----

----

**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**WASHINGTON,      D. C.     20549**

**FORM      10-Q**

**________________________________**

|  x | QUARTERLY                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE                ACT OF                1934 for the quarterly period ended **September 30,                2007** |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  o | TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE                ACT OF                1934 |
|---------|---------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

**610-861-5000**

| Large                accelerated filer |  o | Accelerated                filer |  x | Non-accelerated                filer |  o |
|----------------------------------------|---------|----------------------------------|---------|--------------------------------------|---------|

----

----

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**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**INDEX**

|                                                                |                    |                                                                                                                      |                                                                                          | Page |
|---------------------------------------------------------------------|-------------------------|---------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|------|
| **PART                I – FINANCIAL INFORMATION**             |                    |
|                                                                | Item                1.  | Financial                Statements                                                                                       | 1                                                                                             |
|                                                                |                    |                                                                                                                      | Consolidated                Balance Sheets                                                    | 1    |
|                                                                |                    |                                                                                                                      | Consolidated                Statements of                Income                               | 2    |
|                                                                |                    |                                                                                                                      | Consolidated                Statement of Changes in                Shareholders’ Equity | 3    |
|                                                                |                    |                                                                                                                      | Consolidated                Statements of Cash Flows                                          | 4    |
|                                                                |                    |                                                                                                                      | Notes                to Interim Consolidated Financial                Statements              | 5    |
|                                                                | Item                2.  | Management’s                Discussion and Analysis of Financial                Condition and Results of Operations | 17                                                                                            |
|                                                                | Item                3.  | Quantitative                and Qualitative Disclosures about                Market Risk                                  | 32                                                                                            |
|                                                                | Item                4.  | Controls                and                Procedures                                                                     | 32                                                                                            |
| **PART                II – OTHER                INFORMATION** |                    |
|                                                                | Item                1.  | Legal                Proceedings                                                                                          | 33                                                                                            |
|                                                                | Item                1A. | Risk                Factors                                                                                               | 33                                                                                            |
|                                                                | Item                2.  | Unregistered                Sales of Equity Securities                and Use of Proceeds                                 | 33                                                                                            |
|                                                                | Item                3.  | Defaults                Upon Senior                Securities                                                             | 33                                                                                            |
|                                                                | Item                4.  | Submission                of Matters to a Vote of                Security Holders                                         | 33                                                                                            |
|                                                                | Item                5.  | Other                Information                                                                                          | 34                                                                                            |
|                                                                | Item                6.  | Exhibits                                                                                                                  | 34                                                                                            |
| **Signatures**                                                      | 35                      |

----

| **PART                I.** | **FINANCIAL                INFORMATION** |
|----------------------------|------------------------------------------|

| **Item                1.** | **Financial                Statements** |
|----------------------------|-----------------------------------------|

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS**

|                                                                                                                |   | September                30, |      |   | December                31, |   |
|---------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|--------|-----------------------------|--------|
| *(dollars                in thousands, except share data)*                                                          |   | 2007                         |      |   | 2006                        |   |
|                                                                                                                |   | (unaudited)                  |      |   |                        |   |
| **ASSETS**                                                                                                          |   |                         |      |   |                        |   |
| Cash                and due from banks                                                                              |   | $                            | 61,770    |   |                        | $      | 53,202 |   |
| Interest-bearing                deposits with banks                                                                 |   |                         | 1,302     |   |                        |   | 2,171 |   |
| Federal                funds sold                                                                                   |   |                         | -         |   |                        |   | 4,800 |   |
| Cash                and cash equivalents                                                                            |   |                         | 63,072    |   |                        |   | 60,173 |   |
| Investment                securities available-for-sale                                                             |   |                         | 646,121   |   |                        |   | 858,854 |   |
| Investment                securities held to maturity                                                               |   |                         |      |   |                        |   |   |   |
| (Fair                value of $28,398 at September 30, 2007 and $33,048 at December 31,                2006)        |   |                         | 28,710    |   |                        |   | 33,532 |   |
| FHLBank                Pittsburgh stock                                                                             |   |                         | 23,597    |   |                        |   | 30,724 |   |
| Mortgage                loans held-for-sale                                                                         |   |                         | 900       |   |                        |   | 1,994 |   |
| Loans                                                                                                               |   |                         | 1,819,014 |   |                        |   | 1,620,166 |   |
| Allowance                for loan losses                                                                            |   |                         | (18,118   | )      |                        |   | (17,044 | ) |
| Net                loans                                                                                            |   |                         | 1,800,896 |   |                        |   | 1,603,122 |   |
| Bank                owned life insurance                                                                            |   |                         | 80,984    |   |                        |   | 78,361 |   |
| Premises                and equipment, net                                                                          |   |                         | 46,834    |   |                        |   | 48,228 |   |
| Accrued                interest receivable                                                                          |   |                         | 10,788    |   |                        |   | 10,293 |   |
| Goodwill                                                                                                            |   |                         | 109,865   |   |                        |   | 105,854 |   |
| Other                intangible assets, net                                                                         |   |                         | 26,607    |   |                        |   | 29,387 |   |
| Other                assets                                                                                         |   |                         | 35,102    |   |                        |   | 38,305 |   |
| TOTAL                ASSETS                                                                                         |   | $                            | 2,873,476 |   |                        | $      | 2,898,827 |   |
|                                                                                                                |   |                         |      |   |                        |   |   |   |
| **LIABILITIES**                                                                                                     |   |                         |      |   |                        |   |   |   |
| Non-interest-bearing                deposits                                                                        |   | $                            | 188,250   |   |                        | $      | 206,972 |   |
| Interest-bearing                deposits                                                                            |   |                         | 1,734,350 |   |                        |   | 1,700,575 |   |
| Total                deposits                                                                                       |   |                         | 1,922,600 |   |                        |   | 1,907,547 |   |
| Securities                sold under agreements to repurchase                                                       |   |                         | 173,563   |   |                        |   | 45,296 |   |
| Federal                funds purchased                                                                              |   |                         | 14,800    |   |                        |   | - |   |
| Advances                from the FHLBank of Pittsburgh                                                              |   |                         | 367,025   |   |                        |   | 519,161 |   |
| Subordinated                debt                                                                                    |   |                         | 15,464    |   |                        |   | 38,406 |   |
| Accrued                interest payable                                                                             |   |                         | 12,913    |   |                        |   | 11,924 |   |
| Other                liabilities                                                                                    |   |                         | 17,407    |   |                        |   | 20,467 |   |
| TOTAL                LIABILITIES                                                                                    |   |                         | 2,523,772 |   |                        |   | 2,542,801 |   |
|                                                                                                                |   |                         |      |   |                        |   |   |   |
| **SHAREHOLDERS'                EQUITY**                                                                             |   |                         |      |   |                        |   |   |   |
| Preferred                stock, par value $0.01 per share; authorized 20,000,000 shares, none                issued |   |                         | -         |   |                        |   | - |   |
| Common                stock, par value $0.01 a share; authorized 100,000,000 shares, 33,970,146                and  |   |                         |      |   |                        |   |   |   |
| 33,963,910                shares issued at September 30, 2007 and December 31, 2006 ,                respectively   |   |                         | 330       |   |                        |   | 330 |   |
| Additional                paid-in capital                                                                           |   |                         | 340,843   |   |                        |   | 338,406 |   |
| Retained                earnings, substantially restricted                                                          |   |                         | 146,711   |   |                        |   | 142,519 |   |
| Treasury                stock, at cost; 7,443,739 and  6,285,342 shares                at                 |   |                         |      |   |                        |   |   |   |
| September                30, 2007 and December 31, 2006, respectively                                               |   |                         | (117,645  | )      |                        |   | (101,247 | ) |
| Unallocated                common stock held by Employee Stock Ownership Plan                                       |   |                         | (12,949   | )      |                        |   | (13,556 | ) |
| Accumulated                other comprehensive loss, net                                                            |   |                         | (7,586    | )      |                        |   | (10,426 | ) |
| TOTAL                SHAREHOLDERS' EQUITY                                                                           |   |                         | 349,704   |   |                        |   | 356,026 |   |
|                                                                                                                |   |                         |      |   |                        |   |   |   |
| TOTAL                LIABILITIES AND SHAREHOLDERS' EQUITY                                                           |   | $                            | 2,873,476 |   |                        | $      | 2,898,827 |   |
|                                                                                                                |   |                         |      |   |                        |   |   |   |
| The                accompanying notes are an integral part of these financial                statements.            |   |                         |      |   |                        |   |   |   |

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF INCOME**

|                                                                                                     |   | Three                Months Ended September 30, |   |   | Nine                Months Ended September 30, |   |
|----------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|--------|------------------------------------------------|--------|
| *(dollars                in thousands, except per share data)*                                           |   | 2007                                            |   |   | 2006                                           |   |   | 2007 |   |   | 2006 |   |
|                                                                                                     |   | (unaudited)                                     |   |
| **INTEREST                INCOME**                                                                       |   |                                            |   |   |                                           |   |   |   |   |   |   |   |
| Loans,                including fees                                                                     |   | $                                               | 29,213 |   |                                           | $      | 25,256 |   |   | $ | 83,318 |   |   | $ | 71,348 |   |
| Investment                securities                                                                     |   |                                            |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                                                                  |   |                                            | 8,545  |   |                                           |   | 12,099 |   |   |   | 28,173 |   |   |   | 37,133 |   |
| Tax-exempt                                                                                               |   |                                            | -      |   |                                           |   | 37 |   |   |   | - |   |   |   | 1,373 |   |
| Other                interest                                                                            |   |                                            | 77     |   |                                           |   | 377 |   |   |   | 1,079 |   |   |   | 848 |   |
| Total                interest income                                                                     |   |                                            | 37,835 |   |                                           |   | 37,769 |   |   |   | 112,570 |   |   |   | 110,702 |   |
| **INTEREST                EXPENSE**                                                                      |   |                                            |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                                 |   |                                            | 14,399 |   |                                           |   | 12,573 |   |   |   | 42,048 |   |   |   | 33,111 |   |
| Securities                sold under agreements to repurchase                                            |   |                                            | 1,672  |   |                                           |   | 462 |   |   |   | 3,116 |   |   |   | 1,491 |   |
| Advances                from FHLBank Pittsburgh                                                          |   |                                            | 4,177  |   |                                           |   | 6,028 |   |   |   | 13,699 |   |   |   | 18,809 |   |
| Subordinated                debt                                                                         |   |                                            | 292    |   |                                           |   | 731 |   |   |   | 1,609 |   |   |   | 2,059 |   |
| Total                interest expense                                                                    |   |                                            | 20,540 |   |                                           |   | 19,794 |   |   |   | 60,472 |   |   |   | 55,470 |   |
| **NET                INTEREST INCOME**                                                                   |   |                                            | 17,295 |   |                                           |   | 17,975 |   |   |   | 52,098 |   |   |   | 55,232 |   |
| Provision                for loan losses                                                                 |   |                                            | 813    |   |                                           |   | 365 |   |   |   | 1,458 |   |   |   | 2,315 |   |
| Net                interest income after provision for loan losses                                       |   |                                            | 16,482 |   |                                           |   | 17,610 |   |   |   | 50,640 |   |   |   | 52,917 |   |
| **NON-INTEREST                INCOME**                                                                   |   |                                            |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |
| Trust                revenue                                                                             |   |                                            | 1,523  |   |                                           |   | 1,214 |   |   |   | 4,324 |   |   |   | 3,608 |   |
| Brokerage                services revenue                                                                |   |                                            | 902    |   |                                           |   | 847 |   |   |   | 2,841 |   |   |   | 2,675 |   |
| Benefit                services revenue                                                                  |   |                                            | 1,397  |   |                                           |   | 1,374 |   |   |   | 4,583 |   |   |   | 4,303 |   |
| Insurance                services revenue                                                                |   |                                            | 760    |   |                                           |   | 772 |   |   |   | 2,306 |   |   |   | 2,162 |   |
| Deposit                service charges                                                                   |   |                                            | 1,739  |   |                                           |   | 1,566 |   |   |   | 5,061 |   |   |   | 4,447 |   |
| Lending                fees                                                                              |   |                                            | 336    |   |                                           |   | 322 |   |   |   | 961 |   |   |   | 847 |   |
| Check                card/ATM card fees                                                                  |   |                                            | 980    |   |                                           |   | 890 |   |   |   | 2,811 |   |   |   | 2,535 |   |
| Bank                owned life insurance                                                                 |   |                                            | 889    |   |                                           |   | 835 |   |   |   | 2,622 |   |   |   | 2,390 |   |
| Net                gain (loss) on sale of investment securities                                          |   |                                            | 1      |   |                                           |   | 1,440 |   |   |   | (1,622 | ) |   |   | 3,175 |   |
| Net                gain on  sale of residential mortgage loans                                 |   |                                            | 116    |   |                                           |   | 178 |   |   |   | 327 |   |   |   | 233 |   |
| Net                (loss) gain on sale of other assets                                                   |   |                                            | (22    | )      |                                           |   | 2 |   |   |   | (291 | ) |   |   | 2 |   |
| Net                (loss) gain on sale of other real estate owned                                        |   |                                            | (2     | )      |                                           |   | 29 |   |   |   | (14 | ) |   |   | 26 |   |
| Net                gain on extinguishment of debt                                                        |   |                                            | -      |   |                                           |   | - |   |   |   | - |   |   |   | 1,179 |   |
| Other                non-interest operating income                                                       |   |                                            | 751    |   |                                           |   | 704 |   |   |   | 2,239 |   |   |   | 2,120 |   |
| Total                non-interest income                                                                 |   |                                            | 9,370  |   |                                           |   | 10,173 |   |   |   | 26,148 |   |   |   | 29,702 |   |
| **NON-INTEREST                EXPENSE**                                                                  |   |                                            |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |
| Compensation                and employee benefits                                                        |   |                                            | 11,296 |   |                                           |   | 11,265 |   |   |   | 33,771 |   |   |   | 33,086 |   |
| Net                occupancy and equipment expense                                                       |   |                                            | 2,891  |   |                                           |   | 3,171 |   |   |   | 8,847 |   |   |   | 9,399 |   |
| Professional                fees                                                                         |   |                                            | 1,117  |   |                                           |   | 796 |   |   |   | 2,536 |   |   |   | 2,451 |   |
| Advertising                                                                                              |   |                                            | 261    |   |                                           |   | 205 |   |   |   | 889 |   |   |   | 1,079 |   |
| Data                processing                                                                           |   |                                            | 768    |   |                                           |   | 682 |   |   |   | 2,164 |   |   |   | 1,948 |   |
| Telecommunication                                                                                        |   |                                            | 328    |   |                                           |   | 297 |   |   |   | 1,022 |   |   |   | 1,004 |   |
| Office                supplies and postage                                                               |   |                                            | 501    |   |                                           |   | 404 |   |   |   | 1,474 |   |   |   | 1,575 |   |
| Amortization                of mortgage servicing rights                                                 |   |                                            | 92     |   |                                           |   | 94 |   |   |   | 264 |   |   |   | 281 |   |
| Amortization                of intangible assets                                                         |   |                                            | 963    |   |                                           |   | 927 |   |   |   | 2,888 |   |   |   | 2,744 |   |
| Other                operating expenses                                                                  |   |                                            | 1,593  |   |                                           |   | 1,362 |   |   |   | 5,179 |   |   |   | 4,550 |   |
| Total                non-interest expense                                                                |   |                                            | 19,810 |   |                                           |   | 19,203 |   |   |   | 59,034 |   |   |   | 58,117 |   |
|                                                                                                     |   |                                            |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |
| Income                before income taxes                                                                |   |                                            | 6,042  |   |                                           |   | 8,580 |   |   |   | 17,754 |   |   |   | 24,502 |   |
| Income                tax expense                                                                        |   |                                            | 1,939  |   |                                           |   | 2,669 |   |   |   | 6,153 |   |   |   | 7,205 |   |
| NET                INCOME                                                                                |   | $                                               | 4,103  |   |                                           | $      | 5,911 |   |   | $ | 11,601 |   |   | $ | 17,297 |   |
|                                                                                                     |   |                                            |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |
| **PER                SHARE DATA**                                                                        |   |                                            |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |
| Net                income- basic                                                                         |   | $                                               | 0.16   |   |                                           | $      | 0.22 |   |   | $ | 0.45 |   |   | $ | 0.63 |   |
| Net                income- diluted                                                                       |   | $                                               | 0.16   |   |                                           | $      | 0.22 |   |   | $ | 0.44 |   |   | $ | 0.63 |   |
| Cash                dividends per common share                                                           |   | $                                               | 0.10   |   |                                           | $      | 0.08 |   |   | $ | 0.28 |   |   | $ | 0.23 |   |
|                                                                                                     |   |                                            |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |
| The                accompanying notes are an integral part of these financial                statements. |   |                                            |   |   |                                           |   |   |   |   |   |   |   |   |

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

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

|                                                                                                                |   | Nine                Months Ended September 30, |       |
|---------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|------------|
| *(dollars                in thousands, except share data)*                                                          |   | 2007                                           |       |   | 2006 |   |
|                                                                                                                |   | (unaudited)                                    |       |
| Common                stock number of shares                                                                        |   |                                           |       |   |   |   |
| Beginning                balance                                                                                    |   |                                           | 33,166,591 |   |   |   | 33,080,609 |   |
| Allocated                Employee Stock Ownership Plan shares                                                       |   |                                           | 35,701     |   |   |   | 35,701 |   |
| Shares                issued upon exercise of stock options                                                         |   |                                           | 6,236      |   |   |   | 22,147 |   |
| Ending                balance                                                                                       |   |                                           | 33,208,528 |   |   |   | 33,138,457 |   |
|                                                                                                                |   |                                           |       |   |   |   |   |   |
| Treasury                stock number of shares                                                                      |   |                                           |       |   |   |   |   |   |
| Beginning                balance                                                                                    |   |                                           | (6,285,342 | ) |   |   | (3,861,000 | ) |
| Repurchase                of common stock                                                                           |   |                                           | (1,158,397 | ) |   |   | (2,413,842 | ) |
| Ending                balance                                                                                       |   |                                           | (7,443,739 | ) |   |   | (6,274,842 | ) |
|                                                                                                                |   |                                           |       |   |   |   |   |   |
|                                                                                                                |   |                                           |       |   |   |   |   |   |
| Common                stock value                                                                                   |   |                                           |       |   |   |   |   |   |
| Beginning                balance                                                                                    |   | $                                              | 330        |   |   | $ | 330 |   |
| Shares                issued upon exercise of stock options                                                         |   |                                           | -          |   |   |   | - |   |
| Ending                balance                                                                                       |   |                                           | 330        |   |   |   | 330 |   |
|                                                                                                                |   |                                           |       |   |   |   |   |   |
| Additional                paid in capital                                                                           |   |                                           |       |   |   |   |   |   |
| Beginning                balance                                                                                    |   |                                           | 338,406    |   |   |   | 342,144 |   |
| Reclass                of unearned compensation upon adoption of SFAS 123R                                          |   |                                           | -          |   |   |   | (7,130 | ) |
| Unallocated                Employee Stock Ownership Plan shares                                                     |   |                                           | (115       | ) |   |   | (56 | ) |
| Shares                issued upon exercise of stock options                                                         |   |                                           | 38         |   |   |   | 125 |   |
| Share-based                compensation expense                                                                     |   |                                           | 930        |   |   |   | 839 |   |
| Amortization                of compensation related to the Management Recognition and Retention                Plan |   |                                           | 1,584      |   |   |   | 1,601 |   |
| Ending                balance                                                                                       |   |                                           | 340,843    |   |   |   | 337,523 |   |
|                                                                                                                |   |                                           |       |   |   |   |   |   |
| Retained                earnings, substantially restricted                                                          |   |                                           |       |   |   |   |   |   |
| Beginning                balance                                                                                    |   |                                           | 142,519    |   |   |   | 127,471 |   |
| Net                income                                                                                           |   |                                           | 11,601     |   |   |   | 17,297 |   |
| Cash                dividends paid                                                                                  |   |                                           | (7,409     | ) |   |   | (6,405 | ) |
| Ending                balance                                                                                       |   |                                           | 146,711    |   |   |   | 138,363 |   |
|                                                                                                                |   |                                           |       |   |   |   |   |   |
| Unallocated                common stock held by the Employee Stock Ownership Plan                                   |   |                                           |       |   |   |   |   |   |
| Beginning                balance                                                                                    |   |                                           | (13,556    | ) |   |   | (14,366 | ) |
| Allocation                of Employee Stock Ownership Plan stock                                                    |   |                                           | 607        |   |   |   | 607 |   |
| Ending                balance                                                                                       |   |                                           | (12,949    | ) |   |   | (13,759 | ) |
|                                                                                                                |   |                                           |       |   |   |   |   |   |
| Unearned                common stock held by the Management Recognition and Retention                Plan           |   |                                           |       |   |   |   |   |   |
| Beginning                balance                                                                                    |   |                                           | -          |   |   |   | (7,130 | ) |
| Reclass                of unearned compensation upon adoption of SFAS 123R                                          |   |                                           | -          |   |   |   | 7,130 |   |
| Ending                balance                                                                                       |   |                                           | -          |   |   |   | - |   |
|                                                                                                                |   |                                           |       |   |   |   |   |   |
| Accumulated                other comprehensive income (loss)                                                        |   |                                           |       |   |   |   |   |   |
| Beginning                balance                                                                                    |   |                                           | (10,426    | ) |   |   | (9,898 | ) |
| Other                comprehensive income (loss) net of taxes and reclassification                adjustments       |   |                                           | 2,840      |   |   |   | (1,765 | ) |
| Ending                balance                                                                                       |   |                                           | (7,586     | ) |   |   | (11,663 | ) |
|                                                                                                                |   |                                           |       |   |   |   |   |   |
| Treasury                stock                                                                                       |   |                                           |       |   |   |   |   |   |
| Beginning                balance                                                                                    |   |                                           | (101,247   | ) |   |   | (61,999 | ) |
| Repurchase                of common stock                                                                           |   |                                           | (16,398    | ) |   |   | (39,080 | ) |
| Ending                balance                                                                                       |   |                                           | (117,645   | ) |   |   | (101,079 | ) |
|                                                                                                                |   |                                           |       |   |   |   |   |   |
| Total                Shareholders' Equity                                                                           |   | $                                              | 349,704    |   |   | $ | 349,715 |   |
|                                                                                                                |   |                                           |       |   |   |   |   |   |
| The                accompanying notes are an integral part of these financial                statements.            |   |                                           |       |   |   |   |   |   |

----

** KNBT      BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

|                                                                                                            |   | Nine                Months Ended September 30, |     |
|-----------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|----------|
| *(dollars                in thousands)*                                                                         |   | 2007                                           |     |   | 2006 |   |
|                                                                                                            |   | (unaudited)                                    |     |
| **OPERATING                ACTIVITIES:**                                                                        |   |                                           |     |   |   |   |
| Net                income                                                                                       |   | $                                              | 11,601   |   |   | $ | 17,297 |   |
| Adjustments                to reconcile net income to net cash provided by operating                activities: |   |                                           |     |   |   |   |   |   |
| Provision                for loan losses                                                                        |   |                                           | 1,458    |   |   |   | 2,315 |   |
| Depreciation                and amortization                                                                    |   |                                           | 6,870    |   |   |   | 6,791 |   |
| Compensation                expense, stock option plan                                                          |   |                                           | 930      |   |   |   | 839 |   |
| Management                Recognition and Retention Plan expense                                                |   |                                           | 1,584    |   |   |   | 1,601 |   |
| ESOP                expense                                                                                     |   |                                           | 492      |   |   |   | 551 |   |
| Amortization                and accretion of securities premiums and discounts, net                             |   |                                           | (252     | ) |   |   | (273 | ) |
| Loss                (gain) on sale of other real estate owned                                                   |   |                                           | 14       |   |   |   | (26 | ) |
| Loss                (gain) on sales of investment securities, net                                               |   |                                           | 1,622    |   |   |   | (3,175 | ) |
| Loss                (gain) on sale of other assets                                                              |   |                                           | 291      |   |   |   | (2 | ) |
| Gain                on sale of mortgage loans                                                                   |   |                                           | (327     | ) |   |   | (233 | ) |
| Gain                on extinguishment of debt                                                                   |   |                                           | -        |   |   |   | (1,179 | ) |
| Mortgage                loans originated for sale                                                               |   |                                           | (37,765  | ) |   |   | (24,960 | ) |
| Mortgage                loan sales                                                                              |   |                                           | 38,862   |   |   |   | 23,485 |   |
| Changes                in assets and liabilities:                                                               |   |                                           |     |   |   |   |   |   |
| Increase                in bank owned life insurance                                                            |   |                                           | (2,623   | ) |   |   | (2,390 | ) |
| (Increase)                decrease in accrued interest receivable                                               |   |                                           | (495     | ) |   |   | 740 |   |
| Decrease                (increase) in other assets                                                              |   |                                           | 647      |   |   |   | (7,075 | ) |
| (Decrease)                increase in other liabilities and accrued interest payable                            |   |                                           | (2,970   | ) |   |   | 2,919 |   |
| Net                cash provided by operating activities                                                        |   |                                           | 19,939   |   |   |   | 17,225 |   |
| **INVESTING                ACTIVITIES:**                                                                        |   |                                           |     |   |   |   |   |   |
| Proceeds                from calls and maturities of securities available-for-sale                              |   |                                           | 115,945  |   |   |   | 163,655 |   |
| Proceeds                from calls and maturities of securities held-to-maturity                                |   |                                           | 4,874    |   |   |   | 7,993 |   |
| Proceeds                from sales of securities available-for-sale                                             |   |                                           | 169,763  |   |   |   | 111,128 |   |
| Proceeds                from sales of securities held to maturity                                               |   |                                           | -        |   |   |   | 5,488 |   |
| Purchase                of securities available-for-sale                                                        |   |                                           | (70,029  | ) |   |   | (37,077 | ) |
| Purchase                of securities held to maturity                                                          |   |                                           | -        |   |   |   | (750 | ) |
| Purchase                of FHLBank Pittsburgh stock                                                             |   |                                           | (251     | ) |   |   | (1,436 | ) |
| Redemption                of FHLBank Pittsburgh stock                                                           |   |                                           | 7,378    |   |   |   | 8,309 |   |
| Net                increase in loans                                                                            |   |                                           | (199,232 | ) |   |   | (108,924 | ) |
| Cash                paid for acquisitions                                                                       |   |                                           | (2,869   | ) |   |   | (8,034 | ) |
| Cash                and cash equivalents obtained through acquisitions                                          |   |                                           | -        |   |   |   | 1,249 |   |
| Purchase                of premises and equipment                                                               |   |                                           | (3,087   | ) |   |   | (7,140 | ) |
| Proceeds                from the sale of other assets                                                           |   |                                           | 623      |   |   |   | 1,033 |   |
| Proceeds                from the sale of other real estate owned                                                |   |                                           | 406      |   |   |   | 274 |   |
| Net                cash provided by investing activities                                                        |   |                                           | 23,521   |   |   |   | 135,768 |   |
| **FINANCING                ACTIVITIES:**                                                                        |   |                                           |     |   |   |   |   |   |
| Net                increase in deposits                                                                         |   |                                           | 15,053   |   |   |   | 36,385 |   |
| Net                increase in repurchase agreements and federal funds sold                                     |   |                                           | 143,067  |   |   |   | 9,124 |   |
| Payment                on extinguishment of debt, net                                                           |   |                                           | -        |   |   |   | (49,595 | ) |
| Payment                on the redemption of subordinated debentures                                             |   |                                           | (22,997  | ) |   |   | - |   |
| Proceeds                from long-term debt                                                                     |   |                                           | -        |   |   |   | 92,000 |   |
| Payments                on long-term debt                                                                       |   |                                           | (151,915 | ) |   |   | (216,863 | ) |
| Purchase                of treasury stock                                                                       |   |                                           | (16,398  | ) |   |   | (39,080 | ) |
| Proceeds                from the exercise of stock options                                                      |   |                                           | 38       |   |   |   | 125 |   |
| Cash                dividends paid                                                                              |   |                                           | (7,409   | ) |   |   | (6,405 | ) |
| Net                cash used in financing activities                                                            |   |                                           | (40,561  | ) |   |   | (174,309 | ) |
| Increase                (decrease) in cash and cash equivalents                                                 |   |                                           | 2,899    |   |   |   | (21,316 | ) |
| Cash                and cash equivalents January 1,                                                             |   |                                           | 60,173   |   |   |   | 106,259 |   |
| Cash                and cash equivalents September 30,                                                          |   | $                                              | 63,072   |   |   | $ | 84,943 |   |
|                                                                                                            |   |                                           |     |   |   |   |   |   |
| Supplemental                disclosure of cash flow information                                                 |   |                                           |     |   |   |   |   |   |
| Cash                paid during the period for                                                                  |   |                                           |     |   |   |   |   |   |
| Income                taxes                                                                                     |   | $                                              | 6,805    |   |   | $ | 5,199 |   |
| Interest                on deposits, advances and other borrowed money                                          |   | $                                              | 59,483   |   |   | $ | 51,739 |   |
| Supplemental                disclosure of non-cash investing activities                                         |   |                                           |     |   |   |   |   |   |
| Reclassification                of loans receivable to other real estate owned                                  |   | $                                              | 247      |   |   | $ | 335 |   |
|                                                                                                            |   |                                           |     |   |   |   |   |   |
| The                accompanying notes are an integral part of these financial                statements.        |   |                                           |     |   |   |   |   |   |

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

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

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

| **NOTE                  B** | **PENDING                  MERGER** |
|-----------------------------|-------------------------------------|

----

| ** NOTE                C** | **ACQUISITIONS** |
|---------------------------------|------------------|

**The      Trust Company of Lehigh Valley**

**Caruso      Benefits Group, Inc.**

----

| **NOTE                D** | **EARNINGS                PER SHARE** |
|---------------------------|---------------------------------------|

|                                                            |   | For                the Three Months Ended September 30, |   |
|-----------------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                            |   | 2007                                                    |   |   | 2006 |   |
|                                                            |   | Net                                                     |   |   | Average |   |   |   |   |   | Net |   |   | Average |   |   |   |   |
|                                                            |   | Income                                                  |   |   | Shares |   |   | Per                Share |   |   | Income |   |   | Shares |   |   | Per                Share |   |
| *(in                thousands, except per share data)*          |   | (numerator)                                             |   |   | (denominator) |   |   | Amount |   |   | (numerator) |   |   | (denominator) |   |   | Amount |   |
|                                                            |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share                         |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                available to common shareholders          |   | $                                                       | 4,103  |   |   |   | 25,520,303 |   |   | $ | 0.16 |   |   | $ | 5,911 |   |   |   | 26,355,973 |   |   | $ | 0.22 |   |
| Effect                of dilutive securities                    |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock                options                                    |   |                                                    |   |   |   |   | 147,274 |   |   |   | - |   |   |   |   |   |   |   | 141,185 |   |   |   | - |   |
| Management                Recognition and Retention Plan shares |   |                                                    |   |   |   |   | 28,894 |   |   |   | - |   |   |   |   |   |   |   | 43,502 |   |   |   | - |   |
| Total                effect of dilutive securities              |   |                                                    |   |   |   |   | 176,168 |   |   |   | - |   |   |   |   |   |   |   | 184,687 |   |   |   | - |   |
| Diluted                earnings per share                       |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                available to common shareholders          |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| plus                assumed exercise of options                 |   | $                                                       | 4,103  |   |   |   | 25,696,471 |   |   | $ | 0.16 |   |   | $ | 5,911 |   |   |   | 26,540,660 |   |   | $ | 0.22 |   |
|                                                            |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                            |   | For                the Nine Months Ended September 30,  |   |
|                                                            |   | 2007                                                    |   |   | 2006 |   |
|                                                            |   | Net                                                     |   |   | Average |   |   |   |   |   |   | Net |   |   | Average |   |   |   |   |   |
|                                                            |   | Income                                                  |   |   | Shares |   |   | Per                Share |   |   | Income |   |   | Shares |   |   | Per                Share |   |
| *(in                thousands, except per share data)*          |   | (numerator)                                             |   |   | (denominator) |   |   | Amount |   |   | (numerator) |   |   | (denominator) |   |   | Amount |   |
|                                                            |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share                         |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                available to common shareholders          |   | $                                                       | 11,601 |   |   |   | 26,020,245 |   |   | $ | 0.45 |   |   | $ | 17,297 |   |   |   | 27,254,749 |   |   | $ | 0.63 |   |
| Effect                of dilutive securities                    |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock                options                                    |   |                                                    |   |   |   |   | 138,654 |   |   |   | - |   |   |   |   |   |   |   | 147,060 |   |   |   | - |   |
| Management                Recognition and Retention Plan shares |   |                                                    |   |   |   |   | 37,196 |   |   |   | - |   |   |   |   |   |   |   | 48,206 |   |   |   | - |   |
| Total                effect of dilutive securities              |   |                                                    |   |   |   |   | 175,850 |   |   |   | (0.01 | ) |   |   |   |   |   |   | 195,266 |   |   |   | - |   |
| Diluted                earnings per share                       |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                available to common shareholders          |   |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| plus                assumed exercise of options                 |   | $                                                       | 11,601 |   |   |   | 26,196,095 |   |   | $ | 0.44 |   |   | $ | 17,297 |   |   |   | 27,450,015 |   |   | $ | 0.63 |   |

----

| **NOTE                E** | **INVESTMENT                SECURITIES** |
|---------------------------|------------------------------------------|

|                                                           |   | At                September 30, 2007 |    |
|----------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                           |   |                                 |    |   | Gross |   |   | Gross |   |   |   |   |
|                                                           |   | Amortized                            |    |   | Unrealized |   |   | Unrealized |   |   | Fair |   |
| *(in                thousands)*                                |   | Cost                                 |    |   | Gains |   |   | Losses |   |   | Value |   |
| Held                to maturity:                               |   |                                 |    |   |   |   |   |   |   |   |   |   |
| Mortgage-backed                securities                      |   | $                                    | 28,710  |   |   | $ | - |   |   | $ | (312 | ) |   | $ | 28,398 |   |
| Total                investments held to maturity              |   |                                 | 28,710  |   |   |   | - |   |   |   | (312 | ) |   |   | 28,398 |   |
| Available                for sale:                             |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.                Government and agencies                    |   |                                 | 33,874  |   |   |   | 314 |   |   |   | (29 | ) |   |   | 34,159 |   |
| Obligations                of state and political subdivisions |   |                                 | 802     |   |   |   | - |   |   |   | (22 | ) |   |   | 780 |   |
| Asset-managed                funds                             |   |                                 | 5,048   |   |   |   | - |   |   |   | (191 | ) |   |   | 4,857 |   |
| Mortgage-backed                securities                      |   |                                 | 588,999 |   |   |   | 464 |   |   |   | (11,185 | ) |   |   | 578,278 |   |
| Corporate                and other debt securities             |   |                                 | 26,693  |   |   |   | - |   |   |   | (893 | ) |   |   | 25,800 |   |
| Equity                securities                               |   |                                 | 2,377   |   |   |   | 14 |   |   |   | (144 | ) |   |   | 2,247 |   |
| Total                investments available for sale            |   |                                 | 657,793 |   |   |   | 792 |   |   |   | (12,464 | ) |   |   | 646,121 |   |
| Total                investment securities                     |   | $                                    | 686,503 |   |   | $ | 792 |   |   | $ | (12,776 | ) |   | $ | 674,519 |   |
|                                                           |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                           |   | At                December 31, 2006  |    |
|                                                           |   |                                 |    |   |   | Gross |   |   | Gross |   |   |   |   |   |
|                                                           |   | Amortized                            |    |   | Unrealized |   |   | Unrealized |   |   | Fair |   |
| *(in                thousands)*                                |   | Cost                                 |    |   | Gains |   |   | Losses |   |   | Value |   |
| Held                to maturity:                               |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed                securities                      |   | $                                    | 33,532  |   |   | $ | - |   |   | $ | (484 | ) |   | $ | 33,048 |   |
| Total                investments held to maturity              |   |                                 | 33,532  |   |   |   | - |   |   |   | (484 | ) |   |   | 33,048 |   |
| Available                for sale:                             |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.                Government and agencies                    |   |                                 | 95,523  |   |   |   | 2 |   |   |   | (949 | ) |   |   | 94,576 |   |
| Asset-managed                funds                             |   |                                 | 5,171   |   |   |   | - |   |   |   | (167 | ) |   |   | 5,004 |   |
| Mortgage-backed                securities                      |   |                                 | 703,648 |   |   |   | 439 |   |   |   | (15,595 | ) |   |   | 688,492 |   |
| Corporate                and other debt  securities  |   |                                 | 68,461  |   |   |   | 277 |   |   |   | (100 | ) |   |   | 68,638 |   |
| Equity                securities                               |   |                                 | 2,091   |   |   |   | 79 |   |   |   | (26 | ) |   |   | 2,144 |   |
| Total                investments available for sale            |   |                                 | 874,894 |   |   |   | 797 |   |   |   | (16,837 | ) |   |   | 858,854 |   |
| Total                investment securities                     |   | $                                    | 908,426 |   |   | $ | 797 |   |   | $ | (17,321 | ) |   | $ | 891,902 |   |

----

| **NOTE                F** | **STOCK                BASED COMPENSATION** |
|---------------------------|---------------------------------------------|

|                                             |   | For                the Nine Months Ended |
|--------------------------------------------------|--------|------------------------------------------|
|                                             |   | September                30,             |
|                                             |   | 2007                                     |   | 2006 |
| Expected                dividend yield           |   | 2.50%                                    |   | 2.50% |
| Expected                volatility               |   | 22.81%                                   |   | 22.63% |
| Range                of risk-free interest rates |   | 4.87%                                    |   | 4.31%                to 4.61% |
| Range                of expected option lives    |   | 6.5                years                 |   | 6.5                to 7 years |
| Range                of fair values              |   | $4.05                                    |   |      $3.77                to $3.85 |

----

|                                                  |   | For                the Nine Months Ended September 30, 2007 |      |
|-------------------------------------------------------|--------|-------------------------------------------------------------|-----------|
|                                                  |   |                                                        |      |   |   |   |   | Weighted                Average |   |   | Aggregate |   |
|                                                  |   |                                                        |      |   | Weighted                Average |   |   | Remaining                Contractual |   |   | Intrinsic |   |
|                                                  |   | Shares                                                      |      |   | Exercise                Price |   |   | Term                (years) |   |   | Value |   |
| Outstanding                as of beginning of year    |   |                                                        | 1,961,432 |   |   | $ | 14.07 |   |   |   |   |   |   |   |
| Issued                                                |   |                                                        | 180,050   |   |   |   | 16.40 |   |   |   |   |   |   |   |
| Exercised                                             |   |                                                        | (6,236    | ) |   |   | 6.08 |   |   |   |   |   |   |   |
| Forfeited                                             |   |                                                        | -         |   |   |   | - |   |   |   |   |   |   |   |
| Expired                                               |   |                                                        | -         |   |   |   | - |   |   |   |   |   |   |   |
| Outstanding                as of September 30         |   |                                                        | 2,135,246 |   |   | $ | 14.29 |   |   |   | 6.61 |   |   |   | 4,811,950 |   |
|                                                  |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Options                exercisable as of September 30 |   |                                                        | 1,062,947 |   |   | $ | 12.17 |   |   |   | 5.77 |   |   |   | 4,645,501 |   |

|                           |   | For                the Nine Months Ended September 30, 2007                    |
|--------------------------------|--------|--------------------------------------------------------------------------------|
|                           |   | Options                Outstanding                                             |   | Options                Exercisable |
| Range                of        |   | Stock                Options                                                   |   | Weighted                Average |   | Stock                Options |   | Weighted                Average |
| Exercise                Prices |   | Outstanding                                                                    |   | Life                (in Years) |   | Exercise                Price |   | Exercisable |   | Exercise                Price |
| $3.89                - $4.35   |   |             47,155 |   | 3.59 |   |  $                 4.20 |   |           47,155 |   |  $                    4.20 |
| $4.36                - $6.37   |   |           314,431            |   | 4.22 |   |                     5.67 |   |         314,431 |   |                        5.67 |
| $6.38                - $8.36   |   |             57,180 |   | 4.26 |   |                     6.73 |   |           57,180 |   |                        6.73 |
| $11.35                - $16.56 |   |        1,716,480                            |   | 7.21 |   |                   16.40 |   |         644,181 |   |                      16.41 |
|                           |   |        2,135,246                            |   |   |   |   |   |      1,062,947 |   |   |

|                                                          |   | Number                of |      |   | Average                Grant Date |   |
|---------------------------------------------------------------|--------|--------------------------|-----------|--------|-----------------------------------|--------|
|                                                          |   | Shares                   |      |   | Fair                Value         |   |
| Non-vested                stock options at January 1, 2007    |   |                     | 1,149,449 |   |                              | $      | 4.30 |   |
| Options                Granted                                |   |                     | 180,050   |   |                              |   | 4.05 |   |
| Options                Vested                                 |   |                     | (257,200  | )      |                              |   | 4.29 |   |
| Options                Forfeited                              |   |                     | -         |   |                              |   | - |   |
| Non-vested                stock options at September 30, 2007 |   |                     | 1,072,299 |   |                              | $      | 4.26 |   |

----

----

| **NOTE                G** | **LOANS** |
|---------------------------|-----------|

|                                             |   | September                30, |      |   | December                31, |   |
|--------------------------------------------------|--------|------------------------------|-----------|--------|-----------------------------|--------|
| *(in                thousands)*                  |   | 2007                         |      |   | 2006                        |   |
|                                             |   |                         |      |   |                        |   |
| Real                estate                       |   |                         |      |   |                        |   |
| Residential                                      |   | $                            | 569,795   |   |                        | $      | 493,813 |   |
| Commercial                                       |   |                         | 389,745   |   |                        |   | 362,244 |   |
| Construction                                     |   |                         | 62,529    |   |                        |   | 61,288 |   |
| Total                real estate                 |   |                         | 1,022,069 |   |                        |   | 917,345 |   |
| Consumer                loans                    |   |                         | 526,789   |   |                        |   | 509,555 |   |
| Commercial                (non-real estate)      |   |                         | 256,895   |   |                        |   | 181,103 |   |
| States                and political subdivisions |   |                         | 12,919    |   |                        |   | 13,056 |   |
| Total                gross loans                 |   |                         | 1,818,672 |   |                        |   | 1,621,059 |   |
| Mortgage                loans held-for-sale      |   |                         | (900      | )      |                        |   | (1,994 | ) |
| Deferred                fees                     |   |                         | 1,242     |   |                        |   | 1,101 |   |
| Total                loans                       |   |                         | 1,819,014 |   |                        |   | 1,620,166 |   |
| Allowance                for loan losses         |   |                         | (18,118   | )      |                        |   | (17,044 | ) |
| Total                net loans                   |   | $                            | 1,800,896 |   |                        | $      | 1,603,122 |   |

|                                                                       |   | September                30, |   |   | December                31, |   |
|----------------------------------------------------------------------------|--------|------------------------------|--------|--------|-----------------------------|--------|
| *(dollars                in thousands )*                                   |   | 2007                         |   |   | 2006                        |   |
|                                                                       |   |                         |   |   |                        |   |
| Non-accruing                loans                                          |   | $                            | 4,131  |   |                        | $      | 4,869 |   |
| Accruing                loans 90 days or more past due                     |   |                         | 632    |   |                        |   | 1,058 |   |
| Total                non-performing loans                                  |   |                         | 4,763  |   |                        |   | 5,927 |   |
|                                                                       |   |                         |   |   |                        |   |   |   |
| Other                real estate owned                                     |   |                         | 119    |   |                        |   | 32 |   |
| Total                non-performing assets                                 |   | $                            | 4,882  |   |                        | $      | 5,959 |   |
|                                                                       |   |                         |   |   |                        |   |   |   |
| Total                non-performing loans as a percentage of loans, net    |   |                         | 0.26   | %      |                        |   | 0.37 | % |
| Total                non-performing loans as a percentage of total assets  |   |                         | 0.17   | %      |                        |   | 0.20 | % |
| Total                non-performing assets as a percentage of total assets |   |                         | 0.17   | %      |                        |   | 0.21 | % |
| Net                charge-offs to average loans (net)                      |   |                         | 0.02   | %      |                        |   | 0.15 | % |
|                                                                       |   |                         |   |   |                        |   |   |   |
| Interest                on non-accrual loans which would have been         |   |                         |   |   |                        |   |   |   |
| recorded                at the original rate                               |   | $                            | 512    |   |                        | $      | 459 |   |
| Interest                on non-accrual loans that was reflected in income  |   |                         | 44     |   |                        |   | 46 |   |
| Net                decrease in interest income                             |   | $                            | (468   | )      |                        | $      | (413 | ) |

----

|                                                          |   | For                the Three Months |   |   | For                the Nine Months |   |
|---------------------------------------------------------------|--------|-------------------------------------|--------|--------|------------------------------------|--------|
|                                                          |   | Ended                September 30,  |   |   | Ended                September 30, |   |
| *(dollars                in thousands)*                       |   | 2007                                |   |   | 2006                               |   |   | 2007 |   |   | 2006 |   |
|                                                          |   |                                |   |   |                               |   |   |   |   |   |   |   |
| Allowance                for loan losses, beginning of period |   | $                                   | 17,313 |   |                               | $      | 16,600 |   |   | $ | 17,044 |   |   | $ | 15,964 |   |
| Provision                for loan losses                      |   |                                | 814    |   |                               |   | 365 |   |   |   | 1,458 |   |   |   | 2,315 |   |
| Charge-offs                                                   |   |                                |   |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| One-to                four-family residential                 |   |                                | (44    | )      |                               |   | (13 | ) |   |   | (62 | ) |   |   | (59 | ) |
| Commercial                and industrial                      |   |                                | (42    | )      |                               |   | (8 | ) |   |   | (214 | ) |   |   | (310 | ) |
| Consumer                                                      |   |                                | (250   | )      |                               |   | (392 | ) |   |   | (938 | ) |   |   | (1,634 | ) |
| Total                charge-offs                              |   |                                | (336   | )      |                               |   | (413 | ) |   |   | (1,214 | ) |   |   | (2,003 | ) |
| Recoveries                on loans previously charged-off     |   |                                |   |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| One-to                four-family residential                 |   |                                | 13     |   |                               |   | 18 |   |   |   | 28 |   |   |   | 39 |   |
| Commercial                and industrial                      |   |                                | 258    |   |                               |   | 9 |   |   |   | 673 |   |   |   | 158 |   |
| Consumer                                                      |   |                                | 56     |   |                               |   | 51 |   |   |   | 129 |   |   |   | 157 |   |
| Total                recoveries                               |   |                                | 327    |   |                               |   | 78 |   |   |   | 830 |   |   |   | 354 |   |
| Net                loans charged-off                          |   |                                | (9     | )      |                               |   | (335 | ) |   |   | (384 | ) |   |   | (1,649 | ) |
|                                                          |   |                                |   |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| Allowance                for loan losses, at period end       |   | $                                   | 18,118 |   |                               | $      | 16,630 |   |   | $ | 18,118 |   |   | $ | 16,630 |   |

| **NOTE                H** | **RETIREMENT                PLANS** |
|---------------------------|-------------------------------------|

| *1.  * | *Defined                Benefit Plans* |
|------------------|----------------------------------------|

----

| *2.  * | *Directors’                Deferred Plan* |
|------------------|-------------------------------------------------|

|                                                                |   | September                30, |   |
|---------------------------------------------------------------------|--------|------------------------------|--------|
| *(in                thousands)*                                     |   | 2007                         |   |   | 2006 |   |
|                                                                |   |                         |   |   |   |   |
| Service                cost                                         |   | $                            | -      |   |   | $ | - |   |
| Interest                cost                                        |   |                         | 12     |   |   |   | 12 |   |
| Net                amortization and deferral of prior service costs |   |                         | -      |   |   |   | - |   |
| Amortization                of net loss                             |   |                         | -      |   |   |   | 1 |   |
| Net                periodic benefit cost                            |   | $                            | 12     |   |   | $ | 13 |   |

| **NOTE                I** | **NEW                ACCOUNTING PRONOUNCEMENTS** |
|---------------------------|--------------------------------------------------|

----

----

| **NOTE                J** | **EXTINGUISHMENT                OF DEBT** |
|---------------------------|-------------------------------------------|

| **NOTE                  K** | **TREASURY                  STOCK** |
|-----------------------------|-------------------------------------|

| **NOTE                L** | **INCOME                TAXES** |
|---------------------------|---------------------------------|

----

| **NOTE                M** | **BALANCE                SHEET RESTRUCTURING** |
|---------------------------|------------------------------------------------|

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

**Forward      – Looking Statements**

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

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

|   | • |   | 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; |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | Mergers                may result in significant 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; |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | • |   | Disruptions                may occur from the announced merger with National Penn and may create                difficulties in maintaining relationships with customers and                employees; |
|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | The                failure to obtain shareholder or regulatory approval of the pending                merger                with National Penn; |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

**Available      Information**

**Critical      Accounting Policies, Judgments and Estimates**

----

**Comparison      of Financial Condition as of September 30, 2007 and December 31,      2006**

**Assets.  **
**NOTE M “Balance Sheet      Restructuring”**

----

**Non-Performing      Assets.   **

**Allowance          for Loan          Losses.**

----

**Liabilities.  **
**NOTE M “Balance Sheet      Restructuring”**

**Shareholders’      Equity.  **

----

|                                                           |   | At                September 30, 2007 |    |
|----------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                           |   |                                 |    |   |   |   |   | Required |   |   | To                Be Well Capitalized |   |
|                                                           |   |                                 |    |   |   |   |   | For                Capital |   |   | Under                Prompt Corrective |   |
|                                                           |   | Actual                               |    |   | Adequacy                Purposes |   |   | Action                Provisions |   |
| *(in                thousands)*                                |   | Amount                               |    |   | Ratio |   |   | Amount |   |   | Ratio |   |   | Amount |   |   | Ratio |   |
|                                                           |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                Capital                                   |   |                                 |    |
|    (To                risk-weighted assets)     |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Company                (consolidated)        |   | $                                    | 257,065 |   |   |   | 12.73 | % |   | $ | 161,490 |   |   |   | 8.00 | % |   | N/A |   |   | N/A |   |
|    Bank                                         |   | $                                    | 220,729 |   |   |   | 10.74 | % |   | $ | 164,493 |   |   |   | 8.00 | % |   | $ | 205,616 |   |   |   | 10.00 | % |
| Tier                I Capital                                  |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    (To                risk-weighted assets)     |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Company                (consolidated)        |   | $                                    | 238,947 |   |   |   | 11.84 | % |   | $ | 80,745 |   |   |   | 4.00 | % |   | N/A |   |   | N/A |   |
|    Bank                                         |   | $                                    | 202,864 |   |   |   | 9.85 | % |   | $ | 82,246 |   |   |   | 4.00 | % |   | $ | 123,369 |   |   |   | 6.00 | % |
| Tier                I Capital                                  |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    (To                average assets, leverage) |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Company                (consolidated)        |   | $                                    | 238,947 |   |   |   | 8.79 | % |   | $ | 108,726 |   |   |   | 4.00 | % |   | N/A |   |   | N/A |   |
|    Bank                                         |   | $                                    | 202,864 |   |   |   | 7.36 | % |   | $ | 110,121 |   |   |   | 4.00 | % |   | $ | 137,652 |   |   |   | 5.00 | % |
|                                                           |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                           |   | At                December 31, 2006  |    |
|                                                           |   |                                 |    |   |   |   |   |   |   | Required |   |   | To                Be Well Capitalized |   |
|                                                           |   |                                 |    |   |   |   |   |   |   | For                Capital |   |   | Under                Prompt Corrective |   |
|                                                           |   | Actual                               |    |   | Adequacy                Purposes |   |   | Action                Provisions |   |
| (in                thousands)                                  |   | Amount                               |    |   | Ratio |   |   | Amount |   |   | Ratio |   |   | Amount |   |   | Ratio |   |
|                                                           |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                Capital                                   |   |                                 |    |
|    (To                risk-weighted assets)     |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Company                (consolidated)        |   | $                                    | 288,207 |   |   |   | 14.83 | % |   | $ | 155,432 |   |   |   | 8.00 | % |   | N/A |   |   | N/A |   |
|    Bank                                         |   | $                                    | 256,766 |   |   |   | 13.23 | % |   | $ | 155,320 |   |   |   | 8.00 | % |   | $ | 194,151 |   |   |   | 10.00 | % |
| Tier                I Capital                                  |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    (To                risk-weighted assets)     |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Company                (consolidated)        |   | $                                    | 271,163 |   |   |   | 13.96 | % |   | $ | 77,716 |   |   |   | 4.00 | % |   | N/A |   |   | N/A |   |
|    Bank                                         |   | $                                    | 239,722 |   |   |   | 12.35 | % |   | $ | 77,660 |   |   |   | 4.00 | % |   | $ | 116,490 |   |   |   | 6.00 | % |
| Tier                I Capital                                  |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    (To                average assets, leverage) |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Company                (consolidated)        |   | $                                    | 271,163 |   |   |   | 9.77 | % |   | $ | 111,068 |   |   |   | 4.00 | % |   | N/A |   |   | N/A |   |
|    Bank                                         |   | $                                    | 239,722 |   |   |   | 8.55 | % |   | $ | 112,157 |   |   |   | 4.00 | % |   | $ | 140,196 |   |   |   | 5.00 | % |

**Liquidity.  **

----

**“GAP”      Analysis.  **

|                                                                                                                                                                                                                                                                                    |   | At                September 30, 2007 |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                                                                                                                                                                                                                                    |   |                                 |    |   | More                than |   |   | More                than |   |   | More                than |   |   | More                than |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                    |   | 3                Months              |    |   | 3                Months |   |   | 6                Months |   |   | 1                Year |   |   | 3                Years |   |   | More                than |   |   |   |   |
| ***(dollars                in thousands)***                                                                                                                                                                                                                                             |   | or                Less               |    |   | to                6 Months |   |   | to                1 Year |   |   | to                3 Years |   |   | to                5 Years |   |   | 5                Years |   |   | Total |   |
| Interest-earning                assets (1):                                                                                                                                                                                                                                             |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                at other institutions                                                                                                                                                                                                                                           |   | $                                    | 1,302   |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | 1,302 |   |
| Loans                receivable (2)                                                                                                                                                                                                                                                     |   |                                 | 419,917 |   |   |   | 84,398 |   |   |   | 174,222 |   |   |   | 509,475 |   |   |   | 288,267 |   |   |   | 343,635 |   |   |   | 1,819,914 |   |
| Investment                securities, debt                                                                                                                                                                                                                                              |   |                                 | 68,326  |   |   |   | 33,995 |   |   |   | 76,463 |   |   |   | 249,253 |   |   |   | 123,909 |   |   |   | 120,389 |   |   |   | 672,335 |   |
| Investment                securities, equity                                                                                                                                                                                                                                            |   |                                 | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 26,093 |   |   |   | 26,093 |   |
| Total                interest-earning assets                                                                                                                                                                                                                                            |   | $                                    | 489,545 |   |   | $ | 118,393 |   |   | $ | 250,685 |   |   | $ | 758,728 |   |   | $ | 412,176 |   |   | $ | 490,117 |   |   | $ | 2,519,644 |   |
| Cumulative                total interest-                                                                                                                                                                                                                                               |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| earning                assets                                                                                                                                                                                                                                                           |   | $                                    | 489,545 |   |   | $ | 607,938 |   |   | $ | 858,623 |   |   | $ | 1,617,351 |   |   | $ | 2,029,527 |   |   | $ | 2,519,644 |   |   | $ | 2,519,644 |   |
| Interest-bearing                liabilities:                                                                                                                                                                                                                                            |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings                deposits                                                                                                                                                                                                                                                         |   | $                                    | 8,107   |   |   | $ | 5,354 |   |   | $ | 10,237 |   |   | $ | 35,296 |   |   | $ | 27,732 |   |   | $ | 101,661 |   |   | $ | 188,387 |   |
| Interest-bearing                checking deposits                                                                                                                                                                                                                                       |   |                                 | 6,622   |   |   |   | 6,425 |   |   |   | 12,284 |   |   |   | 42,356 |   |   |   | 48,106 |   |   |   | 107,164 |   |   |   | 222,957 |   |
| Money                market deposits                                                                                                                                                                                                                                                    |   |                                 | 16,697  |   |   |   | 16,201 |   |   |   | 30,972 |   |   |   | 106,794 |   |   |   | 216,976 |   |   |   | 174,518 |   |   |   | 562,158 |   |
| Certificates                of deposit                                                                                                                                                                                                                                                  |   |                                 | 172,042 |   |   |   | 177,269 |   |   |   | 208,811 |   |   |   | 190,921 |   |   |   | 10,129 |   |   |   | 1,676 |   |   |   | 760,848 |   |
| FHLB                advances and other                                                                                                                                                                                                                                                  |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| borrowings                                                                                                                                                                                                                                                                              |   |                                 | 281,239 |   |   |   | 9,894 |   |   |   | 32,719 |   |   |   | 110,211 |   |   |   | 38,435 |   |   |   | 98,354 |   |   |   | 570,852 |   |
| Total                interest-bearing                                                                                                                                                                                                                                                   |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                                                                                                                                                                                                                                                                             |   | $                                    | 484,707 |   |   | $ | 215,143 |   |   | $ | 295,023 |   |   | $ | 485,578 |   |   | $ | 341,378 |   |   | $ | 483,373 |   |   | $ | 2,305,202 |   |
| Cumulative                total interest-                                                                                                                                                                                                                                               |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| bearing                liabilities                                                                                                                                                                                                                                                      |   | $                                    | 484,707 |   |   | $ | 699,850 |   |   | $ | 994,873 |   |   | $ | 1,480,451 |   |   | $ | 1,821,829 |   |   | $ | 2,305,202 |   |   | $ | 2,305,202 |   |
| Interest-earning                assets                                                                                                                                                                                                                                                  |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| less                interest-bearing                                                                                                                                                                                                                                                    |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                                                                                                                                                                                                                                                                             |   | $                                    | 4,838   |   |   | $ | (96,750 | ) |   | $ | (44,338 | ) |   | $ | 273,150 |   |   | $ | 70,798 |   |   | $ | 6,744 |   |   | $ | 214,442 |   |
| Cumulative                interest-rate                                                                                                                                                                                                                                                 |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| sensitivity                gap (3)                                                                                                                                                                                                                                                      |   | $                                    | 4,838   |   |   | $ | (91,912 | ) |   | $ | (136,250 | ) |   | $ | 136,900 |   |   | $ | 207,698 |   |   | $ | 214,442 |   |   |   |   |   |
| Cumulative                interest-rate gap as a                                                                                                                                                                                                                                        |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| percentage                of total assets at                                                                                                                                                                                                                                            |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| September                30, 2007                                                                                                                                                                                                                                                       |   |                                 | 0.17    | % |   |   | (3.20 | %) |   |   | (4.74 | %) |   |   | 4.76 | % |   |   | 7.23 | % |   |   | 7.46 | % |   |   |   |   |
| Cumulative                interest-earning assets                                                                                                                                                                                                                                       |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| as                a percentage of                                                                                                                                                                                                                                                       |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| cumulative                interest-bearing                                                                                                                                                                                                                                              |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                at September 30, 2007                                                                                                                                                                                                                                        |   |                                 | 101.00  | % |   |   | 86.87 | % |   |   | 86.30 | % |   |   | 109.25 | % |   |   | 111.40 | % |   |   | 109.30 | % |   |   |   |   |
|                                                                                                                                                                                                                                                                                    |   |                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1) Interest-earning                assets are included in the period in which the balances are expected                to be                redeployed and/or repriced as a result of anticipated prepayments,                scheduled rate adjustment and contractual maturity. |   |
| (2) For                purposes of the gap analysis, loans receivable includes non-performing                loans, gross of the allowance for loan losses, undisbursed loan funds                and                deferred loan fees.                                           |   |
| (3) Interest-rate                sensitivity gap represents the difference between net interest-earning                assets and interest-bearing liabilities.                                                                                                                    |   |

----

**Comparison      of Operating Results for the Three and Nine Months Ended September 30, 2007      and      2006**

**Results      of      Operations.  **

**Net      Interest      Income.**

----

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

**Interest      Income.  **

----

**Interest      Expense.  **

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

----

|                                                                                                                                                                                                                                                                        |   | For                the Three Months Ended September 30, |      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|-----------|
|                                                                                                                                                                                                                                                                        |   | 2007                                                    |      |   | 2006 |   |
|                                                                                                                                                                                                                                                                        |   |                                                    |      |   | Interest |   |   | Average |   |   |   |   |   | Interest |   |   | Average |   |
|                                                                                                                                                                                                                                                                        |   | Average                                                 |      |   | Income/ |   |   | Yield/ |   |   | Average |   |   | Income/ |   |   | Yield/ |   |
| *(dollars                in thousands)*                                                                                                                                                                                                                                     |   | Balance                                                 |      |   | Expense |   |   | Rate |   |   | Balance |   |   | Expense |   |   | Rate |   |
| Interest-earning                assets                                                                                                                                                                                                                                      |   |                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                balances with banks                                                                                                                                                                                                                         |   | $                                                       | 1,336     |   |   | $ | 15 |   |   |   | 4.49 | % |   | $ | 6,294 |   |   | $ | 80 |   |   |   | 5.08 | % |
| Federal                funds sold                                                                                                                                                                                                                                           |   |                                                    | 4,757     |   |   |   | 62 |   |   |   | 5.21 | % |   |   | 22,529 |   |   |   | 297 |   |   |   | 5.27 | % |
| Investment                securities                                                                                                                                                                                                                                        |   |                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                (1)                                                                                                                                                                                                                                                  |   |                                                    | 719,560   |   |   |   | 8,545 |   |   |   | 4.75 | % |   |   | 1,010,334 |   |   |   | 12,099 |   |   |   | 4.79 | % |
| Tax-exempt                (2)                                                                                                                                                                                                                                               |   |                                                    | -         |   |   |   | - |   |   |   | - |   |   |   | 3,043 |   |   |   | 57 |   |   |   | 7.49 | % |
| Loans                receivable (2) (3)                                                                                                                                                                                                                                     |   |                                                    | 1,795,209 |   |   |   | 29,443 |   |   |   | 6.56 | % |   |   | 1,579,827 |   |   |   | 25,429 |   |   |   | 6.44 | % |
| Allowance                for loan losses                                                                                                                                                                                                                                    |   |                                                    | (17,644   | ) |   |   |   |   |   |   |   |   |   |   | (16,617 | ) |   |   |   |   |   |   |   |   |
| Net                loans                                                                                                                                                                                                                                                    |   |                                                    | 1,777,565 |   |   |   | 29,443 |   |   |   | 6.63 | % |   |   | 1,563,210 |   |   |   | 25,429 |   |   |   | 6.51 | % |
| Total                interest-earning assets                                                                                                                                                                                                                                |   |                                                    | 2,503,218 |   |   |   | 38,065 |   |   |   | 6.08 | % |   |   | 2,605,410 |   |   |   | 37,962 |   |   |   | 5.83 | % |
| Non-interest-earning                assets                                                                                                                                                                                                                                  |   |                                                    | 355,043   |   |   |   | - |   |   |   |   |   |   |   | 359,340 |   |   |   | - |   |   |   |   |   |
| Total                assets, interest income                                                                                                                                                                                                                                |   | $                                                       | 2,858,261 |   |   |   | 38,065 |   |   |   |   |   |   | $ | 2,964,750 |   |   |   | 37,962 |   |   |   |   |   |
| Interest-bearing                liabilities                                                                                                                                                                                                                                 |   |                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                deposits                                                                                                                                                                                                                                              |   | $                                                       | 229,284   |   |   | $ | 516 |   |   |   | 0.90 | % |   | $ | 236,346 |   |   | $ | 424 |   |   |   | 0.72 | % |
| Money                market deposits                                                                                                                                                                                                                                        |   |                                                    | 549,837   |   |   |   | 5,097 |   |   |   | 3.71 | % |   |   | 448,266 |   |   |   | 3,852 |   |   |   | 3.44 | % |
| Savings                deposits                                                                                                                                                                                                                                             |   |                                                    | 197,106   |   |   |   | 234 |   |   |   | 0.47 | % |   |   | 239,887 |   |   |   | 279 |   |   |   | 0.47 | % |
| Certificates                of deposit                                                                                                                                                                                                                                      |   |                                                    | 744,334   |   |   |   | 8,552 |   |   |   | 4.60 | % |   |   | 779,620 |   |   |   | 8,018 |   |   |   | 4.11 | % |
| Total                interest-bearing deposits                                                                                                                                                                                                                              |   |                                                    | 1,720,561 |   |   |   | 14,399 |   |   |   | 3.35 | % |   |   | 1,704,119 |   |   |   | 12,573 |   |   |   | 2.95 | % |
| Securities                sold under agreements                                                                                                                                                                                                                             |   |                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                repurchase                                                                                                                                                                                                                                                |   |                                                    | 152,687   |   |   |   | 1,672 |   |   |   | 4.38 | % |   |   | 45,450 |   |   |   | 462 |   |   |   | 4.07 | % |
| Federal                funds purchased                                                                                                                                                                                                                                      |   |                                                    | 12,470    |   |   |   | 165 |   |   |   | 5.29 | % |   |   | - |   |   |   | - |   |   |   | - |   |
| FHLB                advances                                                                                                                                                                                                                                                |   |                                                    | 384,870   |   |   |   | 4,012 |   |   |   | 4.17 | % |   |   | 602,068 |   |   |   | 6,028 |   |   |   | 4.00 | % |
| Other                debt                                                                                                                                                                                                                                                   |   |                                                    | 15,483    |   |   |   | 292 |   |   |   | 7.54 | % |   |   | 38,585 |   |   |   | 731 |   |   |   | 7.58 | % |
| Total                interest-bearing liabilities                                                                                                                                                                                                                           |   |                                                    | 2,286,071 |   |   |   | 20,540 |   |   |   | 3.59 | % |   |   | 2,390,222 |   |   |   | 19,794 |   |   |   | 3.31 | % |
| Non-interest-bearing                liabilities                                                                                                                                                                                                                             |   |                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing                deposits                                                                                                                                                                                                                                |   |                                                    | 191,170   |   |   |   | - |   |   |   |   |   |   |   | 195,523 |   |   |   | - |   |   |   |   |   |
| Other                liabilities                                                                                                                                                                                                                                            |   |                                                    | 32,021    |   |   |   | - |   |   |   |   |   |   |   | 34,625 |   |   |   | - |   |   |   |   |   |
| Total                liabilities, interest expense                                                                                                                                                                                                                          |   |                                                    | 2,509,262 |   |   |   | 20,540 |   |   |   |   |   |   |   | 2,620,370 |   |   |   | 19,794 |   |   |   |   |   |
| Shareholders'                equity                                                                                                                                                                                                                                         |   |                                                    | 348,999   |   |   |   | - |   |   |   |   |   |   |   | 344,380 |   |   |   | - |   |   |   |   |   |
| Total                liabilities                                                                                                                                                                                                                                            |   |                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                shareholders' equity, interest expense                                                                                                                                                                                                                   |   | $                                                       | 2,858,261 |   |   |   | 20,540 |   |   |   |   |   |   | $ | 2,964,750 |   |   |   | 19,794 |   |   |   |   |   |
|                                                                                                                                                                                                                                                                        |   |                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income on                                                                                                                                                                                                                                       |   |                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                basis (2)                                                                                                                                                                                                                                     |   |                                                    |      |   |   |   | 17,525 |   |   |   |   |   |   |   |   |   |   |   | 18,168 |   |   |   |   |   |
| Net                interest spread on                                                                                                                                                                                                                                       |   |                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                basis (4)                                                                                                                                                                                                                                     |   |                                                    |      |   |   |   |   |   |   |   | 2.49 | % |   |   |   |   |   |   |   |   |   |   | 2.52 | % |
| Net                interest margin on                                                                                                                                                                                                                                       |   |                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                basis (5)                                                                                                                                                                                                                                     |   |                                                    |      |   |   |   |   |   |   |   | 2.80 | % |   |   |   |   |   |   |   |   |   |   | 2.79 | % |
| Tax-exempt                adjustment                                                                                                                                                                                                                                        |   |                                                    |      |   |   |   | (230 | ) |   |   | (0.04 | %) |   |   |   |   |   |   | (193 | ) |   |   | (0.03 | %) |
|                                                                                                                                                                                                                                                                        |   |                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income and margin (4) (5)                                                                                                                                                                                                                       |   |                                                    |      |   |   | $ | 17,295 |   |   |   | 2.76 | % |   |   |   |   |   | $ | 17,975 |   |   |   | 2.76 | % |
| Average                interest-earning assets                                                                                                                                                                                                                              |   |                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                average interest-bearing liabilities                                                                                                                                                                                                                      |   |                                                    |      |   |   |   |   |   |   |   | 109.50 | % |   |   |   |   |   |   |   |   |   |   | 109.00 | % |
|                                                                                                                                                                                                                                                                        |   |                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1)   Includes                Federal Home Loan Bank stock.                                                                                                                                                                                                  |   |                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (2) The                indicated interest income and average yields are presented on a                tax-equivalent basis. The tax-equivalent adjustments                included above are $230,000 and $193,000 for the                three    |
| months                  ended September 30, 2007 and 2006, respectively. The                  effective tax rate used for the tax-equivalent adjustment was                  35%.                                                                                 |   |
| (3) Loan                expenses of $162,854 and $51,258 for the three months ended September                30,                2007 and 2006, respectively, are included                in interest income. Average loan balances include                             |   |
| non-accruing                loans of $4.2 million and $5.8 million and average loans held-for-sale                of                $631,000 and $29,000 for the three months ended September 30, 2007                and                2006, 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 2.45% and 2.49% for                the three months ended September 30, 2007 and 2006,                respectively.                                                                                        |   |
| (5) Net                interest margin is computed on a GAAP basis by dividing net interest                income by average interest-earning assets.                                                                                                                  |   |

----

|                                                                                                                                                                                                                                                              |   | For                the Nine Months Ended September 30, |      |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|-----------|
|                                                                                                                                                                                                                                                              |   | 2007                                                   |      |   | 2006 |   |
|                                                                                                                                                                                                                                                              |   |                                                   |      |   | Interest |   |   | Average |   |   |   |   |   | Interest |   |   | Average |   |
|                                                                                                                                                                                                                                                              |   | Average                                                |      |   | Income/ |   |   | Yield/ |   |   | Average |   |   | Income/ |   |   | Yield/ |   |
| *(dollars                in thousands)*                                                                                                                                                                                                                           |   | Balance                                                |      |   | Expense |   |   | Rate |   |   | Balance |   |   | Expense |   |   | Rate |   |
| Interest-earning                assets                                                                                                                                                                                                                            |   |                                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                balances with banks                                                                                                                                                                                                               |   | $                                                      | 9,098     |   |   | $ | 349 |   |   |   | 5.11 | % |   | $ | 14,355 |   |   | $ | 453 |   |   |   | 4.21 | % |
| Federal                funds sold                                                                                                                                                                                                                                 |   |                                                   | 18,401    |   |   |   | 730 |   |   |   | 5.29 | % |   |   | 10,325 |   |   |   | 395 |   |   |   | 5.10 | % |
| Investment                securities                                                                                                                                                                                                                              |   |                                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                (1)                                                                                                                                                                                                                                        |   |                                                   | 783,494   |   |   |   | 28,173 |   |   |   | 4.79 | % |   |   | 1,056,499 |   |   |   | 37,132 |   |   |   | 4.69 | % |
| Tax-exempt                (2)                                                                                                                                                                                                                                     |   |                                                   | -         |   |   |   | - |   |   |   |   |   |   |   | 39,031 |   |   |   | 2,113 |   |   |   | 7.22 | % |
| Loans                receivable (2) (3)                                                                                                                                                                                                                           |   |                                                   | 1,730,711 |   |   |   | 83,983 |   |   |   | 6.47 | % |   |   | 1,527,986 |   |   |   | 71,868 |   |   |   | 6.27 | % |
| Allowance                for loan losses                                                                                                                                                                                                                          |   |                                                   | (17,185   | ) |   |   |   |   |   |   | 0.00 | % |   |   | (16,203 | ) |   |   |   |   |   |   |   |   |
| Net                loans                                                                                                                                                                                                                                          |   |                                                   | 1,713,526 |   |   |   | 83,983 |   |   |   | 6.53 | % |   |   | 1,511,783 |   |   |   | 71,868 |   |   |   | 6.34 | % |
| Total                interest-earning assets                                                                                                                                                                                                                      |   |                                                   | 2,524,519 |   |   |   | 113,235 |   |   |   | 5.98 | % |   |   | 2,631,993 |   |   |   | 111,961 |   |   |   | 5.67 | % |
| Non-interest-earning                assets                                                                                                                                                                                                                        |   |                                                   | 351,153   |   |   |   | - |   |   |   |   |   |   |   | 354,195 |   |   |   | - |   |   |   |   |   |
| Total                assets, interest income                                                                                                                                                                                                                      |   | $                                                      | 2,875,672 |   |   |   | 113,235 |   |   |   |   |   |   | $ | 2,986,188 |   |   |   | 111,961 |   |   |   |   |   |
| Interest-bearing                liabilities                                                                                                                                                                                                                       |   |                                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                deposits                                                                                                                                                                                                                                    |   | $                                                      | 234,246   |   |   |   | 1,548 |   |   |   | 0.88 | % |   | $ | 233,168 |   |   |   | 1,028 |   |   |   | 0.59 | % |
| Money                market deposits                                                                                                                                                                                                                              |   |                                                   | 562,669   |   |   |   | 15,705 |   |   |   | 3.72 | % |   |   | 400,194 |   |   |   | 9,246 |   |   |   | 3.08 | % |
| Savings                deposits                                                                                                                                                                                                                                   |   |                                                   | 206,113   |   |   |   | 745 |   |   |   | 0.48 | % |   |   | 252,744 |   |   |   | 857 |   |   |   | 0.45 | % |
| Certificates                of deposit                                                                                                                                                                                                                            |   |                                                   | 721,019   |   |   |   | 24,050 |   |   |   | 4.45 | % |   |   | 777,460 |   |   |   | 21,980 |   |   |   | 3.77 | % |
| Total                interest-bearing deposits                                                                                                                                                                                                                    |   |                                                   | 1,724,047 |   |   |   | 42,048 |   |   |   | 3.25 | % |   |   | 1,663,566 |   |   |   | 33,111 |   |   |   | 2.65 | % |
| Securities                sold under agreements                                                                                                                                                                                                                   |   |                                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                repurchase                                                                                                                                                                                                                                      |   |                                                   | 97,103    |   |   |   | 3,116 |   |   |   | 4.28 | % |   |   | 53,806 |   |   |   | 1,491 |   |   |   | 3.69 | % |
| Federal                funds purchased                                                                                                                                                                                                                            |   |                                                   | 7,012     |   |   |   | 278 |   |   |   | 5.29 | % |   |   | - |   |   |   | - |   |   |   |   |   |
| FHLB                advances                                                                                                                                                                                                                                      |   |                                                   | 439,672   |   |   |   | 13,421 |   |   |   | 4.07 | % |   |   | 647,205 |   |   |   | 18,809 |   |   |   | 3.87 | % |
| Other                debt                                                                                                                                                                                                                                         |   |                                                   | 28,503    |   |   |   | 1,609 |   |   |   | 7.53 | % |   |   | 38,709 |   |   |   | 2,059 |   |   |   | 7.09 | % |
| Total                interest-bearing liabilities                                                                                                                                                                                                                 |   |                                                   | 2,296,337 |   |   |   | 60,472 |   |   |   | 3.51 | % |   |   | 2,403,286 |   |   |   | 55,470 |   |   |   | 3.08 | % |
| Non-interest-bearing                liabilities                                                                                                                                                                                                                   |   |                                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing                deposits                                                                                                                                                                                                                      |   |                                                   | 192,329   |   |   |   | - |   |   |   |   |   |   |   | 192,464 |   |   |   | - |   |   |   |   |   |
| Other                liabilities                                                                                                                                                                                                                                  |   |                                                   | 30,922    |   |   |   | - |   |   |   |   |   |   |   | 33,384 |   |   |   | - |   |   |   |   |   |
| Total                liabilities, interest expense                                                                                                                                                                                                                |   |                                                   | 2,519,588 |   |   |   | 60,472 |   |   |   |   |   |   |   | 2,629,134 |   |   |   | 55,470 |   |   |   |   |   |
| Shareholders'                equity                                                                                                                                                                                                                               |   |                                                   | 356,084   |   |   |   | - |   |   |   |   |   |   |   | 357,054 |   |   |   | - |   |   |   |   |   |
| Total                liabilities                                                                                                                                                                                                                                  |   |                                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                shareholders' equity, interest expense                                                                                                                                                                                                         |   | $                                                      | 2,875,672 |   |   |   | 60,472 |   |   |   |   |   |   | $ | 2,986,188 |   |   |   | 55,470 |   |   |   |   |   |
|                                                                                                                                                                                                                                                              |   |                                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income on                                                                                                                                                                                                                             |   |                                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                basis (2)                                                                                                                                                                                                                           |   |                                                   |      |   |   |   | 52,763 |   |   |   |   |   |   |   |   |   |   |   | 56,491 |   |   |   |   |   |
| Net                interest spread on                                                                                                                                                                                                                             |   |                                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                basis (4)                                                                                                                                                                                                                           |   |                                                   |      |   |   |   |   |   |   |   | 2.47 | % |   |   |   |   |   |   |   |   |   |   | 2.59 | % |
| Net                interest margin on                                                                                                                                                                                                                             |   |                                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                basis (5)                                                                                                                                                                                                                           |   |                                                   |      |   |   |   |   |   |   |   | 2.79 | % |   |   |   |   |   |   |   |   |   |   | 2.86 | % |
| Tax-exempt                adjustment                                                                                                                                                                                                                              |   |                                                   |      |   |   |   | (665 | ) |   |   | (0.04 | %) |   |   |   |   |   |   | (1,259 | ) |   |   | (0.06 | %) |
|                                                                                                                                                                                                                                                              |   |                                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income and margin (4) (5)                                                                                                                                                                                                             |   |                                                   |      |   |   | $ | 52,098 |   |   |   | 2.75 | % |   |   |   |   |   | $ | 55,232 |   |   |   | 2.80 | % |
| Average                interest-earning assets                                                                                                                                                                                                                    |   |                                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                average interest-bearing liabilities                                                                                                                                                                                                            |   |                                                   |      |   |   |   |   |   |   |   | 109.94 | % |   |   |   |   |   |   |   |   |   |   | 109.52 | % |
|                                                                                                                                                                                                                                                              |   |                                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1) Includes                Federal Home Loan Bank stock.                                                                                                                                                                                                    |   |                                                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (2) The                indicated interest income and average yields are presented on a                tax-equivalent basis. The tax-equivalent adjustments included above                are $665,000 and $1.3 million for the nine                |   |
| months                ended September 30, 2007 and 2006, respectively. The                effective tax rate used for the tax-equivalent adjustment was                35%.                                                                                  |   |
| (3) Loan                expenses of $451,079 and $45,790 for the nine months ended September                30,                2007 and 2006, respectively, are included in interest income. Average                loan                balances include     |   |
| non-accruing                loans of $4.3 million and $5.5 million and average                loans held-for-sale of $1.3 million and $304,000 for the nine months                ended                September 30, 2007 and 2006, 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 2.43% and 2.53% for                the nine months ended September 30, 2007 and 2006,                respectively.                                                                               |   |
| (5) Net                interest margin is computed on a GAAP basis by dividing net interest                income by average interest-earning assets.                                                                                                        |   |

----

|                                                                            |   | For                the Three Months Ended |   |
|---------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                            |   | September                30, 2007         |   |   | September                30, 2006 |   |
|                                                                            |   |                                      |   |   | Average |   |   |   |   |   | Average |   |
| *(dollars                in thousands)*                                         |   | Interest                                  |   |   | Yield/Cost |   |   | Interest |   |   | Yield/Cost |   |
|                                                                            |   |                                      |   |
| Investment                securities - nontaxable                               |   | $                                         | -      |   |   |   | - |   |   | $ | 37 |   |   |   | 4.86 | % |
| Tax-equivalent                adjustments                                       |   |                                      | -      |   |   |   |   |   |   |   | 20 |   |   |   |   |   |
| Investment                securities - nontaxable to a taxable equivalent yield |   | $                                         | -      |   |   |   | - |   |   | $ | 57 |   |   |   | 7.49 | % |
|                                                                            |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                receivable - nontaxable                                    |   | $                                         | 427    |   |   |   | 4.24 | % |   | $ | 322 |   |   |   | 3.90 | % |
| Tax-equivalent                adjustments                                       |   |                                      | 230    |   |   |   |   |   |   |   | 173 |   |   |   |   |   |
| Loans                receivable - nontaxable to a taxable equivalent yield      |   | $                                         | 657    |   |   |   | 6.52 | % |   | $ | 495 |   |   |   | 5.99 | % |
|                                                                            |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income                                              |   | $                                         | 17,295 |   |   |   |   |   |   | $ | 17,975 |   |   |   |   |   |
| Tax-equivalent                adjustment                                        |   |                                      | 230    |   |   |   |   |   |   |   | 193 |   |   |   |   |   |
| Net                interest income, tax equivalent                              |   | $                                         | 17,525 |   |   |   |   |   |   | $ | 18,168 |   |   |   |   |   |
| Net                interest rate spread, no tax adjustment                      |   |                                      |   |   |   |   | 2.45 | % |   |   |   |   |   |   | 2.49 | % |
| Net                interest margin, no tax adjustment                           |   |                                      |   |   |   |   | 2.76 | % |   |   |   |   |   |   | 2.76 | % |
|                                                                            |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                            |   | For                the Nine Months Ended  |   |
|                                                                            |   | September                30, 2007         |   |   | September                30, 2006 |   |
|                                                                            |   |                                      |   |   |   | Average |   |   |   |   |   |   | Average |   |
| *(dollars                in thousands)*                                         |   | Interest                                  |   |   | Yield/Cost |   |   | Interest |   |   | Yield/Cost |   |
|                                                                            |   |                                      |   |
| Investment                securities - nontaxable                               |   | $                                         | -      |   |   |   | - |   |   | $ | 1,373 |   |   |   | 4.69 | % |
| Tax-equivalent                adjustments                                       |   |                                      | -      |   |   |   |   |   |   |   | 740 |   |   |   |   |   |
| Investment                securities - nontaxable to a taxable equivalent yield |   | $                                         | -      |   |   |   | - |   |   | $ | 2,113 |   |   |   | 7.22 | % |
|                                                                            |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                receivable - nontaxable                                    |   | $                                         | 1,234  |   |   |   | 4.20 | % |   | $ | 965 |   |   |   | 3.90 | % |
| Tax-equivalent                adjustments                                       |   |                                      | 665    |   |   |   |   |   |   |   | 519 |   |   |   |   |   |
| Loans                receivable - nontaxable to a taxable equivalent yield      |   | $                                         | 1,899  |   |   |   | 6.46 | % |   | $ | 1,484 |   |   |   | 5.99 | % |
|                                                                            |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income                                              |   | $                                         | 52,098 |   |   |   |   |   |   | $ | 55,232 |   |   |   |   |   |
| Tax-equivalent                adjustment                                        |   |                                      | 665    |   |   |   |   |   |   |   | 1,259 |   |   |   |   |   |
| Net                interest income, tax equivalent                              |   | $                                         | 52,763 |   |   |   |   |   |   | $ | 56,491 |   |   |   |   |   |
| Net                interest rate spread, no tax adjustment                      |   |                                      |   |   |   |   | 2.43 | % |   |   |   |   |   |   | 2.53 | % |
| Net                interest margin, no tax adjustment                           |   |                                      |   |   |   |   | 2.75 | % |   |   |   |   |   |   | 2.80 | % |

----

**Rate      Volume      Analysis.**

|                                                                                                                                                                                                                                                                                                                                |   | Three                Months Ended September 30, 2007             |   |   | Nine                Months Ended September 30, 2007             |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                |   | Compared                to Three Months Ended September 30, 2006 |   |   | Compared                to Nine Months Ended September 30, 2006 |   |
|                                                                                                                                                                                                                                                                                                                                |   | Increase                (Decrease)                               |   |   | Total                                                           |   |   | Increase                (Decrease) |   |   | Total |   |
|                                                                                                                                                                                                                                                                                                                                |   | Due                to                                            |   |   | Increase                                                        |   |   | Due                to |   |   | Increase |   |
| *(in                thousands)*                                                                                                                                                                                                                                                                                                     |   | Rate                                                             |   |   | Volume                                                          |   |   | (Decrease) |   |   | Rate |   |   | Volume |   |   | (Decrease) |   |
| Interest                Income:                                                                                                                                                                                                                                                                                                     |   |                                                             |   |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                deposits with banks                                                                                                                                                                                                                                                                                 |   | $                                                                | (2     | )      |                                                            | $      | (63 | ) |   | $ | (65 | ) |   | $ | 62 |   |   | $ | (166 | ) |   | $ | (104 | ) |
| Federal                funds sold                                                                                                                                                                                                                                                                                                   |   |                                                             | (1     | )      |                                                            |   | (234 | ) |   |   | (235 | ) |   |   | 26 |   |   |   | 309 |   |   |   | 335 |   |
| Investment                securities (1)                                                                                                                                                                                                                                                                                            |   |                                                             | (87    | )      |                                                            |   | (3,524 | ) |   |   | (3,611 | ) |   |   | 106 |   |   |   | (11,178 | ) |   |   | (11,072 | ) |
| Loans                receivable, net (2)                                                                                                                                                                                                                                                                                            |   |                                                             | 547    |   |                                                            |   | 3,467 |   |   |   | 4,014 |   |   |   | 2,580 |   |   |   | 9,535 |   |   |   | 12,115 |   |
| Total                interest-earning assets                                                                                                                                                                                                                                                                                        |   |                                                             | 457    |   |                                                            |   | (354 | ) |   |   | 103 |   |   |   | 2,774 |   |   |   | (1,500 | ) |   |   | 1,274 |   |
| Interest                Expense:                                                                                                                                                                                                                                                                                                    |   |                                                             |   |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                deposits                                                                                                                                                                                                                                                                                                      |   |                                                             | 105    |   |                                                            |   | (13 | ) |   |   | 92 |   |   |   | 515 |   |   |   | 5 |   |   |   | 520 |   |
| Money                market deposits                                                                                                                                                                                                                                                                                                |   |                                                             | 372    |   |                                                            |   | 873 |   |   |   | 1,245 |   |   |   | 2,705 |   |   |   | 3,754 |   |   |   | 6,459 |   |
| Savings                deposits                                                                                                                                                                                                                                                                                                     |   |                                                             | 5      |   |                                                            |   | (50 | ) |   |   | (45 | ) |   |   | 46 |   |   |   | (158 | ) |   |   | (112 | ) |
| Certificates                of deposit                                                                                                                                                                                                                                                                                              |   |                                                             | 897    |   |                                                            |   | (363 | ) |   |   | 534 |   |   |   | 3,666 |   |   |   | (1,596 | ) |   |   | 2,070 |   |
| Total                interest-bearing deposits                                                                                                                                                                                                                                                                                      |   |                                                             | 1,379  |   |                                                            |   | 447 |   |   |   | 1,826 |   |   |   | 6,932 |   |   |   | 2,005 |   |   |   | 8,937 |   |
| Securities                sold under agreements to repurchase                                                                                                                                                                                                                                                                       |   |                                                             | 120    |   |                                                            |   | 1,090 |   |   |   | 1,210 |   |   |   | 425 |   |   |   | 1,200 |   |   |   | 1,625 |   |
| Federal                funds purchased                                                                                                                                                                                                                                                                                              |   |                                                             | -      |   |                                                            |   | 165 |   |   | $ | 165 |   |   |   | - |   |   |   | 278 |   |   | $ | 278 |   |
| FHLB                advances and other borrowings                                                                                                                                                                                                                                                                                   |   |                                                             | 159    |   |                                                            |   | (2,175 | ) |   |   | (2,016 | ) |   |   | 643 |   |   |   | (6,031 | ) |   |   | (5,388 | ) |
| Other                debt                                                                                                                                                                                                                                                                                                           |   |                                                             | (1     | )      |                                                            |   | (438 | ) |   |   | (439 | ) |   |   | 93 |   |   |   | (543 | ) |   |   | (450 | ) |
| Total                interest-bearing liabilities                                                                                                                                                                                                                                                                                   |   |                                                             | 1,657  |   |                                                            |   | (911 | ) |   |   | 746 |   |   |   | 8,093 |   |   |   | (3,091 | ) |   |   | 5,002 |   |
| (Decrease)                increase in net interest income (3)                                                                                                                                                                                                                                                                       |   | $                                                                | (1,200 | )      |                                                            | $      | 557 |   |   | $ | (643 | ) |   | $ | (5,319 | ) |   | $ | 1,591 |   |   | $ | (3,728 | ) |
|                                                                                                                                                                                                                                                                                                                                |   |                                                             |   |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1)                Total decrease in interest income on investment securities on a nontaxable                equivalent basis would be $3.6 million and $10.3 million for the                three and                nine month comparisons, respectively.             |   |
| (2)                Total increase in interest income on loans receivable on a nontaxable                equivalent basis would be $4.0 million and $12.0 million for the                three and                nine month comparisons, respectively.             |   |
| (3)                Total decrease in net interest income on a nontaxable equivalent                basis                would be $680,000 and $3.1 million for the three and nine month                comparisons, respectively.                                       |   |

**Provision        for Loan Losses.**

----

**Non-Interest      Income.  **

**Non-Interest      Expense.**

----

**Income      Tax      Expense.**

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

| **Item                    4.** | ****Controls                    and                    Procedures**** |
|--------------------------------|-----------------------------------------------------------------------|

**Evaluation      of Disclosure      Controls and Procedures.  **

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

----

**PART      II                      OTHER      INFORMATION**

| **Item                1.** | **Legal                Proceedings** |
|----------------------------|--------------------------------------|

| **Item                1A.** | **Risk                Factors** |
|-----------------------------|---------------------------------|

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

| (a)   | Not                applicable. |
|-----------------|--------------------------------|

| (b)   | Not                applicable. |
|-----------------|--------------------------------|

| (c)   | The                following table sets forth information regarding KNBT’s repurchases of its                common stock during the quarter ended September 30,                2007. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Period                                                                                                                                                                                                                                                                                                       |   | Total                Number of Shares Purchased                                                                                 |   | Average                Price PaidPer                Share                                                                 |   | Total                Number of Shares Purchased as Part of Publicly Announced Plans or                Programs                                                                              |   | Maximum                Number of Shares that may yet be Purchased Under the Plan or Program(s)                (1) |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------|
| July                1 - 31, 2007                                                                                                                                                                                                                                                                             |   | 355,483                                                                                                                         |   | $13.79                                                                                                                    |   | 355,483                                                                                                                                                                                     |   | 1,892,797                                                                                                         |
| August                1 - 31, 2007                                                                                                                                                                                                                                                                           |   | 315,534                                                                                                                         |   | $13.33                                                                                                                    |   | 315,534                                                                                                                                                                                     |   | 1,577,263                                                                                                         |
| September                1 - 30, 2007                                                                                                                                                                                                                                                                        |   |                      - |   |                     - |   |                                - |   | 1,577,263                                                                                                         |
| Total                                                                                                                                                                                                                                                                                                        |   | 671,017                                                                                                                         |   | $13.57                                                                                                                    |   | 671,017                                                                                                                                                                                     |   | N/A                                                                                                               |
|                                                                                                                                                                                                                                                                                                         |   |                                                                                                                            |   |                                                                                                                      |   |                                                                                                                                                                                        |   |                                                                                                              |
| (1)  On                June 26, 2006, the Board of Directors authorized a repurchase                of  2,807,219 shares of which 1,229,956 shares had been                repurchased as of September 30, 2007.  There is no expiration                date for this program. |

| **Item                3.** | **Defaults                Upon Senior Securities Risk                Factors** |
|----------------------------|--------------------------------------------------------------------------------|

| (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** |
|----------------------------|---------------------------------------------------------------------------------------|

----

| **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: |
|-----------------|------------------------------------|

|   |  2.1  | Agreement                  and Plan of Merger between National Penn Bancshares, Inc. and KNBT                  Bancorp, Inc., dated as of September 6, 2007.  (Incorporated by                  reference to Exhibit 2.1 to KNBT’s Current Report on Form 8-K filed with                  the Commission on September 7, 2007) |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |  31.1 | Section                  302 Certification of the Chief Executive Officer                                                                                                                                                                                                                                                                      |
|        |  31.2 | Section                  302 Certification of the Chief Financial Officer                                                                                                                                                                                                                                                                      |
|        |  32.1 | Certification                  Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuantto Section                  906 of                  the Sarbanes-Oxley Act of                  2002                                                                                                                                                       |

----

**SIGNATURES**

**KNBT      BANCORP, INC.**

| DATE:  | November                5, 2007 |   | BY:    | /S/  Scott                V. Fainor                   |
|--------|---------------------------------|--------|--------|-----------------------------------------------------------------|
|   |                            |   |   | Scott                V. Fainor                                  |
|   |                            |   |   | President                and Chief Executive Officer            |
|   |                            |   |   |                                                            |
|   |                            |   |   |                                                            |
|   |                            |   |   |                                                            |
| DATE:  | November                5, 2007 |   | BY:    | /S/  Eugene                T. Sobol                   |
|   |                            |   |   | Eugene                T. Sobol                                  |
|   |                            |   |   | Senior                Executive Vice President, Chief Financial |
|   |                            |   |   | Officer                and Treasurer                            |

----