**=======================================**




**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 THESECURITIES
                EXCHANGE ACT OF 1934 for the quarterly period ended**June
                30, 2006**OR[
                ]
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES
                EXCHANGE ACT OF 1934




For
      the
      transition period from ____________ to ____________





**Commission
                File No. 000-50426**





KNBT Logo(Exact
                Name of Registrant as Specified in its
                Charter)





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





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





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
            
            NO





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
                accelerated filer
            
            Accelerated
                filer
            
            Non-accelerated
                filer





Indicate
      by check mark whether the registrant is a shell company as defined in Rule
      12b-2
      of the Exchange Act.


YES
            
            NO





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
      7, 2006, 27,724,906 shares of the Registrant’s common stock were
      outstanding.





**KNBT
      BANCORP, INC. AND SUBSIDIARIES**




**INDEX**




Page


**PART
                I - FINANCIAL INFORMATION**Item
                1.
            Financial
                Statements
            1Consolidated
                Balance Sheets
            1Consolidated
                Statements of
                Income
            2Consolidated
                Statement of Changes in Shareholders’
                Equity
            3Consolidated
                Statements of Cash
                Flows
            4Notes
                to Interim Consolidated Financial
                Statements
            5Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition
                andResults
                of Operations
            16Item
                3.
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            29Item
                4.
            Controls
                and Procedures
            29**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            29Item
                1A.
            Risk
                Factors
            29Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            30Item
                3.
            Defaults
                Upon Senior Securities
            30Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            30Item
                5.
            Other
                Information
            30Item
                6.
            Exhibits
            30**Signatures**
            
            31**Certifications**
            
            32







**PART
      I.**





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





**KNBT
      BANCORP, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


June
                30,
            
            December
                31,2006
            
            2005(unaudited)(in
                thousands)ASSETSCash
                and due from banks
            
            $
            47,086
            
            $
            47,989Interest-bearing
                deposits with banks
            
            
            49,992
            
            
            58,270Federal
                Funds sold
            
            
            35,000
            
            
            -Cash
                and cash equivalents
            
            
            132,078
            
            
            106,259Investment
                securities available-for-sale
            
            
            944,627
            
            
            1,119,273Investment
                securities held to maturity(Fair
                value of $42,181 at June 30, 2006 and $47,074 at December 31, 2005)
            
            
            43,000
            
            
            47,368Federal
                Home Loan Bank of Pittsburgh stock
            
            
            35,273
            
            
            40,239Mortgage
                loans held-for-sale
            
            
            20
            
            
            556Loans
            
            
            1,540,447
            
            
            1,481,728Less:
                Allowance for loan losses
            
            
            (16,600
            )
            
            (15,964
            )Net
                loans
            
            
            1,523,847
            
            
            1,465,764Bank
                owned life insurance
            
            
            76,642
            
            
            75,087Premises
                and equipment, net
            
            
            50,549
            
            
            47,104Accrued
                interest receivable
            
            
            9,609
            
            
            11,252Goodwill
            
            
            107,608
            
            
            101,496Other
                intangible assets, net
            
            
            29,838
            
            
            30,840Other
                assets
            
            
            41,394
            
            
            36,572TOTAL
                ASSETS
            
            $
            2,994,485
            
            $
            3,081,810LIABILITIESNon-interest-bearing
                deposits
            
            $
            205,847
            
            $
            194,549Interest-bearing
                deposits
            
            
            1,706,950
            
            
            1,657,702Total
                deposits
            
            
            1,912,797
            
            
            1,852,251Securities
                sold under agreements to repurchase
            
            
            54,861
            
            
            76,932Advances
                from the Federal Home Loan Bank
            
            
            613,487
            
            
            705,125Subordinated
                debt
            
            
            38,642
            
            
            38,872Accrued
                interest payable
            
            
            11,840
            
            
            9,659Other
                liabilities
            
            
            21,035
            
            
            22,419TOTAL
                LIABILITIES
            
            
            2,652,662
            
            
            2,705,258SHAREHOLDERS'
                EQUITYPreferred
                stock, par value $0.01 per shareAuthorized:
                20,000,000 shares, none issued
            
            
            -
            
            
            -Common
                stock, par value $0.01 a share
            
            
            330
            
            
            330Authorized:
                100,000,000 sharesIssued:33,944,287
                shares at June 30, 200633,925,529
                shares at December 31, 2005Additional
                paid-in capital
            
            
            336,722
            
            
            342,144Retained
                earnings
            
            
            134,601
            
            
            127,471Treasury
                stock, at cost; 5,932,100 and 3,861,000 shares atJune
                30, 2006 and December 31, 2005, respectively
            
            
            (95,559
            )
            
            (61,999
            )Unallocated
                common stock heldby
                Employee Stock Ownership Plan
            
            
            (13,961
            )
            
            (14,366
            )Unearned
                common stock heldby
                Management Recognition and Retention Plan
            
            
            -
            
            
            (7,130
            )Accumulated
                other comprehensive loss, net
            
            
            (20,310
            )
            
            (9,898
            )TOTAL
                SHAREHOLDERS' EQUITY
            
            
            341,823
            
            
            376,552TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY
            
            $
            2,994,485
            
            $
            3,081,810See
                accompanying notes to consolidated financial statements.


1


**KNBT
      BANCORP, INC. AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF INCOME**


Three
                  Months Ended June 30,
              
              Six
                  Months Ended June 30,2006
              
              2005
              
              2006
              
              2005(in
                  thousands, except per share data)(unaudited)INTEREST
                  INCOMELoans,
                  including fees
              
              $
              23,494
              
              $
              18,162
              
              $
              46,092
              
              $
              33,054Investment
                  securities
              
              
              12,925
              
              
              12,907
              
              
              26,372
              
              
              24,635Other
                  interest
              
              
              243
              
              
              542
              
              
              468
              
              
              888Total
                  interest income
              
              
              36,662
              
              
              31,611
              
              
              72,932
              
              
              58,577INTEREST
                  EXPENSEDeposits
              
              
              10,749
              
              
              6,349
              
              
              20,538
              
              
              11,448Securities
                  sold under agreements to repurchase
              
              
              434
              
              
              308
              
              
              1,028
              
              
              359Advances
                  from the FHLB
              
              
              6,268
              
              
              6,461
              
              
              12,782
              
              
              11,905Subordinated
                  debt
              
              
              690
              
              
              433
              
              
              1,328
              
              
              666Total
                  interest expense
              
              
              18,141
              
              
              13,551
              
              
              35,676
              
              
              24,378NET
                  INTEREST INCOME
              
              
              18,521
              
              
              18,060
              
              
              37,256
              
              
              34,199Provision
                  for loan losses
              
              
              1,200
              
              
              534
              
              
              1,950
              
              
              1,268Net
                  interest income after provisionfor
                  loan losses
              
              
              17,321
              
              
              17,526
              
              
              35,306
              
              
              32,931NON-INTEREST
                  INCOMETrust
                  revenue
              
              
              1,331
              
              
              420
              
              
              2,394
              
              
              818Brokerage
                  services revenue
              
              
              971
              
              
              568
              
              
              1,828
              
              
              1,116Benefit
                  services revenue
              
              
              1,653
              
              
              1,518
              
              
              2,930
              
              
              1,518Insurance
                  services revenue
              
              
              742
              
              
              315
              
              
              1,390
              
              
              315Deposit
                  service charges
              
              
              1,481
              
              
              1,321
              
              
              2,881
              
              
              2,426Lending
                  fees
              
              
              255
              
              
              299
              
              
              526
              
              
              403Check
                  card/ATM card fees
              
              
              859
              
              
              679
              
              
              1,645
              
              
              1,227Bank
                  owned life insurance
              
              
              781
              
              
              712
              
              
              1,555
              
              
              1,364Net
                  gains on sales of investment securities
              
              
              1,597
              
              
              24
              
              
              1,735
              
              
              456Net
                  gains on sales of residential mortgage loans
              
              
              7
              
              
              263
              
              
              55
              
              
              481Net
                  losses on sale of assets
              
              
              -
              
              
              (61
              )
              
              (1
              )
              
              (72
              )Net
                  gains (losses) on sale of other real estate owned
              
              
              3
              
              
              3
              
              
              (3
              )
              
              (14
              )Net
                  gains on extinguishment of debt
              
              
              -
              
              
              -
              
              
              1,179
              
              
              -Other
                  non-interest operating income
              
              
              769
              
              
              495
              
              
              1,415
              
              
              960Total
                  non-interest income
              
              
              10,449
              
              
              6,556
              
              
              19,529
              
              
              10,998NON-INTEREST
                  EXPENSESCompensation
                  and employee benefits
              
              
              11,147
              
              
              9,479
              
              
              21,821
              
              
              17,327Net
                  occupancy and equipment expense
              
              
              2,964
              
              
              2,476
              
              
              6,227
              
              
              4,589Professional
                  fees
              
              
              893
              
              
              756
              
              
              1,654
              
              
              1,183Advertising
              
              
              460
              
              
              249
              
              
              873
              
              
              471Data
                  processing
              
              
              653
              
              
              482
              
              
              1,265
              
              
              915Telecommunication
              
              
              362
              
              
              243
              
              
              706
              
              
              421Office
                  supplies and postage
              
              
              584
              
              
              547
              
              
              1,171
              
              
              975Amortization
                  of mortgage servicing rights
              
              
              87
              
              
              114
              
              
              187
              
              
              198Amortization
                  of intangible assets
              
              
              925
              
              
              782
              
              
              1,818
              
              
              1,329Other
                  operating expenses
              
              
              1,325
              
              
              1,842
              
              
              3,191
              
              
              2,987Total
                  non-interest expenses
              
              
              19,400
              
              
              16,970
              
              
              38,913
              
              
              30,395Income
                  before income taxes
              
              
              8,370
              
              
              7,112
              
              
              15,922
              
              
              13,534Income
                  taxes
              
              
              2,464
              
              
              1,874
              
              
              4,536
              
              
              3,466NET
                  INCOME
              
              $
              5,906
              
              $
              5,238
              
              $
              11,386
              
              $
              10,068PER
                  SHARE DATANet
                  income - basic
              
              $
              0.22
              
              $
              0.18
              
              $
              0.41
              
              $
              0.35Net
                  income - diluted
              
              $
              0.21
              
              $
              0.18
              
              $
              0.40
              
              $
              0.35Cash
                  dividends per common share
              
              $
              0.08
              
              $
              0.06
              
              $
              0.15
              
              $
              0.11See
                  accompanying notes to consolidated financial statements.


2


**KNBT
      BANCORP, INC. AND SUBSIDIARIES**


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


Six
                  Months Ended June 30, 2006 (unaudited)(in
                  thousands, except per share data)Common
              
              Treasury
              
              
              
              
              
              
              
              
              
              
              
              AccumulatedStock
              
              Stock
              
              Common
              
              Add'l
              
              
              
              Unallocated
              
              Unearned
              
              OtherNumber
                  of
              
              Number
                  of
              
              Stock
              
              Paid
                  In
              
              Retained
              
              ESOP
              
              MRRP
              
              Comprehensive
              
              TreasuryShares
              
              Shares
              
              Value
              
              Capital
              
              Earnings
              
              Shares
              
              Shares
              
              Loss
              
              Stock
              
              TotalBalance
                  January 1, 2006
              
              
              33,080,609
              
              
              (3,861,000
              )
              $
              330
              
              $
              342,144
              
              $
              127,471
              
              
              ($14,366
              )
              
              ($7,130
              )
              
              ($9,898
              )
              
              ($61,999
              )
              $
              376,552Comprehensive
                  incomeNet
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              11,386
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              11,386Other
                  comprehensive loss net of taxesand
                  reclassification adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (10,412
              )
              
              
              
              
              (10,412
              )Total
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              974Reclass
                  of unearned compensation uponadoption
                  of SFAS 123(R)
              
              
              
              
              
              
              
              
              
              
              
              (7,130
              )
              
              
              
              
              
              
              
              7,130Cash
                  dividends paid
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,256
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,256
              )Unallocated
                  ESOP shares committed to employees
              
              
              23,801
              
              
              
              
              
              
              
              
              (34
              )
              
              
              
              
              405
              
              
              
              
              
              
              
              
              
              
              
              371Shares
                  issued upon exercise of stock options
              
              
              18,758
              
              
              
              
              
              
              
              
              106
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              106Purchases
                  of treasury stock
              
              
              
              
              
              (2,071,100
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (33,560
              )
              
              (33,560
              )Share-based
                  compensation expense
              
              
              
              
              
              
              
              
              
              
              
              568
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              568Amortization
                  of compensation related to MRRP
              
              
              
              
              
              
              
              
              
              
              
              1,068
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,068Balance
                  at June 30, 2006
              
              
              33,123,168
              
              
              (5,932,100
              )
              $
              330
              
              $
              336,722
              
              $
              134,601
              
              
              ($13,961
              )
              
              -
              
              
              ($20,310
              )
              
              ($95,559
              )
              $
              341,823Six
                  Months Ended June 30, 2005 (unaudited)(in
                  thousands, except per share data)Common
                Stock
                Number
                  of
                Shares
              
              
              Treasury
                Stock
                Number
                  of
                Shares
              
              
              Common
                Stock
                Value
              
              
              Add'l
                Paid-In
                Capital
              
              
              Retained
                Earnings
              
              
              Unallocated
                ESOP
                Shares
              
              
              Unearned
                MRRP
                Shares
              
              
              Accumulated
                Other
                Comprehensive
                Income
                  (Loss)
              
              
              Treasury
                Stock
              
              
              TotalBalance
                  January 1, 2005
              
              
              29,764,319
              
              
              (650,000
              )
              $
              297
              
              $
              296,403
              
              $
              113,748
              
              
              ($15,176
              )
              
              ($9,107
              )
              $
              2,368
              
              
              ($11,179
              )
              $
              377,354Comprehensive
                  incomeNet
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              10,068
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              10,068Other
                  comprehensive loss net of taxesand
                  reclassification adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (708
              )
              
              
              
              
              (708
              )Total
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,360Cash
                  dividends paid
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,185
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,185
              )Unallocated
                  ESOP shares
              
              
              23,801
              
              
              
              
              
              
              
              
              (49
              )
              
              
              
              
              405
              
              
              
              
              
              
              
              
              
              
              
              356Shares
                  issued upon exercise of stock options
              
              
              17,449
              
              
              
              
              
              
              
              
              86
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              86Acquisition
                  of Northeast Pennsylvania Financial Corp.
              
              
              3,226,731
              
              
              
              
              
              33
              
              
              45,432
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              45,465Purchases
                  of treasury stock
              
              
              
              
              
              (1,714,600
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (26,079
              )
              
              (26,079
              )Amortization
                  of compensation of advisory directors options
              
              
              
              
              
              
              
              
              
              
              
              9
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9MRRP
                  share awards
              
              
              
              
              
              
              
              
              
              
              
              151
              
              
              
              
              
              
              
              
              -151
              
              
              
              
              
              
              
              
              -Amortization
                  of compensation related to MRRP
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,060
              
              
              
              
              
              
              
              
              1,060Balance
                  at June 30, 2005
              
              
              33,032,300
              
              
              (2,364,600
              )
              $
              330
              
              $
              342,032
              
              $
              120,631
              
              
              ($14,771
              )
              
              ($8,198
              )
              $
              1,660
              
              
              ($37,258
              )
              $
              404,426


3


**KNBT
      BANCORP, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (unaudited)** ****


Six
                  months ended June 30,2006
              
              2005(in
                  thousands)**OPERATING
                  ACTIVITIES:**Net
                  income
              
              $
              11,386
              
              $
              10,068Adjustments
                  to reconcile net income to net cashprovided
                  by operating activities:Provision
                  for loan losses
              
              
              1,950
              
              
              1,268Depreciation
                  and amortization
              
              
              4,543
              
              
              3,310Share
                  based compensation expense
              
              
              568
              
              
              9Management
                  Recognition and Retention Plan expense
              
              
              1,068
              
              
              1,060ESOP
                  expense
              
              
              371
              
              
              356Amortization
                  and accretion of securities premiums and discounts, net
              
              
              (119
              )
              
              915Loss
                  on sale of other real estate owned
              
              
              3
              
              
              14Net
                  gains on sales of investment securities
              
              
              (1,735
              )
              
              (456
              )Loss
                  on sale of other assets
              
              
              1
              
              
              72Gains
                  on sales of mortgage loans
              
              
              (55
              )
              
              (481
              )Gains
                  on extinguishment of debt
              
              
              (1,179
              )
              
              -Mortgage
                  loans originated for sale
              
              
              (7,402
              )
              
              (29,207
              )Mortgage
                  loan sales
              
              
              7,993
              
              
              30,467Changes
                  in assets and liabilities:Increase
                  in bank owned life insurance
              
              
              (1,555
              )
              
              (1,363
              )Decrease
                  in accrued interest receivable
              
              
              1,643
              
              
              745Increase
                  in other assets
              
              
              (1,856
              )
              
              (257
              )Increase
                  (decrease) in other liabilities and accrued interest
                  payable
              
              
              959
              
              
              (657
              )Net
                  cash provided by operating activities
              
              
              16,584
              
              
              15,863**INVESTING
                  ACTIVITIES:**Proceeds
                  from calls and maturities of securities available-for-sale
              
              
              106,828
              
              
              85,620Proceeds
                  from calls and maturities of securities held-to maturity
              
              
              4,992
              
              
              2,521Proceeds
                  from sales of securities available-for-sale
              
              
              69,206
              
              
              56,600Purchase
                  of securities available-for-sale
              
              
              (15,879
              )
              
              (25,289
              )Purchase
                  of securities held to maturity
              
              
              (553
              )
              
              -Purchase
                  of Federal Home Loan Bank of Pittsburgh stock
              
              
              (1,209
              )
              
              (414
              )Redemption
                  of Federal Home Loan Bank of Pittsburgh stock
              
              
              6,175
              
              
              1,891Net
                  increase in loans
              
              
              (58,719
              )
              
              (42,076
              )Cash
                  paid for acquisitions
              
              
              (8,034
              )
              
              (65,452
              )Cash
                  and cash equivalants obtained through acquisitions
              
              
              1,249
              
              
              52,021Purchase
                  of premises and equipment
              
              
              (6,187
              )
              
              (1,544
              )Proceeds
                  from the sale of other assets
              
              
              759
              
              
              1,029Proceeds
                  from the sale of other real estate owned
              
              
              159
              
              
              202Net
                  cash provided by investing activities
              
              
              98,787
              
              
              65,109**FINANCING
                  ACTIVITIES:**Net
                  increase (decrease) in deposits
              
              
              60,546
              
              
              (3,479
              )Net
                  increase in repurchase agreements
              
              
              17,472
              
              
              9,177Payment
                  on extinguishment of debt, net
              
              
              (49,595
              )
              
              -Proceeds
                  from long-term debt
              
              
              72,000
              
              
              49,500Payments
                  on long-term debt
              
              
              (152,263
              )
              
              (114,526
              )Purchase
                  of treasury stock
              
              
              (33,560
              )
              
              (26,079
              )Proceeds
                  from the exercise of stock options
              
              
              106
              
              
              86Cash
                  dividends paid
              
              
              (4,256
              )
              
              (3,185
              )Net
                  cash used in financing activities
              
              
              (89,550
              )
              
              (88,506
              )Increase
                  (decrease) in cash and cash equivalents
              
              
              25,821
              
              
              (7,534
              )Cash
                  and cash equivalents at January 1,
              
              
              106,259
              
              
              86,220Cash
                  and cash equivalents at June 30,
              
              $
              132,078
              
              $
              78,686Supplemental
                  disclosure of cash flow informationCash
                  paid during the period forIncome
                  taxes
              
              $
              2,274
              
              $
              900Interest
                  on deposits, advances and other borrowed money
              
              $
              33,495
              
              $
              24,158Supplemental
                  disclosure of non-cash activitiesReclassification
                  of loans receivable to other real estate owned
              
              $
              335
              
              $
              1,739See
                  accompanying notes to consolidated financial statements.


4


**KNBT
      BANCORP, INC. AND SUBSIDIARIES**


**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS** (unaudited)








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




KNBT
      Bancorp,
      Inc. (“KNBT” or the “Company”) is a Pennsylvania corporation headquartered in
      Bethlehem, Pennsylvania. The Company is the registered bank holding company
      for
      Keystone Nazareth Bank & Trust Company (the “Bank”), a
      Pennsylvania-chartered savings bank.




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 used in the United States (“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 consolidated financial
      statements and the notes thereto for the Company for the year ended December
      31,
      2005, which are included in the Company’s Annual Report on Form 10-K for the
      year ended December 31, 2005. The results for the interim periods presented
      are
      not necessarily indicative of the results that may be expected for the year
      ended December 31, 2006.




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 and its subsidiaries 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 and KNBT Inv. II, and the
      Bank’s wholly owned subsidiaries KLVI, Inc., KLV, Inc., Traditions Settlement
      Services, Abstractors, Inc. (“Abstractors”), Caruso Benefits Group, Inc.
      (“Caruso”), Higgins Insurance Associates, Inc. (“Higgins”), and KNBT Securities,
      Inc.








**NOTE
      B - ACQUISITIONS**





**The
      Trust Company of Lehigh Valley**




O n
      February 28, 2006, the Bank completed its acquisition of Paragon Group, Inc.
      (“Paragon”), the parent holding company for the Trust Company of Lehigh Valley
      (“TCLV”), a Pennsylvania-chartered non-depository bank located in Allentown,
      Pennsylvania. TCLV provided estate, personal trust and investment management
      services, estate and financial planning and employee retirement benefits
      administration and had approximately $400 million in assets under administration
      and management at the time of its acquisition by the Bank. Paragon and TCLV
      were
      merged into the Bank. The results of the acquired trust operations have been
      included in KNBT’s results since March 1, 2006.





5




Under the terms of the definitive merger agreement, the Bank acquired all of
      the
      capital stock of Paragon for a purchase price of $5.3 million in cash of which
      $4.3 million was paid at time of closing and $1.0 million will be payable over
      an eighteen month period. The escrowed amount will be ultimately payable to
      Paragon shareholders or to meet potential future obligations of the acquired
      trust business.





The
      preliminary purchase price was allocated to the assets acquired and assumed
      liabilities of Paragon at the date of acquisition and resulted in recording
      approximately $3.2 million in goodwill. KNBT
      is
      in the process of finalizing these values and, as such the allocation of the
      purchase price is subject to revision. The
      Company does not anticipate these revisions to materially affect its financial
      position.





**Northeast
      Pennsylvania Financial Corp.**





On
      May
      19, 2005, KNBT acquired 100% of the outstanding shares of Northeast Pennsylvania
      Financial Corp., (“NEPF”). The results of NEPF’s operations have been included
      in the consolidated financial statements beginning on May 19, 2005. NEPF was
      a
      $784.9 million thrift holding company headquartered in Hazleton, Pennsylvania
      with 17 community banking offices in five counties in northeastern Pennsylvania.
      The acquisition expanded KNBT’s franchise into Luzerne, Schuylkill and Columbia
      counties and enhanced KNBT’s presence in Carbon and Monroe counties.





Abstractors
      and Higgins were acquired as part of the NEPF acquisition. Abstractors provides
      real estate title and settlement services while Higgins provides commercial,
      property and casualty, and employee benefit insurance to individuals and
      businesses. Both Abstractors and Higgins operate as wholly owned subsidiaries
      of
      the Bank.





The
      aggregate purchase price was approximately $90.9 million in cash and shares
      of
      common stock of KNBT. Based on an exchange ratio of 1.6328, 1,976,195 shares
      of
      NEPF common stock were converted into the right to receive 3,226,731 shares
      of
      KNBT’s common stock with the 1,976,194 remaining shares of NEPF common stock
      being converted into the right to receive an aggregate cash consideration of
      $45.5 million.





The
      purchase price was allocated to the acquired assets and assumed liabilities
      of
      NEPF as of the date of acquisition. This transaction was accounted for using
      the
      purchase method of accounting in accordance with Statement of Financial
      Accounting Standard (“SFAS”) No. 141.





**Caruso
      Benefits Group, Inc.**





On
      April
      1, 2005, the Bank acquired Caruso, a benefits management firm based in
      Bethlehem, Pennsylvania. Caruso specializes in benefits management with an
      emphasis on group medical, life and disability. Caruso’s results of operations
      have been included in KNBT’s results since the date of acquisition. Caruso
      operates as a wholly owned subsidiary of the Bank.





Under
      the
      terms of the stock purchase agreement, the Bank acquired all of the capital
      stock of Caruso for a purchase price of $28 million in cash of which $20 million
      was paid at the time of closing and $8 million will be payable over a three-year
      period, subject to Caruso maintaining certain levels of profitability. KNBT
      paid
      $2.7 million to Caruso during the second quarter of 2006 that represents the
      aggregate obligation through June 30, 2006. The payment was made pursuant to
      the
      terms of the purchase agreement relating to the purchase price
      contingency.





The
      acquisition resulted in the recording of approximately $10.4 million of
      goodwill. KNBT also recorded an identifiable intangible asset for Caruso’s
      customer list of $9.9 million which is being amortized on a straight line basis
      over 15 years. The expense related to the amortization of the identifiable
      intangible asset arising from the Caruso acquisition totaled $165,000 and
      $331,000 for the three and six-months period ended June 30, 2006.





Additional
      information and disclosures on the NEPF and Caruso acquisitions can be found
      in
      the Company’s Form 10-K for the period ended December 31, 2005.


6


**NOTE
      C - EARNINGS PER SHARE**




The
      Company
      calculates earnings per share as provided by the provisions of SFAS No. 128,
      “Earnings Per Share (SFAS 128)”. Basic and diluted earnings per share for the
      three and six months ended June 30, 2006 and 2005 were calculated as
      follows:


For
                  the Three Months Ended June 30,2006
              
              
              
              
              
              2005Net
              
              Average
              
              
              
              Net
              
              AverageIncome
              
              Shares
              
              Per
                  Share
              
              Income
              
              Shares
              
              Per
                  Share(numerator)
              
              (denominator)
              
              Amount
              
              (numerator)
              
              (denominator)
              
              Amount(dollars
                  in thousands, except per share amounts)Basic
                  earnings per shareIncome
                  available to common shareholders
              
              $
              5,906
              
              
              27,381,824
              
              $
              0.22
              
              $
              5,238
              
              
              29,358,352
              
              $
              0.18Effect
                  of dilutive securitiesStock
                  options
              
              
              
              
              
              153,008
              
              
              -
              
              
              
              
              
              196,804
              
              
              -Management
                  Recognition and Retention Plan
              
              
              
              
              
              270,275
              
              
              -
              
              
              
              
              
              75,569
              
              
              -Total
                  effect of dilutive securities
              
              
              
              
              
              423,283
              
              
              (0.01
              )
              
              
              
              
              272,373
              
              
              -Diluted
                  earnings per shareIncome
                  available to common shareholdersplus
                  assumed exercise of options
              
              $
              5,906
              
              
              27,805,107
              
              $
              0.21
              
              $
              5,238
              
              
              29,630,725
              
              $
              0.18For
                  the Six Months Ended June 30,2006
              
              
              
              
              
              
              
              
              2005Net
              
              
              Average
              
              
              
              
              
              Net
              
              
              AverageIncome
              
              
              Shares
              
              
              Per
                  Share
              
              
              Income
              
              
              Shares
              
              
              Per
                  Share(numerator)
              
              
              (denominator)
              
              
              Amount
              
              
              (numerator)
              
              
              (denominator)
              
              
              Amount(dollars
                  in thousands, except per share amounts)Basic
                  earnings per shareIncome
                  available to common shareholders
              
              $
              11,386
              
              
              27,711,586
              
              $
              0.41
              
              $
              10,068
              
              
              28,795,321
              
              $
              0.35Effect
                  of dilutive securitiesStock
                  options
              
              
              
              
              
              152,953
              
              
              -
              
              
              
              
              
              205,262
              
              
              -Management
                  Recognition and Retention Plan
              
              
              
              
              
              267,785
              
              
              -
              
              
              
              
              
              100,715
              
              
              -Total
                  effect of dilutive securities
              
              
              
              
              
              420,738
              
              
              (0.01
              )
              
              
              
              
              305,977
              
              
              -Diluted
                  earnings per shareIncome
                  available to common shareholdersplus
                  assumed exercise of options
              
              $
              11,386
              
              
              28,132,324
              
              $
              0.40
              
              $
              10,068
              
              
              29,101,298
              
              $
              0.35




KNBT
      also had
      outstanding stock options for the three months and six months ended June 30,
      2006 to purchase 1,290,400 and 1,266,528 shares of common stock, respectively,
      with exercise prices ranging from $16.50 to $16.56 per share. These options
      were
      not included in the computation of diluted earnings per share for the three
      and
      six months ended June 30, 2006 because the option exercise price was greater
      than the average market price. KNBT also had outstanding stock options for
      the
      three months and six months ended June 30, 2005, to purchase 1,328,743 and
      1,291,374 shares of common stock, respectively, with exercise prices ranging
      from $14.91 to $16.50 per share that were anti-dilutive .




Common
      stock
      outstanding for the purpose of calculating basic earnings per share does not
      include 821,119 and 868,720 unallocated shares held by the Employee Stock
      Ownership Pan (“ESOP”) at June 30, 2006 and June 30, 2005, respectively. The
      exclusion of these unallocated shares held by the ESOP is in accordance with
      the
      provisions of Statement of Position (“SOP”) 93-6, “Employer’s Accounting for
      Employee Stock Ownership Plans”, issued by the Accounting Standards Division of
      the American Institute of Certified Public Accountants (“AICPA”).




Unearned
      and
      uncommitted Management Recognition and Retention Plan (“MRRP”) shares to be
      released are not considered to be outstanding for basic earnings per share
      calculations. At June 30, 2006, unearned MRRP shares totaled 379,700 and
      uncommitted MRRP shares totaled 176,547. At June 30, 2005, unearned MRRP shares
      totaled 508,800 and uncommitted MRRP shares totaled 173,347.


7


**NOTE
      D - 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, 2006 (unaudited)
      and December 31, 2005 are as follows:


At
                  June 30, 2006 (unaudited)Gross
              
              GrossAmortized
              
              Unrealized
              
              Unrealized
              
              FairCost
              
              Gains
              
              Losses
              
              Value(in
                  thousands)Held
                  to maturity:U.S.
                  Government and agencies
              
              $
              556
              
              $
              -
              
              $
              -
              
              $
              556Obligations
                  of states and politicalsubdivisions
              
              
              5,490
              
              
              172
              
              
              -
              
              
              5,662Mortgage-backed
                  securitiesFNMA
              
              
              18,006
              
              
              -
              
              
              (458
              )
              
              17,548CMOs
              
              
              18,948
              
              
              
              
              
              (533
              )
              
              18,415Total
                  mortgage-backed securities
              
              
              36,954
              
              
              -
              
              
              (991
              )
              
              35,963Total
                  held to maturity
              
              
              43,000
              
              
              172
              
              
              (991
              )
              
              42,181Available
                  for sale:U.S.
                  Government and agencies
              
              
              145,940
              
              
              -
              
              
              (2,397
              )
              
              143,543Obligations
                  of states and politicalsubdivisions
              
              
              -
              
              
              -
              
              
              -
              
              
              -Asset-managed
                  funds
              
              
              4,904
              
              
              
              
              
              (176
              )
              
              4,728Mortgage-backed
                  securitiesGNMA
              
              
              2,019
              
              
              20
              
              
              (2
              )
              
              2,037FHLMC
              
              
              132,980
              
              
              23
              
              
              (4,912
              )
              
              128,091FNMA
              
              
              365,067
              
              
              81
              
              
              (14,117
              )
              
              351,031CMOs
              
              
              249,936
              
              
              28
              
              
              (10,218
              )
              
              239,746Total
                  mortgage-backed securities
              
              
              750,002
              
              
              152
              
              
              (29,249
              )
              
              720,905Corporate
                  and other debt securities
              
              
              68,532
              
              
              257
              
              
              (645
              )
              
              68,144Equity
                  securities
              
              
              6,496
              
              
              945
              
              
              (134
              )
              
              7,307Total
                  available for sale
              
              
              975,874
              
              
              1,354
              
              
              (32,601
              )
              
              944,627Total
                  investment securities
              
              $
              1,018,874
              
              $
              1,526
              
              $
              (33,592
              )
              $
              986,808


8


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




Management
      has reviewed the securities listed in the above tables and believe all
      unrealized losses to be temporary. The unrealized losses are due primarily
      to
      changes in market interest rates and other temporary changes in market
      conditions.








**NOTE
      E - STOCK BASED COMPENSATION**





Stock
      Option Plans





KNBT
      maintains the 2004 Stock Option Plan (2004 Plan), as well as the stock option
      plans from prior acquisitions. The 2004 Plan allows KNBT to grant options up
      to
      an aggregate of 2,020,118 shares of common stock to key employees and directors.
      The options have a term of ten years when they are issued and typically vest
      over a five-year period, except for some options granted to directors that
      vest
      over an eight-year period. The exercise price of each option is the market
      price
      of KNBT’s stock on the date of grant.





On
      January 1, 2006, KNBT adopted SFAS No. 123(R) (revised 2004), “Share-Based
      Payment”. Statement 123(R) replaces SFAS No. 123, “Accounting for Stock-Based
      Compensation” and supersedes Accounting Principals Bulletin (“APB”) Opinion No.
      25, Accounting for Stock Issued to Employees. SFAS No. 123(R) established
      accounting and disclosure requirements using a fair-value based method of
      accounting for stock-based employee compensation plans. Prior to January 1,
      2006, KNBT accounted for stock options using APB Opinion No. 25 and included
      disclosures of pro forma net income and earnings per share, as if the fair
      value-based method of accounting defined in SFAS No. 123 had been used. KNBT
      elected the modified prospective transition method for adopting SFAS No. 123(R)
      through December 31, 2005. Under SFAS No. 123(R) all forms of share-based
      payments to employees, including stock options, are treated the same as other
      forms of compensation by recognizing the related cost in the income statement.
      The provisions apply to all awards granted after the required effective date
      including existing awards not vested, or which are modified, repurchased, or
      canceled after that date.





9


As
      of
      January 1, 2006, KNBT began to expense these grants as required by SFAS No.
      123(R). Stock-based employee compensation cost pertaining to stock options
      is
      reflected in net income with the fair value of each option being estimated
      as of
      the date of grant using the Black-Scholes option valuation model. The
      Black-Scholes model incorporates variable assumptions, which include: expected
      volatilities, which are based on historical volatility of KNBT’s traded stock
      and peer group comparisons; expected term calculated using the simplified
      method; expected dividend yield based on historical patterns and peer group
      performance; and the risk free rate, based on the U.S. Treasury yield curve
      at
      the time of the grant. KNBT used historical data to estimate option exercise
      and
      employee termination within the valuation model. KNBT used the following
      assumptions:


For
                  the Six MonthsEnded
                  June 30,2006
              
              2005Expected
                  dividend yield
              
              
              2.50
              %
              
              2.00
              %Expected
                  volatility
              
              
              22.63
              %
              
              25.00
              %Risk-free
                  interest rate
              
              
              4.34
              %
              
              3.97
              %Expected
                  option life
              
              
              6.5
                  years
              
              
              7.7
                  yearsFair
                  Value of Option
              
              $
              3.84
              
              $
              4.41







KNBT
      did
      not grant any share-based options during the three month period ended June
      30,
      2006. For the six month period ended June 30, 2006, KNBT granted 217,400 shares
      to certain employees and directors under the 2004 Plan. For the three and six
      month periods ended June 30, 2005, KNBT granted options covering 13,500 and
      228,150 shares, respectively.





The
      following table illustrates the effect on net income and earnings per share
      for
      the three and six months ended June 30, 2005 if KNBT had applied the fair value
      recognition provisions of SFAS No. 123(R) to stock-based employee compensation
      rather than using APB No. 25.


Three
                  months ended
              
              Six
                  months endedJune
                  30, 2005
              
              June
                  30, 2005(in
                  thousands, except per share amounts)Net
                  incomeAs
                  reported
              
              $
              5,238
              
              $
              10,068Add:
                  stock-based employee compensation expenseincluded
                  in reported net income, netof
                  related tax effects
              
              
              6
              
              
              12Less:
                  stock-based compensation cost determinedunder
                  fair value method for all awards, netof
                  related tax effects
              
              
              167
              
              
              327Pro-forma
              
              $
              5,077
              
              $
              9,753Earnings
                  per share (diluted)As
                  reported
              
              $
              0.18
              
              $
              0.35Pro-forma
              
              $
              0.17
              
              $
              0.34Earnings
                  per share (basic)As
                  reported
              
              $
              0.18
              
              $
              0.35Pro-forma
              
              $
              0.17
              
              $
              0.34






10


The
      table
      below is a summary of changes to stock option plans for the six months ended
      June 30, 2006.


For
                  the Six Months Ended June 30, 2006Weighted
                  Average
              
              AggregateWeighted
                  Average
              
              Remaining
                  Contractual
              
              IntrinsticShares
              
              Exercise
                  Price
              
              Term
                  (in years)
              
              ValueOutstanding
                  as of 1/1/2006
              
              
              1,796,338
              
              $
              13.58Issued
              
              
              217,400
              
              
              16.51Exercised
              
              
              (18,758
              )
              
              5.65Forfeited
              
              
              (5,000
              )
              
              16.37Expired
              
              
              -
              
              
              -Outstanding
                  as of 6/30/2006
              
              
              1,989,980
              
              $
              13.97
              
              
              7.56
              
              $
              5,074,449Options
                  exercisable at 6/30/2006
              
              
              836,860
              
              $
              10.64
              
              
              6.53
              
              $
              4,920,737




The
      total
      intrinsic value of stock options exercised during the second quarter of 2006
      was
      $196,291. The following table summarizes information concerning KNBT’s stock
      options outstanding at June 30, 2006.


At
                  June 30, 2006Options
                  Outstanding
              
              Options
                  ExercisableWeighted
                  AverageStock
              
              Remaining
              
              Weighted
              
              Stock
                  Options
              
              WeightedRange
                  of
              
              Options
              
              Contractual
              
              Average
              
              Exercisable
              
              AverageExercise
                  Prices
              
              Outstanding
              
              Life
                  in Years
              
              Exercise
                  Price
              
              
              
              Exercise
                  Price$3.03
                  - $4.35
              
              
              52,278
              
              
              4.81
              
              $
              4.21
              
              
              52,278
              
              $
              4.21$4.36
                  - $6.37
              
              
              330,527
              
              
              5.35
              
              $
              5.65
              
              
              330,527
              
              $
              5.65$6.38
                  - $8.36
              
              
              66,375
              
              
              5.62
              
              $
              6.70
              
              
              66,375
              
              $
              6.70$11.35
                  - $16.56
              
              
              1,540,800
              
              
              8.21
              
              $
              16.40
              
              
              387,680
              
              $
              16.431,989,980
              
              
              
              
              
              
              
              
              836,860





Compensation
      cost is generally recognized over the stated vesting period with the terms
      of
      the arrangement (i.e., either on a straight-line or graded-vesting basis).
      As of
      June 30, 2006, there was $4.8 million of unrecognized compensation cost related
      to unvested stock options, which is expected to be recognized over a
      weighted-average period of approximately 4.81 years.





Management
      Recognition and Retention Plan





The
      MRRP,
      which is a stock-based incentive plan, provides for the ability to grant up
      to
      808,047 restricted shares of KNBT’s common stock to the Company’s directors,
      advisory directors, officers and employees. Shares awarded to date under the
      MRRP are earned by recipients at a rate of 20% per year beginning on the first
      anniversary date of the grant. On May 6, 2004, 638,000 restricted shares were
      awarded. For the year ended December 31, 2005, 10,000 additional MRRP shares
      were awarded. Since the inception of the MRRP, 16,500 awards were forfeited
      and
      returned to the plan for future grants. Compensation expense for this plan
      is
      being recorded over the vesting period and is based on the market value of
      KNBT’s stock as of the date the awards were made. KNBT, 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 a reduction of additional paid-in-capital.
      The remaining unamortized cost of the MRRP shares acquired is $6.1 million
      and
      is reflected as a reduction in shareholders’ equity as of June 30, 2006. As part
      of the adoption of SFAS No. 123(R), the unrecognized compensation was
      reclassified as a component of additional paid-in capital. Expense under this
      plan for the three months ended June 30, 2006 and June 30, 2005 was $534,000
      and
      $537,000, respectively. Expense under this plan for both the six months ended
      June 30, 2006 and 2005 was $1.1 million.





11


The
      MRRP
      also provides for performance share awards. Performance-based grants covering
      50,000 shares were made during the six months ended June 30, 2006. These shares
      are earned if corporate performance targets are achieved for the fiscal year
      2008. If the targets are achieved, on the third anniversary of the date of
      grant, 60% of the shares granted will be earned with the remaining 40% being
      earned pro rata on the fourth and fifth anniversary date of the grant assuming
      the recipient remains employed by KNBT at each of such dates. Furthermore,
      if
      the Company exceeds its target goals for the fiscal year 2008, the awards will
      increase in the aggregate by 7,000 shares. The grants specifically excludes
      accelerated vesting in the event of a change in control. There was no
      compensation expense related to these performance shares during the three months
      or six months ended June 30, 2006.








**NOTE
      F - LOANS**





A
      summary
      of KNBT’s loans receivable at June 30, 2006 (unaudited) and December 31, 2005 is
      as follows:


June
                  30,
              
              December
                  31,2006
              
              2005(unaudited)(in
                  thousands)Real
                  estateResidential
              
              $
              477,343
              
              $
              454,393Construction
              
              
              62,919
              
              
              71,631Commercial
              
              
              364,897
              
              
              336,480Total
                  real estate
              
              
              905,159
              
              
              862,504Consumer
                  loans
              
              
              497,217
              
              
              491,615Commercial
                  (non-real estate)
              
              
              136,645
              
              
              126,122States
                  and political subdivisions
              
              
              759
              
              
              2,017Total
                  gross loans
              
              
              1,539,780
              
              
              1,482,258Less:Mortgage
                  loans held-for-sale
              
              
              (20
              )
              
              (556
              )Deferred
                  fees
              
              
              687
              
              
              26Total
                  loans
              
              
              1,540,447
              
              
              1,481,728Less:
                  Allowance for loan losses
              
              
              (16,600
              )
              
              (15,964
              )Total
                  net loans
              
              $
              1,523,847
              
              $
              1,465,764


12


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 for six months ended June 30, 2006 and for the year ended December
      31, 2005.


Six
                  months ended
              
              Twelve
                  months endedJune
                  30, 2006
              
              December
                  31, 2005(unaudited)(dollars
                  in thousands)Non-accrual
                  loans
              
              $
              6,067
              
              $
              6,839Accruing
                  loans 90 days or more past due
              
              
              988
              
              
              2,167Total
                  non-performing loans
              
              
              7,055
              
              
              9,006Other
                  real estate owned
              
              
              322
              
              
              162Total
                  non-performing assets
              
              $
              7,377
              
              $
              9,168Total
                  non-performing loans as a percentage of loans, net
              
              
              0.46
              %
              
              0.61
              %Total
                  non-performing loans as a percentage of total assets
              
              
              0.24
              %
              
              0.29
              %Total
                  non-performing assets as a percentage of total assets
              
              
              0.25
              %
              
              0.30
              %Interest
                  on non-accrual loans which would have beenrecorded
                  at the original rate
              
              $
              412
              
              $
              301Interest
                  on non-accrual loans that was reflected in income
              
              
              -
              
              
              -Net
                  decrease in interest income
              
              $
              (412
              )
              $
              (301
              )




KNBT’s
      recorded investment in impaired loans was $1.9 million at June 30, 2006 and
      $1.8
      million at December 31, 2005. The valuation allowance for loan losses related
      to
      impaired loans is a part of the allowance for loan losses and was $398,000
      at
      June 30, 2006 and $304,000 at December 31, 2005. The average impaired loan
      balance for the six months ended June 30, 2006 was $  2.1
      million and $525,000 for the six months ended June 30, 2005. During the six
      months ended June 30, 2006 and 2005, the Bank received principal payments on
      impaired loans of $584,000 and $152,000, respectively. Income on impaired loans
      is recognized by KNBT on a cash basis. KNBT recognized $5,000 in interest income
      on impaired loans for the six month period ended June 30, 2006, and did not
      recognize income on impaired loans for the six month period ended June 30,
      2005.





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


For
                the Three Months
            
            For
                the Six MonthsEnded
                June 30,
            
            Ended
                June 30,2006
            
            2005
            
            2006
            
            2005(unaudited)(in
                thousands)Allowance
                for loan losses, beginning of period
            
            $
            15,963
            
            $
            15,731
            
            $
            15,964
            
            $
            15,742Provision
                for loan losses
            
            
            1,200
            
            
            534
            
            
            1,950
            
            
            1,268Charge-offs:One-to-four
                family residential
            
            
            (7
            )
            
            (30
            )
            
            (46
            )
            
            (45
            )Commercial
                business
            
            
            (298
            )
            
            (4
            )
            
            (302
            )
            
            (4
            )Consumer
            
            
            (449
            )
            
            (624
            )
            
            (1,242
            )
            
            (1,372
            )Total
                charge offs
            
            
            (754
            )
            
            (658
            )
            
            (1,590
            )
            
            (1,421
            )Recoveries
                on loans previously charged off:One-to-four
                family residential
            
            
            2
            
            
            7
            
            
            21
            
            
            8Commercial
                business
            
            
            134
            
            
            60
            
            
            149
            
            
            62Consumer
            
            
            55
            
            
            86
            
            
            106
            
            
            101Total
                recoveries
            
            
            191
            
            
            153
            
            
            276
            
            
            171Net
                loans charged-off
            
            
            (563
            )
            
            (505
            )
            
            (1,314
            )
            
            (1,250
            )Allowance
                for loan losses, at period end
            
            $
            16,600
            
            $
            15,760
            
            $
            16,600
            
            $
            15,760


13


**NOTE
      G - RETIREMENT PLANS**





*1.*
            *Defined
                Benefit Plans*





KNBT
      participates in a multiple employer defined benefit pension plan, which covers
      substantially all employees with 1,000 hours of service during the plan year.
      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, 2006 and 2005
      was $183,000 and $131,000, respectively, which is included in compensation
      and
      employee benefits expense. KNBT will continue to contribute to this plan for
      benefits accrued prior to October 2003.





As
      part
      of the NEPF merger, KNBT assumed the multiple employer defined benefit pension
      plan of NEPF. This plan covered all employees who are age 21 or older and have
      one year of service. NEPF had amended the plan and froze the benefits for the
      then current participants of the plan. For the six months ended June 30, 2006,
      KNBT contributed approximately $239,000 to the NEPF pension plan which is
      included in compensation and employee benefits expense.





KNBT
      expects to contribute an additional $368,000 in the aggregate to the two pension
      plans through December 31, 2006.





*2.*
            *Directors’
                Deferred Plan*





KNBT,
      as
      a part of previous acquisitions, assumed the deferred compensation plan for
      certain former directors of First Colonial. The plan requires defined annual
      payments for five to fifteen years beginning at age 65 or death. The annual
      benefit is based upon the amount deferred plus interest. KNBT has recorded
      the
      deferred compensation liabilities using the present value method. The net
      periodic defined benefit expense for the three months ended June 30, 2006 and
      June 30, 2005 was as follows:


June
                  30,2006
              
              2005(in
                  thousands)Service
                  cost
              
              $
              -
              
              $
              -Interest
                  cost
              
              
              17
              
              
              21Net
                  amortization anddeferral
                  of prior service costs
              
              
              -
              
              
              -Amortization
                  of unrecognized net loss
              
              
              1
              
              
              -Net
                  periodic benefit cost
              
              $
              18
              
              $
              21
 
 KNBT
        currently expects to contribute a total of approximately $17,000 to this
        plan in
        the year ended December 31, 2006.








**NOTE
      H - NEW ACCOUNTING PRONOUNCEMENTS**





In
      November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
      Staff Position (FSP) SFAS No. 123(R) 3, “Transition Election Related to
      Accounting for the Tax Effects of Share-Based Payment Awards,” to provide an
      alternative transition method for accounting for the tax effects of share-based
      payment awards to employees. This method comprises (a) a computational
      component that establishes a beginning balance of the additional-paid-in-capital
      pool related to employee compensation: and (b) a simplified method to
      determine the subsequent impact on the pool of employee awards that are fully
      vested and outstanding upon adoption of SFAS No. 123(R). The guidance in the
      FSP
      was effective November 10, 2005. KNBT has adopted SFAS No. 123(R) using
      modified prospective application and may make a one-time election to adopt
      the
      transition method described in this FSP. An entity may take up to one year
      from
      its initial adoption of SFAS No. 123(R) to evaluate its available transition
      alternatives and make its one-time election. An entity that elects the
      transition method described in this FSP is not required to justify the
      preferability of its election. KNBT is evaluating its options at this time.





14


In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
      Assets.” SFAS No. 156, which is an amendment to SFAS No. 140, simplifies
      the accounting for servicing assets and liabilities, such as those common with
      mortgage securitization activities. The new standard clarifies when an
      obligation to service financial assets should be separately recognized as a
      servicing asset or a servicing liability; requires that a separately recognized
      servicing asset or servicing liability be initially measured at fair value,
      if
      practicable; and permits an entity with a separately recognized servicing asset
      or servicing liability to choose either the amortization method or fair value
      method for subsequent measurement. SFAS No. 156 is effective for separately
      recognized servicing assets and liabilities acquired or issued after the
      beginning of an entity’s fiscal year that begins after September 15, 2006,
      with early adoption permitted. Adoption of this statement is not expected to
      have a material effect on results of operations or financial condition.





In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes” (“FIN48”). FIN 48 clarifies the accounting for uncertainty in
      income taxes recognized in an enterprise’s financial statements in accordance
      with SFAS Statement No. 109, “Accounting for Income Taxes.” This interpretation
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. This interpretation also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. The Company does not anticipate that adoption
      of FIN 48 will have a material impact on its results of operations or its
      financial position.








**NOTE
      I - EXTINGUISHMENT OF DEBT**





In
      March
      2006, KNBT repaid $40.0 million of reverse repurchase agreements that had been
      assumed as part of the NEPF acquisition and repaid a $10.0 million Federal
      Home
      Loan Bank advance. The transactions settled at a price less than face value.
      The
      gain on the reverse repurchase agreement transaction was $965,000 and the net
      gain on the repayment of the Federal Home Loan Bank advance was $214,000 which
      included write offs of intangibles totaling $712,000.








**NOTE
      J - TREASURY STOCK**





On
      October 27, 2004, KNBT’s Board of Directors announced its first share repurchase
      program. Under the initial program, KNBT repurchased a total of 3,062,486 shares
      at an average price per share of $15.91 and was completed during the third
      quarter of 2005. On July 27, 2005, the Board of Directors authorized an
      additional repurchase of 3,151,297 shares, which commenced in September 2005
      upon the completion of the initial buyback program. At June 30, 2006, a total
      of
      2,869,614 shares of KNBT common stock had been repurchased pursuant to the
      second repurchase program at an average price per share of $16.32. On June
      26,
      2006, the Board of Directors authorized an additional share repurchase program
      of up to ten percent or approximately 2,807,219 shares of the Company’s
      outstanding stock. This program will commence upon the completion of the current
      share buyback program.








**NOTE
      K - RECLASSIFICATIONS**





Certain
      reclassifications of prior years’ amounts have been made to conform to the June
      30, 2006 presentation.











15


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





**Forward
      - Looking Statements**





The
      information contained in this Form 10-Q may contain forward-looking statements
      (as defined in the Securities Exchange Act of 1934 and the regulations
      thereunder) which are not historical facts or as to the Company’s management's
      intentions, plans, beliefs, expectations or opinions or with respect to the
      operation of the Company or its subsidiaries. These statements include, but
      are
      not limited to, financial projections and estimates and their underlying
      assumptions; statements regarding plans, objectives and expectations with
      respect to future operations, products and services; and statements regarding
      future performance. Such statements are subject to certain risks and
      uncertainties, many of which are difficult to predict and generally beyond
      the
      control of KNBT and its management, that could cause actual results to differ
      materially from those expressed in, or implied or projected by, the
      forward-looking information and statements.





The
      following factors, among others, could cause actual results to differ materially
      from the anticipated results or other expectations expressed in the
      forward-looking statements:





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





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





•
            
            Competitive
                pressure among depository institutions increases
                significantly;





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





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





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





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





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





These
      factors should be considered in evaluating the forward-looking statements and
      undue reliance should not be placed on such statements. KNBT undertakes no
      obligation to update these forward-looking statements to reflect events or
      circumstances that occur after the date of the filing of this Form
      10-Q.





**Available
      Information**





The
      Company is a public company and files annual, quarterly and current reports,
      proxy statements and other information with the SEC. The Company maintains
      a
      website at www.knbt.com and
      makes available, free of charge, on its Internet web site copies of its Annual
      Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
      From
      8-K and any amendments to such documents as soon as reasonably practicable
      after
      the reports have been electronically filed or furnished to the SEC.





**Critical
      Accounting Policies, Judgments and Estimates**





The
      accounting and reporting policies of KNBT conform with accounting principles
      generally accepted in the United States of America and general practices within
      the financial services industry. The preparation of financial statements in
      conformity with accounting principles generally accepted in the United States
      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.





16


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
      the known and inherent losses in the portfolio that are both probable and
      reasonable to estimate. 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. In 2005, a valuation
      allowance of $1.1 million was established to write down the deferred tax asset
      to its net realizable value. Management believes this valuation allowance is
      reasonable.





Goodwill,
      and other identifiable intangible assets are subject to impairment testing
      at
      least annually to determine whether write-downs of the recorded balance 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. As of June 30, 2006, KNBT’s recorded goodwill
      amounted to $107.6 million compared to $101.5 million at December 31, 2005.
      During the first quarter of 2006, KNBT completed its acquisition of Paragon
      and
      recorded goodwill of approximately $3.2 million with respect to that
      acquisition. KNBT is in the process of finalizing these values and, as such,
      the
      allocation of the purchase price is subject to revision. The Company does not
      anticipate these revisions to materially affect its financial
      position.





On
      January 1, 2006, KNBT changed accounting policy related to share-based
      compensation in connection with the adoption of SFAS No.123(R). As a part of
      the
      transition to SFAS No.123(R), KNBT elected to use the modified version of
      prospective application (“modified prospective application”). Under modified
      prospective application, as it is applicable to KNBT, SFAS No. 123(R) applies
      to
      new awards and to awards which are modified, repurchased or cancelled after
      January 1, 2006. Additionally, compensation expense for the portion of
      awards for which the requisite service period has not been rendered, (generally
      referring to nonvested awards) that are outstanding as of January 1, 2006,
      is now recognized as the remaining requisite service is rendered. Compensation
      expense for earlier awards is based on the same method and on the same grant
      date fair values previously determined for the pro forma disclosures required
      for all companies that did not previously adopt the fair value accounting method
      for share-based compensation.





The
      fair
      value of our stock option grants is estimated at the date of grant using the
      Black-Scholes option-pricing model. The Black-Scholes option valuation model
      was
      developed for use in estimating the fair value of traded options, which have
      no
      vesting restrictions and are fully transferable. In addition, option valuation
      models require the input of highly subjective assumptions. KNBT utilizes the
      following assumptions when estimating fair value of its stock option grants
      under SFAS No. 123(R): expected volatility, based on historical volatility
      of
      KNBT’s traded stock and peer group comparisons; expected term, calculated using
      the simplified method; expected dividend yield, based on historical patterns
      and
      peer group performance; and the risk free rate, based on the U.S. Treasury
      yield
      curve at the time of the grant. KNBT uses historical data to estimate the
      likelihood of option exercise and employee termination within the valuation
      model.










17


**Comparison
      of Financial Condition as of June 30, 2006 and December 31,
      2005**





**Assets.** KNBT’s
      total assets were $3.0 billion at June 30, 2006 a decrease of $87.3 million
      or
      2.8% compared to $3.1 billion at December 31, 2005 primarily due to a decline
      in
      investment securities available for sale partially offset by growth of the
      loan
      portfolio. KNBT’s total loans receivable increased by $58.7 million or 4.0% to
      $1.5 billion at June 30, 2006, compared to December 31, 2005. The growth in
      loans receivable was primarily due to an increase of $22.9 million or 5.1%
      in
      residential real estate loans. In addition, although real estate construction
      loans decreased $8.7 million or 12.2% during the quarter, commercial real estate
      loans increased $28.4 million or 8.4% due to the conversion of a large real
      estate construction loan to permanent financing. At June 30, 2006, total
      investment securities decreased $179.0 million or 15.3% to $987.6 million
      compared to $1.2 billion at December 31, 2005. During the six months ended
      June
      30, 2006, there was a decrease in both the available-for-sale and
      held-to-maturity investment securities portfolios of KNBT. The
      available-for-sale category decreased $174.6 million or 15.6% while the
      held-to-maturity category decreased $4.4 million or 9.2% during the quarter.
      The
      decrease in the available-for-sale portfolio was primarily attributable to
      a
      decrease of $82.5 million or 10.3% in mortgage-backed securities, a decrease
      of
      $13.9 million or 8.8% in U.S. Government and agency securities and the
      liquidation of $65.2 million of state and political subdivision tax advantaged
      securities. Tax planning strategies, principally the utilization of charitable
      contribution carry forward, was the primary reason for the liquidation of the
      state and political subdivision securities within the available-for-sale
      portfolio. The primary reason for the decrease of the mortgage-backed and U.S.
      government agency securities, classified as available-for-sale, was to fund
      the
      growth in the loan portfolio, to fund maturing Federal Home Loan Bank (“FHLB”)
      advances and to fund repurchases of common stock made pursuant to KNBT’s stock
      repurchase program.





**Non-Performing
      Assets.** On
      loans
      where the collection of principal or interest payments is doubtful, the accrual
      of interest income ceases (“non-accrual” loans). On loans 90 days or more past
      due as to principal and interest payments, KNBT’s policy, with certain limited
      exceptions, is to discontinue accruing interest. On occasion, this action may
      be
      taken earlier if the financial condition of the borrower raises significant
      concern with regard to the borrower’s ability to service the debt in accordance
      with the terms of the loan agreement. Interest income is not accrued on these
      loans until the borrowers’ financial condition and payment record demonstrate an
      ability to service the debt. Real estate that is acquired as a result of
      foreclosure is classified as Other Real Estate Owned. Other Real Estate Owned
      is
      recorded at the lower of cost or fair value less estimated selling costs. Costs
      associated with acquiring and improving a foreclosed property may be capitalized
      to the extent that the carrying value does not exceed fair value less estimated
      selling costs. Holding costs are charged to expense. Gains and losses on the
      sale of other real estate owned are credited or charged to operations, as
      incurred.




Non-performing
      loans decreased $2.0 million or 21.7% to $7.1 million at June 30, 2006 compared
      to $9.0 million at December 31, 2005. The decrease was principally due to a
      $1.4
      million or 33.4% decline in non-performing residential mortgage loans, a
      $354,000 or 15.9% decrease in non-performing commercial loans and a $247,000
      or
      9.0% decrease in non-performing consumer loans at June 30, 2006 compared to
      December 31, 2005. Total non-performing loans as a percentage of net loans
      improved to 0.46% at June 30, 2006 compared with 0.61% at December 31, 2005.





**Allowance
      for Loan Losses.** 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
      on a monthly basis all loans that are delinquent and performs regular reviews
      of
      the portfolio in order to identify those inherent losses and assess the overall
      adequacy of the allowance. 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.





18


In
      addition, in establishing the allowance for loan losses, KNBT’s management uses
      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 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
      KNBT to make additional provisions for estimated loan losses based upon
      judgments different from those of management. As of June 30, 2006, KNBT’s
      allowance for loan losses was 1.08% of total loans receivable compared to 1.08%
      at December 31, 2005.





KNBT
      will
      continue to monitor and modify its allowance for loan losses as conditions
      dictate. No assurances can be given that its level of allowance for loan losses
      will cover all of the inherent losses on its loans or that future adjustments
      to
      the allowance for loan losses will not be necessary if economic and other
      conditions differ substantially from the economic and other conditions used
      by
      management to determine the current level of the allowance for loan losses.




**Liabilities.** KNBT’s
      total liabilities were $2.7 billion at June 30, 2006, a decrease of $52.6
      million or 1.9% compared to December 31, 2005 primarily due to declines in
      the
      balances of securities sold under agreements to repurchase and FHLB advances,
      partially offset by an increase in total deposits. Total deposits increased
      $60.5 million or 3.3% to $1.9 billion at June 30, 2006 compared to December
      31,
      2005. This increase reflected, in part, KNBT’s continuing efforts to boost the
      level of checking accounts and other core deposits. Core deposits consist of
      all
      deposits other than certificates of deposit. FHLB advances declined $91.6
      million or 13.0% to $613.5 million at June 30, 2006 compared to $705.1 million
      at December 31, 2005. Maturing advances were the primary reason for the decline
      along with the advance repayment of $10.0 million in FHLB advances. Securities
      sold under agreements to repurchase declined $22.0 million or 28.7% to $54.9
      million at June 30, 2006 compared to $76.9 million at December 31, 2005. The
      primary reason for the decrease was the repayment of $40.0 million of repurchase
      agreements that were acquired in the NEPF acquisition. The repurchase decision
      was precipitated by an analysis of KNBT’s funding and cash flow requirements
      that allowed KNBT to redeem the securities at a price less than face value.





**Shareholders’
      Equity.** Shareholders’
      equity totaled $341.8 million at June 30, 2006 compared to $376.6 million at
      December 31, 2005, a decrease of $34.7 million or 9.2%. The decrease in
      shareholders’ equity was primarily the result of the continued repurchase of
      KNBT common stock through the Company’s stock repurchase programs and the
      payment of cash dividends. During the six month period ended June 30, 2006,
      KNBT
      repurchased 2,071,100 shares of its common stock at a cost of $33.6 million.
      Dividends declared and paid during the six month period ended June 30, 2006
      reduced retained earnings $ 4.3 million. Since the third quarter ended September
      30, 2005 to the quarter ended June 30, 2006, KNBT has increased cash dividends
      per share by 33.3% from $0.06 per share to $0.08 per share. Also contributing
      to
      the decline in shareholders’ equity was a decrease in accumulated other
      comprehensive income of $10.4 million relating to unrealized losses in
      investment securities available-for-sale. Net income for the six months ended
      June 30, 2006 was $11.4 million.  KNBT
      committed to release 23,801 shares of the Company’s common stock during the six
      months ended June 30, 2006 pursuant to the ESOP for a value of
      $371,000.
















19


Regulatory
      capital for KNBT and the Bank at June 30, 2006 and December 31, 2005 are shown
      in the following tables.


At
                  June 30, 2006Required
              
              To
                  Be Well CapitalizedFor
                  Capital
              
              Under
                  Prompt CorrectiveActual
              
              Adequacy
                  Purposes
              
              Action
                  ProvisionsAmount
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              RatioTotal
                  Capital
              
              (dollars
                  in thousands)(To
                  risk-weighted assets)Company
                  (consolidated)
              
              $
              281,719
              
              
              14.81
              %
              $
              152,200
              
              
              8.00
              %
              
              N/A
              
              
              N/ABank
              
              $
              253,503
              
              
              13.39
              %
              $
              151,432
              
              
              8.00
              %
              $
              189,290
              
              
              10.00
              %Tier
                  I Capital(To
                  risk-weighted assets)Company
                  (consolidated)
              
              $
              264,833
              
              
              13.92
              %
              $
              76,100
              
              
              4.00
              %
              
              N/A
              
              
              N/ABank
              
              $
              236,903
              
              
              12.52
              %
              $
              75,716
              
              
              4.00
              %
              $
              113,574
              
              
              6.00
              %Tier
                  I Capital(To
                  average assets, leverage)Company
                  (consolidated)
              
              $
              264,833
              
              
              7.68
              %
              $
              138,009
              
              
              4.00
              %
              
              N/A
              
              
              N/ABank
              
              $
              236,903
              
              
              8.29
              %
              $
              114,281
              
              
              4.00
              %
              $
              142,852
              
              
              5.00
              %At
                  December 31, 2005Required
              
              
              To
                  Be Well CapitalizedFor
                    Capital
              
              
              Under
                  Prompt CorrectiveActual
              
              Adequacy
                  Purposes
              
              Action
                  ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioTotal
                  Capital
              
              (dollars
                  in thousands)(To
                  risk-weighted assets)Company
                  (consolidated)
              
              $
              312,692
              
              
              16.95
              %
              $
              147,621
              
              
              8.00
              %
              
              N/A
              
              
              N/ABank
              
              $
              281,866
              
              
              15.16
              %
              $
              148,727
              
              
              8.00
              %
              $
              185,908
              
              
              10.00
              %Tier
                  I Capital(To
                  risk-weighted assets)Company
                  (consolidated)
              
              $
              296,543
              
              
              16.07
              %
              $
              73,811
              
              
              4.00
              %
              
              N/A
              
              
              N/ABank
              
              $
              265,902
              
              
              14.30
              %
              $
              74,363
              
              
              4.00
              %
              $
              111,545
              
              
              6.00
              %Tier
                  I Capital(To
                  average assets, leverage)Company
                  (consolidated)
              
              $
              296,543
              
              
              8.16
              %
              $
              145,394
              
              
              4.00
              %
              
              N/A
              
              
              N/ABank
              
              $
              265,902
              
              
              8.80
              %
              $
              120,895
              
              
              4.00
              %
              $
              151,119
              
              
              5.00
              %





**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 advances in recent years as a cost efficient addition to deposits as
      a
      source of funds. The average balance of FHLB advances was $670.1 million and
      $700.1 million for the six months ended June 30, 2006 and June 30, 2005,
      respectively. To date, KNBT’s borrowings have consisted primarily of advances
      from the FHLB of Pittsburgh.





20


**“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,
      2006, 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,
      2006, 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 12%
      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 8%, respectively.


At
                June 30, 2006More
                than
            
            More
                than
            
            More
                than
            
            More
                than3
                Months
            
            3
                Months
            
            6
                Months
            
            1
                Year
            
            3
                Years
            
            More
                thanor
                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
            
            $
            84,992
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            84,992Loans
                receivable (2)
            
            
            251,884
            
            
            97,379
            
            
            163,600
            
            
            426,647
            
            
            260,367
            
            
            340,570
            
            
            1,540,447Investment
                securities, debt
            
            
            136,905
            
            
            55,806
            
            
            77,697
            
            
            321,322
            
            
            199,682
            
            
            190,036
            
            
            981,448Investment
                securities, equity
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            41,452
            
            
            41,452Total
                interest-earningassets
            
            $
            473,781
            
            $
            153,185
            
            $
            241,297
            
            $
            747,969
            
            $
            460,049
            
            $
            572,058
            
            $
            2,648,339Cumulative
                total interest-earning
                assets
            
            $
            473,781
            
            $
            626,966
            
            $
            868,263
            
            $
            1,616,232
            
            $
            2,076,281
            
            $
            2,648,339
            
            $
            2,648,339Interest-bearingliabilities:Savings
                deposits
            
            $
            767
            
            $
            10,066
            
            $
            10,067
            
            $
            13,422
            
            $
            16,778
            
            $
            201,335
            
            $
            252,435Interest-bearing
                checking deposits
            
            
            -
            
            
            14,323
            
            
            9,549
            
            
            9,549
            
            
            4,774
            
            
            200,520
            
            
            238,715Money
                market deposits
            
            
            43,844
            
            
            52,615
            
            
            35,077
            
            
            58,461
            
            
            29,231
            
            
            219,229
            
            
            438,457Certificates
                of deposit
            
            
            106,994
            
            
            188,340
            
            
            267,269
            
            
            170,686
            
            
            42,396
            
            
            1,658
            
            
            777,343FHLB
                advances and otherborrowings
            
            
            139,966
            
            
            53,709
            
            
            125,132
            
            
            194,099
            
            
            103,330
            
            
            90,754
            
            
            706,990Total
                interest-bearingliabilities
            
            $
            291,571
            
            $
            319,053
            
            $
            447,094
            
            $
            446,217
            
            $
            196,509
            
            $
            713,496
            
            $
            2,413,940Cumulative
                total interest-bearing
                liabilities
            
            $
            291,571
            
            $
            610,624
            
            $
            1,057,718
            
            $
            1,503,935
            
            $
            1,700,444
            
            $
            2,413,940
            
            $
            2,413,940Interest-earning
                assetsless
                interest-bearingliabilities
            
            $
            182,210
            
            $
            (165,868
            )
            $
            (205,797
            )
            $
            301,752
            
            $
            263,540
            
            $
            (141,438
            )
            $
            234,399Cumulative
                interest-ratesensitivity
                gap (3)
            
            $
            182,210
            
            $
            16,342
            
            $
            (189,455
            )
            $
            112,297
            
            $
            375,837
            
            $
            234,399Cumulative
                interest-rate gap as apercentage
                of total assets atJune
                30, 2006
            
            
            6.08
            %
            
            0.55
            %
            
            (6.33
            %)
            
            3.75
            %
            
            12.55
            %
            
            7.83
            %Cumulative
                interest-earning assetsas
                a percentage ofcumulative
                interest-bearingliabilities
                at June 30, 2006
            
            
            162.49
            %
            
            102.68
            %
            
            82.09
            %
            
            107.47
            %
            
            122.10
            %
            
            109.71
            %




(1)
                Interest-earning assets are included in the period in which the balances
                are expected to be redeployed and/or repriced as a
                result of anticipated prepayments, scheduled rate adjustment or
                contractual maturity.(2)
                For purposes of the gap analysis, loans receivable includes non-performing
                loans, gross of the allowance for loan losses, undisbursed
                loan funds and deferred loan fees.(3)
                Interest-rate sensitivity gap represents the net difference between
                interest-earning assets and interest-bearing
                liabilities.


21


**Comparison
      of Operating Results for the Three and Six Months Ended June 30, 2006 and
      2005**





**General.** KNBT’s
      net income increased by $668,000, or 12.8% to $5.9 million for the three months
      ended June 30, 2006 compared to $5.2 million for the three months ended June
      30,
      2005. For the six months ended June 30, 2006, net income increased by $1.3
      million, or 13.1% to $11.4 million compared to $10.1 million for the same period
      in 2005. Net income increased during the 2006 periods due to higher levels
      of
      net interest income and non-interest income. These increases were partially
      offset by increases in non-interest expense. The primary reason for the increase
      in net interest income in the 2006 periods compared to the same periods in
      2005
      was the increase in the balance of KNBT’s average interest-earning assets as a
      result of the May 2005 acquisition of NEPF. NEPF’s interest-earning assets were
      included for both 2006 periods. The primary reason for growth in non-interest
      income in the 2006 periods compared to the 2005 periods was increasing revenues
      from the Bank’s trust operations, and brokerage service revenue from KNBT
      Securities combined with revenues from Caruso and Higgins. In addition, the
      Trust Company of the Lehigh Valley, part of the Paragon acquisition, was
      included in KNBT’s results as of March 1, 2006. Also, KNBT redeemed $40.0
      million in reverse repurchase agreements and $10.0 million in FHLB advances
      at a
      price less than face value which resulted in a gain of $1.2 million and also
      had
      $1.6 million in gains on sales of investment securities. Non-interest expense
      increased in 2006 due to the added expenses from expanded operations attributed
      to acquisitions.





**Net
      Interest Income.**  N et
      interest income is the principal source of earnings for KNBT, and consists
      primarily of interest income on loans receivable and investment and
      mortgage-backed securities, offset by interest expense on deposits and borrowed
      funds. Therefore, the interest rate environment has a material impact on KNBT’s
      earnings. Net interest income also depends upon the relative amounts of
      interest-earning assets and interest-bearing liabilities and the interest rate
      earned or paid on them. Generally, KNBT is able to increase net interest income
      at a faster pace when the spread between short-term and long-term Treasury
      rates
      is positive. This is due to funding costs being more directly tied to shorter
      term rates, while loan rates are tied to intermediate and longer term rates.
      However, in 2004 the yield curve flattened and has remained so through June
      30,
      2006. This has applied pressure to yields on KNBT’s interest-earning assets.




For
      the
      three months ended June 30, 2006, KNBT’s net interest income was $18.5 million,
      an increase of $461,000 or 2.6% compared to $18.1 million for the three months
      ended June 30, 2005. For the six months ended June 30, 2006, net interest income
      was $37.3 million an increase of $3.1 million or 8.9% compared to $34.2 million
      for the six months ended June 30, 2005. KNBT’s average interest-earning assets
      totaled $2.6 billion for the three months ended June 30, 2006 compared to $2.5
      billion for the three months ended June 30, 2005. Average interest-earning
      assets for the six month period ended June 30, 2006 were $2.6 billion, a $297.5
      million or 12.7% increase over the average interest-earning assets of $2.3
      billion for the same period in 2005. Average interest-bearing liabilities were
      $2.4 billion for the three months ended June 30, 2006 compared to $2.2 billion
      for the three months ended June 30, 2005. Average interest-earning liabilities
      for the six month period ended June 30, 2006 totaled $2.4 billion, a $360.6
      million or 17.6% increase over the average interest-bearing liabilities of
      $2.0
      million for the same period in 2005. KNBT’s average interest rate spread on a
      tax equivalent basis was 2.64% and 2.63% for the three and six month periods
      ended June 30, 2006, respectively, compared to 2.72% for both the three and
      six
      month periods ended June 30, 2005.





The
      net
      interest margin, a measure of net interest income performance, is determined
      by
      dividing net interest income on a tax equivalent basis by the average balance
      of
      total interest-earning assets. For both the three and six month periods ended
      June 30, 2006, the net interest margin on a tax-equivalent basis was 2.90%
      compared to 3.00% and 3.02%, respectively, for the same periods in 2005. KNBT’s
      net interest margin and average interest rate spread has contracted from the
      comparable 2005 levels due to increased deposit costs and the flattening yield
      curve which has typically led to replacement yields on new interest-earning
      assets being lower than yields on maturing assets as well as short-term funding
      costs increasing at a faster rate than yields on interest-earning assets. The
      flattening of the yield curve that was experienced in 2005 as well as through
      the first two quarters of 2006 has negatively impacted our margin and contracted
      the spread between our longer-term assets and our shorter-term
      liabilities.




22


KNBT
      presents its net interest margin on a tax-equivalent basis because management
      believes that presentation of its net interest margin on a tax-equivalent basis
      provides information that is useful for a proper understanding of the operating
      results of KNBT's business. These disclosures should not be viewed as a
      substitute for operating results determined in accordance with generally
      accepted accounting principles (“GAAP”) nor are they necessarily comparable to
      non-GAAP performance measures, which may be presented by other companies.
      Without the adjustment for tax-free income, the net interest margin was 2.83%
      and 2.82% respectively, for three and six month periods ended June 30, 2006,
      and
      2.89% and 2.91% for the same periods in 2005. See “-Average Balances, Net
      Interest Income, and Yields Earned and Rates Paid.”





**Interest
      Income.** KNBT’s
      total interest income was $36.7 million for the three-month period ended June
      30, 2006, a $5.1 million or 16.0% increase compared to $31.6 million in total
      interest income for the three month period ended June 30, 2005. For the six
      months ended June 30, 2006, total interest income was $72.9 million, a $14.4
      million or 24.5% increase compared to $58.6 million for the six month period
      end
      June 30, 2005. For the
      three months ended June 30, 2006, interest income on loans was $23.5 million,
      a
      $5.3 million or 29.4% increase compared to $18.2 million for the three months
      ended June 30, 2005 .
      For the
      six months ended June 30, 2006, interest income on loans was $46.1 million,
      a
      $13.0 million or 39.4% increase compared to $33.1 million for the six months
      ended June 30, 2005. Interest income on investment securities for the three
      months ended June 30, 2006 was only slightly more than the $12.9 million earned
      for the same period in 2005. For the six months ended June 30, 2006, interest
      income on investment securities was $26.4 million, a $1.7 million or 7.1%
      increase compared to $24.6 million for the six months ended June 30, 2005.





The
      reason for the increase in total loan interest income for both the three and
      six
      month periods ended June 30, 2006 compared to the same periods in 2005 was
      primarily due to the increases in the average balance of KNBT’s interest-earning
      assets. The average balances of loans for the three month period ended June
      30,
      2006 increased $295.9 million or 24.3% to $1.52 billion compared to $1.22
      billion for the three month period ended June 30, 2005. For the six month period
      ended June 30, 2006, the average balance for loans increased $380.5 million
      or
      33.9% to $1.50 billion compared to $1.12 million for the same period in 2005.
      The increase in the 2006 period was also affected, in part, by the loans
      acquired from the May 19, 2005 acquisition of NEPF. The increase in interest
      income on investment securities for both the three and six month periods ended
      June 30 2006 compared to the same periods in 2005 was primarily driven by
      increases in the yield earned thereon, offset in large part, especially in
      the
      second quarter, by the effect on the average balance of the sale of investment
      securities. The average balances of investment securities for the three month
      period ended June 30, 2006 decreased $113.5 million or 9.4% to $1.10 billion
      compared to $1.21 billion for the three month period ended June 30, 2005. For
      the six month period ended June 30, 2006, the average balance on investment
      securities declined $31.1 million or 2.7% to $1.1 billion compared to the same
      period in 2005.





**Interest
      Expense.** KNBT’s
      total interest expense for the three months ended June 30, 2006 was $18.1
      million, an increase of $4.6 million or 33.9%, compared to $13.6 million for
      the
      same period in 2005. For the six months ended June 30, 2006, total interest
      expense was $35.7 million, an $11.3 million or 46.3% increase over the six
      month
      period ended June 30, 2005. Interest expense on deposits totaled $10.7 million
      for the three months ended June 30, 2006, an increase of $4.4 million or 69.3%,
      compared to $6.3 million for the three months ended June 30, 2005. For the
      six
      months ended June 30 2006, interest expense on deposits totaled $20.5 million,
      a
      increase of $9.1 million or 79.4%, compared to $11.4 million for the six months
      ended June 30, 2005. Interest on FHLB advances, subordinated debt and securities
      sold under agreements to repurchase increased by an aggregate of $190,000 or
      2.6% to $7.4 million for the three months ended June 30, 2006 compared to $7.2
      million for the same period in 2005. Interest expense on FHLB advances,
      subordinated debt and securities sold under agreements to repurchase for the
      six
      months ended June 30 2006, totaled $15.1 million, an increase of $2.2 million
      or
      17.1%, compared to $12.9 million for the six months ended June 30, 2005.





23


The
      increase in interest expense on deposits for the three and six months ended
      June
      30, 2006 compared to the three and six months June 30, 2005 was primarily due
      to
      the increase in the average rate paid on deposits and to a lesser degree the
      increase in the average balances, as a result of the NEPF acquisition. The
      Federal Reserve’s increases in short-term rates throughout 2005 and into 2006
      increased market rates generally and resulted in KNBT having to increase the
      rates paid on deposits. Consequently, the average rates paid increased 77 basis
      points to 2.59% for the three month period ended June 30, 2006 compared to
      the
      same period in 2005 and 73 basis points to 2.50% compared to the six months
      ended June 30, 2006. The average balances of interest-bearing deposits increased
      $264.5 million or 19.0% to $1.7 billion for the three months ended June 30,
      2006
      compared to $1.4 billion for the same period in 2005. For the six month period
      ended June 30, 2006, the average balance for deposits increased $347.0 million
      or 26.8% to $1.6 billion compared to $1.3 million for the same period in 2005.
      The primary reason for the increase in interest expense on FHLB advances and
      subordinated debt in for the both the three and six month periods ended June
      30,
      2006 as compared with the same periods in 2005 was an increase in such
      instruments due to the assumption of FHLB advances and trust preferred
      securities from NEPF. KNBT has moderated the increase in this category through
      extinguishment of debt and the repayment of maturing of FHLB
      advances.




**Average
      Balances, Net Interest Income, and Yields Earned and Rates
      Paid.** The
      following tables show 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 and loans. 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.





24


For
                  the Three Months Ended June 30,2006
              
              2005Interest
              
              Average
              
              
              
              Interest
              
              AverageAverage
              
              Income/
              
              Yield/
              
              Average
              
              Income/
              
              Yield/Balance
              
              Expense
              
              Rate
              
              Balance
              
              Expense
              
              RateAssets
              
              (dollars
                  in thousands)Interest-earning
                  assetsInterest-bearing
                  balances with banks
              
              $
              14,329
              
              $
              145
              
              
              4.05
              %
              $
              79,509
              
              $
              542
              
              
              2.73
              %Federal
                  Funds sold
              
              $
              8,199
              
              $
              98
              
              
              4.78
              %
              $
              -
              
              $
              -
              
              
              -Investment
                  securitiesTaxable
                  (1)
              
              
              1,048,208
              
              
              12,356
              
              
              4.72
              %
              
              1,101,397
              
              
              11,746
              
              
              4.27
              %Non-taxable
                  (2)
              
              
              48,448
              
              
              877
              
              
              7.24
              %
              
              108,715
              
              
              1,760
              
              
              6.48
              %Loans
                  receivable (2) (3)
              
              
              1,516,016
              
              
              23,666
              
              
              6.24
              %
              
              1,220,113
              
              
              18,221
              
              
              5.97
              %Allowance
                  for loan losses
              
              
              (16,102
              )
              
              
              
              
              
              
              
              (12,953
              )Net
                  loans
              
              
              1,499,914
              
              
              23,666
              
              
              6.31
              %
              
              1,207,160
              
              
              18,221
              
              
              6.04
              %Total
                  interest-earning assets
              
              
              2,619,098
              
              
              37,142
              
              
              5.67
              %
              
              2,496,781
              
              
              32,269
              
              
              5.17
              %Non-interest-earning
                  assets
              
              
              356,434
              
              
              -
              
              
              
              
              
              268,035
              
              
              -Total
                  assets, interest income
              
              $
              2,975,532
              
              
              37,142
              
              
              
              
              $
              2,764,816
              
              
              32,269LiabilitiesInterest-bearing
                  liabilitiesInterest-bearing
                  depositsDemand
                  deposits
              
              $
              233,862
              
              
              325
              
              
              0.56
              %
              $
              207,076
              
              
              96
              
              
              0.19
              %Money
                  market deposits
              
              
              380,712
              
              
              2,780
              
              
              2.92
              %
              
              276,281
              
              
              1,114
              
              
              1.61
              %Savings
                  deposits
              
              
              257,816
              
              
              292
              
              
              0.45
              %
              
              252,721
              
              
              267
              
              
              0.42
              %Certificates
                  of deposit
              
              
              784,583
              
              
              7,352
              
              
              3.75
              %
              
              656,412
              
              
              4,872
              
              
              2.97
              %Total
                  interest-bearing deposits
              
              
              1,656,973
              
              
              10,749
              
              
              2.59
              %
              
              1,392,490
              
              
              6,349
              
              
              1.82
              %Securities
                  sold under agreementsto
                  repurchase
              
              
              48,037
              
              
              434
              
              
              3.61
              %
              
              43,754
              
              
              308
              
              
              2.82
              %FHLB
                  advances
              
              
              646,603
              
              
              6,269
              
              
              3.88
              %
              
              749,132
              
              
              6,461
              
              
              3.45
              %Other
                  debt
              
              
              38,713
              
              
              689
              
              
              7.12
              %
              
              26,523
              
              
              433
              
              
              6.53
              %Total
                  interest-bearing liabilities
              
              
              2,390,326
              
              
              18,141
              
              
              3.04
              %
              
              2,211,899
              
              
              13,551
              
              
              2.45
              %Non-interest-bearing
                  liabilitiesNon-interest-bearing
                  deposits
              
              
              196,149
              
              
              -
              
              
              -
              
              
              149,867
              
              
              -
              
              
              -Other
                  liabilities
              
              
              32,388
              
              
              -
              
              
              -
              
              
              11,257
              
              
              -
              
              
              -Total
                  liabilities
              
              
              2,618,863
              
              
              18,141
              
              
              
              
              
              2,373,024
              
              
              13,551Shareholders'
                  equity
              
              
              356,669
              
              
              -
              
              
              -
              
              
              391,792
              
              
              -
              
              
              -Total
                  liabilities and shareholders'equity,
                  interest expense
              
              $
              2,975,532
              
              
              18,141
              
              
              
              
              $
              2,764,816
              
              
              13,551Net
                  interest income on tax equivalent basis (2)
              
              
              
              
              
              19,001
              
              
              
              
              
              
              
              
              18,718Net
                  interest spread ontax
                  equivalent basis (4)
              
              
              
              
              
              
              
              
              2.64
              %
              
              
              
              
              
              
              
              2.72
              %Net
                  interest margintax
                  equivalent basis (5)
              
              
              
              
              
              
              
              
              2.90
              %
              
              
              
              
              
              
              
              3.00
              %Tax-exempt
                  adjustment (2)
              
              
              
              
              
              (480
              )
              
              (0.07
              %)
              
              
              
              
              (658
              )
              
              (0.11
              %)Net
                  interest income and margin (4)
              
              
              
              
              $
              18,521
              
              
              2.83
              %
              
              
              
              $
              18,060
              
              
              2.89
              %Average
                  interest-earning assetsto
                  average interest-bearing liabilities
              
              
              
              
              
              
              
              
              109.57
              %
              
              
              
              
              
              
              
              112.88
              %
  (1)
                  Includes Federal Home Loan Bank stock.(2)
                  The indicated interest income and average yields are presented
                  on a
                  tax-equivalent basis. The taxable equivalent adjustments
                  included the effect of increasing interest income over the GAAP
                  basis and
                  were $480,000 and $658,000 for the three months
                  ended June 30, 2006 and 2005, respectively. The effective tax rate
                  used
                  for the taxable equivalent adjustment was
                  35%.(3)
                  Loan expenses of $(43,724) and $(187,000) for the three months
                  ended June
                  30, 2006 and 2005, respectively, are included
                  in interest income. Average loan balances include non-accruing
                  loans
                  of$6.6million and $4.9 million and average
                  loans held-for-sale of $330,000 and $707,000 for the three months
                  ended
                  June 30, 2006 and 2005, respectively.(4)
                  Net interest spread is the arithmatic difference between yield
                  on
                  interest-earning assets, adjusted to a tax equivalent basis, and
                  the rate paid on interest-bearing liabilities. On a GAAP basis,
                  the
                  Company's net interest spread was 2.57% and 2.61% for the
                  three months ended June 30, 2006 and
                  2005.(5)
                  Net interest margin is computed on a GAAP basis by dividing net
                  interest
                  income by average interest-earning
                  assets.


25


For
                the Six Months Ended June 30,2006
            
            2005Interest
            
            Average
            
            
            
            Interest
            
            AverageAverage
            
            Income/
            
            Yield/
            
            Average
            
            Income/
            
            Yield/Balance
            
            Expense
            
            Rate
            
            Balance
            
            Expense
            
            RateAssets
            
            (dollars
                in thousands)Interest-earning
                assetsInterest-bearing
                balances with banks
            
            $
            18,453
            
            $
            370
            
            
            4.01
            %
            $
            70,101
            
            $
            888
            
            
            2.53
            %Federal
                Funds sold
            
            $
            4,122
            
            $
            98
            
            
            4.75
            %
            $
            -
            
            $
            -
            
            
            -Investment
                securitiesTaxable
                (1)
            
            
            1,079,551
            
            
            25,025
            
            
            4.64
            %
            
            1,059,786
            
            
            22,312
            
            
            4.21
            %Non-taxable
                (2)
            
            
            57,737
            
            
            2,072
            
            
            7.18
            %
            
            108,629
            
            
            3,520
            
            
            6.48
            %Loans
                receivable (2) (3)
            
            
            1,501,634
            
            
            46,438
            
            
            6.18
            %
            
            1,121,178
            
            
            33,141
            
            
            5.91
            %Allowance
                for loan losses
            
            
            (15,993
            )
            
            
            
            
            
            
            
            (11,678
            )Net
                loans
            
            
            1,485,641
            
            
            46,438
            
            
            6.25
            %
            
            1,109,500
            
            
            33,141
            
            
            5.97
            %Total
                interest-earning assets
            
            
            2,645,504
            
            
            74,003
            
            
            5.59
            %
            
            2,348,016
            
            
            59,861
            
            
            5.10
            %Non-interest-earning
                assets
            
            
            351,580
            
            
            -
            
            
            
            
            
            235,654
            
            
            -Total
                assets, interest income
            
            $
            2,997,084
            
            
            74,003
            
            
            
            
            $
            2,583,670
            
            
            59,861LiabilitiesInterest-bearing
                liabilitiesInterest-bearing
                depositsDemand
                deposits
            
            $
            231,553
            
            
            604
            
            
            0.52
            %
            $
            191,894
            
            
            168
            
            
            0.18
            %Money
                market deposits
            
            
            375,759
            
            
            5,394
            
            
            2.87
            %
            
            262,005
            
            
            1,906
            
            
            1.45
            %Savings
                deposits
            
            
            259,279
            
            
            577
            
            
            0.45
            %
            
            231,225
            
            
            516
            
            
            0.45
            %Certificates
                of deposit
            
            
            776,363
            
            
            13,963
            
            
            3.60
            %
            
            610,791
            
            
            8,858
            
            
            2.90
            %Total
                interest-bearing deposits
            
            
            1,642,954
            
            
            20,538
            
            
            2.50
            %
            
            1,295,915
            
            
            11,448
            
            
            1.77
            %Securities
                sold under agreementsto
                repurchase
            
            
            58,054
            
            
            1,028
            
            
            3.54
            %
            
            31,338
            
            
            359
            
            
            2.29
            %FHLB
                advances
            
            
            670,147
            
            
            12,782
            
            
            3.81
            %
            
            700,952
            
            
            11,905
            
            
            3.40
            %Other
                debt
            
            
            38,772
            
            
            1,328
            
            
            6.85
            %
            
            21,087
            
            
            666
            
            
            6.32
            %Total
                interest-bearing liabilities
            
            
            2,409,927
            
            
            35,676
            
            
            2.96
            %
            
            2,049,292
            
            
            24,378
            
            
            2.38
            %Non-interest-bearing
                liabilitiesNon-interest-bearing
                deposits
            
            
            190,910
            
            
            -
            
            
            -
            
            
            136,872
            
            
            -
            
            
            -Other
                liabilities
            
            
            32,753
            
            
            -
            
            
            -
            
            
            12,611
            
            
            -
            
            
            -Total
                liabilities
            
            
            2,633,590
            
            
            35,676
            
            
            
            
            
            2,198,775
            
            
            24,378Shareholders'
                equity
            
            
            363,494
            
            
            -
            
            
            -
            
            
            384,895
            
            
            -
            
            
            -Total
                liabilities and shareholders'equity,
                interest expense
            
            $
            2,997,084
            
            
            35,676
            
            
            
            
            $
            2,583,670
            
            
            24,378Net
                interest income on tax equivalent basis (2)
            
            
            
            
            
            38,327
            
            
            
            
            
            
            
            
            35,483Net
                interest spread ontax
                equivalent basis (4)
            
            
            
            
            
            
            
            
            2.63
            %
            
            
            
            
            
            
            
            2.72
            %Net
                interest margintax
                equivalent basis (5)
            
            
            
            
            
            
            
            
            2.90
            %
            
            
            
            
            
            
            
            3.02
            %Tax-exempt
                adjustment
            
            
            
            
            
            (1,071
            )
            
            (0.08
            %)
            
            
            
            
            (1,284
            )
            
            (0.11
            %)Net
                interest income and margin (4)
            
            
            
            
            $
            37,256
            
            
            2.82
            %
            
            
            
            $
            34,199
            
            
            2.91
            %Average
                interest-earning assetsto
                average interest-bearing liabilities
            
            
            
            
            
            
            
            
            109.78
            %
            
            
            
            
            
            
            
            114.58
            %




(1)
                Includes Federal Home Loan Bank stock.(2)
                The indicated interest income and average yields are presented on
                a
                tax-equivalent basis. The taxable equivalent adjustments
                included the effect of increasing interest income over the GAAP basis
                and
                were $1,071,000 and $1,284,000 for the six months
                ended June 30, 2006 and 2005, respectively. The effective tax rate
                used
                for the taxable equivalent adjustment was
                35%.(3)
                Loan (expenses) fees of $6,000 and $(211,000) for the six months
                ended
                June 30, 2006 and 2005, respectively, are included
                in interest income. Average loan balances include non-accruing loans
                of$6.8
                millionand $4.4 million and average
                loans held-for-sale of $444,000 and $1.1 million for the six months
                ended
                June 30, 2006 and 2005, respectively.(4)
                Net interest spread is the arithmatic difference between yield on
                interest-earning assets, adjusted to a tax equivalent basis, and
                the rate paid on interest-bearing liabilities. On a GAAP basis, the
                Company's net interest spread was 2.55% and 2.61% for the
                six months ended June 30, 2006 and 2005.(5)
                Net interest margin is computed on a GAAP basis by dividing net interest
                income by average interest-earning
                assets.


26


**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.




Three
                  Months Ended June 30, 2006
              
              Six
                  Months Ended June 30, 2006Compared
                  to Three Months Ended June 30, 2005
              
              Compared
                  to Six Months Ended June 30, 2005Increase
                  (Decrease)
              
              Total
              
              Increase
                  (Decrease)
              
              TotalDue
                  to
              
              Increase
              
              Due
                  to
              
              IncreaseRate
              
              Volume
              
              (Decrease)
              
              Rate
              
              Volume
              
              (Decrease)(in
                  thousands)
              
              (in
                  thousands)Interest
                  Income:Interest
                  bearing deposits with banks
              
              $
              89
              
              $
              (388
              )
              $
              (299
              )
              $
              182
              
              $
              (602
              )
              $
              (420
              )Investment
                  securities (1)
              
              
              993
              
              
              (1,266
              )
              
              (273
              )
              
              1,953
              
              
              (688
              )
              
              1,265Loans
                  receivable, net (2)
              
              
              1,026
              
              
              4,419
              
              
              5,445
              
              
              2,051
              
              
              11,246
              
              
              13,297Total
                  interest-earning assets
              
              
              2,108
              
              
              2,765
              
              
              4,873
              
              
              4,186
              
              
              9,956
              
              
              14,142Interest
                  Expense:Savings
                  deposits
              
              
              20
              
              
              5
              
              
              25
              
              
              (2
              )
              
              63
              
              
              61Demand
                  deposits
              
              
              217
              
              
              12
              
              
              229
              
              
              401
              
              
              35
              
              
              436Money
                  market deposits
              
              
              1,245
              
              
              421
              
              
              1,666
              
              
              2,660
              
              
              828
              
              
              3,488Certificates
                  of deposit
              
              
              1,529
              
              
              951
              
              
              2,480
              
              
              2,704
              
              
              2,401
              
              
              5,105Total
                  interest-bearing deposits
              
              
              3,011
              
              
              1,389
              
              
              4,400
              
              
              5,763
              
              
              3,327
              
              
              9,090Securities
                  sold under agreementsto
                  repurchase
              
              
              96
              
              
              30
              
              
              126
              
              
              363
              
              
              306
              
              
              669FHLB
                  advances and other borrowings
              
              
              692
              
              
              (884
              )
              
              (192
              )
              
              1,400
              
              
              (523
              )
              
              877Other
                  debt
              
              
              57
              
              
              199
              
              
              256
              
              
              103
              
              
              559
              
              
              662Total
                  interest-bearing liabilities
              
              
              3,856
              
              
              734
              
              
              4,590
              
              
              7,629
              
              
              3,669
              
              
              11,298(Decrease)
                  increase in netinterest
                  income (3)
              
              $
              (1,748
              )
              $
              2,031
              
              $
              283
              
              $
              (3,443
              )
              $
              6,287
              
              $
              2,844
  (1)
                  Total increase in loans receivable on a nontaxable equivalent basis
                  would
                  be $5,332 and $13,038 for the three and six month comparisons,
                  respectively.(2)
                  Total increase in investment securities on a nontaxable equivalent
                  basis
                  would be $18 and $1,737 for the three and six month comparisons,
                  respectively.(3)
                  Total increase in net interest income on a nontaxable equivalent
                  basis
                  would be $461 and $3,057 for the three and isx month comparisons,
                  respectively.




**Provision
      for Loan Losses** **.** The
      provision for loan losses is determined by management’s review and analysis of
      the loan portfolio. This evaluation process includes, among other things, an
      analysis of delinquent and non-performing loans, the level of charge-offs and
      recoveries, the value of collateral securing loans, the borrowers’ ability to
      repay, repayment performance and local economic conditions. The valuation also
      takes into consideration performing loans that may have certain weaknesses
      as
      identified by management in its review of loans.




K NBT **** made
      a
      provision for loan losses of $1.2 million for the three months ended June 30,
      2006 compared to $534,000 for the three months ended June 30, 2005, an increase
      of $666,000 or 124.7%. For the six months ended June 30, 2006, the provision
      for
      loan losses was $2.0 million, a $682,000 or 53.8% increase over the same period
      in 2005. KNBT has made provisions in order to maintain the allowance for loan
      losses at a level, that to the best of our knowledge, covers all known and
      inherent losses that are both probable and reasonable to estimate at this time
      in KNBT’s growing loan portfolio. The allowance for loan loss to total loans at
      June 30, 2006 and also at December 31, 2005 was unchanged at 1.08%. For the
      three months ended June 30, 2006, charge-offs were primarily related to consumer
      loans. Non-performing loans totaled $7.1 million and $9.0 million at June 30,
      2006 and December 31, 2005, respectively. At June 30, 2006, KNBT’s allowance for
      loan losses was 235.3% of non-performing loans compared to 177.3% at December
      31, 2005.


27


**Non-Interest
      Income.** Non-interest
      income increased $3.9 million or 59.4% to $10.4 million for the three months
      ended June 30, 2006 compared to $6.6 million for the three months ended June
      30,
      2005. For
      the
      six months ended June 30, 2006, non-interest income totaled $19.5 million,
      an
      $8.5 million or 77.6% increase over the same period in 2005. The
      increase during the three month period ended June 30, 2006 over the comparable
      period in 2005 was primarily the result of an increase of $911,000 or 216.9%
      in
      trust revenue, an increase of $403,000 or 71.0% in brokerage services revenue,
      an increase of $160,000 or 12.1% from deposit service charges, a gain of $1.6
      million on the sale of investments, and an increase of $427,000 or 135.6% in
      insurance service revenue from Higgins which was acquired as part of the NEPF
      acquisition. The increase in trust revenue was the primarily the result of
      additional revenues provided from the Trust Department acquired as part of
      the
      NEPF acquisition and the inclusion of a full quarter’s activity from the
      recently acquired TCLV. Brokerage revenues increased as a result of increased
      securities brokerage activity reflecting increased penetration by the sales
      force of KNBT Securities in both existing as well as its recently expanded
      territories. The $1.6 million gain was the result of the sale of $55.0 million
      of investment securities consisting primarily of tax-advantaged securities,
      which was done to fund (i) the growth in the loan portfolio, (ii) repayment
      of
      maturing FHLB advances, (iii) common stock purchases made pursuant to the stock
      repurchase programs and to utilize certain tax attributes. The increase for
      the
      six month period ended June 30, 2006 over the comparable period in 2005 was
      an
      increase of $1.6 million or 192.7% from trust revenues, a $712,000 or 63.8%
      increase in brokerage services revenue, $1.4 million or 93.0% increase in
      revenues from Caruso which was included for the full six months of the 2006
      period compared with only three months of the six months ended June 30, 2005,
      a
      $1.1 million increase due to Higgins a $1.2 million gain on the extinguishment
      of debt, which includes $712,000 related to the reversal of intangible assets
      recorded as part of the NEPF acquisition, and a $1.3 million increase in gains
      on sales of investments.





**Non-Interest
      Expense.** Non-interest expense increased by $2.4 million or 14.3%, to $19.4 million for
      the three months ended June 30, 2006 compared to $17.0 million for the three
      months ended June 30, 2005. For the six months ended June 30, 2006, non-interest
      expense totaled $38.9 million, a $8.5 million or 28.0% increase over the same
      period in 2005. The major factors for the increases in the 2005 periods were
      higher compensation and benefit expenses, higher occupancy and equipment
      expenses, increased advertising expense, data processing expense, and
      amortization of intangible assets. Compensation and benefit expenses increased
      $1.7 million or 17.6% and $4.5 million or 25.9%, for the three and six month
      periods ended June 2006 and June 2005. The increase reflects the addition of
      7
      employees from the April 2005 acquisition of Caruso, 17 employees from the
      Paragon acquisition in February 2006 and approximately 180 employees from the
      NEPF acquisition in May 2005 as well as the impact of SFAS No. 123(R). Net
      occupancy and equipment costs increased $488,000 or 19.7% and $1.6 million
      or
      35.7%, for the three and six month periods ended June 2006 and June 2005. The
      increase in net occupancy and equipment costs was primarily due to the addition
      of 16 full-service branches acquired in the NEPF acquisition, as well as an
      administrative office building and two other properties housing banking units
      in
      Hazleton, Pennsylvania. Advertising expenses increased $211,000 or 84.7%, and
      $402,000 or 85.4% and data processing costs increased $171,000 or 35.5% and
      $350,000 or 38.3% for the three and six month periods ended June 30, 2006,
      respectively, compared to the same periods in 2005. Increased marketing costs
      to
      establish a market identity in the market area primarily served by NEPF was
      the
      main reason for the increase in advertising costs while the increased costs
      of
      systems conversions to connect the former NEPF office network to the KNBT
      network and its ongoing operation was the primary cause for the data processing
      cost increase. Amortization of intangible assets increased $143,000 or 18.3%
      and
      $489,000 or 36.8% for the three and six month periods ended June 2006 and June
      2006, respectively. The increase in amortization of intangible asset expense
      was
      the result of the mark-to-market of the NEPF and Caruso assets and liabilities
      as required by SFAS No. 141. Other operating expenses decreased $517,000 or
      28.1% to $1.3 million for the three month period ended June 30, 2006 as compared
      to similar period in 2005. The principal reason was that merger costs, related
      to the NEPF acquisition, were expensed in June 2005.




**Income
      Tax Expense.** KNBT’s
      income tax expense increased by $590,000 to $2.5 million and by $1.1 to $4.5
      million for the three and six months ended June 30, 2006 and June 30, 2005
      respectively. The effective income tax rate for the three and six months ended
      June 30, 2006 was 29.4% and 28.5%, respectively, compared to 26.4% and 25.6%
      for
      the three and six month periods ended June 30, 2005. The higher effective tax
      rates for 2006 were primarily the result of lower tax-free investment securities
      income.





28


**Item
      3.****Quantitative
      and Qualitative Disclosures 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, 2005. There have been no material changes in KNBT’s assessment of its
      sensitivity to market risk since December 31, 2005.








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




**Evaluation
      of Disclosure Controls and Procedures.** KNBT’s
      management evaluated, with the participation of its Chief Executive Officer
      and
      Chief Financial Officer, the effectiveness of its disclosure controls and
      procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities
      Exchange Act of 1934) as of the end of the period covered by this report. Based
      on such evaluation, KNBT’s Chief Executive Officer and Chief Financial Officer
      have concluded that its disclosure controls and procedures are designed to
      ensure that information required to be disclosed in the reports that it files
      or
      submits under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      regulations and are operating in an effective manner.





**Changes
      in Internal Control Over Financial Reporting.** No
      change in KNBT’s internal control over financial reporting (as defined in Rules
      13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, as amended)
      occurred during the quarter ended June 30, 2006 that has materially affected
      or
      is reasonably likely to materially affect, KNBT’s internal control over
      financial reporting.








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





**Item
      1.****Legal
      Proceedings**




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








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





There
      have been no material changes from the risk factors disclosed in KNBT’s Annual
      Report on Form 10-K for the year ended December 31, 2005.





29


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




(a)
            Not
                applicable.(b)
            Not
                applicable.(c)
            The
                following table sets forth information regarding KNBT’s repurchases of its
                common stock during the quarter ended June 30, 2006.


Period
              
              Total
                  Number of Shares Purchased
              
              Average
                  Price Paid
                Per
                  Share
              
              Total
                  Number of Shares Purchased as Part of Publicly Announced Plans
                  or
                  Programs
              
              Maximum
                  Number of Shares that may yet be Purchased Under the Plan or Program(s)
                  (1)1,414,883April
                  1 - 30, 2006
              
              177,700
              
              $16.60
              
              177,700
              
              1,237,183May
                  1 - 31, 2006
              
              37,000
              
              $16.60
              
              37,000
              
              1,200,183June
                  1 - 30, 2006
              
              918,500
              
              $16.06
              
              918,500
              
              3,088,902Total
              
              1,133,200
              
              $16.16
              
              1,133,200
              
              N/A(1)
                  On July 27, 2005, the Board of Directors authorized the repurchase
                  of
                  3,151,297 shares of which 2,869,614 shares had been repurchased
                  as of June
                  30, 2006. On June 26, 2006, the Board of Directors authorized the
                  repurchase of an additional 2,807,219 shares to commence upon the
                  completion of the current buyback
                  program.


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





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








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





The
      results of the Annual Meeting of Shareholders held on May 4, 2006 were
      previously reported in KNBT’s Form 10-Q for the quarter ended March 31,
      2006.





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




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








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





(a)
            List
                of exhibits:31.1
                Section 302 Certification of the Chief Executive
                Officer31.2
                Section 302 Certification of the Chief Financial
                Officer32.1
                Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuantto
                Section 906 of the Sarbanes-Oxley Act of
                2002.





30


**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
                9, 2006
            
            BY:
            /S/
                Scott V. FainorScott
                V. FainorPresident
                and Chief Executive OfficerDATE:
            August
                9, 2006
            
            BY:
            /S/
                Eugene T. SobolEugene
                T. SobolSenior
                Executive Vice President, Chief FinancialOfficer
                and Treasurer







31