UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549
                                    FORM 10-Q

                      ------------------------------------
         (Mark One)

     [x]  QUARTERLY  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES
          EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 2004

                                       OR

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

           For the transition period from ____________ to ____________


                          Commission File No. 000-50426
             -----------------------------------------------------


                               KNBT Bancorp, Inc.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

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

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

Registrant's Telephone Number, Including Area Code:  610-861-5000

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

                                 YES X NO _____

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

                                  YES _ NO __X

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common  stock  as of  the  latest  practicable  date:  As of  August  12,  2004,
30,579,727 shares of the Registrant's common stock were issued and outstanding.


<PAGE>


<TABLE>
<CAPTION>

<S>                                                                                    <C>

                       KNBT BANCORP, INC. AND SUBSIDIARIES

                                      INDEX

PART 1  -  FINANCIAL INFORMATION                                                   PAGE NO.

     ITEM 1  -       Financial Statements

         Consolidated Balance Sheets                                                   2
         Consolidated Statements of Income                                             3
         Consolidated Statement of Changes in Shareholders' Equity                     4
         Consolidated Statements of Cash Flows                                         5
         Notes to Consolidated Financial Statements                                    6

     ITEM 2 -        Management's Discussion and Analysis of
                     Financial Condition and Results of Operations                    16

     ITEM 3  -       Quantitative and Qualitative Discussion About
                     Market Risk                                                      28

     ITEM 4 -        Controls and Procedures                                          28

PART II  -  OTHER INFORMATION

     ITEM 1  -       Legal Proceedings                                                29

     ITEM 2  -       Changes in Securities, Use of Proceeds and
                     Issuer Purchases of Equity Securities                            29

     ITEM 3  -       Defaults Upon Senior Securities                                  29

     ITEM 4  -       Submission of Matters to a Vote of Security Holders              30

     ITEM 5  -       Other Information                                                31

     ITEM 6  -       Exhibits and Reports on Form 8-K                                 31

SIGNATURES                                                                            32

CERTIFICATIONS                                                                        33


</TABLE>


<PAGE>


PART 1.  FINANCIAL INFORMATION
ITEM 1.   Financial Statements



<TABLE>
<CAPTION>


KNBT BANCORP, INC. AND SUBSDIARIES
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------------------------------------------

                                                              June 30,     December 31,
(dollars in thousands)                                         2004            2003
-----------------------------------------------------------------------------------------
ASSETS                                                       (unaudited)
<S>                                                        <C>            <C>
      Cash and Due From Banks                              $    43,582    $    53,555
      Interest-Bearing Deposits With Banks                      18,631         85,422
                                                           -----------    -----------
        Cash and Cash Equivalents                               62,213        138,977
      Investment Securities Available-for-Sale                 890,487        734,087
      Investment Securities Held to Maturity
        (Fair Value of $59,862 at June 30, 2004)                59,751           --
      Federal Home Loan Bank of Pittsburgh Stock                23,746         11,543
      Mortgage Loans Held-for-Sale                               1,532          4,677
      Loans                                                    976,070        890,076
      Less:  Allowance for Loan Losses                          (9,519)        (7,910)
                                                           -----------    -----------
        Net Loans                                              966,551        882,166
      Bank Owned Life Insurance                                 59,171         57,849
      Premises and Equipment, Net                               41,310         35,867
      Accrued Interest Receivable                                9,041          7,645
      Goodwill and Other Intangible Assets                      45,991         47,448
      Other Assets                                              24,895         21,714
                                                           -----------    -----------
        TOTAL ASSETS                                       $ 2,184,688    $ 1,941,973
                                                           ===========    ===========
LIABILITIES
      Non-Interest-Bearing Deposits                            124,456        117,270
      Interest-Bearing Deposits                              1,186,526      1,172,140
                                                           -----------    -----------
         Total Deposits                                    $ 1,310,982    $ 1,289,410
      Securities Sold Under Agreements to Repurchase            31,076         24,550
      Advances from the Federal Home Loan Bank                 433,428        207,153
      Guaranteed Preferred Beneficial Interest in the
         Company's Subordinated Debentures                        --           15,000
      Subordinated Debt                                         15,464           --
      Accrued Interest Payable                                   3,826          3,218
      Other Liabilities                                         13,690         13,562
                                                           -----------    -----------
        TOTAL LIABILITIES                                    1,808,466      1,552,893
                                                           -----------    -----------

SHAREHOLDERS' EQUITY
      Preferred Stock, no par
        Authorized:  20,000,000 shares                            --             --
      Common Stock, Par Value $0.01 a share                        297            295
        Authorized:  100,000,000 shares
        Issued and Outstanding:
          30,578,088 shares at June 30, 2004
          30,419,397 shares at Dec. 31, 2003
      Additional Paid-In Capital                               296,094        297,887
      Retained Earnings                                        107,512        100,570
      Unallocated Common Stock Held
        by Employee Stock Ownership Plan                       (15,582)       (15,987)
      Unearned Common Stock Held
        by Management Recognition and Retention Plan           (10,303)          --
      Accumulated Other Comprehensive (Loss) Income             (1,796)         6,315
      TOTAL SHAREHOLDERS' EQUITY                               376,222        389,080
                                                           -----------    -----------

      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY           $ 2,184,688    $ 1,941,973
                                                           ===========    ===========
-------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.

</TABLE>



                                       2
<PAGE>

<TABLE>
<CAPTION>

<S>                                                            <C>         <C>          <C>         <C>

KNBT BANCORP, INC.. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

------------------------------------------------------------------------------------    ---------------------
(Dollars in Thousands, except per share data)                    Three Months Ended        Six Months Ended
                                                                June 30,    June 30,     June 30,    June 30,
                                                                 2004        2003         2004        2003
------------------------------------------------------------------------------------    ---------------------
INTEREST INCOME                                                                 (unaudited)
     Loans, including fees                                     $ 14,479    $  9,526     $ 28,572    $ 19,659
     Investment Securities                                        8,580       4,005       16,696       7,943
     Other Interest                                                 136          47          278         115
                                                               --------    --------     --------    --------
         Total Interest Income                                   23,195      13,578       45,546      27,717
                                                               --------    --------     --------    --------

INTEREST EXPENSE
     Deposits                                                     4,357       3,809        8,892       7,972
     Securities sold under Agreements to Repurchase                  42          28           77          60
     Advances from the Federal Home Loan Bank                     2,740       1,154        4,864       2,262
     Subordinated Debt                                              179        --            360        --
                                                               --------    --------     --------    --------
         Total Interest Expense                                   7,318       4,991       14,193      10,294
                                                               --------    --------     --------    --------

NET INTEREST INCOME                                              15,877       8,587       31,353      17,423
Provision for Loan Losses                                           971         326        2,471         388
                                                               --------    --------     --------    --------

     Net Interest Income After Provision
        for Loan Losses                                          14,906       8,261       28,882      17,035
                                                               --------    --------     --------    --------

NON-INTEREST INCOME
     Trust Income                                                   372        --            725        --
     Brokerage Services Income                                      117         111          277         198
     Deposit Service Charges                                      1,009         933        2,320       1,785
     Bank Owned Life Insurance                                      655         342        1,322         697
     Net Gains on Sales of Investment Securities                     20           2           12           2
     Net Gains on Sales of Residential Mortgage Loans                12         376          171         640
     Net Gains on Sales of Credit Card Loans                       --          --            298        --
     Net Gains on Sale of Assets                                    213        --            213        --
     Net Gains ( Losses) on Sale of Other Real Estate Owned          25         (14)          69         (35)
     Non-Interest Operating Income                                1,015         651        1,998       1,295
                                                               --------    --------     --------    --------

         Total Non-Interest Income                                3,438       2,401        7,405       4,582
                                                               --------    --------     --------    --------

NON-INTEREST EXPENSES
     Compensation and Employee Benefits                           7,309       3,723       14,554       7,458
     Net Occupancy and Equipment Expense                          1,962         842        3,787       1,693
     Professional Fees                                              239         181          811         293
     Advertising                                                    340         209          493         516
     Data Processing                                                478         489        1,009         920
     Impairment of Mortgage Servicing Rights                        154        --            212        --
     Amortization of Intangible Assets                              546        --          1,093        --
     Other Operating Expenses                                     1,989       1,704        3,563       3,174
                                                               --------    --------     --------    --------

         Total Non-Interest Expenses                             13,017       7,148       25,522      14,054
                                                               --------    --------     --------    --------

Income Before Income Taxes                                        5,327       3,514       10,765       7,563
Income Taxes                                                      1,019         888        2,342       1,988
                                                               --------    --------     --------    --------

NET INCOME                                                     $  4,308    $  2,626     $  8,423    $  5,575
                                                               ========    ========     ========    ========

PER SHARE DATA
     Net Income - Basic                                        $   0.15         N/A     $   0.29         N/A
                                                               ========    ========     ========    ========
     Net Income - Diluted                                      $   0.15         N/A     $   0.28         N/A
                                                               ========    ========     ========    ========
     Cash Dividends Per Common Share                           $   0.05         N/A     $   0.05         N/A
                                                               ========    ========     ========    ========
------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


</TABLE>


                                       3
<PAGE>




KNBT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Six Months Ended June 30, 2004 (Unaudited)
(dollars in thousands)

<TABLE>
<CAPTION>

<S>             <C>                      <C>           <C>   <C>        <C>          <C>                        <C>       <C>

                                                                                                             Accumulated
                                                                                                                Other
                                                     Common  Additional           Unallocated    Unearned   Comprehensive
                                          Common     Stock    Paid In   Retained      ESOP     Compensation    Income
                                          Shares     Value    Capital   Earnings     Shares        MRP         (Loss)        Total
-----------------------------------------------------------------------------------------------------------------------------------
Balance January 1, 2004                  29,479,275    $295  $297,887   $ 100,570    $ (15,987)                 $ 6,315   $ 389,080

Comprehensive Income
   Net Income                                                               8,423                                             8,423
   Other Comprehensive Loss Net of Taxes
      and Reclassification Adjustments                                                                           (8,111)     (8,111)
                                                                                                                        -----------
Total Comprehensive Income                                                                                                      312
Cash Dividends                                                             (1,481)                                           (1,481)
Purchase of Stock for Management
   Recognition and Retention Plan (MRRP)                      (13,281)                                                      (13,281)
Unallocated ESOP Shares Committed to
  Employees                                  23,801                (3)                     405                                  402
Shares Issued upon Exercise
   of Stock Options                         158,691       2       832                                                           834
Establishment of a Management
   Recognition and Retention Plan (MRRP)                       10,659                                (10,659)                     -
Amortization of compensation
   related to MRRP                                                                                       356                    356
                                         ------------------------------------------------------------------------------------------
Balance at June 30, 2004                 29,661,767    $297  $296,094   $ 107,512    $ (15,582)    $ (10,303)  $ (1,796)  $ 376,222
                                         ===========================================================================================

------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


</TABLE>



                                       4
<PAGE>


<TABLE>
<CAPTION>

<S>                                                                         <C>           <C>

KNBT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------
                                                                                 Six Months Ended
                                                                        ------------------------------
                                                                             June 30,        June 30,
(Dollars in Thousands)                                                         2004            2003
------------------------------------------------------------------------------------------------------
                                                                                   (unaudited)
OPERATING ACTIVITIES:
  Net Income                                                                $   8,423     $   5,575
  Adjustments to Reconcile Net Income to Net Cash
     Provided by Operating Activities:
      Provision for Loan Losses                                                 2,471           388
      Depreciation and Amortization                                             2,758           795
      Compensation expense stock option plan                                        4          --
      Management Recognition and Retention Plan Expense                           356          --
      Amortization and Accretion of Security Premiums and Discounts, net        1,316         1,374
      (Gain) Loss on Sale of Other Real Estate Owned                              (69)           35
      Net Gain on Sales of Investment Securities                                  (12)           (2)
      Gain on Sale of Credit Card Portfolio                                      (298)         --
      Gain on Sale of Other Assets                                               (213)         --
      Gains on Sale of Mortgage Loans                                            (171)         (640)
      Mortgage Loans Originated for Sale                                      (15,135)       22,069
      Mortgage Loan Sales                                                      16,462       (22,928)
   Changes in Assets and Liabilities:
      Increase in Bank Owned Life Insurance                                    (1,322)         --
      Increase in Accrued Interest Receivable                                  (1,396)         (748)
      Decrease (Increase) in Other Assets                                       1,348          (790)
      Increase in Other Liabilities and Accrued Interest Payable                  732         3,352
                                                                            ---------     ---------
Net Cash Provided by Operating Activities                                      15,254         8,480
                                                                            ---------     ---------

INVESTING ACTIVITIES:
Proceeds from Calls and Maturities of Securities Available-for-Sale            91,115       118,303
Proceeds from Sales of Securities Available-for-Sale                              351         3,050
Purchase of Securities Available-for-Sale                                    (261,466)     (170,716)
Purchase of Securities Held-to-Maturity                                       (59,751)         --
Purchase of Stock of Federal Home Loan Bank of Pittsburgh                     (12,203)         (741)
Redemption of Stock of Federal Home Loan Bank of Pittsburgh                      --             233
Proceeds from the Sale of Credit Card Portfolio                                 1,831          --
Net Increase in Loans                                                         (85,994)      (24,636)
Purchase of Premises and Equipment                                             (7,100)       (6,701)
Proceeds from Sale of Other Assets                                                418          --
Proceeds from Sale of Other Real Estate Owned                                     336           337
                                                                            ---------     ---------
Net Cash Used in Investing Activities                                        (332,463)      (80,871)
                                                                            ---------     ---------

FINANCING ACTIVITIES:
Net Increase in Deposits                                                       21,572        42,853
Net Increase in Repurchase Agreements                                           6,526           362
Proceeds from Long-Term Debt                                                  262,562          --
Repayment of Long-Term Debt                                                   (36,287)       (5,500)
Proceeds from the Exercise of Stock Options                                       834          --
Purchase of Stock for the Management Recognition and Retention Plan           (13,281)         --
Cash Dividends Paid                                                            (1,481)         --
                                                                            ---------     ---------
Net Cash Provided by Financing Activities                                     240,445        37,715
                                                                            ---------     ---------

Increase in Cash and Cash Equivalents                                         (76,764)      (34,676)
Cash and Cash Equivalents, January 1,                                         138,977        86,293
                                                                            ---------     ---------
Cash and Cash Equivalents, June 30,                                         $  62,213     $  51,617
                                                                            =========     =========

Supplemental Disclosure of Cash Flow Information
   Cash Paid During the Period for
      Income Taxes                                                          $      22     $   2,095
                                                                            =========     =========

      Interest                                                              $  13,585     $  10,189
                                                                            =========     =========

Supplemental Disclosure of Non-cash Activities
      Mortgage Loan Securitizations                                         $    --       $  47,251
                                                                            =========     =========

      Reclassification of Loans Receivable to Other Real Estate Owned       $     152     $     337
                                                                            =========     =========
---------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements

</TABLE>



                                       5
<PAGE>


                       KNBT BANCORP, INC. AND SUBSIDIARIES

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
               --------------------------------------------------

                                   (unaudited)


NOTE A  -  BASIS OF PRESENTATION

KNBT Bancorp,  Inc. ("KNBT" or the "Company") is a Pennsylvania  corporation and
registered bank holding  company  organized in 2003.  KNBT's  business  consists
primarily of being the parent holding company for Keystone Nazareth Bank & Trust
Company, a Pennsylvania  chartered savings bank.  Keystone Nazareth Bank & Trust
Company (the "Bank") is the stock-form  successor to Keystone  Savings Bank upon
the mutual-to-stock  conversion of Keystone Savings Bank, which was completed on
October  31,  2003.  Concurrently  with  the  mutual-to-stock  conversion,  KNBT
acquired,  through a merger, First Colonial Group, Inc. ("First Colonial"),  the
parent bank holding  company for Nazareth  National Bank and Trust  Company.  At
June 30, 2004,  the Bank operates 41 banking  offices with  nineteen  located in
Northampton County, Pennsylvania,  sixteen in Lehigh County, Pennsylvania,  five
in Monroe  County,  Pennsylvania  and one in Carbon  County,  Pennsylvania.  The
Bank's office network includes fourteen full service in-store supermarket branch
offices.  The Bank has ATMs in all but one of its  facilities and also maintains
six off-site ATMs.

NOTE B  -  BASIS OF CONSOLIDATION

The accompanying  consolidated  financial statements were prepared in accordance
with  instructions  to Form 10-Q, and therefore,  do not include  information or
footnotes necessary for a complete  presentation of financial position,  results
of operations and cash flows in conformity  with generally  accepted  accounting
principles  ("GAAP").  However, all normal,  recurring  adjustments that, in the
opinion of management,  are necessary for a fair presentation of these financial
statements  have been included.  These  financial  statements  should be read in
conjunction with the audited financial  statements and the notes thereto for the
Company  for the year  ended  December  31,  2003,  which  are  included  in the
Company's  Annual Report on Form 10-K for the year ended  December 31, 2003. The
results for the interim period  presented are not necessarily  indicative of the
results that may be expected for the year ending December 31, 2004.

The financial information presented herein is unaudited; however, in the opinion
of management,  all  adjustments  (which include normal  recurring  adjustments)
necessary to present fairly the unaudited financial  information have been made.
The Company has prepared its accompanying  consolidated  financial statements in
accordance with GAAP as applicable to the banking  industry.  Certain amounts in
prior  years  are   reclassified   for   comparability  to  the  current  year's
presentation.  Such  reclassifications,  when  applicable  have no effect on net
income.  The  consolidated  financial  statements  include  the  balances of the
Company and its wholly owned subsidiaries.  All material  intercompany  balances
and  transactions  have been  eliminated  in  consolidation.  References  to the
Company include the Bank unless otherwise noted.

In preparing the consolidated  financial statements,  the Company is required to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  as of the date of the statement of financial  condition and revenue
and expense for the period. Actual results could differ significantly from those
estimates.  A material estimate that is particularly  susceptible to significant
changes in the near-term is the determination of the allowance for loan losses.

In addition to the Bank,  KNBT's  subsidiaries  include  KNBT Inv. I, founded in
December 2003, and two  subsidiaries,  acquired in October 2003 as a part of the
acquisition of First Colonial,  KNBT Inv. II and First Colonial  Statutory Trust
I. The Bank has two wholly owned subsidiaries KLV, Inc., which is inactive,  and
KLVI,  Inc. The Bank is the majority  owner of Traditions  Settlement  Services,
LLC.


                                       6
<PAGE>



NOTE C  -  CONVERSION AND ACQUISITION

The  mutual-to-stock  conversion  of Keystone  Savings Bank  coincided  with the
completion  of the initial  public  offering  of KNBT  Bancorp,  Inc.  KNBT sold
approximately  20.2 million shares of its common stock for aggregate proceeds of
$202.0  million to subscribers in its offering,  contributed  approximately  1.6
million shares of common stock to the Keystone  Nazareth  Charitable  Foundation
and issued,  as  discussed  below,  approximately  8.5 million  shares to former
shareholders of First Colonial in exchange for their First Colonial shares.

On October 31, 2003, KNBT and the Bank completed mergers with First Colonial and
its subsidiary Nazareth National Bank and Trust Company, respectively. Under the
terms of the merger agreement,  which was the result of arms-length negotiation,
each of the shares of First  Colonial stock was exchanged for 3.7 shares of KNBT
common stock for a total issuance of 8,545,855 shares of common stock.  Based on
management's   assessment  of  the  anticipated  benefits  of  the  acquisition,
including  enhanced  market share and expansion of its banking  franchise,  KNBT
entered into the merger  agreement and proceeded  with its  acquisition of First
Colonial.   First  Colonial  stock  options  outstanding  at  the  date  of  its
acquisition  were converted  into 808,157  options to purchase KNBT common stock
and were fully vested at the time of the merger.  The  transaction was accounted
for under the purchase  method of accounting.  The  acquisition  resulted in the
recording  of  approximately  $45.9  million of  goodwill  and other  intangible
assets. KNBT's financial position and results of operations at and for the three
and six months  ended June 30, 2003 do not include  First  Colonial  because the
acquisition was not completed until October 31, 2003.



                                       7
<PAGE>


NOTE D  -  EARNINGS PER SHARE

The Company  calculates  earnings  per share as provided  by the  provisions  of
Statement of Financial  Accounting  Standards No. 128, "Earnings Per Share (SFAS
128)".  Basic and diluted  earnings per share for the three and six months ended
June 30, 2004 were calculated as follows:

<TABLE>
<CAPTION>

<S>                                                      <C>              <C>           <C>

For the Three Months Ended June 30, 2004

                                                           Net           Average
                                                          Income         Shares       Per Share
                                                        (numerator)    (denominator)    Amount
                                                      ------------------------------------------
                                                            (dollars in thousands)
Basic Earnings Per Share
   Income Available to Common Shareholders               $      4,308     29,232,941    $   0.15

Effect of Dilutive Securities
   Stock Options                                                             412,754
   Management Recognition and Retention Plan                                   9,568
                                                                        ------------    --------
     Total Effect of Dilutive Securities                                     422,322    $     --

Diluted Earnings Per Share
   Income Available to Common Shareholders
   plus Assumed Exercise of Options                      $      4,308     29,655,263    $   0.15
                                                         ============   ============    ========


------------------------------------------------------------------------------------------------

For the Six Months Ended June 30, 2004

                                                           Net           Average
                                                          Income         Shares       Per Share
                                                        (numerator)    (denominator)    Amount
                                                      ------------------------------------------
                                                            (dollars in thousands)
Basic Earnings Per Share
   Income Available to Common Shareholders               $      8,423     29,394,090    $   0.29

Effect of Dilutive Securities
   Stock Options                                                             509,844
   Management Recognition and Retention Plan                                  28,533
                                                                        ------------    --------
     Total Effect of Dilutive Securities                                     538,377    $  (0.01)

Diluted Earnings Per Share
   Income Available to Common Shareholders
   plus Assumed Exercise of Options                      $      8,423     29,932,467    $   0.28
                                                         ============   ============    ========
------------------------------------------------------------------------------------------------

</TABLE>



KNBT had  1,132,000  options  that were  outstanding  for the period May 6, 2004
(date of grant)  through June 30, 2004.  These  options were not included in the
computation  of diluted  earnings  per share for the three months ended June 30,
2004,  because the option  exercise  price was greater  than the average  market
price.

Common  Stock  outstanding  at June  30,  2004  for  basic  earnings  per  share
calculations  does not include 916,321  unallocated  shares held by the Employee
Stock Ownership Plan ("ESOP").

Unearned Management  Recognition and Retention Plan ("MRRP") and MRRP shares not
committed to be released are not considered to be outstanding for basic earnings
per share  calculations.  At June 30, 2004,  unearned shares totaled 638,000 and
uncommitted shares totaled 170,047.



                                       8
<PAGE>



Earnings per shares are presented only for the three and six-month periods ended
June 30, 2004.  KNBT had no shares  outstanding in the first quarter of 2003, as
KNBT did not complete its initial public offering until October 31, 2003.


NOTE E  -  INVESTMENT SECURITIES

The  amortized  cost,  unrealized  gains  and  losses  and fair  value of KNBT's
investment securities  held-to-maturity and  available-for-sale at June 30, 2004
(unaudited) and available-for-sale at December 31, 2003 are as follows:

<TABLE>
<CAPTION>

<S>                                    <C>         <C>         <C>          <C>

                                                   Investment Securities
                                                  June 30, 2004 (unaudited)

--------------------------------------------------------------------------------------
                                                    Gross       Gross
                                       Amortized  unrealized  unrealized      Fair
                                          Cost      gains       losses       Value
                                       --------    --------    --------     --------

Held-to-Maturity:                                       (in thousands)
Obligations of states and political
  subdivisions                         $  5,517    $      7    $    (36)    $  5,488

Mortgaged-backed securities
  FNMA                                   27,394          62          (7)      27,449
  Other CMO's                            26,840          85        --         26,925
                                       --------    --------    --------     --------
   Total mortgage-backed                 54,234         147          (7)      54,374

Total Held-to-Maturity                 $ 59,751    $    154    $    (43)    $ 59,862
                                       ========    ========    ========     ========

------------------------------------------------------------------------------------

Available-for-sale:
U.S. Government and agencies           $143,652    $    629    $   (978)    $143,303
Obligations of states and political
  subdivisions                          106,582       1,944      (1,486)     107,040

Asset-managed funds                       4,904        --           (88)       4,816
Federated Liquid Cash Trust                  35        --          --             35
Mortgaged-backed securities
  GNMA                                    1,796           7         (21)       1,782
  FHLMC                                  95,512       1,155      (1,053)      95,614
  FNMA                                  325,541       1,619      (2,468)     324,692
  Other CMO's                           190,475         183      (2,480)     188,178
                                       --------    --------    --------     --------
   Total mortgage-backed                613,324       2,964      (6,022)     610,266
Corporate and other debt securities      11,045         307        --         11,352
Equity Securities                        13,673         380        (378)      13,675
                                       --------    --------    --------     --------
Total Available-for-Sale               $893,215    $  6,224    $ (8,952)    $890,487
                                       ========    ========    ========     ========

--------------------------------------------------------------------------------------

</TABLE>



                                       9
<PAGE>



<TABLE>
<CAPTION>

<S>                                        <C>         <C>         <C>          <C>

                                                        At December 31, 2003
                                           -----------------------------------------------
                                                          Gross        Gross
                                            Amortized   Unrealized   Unrealized    Fair
                                              Cost        Gains       Losses      Value
                                           -----------------------------------------------
Available-for-Sale:                                        (in thousands)
U. S. Government and agencies              $118,037    $  2,442    $    (99)    $120,380
Obligations of states and political
    subdivisions                            112,228       3,584        (157)     115,655

Mortgage-backed securities
    GNMA                                      2,124          14        --          2,138
    FHLMC                                    83,737       1,016        (768)      83,985
    FNMA                                    224,802       5,597      (2,861)     227,538
    Other CMOs                              150,645         628        (576)     150,697
                                           --------    --------    --------     --------
       Total Mortgage-backed securities     461,308       7,255      (4,205)     464,358
Corporate and other debt securities          15,068         569        --         15,637
ARM fund                                      4,939        --           (59)       4,880
Equity securities                            12,939         272         (34)      13,177
                                           --------    --------    --------     --------
Total Investment Securities                $724,519    $ 14,122    $ (4,554)    $734,087
                                           ========    ========    ========     ========

------------------------------------------------------------------------------------------

</TABLE>


NOTE F  -  STOCK BASED COMPENSATION

Stock Option Plans
------------------

KNBT  maintains  the 2004 Stock Option Plan adopted by its  stockholders  at the
2004 annual meeting, as well as the stock option plans previously  maintained by
First  Colonial  acquired  as a part of the  acquisition  of First  Colonial  in
October 2003.  KNBT's stock option plans are  accounted  for under  Statement of
Financial  Accounting  Standards  No.  123  (SFAS  No.  123),   "Accounting  for
Stock-Based  Compensation." This standard contains a fair value-based method for
valuing stock-based compensation,  which measures compensation cost at the grant
date based on the fair value of the award.  Compensation is then recognized over
the service  period,  which is usually the vesting  period.  Alternatively,  the
standard permits entities to continue  accounting for employee stock options and
similar  instruments under APB Opinion No. 25. Entities that continue to account
for stock  options  using APB  Opinion  No.  25 are  required  to make pro forma
disclosures  of net income and  earnings per share,  as if the fair  value-based
method of accounting  defined in SFAS No. 123 had been applied.  The Company has
elected to account for options,  except as discussed  below,  in accordance with
APB Opinion No. 25.

The Company accounts for stock-based  compensation on awards granted pursuant to
the former First Colonial option plans and to directors,  officers and employees
under KNBT's 2004 Stock Option Plan using the intrinsic value method,  except as
discussed below. Since each option granted had an exercise price per share equal
to the fair market value of one share of the Company's  stock on the date of the
grant, no compensation cost at date of grant has been recognized.



                                       10
<PAGE>


The following table  illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation. The results are not necessarily indicative
of results that may be expected for the year ended December 31, 2004.





                                                       Six Months Ended
                                                        June 30, 2004
---------------------------------------------------------------------------
                                                    (dollars in thousands,
                                                    except per share data)
Net income
As reported                                                   $ 8,423

Add:  Stock-based employee compensation expense
included in reported net income, net
of related tax effets                                               4

Less:  Stock-based compensation cost determined
under fair value method for all awards, net
of related tax effects                                            (92)
                                                        --------------

Proforma                                                      $ 8,335
                                                        ==============

Earnings per share (Diluted)
As reported                                                      0.28
Proforma                                                         0.28

Earnings per share (Basic)
As reported                                                      0.29
Proforma                                                         0.28

---------------------------------------------------------------------------

The weighted  average fair value of each option grant,  of the 2004 Stock Option
Plan, is $4.69.  The fair value of each option grant is estimated on the date of
grant  using  the  Black-Scholes   options  pricing  model  with  the  following
assumptions  used for the Company's  2004 Stock Option Plan:  dividend  yield of
2.0%; expected volatility of 25.0%;  weighted average risk-free interest rate of
3.91%; and weighted average expected life of 6.67 years.

In May 2004,  the  Company  granted  22,500  options to  purchase  shares of the
Company's common stock at $16.50 to KNBT's advisory directors.  The Company will
recognize compensation expense in accordance with the fair value-based method of
accounting  described in SFAS No. 123. The fair value of each option is expensed
over its vesting period.  Compensation  expense of $4,000 was recognized  during
the three and six months  ended June 30,  2004 for  options  granted to advisory
directors.

On March 31, 2004, the Financial  Accounting  Standards  Board ("FASB") issued a
proposed Statement, "Share-Based Payment an Amendment of FASB Statements No. 123
and No 95," that addresses the accounting for share-based  payment  transactions
in which an  enterprise  receives  employee  services in exchange for (a) equity
instruments  of the  enterprise  or (b)  liabilities  that are based on the fair
value of the  enterprise's  equity  instruments  or that may be  settled  by the
issuance of such equity  instruments.  Under the FASB's  proposal,  all forms of
share-based  payments to employees,  including employee stock options,  would be
treated the same as other forms of  compensation by recognizing the related cost
in the income statement. The expense of the award would generally be measured at
fair value at the grant date.  Current  accounting  guidance  requires  that the
expense  relating  to  so-called  fixed  plan  employee  stock  options  only


                                       11
<PAGE>


be  disclosed  in  the  footnotes  to the  financial  statements.  The  proposed
Statement would  eliminate the ability to account for  share-based  compensation
transactions  using  APB  Opinion  No.  25,  "Accounting  for  Stock  Issued  to
Employees". KNBT is currently evaluating this proposed statement and its effects
on its results of operations.

Management Recognition and Retention Plan
-----------------------------------------

The MRRP, which is a stock-based  incentive plan, provides for 808,047 shares of
the  Company's  common  stock,  subject to  adjustment,  which may be granted as
restricted shares to the Company's directors,  advisory directors,  officers and
employees. Shares awarded by the MRRP are earned by the participants at the rate
of 20% per year. On May 6, 2004,  638,000 restricted shares had been awarded and
170,047 are available for future grants.  Compensation  expense for this plan is
being  recorded over the vested period or a 60-month  period and is based on the
market  value of the  Company's  stock as of the date the awards were made.  The
Company,  for the benefit of the MRRP Trust,  purchased  808,047  shares of KNBT
common  stock  at an  average  price  of  $16.44  per  share,  which is shown as
reduction of additional  paid-in-capital.  The remaining unamortized cost of the
MRRP  shares  acquired to date is  reflected  as a  reduction  in  shareholders'
equity. Expense under this plan for the three and six months ended June 30, 2004
was $355,300.

NOTE G - LOANS

A summary of KNBT's loans receivable at June 30, 2004 and December 31, 2003 is
as follows:


--------------------------------------------------------------------------------

                                       June 30,    December 31,
                                        2004          2003
                                     ---------     ---------
                                    (unaudited)
                                           (in thousands)
Real Estate
     Residential                     $ 340,350     $ 346,221
     Construction                       99,182       112,684
     Commercial                        220,647       156,563
                                     ---------     ---------
        Total real estate              660,179       615,468

Consumer loans                         281,427       265,541
Commercial (non real estate)            43,586        38,978
States and political subdivisions        1,302         2,334
                                     ---------     ---------
        Total gross loans              986,494       922,321

Less:
     Mortgage loans held-for-sale       (1,532)       (4,677)
     Loans in process                   (8,561)      (27,099)
     Deferred fees (costs)                (331)         (469)
                                     ---------     ---------
        Total loans                    976,070       890,076

Less:  Allowance for loan losses        (9,519)       (7,910)
                                     ---------     ---------
        Total net loans              $ 966,551     $ 882,166
                                     =========     =========

--------------------------------------------------------------------------------


                                       12
<PAGE>

The following table shows the amounts of KNBT's non-performing  assets,  defined
as  non-accruing  loans,  accruing loans 90 days or more past due and other real
estate owned at June 30, 2004 (unaudited) and December 31, 2003.


<TABLE>
<CAPTION>


<S>                                                            <C>              <C>
---------------------------------------------------------------------------------------

                                                              At June 30,  At December 31,
                                                                 2004           2003
                                                             -----------    --------------
                                                             (unaudited)
                                                                    (in thousands)

Non-accrual loans                                              $ 4,020          $ 1,720
Accruing loans 90 days or more past due                            654              405
                                                               -------          -------
    Total non-performing loans                                   4,674            2,125
                                                               -------          -------

Other real estate owned                                            201              173
                                                               -------          -------
    Total non-performing assets                                $ 4,875          $ 2,298
                                                               =======          =======

---------------------------------------------------------------------------------------

Total non-performing loans as a percentage of loans, net          0.48%            0.24%
Total non-performing loans as a percentage of total assets        0.21%            0.11%
Total non-performing assets as a percentage of total assets       0.22%            0.12%

---------------------------------------------------------------------------------------

Interest on non-accrual loans which would have been
  recorded at the original rate                                $    59          $    50
Interest on non-accrual loans that was reflected in income        --                 60
                                                               -------          -------
      Net (decrease) increase on interest income               $   (59)         $    10
                                                               =======          =======

---------------------------------------------------------------------------------------

</TABLE>

<PAGE>


KNBT's  recorded  investment in impaired loans was $844,000 at June 30, 2004 and
$217,000 at December 31, 2003.  The valuation  allowance for loan losses related
to impaired loans is a part of the allowance for loan losses and was $111,000 at
June 30, 2004 and $33,000 at  December  31,  2003.  The  average  impaired  loan
balance for the six months ended June 30, 2004 was $420,000.  During the quarter
ended June 30,  2004,  we  received  principal  payments  of $11,000 on impaired
loans, which payments are recognized on a cash basis. We recognized no income on
impaired  loans in the  six-month  period  ended  June 30,  2004.  There were no
principal  payments  and no income  recognized  on impaired  loans in the second
quarter of 2003.

The  following  table  shows the  activity in KNBT's  allowance  for loan losses
during the periods indicated:


<TABLE>
<CAPTION>

<S>                                                    <C>                  <C>             <C>                  <C>
-------------------------------------------------------------------------------------------------------------------------
                                                           At or for the                        At or for the
                                                     Three Months Ended June 30,           Six Months Ended June 30,
                                                      2004                 2003            2004                 2003
                                                  -------------        -------------   -------------        -------------
                                                              (unaudited)                         (unaudited)
                                                             (in thousands)                      (in thousands)

Balance, beginning of period                           $ 9,000              $ 2,689         $ 7,910              $ 2,927
Provision charged to operations                            971                  326           2,471                  388
Loans charged-off                                         (566)                (212)         (1,058)                (524)
Recoveries of loans previously charged-off                 114                   11             196                   23
                                                  -------------        -------------   -------------        -------------

Balance, end of period                                 $ 9,519              $ 2,814         $ 9,519              $ 2,814
                                                  =============        =============   =============        =============

-------------------------------------------------------------------------------------------------------------------------

</TABLE>


                                       13
<PAGE>


NOTE H -  RETIREMENT PLANS

1.   Defined Benefit Plan.  KNBT  participates  in a multiple  employer  defined
     benefit pension plan, which covers  substantially  all employees with 1,000
     hours of service  during plan years prior to October 2003. In October 2003,
     KNBT froze the future accrual of benefits  under this plan.  KNBT continues
     to  contribute  to this plan for benefits  accrued  prior to October  2003.
     KNBT's  contribution to this plan in the six months ended June 30, 2004 was
     $131,000.  During the six months  ended June 30, 2003 the  contribution  to
     this plan  amounted  to  $429,000.  KNBT  currently  expects to  contribute
     approximately $88,000 to this plan during the remainder of 2004.

2.   Directors'  Deferred  Plan.  KNBT,  as a part  of  the  merger  with  First
     Colonial,  assumed,  as of October 31, 2003, the First Colonial  directors'
     deferred plan involving  certain former  directors of First  Colonial.  The
     plan requires defined annual payments over a fifteen-year  period beginning
     at age 65. The net  periodic  defined  benefit  expense  for the six months
     ended June 30, 2004 was as follows.


---------------------------------------------------------------------------
                                                      (dollars in thousands)
Service cost                                                     $ -
Interest cost                                                     13
Expected return on plan assets                                     -
Amortization of unrecognized net
   transition asset or obligation                                  -
Amortization of Unrecognized Prior Service Cost                    -
Amortization of Unrecognized Net Gain or Loss                      -
                                                         ------------

Total Net Periodic Pension Cost for the Quarter                 $ 13
                                                         ============

---------------------------------------------------------------------------

     KNBT currently  expects to contribute a total of  approximately  $22,000 to
     this plan in the year ended December 31, 2004. We are currently  evaluating
     the impact on the  Company of the  Pension  Funding  Equity Act  enacted in
     April 2004 on our projected funding.

NOTE I - VARIABLE INTEREST ENTITY

Management has determined that The First Colonial Statutory Trust I ("Trust I"),
which was  created by First  Colonial  and  acquired  by KNBT in the merger with
First   Colonial,   qualifies   as  a  variable   interest   entity  under  FASB
Interpretation 46 ("FIN 46"),  "Consolidation of Variable Interest Entities," as
revised.  Trust I issued mandatorily  redeemable preferred stock in July 2002 to
investors and loaned the proceeds to the Company.  Trust I is included in KNBT's
consolidated  balance sheet and  statements of operations as of and for the year
ended  December 31, 2003.  Subsequent to the issuance of FIN 46 in January 2003,
the FASB issued a revised  interpretation,  FIN 46(R),  the  provisions of which
must be applied to certain variable interest entities by March 31, 2004.

KNBT  adopted  the  provisions  under the  revised  interpretation  in the first
quarter of 2004.  Accordingly,  KNBT no longer  consolidates Trust I as of March
31, 2004. FIN 46(R) precludes  consideration  of the call option embedded in the
preferred  stock when  determining  if KNBT has the right to a majority of Trust
I's expected residual returns. The deconsolidation resulted in the investment in
the common  stock of Trust I to be included in other assets as of March 31, 2004
and  June  30,  2004  and the  corresponding  increase  in  outstanding  debt of
$464,000. In addition,  the income received on KNBT's common stock investment is
included in other  income.  The adoption of FIN 46(R) had no material  impact on
the financial position or results of operation.  The banking regulatory agencies
have issued no guidance that would change the regulatory  capital  treatment for
the  trust-preferred  securities  issued by Trust I based on the adoption of FIN
46(R).  The Federal  Reserve  has issued  proposed  guidance  on the  regulatory
capital treatment for the trust-preferred  securities issued by KNBT as a result
of the adoption of FIN 46(R). The proposed rule


                                       14
<PAGE>


would retain the current maximum percentage of total capital permitted for trust
preferred  securities  at 25%,  but  would  enact  other  changes  to the  rules
governing  trust  preferred  securities  that  affect  their  use as part of the
collection of entities known as  "restricted  core capital  elements".  The rule
would take effect  March 31,  2007;  however,  a  three-year  transition  period
starting now and leading up to that date would allow bank  holding  companies to
continue to count trust  preferred  securities as Tier I Capital after  applying
FIN-46(R).  Management  has  evaluated the effects of the proposed rule and does
not anticipate a material impact on its capital ratios when the proposed rule is
finalized.

NOTE J - NEW ACCOUNTING PRONOUNCEMENTS

The  Securities  and Exchange  Commission  recently  released  Staff  Accounting
Bulletin ("SAB") 105, Application of Accounting  Principles to Loan Commitments.
SAB  105  provides  guidance  regarding  the  measurement  of  loan  commitments
recognized  at  fair  value  under  FASB  Statement  No.  133,  "Accounting  for
Derivative Instruments and Hedging Activities".  SAB 105 also requires companies
to disclose their accounting policy for those loan commitments including methods
and assumptions used to estimate fair value and associated  hedging  strategies.
SAB 105 is effective for all loan commitments  accounted for as derivatives that
are entered into after March 31,  2004.  The adoption of SAB 105 had no material
effect on KNBT's consolidated financial statements.

In November 2003, the Emerging  Issues Task Force (EITF) of the FASB issued EITF
Abstract   03-1,  The  meaning  of   Other-Than-Temporary   Impairment  and  its
Application to Certain Investments (EITF 03-1). The quantitative and qualitative
disclosure  provisions  of EITF  03-1 were  effective  for  years  ending  after
December 15, 2003 and were  included in the  Company's  2003 Form 10-K. In March
2004, the EITF issued a Consensus on Issue 03-1 requiring that the provisions of
EITF 03-1 be applied  for  reporting  periods  beginning  after June 15, 2004 to
investments  accounted for under SFAS No. 115 and 124,  EITF 03-1  establishes a
three-step   approach  for  determining  whether  an  investment  is  considered
impaired,  whether that impairment is other-than-temporary,  and the measurement
of an impairment  loss. The Company is in the process of determining  the impact
that this EITF will have on its financial statements.

NOTE K - RECLASSIFICATIONS

Certain  reclassifications  of prior years' amounts have been made to conform to
the June 30, 2004 presentation.

                                       15
<PAGE>

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



CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

In  addition  to  historical  information,  this  Quarterly  Report on Form 10-Q
includes certain "forward-looking  statements," as defined in the Securities Act
of 1933 and the  Securities  Exchange Act of 1934,  based on current  management
expectations.   KNBT's  actual  results  could  differ   materially  from  those
management  expectations.  Such  forward-looking  statements  include statements
regarding  KNBT's  intentions,  beliefs or current  expectations  as well as the
assumptions  on which such  statements  are based.  Stockholders  and  potential
stockholders  are cautioned  that any such  forward-looking  statements  are not
guarantees of future performance and involve risks and  uncertainties,  and that
actual  results  may  differ   materially   from  those   contemplated  by  such
forward-looking statements. Factors that could cause future results to vary from
current  management  expectations  include,  but are  not  limited  to,  general
economic  conditions,   legislative  and  regulatory  changes,  monetary  fiscal
policies  of  the  federal  government,  changes  in  tax  policies,  rates  and
regulations  of federal,  state and local tax  authorities,  changes in interest
rates,  deposit  flows,  cost of funds,  demand  for loan  products,  demand for
financial services, competition, changes in the quality or composition of KNBT's
loan and investment portfolios,  changes in accounting  principles,  policies or
guidelines  and other  economic,  competitive,  governmental  and  technological
factors affecting KNBT's operations,  markets, products, services and fees. KNBT
undertakes no obligation to update or revise any  forward-looking  statements to
reflect changed  assumptions,  the occurrence of unanticipated events or changes
to future operating results over time.


Critical Accounting Policies, Judgments and Estimates

The accounting and reporting  policies of KNBT conform to accounting  principles
generally  accepted in the United States of America and general practices within
the  financial  services  industry.  The  preparation  of  financial  statements
requires  management to make estimates and  assumptions  that affect the amounts
reported in the financial  statements and the accompanying notes. Actual results
could differ from those estimates.

KNBT considers that the  determination of the allowance for loan losses involves
a higher degree of judgment and complexity than its other significant accounting
policies.  The  allowance  for loan losses is  calculated  with the objective of
maintaining  a reserve  level  believed by management to be sufficient to absorb
all known and inherent losses in the loan portfolio, which are both probable and
reasonably  estimable.   Management's  determination  of  the  adequacy  of  the
allowance  is based on  periodic  evaluations  of the loan  portfolio  and other
relevant  factors.  However,  this  evaluation  is  inherently  subjective as it
requires  material  estimates,   including,   among  others,   expected  default
probabilities,  loss given default,  expected  commitment usage, the amounts and
timing of expected future cash flows on impaired loans,  mortgages,  and general
amounts for historical  loss  experience.  The process also  considers  economic
conditions,  uncertainties  in estimating  losses and inherent risks in the loan
portfolio. All of these factors may be susceptible to significant change. To the
extent actual outcomes differ from management  estimates,  additional provisions
for loan losses may be required that would  adversely  impact earnings in future
periods.

KNBT  recognizes  deferred tax assets and  liabilities for future tax effects of
temporary  differences,  net  operating  loss carry  forwards  and tax  credits.
Deferred tax assets are subject to  management's  judgment  based upon available
evidence  that  future  realization  is more  likely  than  not.  If  management
determines  that KNBT may be unable to realize all or part of net  deferred  tax
assets in the future,  a direct  charge to income tax expense may be required to
reduce  the  recorded  value  of the net  deferred  tax  asset  to the  expected
realizable amount.


                                       16
<PAGE>


Goodwill, under SFAS No. 142, is subject to impairment testing at least annually
to determine whether  write-downs of the recorded  balances are necessary.  KNBT
tests for impairment based on the goodwill  maintained at each defined reporting
unit. A fair value is determined  for each  reporting unit based on at least one
of three  various  market  valuation  methodologies.  If the fair  values of the
reporting units exceed their book values,  no write-down of recorded goodwill is
necessary.  If the fair value of the  reporting  unit is less, an expense may be
required  on KNBT's  books to write  down the  related  goodwill  to the  proper
carrying value. KNBT recorded goodwill and other identifiable  intangible assets
as a result of the acquisition of First Colonial in October 2003.

Comparison of Financial Condition as of June 30, 2004 and December 31, 2003

Assets.  KNBT's  total  assets were $2.2 billion at June 30, 2004 as compared to
$1.9 billion at December 31, 2003, an increase of $242.7  million or 12.5%.  The
increase in assets was  principally  due to increases in investment  securities,
loans receivable, Federal Home Loan Bank stock and premises and equipment. These
increases were offset in part by a reduction in cash and cash equivalents and an
increase in the allowance for loan losses.  During the first six months of 2004,
KNBT's investment securities increased $216.2 million or 29.4% to $950.2 million
at June 30, 2004  compared to $734.1  million at December 31, 2003.  The primary
source of funds used for the increase in investment  securities  were additional
advances  from the Federal Home Loan Bank of Pittsburgh  ("FHLB").  KNBT's total
loans  receivable  were $976.1  million at June 30,  2004,  an increase of $86.0
million or 9.7% over the December 31, 2003 total of $890.1  million.  The growth
in loans  receivable was principally due to a $64.1 million or 40.9% increase in
commercial real estate loans, a $4.6 million or 11.8% in other  commercial loans
and a $15.9 million or 6.0%  increase in consumer  loans.  These loan  increases
were  offset  in  part  by a $5.9  million  or 1.7%  decrease  in  single-family
residential  mortgage loans. The decrease in single-family  residential mortgage
loans was a result of a $16.5  million sale of these loans during the six- month
period  ended June 30,  2004,  customer  repayments  and a reduced  level of new
mortgage loans because of rising  interest rates.  Construction  loans decreased
$13.5  million or 12.0% during the six months  ended June 30,  2004.  We believe
that rising  interest  rates  reduced  the level of  activity in this  category.
During the first  quarter  of 2004,  KNBT sold $1.8  million of its credit  card
portfolio  for a gain of $298,000.  These credit card loans were sold because of
the relatively low volume and high  administrative  costs. KNBT will continue to
offer  credit  cards to its  customers  through a third party  provider and will
receive fee income through this  arrangement.  KNBT's investment in the stock of
the FHLB was $23.7  million at June 30,  2004 as  compared  to $11.5  million at
December  31,  2003.  This was an  increase  of $12.2  million or 105.7% for the
period.  Net premises and equipment  increased by $5.4 million or 15.2% to $41.3
million  at June 30,  2004  compared  to $35.9  million  at  December  31,  2003
principally  as a result of the purchase of new computer  equipment and the cost
of renovations to the Company's  headquarters and operations buildings.  At June
30, 2004, such renovations  were  substantially  complete.  KNBT's cash and cash
equivalents were $62.2 million at June 30, 2004 as compared to $139.0 million at
December 31, 2003.  This decrease of $76.8 million or 55.2% was  principally the
result of the  investment  of these  funds in  investment  securities  and loans
receivable.


                                       17
<PAGE>


Allowance  for Loan Losses.  KNBT's  allowance  for loan losses  increased  $1.6
million or 20.3%  during the first six months of 2004.  The  allowance  for loan
losses was $9.5 million and $7.9 million at June 30, 2004 and December 31, 2003,
respectively.  The  increase  in the  allowance  for loan  losses was based upon
management's analysis of the inherent loss in the loan portfolio.  The allowance
for loan  losses  is  established  through a  provision  for loan  losses.  KNBT
maintains  the  allowance  at a  level  believed  to the  best  of  management's
knowledge, to cover all known and inherent losses in the portfolio that are both
probable and reasonable to estimate at each reporting date.  Management  reviews
all loans that are delinquent 60 days or more on a monthly  basis,  and performs
regular  reviews of the  allowance  no less than  quarterly in order to identify
those inherent losses and assess the overall collection probability for the loan
portfolio.  Such reviews  consist of a  quantitative  analysis by loan category,
using  historical loss experience and  consideration  of a series of qualitative
loss  factors.  KNBT's  evaluation  process  includes,  among other  things,  an
analysis  of  delinquency  trends,  non-performing  loan  trends,  the  level of
charge-offs and recoveries,  prior loss experience, total loans outstanding, the
volume of loan originations,  the type, size and geographic concentration of its
loans,  the value of collateral  securing the loan,  the  borrower's  ability to
repay  and  repayment  performance,  the  number of loans  requiring  heightened
management  oversight,  local economic  conditions and industry  experience.  In
addition, in establishing the allowance for loan losses,  management considers a
ten point  internal  rating system for all loans  originated  by the  Commercial
Lending department. At the time of origination, each commercial loan is assigned
a rating based on the assumed risk  elements of the loan.  Such risk ratings are
periodically  reviewed  by  management  and revised as deemed  appropriate.  The
establishment  of the  allowance  for loan losses is  significantly  affected by
management's judgment and uncertainties and there is a likelihood that different
amounts would be reported under  different  conditions or  assumptions.  Various
regulatory  agencies,   as  an  integral  part  of  their  examination  process,
periodically  review KNBT's allowance for loan losses. Such agencies may require
the Company to make  additional  provisions for estimated loan losses based upon
judgments  different from those of management.  KNBT's allowance for loan losses
was 0.98% and 0.89% of total loans  receivable at June 30, 2004 and December 31,
2003,  respectively.  See  "Comparison  of Operating  Results for the six months
ended June 30, 2004 and 2003 - Provision for Loan Losses."

Liabilities. KNBT's total liabilities amounted to $1.8 billion at June 30, 2004,
an increase of $255.6 million or 16.5% compared to total liabilities at December
31, 2003 of $1.6 billion.  The increase in liabilities  was principally due to a
$226.3  million or 109.2%  increase in  advances  from the FHLB during the first
half of 2004.  These advances  totaled $433.4 million and $207.2 million at June
30, 2004 and December 31, 2003,  respectively.  KNBT's deposits  increased $21.6
million or 1.7%  during the  six-month  period  ended  June 30,  2004.  Deposits
totaled $1.3  billion at both June 30, 2004 and December 31, 2003.  At March 31,
2004, KNBT adopted FIN 46(R) and, as a result, KNBT deconsolidated  Trust I. The
$15.5  million of debentures  issued by KNBT to Trust I were  reflected as other
debt in the June 30, 2004 consolidated  balance sheet.  KNBT's investment in the
Trust in the amount of $464,000 was included in other assets in the consolidated
balance  sheet of KNBT at June 30,  2004.  At  December  31,  2003 Trust I was a
consolidated  subsidiary  and was included in  liabilities  in the  consolidated
balance  sheet as  "Guaranteed  preferred  beneficial  interest in the Company's
subordinated  debentures"  and the common  stock and the  debentures  of Trust I
along with the  related  income  effects  were  eliminated  in the  consolidated
financial statements. The debentures issued to Trust I, less the common stock of
Trust I, or $15.0 million at June 30, 2004 continue to qualify as Tier I capital
under current guidance issued by the Federal Reserve Board.

Shareholders'  Equity.  Shareholders'  equity totaled $376.2 million at June 30,
2004  compared  to $389.1  million at  December  31,  2003,  a decrease of $12.9
million or 3.3%. The decrease in shareholders' equity was principally the result
of the purchase of 808,047 shares of the Company's stock to fund the shareholder
approved 2004  Management  Recognition  and Retention  Plan (MRRP) at an average
cost of $16.44 per share. KNBT also declared and paid its first cash dividend of
$.05 per share  during the  quarter  ended June 30,  2004.  This  resulted  in a
decrease in retained  earnings of $1.5 million.  Another factor  contributing to
the  decrease  in  shareholders'  equity was a  decrease  in  accumulated  other
comprehensive  income of $8.1 million relating to a decrease in unrealized gains
on investment securities  available-for-sale.  We had $8.4 million in net income
for the six months ended June 30, 2004 that  partially  offset the impact of the
funding of the MRRP.



                                       18
<PAGE>


KNBT committed to release 23,801 shares of the Company's common stock during the
six months ended June 30, 2004  pursuant to the ESOP for a value of $402,000 and
issued  158,691 common shares upon the exercise of stock options for proceeds of
$834,000.  Regulatory  capital ratios for KNBT and the Bank at June 30, 2004 and
December 31, 2003 are shown in the following tables.


<TABLE>
<CAPTION>

<S>                                         <C>             <C>           <C>             <C>

CAPITAL RATIOS

-------------------------------------------------------------------------------------------------------------------------------
                                                                        Required                      To Be Well Capitalized
                                                                       For Capital                    Under Prompt Corrective
                                                  Actual               Adequacy Purposes              Action Provisions
                                       ----------------------------  ---------------------------  -----------------------------
(Dollars in Thousands)
  At June 30, 2004                         Amount        Ratio          Amount        Ratio           Amount         Ratio
-------------------------------------------------------------------------------------------------------------------------------

Total Capital
(To Risk-Weighted Assets)
    Company                                 $ 357,950       29.96%        $ 95,587        8.00%              N/A            N/A
    Bank                                    $ 253,473       21.41%        $ 94,702        8.00%        $ 118,377         10.00%

Tier 1 Capital
(To Risk-Weighted Assets)
    Company                                 $ 348,431       29.16%        $ 47,794        4.00%              N/A            N/A
    Bank                                    $ 243,954       20.61%        $ 47,351        4.00%         $ 71,026          6.00%

Tier 1 Capital
(To Average Assets, Leverage)
    Company                                 $ 348,431       17.21%        $ 81,005        4.00%              N/A            N/A
    Bank                                    $ 243,954       12.54%        $ 77,829        4.00%         $ 97,287          5.00%

-------------------------------------------------------------------------------------------------------------------------------
                                                                       Required                      To Be Well Capitalized
                                                                      For Capital                    Under Prompt Corrective
                                                  Actual              Adequacy Purposes               Action Provisions
                                       ----------------------------  ---------------------------  -----------------------------
(Dollars in Thousands)
  At December 31, 2003                     Amount        Ratio          Amount        Ratio           Amount         Ratio
-------------------------------------------------------------------------------------------------------------------------------

Total Capital
(To Risk-Weighted Assets)
    Company                                 $ 359,522       33.24%        $ 86,535        8.00%              N/A            N/A
    Bank                                    $ 258,441       24.01%        $ 86,123        8.00%        $ 107,654         10.00%

Tier 1 Capital
(To Risk-Weighted Assets)
    Company                                 $ 351,612       32.51%        $ 43,268        4.00%              N/A            N/A
    Bank                                    $ 250,499       23.27%        $ 43,062        4.00%         $ 64,593          6.00%

Tier 1 Capital
(To Average Assets, Leverage)
    Company                                 $ 351,612       19.39%        $ 72,525        4.00%              N/A            N/A
    Bank                                    $ 250,499       13.42%        $ 74,646        4.00%         $ 93,307          5.00%

-------------------------------------------------------------------------------------------------------------------------------

</TABLE>



                                       19
<PAGE>


Liquidity.  KNBT's primary  sources of funds are from deposits,  amortization of
loans,  loan prepayments and the maturity of loans,  mortgage-backed  securities
and other investments, and other funds provided from operations. While scheduled
payments  from the  amortization  of loans and  mortgage-backed  securities  and
maturing  investment  securities  are relatively  predictable  sources of funds,
deposit flows and loan prepayments can be greatly influenced by general interest
rates, economic conditions and competition.  KNBT also maintains excess funds in
short-term,  interest-bearing  assets that provide additional liquidity and also
utilizes outside  borrowings,  primarily from the FHLB, as an additional funding
source. KNBT uses its liquidity to fund existing and future loan commitments, to
fund maturing certificates of deposit and demand deposit withdrawals,  to invest
in other interest-earning assets, and to meet operating expenses. In addition to
cash flow from loan and  securities  payments  and  prepayments  as well as from
sales of available-for-sale  securities and mortgage loans, KNBT has significant
borrowing  capacity  available to fund liquidity  needs.  KNBT has increased its
utilization of FHLB  borrowings in recent years as a cost efficient  addition to
deposits as a source of funds. The average balance of FHLB borrowings was $288.5
million and $104.6  million for the six months  ended June 30, 2004 and June 30,
2003, respectively.

"GAP" Analysis.  The following  interest rate sensitivity "GAP" table sets forth
the amounts of KNBT's interest-earning  assets and interest-bearing  liabilities
outstanding  at  June  30,  2004,   which  are  expected,   based  upon  certain
assumptions,  to  reprice or mature in each of the future  time  periods  shown.
Except as stated below, the amount of assets and liabilities shown which reprice
or mature during a particular  period were  determined  in  accordance  with the
earlier  of term to  repricing  or the  contractual  maturity  of the  asset  or
liability.  The table sets forth an approximation of the projected  repricing of
assets and liabilities at June 30, 2004, on the basis of contractual maturities,
anticipated  prepayments,  and scheduled rate  adjustments  within a three-month
period and  subsequent  selected time  intervals.  The loan amounts in the table
reflect principal  balances expected to be repaid and/or repriced as a result of
contractual  amortization and anticipated  prepayments of adjustable-rate  loans
and  fixed-rate  loans,  and as a result  of  contractual  rate  adjustments  on
adjustable-rate   loans.   Annual  prepayment  rates  for   adjustable-rate  and
fixed-rate  single-family  and multi-family  mortgage loans are assumed to range
from 14% to 32%. The annual  prepayment rate for  mortgage-backed  securities is
assumed  to range  from  14% to 32%.  Money  market  deposit  accounts,  savings
accounts and interest-bearing checking accounts are assumed to have annual rates
of withdrawal, or "decay rates," of 38%, 8% and 3%, respectively.


                                       20
<PAGE>


<TABLE>
<CAPTION>

<S>                                 <C>                 <C>           <C>            <C>            <C>            <C>       <C>

INTEREST RATE SENSITIVITY "GAP"

------------------------------------------------------------------------------------------------------------------------------------
                                                                         At June 30, 2004
------------------------------------------------------------------------------------------------------------------------------------
                                                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 $   18,631  $     --      $     --        $     --       $     --       $     --       $   18,631
    Loans receivable (2)              162,921      42,349        77,276         209,147        244,777        250,024        986,494
    Investment securities, debt        27,979      36,856        56,042         288,609        215,766        311,311        936,563
    Investment securities, equity        --          --            --              --             --           37,421         37,421
                                   ----------  ----------    ----------      ----------     ----------     ----------     ----------
       Total interest-earning
          assets                   $  209,531  $   79,205    $  133,318      $  497,756     $  460,543     $  598,756     $1,979,109
                                   ==========  ==========    ==========      ==========     ==========     ==========     ==========
Cumulative total interest-
    earning assets                 $  209,531  $  288,736    $  422,054      $  919,810     $1,380,353     $1,979,109     $1,979,109
                                   ==========  ==========    ==========      ==========     ==========     ==========     ==========
Interest-bearing
    liabilities:
    Savings deposits               $     --    $    8,910    $    8,910      $   11,880     $   14,850     $  178,204     $  222,754
    Interest-bearing
       checking deposits                 --          --            --             6,860          3,430        161,216        171,506
    Money market deposits              33,843      39,049        26,033          34,711         17,355        109,338        260,329
    Certificates of deposit            94,515      70,662       141,323         179,640         25,486         20,311        531,937
    FHLB advances and other
       borrowings                      42,708      15,632        38,314         153,858        137,059         92,397        479,968
                                   ----------  ----------    ----------      ----------     ----------     ----------     ----------
       Total interest-bearing
          liabilities              $  171,066  $  134,253    $  214,580      $  386,949     $  198,180     $  561,466     $1,666,494
                                   ==========  ==========    ==========      ==========     ==========     ==========     ==========
Cumulative total interest-
    bearing liabilities            $  171,066  $  305,319    $  519,899      $  906,848     $1,105,028     $1,666,494     $1,666,494
                                   ==========  ==========    ==========      ==========     ==========     ==========     ==========
Interest-earning assets
    less interest-bearing
    liabilities                    $   38,465  $  (55,048)   $  (81,262)     $  110,807     $  262,363     $   37,290     $  312,615
                                   ==========  ==========    ==========      ==========     ==========     ==========     ==========
Cumulative interest-rate
    sensitivity gap (3)            $   38,465  $  (16,583)   $  (97,845)     $   12,962     $  275,325     $  312,615
                                   ==========  ==========    ==========      ==========     ==========     ==========
Cumulative interest-rate
    gap as a percentage
    of total assets at
    June 30, 2004                        1.76%      -0.76%        -4.48%           0.59%         12.60%         14.31%
Cumulative interest
    earning assets as a
    percentage of
    cumulative interest-
    bearing liabilities at
    June 30, 2004                      122.49%      94.57%        81.18%         101.43%        124.92%        118.76%

------------------------------------------------------------------------------------------------------------------------------------

(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 and contractual maturity.

(2)     For purposes of the "GAP" analysis, loans receivable includes
        non-performing loans, gross of the allowance for loan losses,
        undisbursed loan funds and deferred loan fees.

(3)     Interest-rate sensitivity "GAP" represents the difference between net
        interest-earning assets and interest-bearing liabilities.

</TABLE>



                                       21
<PAGE>





Comparison of Operating Results for the Three and Six Months Ended June 30, 2004
and 2003

General.  KNBT's net income increased by $1.7 million,  or 64.1% to $4.3 million
for the three months ended June 30, 2004  compared to $2.6 million for the three
months ended June 30, 2003.  For the six months ended June 30, 2004,  net income
increased  $2.8 million,  or 51.1% to $8.4 million  compared to $5.6 million for
the same period in 2003. Net income  increased  during 2004 due to higher levels
of net interest  income and  non-interest  income.  This  increase was partially
offset by increases in  non-interest  expenses and the  provision for loan loss.
The increase in net interest income primarily reflects increased interest income
in the 2004  periods due to a  significant  increase  in the average  balance of
interest-earning assets as a result of the use of $196.2 million in net proceeds
received  in  the  Company's  initial  public  offering  in  October  2003,  the
acquisition of First Colonial,  also in October 2003 and the investment of funds
received  from  Federal  Home Loan  Bank  advances  as part of the our  leverage
strategy. At the time of acquisition,  First Colonial had total assets of $666.9
million.  Including $272.3 million in net loans and $271.8 million in investment
securities, and total deposits of $512.1 million.

Net Interest Income.  KNBT`s net interest income for the three months ended June
30, 2004 was $15.9 million,  a $7.3 million,  or 84.9% increase when compared to
$8.6 million for the three months ended June 30, 2003.  For the six months ended
June 30, 2004, net interest  income was $31.4 million,  a $13.9 million or 80.0%
increase  when compared to $17.4 million for the six months ended June 30, 2003.
The major factors in the increases in both interest income and interest  expense
were  the   increased   average   balances   of   interest-earning   assets  and
interest-bearing liabilities due to the acquisition of First Colonial on October
31, 2003, the use of proceeds from KNBT's initial  public  offering,  on October
31, 2003 and an increase in FHLB  advances  which were used to fund the increase
in the investment portfolio. KNBT's average interest earning assets totaled $1.9
billion for the three months  ended June 30, 2004 as compared to $973.9  million
for the three months ended June 30, 2003.  Average  interest  earning assets for
the six-month period ended June 30, 2004 were $1.8 billion as compared to $966.2
million for the six-month  period ended June 30, 2003. Total interest income was
$23.2 million for the second  quarter of 2004, a $9.6 million or 70.8%  increase
when  compared to the $13.6 million in total  interest  income during the second
quarter of 2003. For the six months ended June 30, 2004,  total interest  income
was $45.5  million,  a $17.8 million or 64.3% increase when compared to the same
period in 2003. Average interest- bearing  liabilities were $1.6 billion for the
three  months  ended June 2004  compared to $876.0  million for the three months
ended June 30, 2004.  For the six months  ended June 30, 2004 and 2003,  average
interest-bearing liabilities were $1.5 billion and $865.9 million, respectively.
Total  interest  expense was $7.3 million for the second quarter of 2004, a $2.3
million or 46.6%  increase when  compared to the $5.0 million in total  interest
expense  during the second  quarter of 2003.  For the six months  ended June 30,
2004, total interest expense was $14.2 million, a $3.9 million or 37.9% increase
when  compared  to the same  period in 2003.  Our net  interest  margin on a tax
equivalent basis was 3.56% and 3.62% for the three and six months, respectively,
ended June 30, 2004  compared  to 3.66% and 3.73% for the prior year  comparable
periods.  Net interest spread on a tax equivalent  basis was 3.26% and 3.31% for
the three and six months,  respectively,  ended June 30,  2004 versus  3.43% and
3.49% for the prior  year  comparable  period.  The lower  interest  margin  and
interest  spread in the 2004  periods  was the result of the decline of interest
rates during the past year with the average yield earned on our interest-earning
assets  declining  to a greater  degree  than the  average  interest we paid our
interest-bearing liabilities.

Average  Balances,  Net Interest  Income,  and Yields Earned and Rates Paid. The
following  table  shows for the periods  indicated  the total  dollar  amount of
interest from average  interest-earning assets and the resulting yields, as well
as the interest expense on average interest-bearing liabilities,  expressed both
in  dollars  and  rates,  and  the  net  interest  margin.  The  table  includes
information  adjusted to a tax  equivalent  basis for the  Company's  tax-exempt
investment  securities.  The  presentation  on a  tax-equivalent  basis  may  be
considered to include  non-GAAP  information.  Management  believes that it is a
common industry  practice in the banking industry to present such information on
a fully tax equivalent basis and that such information is useful to investors in
making  peer  comparisons.   The  tax-exempt  adjustments  and  comparable  GAAP
information also is included in the table.



                                       22
<PAGE>


<TABLE>
<CAPTION>

<S>                                            <C>              <C>          <C>              <C>              <C>         <C>

------------------------------------------------------------------------------------------------------------------------------------
Consolidated Comparative Statement Analysis
(Dollars in Thousands) For the Three Months Ended June 30,
------------------------------------------------------------------------------------------------------------------------------------
                                                               2004                                           2003
                                            --------------------------------------------  ------------------------------------------
                                                           Interest         Average                       Interest        Average
                                              Average       Income/         Yield/          Average       Income/         Yield/
                                              Balance       Expense          Rate           Balance       Expense          Rate
                                            --------------------------------------------  ------------------------------------------
Assets
Interest-Earning Assets
  Interest-Bearing Balances with Banks         $ 31,649         $ 136        1.72%            $ 45,347         $ 110       0.97%
  Investment Securities
     Taxable (1)                                768,551         7,393        3.85%             335,393         3,334       3.98%
     Non-Taxable (2)                            110,002         1,798        6.54%              52,389           921       7.03%
   Loans Receivable (2) (3)                     951,846        14,488        6.09%             543,492         9,526       7.01%
   Allowance for Loan Losses                     (9,124)            -           -               (2,672)            -           -
                                            ------------  ------------                    ------------- -------------
   Net Loans                                    942,722        14,730        6.25%             540,820         9,526       7.05%
                                            ------------  ------------                    ------------- -------------
     Total Interest-Earning Assets            1,852,924        23,815        5.14%             973,949        13,891       5.71%
   Non-Interest-Earning Assets                  217,296             -           -               68,686             -           -
                                            ------------  ------------                    ------------- -------------
        Total Assets,
          Interest Income                   $ 2,070,220        23,815                      $ 1,042,635        13,891
                                            ------------  ------------                    ------------- -------------

Liabilities
Interest-Bearing Liabilities
   Interest-Bearing Deposits
      Demand Deposits                         $ 171,152          $ 68        0.16%            $ 91,649          $ 67       0.29%
      Money Market Deposits                     254,073           570        0.90%             160,210           528       1.32%
      Savings Deposits                          226,276           273        0.48%             125,966           289       0.92%
      Certificates of Deposit                   533,766         3,446        2.58%             383,109         2,925       3.05%
                                            ------------  ------------                    ------------- -------------
        Total interest-Bearing Deposits       1,185,267         4,357        1.47%             760,934         3,809       2.00%

   Securities Sold Under Agreements
      to Repurchase                              24,127            42        0.70%               8,813            27       1.23%
   FHLB Advances                                328,562         2,740        3.34%             106,290         1,155       4.35%
   Other Debt                                    15,464           179        4.63%                   -             -
                                            ------------  ------------                    ------------- -------------
        Total Interest-Bearing Liabilities    1,553,420         7,318        1.88%             876,037         4,991       2.28%

Non-Interest-Bearing Liabilities
   Non-Interest-Bearing Deposits                117,570             -           -               40,538             -           -
   Other Liabilities                             12,964             -           -                9,045             -           -
                                            ------------  ------------                    ------------- -------------
      Total Liabilities                       1,683,954         7,318                          925,620         4,991
   Shareholders' Equity /
      Retained Earnings                         386,266             -           -              117,015             -           -
                                            ------------  ------------                    ------------- -------------
   Total Liabilities and Shareholders'
      Equity, Interest Expense              $ 2,070,220         7,318                      $ 1,042,635         4,991
                                            ------------  ------------                    ------------- -------------

Net Interest Income Tax Equivalent Basis                     $ 16,497                                        $ 8,900
                                                          ------------                                  -------------
   Net Interest Spread (4)
     Tax Equivalent Basis                                                    3.26%                                         3.43%
   Effect of Interest-Free Sources
      Used to Fund Earning Assets                                            0.30%                                         0.23%
                                                                        ----------------                              --------------

Net Interest Marginn (5)
     Tax Equivalent Basis                                                    3.56%                                         3.66%
                                                                        ----------------                              --------------

Tax-Exempt Adjustment                                             620                                            313
                                                          ------------                                  -------------

Net Interest Income and Margin                               $ 15,877        3.43%                           $ 8,587       3.53%
                                                          ============  ================                ============= ==============

Average Interest-Earning Assets
      to Average Interest-Bearing Liabilities                               119.28%                                       111.18%
                                                                        ----------------                              --------------

------------------------------------------------------------------------------------------------------------------------------------

     (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  $620,000  and  $313,000 for the three months ended June 30,
          2004 and June 30, 2003, respectively.  The effective tax rate used for
          the taxable equivalent adjustment was 34%.
     (3)  Loan fees of $741,000 and $507,000 for the three months ended June 30,
          2004 and June 30, 2003, respectively, are included in interest income.
          Average loan balances  include  non-accruing  loans of $3,351,000  and
          $1,117,000   and  average  loans   held-for-sale   of  $3,735,000  and
          $4,076,000 for the three months ended June 30, 2004 and June 30, 2003,
          respectively.
     (4)  Net interest  spread is the  arithmatic  difference  between  yield on
          interest-earning   assets  and  the  rate  paid  on   interest-bearing
          liabilities.
     (5)  Net interest  margin is computed by dividing  net  interest  income by
          average interest-earning assets.

</TABLE>



                                       23
<PAGE>



<TABLE>
<CAPTION>

<S>                                                 <C>              <C>        <C>               <C>              <C>       <C>

------------------------------------------------------------------------------------------------------------------------------------
Consolidated Comparative Statement Analysis
(Dollars in Thousands) For the Six Months Ended June 30,
------------------------------------------------------------------------------------------------------------------------------------
                                                                 2004                                          2003
                                                 ----------------------------------------     --------------------------------------
                                                                Interest       Average                        Interest      Average
                                                   Average       Income/       Yield/           Average       Income/        Yield/
                                                   Balance       Expense        Rate            Balance       Expense         Rate
                                                 ----------------------------------------     --------------------------------------
Assets
Interest-Earning Assets
  Interest-Bearing Balances with Banks              $ 34,020         $ 278      1.63%             $ 50,062         $ 243     0.97%
  Investment Securities
     Taxable (1)                                     735,237        14,264      3.88%              308,092         6,632     4.31%
     Non-Taxable (2)                                 111,793         3,685      6.59%               49,890         1,792     7.19%
   Loans Receivable (2) (3)                          931,605        28,591      6.14%              560,913        19,659     7.01%
   Allowance for Loan Losses                          (8,601)            -         -                (2,784)            -        -
                                                 ------------  ------------                   ------------- -------------
   Net Loans                                         923,004        28,833      6.20%              558,129        19,659     7.04%
                                                 ------------  ------------                   ------------- -------------
     Total Interest-Earning Assets                 1,804,054        46,818      5.19%              966,173        28,326     5.86%
   Non-Interest-Earning Assets                       220,661             -         -                59,460             -        -
                                                 ------------  ------------                   ------------- -------------
        Total Assets,
          Interest Income                        $ 2,024,715        46,818                     $ 1,025,633        28,326
                                                 ------------  ------------                   ------------- -------------
Liabilities
Interest-Bearing Liabilities
   Interest-Bearing Deposits
      Demand Deposits                              $ 174,626         $ 132      0.15%             $ 88,725         $ 179     0.40%
      Money Market Deposits                          246,224         1,112      0.90%              156,724         1,154     1.47%
      Savings Deposits                               225,155           536      0.48%              122,285           595     0.97%
      Certificates of Deposit                        535,151         7,112      2.66%              385,181         6,044     3.14%
                                                 ------------  ------------                   ------------- -------------
        Total interest-Bearing Deposits            1,181,156         8,892      1.51%              752,915         7,972     2.12%

   Securities Sold Under Agreements
      to Repurchase                                   23,712            77      0.65%                8,346            59     1.41%
   FHLB Advances                                     288,516         4,864      3.37%              104,626         2,263     4.33%
   Other Debt                                         15,464           360      4.66%                    -             -
                                                 ------------  ------------                   ------------- -------------
        Total Interest-Bearing Liabilities         1,508,848        14,193      1.88%              865,887        10,294     2.38%

Non-Interest-Bearing Liabilities
   Non-Interest-Bearing Deposits                     116,748             -         -                37,477             -        -
   Other Liabilities                                   9,287             -         -                 7,352             -        -
                                                 ------------  ------------                   ------------- -------------
      Total Liabilities                            1,634,883        14,193                         910,716        10,294
   Shareholders' Equity /
      Retained Earnings                              389,832             -         -               114,917             -        -
                                                 ------------  ------------                   ------------- -------------
   Total Liabilities and Shareholders'
      Equity, Interest Expense                   $ 2,024,715        14,193                     $ 1,025,633        10,294
                                                 ------------  ------------                   ------------- -------------

Net Interest Income Tax Equivalent Basis                          $ 32,625                                      $ 18,032
                                                               ------------                                 -------------
   Net Interest Spread (4)
     Tax Equivalent Basis                                                       3.31%                                        3.49%
   Effect of Interest-Free Sources
      Used to Fund Earning Assets                                               3.10%                                        2.50%
                                                                             ------------                                 ----------

Net Interest Margin (5)
     Tax Equivalent Basis                                                       3.62%                                        3.73%
                                                                             ------------                                 ----------

Tax-Exempt Adjustment                                                1,272                                           609
                                                               ------------                                 -------------

Net Interest Income and Margin                                    $ 31,353      3.48%                           $ 17,423     3.61%
                                                               ============  ============                   ============= ==========

Average Interest-Earning Assets
      to Average Interest-Bearing Liabilities                                  119.56%                                      111.58%
                                                                             ------------                                 ----------

------------------------------------------------------------------------------------------------------------------------------------

     (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  $1,272,000  and  $609,000 for the six months ended June 30,
          2004 and June 30, 2003, respectively.  The effective tax rate used for
          the taxable equivalent adjustment was 34%.
     (3)  Loan fees of $465,000  and  $890,000 for the six months ended June 30,
          2004 and June 30, 2003, respectively, are included in interest income.
          Average loan balances  include  non-accruing  loans of $4,020,000  and
          $1,588,000   and  average  loans   held-for-sale   of  $3,544,000  and
          $3,451,000  for the six months  ended June 30, 2004 and June 30, 2003,
          respectively.
     (4)  Net interest  spread is the  arithmatic  difference  between  yield on
          interest-earning   assets  and  the  rate  paid  on   interest-bearing
          liabilities.
     (5)  Net interest  margin is computed by dividing  net  interest  income by
          average interest-earning assets.


</TABLE>


                                       24
<PAGE>



Rate Volume  Analysis.  The following table shows the extent to which changes in
interest   rates  and   changes  in  volume  of   interest-earning   assets  and
interest-bearing  liabilities affected KNBT's interest income and expense during
the  periods  indicated.  For  each  category  of  interest-earning  assets  and
interest-bearing liabilities, information is provided on changes attributable to
(1)  changes  in rate,  which is the  change in rate  multiplied  by prior  year
volume,  and (2) changes in volume,  which is the change in volume multiplied by
prior year rate. The combined effect of changes in both rate and volume has been
allocated  proportionately  to the  change  due to rate  and the  change  due to
volume.


<TABLE>
<CAPTION>

<S>                                            <C>            <C>              <C>           <C>             <C>              <C>

                                                                        RATE / VOLUME ANALYSIS
                                                                        (Dollars in Thousands)
                                                                              (Unaudited)


                                           Three Months Ended June 30, 2004 vs.            Six Months Ended June 30, 2004 vs.
                                             Three Months Ended June 30, 2003                Six Months Ended June 30, 2003
                                       -----------------------------------------    ---------------------------------------------
                                        Increase (Decrease)                         Increase (Decrease)
                                               Due to                                      Due to
                                       -------------------------------              -------------------------------
                                                                          Total                                          Total
                                                                        Increase                                       Increase
(Fully Taxable Equivalent)                 Rate           Volume       (Decrease)         Rate           Volume       (Decrease)
                                       -----------------------------  --------------  -----------------------------  --------------
Interest Income:
   Cash and cash equivalents                   $ 59           $ (33)           $ 26          $ 113           $ (78)           $ 35
   Investment Securities                       (449)          5,385           4,936         (1,983)         11,508           9,525
   Loans receivable, net                     (2,117)          7,079           4,962         (3,920)         12,852           8,932
                                       -------------   -------------  --------------  -------------   -------------  --------------
      Total interest-earning assets          (2,507)         12,431           9,924         (5,790)         24,282          18,492

Interest expense:
   Demand deposits                              (57)             58               1           (220)            173             (47)
   Money market deposits                       (267)            309              42           (701)            659             (42)
   Savings & club deposits                     (246)            230             (16)          (560)            501             (59)
   Certificates of deposit                     (629)          1,150             521         (1,285)          2,353           1,068
                                       -------------   -------------  --------------  -------------   -------------  --------------
      Total interest-bearing deposits        (1,199)          1,747             548         (2,766)          3,686             920

Securities sold under agreements
   to repurchase                                (32)             47              15            (91)            109              18
FHLB advances and other borrowings             (830)          2,415           1,585         (1,376)          3,977           2,601
Other debt                                        -             179             179              -             360             360
                                       -------------   -------------  --------------  -------------   -------------  --------------
Total interest-bearing liabilities           (2,061)          4,388           2,327         (4,233)          8,132           3,899

Increase in Net Interest Income              $ (446)        $ 8,043         $ 7,597       $ (1,557)        $16,150        $ 14,593
                                       -------------   -------------  --------------  -------------   -------------  --------------


</TABLE>


                                       25
<PAGE>

Provision for Loan Losses. KNBT made a provision for loan losses of $971,000 for
the three  months  ended June 30, 2004 as  compared  to  $326,000  for the three
months  ended  June 30,  2003.  For the six  months  ended  June 30,  2004,  our
provision  for loan losses was $2.5 million as compared to $388,000 for the same
period in 2003. A primary factor in the increased  provision over the comparable
2003 periods was the  acquisition  of $271.2 million of net loans from the First
Colonial acquisition of which commercial loans totaled $61.5 million. Commercial
loans and commercial real estate loans are deemed to have higher levels of known
and inherent losses than one-four family  residential  loans due to, among other
things,  the nature of the collateral and the dependency on economic  conditions
for successful  completion or operation of the project. KNBT has made provisions
in order to maintain the  allowance for loan losses at a level,  we believe,  to
the best of our knowledge, covers all known and inherent losses in the portfolio
that are both  probable  and  reasonable  to estimate at this time.  For the six
months ended June 30, 2004,  KNBT  charged-off,  net of recoveries,  $862,000 as
compared  to  $501,000  for the same  period  in  2003.  Most  charge-offs  were
primarily related to consumer loans.  Non-performing loans totaled $4.7 million,
$2.1 million and $1.6  million at June 30, 2004,  December 31, 2003 and June 30,
2003,  respectively.  The  increase  in  non-performing  loans was due to a $1.6
million  increase in  non-performing  single-family  residential  loans over the
six-month  period  ending  June 30,  2004.  Due to the  nature of  single-family
residential  loans, KNBT is well secured and does not anticipate the increase in
this category's  non-performing levels to generate above normal charge-offs.  At
June  30,  2004,  KNBT's  allowance  for  loan  losses  amounted  to  204.6%  of
non-performing  loans as compared to 372.2% at December 31, 2003.  Allowance for
loan losses as a percentage  of net loans was .98% and .89% at June 30, 2004 and
December 31, 2003, respectively.

Non-Interest Income.  KNBT's non-interest income increased $1.0 million or 43.2%
to $3.4  million  for the three  months  ended June 30, 2004 as compared to $2.4
million for the three months ended June 30, 2003.  For the six months ended June
30, 2004,  non-interest  income  totaled $7.4  million,  a $2.8 million or 61.6%
increase  over the same  period in 2003.  The  increase  during the three  month
period ended June 30, 2004 over the comparable  period in 2003 was primarily the
result of trust  revenues from the  Company's  Trust  Department,  acquired from
First Colonial, of $372,000; a $313,000 increase in revenue from Bank Owned Life
Insurance  (BOLI)  income,  due to the purchase of an additional  $30 million of
insurance  in  November  2003,  and a  $213,000  gain on the sale of our  former
operations  center. The increase for the six month period ended June 30, of 2004
over the  comparable  period in 2003 was the  result of an  increase  in deposit
service charges of $535,000 due primarily to a larger number of deposit accounts
added as a result of the First Colonial  acquisition,  a gain of $298,000 on the
sale of our credit card portfolio,  Trust  Department  revenue of $725,000 and a
$625,000  increase in revenue from BOLI. These increases in non-interest  income
were offset in part by a $364,000 and $469,000  decrease in gains on the sale of
residential  mortgages for the three and six-month  periods ended June 30, 2004,
respectively.

Non-Interest Expense.  Non-interest expense increased by $5.9 million, or 82.1%,
to $13.0  million for the three  months  ended June 30, 2004 as compared to $7.1
million for the three months ended June 30, 2003.  For the six months ended June
30, 2004, non-interest expense totaled $25.5 million, an $11.5 million, or 81.6%
increase  compared to $14.1 million  during the same period in 2003. The reasons
for the increase in non-interest expense in 2004 were similar for both the three
and six month  periods.  The primary reason was higher salary and benefit costs,
higher occupancy and equipment  expenses,  amortization of intangible assets and
increases in other expenses due principally to the acquisition of First Colonial
in the fourth quarter of 2003.  Compensation and benefit expenses increased $3.6
million or 96.3% and $7.1  million or 95.2% for the three and six month  periods
of 2004 and 2003, respectively.  At June 30, 2004, we had 570 employees compared
to 343 at June 30, 2003.  The  increase in employees  was due to the addition of
245 employees as a result of the First Colonial  acquisition.  Net occupancy and
equipment  costs increased $1.1 million or 133.0% and $2.1 million or 123.7% for
the three and six month periods of 2004 and 2003.  The  principal  factor in the
higher occupancy expenses was the acquisition of First Colonial,  which added 20
offices.  Since June 30, 2003, we have opened two branch  offices and acquired a
47,000 square foot operations center.  Extensive building renovation occurred at
the newly acquired operations center, KNBT's headquarters and also at the former
operations  center of First


                                       26
<PAGE>



Colonial.  The  amortization of intangible  assets related to the First Colonial
acquisition  amounted to $546,000 and $1.1  million for the three and  six-month
periods  ended June 30,  2004,  respectively.  All other  non-interest  expenses
including professional fees, advertising,  data processing,  supplies,  postage,
telephone and other  miscellaneous  aggregated $6.0 million and $4.9 million for
the  first  six  months of 2004 and 2003,  respectively.  The  increase  of $1.2
million or 24.2% was due to merger and systems  integration  following the First
Colonial acquisition.

Income Tax  Expense.  KNBT's  income tax expense  increased  by $131,000 to $1.0
million and by $354,000 to $2.3  million for the three and six months ended June
30, 2004 and June 30, 2003  respectively.  The effective income tax rate for the
three and six  months  ended  June 30,  2004 was 19% and 22%,  respectively,  as
compared to 25% and 26% for the three and six month periods ended June 30, 2003.
The  principal  factors  in the  lower  effective  tax  rate  was the  increased
investment in tax-free securities and in BOLI.




                                       27
<PAGE>

ITEM 3.      Quantitative and Qualitative Discussion About Market Risk

For a discussion  of KNBT's asset and liability  management  policies as well as
the methods used to manage its exposure to the risk of loss from adverse changes
in market prices and interest rates see "Management's Discussion and Analysis of
Financial  Condition  and Results of  Operations"  - "Market Risk" and "Interest
Rate  Sensitivity"  in KNBT's  annual  report  on Form  10-K for the year  ended
December 31, 2003. There have been no material  changes in KNBT's  assessment of
its sensitivity to market risk since December 31, 2003.

ITEM 4.      Controls and Procedures

Management evaluated,  with the participation of the Chief Executive Officer and
Chief  Financial  Officer,  the  effectiveness  of the  disclosure  controls and
procedures  (as defined in Rules  13a-15(e)  or 15d-15(e)  under the  Securities
Exchanges  Act of 1934) at June 30, 2004.  Based on such  evaluation,  the Chief
Executive Officer and Chief Financial Officer have concluded that the disclosure
controls and procedures are designed to ensure that  information  required to be
disclosed in the reports that the Company files or submits under the  Securities
Exchange Act of 1934 is recorded, processed,  summarized and reported within the
same time period  specified in the SEC's rules and regulations and are operating
in an effective manner.

During the quarter ended March 31, 2004,  the Company  converted  certain of its
operating and accounting  functions to a new data  processing  system.  This has
resulted  in  certain  changes  in the  information  gathering,  collection  and
reporting  functions  during the quarter  ended June 30,  2004.  The Company has
adjusted the internal controls  appropriately and none of these changes,  or any
other changes during the quarter,  have materially  affected,  or are reasonably
likely to materially affect,  the internal control over financial  reporting (as
defined in Rules 13a - 15(f) or 15(d) - 15(f) under the Securities  Exchange Act
of 1934).


                                       28
<PAGE>

PART II  -      OTHER INFORMATION

ITEM 1.         Legal Proceedings

                There are no matters required to be reported under this item.

ITEM 2.         Changes in Securities, Use of Proceeds and Issuer Purchases of
                Equity Securities

               (e)  The following table sets forth  information  with respect to
                    purchases  made by or on behalf of the  Company of shares of
                    common stock of the Company during the indicated periods.

<TABLE>
<CAPTION>


                                                               Total Number of
                                                             Shares Purchased as     Maximum Number of Shares
                           Total Number        Average         Part of Publicly     that May Yet Be Purchased
                             of Shares        Price Paid      Announced Plans or        Under the Plans or
         Period              Purchased        per Share         Programs                    Programs(1)
-----------------         ------------        ----------    ------------------     ---------------------------

<S>                           <C>
April 1-30, 2004                   --             $  --               --                          --

May 1-31, 2004                808,047             16.44          808,047
                                                                                                  (1)

June 1-30, 2004                    --                --               --                          --
                              -------              ----          -------                    --------

     Total                    808,047            $16.44          808,047                          --
                              =======             =====          =======                    ========
------------

 (1)   The Company commenced purchasing a total of 808,047 shares in May 2004 on
       behalf of the Company's 2004 Recognition and Retention Plan Trust that
       was publicly announced on May 6, 2004. A total of 808,047 shares were
       purchased in open-market transactions in May 2004, all of which are held
       in the recognition plan trust until earned by participants.


</TABLE>



ITEM 3.         Defaults Upon Senior Securities

                There are no matters required to be reported under this item.



                                       29
<PAGE>


ITEM 4.         Submission of Matters to a Vote of Security Holders


On May 6, 2004,  the Company held its first Annual  Meeting of  Stockholders  to
obtain  approval for four proxy  proposals  submitted on behalf of the Company's
Board of Directors.  Stockholders of record as of March 19, 2004, received proxy
materials and were considered eligible to vote on these proposals. The following
is a brief summary of each proposal and the result of the vote.


1.   The  following  directors  were elected by the  requisite  plurality of the
     votes cast to serve on the Company's Board of Directors:



                                                     For              Withheld
                                                  ----------          --------
        Scott V. Fainor                           26,106,699          814,057
        Christian F. Martin, IV                   26,546,248          374,508
        R. Chadwick Paul, Jr.                     26,107,238          813,518
        Kenneth R. Smith                          26,474,979          445,777
        R. Charles Stehly                         26,110,267          810,489

<TABLE>
<CAPTION>

<C>              <C>                                 <C>              <C>             <C>              <C>

                                                        For            Against        Abstain      Broker Non-Votes
                                                     ----------       ----------     ----------    -----------------

2.  To adopt the 2004 Stock Option Plan              16,051,001       3,529,692       265,414          7,074,649

3.  To adopt the 2004 Recognition and Retention
    Plan and Trust Agreement                         15,695,527       3,897,582       252,998          7,074,649

4. To ratify the appointment of Grant
   Thornton LLP as independent auditors for
   the year ended December 31, 2004                  26,640,294         179,352       101,110              N/A


</TABLE>


                                       30
<PAGE>



ITEM 5.  Other Information

         There are no matters required to be reported under this item.

ITEM 6.  Exhibits and Reports on Form 8-K

         (a) 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.

         (b) Reports on Form 8-K

               On April 30, 2004, the Registrant filed a Current Report
               on Form 8-K, dated April 30, 2004, providing under Item
               12, information with respect to the results of operations
               and financial condition at and the for the quarter ended
               March 31, 2003.

               On May 6, 2004, the Registrant filed a Current Report on
               Form 8-K, dated May 6, 2004, providing under Item 9, a
               slide presentation shown at the Company's Annual Meeting
               on May 6, 2004.

               On May 6, 2004, the Registrant filed a Current Report on
               Form 8-K, dated May 6, 2004, providing under Item 9, the
               results of the voting at the Annual Meeting of
               Stockholders.



                                       31
<PAGE>



                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.


                                                KNBT BANCORP, INC.


DATE:    August 16, 2004              BY: /S/  Scott V. Fainor
       -----------------------            --------------------------------------
                                               Scott V. Fainor
                                               President and Chief Executive
Officer



DATE:    August 16, 2004              BY: /S/  Eugene T. Sobol
       -----------------------            --------------------------------------
                                               Eugene T. Sobol
                                               Senior Executive Vice President,
                                               Chief Operating Officer and
                                               Chief Financial Officer




                                       32