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

                      ____________________________________
(Mark One)

[x]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934
                For the quarterly period ended September 30, 2004
                                       OR
[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

           For the transition period from ____________ to ____________

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

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

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

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

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

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

                                 YES X  NO
                                    ---   ---

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

                                 YES    NO X
                                    ---   ---

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common  stock as of the  latest  practicable  date:  As of  November  12,  2004,
30,333,604 shares of the Registrant's common stock were outstanding.

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<S>                                                                                  <C>

PART 1  -  FINANCIAL INFORMATION                                                 PAGE NO.

     ITEM 1  -       Financial Statements

         Consolidated Balance Sheet                                                  2
         Consoliated Statement of Income                                             3
         Consolidated Statement of Comprehensive Income                              4
         Consolidated Statement of Cash Flows                                        5
         Notes to Consolidated Financial Statements                                  6

     ITEM 2 -        Management's Discussion and Analysis of
                     Financial Condition and Results of Operations                  17

     ITEM 3  -       Quantitative and Qualitative Discussion About
                     Market Risk                                                    28

     ITEM 4  -       Controls and Procedures                                        28

PART 11  -  OTHER INFORMATION

     ITEM 1  -       Legal Proceedings                                              29

     ITEM 2 -        Unregistered Sales of Equity Securities and
                     Use of Proceeds

     ITEM 3 -        Defaults Upon Senior Securities                                29

     ITEM 4  -       Submission of Matters to a Vote of Security Holders            29

     ITEM 5  -       Other Information                                              29

     ITEM 6  -       Exhibits and Reports on Form 8-K                               29


SIGNATURES                                                                          30

CERTIFICATIONS                                                                      31

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<S>                                                                   <C>            <C>


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

                                                                        Sept. 30,       Dec. 31,
(dollars in thousands)                                                    2004            2003
---------------------------------------------------------------------------------------------------
ASSETS                                                                         (unaudited)

      Cash and Due From Banks                                         $    26,186    $    55,059
      Interest-Bearing Deposits With Banks                                 12,643         83,918
                                                                      -----------    -----------
        Cash and Cash Equivalents                                          38,829        138,977
      Investment Securities Available-for-Sale                            987,183        734,087
      Investment Securities Held to Maturity                               58,657           --
        (Fair value of $59,344 at September 30, 2004)
      Federal Home Loan Bank of Pittsburgh Stock                           30,338         11,543
      Mortgage Loans Held-for-Sale                                          1,980          4,677
      Loans                                                             1,006,719        890,076
      Less:  Allowance for Loan Losses                                     (9,905)        (7,910)
                                                                      -----------    -----------
        Net Loans                                                         996,814        882,166
      Bank Owned Life Insurance                                            59,840         57,849
      Premises and Equipment, Net                                          41,093         35,867
      Accrued Interest Receivable                                           9,439          7,645
      Goodwill and Other Intangible Assets                                 45,381         47,448
      Other Assets                                                         22,828         21,714
                                                                      ===========    ===========
        TOTAL ASSETS                                                  $ 2,292,382    $ 1,941,973
                                                                      ===========    ===========

LIABILITIES
      Non-Interest-Bearing Deposits                                   $   116,590    $   117,270
      Interest-Bearing Deposits                                         1,170,234      1,172,140
                                                                      -----------    -----------
         Total Deposits                                                 1,286,824      1,289,410
      Securities Sold Under Agreements to Repurchase                       20,501         24,550
      Advances from the Federal Home Loan Bank                            568,113        207,153
      Guaranteed Preferred Beneficial Interest in the
         Company's Subordinated Debentures                                   --           15,000
      Subordinated Debt                                                    15,464           --
      Accrued Interest Payable                                              4,451          3,218
      Other Liabilities                                                    11,286         13,562
                                                                      -----------    -----------
        TOTAL LIABILITIES                                               1,906,639      1,552,893
                                                                      -----------    -----------

SHAREHOLDERS' EQUITY
      Preferred Stock, no par
        Authorized:  20,000,000 shares, none issued and outstanding          --             --
      Common Stock, Par Value $0.01 a share                                   297            295
        Authorized:  100,000,000 shares
        Issued and Outstanding:
          30,624,861 shares at Sept. 30, 2004
          30,419,397 shares at Dec. 31, 2003
      Additional Paid-In Capital                                          296,232        297,887
      Retained Earnings                                                   110,476        100,570
      Unallocated Common Stock Held
        by Employee Stock Ownership Plan                                  (15,379)       (15,987)
      Unearned Common Stock Held
        by Management Recognition and Retention Plan                       (9,640)          --
      Accumulated Other Comprehensive Income                                3,757          6,315
                                                                      -----------    -----------
      TOTAL SHAREHOLDERS' EQUITY                                          385,743        389,080
                                                                      -----------    -----------

      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                      $ 2,292,382    $ 1,941,973
                                                                      ===========    ===========

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

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                                                                               2


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

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

---------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, except per share data)                   Three Months Ended         Nine Months Ended
                                                              Sept. 30,     Sept. 30,   Sept. 30,   Sept. 30,
                                                                2004          2003        2004        2003
---------------------------------------------------------------------------------------------------------------
INTEREST INCOME                                                                 (unaudited)

     Loans, including fees                                    $ 14,724     $  9,745     $ 43,295    $ 29,404
     Investment Securities                                      10,012        3,272       26,709      11,089
     Other Interest                                                 36          160          314         368
                                                              --------     --------     --------    --------
         Total Interest Income                                  24,772       13,177       70,318      40,861
                                                              --------     --------     --------    --------

INTEREST EXPENSE
     Deposits                                                    4,492        3,452       13,384      11,424
     Securities sold under Agreements to Repurchase                 49           28          126          88
     Advances from the Federal Home Loan Bank                    4,036        1,177        8,900       3,439
     Subordinated Debt                                             200         --            560        --
                                                              --------     --------     --------    --------
         Total Interest Expense                                  8,777        4,657       22,970      14,951
                                                              --------     --------     --------    --------

NET INTEREST INCOME                                             15,995        8,520       47,348      25,910
Provision for Loan Losses                                          742          468        3,213         856
                                                              --------     --------     --------    --------

     Net Interest Income After Provision
        for Loan Losses                                         15,253        8,052       44,135      25,054
                                                              --------     --------     --------    --------

NON-INTEREST INCOME
     Trust Income                                                  363         --          1,088        --
     Brokerage Services Income                                     141          174          418         372
     Deposit Service Charges                                     1,040          947        3,360       2,701
     Bank Owned Life Insurance                                     669          344        1,991       1,041
     Net Gain on Sale of Investment Securities                     338         --            350           2
     Net Gain (Loss) on Sale of Residential Mortgage Loans         221         (127)         392         513
     Net Gain on Sale of Credit Card Loans                        --           --            298        --
     Net Gain ( Loss) on Sale of Assets                            (18)        --            195        --
     Net Gain ( Loss) on Sale of Other Real Estate Owned            (1)          12           68         (23)
     Non-Interest Operating Income                               1,087          684        3,085       2,044
                                                              --------     --------     --------    --------

         Total Non-Interest Income                               3,840        2,034       11,245       6,650
                                                              --------     --------     --------    --------

NON-INTEREST EXPENSES
     Compensation and Employee Benefits                          7,473        4,333       22,027      11,791
     Net Occupancy and Equipment Expense                         2,318        1,046        6,105       3,058
     Professional Fees                                             540          210        1,351         502
     Advertising                                                   281           59          731         413
     Data Processing                                               405          514        1,414       1,434
     Impairment of Mortgage Servicing Rights                       105          293          317       1,220
     Amortization of Intangible Assets                             547         --          1,640        --
     Other Operating Expenses                                    1,827        1,397        5,433       3,488
                                                              --------     --------     --------    --------

         Total Non-Interest Expenses                            13,496        7,852       39,018      21,906
                                                              --------     --------     --------    --------

Income Before Income Taxes                                       5,597        2,234       16,362       9,798
Income Taxes                                                     1,150          478        3,492       2,467
                                                              --------     --------     --------    --------

NET INCOME                                                    $  4,447     $  1,756     $ 12,870    $  7,331
                                                              ========     ========     ========    ========

PER SHARE DATA
     Net Income - Basic                                       $   0.15          N/A     $   0.44         N/A
                                                              ========     ========     ========    ========
     Net Income - Diluted                                     $   0.15          N/A     $   0.43         N/A
                                                              ========     ========     ========    ========
     Cash Dividends Per Common Share                          $   0.05          N/A     $   0.10         N/A
                                                              ========     ========     ========    ========

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

See accompanying notes to consolidated financial statements.

</TABLE>

                                                                               3

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<TABLE>
<CAPTION>

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

KNBT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Nine Months Ended September 30, 2004 (unaudited)
(dollars in thousands except share data)
                                                                                                             Accumulated
                                                          Common    Addl            Unallocated   Unearned       Other
                                                 Common   Stock   Paid In  Retained    ESOP     Compensation Comprehensive
                                                 Shares   Value   Capital  Earnings   Shares        MRP         Income       Total
------------------------------------------------------------------------------------------------------------------------------------
Balance January 1, 2004                       29,479,275   $295  $297,887  $100,570  ($15,987)          $0        $6,315   $389,080

Comprehensive Income
   Net Income                                                                12,870                                          12,870
   Other Comprehensive Loss Net of Taxes
      and Reclassification Adjustments                                                                            (2,558)    (2,558)
                                                                                                                         -----------
Total Comprehensive Income                                                                                                 $ 10,312
                                                                                                                         -----------
Cash Dividends                                                               (2,964)                                         (2,964)
Purchase of Stock for Management
   Recognition and Retention Plan (MRRP)                          (13,281)                                                  (13,281)
Unallocated ESOP Shares Committed to Employees    35,701              (14)                608                                   594
Shares Issued upon Exercise of Stock Options     205,464      2     1,113                                                     1,115
Establishment of a Management Recognition
   Program(MRRP)                                                   10,527                          (10,527)                       -
Amortization of Compensation related to MRRP                                                           887                      887
                                              --------------------------------------------------------------------------------------
Balance at September 30, 2004                 29,720,440   $297  $296,232  $110,476  ($15,379)     ($9,640)       $3,757   $385,743
                                              ======================================================================================

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

</TABLE>


                                                                               4

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<TABLE>
<CAPTION>

<S>                                                                                     <C>           <C>

KNBT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------------
                                                                                            Nine months ended
(Dollars in Thousands)                                                              Sept. 30, 2004   Sept. 30, 2003
-------------------------------------------------------------------------------------------------------------------
                                                                                               (unaudited)
OPERATING ACTIVITIES:
Net Income                                                                              $  12,870     $   7,331
Adjustments to Reconcile Net Income to Net Cash
   Provided by (Used in) Operating Activities:
      Provision for Loan Losses                                                             3,213           856
      Depreciation and Amortization                                                         4,544         1,230
      Compensation expense stock option plan                                                   10          --
      Management Recognition and Retention Plan Expense                                       877          --
      Amortization and Accretion of Security Premiums and Discounts, net                    1,840         2,477
      (Gain) Loss on Sale of Other Real Estate Owned                                          (68)           23
      Gain on Sales of Investment Securities                                                 (350)           (2)
      Gain on Sale of Credit Card Portfolio                                                  (298)         --
      Gain on Sale of Other Assets                                                           (195)         --
      Gain on Sale of Mortgage Loans                                                         (392)         (513)
      Mortgage Loans Originated for Sale                                                  (36,776)      (45,514)
      Mortgage Loan Sales                                                                  39,865        58,693
  Changes in Assets and Liabilities:                                                         --            --
      Increase in Bank Owned Life Insurance                                                (1,991)       (1,040)
      Increase in Accrued Interest Receivable                                              (1,794)         (902)
      Increase in Other Assets                                                             (8,895)       (4,341)
      Decrease in Other Liabilities and Accrued Interest Payable                           (1,043)         (204)
                                                                                        ---------     ---------
Net Cash Provided by Operating Activities                                                  11,417        18,094
                                                                                        ---------     ---------

INVESTING ACTIVITIES:
Proceeds from Calls and Maturities of Securities Available-for-Sale                       109,851       212,473
Proceeds from Sales of Securities Available-for-Sale                                       12,237         3,051
Purchase of Securities Available-for-Sale                                                (371,598)     (214,987)
Purchase of Securities Held to Maturity                                                   (59,751)         --
Purchase of Federal Home Loan Bank of Pittsburgh Stock                                    (18,795)       (1,111)
Redemption of Federal Home Loan Bank of Pittsburgh Stock                                     --             233
Proceeds from the Sale of Credit Cards                                                      1,831          --
Net Increase in Loans                                                                    (117,861)      (65,428)
Purchase of Premises & Equipment                                                           (7,813)       (6,752)
Proceeds from the Sale of Other Assets                                                        775          --
Proceeds from the Sale of Other Real Estate Owned                                             364           740
                                                                                        ---------     ---------
Net Cash Used in Investing Activities                                                    (450,760)      (71,781)
                                                                                        ---------     ---------

FINANCING ACTIVITIES:
Net (Decrease) Increase in Deposits                                                        (2,586)       46,232
Net (Decrease) Increase in Repurchase Agreements                                           (4,049)        2,130
Net Increase in Short-Term Borrowings                                                       8,500          --
Proceeds from Long-Term Debt                                                              400,112          --
Repayment of Long-Term Debt                                                               (47,652)       (7,500)
Increase in Stock Escrow Funds                                                               --         304,477
Proceeds From the Exercise of Stock Options                                                 1,115          --
Purchase of Stock for the Management Recognition and Retention Plan                       (13,281)         --
Cash Dividends Paid                                                                        (2,964)         --
                                                                                        ---------     ---------
Net Cash Provided by Financing Activities                                                 339,195       345,339
                                                                                        ---------     ---------

Inrcrease (decrease) in Cash and Cash Equivalents                                        (100,148)      291,652
Cash & Cash Equivalents January 1,                                                        138,977        86,293
                                                                                        ---------     ---------
Cash & Cash Equivalents  September 30,                                                  $  38,829     $ 377,945
                                                                                        =========     =========

Supplemental Disclosure of Cash Flow Information
      Cash Paid During the Year for
              Income Taxes                                                              $   1,522     $   3,075
                                                                                        =========     =========

              Interest                                                                  $  21,737     $  14,882
                                                                                        =========     =========

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

              Reclassification of Loans Receivable to Other Real Estate Owned           $     326     $   1,367
                                                                                        =========     =========

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

</TABLE>
                                                                               5

<PAGE>



                       KNBT BANCORP, INC. AND SUBSIDIARIES

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

                                   (unaudited)


NOTE A  -  BASIS OF PRESENTATION

KNBT Bancorp,  Inc. ("KNBT" or the "Company") is a Pennsylvania  corporation and
registered bank holding  company  organized in 2003.  KNBT's  business  consists
primarily of being the parent holding company for Keystone Nazareth Bank & Trust
Company, a Pennsylvania  chartered savings bank.  Keystone Nazareth Bank & Trust
Company (the "Bank") is the stock-form  successor to Keystone  Savings Bank upon
the mutual-to-stock  conversion of Keystone Savings Bank, which was completed on
October  31,  2003.  Concurrently  with  the  mutual-to-stock  conversion,  KNBT
acquired,  through a merger, First Colonial Group, Inc. ("First Colonial"),  the
parent bank holding  company for Nazareth  National Bank and Trust  Company.  At
September  30,  2004,  the Bank  operates 41 banking  offices with 19 located in
Northampton County,  Pennsylvania,  16 in Lehigh County,  Pennsylvania,  five in
Monroe County, Pennsylvania and one in Carbon County,  Pennsylvania.  The Bank's
office network includes 14 full service in-store supermarket branch offices. The
Bank has ATMs in all but one of its  facilities  and also maintains six off-site
ATMs.

NOTE B  -  BASIS OF CONSOLIDATION

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

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

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

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

                                                                               6

<PAGE>

NOTE C  -  CONVERSION AND ACQUISITION

First Colonial

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

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

Oakwood Financial Corp.

On  September  28,  2004,  KNBT  announced  its  agreement  to purchase  Oakwood
Financial Corp.  ("Oakwood"),  a full-service securities and insurance brokerage
firm based in Allentown, PA.

Oakwood provides a full menu of securities  brokerage,  insurance and investment
advisory products and services. Upon completion of the transaction, Oakwood will
operate as KNBT Securities,  a wholly owned  subsidiary of the Bank.  Management
intends to account for the transaction using the purchase method of accounting.

The acquisition is subject to customary conditions, including the receipt of all
required  regulatory  approvals.  This  transaction  is expected to close in the
fourth quarter of 2004.

                                                                               7

<PAGE>

NOTE D  -  EARNINGS PER SHARE

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



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<CAPTION>

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


                                                             For the Three Months Ended Sept. 30, 2004
                                                             Net              Average
                                                           Income              Shares            Per Share
                                                         (numerator)       (denominator)          Amount
                                                       -------------------------------------------------------
                                                          (dollars in thousands except per share amounts)
Basic Earnings Per Share
   Income Available to Common Shareholders                     $ 4,447           28,875,080            $ 0.15

Effect of Dilutive Securities
   Stock Options                                                                    370,998
   Management Recognition and Retention Plan                                         39,172
                                                                         -------------------  ----------------
     Total Effect of Dilutive Securities                                            410,170               $ -

Diluted Earnings Per Share
   Income Available to Common Shareholders
   plus Assumed Exercise of Options                            $ 4,447           29,285,250            $ 0.15
                                                       ================  ===================  ================



                                                              For the Nine Months ended Sept. 30, 2004
                                                             Net              Average
                                                           Income              Shares            Per Share
                                                         (numerator)       (denominator)          Amount
                                                       -------------------------------------------------------
                                                                           (dollars in thousands)
Basic Earnings Per Share
   Income Available to Common Shareholders                    $ 12,870           29,219,824            $ 0.44

Effect of Dilutive Securities
   Stock Options                                                                    427,494
   Management Recognition and Retention Plan                                         55,216
                                                                         -------------------  ----------------
     Total Effect of Dilutive Securities                                            482,710           $ (0.01)

Diluted Earnings Per Share
   Income Available to Common Shareholders
   plus Assumed Exercise of Options                           $ 12,870           29,702,534            $ 0.43
                                                       ================  ===================  ================


</TABLE>



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

Common stock  outstanding  at September 30, 2004 for the purpose of  calculating
basic earnings per share does not include 904,421 unallocated shares held by the
Employee Stock Ownership Plan ("ESOP").

                                                                               8

<PAGE>

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

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



NOTE E  -  INVESTMENT SECURITIES

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


<TABLE>
<CAPTION>

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


                                                        Investment Securities
                                                       Sept. 30, 2004 (unaudited)
                                      -----------------------------------------------------
                                                        Gross         Gross
                                       Amortized      unrealized    unrealized   Fair
                                          Cost          gains         losses     Value
                                      -----------------------------------------------------
                                                          (in thousands)
Held to Maturity:
   Obligations of states and political
    subdivisions                          $  5,514    $     29    $     (5)    $  5,538
   Mortgaged-backed securities
       FNMA                                 27,030         302        --         27,332
       Other CMOs                           26,113         361        --         26,474
                                      -----------------------------------------------------
       Total mortgage backed                53,143         663        --         53,806

Total Held to Maturity                    $ 58,657    $    692    $     (5)    $ 59,344
                                      =====================================================

Available for Sale:
   U.S. Government and agencies           $163,239    $  2,039    $   (309)    $164,969
   Obligations of states and political
    subdivisions                           105,924       2,385        (143)     108,166
   Asset-managed funds                       4,904        --           (88)       4,816
   Federated Liquid Cash Trust                  36        --          --             36
   Mortgaged-backed securities
       GNMA                                  1,568          61        --          1,629
       FHLMC                                99,998         725        (295)     100,428
       FNMA                                315,141       3,489      (1,061)     317,569
       Other CMOs                          245,440         592      (1,833)     244,199
                                      -----------------------------------------------------
   Total mortgage backed                   662,147       4,867      (3,189)     663,825
   Corporate and other debt securities       9,037         246        --          9,283
   Equity Securities                        36,211         544        (667)      36,088
                                      -----------------------------------------------------
Total Available for Sale                  $981,498    $ 10,081    $ (4,396)    $987,183
                                      =====================================================

</TABLE>





                                                                               9

<PAGE>


<TABLE>
<CAPTION>

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

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

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

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


</TABLE>


NOTE F  -  STOCK BASED COMPENSATION

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

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

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

                                                                              10

<PAGE>

The following table  illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation (in thousands, except per share amounts).


<TABLE>
<CAPTION>

<S>                                                                                 <C>

                                                                    For the Three Months Ended
                                                                          Sept. 30, 2004
                                                                 -----------------------------
                                                                   (dollars in thousands
                                                                   except per share data)

Net Income As reported                                                              $ 4,447

Add: Stock-based employee compensation expense
included in reported net income, net                                                      6
of related tax effects

Less: Stock-based compensation cost determined
under fair value method for all awards, net                                             138
of related tax effects

Pro forma                                                                           $ 4,315
                                                                       =====================

Earnings per share (Diluted)
As reported                                                                          $ 0.15
Pro forma                                                                            $ 0.15

Earnings per share (Basic)
As reported                                                                          $ 0.15
Pro forma                                                                            $ 0.15




                                                                    For the Nine Months Ended
                                                                          Sept. 30, 2004
                                                                 -----------------------------
                                                                   (dollars in thousands
                                                                   except per share data)

Net Income As reported                                                             $ 12,870

Add: Stock-based employee compensation expense
included in reported net income, net                                                     10
of related tax effects

Less: Stock-based compensation cost determined
under fair value method for all awards, net                                             231
of related tax effects

Pro forma                                                                          $ 12,649
                                                                       =====================

Earnings per share (Diluted)
As reported                                                                          $ 0.43
Pro forma                                                                            $ 0.43

Earnings per share (Basic)
As reported                                                                          $ 0.44
Pro forma                                                                            $ 0.43

</TABLE>






                                                                              11

<PAGE>

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

In May 2004,  the  Company  granted  22,500  options to  purchase  shares of the
Company's common stock at $16.50 to KNBT's advisory directors.  The Company will
recognize compensation expense in accordance with the fair value-based method of
accounting  described in SFAS No. 123. The fair value of each option is expensed
over its  vesting  period.  Compensation  expense  of  $4,000  and  $10,000  was
recognized   during  the  three  and  nine  months  ended  September  30,  2004,
respectively, for options granted to advisory directors.

On March 31, 2004, the Financial  Accounting  Standards  Board ("FASB") issued a
proposed Statement, "Share-Based Payment an Amendment of FASB Statements No. 123
and No 95," that addresses the accounting for share-based  payment  transactions
in which an  enterprise  receives  employee  services in exchange for (a) equity
instruments  of the  enterprise  or (b)  liabilities  that are based on the fair
value of the  enterprise's  equity  instruments  or that may be  settled  by the
issuance of such equity  instruments.  Under the FASB's  proposal,  all forms of
share-based  payments to employees,  including employee stock options,  would be
treated the same as other forms of  compensation by recognizing the related cost
in the income statement. The expense of the award would generally be measured at
fair value at the grant date.  Current  accounting  guidance  requires  that the
expense  relating  to  so-called  fixed  plan  employee  stock  options  only be
disclosed in the footnotes to the financial  statements.  The proposed Statement
would eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25,  "Accounting  for Stock Issued to Employees."  KNBT is
currently  evaluating this proposed  statement and its effects on its results of
operations.  FASB has postponed  the  effective  date for periods after June 15,
2005.

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

The MRRP, which is a stock-based  incentive plan, provides for 808,047 shares of
the  Company's  common  stock,  subject to  adjustment,  which may be granted as
restricted shares to the Company's directors,  advisory directors,  officers and
employees. Shares awarded by the MRRP are earned by the participants at the rate
of 20% per year. On May 6, 2004,  638,000 restricted shares had been awarded and
170,047 are available for future grants.  Compensation  expense for this plan is
being  recorded over the vested period or a 60-month  period and is based on the
market  value of the  Company's  stock as of the date the awards were made.  The
Company,  for the benefit of the MRRP Trust,  purchased  808,047  shares of KNBT
common  stock  at an  average  price  of  $16.44  per  share,  which is shown as
reduction of additional  paid-in-capital.  The remaining unamortized cost of the
MRRP  shares  acquired to date is  reflected  as a  reduction  in  shareholders'
equity.  Expense  under this plan for the three and nine months ended  September
30, 2004 was $526,000 and $877,000 respectively.

                                                                              12

<PAGE>

NOTE G - LOANS

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


                                              Sept. 30,            Dec. 31,
                                                2004                 2003
                                             -----------         -----------
                                            (unaudited)
                                                       (in thousands)
Real Estate
   Residential                               $   328,577         $   346,221
   Construction                                  108,198             112,684
   Commercial                                    232,046             156,563
                                             -----------         -----------
     Total real estate                           668,821             615,468

Consumer loans                                   296,062             265,541
Commercial (non real estate)                      46,215              38,978
States and political subdivisions                  1,237               2,334
                                             -----------         -----------
     Total gross loans                         1,012,335             922,321

Less:
   Mortgage loans held-for-sale                   (1,980)             (4,677)
   Loans in process                               (3,593)            (27,099)
   Deferred fees (costs)                             (43)               (469)
                                             -----------         -----------
     Total loans                               1,006,719             890,076

Less: Allowance for loan losses                   (9,905)             (7,910)
                                             -----------         -----------
     Total net loans                         $   996,814         $   882,166
                                             ===========         ===========






                                                                              13

<PAGE>

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


<TABLE>
<CAPTION>

<S>                                                                <C>           <C>


                                                                  At Sept. 30,  At Dec. 31,
                                                                     2004          2003
                                                                   -------       -------
                                                                 (unaudited)
                                                                       (in thousands)
Non-accrual loans                                                  $ 3,801       $ 1,720
Accruing loans 90 days or more past due                                653           405
                                                                   -------       -------
    Total non-performing loans                                       4,454         2,125
                                                                   -------       -------

Other real estate owned                                                 32           173
                                                                   -------       -------
    Total non-performing assets                                    $ 4,486       $ 2,298
                                                                   =======       =======


Total non-performing loans as a percentage of loans, net              0.45%         0.24%
Total non-performing loans as a percentage of total assets            0.19%         0.11%
Total non-performing assets as a percentage of total assets           0.20%         0.12%


Interest on non-accrual loans which would have been
  recorded at the original rate                                    $    70       $    50
Interest on non-accrual loans that was reflected in income            --              60
                                                                   -------       -------
      Net (decrease) increase on interest income                   $   (70)      $    10
                                                                   =======       =======

</TABLE>





KNBT's recorded  investment in impaired loans was $370,000 at September 30, 2004
and $217,000 at December  31,  2003.  The  valuation  allowance  for loan losses
related to  impaired  loans is a part of the  allowance  for loan losses and was
$39,000 at  September  30, 2004 and $33,000 at December  31,  2003.  The average
impaired loan balance for the nine months ended September 30, 2004 was $456,000.
During the quarter ended September 30, 2004, we received  principal  payments of
$3,000 on impaired  loans,  which  payments are  recognized on a cash basis.  We
recognized no income on impaired loans in the nine-month  period ended September
30, 2004. There were no principal  payments and no income recognized on impaired
loans in the second quarter of 2003.

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

<TABLE>
<CAPTION>

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


                                                       At or for the                         At or for the
                                                 Three Months Ended Sept. 30,          Nine Months Ended Sept. 30,
                                                  2004               2003               2004                2003
                                             ---------------    ---------------    ---------------     ----------------
                                                          (unaudited)                           (unaudited)
                                                        (in thousands)                        (in thousands)

Balance, beginning of period                        $ 9,519            $ 2,814            $ 7,910              $ 2,927
Provision charged to operations                         742                468              3,213                  856
Loans charged-off                                      (395)              (362)            (1,453)                (886)
Recoveries of loans previously charged-off               39                 21                235                   44
                                             ---------------    ---------------    ---------------     ----------------

Balance, end of period                              $ 9,905            $ 2,941            $ 9,905              $ 2,941
                                             ===============    ===============    ===============     ================

</TABLE>
                                                                              14

<PAGE>

NOTE H -  RETIREMENT PLANS

1.   Defined Benefit Plan.  KNBT  participates  in a multiple  employer  defined
     benefit pension plan, which covers  substantially  all employees with 1,000
     hours of service  during plan years prior to October 2003. In October 2003,
     KNBT froze the future accrual of benefits  under this plan.  KNBT continues
     to  contribute  to this plan for benefits  accrued  prior to October  2003.
     KNBT's  contribution  to this plan in the nine months ended  September  30,
     2004 was  $131,000.  During the nine months  ended  September  30, 2003 the
     contribution to this plan amounted to $593,000.  KNBT currently  expects to
     contribute approximately $88,000 to this plan during the remainder of 2004.

2.   Directors'  Deferred  Plan.  KNBT,  as a part  of  the  merger  with  First
     Colonial,  assumed,  as of October 31, 2003, the First Colonial  directors'
     deferred plan involving  certain former  directors of First  Colonial.  The
     plan requires  defined annual  payments over a 15-year period  beginning at
     age 65. The net periodic  defined benefit expense for the nine months ended
     September 30, 2004 was as follows.

                                                 (dollars in thousands)
Service cost                                              $
Interest cost                                              19
Expected return on plan assets                             --
Amortization of unrecognized net
  transition asset or obligation                           --
Amortization of Unrecognized Prior
  Service Cost                                             --
Amortization of Unrecognized Net Gain or Loss              --

Total Net Periodic Pension Cost for the Quarter           $19


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

NOTE I - VARIABLE INTEREST ENTITY

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

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

                                                                              15

<PAGE>

proposed  rule would  retain the current  maximum  percentage  of total  capital
permitted for trust  preferred  securities at 25%, but would enact other changes
to the rules governing trust preferred  securities that affect their use as part
of the collection of entities known as "restricted core capital  elements".  The
rule would take effect March 31, 2007;  however, a three-year  transition period
starting  March 31, 2004 and  leading up to that date would  allow bank  holding
companies  to  continue to count trust  preferred  securities  as Tier I Capital
after applying  FIN-46(R).  Management has evaluated the effects of the proposed
rule and does not  anticipate a material  impact on its capital  ratios when the
proposed rule is finalized.

NOTE J - NEW ACCOUNTING PRONOUNCEMENTS

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

In November  2003,  the Emerging  Issues Task Force  ("EITF") of the FASB issued
EITF  Abstract  03-1,  The meaning of  Other-Than-Temporary  Impairment  and its
Application to Certain Investments (EITF 03-1). The quantitative and qualitative
disclosure  provisions  of EITF  03-1 were  effective  for  years  ending  after
December 15, 2003 and were  included in the  Company's  2003 Form 10-K. In March
2004, the EITF issued a Consensus on Issue 03-1 requiring that the provisions of
EITF 03-1 be applied  for  reporting  periods  beginning  after June 15, 2004 to
investments  accounted  for  under  SFAS No.  115 and  124.  At its  meeting  on
September 8, 2004, the FASB discussed  whether  additional  guidance  related to
paragraph 16 of EITF 03-1 should be issued in a FASB Staff Position ("FSP"). The
FASB agreed that additional  guidance is necessary and that such guidance should
be issued in an FSP.  Given the current  effective date of paragraph 16 of Issue
03-1 for  application  of the  other-than-temporary  impairment  evaluations  in
reporting  periods  beginning  after June 15, 2004, the FASB also agreed that an
additional  FSP should be issued to delay the effective  date of paragraph 16 of
Issue 03-1. EITF 03-1 establishes a three-step  approach for determining whether
an   investment   is   considered   impaired,   whether   that   impairment   is
other-than-temporary,  and the measurement of an impairment loss. The Company is
in the  process  of  determining  the  impact  that  this  EITF will have on its
financial statements.

NOTE K - RECLASSIFICATIONS

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

                                                                              16


<PAGE>

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


CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

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


Critical Accounting Policies, Judgments and Estimates

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

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

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

                                                                              17

<PAGE>

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

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

Assets.  KNBT's total assets were $2.3 billion at September 30, 2004 as compared
to $1.9 billion at December 31,  2003,  an increase of $350.4  million or 18.1%.
The  increase  in  assets  was   principally  due  to  increases  in  investment
securities, loans receivable, Federal Home Loan Bank ("FHLB") stock and premises
and  equipment.  These  increases were offset in part by a reduction in cash and
cash  equivalents  and an increase in the allowance for loan losses.  During the
first nine months of 2004, KNBT's investment securities increased $311.8 million
or 42.5% to $1.0 billion at  September  30, 2004  compared to $734.1  million at
December  31,  2003.  The  primary  sources  of funds used for the  increase  in
investment  securities  were  advances from the FHLB and to a lesser extent cash
and cash  equivalents.  KNBT's  total  loans  receivable  were $1.0  billion  at
September 30, 2004, an increase of $116.6 million or 13.1% over the December 31,
2003 total of $890.1 million. The growth in loans receivable was principally due
to a $75.5  million or 48.2%  increase in commercial  real estate loans,  a $7.2
million or 18.6% in other commercial loans and a $30.5 million or 11.5% increase
in consumer  loans.  These loan increases were offset in part by a $17.6 million
or 5.1% decrease in  single-family  residential  mortgage loans. The decrease in
single-family residential mortgage loans was a result of a $39.9 million sale of
loans during the nine-month period ended September 30, 2004, customer repayments
and a reduced level of new mortgage loan originations because of rising interest
rates.  Construction loans decreased $4.5 million or 4.0% during the nine months
ended  September  30, 2004.  We believe that rising  interest  rates reduced the
level of activity in this category.  During the first quarter of 2004, KNBT sold
its $1.8 million credit card portfolio for a gain of $298,000. These credit card
loans were sold because of relatively low volume and high administrative  costs.
KNBT  continues  to offer credit  cards to its  customers  through a third party
provider and receives fee income through this arrangement.  KNBT's investment in
the stock of the FHLB was $30.3  million at  September  30,  2004 as compared to
$11.5  million at December  31, 2003.  This was an increase of $18.8  million or
162.8% for the period.  Net premises and equipment  increased by $5.2 million or
14.6% to $41.1  million at  September  30,  2004  compared  to $35.9  million at
December  31,  2003.  The primary  reason for the increase was the result of the
purchase of new computer  equipment and the cost of renovations to the Company's
headquarters and operations  buildings.  At September 30, 2004, such renovations
were substantially complete. KNBT's cash and cash equivalents were $38.8 million
at September 30, 2004 as compared to $139.0  million at December 31, 2003.  This
decrease of $100.1 million or 72.1% was principally the result of the investment
of these funds in additional investment securities and new loans.

                                                                              18

<PAGE>

Allowance  for Loan Losses.  KNBT's  allowance  for loan losses  increased  $2.0
million or 25.2% during the first nine months of 2004.  The  allowance  for loan
losses was $9.9 million and $7.9 million at September  30, 2004 and December 31,
2003, respectively. The increase in the allowance for loan losses was based upon
management's  analysis  of the  inherent  losses  in  the  loan  portfolio.  The
allowance  for loan losses is  established  through a provision for loan losses.
KNBT maintains the allowance at a level  believed,  to the best of  management's
knowledge, to cover all known and inherent losses in the portfolio that are both
probable and reasonable to estimate at each reporting date.  Management  reviews
all loans that are delinquent 60 days or more on a monthly  basis,  and performs
regular  reviews of the  allowance  no less than  quarterly in order to identify
those inherent losses and assess the overall collection probability for the loan
portfolio.  Such reviews  consist of a  quantitative  analysis by loan category,
using  historical loss experience and  consideration  of a series of qualitative
loss  factors.  KNBT's  evaluation  process  includes,  among other  things,  an
analysis  of  delinquency  trends,  non-performing  loan  trends,  the  level of
charge-offs and recoveries,  prior loss experience, total loans outstanding, the
volume of loan originations,  the type, size and geographic concentration of its
loans, the value of collateral  securing loans, the borrower's  ability to repay
and repayment  performance,  the number of loans requiring heightened management
oversight,  local economic conditions and industry experience.  In addition,  in
establishing  the  allowance for loan losses,  management  considers a ten point
internal  rating  system  for all loans  originated  by the  Commercial  Lending
department.  At the time of  origination,  each  commercial  loan is  assigned a
rating  based on the assumed  risk  elements of the loan.  Such risk ratings are
periodically  reviewed  by  management  and revised as deemed  appropriate.  The
establishment  of the  allowance  for loan losses is  significantly  affected by
management's judgment and uncertainties and there is a likelihood that different
amounts would be reported under  different  conditions or  assumptions.  Various
regulatory  agencies,   as  an  integral  part  of  their  examination  process,
periodically  review KNBT's allowance for loan losses. Such agencies may require
the Company to make  additional  provisions for estimated loan losses based upon
judgments  different from those of management.  KNBT's allowance for loan losses
was 0.98% and 0.89% of total loans receivable at September 30, 2004 and December
31, 2003,  respectively.  See "Comparison of Operating Results for the three and
nine months ended September 30, 2004 and 2003 - Provision for Loan Losses."

Liabilities.  KNBT's total liabilities amounted to $1.9 billion at September 30,
2004, an increase of $353.7  million or 22.8%  compared to total  liabilities at
December 31, 2003 of $1.6 billion.  The increase in liabilities  was principally
due to a $361.0 million or 174.3%  increase in advances from the FHLB during the
first nine months of 2004.  These  advances  totaled  $568.1  million and $207.2
million at  September  30, 2004 and  December  31,  2003,  respectively.  KNBT's
deposit growth  remained flat during the nine-month  period ended  September 30,
2004.  Deposits totaled $1.3 billion at both September 30, 2004 and December 31,
2003.  At March 31,  2004,  KNBT  adopted  FIN  46(R)  and,  as a  result,  KNBT
deconsolidated  Trust I. The $15.5 million of debentures issued by KNBT to Trust
I were  reflected as  subordinated  debt in the September 30, 2004  consolidated
balance  sheet.  KNBT's  investment  in the Trust in the amount of $464,000  was
included in other assets in the consolidated  balance sheet of KNBT at September
30, 2004.  At December 31, 2003 Trust I was a  consolidated  subsidiary  and was
included  in  liabilities  in the  consolidated  balance  sheet  as  "Guaranteed
preferred beneficial interest in the Company's subordinated  debentures" and the
common stock and the debentures of Trust I along with the related income effects
were eliminated in the consolidated financial statements.  The debentures issued
to Trust I, less the common stock of Trust I, or $15.0  million at September 30,
2004 continue to qualify as Tier I capital under current  guidance issued by the
Federal Reserve Board.

Shareholders'  Equity.  Shareholders' equity totaled $385.7 million at September
30, 2004  compared to $389.1  million at December  31,  2003, a decrease of $3.3
million or .9%. The decrease in shareholders'  equity was principally the result
of the purchase of 808,047 shares of the Company's stock to fund the shareholder
approved 2004  Management  Recognition and Retention Plan ("MRRP") at an average
cost of $16.44 per share.  KNBT also  declared and paid a cash  dividend of $.05
per share during the quarters ended  September 30, 2004 and June 30, 2004.  This
resulted in a decrease in retained  earnings  of $3.0  million.  Another  factor
contributing  to  the  decrease  in  shareholders'  equity  was  a  decrease  in
accumulated other comprehensive income of $2.6 million relating to a decrease in
unrealized gains on investment securities available-for-sale. Net income for the
nine months ended September 30, 2004 was $12.9 million and partially  offset the
impact of the funding of the MRRP.

                                                                              19

<PAGE>

KNBT committed to release 35,701 shares of the Company's common stock during the
nine  months  ended  September  30,  2004  pursuant  to the  ESOP for a value of
$594,000 and issued 205,464 common shares upon the exercise of stock options for
proceeds of $1.1  million.  Regulatory  capital  ratios for KNBT and the Bank at
September 30, 2004 and December 31, 2003 are shown in the following tables.


<TABLE>
<CAPTION>

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

CAPITAL RATIOS

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

Total Capital
(To Risk-Weighted Assets)
    Company                                    $ 361,985       28.13%       $ 102,955        8.00%               N/A           N/A
    Bank                                       $ 258,628       20.18%       $ 102,529        8.00%         $ 128,161        10.00%

Tier 1 Capital
(To Risk-Weighted Assets)
    Company                                    $ 352,080       27.36%        $ 51,477        4.00%               N/A           N/A
    Bank                                       $ 248,723       23.27%        $ 51,264        4.00%          $ 76,897         6.00%

Tier 1 Capital
(To Average Assets, Leverage)
    Company                                    $ 352,080       16.29%        $ 86,466        4.00%               N/A           N/A
    Bank                                       $ 248,723       12.41%        $ 80,188        4.00%         $ 100,235         5.00%

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

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

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

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

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

</TABLE>


<PAGE>


                                                                              20

<PAGE>

Liquidity.  KNBT's primary  sources of funds are from deposits,  amortization of
loans,  loan prepayments and the maturity of loans,  mortgage-backed  securities
and other investments, and other funds provided from operations. While scheduled
payments  from the  amortization  of loans and  mortgage-backed  securities  and
maturing  investment  securities  are relatively  predictable  sources of funds,
deposit flows and loan prepayments can be greatly influenced by general interest
rates, economic conditions and competition.  KNBT also maintains excess funds in
short-term,  interest-bearing  assets that provide additional liquidity and also
utilizes outside  borrowings,  primarily from the FHLB, as an additional funding
source. KNBT uses its liquidity to fund existing and future loan commitments, to
fund maturing certificates of deposit and demand deposit withdrawals,  to invest
in other interest-earning assets, and to meet operating expenses. In addition to
cash flow from loan and  securities  payments  and  prepayments  as well as from
sales of available-for-sale  securities and mortgage loans, KNBT has significant
borrowing  capacity  available to fund liquidity  needs.  KNBT has increased its
utilization of FHLB  borrowings in recent years as a cost efficient  addition to
deposits as a source of funds. The average balance of FHLB borrowings was $334.6
million  and $105.2  million for the nine months  ended  September  30, 2004 and
September 30, 2003, respectively.

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

                                                                              21

<PAGE>

<TABLE>
<CAPTION>

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

INTEREST RATE SENSITIVITY "GAP"

                                                                  At September 30, 2004
                                                  More than    More than      More than   More than
------------------------------------------------------------------------------------------------------------------------------------
                                    3 Months      3 Months      6 Months        1 Year       3 Years   More than
                                     or Less    to 6 Months    to 1 Year      to 3 Years   to 5 Years   5 Years       Total
                                    ----------   ----------   ----------    ----------   ----------   ----------   ----------
                                                                     (dollars in thousands)
Interest-earning assets (1):
    Deposits at other institutions  $   12,643   $     --     $     --      $     --     $     --     $     --     $   12,643
    Loans receivable (2)               174,954       87,155      170,764       319,954      156,515      102,993    1,012,335
    Investment securities, debt         85,739       48,548       74,060       339,832      205,512      286,156    1,039,847
    Investment securities, equity         --           --           --            --           --         36,331       36,331

                                    ----------   ----------   ----------    ----------   ----------   ----------   ----------
      Total interest-earning
         assets                     $  273,336   $  135,703   $  244,824    $  659,786   $  362,027   $ 425,480    $2,101,156
                                    ==========   ==========   ==========    ==========   ==========   ==========   ==========
Cumulative total interest-
    earning assets                  $  273,336   $  409,039   $  653,863    $1,313,649   $1,675,676   $2,101,156   $2,101,156
                                    ==========   ==========   ==========    ==========   ==========   ==========   ==========
Interest-bearing
    liabilities:
    Savings deposits                $     --     $    8,573   $    8,573    $   11,430   $   14,288   $  171,452   $  214,315
    Interest-bearing
      checking deposits                   --           --           --           6,734        3,367      158,247      168,348
    Money market deposits               31,176       35,972       23,982        31,975       15,988      100,722      239,815
    Certificates of deposit             89,058       90,714      108,157       218,885       40,823          118      547,756
    FHLB advances and other
      borrowings                        70,541       13,126       45,153       230,977      168,419       75,861      604,078
                                    ----------   ----------   ----------    ----------   ----------   ----------   ----------
      Total interest-bearing
         liabilities                $  190,776   $  148,385   $  185,864    $  500,001   $  242,885   $ 506,401    $1,774,313
                                    ==========   ==========   ==========    ==========   ==========   ==========   ==========
Cumulative total interest-
    bearing liabilities             $  190,776   $  339,161   $  525,025    $1,025,026   $1,267,911   $1,774,313   $1,774,313
                                    ==========   ==========   ==========    ==========   ==========   ==========   ==========
Interest-earning assets
    less interest-bearing
    liabilities                     $   82,560   $  (12,682)   $  58,960    $  159,785   $  119,142   $ (80,922)   $ 326,843
                                    ==========   ==========   ==========    ==========   ==========   ==========   ==========
Cumulative interest-rate
    sensitivity GAP (3)             $   82,560   $   69,878   $  128,838    $  288,623   $  407,765   $ 326,843
                                    ==========   ==========    ==========   ==========   ==========   ==========
Cumulative interest-rate
    GAP as a percentage
    of total assets at
    September 30, 2004                    3.60%        3.05%        5.62%       12.59%       17.79%       14.26%
Cumulative interest-rate
    earning assets as a
    percentage of
    cumulative interest-
    bearing liabilities at
    September 30, 2004                  143.28%      120.60%      124.54%      128.16%      132.16%      118.42%

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

(1)  Interest  earning  assets are  included in the period in which the balances
     are expected to be redeployed  and/or  repriced as a result of  anticipated
     prepayments, scheduled rate adjustment and contractual maturity.

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

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


</TABLE>

                                                                              22

<PAGE>

Comparison  of Operating  Results for the Three and Nine Months Ended  September
30, 2004 and 2003

General.  KNBT's net income increased by $2.7 million, or 153.3% to $4.4 million
for the three months ended  September  30, 2004 compared to $1.8 million for the
three months ended  September 30, 2003. For the nine months ended  September 30,
2004, net income  increased $5.5 million,  or 75.6% to $12.9 million compared to
$7.3 million for the same period in 2003. Net income  increased  during 2004 due
to higher levels of net interest income and non-interest  income.  This increase
was partially offset by increases in non-interest expenses and the provision for
loan losses.  The increase in net interest income primarily  reflects  increased
interest income in the 2004 periods due to a significant increase in the average
balance of  interest-earning  assets as a result of the use of $196.2 million in
net proceeds  received in the Company's initial public offering in October 2003,
the acquisition of First  Colonial,  also in October 2003, and the investment of
funds received from FHLB advances as part of the our leverage  strategy.  At the
time of  acquisition,  First  Colonial  had  total  assets  of  $666.9  million,
including  $272.3  million  in  net  loans  and  $271.8  million  in  investment
securities, and total deposits of $512.1 million.

Net  Interest  Income.  KNBT`s net  interest  income for the three  months ended
September  30, 2004 was $16.0  million,  a $7.5 million or 87.7%  increase  when
compared to $8.5 million for the three months ended  September 30, 2003. For the
nine months ended September 30, 2004, net interest  income was $47.3 million,  a
$21.4  million or 82.7%  increase  when  compared to $25.9  million for the nine
months ended  September  30, 2003.  The major  factors in the  increases in both
interest  income and interest  expense were the  increased  average  balances of
interest-earning assets and interest-bearing  liabilities due to the acquisition
of First  Colonial on October 31, 2003,  the use of proceeds from KNBT's initial
public offering, on October 31, 2003 and an increase in FHLB advances which were
used to fund the increase in the investment  portfolio.  KNBT's average interest
earning  assets  totaled $2.0 billion for the three months ended  September  30,
2004 as compared to $1.0 billion for the three months ended  September 30, 2003.
Average  interest  earning assets for the nine-month  period ended September 30,
2004 were $1.9 billion as compared to $974.9 million for the  nine-month  period
ended September 30, 2003.  Total interest income was $24.8 million for the third
quarter of 2004, an $11.6  million or 88.0%  increase when compared to the $13.2
million in total interest  income during the third quarter of 2003. For the nine
months ended  September 30, 2004,  total interest  income was $70.3  million,  a
$29.5  million  or 72.1%  increase  when  compared  to the same  period in 2003.
Average  interest-bearing  liabilities  were $1.7  billion for the three  months
ended  September  2004  compared to $883.6  million for the three  months  ended
September  30,  2004.  For the nine months  ended  September  30, 2004 and 2003,
average  interest-bearing  liabilities  were $1.6  billion  and $871.8  million,
respectively.  Total interest  expense was $8.8 million for the third quarter of
2004,  a $4.1  million or 88.5%  increase  when  compared to the $4.7 million in
total  interest  expense  during the third quarter of 2003.  For the nine months
ended  September 30, 2004,  total interest  expense was $23.0  million,  an $8.0
million or 53.6%  increase  when  compared to the same  period in 2003.  Our net
interest margin on a tax equivalent  basis was 3.34% and 3.51% for the three and
nine months, respectively,  ended September 30, 2004 compared to 3.41% and 3.67%
for the prior year comparable  periods.  Net interest spread on a tax equivalent
basis was 3.01% and  3.18% for the three and nine  months,  respectively,  ended
September 30, 2004 versus 3.10% and 3.43% for the prior year comparable  period.
The lower interest margin and interest spread in the 2004 periods was the result
of the decline of  interest  rates  during the past year with the average  yield
earned on our  interest-earning  assets  declining to a greater  degree than the
average interest we paid our interest-bearing liabilities.

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

                                                                              23

<PAGE>

<TABLE>
<CAPTION>

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

------------------------------------------------------------------------------------------------------------------------------------
Consolidated Comparative Statement Analysis
(Dollars in Thousands) For the Three Months Ended September 30,
--------------------------------------------------------------------------------------------------------------------------------
                                                                 2004                                         2003
                                             -----------------------------------------    ----------------------------------------
                                                            Interest         Average                     Interest        Average
                                               Average       Income/         Yield/         Average       Income/         Yield/
                                               Balance       Expense          Rate          Balance       Expense          Rate
                                             -----------------------------------------    ----------------------------------------
Assets
Interest-Earning Assets
  Interest-Bearing Balances with Banks           $ 9,272          $ 36        1.55%          $ 88,434         $ 160       0.72%
  Investment Securities
     Taxable (1)                                 885,687         8,879        4.01%           314,099         2,629       3.35%
     Non-Taxable (2)                             111,088         1,717        6.18%            56,659           974       6.88%
   Loans Receivable (2) (3)                      992,696        14,733        5.94%           581,224         9,745       6.71%
   Allowance for Loan Losses                      (9,641)            -                         (2,810)            -
                                             ------------  ------------                   ------------
   Net Loans                                     983,055        14,733        5.99%           578,414         9,745       6.74%
                                             ------------  ------------                   ------------  ------------
     Total Interest-Earning Assets             1,989,102        25,365        5.10%         1,037,606        13,508       5.21%
   Non-Interest-Earning Assets                   217,201             -                         65,291             -
                                             ------------  ------------                   ------------  ------------
        Total Assets,
          Interest Income                    $ 2,206,304        25,365                    $ 1,102,897        13,508
                                             ------------  ------------                   ------------  ------------

Liabilities
Interest-Bearing Liabilities
   Interest-Bearing Deposits
      Demand Deposits                          $ 174,871          $ 72        0.16%          $ 93,482          $ 56       0.24%
      Money Market Deposits                      250,345           661        1.06%           168,822           480       1.14%
      Savings Deposits                           220,901           269        0.49%           130,135           201       0.62%
      Certificates of Deposit                    533,892         3,490        2.61%           374,247         2,715       2.90%
                                             ------------  ------------                   ------------  ------------
        Total interest-Bearing Deposits        1,180,009         4,492        1.52%           766,686         3,452       1.80%

   Securities Sold Under Agreements
      to Repurchase                               24,739            49        0.79%            10,583            29       1.10%
   FHLB Advances                                 457,031         4,036        3.53%           106,345         1,176       4.42%
   Other Debt                                     15,464           200        5.17%                 -             -
                                             ------------  ------------                   ------------  ------------
        Total Interest-Bearing Liabilities     1,677,243         8,777        2.09%           883,614         4,657       2.11%

Non-Interest-Bearing Liabilities
   Non-Interest-Bearing Deposits                 119,155             -                         45,920             -
   Other Liabilities                              29,469             -                         57,560             -
                                             ------------  ------------                   ------------  ------------
      Total Liabilities                        1,825,867         8,777                        987,094         4,657
   Shareholders' Equity /
      Retained Earnings                          380,437             -                        115,803             -
                                             ------------  ------------                   ------------  ------------
   Total Liabilities and Shareholders'
      Equity, Interest Expense               $ 2,206,304         8,777                    $ 1,102,897         4,657
                                             ------------  ------------                   ------------  ------------

Net Interest Income Tax Equivalent Basis                      $ 16,588                                      $ 8,852
                                                           ------------                                 ------------
   Net Interest Spread
     Tax Equivalent Basis (4)                                                 3.01%                                       3.10%
   Effect of Interest-Free Sources
      Used to Fund Earning Assets                                             0.12%                                       0.13%
                                                                         -------------                                ------------

Net Interest Margin
     Tax Equivalent Basis (5)                                                 3.34%                                       3.41%
                                                                         -------------                                ------------

Tax-Exempt Adjustment                                              593                                          332
                                                           ------------                                 ------------

Net Interest Income and Margin                                $ 15,995        3.22%                         $ 8,520       3.28%
                                                           ============  =============                  ============  ============

Average Interest-Earning Assets
      to Average Interest-Bearing Liabilities                                118.59%                                     117.43%
                                                                         -------------                                ------------

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

</TABLE>

(1)  Includes Federal Home Loan Bank stock.
(2)  The indicated interest income and average yields are presented on a taxable
     equivalent  basis. The taxable  equivalent  adjustments  included above are
     $593,000 and $332,000  for the three  months ended  September  30, 2004 and
     September  30,  2003,  respectively.  The  effective  tax rate used for the
     taxable equivalent adjustment was 34%.
(3)  Loan fees of $154,000 and $520,000 for the three months ended September 30,
     2004 and September 30, 2003, respectively, are included in interest income.
     Average loan balances include non-accruing loans of $3,966,000 and $817,000
     and average loans  held-for-sale  of $929,000 and  $6,950,000 for the three
     months ended September 30, 2004 and September 30, 2003, respectively.
(4)  Net  interest  spread  is  the  arithmatic   difference  between  yield  on
     interest-earning assets and the rate paid on interest-bearing liabilities.
(5)  Net interest  margin is computed by dividing net interest income by average
     interest-earning assets.


                                                                              24

<PAGE>

<TABLE>
<CAPTION>

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

------------------------------------------------------------------------------------------------------------------------------------
Consolidated Comparative Statement Analysis
(Dollars in Thousands) For the Nine Months Ended September 30,
------------------------------------------------------------------------------------------------------------------------------------
                                                                  2004                                      2003
                                                 ---------------------------------------- -----------------------------------------
                                                                Interest       Average                    Interest      Average
                                                   Average       Income/       Yield/       Average       Income/        Yield/
                                                   Balance       Expense        Rate        Balance       Expense         Rate
                                                 ---------------------------------------- -----------------------------------------
Assets
Interest-Earning Assets
  Interest-Bearing Balances with Banks              $ 29,361         $ 314      1.43%         $ 62,945         $ 368     0.78%
  Investment Securities
     Taxable (1)                                     787,912        23,144      3.92%          294,980         9,262     4.19%
     Non-Taxable (2)                                 109,226         5,401      6.59%           52,146         2,767     7.08%
   Loans Receivable (2) (3)                          952,080        43,323      6.07%          567,659        29,404     6.91%
   Allowance for Loan Losses                          (8,950)            -                      (2,792)            -
                                                 ------------  ------------               ------------- -------------
   Net Loans                                         943,130        43,323      6.12%          564,867        29,404     6.94%
                                                 ------------  ------------               ------------- -------------
     Total Interest-Earning Assets                 1,869,629        72,182      5.15%          974,938        41,801     5.72%
   Non-Interest-Earning Assets                       215,853             -                      76,449             -
                                                 ------------  ------------               ------------- -------------
        Total Assets,
          Interest Income                        $ 2,085,482        72,182                 $ 1,051,387        41,801
                                                 ------------  ------------               ------------- -------------
Liabilities
Interest-Bearing Liabilities
   Interest-Bearing Deposits
      Demand Deposits                              $ 174,687         $ 203      0.15%         $ 90,311         $ 236     0.35%
      Money Market Deposits                          247,658         1,772      0.95%          160,757         1,634     1.36%
      Savings Deposits                               223,737           805      0.48%          124,902           798     0.85%
      Certificates of Deposit                        534,703        10,604      2.64%          381,536         8,756     3.06%
                                                 ------------  ------------               ------------- -------------
        Total interest-Bearing Deposits            1,180,785        13,384      1.51%          757,506        11,424     2.01%

   Securities Sold Under Agreements
      to Repurchase                                   24,077           126      0.70%            9,092            88     1.29%
   FHLB Advances                                     334,616         8,900      3.55%          105,199         3,439     4.36%
   Other Debt                                         15,464           560      4.83%                -
                                                 ------------  ------------               ------------- -------------
        Total Interest-Bearing Liabilities         1,554,942        22,970      1.97%          871,797        14,951     2.29%

Non-Interest-Bearing Liabilities
   Non-Interest-Bearing Deposits                     117,560             -                      40,291             -
   Other Liabilities                                  26,327             -                      24,087             -
                                                 ------------  ------------               ------------- -------------
      Total Liabilities                            1,698,829        22,970                     936,175        14,951
   Shareholders' Equity /
      Retained Earnings                              386,653             -                     115,212             -
                                                 ------------  ------------               ------------- -------------
   Total Liabilities and Shareholders'
      Equity, Interest Expense                   $ 2,085,482        22,970                 $ 1,051,387        14,951
                                                 ------------  ------------               ------------- -------------

Net Interest Income Tax Equivalent Basis                          $ 49,212                                  $ 26,850
                                                               ------------                             -------------
   Net Interest Spread
     Tax Equivalent Basis (4)                                                   3.18%                                    3.43%
   Effect of Interest-Free Sources
      Used to Fund Earning Assets                                               0.13%                                    0.13%
                                                                             ------------                             -------------

Net Interest Margin
     Tax Equivalent Basis (5)                                                   3.51%                                    3.67%
                                                                             ------------                             -------------

Tax-Exempt Adjustment                                                1,864                                       940
                                                               ------------                             -------------

Net Interest Income and Margin                                    $ 47,348      3.38%                       $ 25,910     3.54%
                                                               ============  ============               ============= =============

Average Interest-Earning Assets
      to Average Interest-Bearing Liabilities                                  120.24%                                  111.83%
                                                                             ------------                             -------------

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

</TABLE>

(1)  Includes Federal Home Loan Bank stock.
(2)  The indicated interest income and average yields are presented on a taxable
     equivalent  basis. The taxable  equivalent  adjustments  included above are
     $1,864,000  and $940,000 for the nine months ended  September  30, 2004 and
     September  30,  2003,  respectively.  The  effective  tax rate used for the
     taxable equivalent adjustment was 34%.
(3)  Loan fees of $619,000 and  $1,410,000  for the nine months ended  September
     30, 2004 and  September  30, 2003,  respectively,  are included in interest
     income.  Average loan balances include non-accruing loans of $3,195,000 and
     $1,331,000 and average loans held-for-sale of $2,672,000 and $4,613,000 for
     the  nine  months  ended   September  30,  2004  and  September  30,  2003,
     respectively.
(4)  Net  interest  spread  is  the  arithmatic   difference  between  yield  on
     interest-earning assets and the rate paid on interest-bearing liabilities.
(5)  Net interest  margin is computed by dividing net interest income by average
     interest-earning assets.





                                                                              25

<PAGE>

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


<TABLE>
<CAPTION>

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

                                                        RATE / VOLUME ANALYSIS
                                                            (in thousands)
                                                              (unaudited)


                                          Three Months Ended Sept 30, 2004 vs.       Nine Months Ended Sept 30, 2004 vs.
                                          Three Months Ended Sept 30, 2003           Nine Months Ended Sept 30, 2003
                                        ------------------------------------------- ------------------------------------
                                            Increase (Decrease)                          Increase (Decrease)
                                                    Due to                                      Due to
                                        -----------------------------                 ---------------------------
                                                                 Total                                Total
                                                                Increase                             Increase
(Fully Taxable Equivalent)                Rate       Volume    (Decrease)     Rate       Volume     (Decrease)
                                        --------    --------    --------    --------    --------    --------
Interest Income:
   Cash and cash equivalents            $     19    $   (143)   $   (124)   $    142    $   (196)   $    (54)
   Investment Securities                     913       6,079       6,993      (2,545)     19,060      16,516
   Loans receivable, net                  (1,827)      6,815       4,988      (5,771)     19,690      13,919
                                        --------    --------    --------    --------    --------    --------
      Total interest-earning assets         (895)     12,751      11,857      (8,173)     38,554      30,381

Interest expense:
   Demand deposits                           (33)         49          16        (253)        220         (33)
   Money market deposits                     (51)        232         181        (745)        883         138
   Savings & club deposits                   (72)        140          68        (624)        631           7
   Certificates of deposit                  (383)      1,158         775      (1,667)      3,515       1,848
                                        --------    --------    --------    --------    --------    --------
      Total interest-bearing deposits       (539)      1,579       1,040      (3,290)      5,250       1,960

Securities sold under agreements
   to repurchase                             (19)         39          20        (107)        145          38
FHLB advances and other borrowings        (1,011)      3,871       2,860      (2,039)      7,500       5,461
Other debt                                  --           200         200        --           560         560
                                        --------    --------    --------    --------    --------    --------
Total interest-bearing liabilities        (1,569)      5,689       4,120      (5,436)     13,455       8,019

Increase (decrease) in net
   interest income                      $    674    $  7,062    $  7,737    $ (2,737)   $ 25,099    $ 22,362
                                        ========    ========    ========    ========    ========    ========


</TABLE>




                                                                              26

<PAGE>

Provision for Loan Losses. KNBT made a provision for loan losses of $742,000 for
the three months ended  September 30, 2004 as compared to $468,000 for the three
months ended  September 30, 2003. For the nine months ended  September 30, 2004,
the  provision  for loan losses was $3.2 million as compared to $856,000 for the
same  period in 2003.  A  primary  factor in the  increased  provision  over the
comparable  2003 periods was the acquisition of $271.2 million of net loans from
the First Colonial  acquisition of which commercial loans totaled $61.5 million.
Commercial  loans and  commercial  real  estate  loans are deemed to have higher
levels of known and inherent  losses than one to four-family  residential  loans
due to, among other things,  the nature of the  collateral and the dependency on
economic conditions for successful  completion or operation of the project. KNBT
has made  provisions  in order to maintain  the  allowance  for loan losses at a
level, we believe,  to the best of our knowledge,  covers all known and inherent
losses in the  portfolio  that are both  probable and  reasonable to estimate at
this time. For the nine months ended September 30, 2004, KNBT  charged-off,  net
of recoveries, $1.2 million as compared to $842,000 for the same period in 2003.
Most charge-offs were primarily related to consumer loans.  Non-performing loans
totaled $4.5  million,  $2.1  million and $1.7  million at  September  30, 2004,
December  31,  2003 and  September  30,  2003,  respectively.  The  increase  in
non-performing   loans  was  primarily  due  to  a  $1.6  million   increase  in
non-performing single-family residential loans over the nine-month period ending
September  30, 2004.  At September  30, 2004,  KNBT's  allowance for loan losses
amounted to 222.4% of non-performing loans as compared to 372.2% at December 31,
2003.  Allowance  for loan losses as a percentage of net loans was .99% and .89%
at September 30, 2004 and December 31, 2003, respectively.

Non-Interest Income. Non-Interest income increased $1.8 million or 88.8% to $3.8
million  for the three  months  ended  September  30,  2004 as  compared to $2.0
million for the three months ended September 30, 2003. For the nine months ended
September 30, 2004, non-interest income totaled $11.2 million, a $4.6 million or
69.1%  increase  over the same period in 2003.  The  increase in the three month
period ended September 30, 2004 over the comparable period in 2003 primarily was
the result of trust revenues from the Company's Trust Department,  acquired from
First Colonial of $363,000,  a $325,000 increase in revenue from Bank Owned Life
Insurance  ("BOLI") resulting from a November 2003 purchase of an additional $30
million of insurance,  an increase in net gains on sale of residential  mortgage
loans of  $348,000  and net  gains on sales of  investment  securities  totaling
$338,000.  The increase for the nine-month  period ended September 30, 2004 over
the comparable period in 2003 was the result of Trust Department revenue of $1.1
million,  an increase of $950,000 in revenue  from BOLI,  an increase in deposit
service  charges of $659,000  due to the  addition  of  accounts  from the First
Colonial acquisition,  an increase on net gains on sale of investment securities
of  $348,000  and the  gains  on the  sales of our  credit  card  portfolio  and
operations  center that  contributed  $298,000  and $213,000  respectively.  The
nine-month  increase in non-interest  income was offset in part by a decrease in
gains on sale of residential mortgages of $121,000.

Non-Interest Expense.  Non-interest expense increased by $5.6 million, or 71.9%,
to $13.5  million for the three months ended  September  30, 2004 as compared to
$7.9 million for the three months ended  September 30, 2003. For the nine months
ended September 30, 2004,  non-interest  expense totaled $39.0 million,  a $17.1
million,  or 78.1%  increase  compared to $21.9  million  during the  comparable
period in 2003.  The reasons for the  increase in  non-interest  expense in 2004
were similar for both the three and nine-month  periods.  The primary reason was
higher  salary and benefit  costs,  higher  occupancy  and  equipment  expenses,
amortization   of  intangible   assets  and  increases  in  other  expenses  due
principally to the  acquisition of First Colonial in the fourth quarter of 2003.
Compensation  and benefit  expenses  increased  $3.1  million or 72.5% and $10.2
million  or 86.8%  for the  three  and  nine-month  periods  of 2004  and  2003,
respectively.  At September 30, 2004,  we had 569  employees  compared to 357 at
September  30, 2003.  The  increase in employees  was due to the addition of 245
employees  as a result of the First  Colonial  acquisition.  Net  occupancy  and
equipment  costs  increased $1.3 million or 121.6% and $3.0 million or 99.6% for
the three and nine-month  periods of 2004 and 2003. The principal  factor in the
higher occupancy expenses was the acquisition of First Colonial,  which added 20
offices.  Since  September  30,  2003,  we have opened  four branch  offices and
acquired a 47,000 square foot operations center.  Extensive building  renovation
occurred at the newly acquired  operations center,  KNBT's headquarters and also
at  the  former  operations  center  of  First  Colonial.  The  amortization  of
intangible assets related to the First Colonial acquisition amounted to $547,000
and $1.6 million for the three and nine-month  periods ended September 30, 2004,
respectively.  All other  non-interest  expenses  including  professional  fees,
advertising,   data   processing,   supplies,   postage,   telephone  and  other
miscellaneous aggregated $9.2

                                                                              27

<PAGE>

million  and  $7.1  million  for  the  first  nine  months  of  2004  and  2003,
respectively.  The increase of $2.2 million or 31.0% was primarily due to merger
and systems integration following the First Colonial acquisition.

Income Tax  Expense.  KNBT's  income tax expense  increased  by $672,000 to $1.2
million  and by  $1.0 to $3.5  million  for the  three  and  nine  months  ended
September 30, 2004 and September 30, 2003 respectively. The effective income tax
rate for the three and nine months ended September 30, 2004 was 20.6% and 21.3%,
respectively,  as  compared  to 21.4% and  25.0%  for the  three and  nine-month
periods ended  September 30, 2003. The principal  factors in the lower effective
tax rate were the increased investment in tax-free securities and in BOLI.


ITEM 3.      Quantitative and Qualitative Disclosures About Market Risk

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

ITEM 4.      Controls and Procedures

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

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

                                                                              28

<PAGE>


PART II -       OTHER INFORMATION

ITEM 1.         Legal Proceedings

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

ITEM 2.         Unregistered Sales of Equity Securities and Use of Proceeds

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

ITEM 3.         Defaults Upon Senior Securities

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

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

                Not applicable.

ITEM 5.         Other Information

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

ITEM 6.         Exhibits and Reports on Form 8-K

                (a) List of exhibits:
                    31.1 Section 302  Certification  of the Chief  Executive
                         Officer
                    31.2 Section 302 Certification of the Chief Financial
                         Officer
                    32.1 Certification Pursuant to 18 U.S.C. Section 1350 as
                         Adopted Pursuant to Section 906 of the Sarbanes-Oxley
                         Act of 2002.

                                                                              29

<PAGE>


                                   SIGNATURES


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


                                   KNBT BANCORP, INC.


DATE:    November 15, 2004         BY: /s/  Scott V. Fainor
--------------------------         ------------------------
                                       Scott V. Fainor
                                       President and Chief Executive Officer



DATE:    November 15, 2004         BY: /s/  Eugene T. Sobol
--------------------------         ------------------------
                                       Eugene T. Sobol
                                       Senior Executive Vice President,
                                       Chief Operating Officer and
                                       Chief Financial Officer


                                                                              30


<PAGE>