|
|                                                   |   | 2006                            |   | 2005 |   |
|                                                   |   | (in                  thousands) |   |
|                                                   |   |                            |   |   |   |
| Service                  cost                          |   | $                               | -      |   | $ | - |   |
| Interest                  cost                         |   |                            | 17     |   |   | 19 |   |
| Net                  amortization and                  |   |                            |   |   |   |   |   |
| deferral                  of prior service costs       |   |                            | -      |   |   | - |   |
| Amortization                  of unrecognized net loss |   |                            | 1      |   |   | - |   |
|                                                   |   |                            |   |   |   |   |   |
| Net                  periodic benefit cost             |   | $                               | 18     |   | $ | 19 |   |

----

**NOTE      H - NEW ACCOUNTING PRONOUNCEMENTS**

**NOTE      I - EXTINGUISHMENT OF DEBT**

**NOTE      J - RECLASSIFICATIONS**

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

**Forward      - Looking Statements**

----

|   | • |   | Economic                and competitive conditions which could affect the volume of loan                originations, deposit flows and real estate values;  |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | The                levels of non-interest income and expense and the amount of loan                losses; |
|--------|---------|--------|------------------------------------------------------------------------------------------------------------|

|   | • |   | Revenues                following the acquisitions of Paragon Group, Inc. (“Paragon”) are lower                than expected; |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | Competitive                pressure among depository institutions increases                significantly; |
|--------|---------|--------|-----------------------------------------------------------------------------------------------------------|

|   | • |   | Costs                or difficulties related to the integration of the businesses of Paragon                into KNBT are greater than                expected; |
|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | Changes                in the interest rate environment may further reduce interest                margins; |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------|

|   | • |   | General                economic conditions, either nationally or in the markets in which                KNBT is                doing business, are less favorable than                expected; |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | Acquisitions                may result in large one-time charges to income, may not produce revenue                enhancements or cost savings at levels or within time frames originally                anticipated and may result in unforeseen integration                difficulties; |
|--------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | Legislation                or changes in regulatory requirements adversely affect the business                in                which KNBT is engaged; and |
|--------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | Other                factors discussed in the documents filed by KNBT with the Securities                and                Exchange Commission ("SEC") from time to                time. |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Available      Information**

**Critical      Accounting Policies, Judgments and Estimates**

----

----

**Comparison      of Financial Condition as of March 31, 2006 and December 31,      2005**

**Assets.      **

**Non-Performing      Assets. **

** **

**Allowance      for Loan Losses. **

----

**Liabilities.      **

**Shareholders’      Equity. **

----

|                                           |   | At                  March 31, 2006      |
|------------------------------------------------|--------|-----------------------------------------|
|                                           |   |                                    |   |   |   | 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)        |   | $298,023                                |   | 16.03% |   | $                  148,701 |   | 8.00% |   | N/A |   | N/A |
| Bank                                           |   | $264,295                                |   | 14.30% |   | $                  147,898 |   | 8.00% |   | $                  184,872 |   | 10.00% |
| Tier                  I Capital                |   |                                    |   |   |   |   |   |   |   |   |   |   |
| (To                  risk-weighted assets)     |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Company                  (consolidated)        |   | $281,719                                |   | 15.16% |   | $                  74,351 |   | 4.00% |   | N/A |   | N/A |
| Bank                                           |   | $248,332                                |   | 13.43% |   | $                  73,949 |   | 4.00% |   | $                  110,923 |   | 6.00% |
| Tier                  I Capital                |   |                                    |   |   |   |   |   |   |   |   |   |   |
| (To                  average assets, leverage) |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Company                  (consolidated)        |   | $281,719                                |   | 8.04% |   | $                  140,094 |   | 4.00% |   | N/A |   | N/A |
| Bank                                           |   | $248,332                                |   | 8.57% |   | $                  115,854 |   | 4.00% |   | $                  144,818 |   | 5.00% |
|                                           |   |                                    |   |   |   |   |   |   |   |   |   |   |
|                                           |   | At                  December 31, 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)        |   | $312,692                                |   | 16.95% |   | $147,621 |   | 8.00% |   | N/A |   | N/A |
| Bank                                           |   | $281,866                                |   | 15.16% |   | $148,727 |   | 8.00% |   | $185,908 |   | 10.00% |
| Tier                  I Capital                |   |                                    |   |   |   |   |   |   |   |   |   |   |
| (To                  risk-weighted assets)     |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Company                  (consolidated)        |   | $296,543                                |   | 16.07% |   | $73,811 |   | 4.00% |   | N/A |   | N/A |
| Bank                                           |   | $265,902                                |   | 14.30% |   | $74,363 |   | 4.00% |   | $111,545 |   | 6.00% |
| Tier                  I Capital                |   |                                    |   |   |   |   |   |   |   |   |   |   |
| (To                  average assets, leverage) |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Company                  (consolidated)        |   | $296,543                                |   | 8.16% |   | $145,394 |   | 4.00% |   | N/A |   | N/A |
| Bank                                           |   | $265,902                                |   | 8.80% |   | $120,895 |   | 4.00% |   | $151,119 |   | 5.00% |

**Liquidity.      **

----

**“GAP”      Analysis. **

|                                                                                                                                                                                                                                                                                                       |   | At                  March 31, 2006      |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                       |   |                                    |    | 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                                                                                                                                                                                                                                                            |   | $                                       | 30,089  |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   | $ | 30,089 |   |
| Loans                  receivable (2)                                                                                                                                                                                                                                                                 |   |                                    | 216,488 |   |   | 85,203 |   |   | 160,689 |   |   | 412,003 |   |   | 261,162 |   |   | 354,576 |   |   | 1,490,121 |   |
| Investment                  securities, debt                                                                                                                                                                                                                                                               |   |                                    | 152,257 |   |   | 63,027 |   |   | 83,887 |   |   | 360,831 |   |   | 228,595 |   |   | 211,057 |   |   | 1,099,654 |   |
| Investment                  securities, equity                                                                                                                                                                                                                                                             |   |                                    | -       |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 42,827 |   |   | 42,827 |   |
|  Total                  interest-earning                                                                                                                                                                                                                                                              |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  assets                                                                                                                                                                                                                                                                                               |   | $                                       | 398,834 |   | $ | 148,230 |   | $ | 244,576 |   | $ | 772,834 |   | $ | 489,757 |   | $ | 608,460 |   | $ | 2,662,691 |   |
| Cumulative                  total interest-                                                                                                                                                                                                                                                                |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| earning                  assets                                                                                                                                                                                                                                                                            |   | $                                       | 398,834 |   | $ | 547,064 |   | $ | 791,640 |   | $ | 1,564,474 |   | $ | 2,054,231 |   | $ | 2,662,691 |   | $ | 2,662,691 |   |
| Interest-bearing                                                                                                                                                                                                                                                                                           |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities:                                                                                                                                                                                                                                                                                          |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings                  deposits                                                                                                                                                                                                                                                                          |   | $                                       | 882     |   | $ | 10,563 |   | $ | 10,563 |   | $ | 14,084 |   | $ | 17,604 |   | $ | 211,253 |   | $ | 264,949 |   |
| Interest-bearing                  checking deposits                                                                                                                                                                                                                                                   |   |                                    | -       |   |   | 14,366 |   |   | 9,578 |   |   | 9,578 |   |   | 4,789 |   |   | 201,129 |   |   | 239,440 |   |
| Money                  market deposits                                                                                                                                                                                                                                                                     |   |                                    | 39,005  |   |   | 46,806 |   |   | 31,204 |   |   | 52,007 |   |   | 26,003 |   |   | 195,025 |   |   | 390,050 |   |
| Certificates                  of deposit                                                                                                                                                                                                                                                                   |   |                                    | 135,030 |   |   | 121,782 |   |   | 250,445 |   |   | 218,919 |   |   | 50,822 |   |   | 1,350 |   |   | 778,348 |   |
| FHLB                  advances and other                                                                                                                                                                                                                                                              |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  borrowings                                                                                                                                                                                                                                                                                           |   |                                    | 159,977 |   |   | 36,211 |   |   | 104,556 |   |   | 217,161 |   |   | 135,568 |   |   | 81,787 |   |   | 735,260 |   |
|  Total                  interest-bearing                                                                                                                                                                                                                                                              |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  liabilities                                                                                                                                                                                                                                                                                          |   | $                                       | 334,894 |   | $ | 229,728 |   | $ | 406,346 |   | $ | 511,749 |   | $ | 234,786 |   | $ | 690,544 |   | $ | 2,408,047 |   |
| Cumulative                  total interest-                                                                                                                                                                                                                                                                |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| bearing                  liabilities                                                                                                                                                                                                                                                                       |   | $                                       | 334,894 |   | $ | 564,622 |   | $ | 970,968 |   | $ | 1,482,717 |   | $ | 1,717,503 |   | $ | 2,408,047 |   | $ | 2,408,047 |   |
| Interest-earning                  assets                                                                                                                                                                                                                                                                   |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| less                  interest-bearing                                                                                                                                                                                                                                                                |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                                                                                                                                                                                                                                                                                                |   | $                                       | 63,940  |   | $ | (81,498 | ) | $ | (161,770 | ) | $ | 261,085 |   | $ | 254,971 |   | $ | (82,084 | ) | $ | 254,644 |   |
| Cumulative                  interest-rate                                                                                                                                                                                                                                                                  |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| sensitivity                  gap (3)                                                                                                                                                                                                                                                                  |   | $                                       | 63,940  |   | $ | (17,558 | ) | $ | (179,328 | ) | $ | 81,757 |   | $ | 336,728 |   | $ | 254,644 |   |   |   |   |
| Cumulative                  interest-rate gap as a                                                                                                                                                                                                                                                         |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| percentage                  of total assets at                                                                                                                                                                                                                                                        |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| March                  31, 2006                                                                                                                                                                                                                                                                            |   |                                    | 2.13    | % |   | (0.58 | %) |   | (5.97 | %) |   | 2.72 | % |   | 11.22 | % |   | 8.48 | % |   |   |   |
|                                                                                                                                                                                                                                                                                                       |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative                  interest-earning assets                                                                                                                                                                                                                                                        |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| as                  a percentage of                                                                                                                                                                                                                                                                   |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| cumulative                  interest-bearing                                                                                                                                                                                                                                                          |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                  at March 31, 2006                                                                                                                                                                                                                                                        |   |                                    | 119.09  | % |   | 96.89 | % |   | 81.53 | % |   | 105.51 | % |   | 119.61 | % |   | 110.57 | % |   |   |   |
|                                                                                                                                                                                                                                                                                                       |
| (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 net difference between                  interest-earning assets and interest-bearing                  liabilities.                                                                                                                       |

----

**Comparison      of Operating Results for the Three Months Ended March 31, 2006 and      2005**

**General.**

**Net      Interest Income.**

----

**Interest      Income. **

**Interest      Expense. **

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

----

|                                                             |   | For                  the Three Months Ended March 31, |      |
|------------------------------------------------------------------|--------|-------------------------------------------------------|-----------|
|                                                             |   | 2006                                                  |      | 2005 |   |
|                                                             |   |                                                  |      | 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            |   | $                                                     | 22,622    |   | $ | 225 |   |   | 3.98 | % | $ | 60,543 |   | $ | 346 |   |   | 2.29 | % |
| Investment                  securities                           |   |                                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                  (1)                                     |   |                                                  | 1,111,077 |   |   | 12,670 |   |   | 4.56 | % |   | 1,017,927 |   |   | 10,566 |   |   | 4.15 | % |
| Non-taxable                  (2)                                 |   |                                                  | 67,291    |   |   | 1,196 |   |   | 7.11 | % |   | 108,544 |   |   | 1,759 |   |   | 6.48 | % |
| Loans                  receivable (2) (3)                        |   |                                                  | 1,487,095 |   |   | 22,773 |   |   | 6.13 | % |   | 1,021,335 |   |   | 14,920 |   |   | 5.84 | % |
| Allowance                  for loan losses                       |   |                                                  | (15,882   | ) |   |   |   |   |   |   |   | (10,393 | ) |   |   |   |   |   |   |
| Net                  loans                                       |   |                                                  | 1,471,213 |   |   | 22,773 |   |   | 6.19 | % |   | 1,010,942 |   |   | 14,920 |   |   | 5.90 | % |
| Total                  interest-earning assets                   |   |                                                  | 2,672,203 |   |   | 36,864 |   |   | 5.52 | % |   | 2,197,956 |   |   | 27,591 |   |   | 5.02 | % |
| Non-interest-earning                  assets                     |   |                                                  | 346,673   |   |   | - |   |   |   |   |   | 202,307 |   |   | - |   |   |   |   |
| Total                  assets, interest income                   |   | $                                                     | 3,018,876 |   |   | 36,864 |   |   |   |   | $ | 2,400,263 |   |   | 27,591 |   |   |   |   |
| Liabilities                                                      |   |                                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                  liabilities                    |   |                                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                  deposits                       |   |                                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                  deposits                                 |   | $                                                     | 229,219   |   |   | 279 |   |   | 0.49 | % | $ | 176,622 |   |   | 71 |   |   | 0.16 | % |
| Money                  market deposits                           |   |                                                  | 370,750   |   |   | 2,614 |   |   | 2.82 | % |   | 247,648 |   |   | 792 |   |   | 1.28 | % |
| Savings                  deposits                                |   |                                                  | 260,759   |   |   | 285 |   |   | 0.44 | % |   | 209,538 |   |   | 249 |   |   | 0.48 | % |
| Certificates                  of deposit                         |   |                                                  | 768,051   |   |   | 6,611 |   |   | 3.44 | % |   | 564,659 |   |   | 3,987 |   |   | 2.82 | % |
| Total                  interest-bearing deposits                 |   |                                                  | 1,628,779 |   |   | 9,789 |   |   | 2.40 | % |   | 1,198,467 |   |   | 5,099 |   |   | 1.70 | % |
|                                                             |   |                                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities                  sold under agreements                |   |                                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                  repurchase                                   |   |                                                  | 68,182    |   |   | 595 |   |   | 3.49 | % |   | 18,732 |   |   | 51 |   |   | 1.09 | % |
| FHLB                  advances                                   |   |                                                  | 693,955   |   |   | 6,514 |   |   | 3.75 | % |   | 651,901 |   |   | 5,444 |   |   | 3.34 | % |
| Other                  debt                                      |   |                                                  | 38,831    |   |   | 638 |   |   | 6.57 | % |   | 15,464 |   |   | 233 |   |   | 6.03 | % |
| Total                  interest-bearing liabilities              |   |                                                  | 2,429,747 |   |   | 17,536 |   |   | 2.89 | % |   | 1,884,564 |   |   | 10,827 |   |   | 2.30 | % |
|                                                             |   |                                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing                  liabilities                |   |                                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing                  deposits                   |   |                                                  | 185,614   |   |   | - |   |   | - |   |   | 123,805 |   |   | - |   |   | - |   |
| Other                  liabilities                               |   |                                                  | 33,120    |   |   | - |   |   | - |   |   | 13,969 |   |   | - |   |   | - |   |
| Total                  liabilities                               |   |                                                  | 2,648,481 |   |   | 17,536 |   |   |   |   |   | 2,022,338 |   |   | 10,827 |   |   |   |   |
| Shareholders'                  equity /retained earnings         |   |                                                  | 370,395   |   |   | - |   |   | - |   |   | 377,925 |   |   | - |   |   | - |   |
| Total                  liabilities and shareholders'             |   |                                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| equity,                  interest expense                        |   | $                                                     | 3,018,876 |   |   | 17,536 |   |   |   |   | $ | 2,400,263 |   |   | 10,827 |   |   |   |   |
|                                                             |   |                                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  interest income on tax equivalent basis (2) |   |                                                  |      |   |   | 19,328 |   |   |   |   |   |   |   |   | 16,764 |   |   |   |   |
| Net                  interest spread on                          |   |                                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax                  equivalent basis (4)                        |   |                                                  |      |   |   |   |   |   | 2.63 | % |   |   |   |   |   |   |   | 2.72 | % |
| Net                  interest margin                             |   |                                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax                  equivalent basis (5)                        |   |                                                  |      |   |   |   |   |   | 2.89 | % |   |   |   |   |   |   |   | 3.05 | % |
| Tax-exempt                  adjustment                           |   |                                                  |      |   |   | (593 | ) |   | (0.09 | %) |   |   |   |   | (625 | ) |   | (0.11 | %) |
|                                                             |   |                                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  interest income and margin (4)              |   |                                                  |      |   | $ | 18,735 |   |   | 2.80 | % |   |   |   | $ | 16,139 |   |   | 2.94 | % |
| Average                  interest-earning assets                 |   |                                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                  average interest-bearing liabilities         |   |                                                  |      |   |   |   |   |   | 109.98 | % |   |   |   |   |   |   |   | 116.63 | % |

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)    | Includes                Federal Home Loan Bank stock.                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (2)    | The                indicated interest income and average yields are presented on a taxable                equivalent basis. The taxable equivalent adjustments                included above are $593,000 and $625,000 for the three months ended                March                31, 2006 and 2005, respectively. The                effective tax rate used for the taxable equivalent adjustment was                35%.                                                           |
| (3)    | Loan                (expenses) fees of $49,192 and $(24,041) for the three months ended                March                31, 2006 and 2005, respectively, are included                in interest income. Average loan balances include non-accruing loans                of                $6.9 million and $3.8 million and average                loans held-for-sale of $559,000 and $1.4 million for the three months                ended March 31, 2006 and 2005, respectively. |
| (4)    | Net                interest                spread is the arithmatic difference between yield on interest-earning                assets, adjusted to a tax equivalent basis, and                the rate paid on interest-bearing liabilities. On a GAAP basis, the                Company's net interest spread was 2.57% and 2.61% for the                three months ended March 31, 2006 and 2005.                                                                                    |
| (5)    | Net                interest                margin is computed on a GAAP basis by dividing net interest income                by                average interest-earning assets.                                                                                                                                                                                                                                                                                                           |

----

**Rate      Volume Analysis. **

|                                                  |   | Three                  Months Ended March 31, 2006             |   |
|-------------------------------------------------------|--------|----------------------------------------------------------------|--------|
|                                                  |   | Compared                  to Three Months Ended March 31, 2005 |   |
|                                                  |   | Increase                  (Decrease)                           |   | Total |   |
|                                                  |   | Due                  to                                        |   | Increase |   |
|                                                  |   | Rate                                                           |   | Volume |   | (Decrease) |   |
|                                                  |   | (in                  thousands)                                |   |
| Interest                  Income:                     |   |                                                           |   |   |   |   |   |   |   |   |
| Interest                  bearing deposits with banks |   | $                                                              | 96     |   | $ | (217 | ) | $ | (121 | ) |
| Investment                  securities                |   |                                                           | 973    |   |   | 568 |   |   | 1,541 |   |
| Loans                  receivable, net                |   |                                                           | 1,049  |   |   | 6,804 |   |   | 7,853 |   |
| Total                  interest-earning assets        |   |                                                           | 2,118  |   |   | 7,155 |   |   | 9,273 |   |
|                                                  |   |                                                           |   |   |   |   |   |   |   |   |
| Interest                  Expense:                    |   |                                                           |   |   |   |   |   |   |   |   |
| Savings                  deposits                     |   |                                                           | (25    | ) |   | 61 |   |   | 36 |   |
| Demand                  deposits                      |   |                                                           | 187    |   |   | 21 |   |   | 208 |   |
| Money                  market deposits                |   |                                                           | 1,428  |   |   | 394 |   |   | 1,822 |   |
| Certificates                  of deposit              |   |                                                           | 1,188  |   |   | 1,436 |   |   | 2,624 |   |
| Total                  interest-bearing deposits      |   |                                                           | 2,778  |   |   | 1,912 |   |   | 4,690 |   |
|                                                  |   |                                                           |   |   |   |   |   |   |   |   |
| Securities                  sold under agreements     |   |                                                           |   |   |   |   |   |   |   |   |
| to                  repurchase                        |   |                                                           | 409    |   |   | 135 |   |   | 544 |   |
| FHLB                  advances and other borrowings   |   |                                                           | 718    |   |   | 352 |   |   | 1,070 |   |
| Other                  debt                           |   |                                                           | 54     |   |   | 351 |   |   | 405 |   |
| Total                  interest-bearing liabilities   |   |                                                           | 3,959  |   |   | 2,750 |   |   | 6,709 |   |
|                                                  |   |                                                           |   |   |   |   |   |   |   |   |
| (Decrease)                  increase in net           |   |                                                           |   |   |   |   |   |   |   |   |
| interest                  income                      |   | $                                                              | (1,841 | ) | $ | 4,405 |   | $ | 2,564 |   |

**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      1A.** **Risk      Factors**

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

| (a)  | Not                applicable.                                                                                                                                                 |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b)  | Not                applicable.                                                                                                                                                 |
| (c)  | The                following table sets forth information regarding KNBT’s repurchases of its                common stock during the quarter ended March 31, 2006.  |

| 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) |
|----------------------------------------|--------|---------------------------------------------------|--------|---------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------|
|                                   |   |                                              |   |                                                          |   |                                                                                                                                |   | 2,352,783                                                                                                             |
| January                  1 - 31, 2006  |   | 484,200                                           |   | $16.35                                                        |   | 484,200                                                                                                                             |   | 1,868,583                                                                                                             |
| February                  1 - 28, 2006 |   | 166,800                                           |   | $15.94                                                        |   | 166,800                                                                                                                             |   | 1,701,783                                                                                                             |
| March                  1 - 31, 2006    |   | 286,900                                           |   | $16.27                                                        |   | 286,900                                                                                                                             |   | 1,414,883                                                                                                             |
| Total                                  |   | 937,900                                           |   | $16.25                                                        |   | 937,900                                                                                                                             |   | N/A                                                                                                                   |

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)    |  On                October 27, 2004, the Board of Directors authorized the repurchase                of up                to 3,062,486 shares or approximately 10% of its outstanding common                stock.                This repurchase plan was completed during the third quarter of 2005.                On                July 27, 2005, the Board of Directors authorized the repurchase of                an                additional 3,151,297 shares of which 1,736,414 shares had been repurchased                as of March 31, 2006. |

----

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

| (a) | There                were no matters required to be reported under this                item. |
|-----|----------------------------------------------------------------------------------------------|
| (b) | There                were no matters required to be reported under this                item. |

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

|                                |   | For        |   | Withheld |
|-------------------------------------|--------|------------|--------|----------|
|                                |   |       |   |     |
| Michael                J. Gausling  |   | 25,817,592 |   | 580,835  |
| Donna                D. Holton      |   | 25,832,250 |   | 566,177  |
| Richard                Stevens, III |   | 25,823,645 |   | 574,782  |
| Maria                Zumas Thulin   |   | 25,807,637 |   | 590,790  |

| For        |   | Against |   | Abstain |
|------------|--------|---------|--------|---------|
|       |   |    |   |    |
| 26,164,820 |   | 117,160 |   | 116,447 |

**Item      5.** **Other      Information**

| (a)  | There                were no matters required to be reported under this                item. |
|-----------|----------------------------------------------------------------------------------------------|
| (b)       | There                were no matters required to be reported under this                item. |

**Item      6.** **Exhibits**

|   | List                of exhibits:                                                                                                                                                        |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 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. |

----

**SIGNATURES**

|   |                        |   | **KNBT                BANCORP, INC.** |
|--------|-----------------------------|--------|---------------------------------------|
|   |                        |   |                                  |   |
|   |                        |   |                                  |   |
| DATE:  | May                10, 2006 |   | BY:                                   | /S/                Scott V. Fainor |
|   |                        |   |                                  | Scott                V. Fainor |
|   |                        |   |                                  | President                and Chief Executive Officer |
|   |                        |   |                                  |   |
|   |                        |   |                                  |   |
|   |                        |   |                                  |   |
| DATE:  | May                10, 2006 |   | BY:                                   | /S/                Eugene T. Sobol |
|   |                        |   |                                  | Eugene                T. Sobol |
|   |                        |   |                                  | Senior                Executive Vice President, Chief Financial |
|   |                        |   |                                  | Officer                and Treasurer |

----