----

**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**WASHINGTON,      D. C.     20549**

**FORM      10-Q**

**____________________________________**

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

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

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

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

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

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

**610-861-5000**

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

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**INDEX**

|                                                                |                    |                                                                                                                      |                                                                                          | Page |
|---------------------------------------------------------------------|-------------------------|---------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|------|
| **PART                I – FINANCIAL INFORMATION**             |                    |
|                                                                | Item                1.  | Financial                Statements                                                                                       | 1                                                                                             |
|                                                                |                    |                                                                                                                      | Consolidated                Balance                Sheets                                     | 1    |
|                                                                |                    |                                                                                                                      | Consolidated                Statements of                Income                               | 2    |
|                                                                |                    |                                                                                                                      | Consolidated                Statement of Changes                in Shareholders’ Equity | 3    |
|                                                                |                    |                                                                                                                      | Consolidated                Statements of Cash                Flows                           | 4    |
|                                                                |                    |                                                                                                                      | Notes                to Interim Consolidated Financial                Statements              | 5    |
|                                                                | Item                2.  | Management’s                Discussion and Analysis of Financial                Condition and Results of Operations | 16                                                                                            |
|                                                                | Item                3.  | Quantitative                and Qualitative Disclosures about Market                Risk                                  | 31                                                                                            |
|                                                                | Item                4.  | Controls                and Procedures                                                                                    | 31                                                                                            |
| **PART                II – OTHER                INFORMATION** |                    |
|                                                                | Item                1.  | Legal                Proceedings                                                                                          | 31                                                                                            |
|                                                                | Item                1A. | Risk                Factors                                                                                               | 32                                                                                            |
|                                                                | Item                2.  | Unregistered                Sales of Equity                Securities and Use of Proceeds                                 | 32                                                                                            |
|                                                                | Item                3.  | Defaults                Upon Senior                Securities                                                             | 32                                                                                            |
|                                                                | Item                4.  | Submission                of Matters to a Vote of                Security Holders                                         | 32                                                                                            |
|                                                                | Item                5.  | Other                Information                                                                                          | 32                                                                                            |
|                                                                | Item                6.  | Exhibits                                                                                                                  | 32                                                                                            |
| **Signatures**                                                      | 33                      |

----

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

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

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS**

|                                                                                                                |   | June                30, |      |   | December                31, |   |
|---------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|--------|-----------------------------|--------|
| *(dollars                in thousands, except share data)*                                                          |   | 2007                    |      |   | 2006                        |   |
|                                                                                                                |   | (unaudited)             |      |   |                        |   |
| **ASSETS**                                                                                                          |   |                    |      |   |                        |   |
| Cash                and due from banks                                                                              |   | $                       | 51,168    |   |                        | $      | 53,202 |   |
| Interest-bearing                deposits with banks                                                                 |   |                    | 1,388     |   |                        |   | 2,171 |   |
| Federal                funds sold                                                                                   |   |                    | 29,000    |   |                        |   | 4,800 |   |
| Cash                and cash equivalents                                                                            |   |                    | 81,556    |   |                        |   | 60,173 |   |
| Investment                securities available-for-sale                                                             |   |                    | 682,144   |   |                        |   | 858,854 |   |
| Investment                securities held to maturity                                                               |   |                    |      |   |                        |   |   |   |
| (Fair                value of $29,583 at June 30, 2007 and $33,048 at December 31,                2006)             |   |                    | 30,125    |   |                        |   | 33,532 |   |
| FHLBank                Pittsburgh stock                                                                             |   |                    | 26,013    |   |                        |   | 30,724 |   |
| Mortgage                loans held-for-sale                                                                         |   |                    | 1,362     |   |                        |   | 1,994 |   |
| Loans                                                                                                               |   |                    | 1,772,603 |   |                        |   | 1,620,166 |   |
| Less:  Allowance                for loan losses                                                           |   |                    | (17,313   | )      |                        |   | (17,044 | ) |
| Net                loans                                                                                            |   |                    | 1,755,290 |   |                        |   | 1,603,122 |   |
| Bank                owned life insurance                                                                            |   |                    | 80,094    |   |                        |   | 78,361 |   |
| Premises                and equipment, net                                                                          |   |                    | 47,164    |   |                        |   | 48,228 |   |
| Accrued                interest receivable                                                                          |   |                    | 9,438     |   |                        |   | 10,293 |   |
| Goodwill                                                                                                            |   |                    | 109,865   |   |                        |   | 105,854 |   |
| Other                intangible assets, net                                                                         |   |                    | 27,492    |   |                        |   | 29,387 |   |
| Other                assets                                                                                         |   |                    | 38,246    |   |                        |   | 38,305 |   |
| TOTAL                ASSETS                                                                                         |   | $                       | 2,888,789 |   |                        | $      | 2,898,827 |   |
|                                                                                                                |   |                    |      |   |                        |   |   |   |
| **LIABILITIES**                                                                                                     |   |                    |      |   |                        |   |   |   |
| Non-interest-bearing                deposits                                                                        |   | $                       | 206,327   |   |                        | $      | 206,972 |   |
| Interest-bearing                deposits                                                                            |   |                    | 1,773,924 |   |                        |   | 1,700,575 |   |
| Total                deposits                                                                                       |   |                    | 1,980,251 |   |                        |   | 1,907,547 |   |
| Securities                sold under agreements to repurchase                                                       |   |                    | 104,269   |   |                        |   | 45,296 |   |
| Advances                from the FHLBank of Pittsburgh                                                              |   |                    | 399,314   |   |                        |   | 519,161 |   |
| Subordinated                debt                                                                                    |   |                    | 15,515    |   |                        |   | 38,406 |   |
| Accrued                interest payable                                                                             |   |                    | 11,215    |   |                        |   | 11,924 |   |
| Other                liabilities                                                                                    |   |                    | 25,951    |   |                        |   | 20,467 |   |
| TOTAL                LIABILITIES                                                                                    |   |                    | 2,536,515 |   |                        |   | 2,542,801 |   |
|                                                                                                                |   |                    |      |   |                        |   |   |   |
| **SHAREHOLDERS'                EQUITY**                                                                             |   |                    |      |   |                        |   |   |   |
| Preferred                stock, par value $0.01 per share; authorized 20,000,000 shares, none                issued |   |                    | -         |   |                        |   | - |   |
| Common                stock, par value $0.01 a share; authorized 100,000,000 shares, 33,970,146                and  |   |                    |      |   |                        |   |   |   |
| 33,963,910                shares issued at June 30, 2007 and December 31, 2006 ,                respectively        |   |                    | 330       |   |                        |   | 330 |   |
| Additional                paid-in capital                                                                           |   |                    | 340,044   |   |                        |   | 338,406 |   |
| Retained                earnings, substantially restricted                                                          |   |                    | 145,188   |   |                        |   | 142,519 |   |
| Treasury                stock, at cost; 6,772,722 and  6,285,342 shares                at                 |   |                    |      |   |                        |   |   |   |
| June                30, 2007 and December 31, 2006, respectively                                                    |   |                    | (108,536  | )      |                        |   | (101,247 | ) |
| Unallocated                common stock held by Employee Stock Ownership Plan                                       |   |                    | (13,151   | )      |                        |   | (13,556 | ) |
| Accumulated                other comprehensive loss, net                                                            |   |                    | (11,601   | )      |                        |   | (10,426 | ) |
| TOTAL                SHAREHOLDERS' EQUITY                                                                           |   |                    | 352,274   |   |                        |   | 356,026 |   |
|                                                                                                                |   |                    |      |   |                        |   |   |   |
| TOTAL                LIABILITIES AND SHAREHOLDERS' EQUITY                                                           |   | $                       | 2,888,789 |   |                        | $      | 2,898,827 |   |
|                                                                                                                |   |                    |      |   |                        |   |   |   |
| The                accompanying notes are an integral part of these financial                statements.            |   |                    |      |   |                        |   |   |   |

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF INCOME**

|                                                                                                     |   | Three                Months Ended June 30, |   |   | Six                Months Ended June 30, |   |
|----------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------|------------------------------------------|--------|
| *(dollars                in thousands, except per share data)*                                           |   | 2007                                       |   |   | 2006                                     |   |   | 2007 |   |   | 2006 |   |
|                                                                                                     |   | (unaudited)                                |   |
| **INTEREST                INCOME**                                                                       |   |                                       |   |   |                                     |   |   |   |   |   |   |   |
| Loans,                including fees                                                                     |   | $                                          | 27,967 |   |                                     | $      | 23,494 |   |   | $ | 54,106 |   |   | $ | 46,092 |   |
| Investment                securities                                                                     |   |                                       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                                                                  |   |                                       | 8,806  |   |                                     |   | 12,355 |   |   |   | 19,628 |   |   |   | 25,025 |   |
| Tax-exempt                                                                                               |   |                                       | -      |   |                                     |   | 570 |   |   |   | - |   |   |   | 1,347 |   |
| Other                interest                                                                            |   |                                       | 920    |   |                                     |   | 243 |   |   |   | 1,001 |   |   |   | 468 |   |
| Total                interest income                                                                     |   |                                       | 37,693 |   |                                     |   | 36,662 |   |   |   | 74,735 |   |   |   | 72,932 |   |
| **INTEREST                EXPENSE**                                                                      |   |                                       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                                 |   |                                       | 14,252 |   |                                     |   | 10,749 |   |   |   | 27,648 |   |   |   | 20,538 |   |
| Securities                sold under agreements to repurchase                                            |   |                                       | 847    |   |                                     |   | 434 |   |   |   | 1,444 |   |   |   | 1,028 |   |
| Advances                from FHLBank Pittsburgh                                                          |   |                                       | 4,484  |   |                                     |   | 6,268 |   |   |   | 9,522 |   |   |   | 12,782 |   |
| Subordinated                debt                                                                         |   |                                       | 608    |   |                                     |   | 690 |   |   |   | 1,318 |   |   |   | 1,328 |   |
| Total                interest expense                                                                    |   |                                       | 20,191 |   |                                     |   | 18,141 |   |   |   | 39,932 |   |   |   | 35,676 |   |
| **NET                INTEREST INCOME**                                                                   |   |                                       | 17,502 |   |                                     |   | 18,521 |   |   |   | 34,803 |   |   |   | 37,256 |   |
| Provision                for loan losses                                                                 |   |                                       | 645    |   |                                     |   | 1,200 |   |   |   | 645 |   |   |   | 1,950 |   |
| Net                interest income after provision for loan losses                                       |   |                                       | 16,857 |   |                                     |   | 17,321 |   |   |   | 34,158 |   |   |   | 35,306 |   |
| **NON-INTEREST                INCOME**                                                                   |   |                                       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Trust                revenue                                                                             |   |                                       | 1,367  |   |                                     |   | 1,331 |   |   |   | 2,801 |   |   |   | 2,394 |   |
| Brokerage                services revenue                                                                |   |                                       | 998    |   |                                     |   | 971 |   |   |   | 1,939 |   |   |   | 1,828 |   |
| Benefit                services revenue                                                                  |   |                                       | 1,708  |   |                                     |   | 1,653 |   |   |   | 3,185 |   |   |   | 2,930 |   |
| Insurance                services revenue                                                                |   |                                       | 735    |   |                                     |   | 742 |   |   |   | 1,546 |   |   |   | 1,390 |   |
| Deposit                service charges                                                                   |   |                                       | 1,715  |   |                                     |   | 1,481 |   |   |   | 3,322 |   |   |   | 2,881 |   |
| Lending                fees                                                                              |   |                                       | 312    |   |                                     |   | 255 |   |   |   | 624 |   |   |   | 526 |   |
| Check                card/ATM card fees                                                                  |   |                                       | 972    |   |                                     |   | 859 |   |   |   | 1,831 |   |   |   | 1,645 |   |
| Bank                owned life insurance                                                                 |   |                                       | 872    |   |                                     |   | 781 |   |   |   | 1,733 |   |   |   | 1,555 |   |
| Net                (loss) gain on sale of investment securities                                          |   |                                       | (2,159 | )      |                                     |   | 1,597 |   |   |   | (1,623 | ) |   |   | 1,735 |   |
| Net                gain on  sale of residential mortgage loans                                 |   |                                       | 92     |   |                                     |   | 7 |   |   |   | 210 |   |   |   | 55 |   |
| Net                loss on sale of other assets                                                          |   |                                       | (259   | )      |                                     |   | - |   |   |   | (269 | ) |   |   | (1 | ) |
| Net                (loss) gain on sale of other real estate owned                                        |   |                                       | (12    | )      |                                     |   | 3 |   |   |   | (12 | ) |   |   | (3 | ) |
| Net                gain on extinguishment of debt                                                        |   |                                       | -      |   |                                     |   | - |   |   |   | - |   |   |   | 1,179 |   |
| Other                non-interest operating income                                                       |   |                                       | 735    |   |                                     |   | 769 |   |   |   | 1,491 |   |   |   | 1,415 |   |
| Total                non-interest income                                                                 |   |                                       | 7,076  |   |                                     |   | 10,449 |   |   |   | 16,778 |   |   |   | 19,529 |   |
| **NON-INTEREST                EXPENSE**                                                                  |   |                                       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Compensation                and employee benefits                                                        |   |                                       | 11,260 |   |                                     |   | 11,147 |   |   |   | 22,475 |   |   |   | 21,821 |   |
| Net                occupancy and equipment expense                                                       |   |                                       | 2,979  |   |                                     |   | 2,964 |   |   |   | 5,956 |   |   |   | 6,227 |   |
| Professional                fees                                                                         |   |                                       | 901    |   |                                     |   | 893 |   |   |   | 1,420 |   |   |   | 1,654 |   |
| Advertising                                                                                              |   |                                       | 375    |   |                                     |   | 460 |   |   |   | 627 |   |   |   | 873 |   |
| Data                processing                                                                           |   |                                       | 739    |   |                                     |   | 653 |   |   |   | 1,396 |   |   |   | 1,265 |   |
| Telecommunication                                                                                        |   |                                       | 350    |   |                                     |   | 362 |   |   |   | 694 |   |   |   | 706 |   |
| Office                supplies and postage                                                               |   |                                       | 474    |   |                                     |   | 584 |   |   |   | 973 |   |   |   | 1,171 |   |
| Amortization                of mortgage servicing rights                                                 |   |                                       | 82     |   |                                     |   | 87 |   |   |   | 172 |   |   |   | 187 |   |
| Amortization                of intangible assets                                                         |   |                                       | 963    |   |                                     |   | 925 |   |   |   | 1,926 |   |   |   | 1,818 |   |
| Other                operating expenses                                                                  |   |                                       | 2,128  |   |                                     |   | 1,325 |   |   |   | 3,585 |   |   |   | 3,191 |   |
| Total                non-interest expense                                                                |   |                                       | 20,251 |   |                                     |   | 19,400 |   |   |   | 39,224 |   |   |   | 38,913 |   |
|                                                                                                     |   |                                       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Income                before income taxes                                                                |   |                                       | 3,682  |   |                                     |   | 8,370 |   |   |   | 11,712 |   |   |   | 15,922 |   |
| Income                tax expense                                                                        |   |                                       | 1,670  |   |                                     |   | 2,464 |   |   |   | 4,214 |   |   |   | 4,536 |   |
| NET                INCOME                                                                                |   | $                                          | 2,012  |   |                                     | $      | 5,906 |   |   | $ | 7,498 |   |   | $ | 11,386 |   |
|                                                                                                     |   |                                       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| **PER                SHARE DATA**                                                                        |   |                                       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Net                income- basic                                                                         |   | $                                          | 0.08   |   |                                     | $      | 0.22 |   |   | $ | 0.29 |   |   | $ | 0.41 |   |
| Net                income- diluted                                                                       |   | $                                          | 0.08   |   |                                     | $      | 0.21 |   |   | $ | 0.28 |   |   | $ | 0.40 |   |
| Cash                dividends per common share                                                           |   | $                                          | 0.10   |   |                                     | $      | 0.08 |   |   | $ | 0.18 |   |   | $ | 0.15 |   |
|                                                                                                     |   |                                       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                     |   |                                       |   |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| The                accompanying notes are an integral part of these financial                statements. |   |                                       |   |   |                                     |   |   |   |   |   |   |   |   |

----

**KNBT      BANCORP, INC. AND      SUBSIDIARIES**

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

|                                                                                                                    |   | Six                  Months Ended June 30, |       |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
| ***(dollars                  in thousands, except share data)***                                                        |   | 2007                                       |       |   | 2006 |   |
|                                                                                                                    |   | (unaudited)                                |       |
| Common                  stock number of shares                                                                          |   |                                       |       |   |   |   |
| Beginning                  balance                                                                                      |   |                                       | 33,166,591 |   |   |   | 33,080,609 |   |
| Allocated                  Employee Stock Ownership Plan shares                                                         |   |                                       | 23,801     |   |   |   | 23,801 |   |
| Shares                  issued upon exercise of stock options                                                           |   |                                       | 6,236      |   |   |   | 18,758 |   |
| Ending                  balance                                                                                         |   |                                       | 33,196,628 |   |   |   | 33,123,168 |   |
|                                                                                                                    |   |                                       |       |   |   |   |   |   |
| Treasury                  stock number of shares                                                                        |   |                                       |       |   |   |   |   |   |
| Beginning                  balance                                                                                      |   |                                       | (6,285,342 | ) |   |   | (3,861,000 | ) |
| Repurchase                  of common stock                                                                             |   |                                       | (487,380   | ) |   |   | (2,071,100 | ) |
| Ending                  balance                                                                                         |   |                                       | (6,772,722 | ) |   |   | (5,932,100 | ) |
|                                                                                                                    |   |                                       |       |   |   |   |   |   |
|                                                                                                                    |   |                                       |       |   |   |   |   |   |
| Common                  stock value                                                                                     |   |                                       |       |   |   |   |   |   |
| Beginning                  balance                                                                                      |   | $                                          | 330        |   |   | $ | 330 |   |
| Shares                  issued upon exercise of stock options                                                           |   |                                       | -          |   |   |   | - |   |
| Ending                  balance                                                                                         |   |                                       | 330        |   |   |   | 330 |   |
|                                                                                                                    |   |                                       |       |   |   |   |   |   |
| Additional                  paid in capital                                                                             |   |                                       |       |   |   |   |   |   |
| Beginning                  balance                                                                                      |   |                                       | 338,406    |   |   |   | 342,144 |   |
| Reclass                  of unearned compensation upon adoption of SFAS 123R                                            |   |                                       | -          |   |   |   | (7,130 | ) |
| Unallocated                  Employee Stock Ownership Plan shares                                                       |   |                                       | (68        | ) |   |   | (34 | ) |
| Shares                  issued upon exercise of stock options                                                           |   |                                       | 38         |   |   |   | 106 |   |
| Share-based                  compensation expense                                                                       |   |                                       | 616        |   |   |   | 568 |   |
| Amortization                  of compensation related to the Management Recognition and Retention                  Plan |   |                                       | 1,052      |   |   |   | 1,068 |   |
| Ending                  balance                                                                                         |   |                                       | 340,044    |   |   |   | 336,722 |   |
|                                                                                                                    |   |                                       |       |   |   |   |   |   |
| Retained                  earnings, substantially restricted                                                            |   |                                       |       |   |   |   |   |   |
| Beginning                  balance                                                                                      |   |                                       | 142,519    |   |   |   | 127,471 |   |
| Net                  income                                                                                             |   |                                       | 7,498      |   |   |   | 11,386 |   |
| Cash                  dividends paid                                                                                    |   |                                       | (4,829     | ) |   |   | (4,256 | ) |
| Ending                  balance                                                                                         |   |                                       | 145,188    |   |   |   | 134,601 |   |
|                                                                                                                    |   |                                       |       |   |   |   |   |   |
| Unallocated                  common stock held by the Employee Stock Ownership Plan                                     |   |                                       |       |   |   |   |   |   |
| Beginning                  balance                                                                                      |   |                                       | (13,556    | ) |   |   | (14,366 | ) |
| Allocation                  of Employee Stock Ownership Plan stock                                                      |   |                                       | 405        |   |   |   | 405 |   |
| Ending                  balance                                                                                         |   |                                       | (13,151    | ) |   |   | (13,961 | ) |
|                                                                                                                    |   |                                       |       |   |   |   |   |   |
| Unearned                  common stock held by the Management Recognition and Retention                  Plan           |   |                                       |       |   |   |   |   |   |
| Beginning                  balance                                                                                      |   |                                       | -          |   |   |   | (7,130 | ) |
| Reclass                  of unearned compensation upon adoption of SFAS 123R                                            |   |                                       | -          |   |   |   | 7,130 |   |
| Ending                  balance                                                                                         |   |                                       | -          |   |   |   | - |   |
|                                                                                                                    |   |                                       |       |   |   |   |   |   |
| Accumulated                  other comprehensive income (loss)                                                          |   |                                       |       |   |   |   |   |   |
| Beginning                  balance                                                                                      |   |                                       | (10,426    | ) |   |   | (9,898 | ) |
| Other                  comprehensive loss net of taxes and reclassification                  adjustments                |   |                                       | (1,175     | ) |   |   | (10,412 | ) |
| Ending                  balance                                                                                         |   |                                       | (11,601    | ) |   |   | (20,310 | ) |
|                                                                                                                    |   |                                       |       |   |   |   |   |   |
| Treasury                  stock                                                                                         |   |                                       |       |   |   |   |   |   |
| Beginning                  balance                                                                                      |   |                                       | (101,247   | ) |   |   | (61,999 | ) |
| Repurchase                  of common stock                                                                             |   |                                       | (7,289     | ) |   |   | (33,560 | ) |
| Ending                  balance                                                                                         |   |                                       | (108,536   | ) |   |   | (95,559 | ) |
|                                                                                                                    |   |                                       |       |   |   |   |   |   |
| Total                  Shareholders' Equity                                                                             |   | $                                          | 352,274    |   |   | $ | 341,823 |   |
|                                                                                                                    |   |                                       |       |   |   |   |   |   |
| The                  accompanying notes are an integral part of these financial                  statements.            |   |                                       |       |   |   |   |   |   |

----

**KNBT      BANCORP, INC. AND      SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

|                                                                                                            |   | Six                Months Ended June 30, |     |
|-----------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|----------|
| *(dollars                in thousands)*                                                                         |   | 2007                                     |     |   | 2006 |   |
|                                                                                                            |   | (unaudited)                              |     |
| **OPERATING                ACTIVITIES:**                                                                        |   |                                     |     |   |   |   |
| Net                income                                                                                       |   | $                                        | 7,498    |   |   | $ | 11,386 |   |
| Adjustments                to reconcile net income to net cash provided by operating                activities: |   |                                     |     |   |   |   |   |   |
| Provision                for loan losses                                                                        |   |                                     | 645      |   |   |   | 1,950 |   |
| Depreciation                and amortization                                                                    |   |                                     | 4,533    |   |   |   | 4,543 |   |
| Compensation                expense, stock option plan                                                          |   |                                     | 616      |   |   |   | 568 |   |
| Management                Recognition and Retention Plan expense                                                |   |                                     | 1,052    |   |   |   | 1,068 |   |
| ESOP                expense                                                                                     |   |                                     | 337      |   |   |   | 371 |   |
| Amortization                and accretion of securities premiums and discounts, net                             |   |                                     | (159     | ) |   |   | (119 | ) |
| Loss                on sale of other real estate owned                                                          |   |                                     | 12       |   |   |   | 3 |   |
| Loss                (gain) on sales of investment securities, net                                               |   |                                     | 1,623    |   |   |   | (1,735 | ) |
| Loss                on sale of other assets                                                                     |   |                                     | 269      |   |   |   | 1 |   |
| Gain                on sale of mortgage loans                                                                   |   |                                     | (210     | ) |   |   | (55 | ) |
| Gain                on extinguishment of debt                                                                   |   |                                     | -        |   |   |   | (1,179 | ) |
| Mortgage                loans originated for sale                                                               |   |                                     | (22,922  | ) |   |   | (7,402 | ) |
| Mortgage                loan sales                                                                              |   |                                     | 23,604   |   |   |   | 7,993 |   |
| Changes                in assets and liabilities:                                                               |   |                                     |     |   |   |   |   |   |
| Increase                in bank owned life insurance                                                            |   |                                     | (1,733   | ) |   |   | (1,555 | ) |
| Decrease                in accrued interest receivable                                                          |   |                                     | 855      |   |   |   | 1,643 |   |
| Increase                in other assets                                                                         |   |                                     | (134     | ) |   |   | (1,856 | ) |
| Increase                in other liabilities and accrued interest payable                                       |   |                                     | 3,876    |   |   |   | 959 |   |
| Net                cash provided by operating activities                                                        |   |                                     | 19,762   |   |   |   | 16,584 |   |
| **INVESTING                ACTIVITIES:**                                                                        |   |                                     |     |   |   |   |   |   |
| Proceeds                from calls and maturities of securities available-for-sale                              |   |                                     | 73,431   |   |   |   | 106,828 |   |
| Proceeds                from calls and maturities of securities held-to-maturity                                |   |                                     | 3,445    |   |   |   | 4,992 |   |
| Proceeds                from sales of securities available-for-sale                                             |   |                                     | 169,857  |   |   |   | 69,206 |   |
| Purchase                of securities available-for-sale                                                        |   |                                     | (69,887  | ) |   |   | (15,879 | ) |
| Purchase                of securities held to maturity                                                          |   |                                     | -        |   |   |   | (553 | ) |
| Purchase                of FHLBank Pittsburgh stock                                                             |   |                                     | -        |   |   |   | (1,209 | ) |
| Redemption                of FHLBank Pittsburgh stock                                                           |   |                                     | 4,711    |   |   |   | 6,175 |   |
| Net                increase in loans                                                                            |   |                                     | (152,813 | ) |   |   | (58,719 | ) |
| Cash                paid for acquisitions                                                                       |   |                                     | (2,869   | ) |   |   | (8,034 | ) |
| Cash                and cash equivalents obtained through acquisitions                                          |   |                                     | -        |   |   |   | 1,249 |   |
| Purchase                of premises and equipment                                                               |   |                                     | (1,973   | ) |   |   | (6,187 | ) |
| Proceeds                from the sale of other assets                                                           |   |                                     | 437      |   |   |   | 759 |   |
| Proceeds                from the sale of other real estate owned                                                |   |                                     | 406      |   |   |   | 159 |   |
| Net                cash provided by investing activities                                                        |   |                                     | 24,745   |   |   |   | 98,787 |   |
| **FINANCING                ACTIVITIES:**                                                                        |   |                                     |     |   |   |   |   |   |
| Net                increase in deposits                                                                         |   |                                     | 72,704   |   |   |   | 60,546 |   |
| Net                increase in repurchase agreements                                                            |   |                                     | 58,973   |   |   |   | 17,472 |   |
| Payment                on extinguishment of debt, net                                                           |   |                                     | -        |   |   |   | (49,595 | ) |
| Payment                on the redemption of subordinated debentures                                             |   |                                     | (22,997  | ) |   |   | - |   |
| Proceeds                from long-term debt                                                                     |   |                                     | -        |   |   |   | 72,000 |   |
| Payments                on long-term debt                                                                       |   |                                     | (119,724 | ) |   |   | (152,263 | ) |
| Purchase                of treasury stock                                                                       |   |                                     | (7,289   | ) |   |   | (33,560 | ) |
| Proceeds                from the exercise of stock options                                                      |   |                                     | 38       |   |   |   | 106 |   |
| Cash                dividends paid                                                                              |   |                                     | (4,829   | ) |   |   | (4,256 | ) |
| Net                cash used in financing activities                                                            |   |                                     | (23,124  | ) |   |   | (89,550 | ) |
| Increase                in cash and cash equivalents                                                            |   |                                     | 21,383   |   |   |   | 25,821 |   |
| Cash                and cash equivalents January 1,                                                             |   |                                     | 60,173   |   |   |   | 106,259 |   |
| Cash                and cash equivalents June 30,                                                               |   | $                                        | 81,556   |   |   | $ | 132,078 |   |
|                                                                                                            |   |                                     |     |   |   |   |   |   |
| Supplemental                disclosure of cash flow information                                                 |   |                                     |     |   |   |   |   |   |
| Cash                paid during the period for                                                                  |   |                                     |     |   |   |   |   |   |
| Income                taxes                                                                                     |   | $                                        | 6,805    |   |   | $ | 2,274 |   |
| Interest                on deposits, advances and other borrowed money                                          |   | $                                        | 40,641   |   |   | $ | 33,495 |   |
| Supplemental                disclosure of non-cash investing activities                                         |   |                                     |     |   |   |   |   |   |
| Reclassification                of loans receivable to other real estate owned                                  |   | $                                        | 195      |   |   | $ | 335 |   |
|                                                                                                            |   |                                     |     |   |   |   |   |   |
| The                accompanying notes are an integral part of these financial                statements.        |   |                                     |     |   |   |   |   |   |

----

**KNBT      BANCORP, INC. AND SUBSIDIARIES**

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

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

----

| **NOTE                B** | **ACQUISITIONS** |
|---------------------------|------------------|

**The      Trust Company of Lehigh Valley**

**Caruso      Benefits Group, Inc.**

----

| **NOTE                C** | **EARNINGS                PER SHARE** |
|---------------------------|---------------------------------------|

|                                                            |   | For                the Three Months Ended June 30, |   |
|-----------------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                            |   | 2007                                               |   |   | 2006 |   |
|                                                            |   | Net                                                |   |   | Average |   |   |   |   |   | Net |   |   | Average |   |   |   |   |
|                                                            |   | Income                                             |   |   | Shares |   |   | Per                Share |   |   | Income |   |   | Shares |   |   | Per                Share |   |
| *(in                thousands, except per share data)*          |   | (numerator)                                        |   |   | (denominator) |   |   | Amount |   |   | (numerator) |   |   | (denominator) |   |   | Amount |   |
|                                                            |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share                         |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                available to common shareholders          |   | $                                                  | 2,012  |   |   |   | 26,237,836 |   |   | $ | 0.08 |   |   | $ | 5,906 |   |   |   | 27,381,824 |   |   | $ | 0.22 |   |
| Effect                of dilutive securities                    |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock                options                                    |   |                                               |   |   |   |   | 152,418 |   |   |   | - |   |   |   |   |   |   |   | 153,008 |   |   |   | - |   |
| Management                Recognition and Retention Plan shares |   |                                               |   |   |   |   | - |   |   |   | - |   |   |   |   |   |   |   | 270,275 |   |   |   | - |   |
| Total                effect of dilutive securities              |   |                                               |   |   |   |   | 152,418 |   |   |   | - |   |   |   |   |   |   |   | 423,283 |   |   |   | (0.01 | ) |
| Diluted                earnings per share                       |   |                                               |   |   |   |   |   |   |   |   | - |   |   |   |   |   |   |   |   |   |   |   | - |   |
| Income                available to common shareholders          |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| plus                assumed exercise of options                 |   | $                                                  | 2,012  |   |   |   | 26,390,254 |   |   | $ | 0.08 |   |   | $ | 5,906 |   |   |   | 27,805,107 |   |   | $ | 0.21 |   |
|                                                            |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                            |   | For                the Six Months Ended June 30,   |   |
|                                                            |   | 2007                                               |   |   | 2006 |   |
|                                                            |   | Net                                                |   |   | Average |   |   |   |   |   |   | Net |   |   | Average |   |   |   |   |   |
|                                                            |   | Income                                             |   |   | Shares |   |   | Per                Share |   |   | Income |   |   | Shares |   |   | Per                Share |   |
| *(in                thousands, except per share data)*          |   | (numerator)                                        |   |   | (denominator) |   |   | Amount |   |   | (numerator) |   |   | (denominator) |   |   | Amount |   |
|                                                            |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share                         |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                available to common shareholders          |   | $                                                  | 7,498  |   |   |   | 26,274,359 |   |   | $ | 0.29 |   |   | $ | 11,386 |   |   |   | 27,711,586 |   |   | $ | 0.41 |   |
| Effect                of dilutive securities                    |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock                options                                    |   |                                               |   |   |   |   | 141,019 |   |   |   | - |   |   |   |   |   |   |   | 152,953 |   |   |   | - |   |
| Management                Recognition and Retention Plan shares |   |                                               |   |   |   |   | 6,726 |   |   |   | - |   |   |   |   |   |   |   | 267,785 |   |   |   | - |   |
| Total                effect of dilutive securities              |   |                                               |   |   |   |   | 147,745 |   |   |   | (0.01 | ) |   |   |   |   |   |   | 420,738 |   |   |   | (0.01 | ) |
| Diluted                earnings per share                       |   |                                               |   |   |   |   |   |   |   |   | - |   |   |   |   |   |   |   |   |   |   |   | - |   |
| Income                available to common shareholders          |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| plus                assumed exercise of options                 |   | $                                                  | 7,498  |   |   |   | 26,422,104 |   |   | $ | 0.28 |   |   | $ | 11,386 |   |   |   | 28,132,324 |   |   | $ | 0.40 |   |
|                                                            |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

| **NOTE                D** | **INVESTMENT                SECURITIES** |
|---------------------------|------------------------------------------|

|                                                           |   | At                June 30, 2007     |    |
|----------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                           |   |                                |    |   | Gross |   |   | Gross |   |   |   |   |
|                                                           |   | Amortized                           |    |   | Unrealized |   |   | Unrealized |   |   | Fair |   |
| *(in                thousands)*                                |   | Cost                                |    |   | Gains |   |   | Losses |   |   | Value |   |
| Held                to maturity:                               |   |                                |    |   |   |   |   |   |   |   |   |   |
| Mortgage-backed                securities                      |   | $                                   | 30,125  |   |   | $ | - |   |   | $ | (542 | ) |   | $ | 29,583 |   |
| Total                investments held to maturity              |   |                                | 30,125  |   |   |   | - |   |   |   | (542 | ) |   |   | 29,583 |   |
| Available                for sale:                             |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.                Government and agencies                    |   |                                | 47,290  |   |   |   | 23 |   |   |   | (247 | ) |   |   | 47,066 |   |
| Obligations                of state and political subdivisions |   |                                | 802     |   |   |   |   |   |   |   | (46 | ) |   |   | 756 |   |
| Asset-managed                funds                             |   |                                | 4,954   |   |   |   | - |   |   |   | (186 | ) |   |   | 4,768 |   |
| Mortgage-backed                securities                      |   |                                | 617,992 |   |   |   | 133 |   |   |   | (17,071 | ) |   |   | 601,054 |   |
| Corporate                and other debt securities             |   |                                | 26,720  |   |   |   | 45 |   |   |   | (362 | ) |   |   | 26,403 |   |
| Equity                securities                               |   |                                | 2,234   |   |   |   | 35 |   |   |   | (172 | ) |   |   | 2,097 |   |
| Total                investments available for sale            |   |                                | 699,992 |   |   |   | 236 |   |   |   | (18,084 | ) |   |   | 682,144 |   |
| Total                investment securities                     |   | $                                   | 730,117 |   |   | $ | 236 |   |   | $ | (18,626 | ) |   | $ | 711,727 |   |
|                                                           |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                           |   | At                December 31, 2006 |    |
|                                                           |   |                                |    |   |   | Gross |   |   | Gross |   |   |   |   |   |
|                                                           |   | Amortized                           |    |   | Unrealized |   |   | Unrealized |   |   | Fair |   |
| *(in                thousands)*                                |   | Cost                                |    |   | Gains |   |   | Losses |   |   | Value |   |
| Held                to maturity:                               |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed                securities                      |   | $                                   | 33,532  |   |   | $ | - |   |   | $ | (484 | ) |   | $ | 33,048 |   |
| Total                investments held to maturity              |   |                                | 33,532  |   |   |   | - |   |   |   | (484 | ) |   |   | 33,048 |   |
| Available                for sale:                             |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.                Government and agencies                    |   |                                | 95,523  |   |   |   | 2 |   |   |   | (949 | ) |   |   | 94,576 |   |
| Asset-managed                funds                             |   |                                | 5,171   |   |   |   | - |   |   |   | (167 | ) |   |   | 5,004 |   |
| Mortgage-backed                securities                      |   |                                | 703,648 |   |   |   | 439 |   |   |   | (15,595 | ) |   |   | 688,492 |   |
| Corporate                and other debt  securities  |   |                                | 68,461  |   |   |   | 277 |   |   |   | (100 | ) |   |   | 68,638 |   |
| Equity                securities                               |   |                                | 2,091   |   |   |   | 79 |   |   |   | (26 | ) |   |   | 2,144 |   |
| Total                investments available for sale            |   |                                | 874,894 |   |   |   | 797 |   |   |   | (16,837 | ) |   |   | 858,854 |   |
| Total                investment securities                     |   | $                                   | 908,426 |   |   | $ | 797 |   |   | $ | (17,321 | ) |   | $ | 891,902 |   |

| **NOTE                E** | **STOCK                BASED COMPENSATION** |
|---------------------------|---------------------------------------------|

----

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

|                                               | For                the Six Months Ended June 30,                                                              |
|----------------------------------------------------|---------------------------------------------------------------------------------------------------------------|
|                                               | 2007                                                                                                          |   | 2006 |
|                                               |                                                                                                          |   | Weighted                Average |   |   |   | Weighted                Average |
|                                               | Shares                                                                                                        |   | Exercise                Price |   | Shares |   | Exercise                Price |
| Outstanding                as of beginning of year | 1,961,432                                                                                                     |   |  $               14.07 |   | 1,796,338 |   |  $                  13.58 |
| Issued                                             | 180,050                                                                                                       |   |                   16.40 |   | 217,400 |   |                      16.51 |
| Exercised                                          | (6,236)                                                                                                       |   |                     6.08 |   | (18,758) |   |                        5.65 |
| Forfeited                                          |                   - |   |                        - |   | (5,000) |   |                      16.37 |
| Expired                                            |                   - |   |                        - |   | - |   |  - |
| Outstanding                as of June 30           | 2,135,246                                                                                                     |   |  $               14.29 |   | 1,989,980 |   |  $                  13.97 |
|                                               |                                                                                                          |   |   |   |   |   |   |
| Options                exercisable as of June 30   | 1,062,247                                                                                                     |   |  $               12.17 |   | 836,860 |   |  $                  10.64 |

----

|                             |   | For                  the Six Months Ended June 30, 2007                        |
|----------------------------------|--------|--------------------------------------------------------------------------------|
|                             |   | Options                  Outstanding                                           |   | Options                  Exercisable |
| Range                  of        |   | Stock                  Options                                                 |   | Weighted                  Average |   | Stock                  Options |   | Weighted                  Average |
| Exercise                  Prices |   | Outstanding                                                                    |   | Life                  (in Years) |   | Exercise                  Price |   | Exercisable |   | Exercise                  Price |
| $3.73                  - $4.35   |   |             47,155 |   | 3.84 |   |  $                 4.20 |   |           47,155 |   |  $                    4.20 |
| $4.36                  - $6.37   |   |           314,431            |   | 4.48 |   |                     5.67 |   |         314,431 |   |                        5.67 |
| $6.38                  - $8.36   |   |             57,180 |   | 4.51 |   |                     6.73 |   |           57,180 |   |                        6.73 |
| $11.35                  - $16.56 |   |        1,716,480                            |   | 7.46 |   |                   16.40 |   |         643,481 |   |                      16.41 |
|                             |   |        2,135,246                            |   |   |   |   |   |      1,062,247 |   |   |

----

| **NOTE                F** | **LOANS** |
|---------------------------|-----------|

|                                             |   | June                30, |      |   | December                31, |   |
|--------------------------------------------------|--------|-------------------------|-----------|--------|-----------------------------|--------|
| ***(in                thousands)***              |   | 2007                    |      |   | 2006                        |   |
|                                             |   |                    |      |   |                        |   |
| Real                estate                       |   |                    |      |   |                        |   |
| Residential                                      |   | $                       | 569,474   |   |                        | $      | 493,813 |   |
| Commercial                                       |   |                    | 381,488   |   |                        |   | 362,244 |   |
| Construction                                     |   |                    | 61,574    |   |                        |   | 61,288 |   |
| Total                real estate                 |   |                    | 1,012,536 |   |                        |   | 917,345 |   |
| Consumer                loans                    |   |                    | 523,232   |   |                        |   | 509,555 |   |
| Commercial                (non-real estate)      |   |                    | 223,795   |   |                        |   | 181,103 |   |
| States                and political subdivisions |   |                    | 13,050    |   |                        |   | 13,056 |   |
| Total                gross loans                 |   |                    | 1,772,613 |   |                        |   | 1,621,059 |   |
| Mortgage                loans held-for-sale      |   |                    | (1,362    | )      |                        |   | (1,994 | ) |
| Deferred                fees                     |   |                    | 1,352     |   |                        |   | 1,101 |   |
| Total                loans                       |   |                    | 1,772,603 |   |                        |   | 1,620,166 |   |
| Allowance                for loan losses         |   |                    | (17,313   | )      |                        |   | (17,044 | ) |
| Total                net loans                   |   | $                       | 1,755,290 |   |                        | $      | 1,603,122 |   |

----

|                                                                       |   | June                30, |   |   | December                31, |   |
|----------------------------------------------------------------------------|--------|-------------------------|--------|--------|-----------------------------|--------|
| *(dollars                in thousands )*                                   |   | 2007                    |   |   | 2006                        |   |
|                                                                       |   |                    |   |   |                        |   |
| Non-accruing                loans                                          |   | $                       | 4,245  |   |                        | $      | 4,869 |   |
| Accruing                loans 90 days or more past due                     |   |                    | 852    |   |                        |   | 1,058 |   |
| Total                non-performing loans                                  |   |                    | 5,097  |   |                        |   | 5,927 |   |
|                                                                       |   |                    |   |   |                        |   |   |   |
| Other                real estate owned                                     |   |                    | 126    |   |                        |   | 32 |   |
| Total                non-performing assets                                 |   | $                       | 5,223  |   |                        | $      | 5,959 |   |
|                                                                       |   |                    |   |   |                        |   |   |   |
| Total                non-performing loans as a percentage of loans, net    |   |                    | 0.29   | %      |                        |   | 0.37 | % |
| Total                non-performing loans as a percentage of total assets  |   |                    | 0.18   | %      |                        |   | 0.20 | % |
| Total                non-performing assets as a percentage of total assets |   |                    | 0.18   | %      |                        |   | 0.21 | % |
| Net                charge-offs to average loans (net)                      |   |                    | 0.02   | %      |                        |   | 0.15 | % |
|                                                                       |   |                    |   |   |                        |   |   |   |
| Interest                on non-accrual loans which would have been         |   |                    |   |   |                        |   |   |   |
| recorded                at the original rate                               |   | $                       | 487    |   |                        | $      | 459 |   |
| Interest                on non-accrual loans that was reflected in income  |   |                    | 39     |   |                        |   | 46 |   |
| Net                decrease in interest income                             |   | $                       | (448   | )      |                        | $      | (413 | ) |

|                                                          |   | For                the Three Months |   |   | For                the Six Months |   |
|---------------------------------------------------------------|--------|-------------------------------------|--------|--------|-----------------------------------|--------|
|                                                          |   | Ended                June 30,       |   |   | Ended                June 30,     |   |
| *(dollars                in thousands)*                       |   | 2007                                |   |   | 2006                              |   |   | 2007 |   |   | 2006 |   |
|                                                          |   |                                |   |   |                              |   |   |   |   |   |   |   |
| Allowance                for loan losses, beginning of period |   | $                                   | 16,667 |   |                              | $      | 15,963 |   |   | $ | 17,044 |   |   | $ | 15,964 |   |
| Provision                for loan losses                      |   |                                | 645    |   |                              |   | 1,200 |   |   |   | 645 |   |   |   | 1,950 |   |
| Charge-offs                                                   |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| One-to                four-family residential                 |   |                                | 9      |   |                              |   | 7 |   |   |   | 18 |   |   |   | 46 |   |
| Commercial                and industrial                      |   |                                | 94     |   |                              |   | 298 |   |   |   | 172 |   |   |   | 302 |   |
| Consumer                                                      |   |                                | 327    |   |                              |   | 449 |   |   |   | 689 |   |   |   | 1,242 |   |
| Total                charge-offs                              |   |                                | 430    |   |                              |   | 754 |   |   |   | 879 |   |   |   | 1,590 |   |
| Recoveries                on loans previously charged-off     |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| One-to                four-family residential                 |   |                                | 15     |   |                              |   | 2 |   |   |   | 15 |   |   |   | 21 |   |
| Commercial                and industrial                      |   |                                | 364    |   |                              |   | 134 |   |   |   | 415 |   |   |   | 149 |   |
| Consumer                                                      |   |                                | 52     |   |                              |   | 55 |   |   |   | 73 |   |   |   | 106 |   |
| Total                recoveries                               |   |                                | 431    |   |                              |   | 191 |   |   |   | 503 |   |   |   | 276 |   |
| Net                loans charged-off                          |   |                                | 1      |   |                              |   | (563 | ) |   |   | (376 | ) |   |   | (1,314 | ) |
|                                                          |   |                                |   |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Allowance                for loan losses, at period end       |   | $                                   | 17,313 |   |                              | $      | 16,600 |   |   | $ | 17,313 |   |   | $ | 16,600 |   |

----

| **NOTE                G** | **RETIREMENT                PLANS** |
|---------------------------|-------------------------------------|

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

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

|                                                                |   | June                30, |   |
|---------------------------------------------------------------------|--------|-------------------------|--------|
| *(in                thousands)*                                     |   | 2007                    |   |   | 2006 |   |
|                                                                |   |                    |   |   |   |   |
| Service                cost                                         |   | $                       | -      |   |   | $ | - |   |
| Interest                cost                                        |   |                    | 8      |   |   |   | 8 |   |
| Net                amortization and deferral of prior service costs |   |                    | -      |   |   |   | - |   |
| Amortization                of net loss                             |   |                    | -      |   |   |   | 1 |   |
| Net                periodic benefit cost                            |   | $                       | 8      |   |   | $ | 9 |   |

| **NOTE                H** | **NEW                ACCOUNTING PRONOUNCEMENTS** |
|---------------------------|--------------------------------------------------|

----

----

| **NOTE                I** | **EXTINGUISHMENT                OF DEBT** |
|---------------------------|-------------------------------------------|

| **NOTE                J** | **TREASURY                STOCK** |
|---------------------------|-----------------------------------|

| **NOTE                  K** | **INCOME                  TAXES** |
|-----------------------------|-----------------------------------|

----

| **NOTE                L** | **BALANCE                SHEET RESTRUCTURING** |
|---------------------------|------------------------------------------------|

| **NOTE                M** | **RECLASSIFICATIONS** |
|---------------------------|-----------------------|

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

**Forward      – Looking Statements**

----

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

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

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

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

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

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

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

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

**Available      Information**

**Critical      Accounting Policies, Judgments and Estimates**

----

----

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

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

**Non-Performing      Assets.   **

**Allowance      for Loan Losses.**

----

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

**Shareholders’      Equity.  **

----

|                                                           |   | At                June 30, 2007     |    |
|----------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                           |   |                                |    |   |   |   |   | Required |   |   | To                Be Well Capitalized |   |
|                                                           |   |                                |    |   |   |   |   | For                Capital |   |   | Under                Prompt Corrective |   |
|                                                           |   | Actual                              |    |   | Adequacy                Purposes |   |   | Action                Provisions |   |
| *(in                thousands)*                                |   | Amount                              |    |   | Ratio |   |   | Amount |   |   | Ratio |   |   | Amount |   |   | Ratio |   |
|                                                           |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                Capital                                   |   |                                |    |
|    (To                risk-weighted assets)     |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Company                (consolidated)        |   | $                                   | 261,929 |   |   |   | 13.13 | % |   | $ | 159,552 |   |   |   | 8.00 | % |   | N/A |   |   | N/A |   |
|    Bank                                         |   | $                                   | 223,907 |   |   |   | 11.04 | % |   | $ | 162,321 |   |   |   | 8.00 | % |   | $ | 202,901 |   |   |   | 10.00 | % |
| Tier                I Capital                                  |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    (To                risk-weighted assets)     |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Company                (consolidated)        |   | $                                   | 244,616 |   |   |   | 12.27 | % |   | $ | 79,776 |   |   |   | 4.00 | % |   | N/A |   |   | N/A |   |
|    Bank                                         |   | $                                   | 206,840 |   |   |   | 10.18 | % |   | $ | 81,160 |   |   |   | 4.00 | % |   | $ | 121,741 |   |   |   | 6.00 | % |
| Tier                I Capital                                  |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    (To                average assets, leverage) |   | $                                   | 244,616 |   |   |   | 8.87 | % |   | $ | 110,322 |   |   |   | 4.00 | % |   | N/A |   |   | N/A |   |
|    Company                (consolidated)        |   | $                                   | 206,840 |   |   |   | 7.41 | % |   | $ | 111,562 |   |   |   | 4.00 | % |   | $ | 139,452 |   |   |   | 5.00 | % |
|    Bank                                         |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                           |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                           |   | At                December 31, 2006 |    |
|                                                           |   |                                |    |   |   |   |   |   |   | Required |   |   | To                Be Well Capitalized |   |
|                                                           |   |                                |    |   |   |   |   |   |   | For                Capital |   |   | Under                Prompt Corrective |   |
|                                                           |   | Actual                              |    |   | Adequacy                Purposes |   |   | Action                Provisions |   |
| (in                thousands)                                  |   | Amount                              |    |   | Ratio |   |   | Amount |   |   | Ratio |   |   | Amount |   |   | Ratio |   |
|                                                           |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                Capital                                   |   |                                |    |
|    (To                risk-weighted assets)     |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Company                (consolidated)        |   | $                                   | 288,207 |   |   |   | 14.83 | % |   | $ | 155,432 |   |   |   | 8.00 | % |   | N/A |   |   | N/A |   |
|    Bank                                         |   | $                                   | 256,766 |   |   |   | 13.23 | % |   | $ | 155,320 |   |   |   | 8.00 | % |   | $ | 194,151 |   |   |   | 10.00 | % |
| Tier                I Capital                                  |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    (To                risk-weighted assets)     |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Company                (consolidated)        |   | $                                   | 271,163 |   |   |   | 13.96 | % |   | $ | 77,716 |   |   |   | 4.00 | % |   | N/A |   |   | N/A |   |
|    Bank                                         |   | $                                   | 239,722 |   |   |   | 12.35 | % |   | $ | 77,660 |   |   |   | 4.00 | % |   | $ | 116,490 |   |   |   | 6.00 | % |
| Tier                I Capital                                  |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    (To                average assets, leverage) |   |                                |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Company                (consolidated)        |   | $                                   | 271,163 |   |   |   | 9.77 | % |   | $ | 111,068 |   |   |   | 4.00 | % |   | N/A |   |   | N/A |   |
|    Bank                                         |   | $                                   | 239,722 |   |   |   | 8.55 | % |   | $ | 112,157 |   |   |   | 4.00 | % |   | $ | 140,196 |   |   |   | 5.00 | % |

**Liquidity.  **

----

**“GAP”      Analysis.  **

|                                                                                                                                                                                                                                                                                    |   | At                June 30, 2007 |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                                                                                                                                                                                                                                                    |   |                            |    |   | More                than |   |   | More                than |   |   | More                than |   |   | More                than |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                    |   | 3                Months         |    |   | 3                Months |   |   | 6                Months |   |   | 1                Year |   |   | 3                Years |   |   | More                than |   |   |   |   |
| ***(dollars                in thousands)***                                                                                                                                                                                                                                             |   | or                Less          |    |   | to                6 Months |   |   | to                1 Year |   |   | to                3 Years |   |   | to                5 Years |   |   | 5                Years |   |   | Total |   |
| Interest-earning                assets (1):                                                                                                                                                                                                                                             |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                at other institutions                                                                                                                                                                                                                                           |   | $                               | 30,388  |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | 30,388 |   |
| Loans                receivable (2)                                                                                                                                                                                                                                                     |   |                            | 372,850 |   |   |   | 85,362 |   |   |   | 155,942 |   |   |   | 490,123 |   |   |   | 296,048 |   |   |   | 373,640 |   |   |   | 1,773,965 |   |
| Investment                securities, debt                                                                                                                                                                                                                                              |   |                            | 77,559  |   |   |   | 44,251 |   |   |   | 67,904 |   |   |   | 251,287 |   |   |   | 140,235 |   |   |   | 128,890 |   |   |   | 710,126 |   |
| Investment                securities, equity                                                                                                                                                                                                                                            |   |                            | -  |   |   |   | -  |   |   |   | -  |   |   |   | -  |   |   |   | -  |   |   |   | 28,156 |   |   |   | 28,156 |   |
| Total                interest-earning assets                                                                                                                                                                                                                                            |   | $                               | 480,797 |   |   | $ | 129,613 |   |   | $ | 223,846 |   |   | $ | 741,410 |   |   | $ | 436,283 |   |   | $ | 530,686 |   |   | $ | 2,542,635 |   |
| Cumulative                total interest-                                                                                                                                                                                                                                               |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| earning                assets                                                                                                                                                                                                                                                           |   | $                               | 480,797 |   |   | $ | 610,410 |   |   | $ | 834,256 |   |   | $ | 1,575,666 |   |   | $ | 2,011,949 |   |   | $ | 2,542,635 |   |   | $ | 2,542,635 |   |
| Interest-bearing                liabilities:                                                                                                                                                                                                                                            |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings                deposits                                                                                                                                                                                                                                                         |   | $                               | 6,093   |   |   | $ | 7,808 |   |   | $ | 11,192 |   |   | $ | 38,589 |   |   | $ | 30,318 |   |   | $ | 111,144 |   |   | $ | 205,144 |   |
| Interest-bearing                checking deposits                                                                                                                                                                                                                                       |   |                            | 7,174   |   |   |   | 6,961 |   |   |   | 13,308 |   |   |   | 45,886 |   |   |   | 50,674 |   |   |   | 117,540 |   |   |   | 241,543 |   |
| Money                market deposits                                                                                                                                                                                                                                                    |   |                            | 18,394  |   |   |   | 17,848 |   |   |   | 34,122 |   |   |   | 117,654 |   |   |   | 269,282 |   |   |   | 162,022 |   |   |   | 619,322 |   |
| Certificates                of deposit                                                                                                                                                                                                                                                  |   |                            | 135,829 |   |   |   | 129,527 |   |   |   | 287,386 |   |   |   | 140,879 |   |   |   | 12,442 |   |   |   | 1,852 |   |   |   | 707,915 |   |
| FHLB                advances and other                                                                                                                                                                                                                                                  |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| borrowings                                                                                                                                                                                                                                                                              |   |                            | 184,080 |   |   |   | 45,403 |   |   |   | 35,401 |   |   |   | 166,339 |   |   |   | 34,406 |   |   |   | 53,469 |   |   |   | 519,098 |   |
| Total                interest-bearing                                                                                                                                                                                                                                                   |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                                                                                                                                                                                                                                                                             |   | $                               | 351,570 |   |   | $ | 207,547 |   |   | $ | 381,409 |   |   | $ | 509,347 |   |   | $ | 397,122 |   |   | $ | 446,027 |   |   | $ | 2,293,022 |   |
| Cumulative                total interest-                                                                                                                                                                                                                                               |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| bearing                liabilities                                                                                                                                                                                                                                                      |   | $                               | 351,570 |   |   | $ | 559,117 |   |   | $ | 940,526 |   |   | $ | 1,449,873 |   |   | $ | 1,846,995 |   |   | $ | 2,293,022 |   |   | $ | 2,293,022 |   |
| Interest-earning                assets                                                                                                                                                                                                                                                  |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| less                interest-bearing                                                                                                                                                                                                                                                    |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                                                                                                                                                                                                                                                                             |   | $                               | 129,227 |   |   | $ | (77,934 | ) |   | $ | (157,563 | ) |   | $ | 232,063 |   |   | $ | 39,161 |   |   | $ | 84,659 |   |   | $ | 249,613 |   |
| Cumulative                interest-rate                                                                                                                                                                                                                                                 |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| sensitivity                gap (3)                                                                                                                                                                                                                                                      |   | $                               | 129,227 |   |   | $ | 51,293 |   |   | $ | (106,270 | ) |   | $ | 125,793 |   |   | $ | 164,954 |   |   | $ | 249,613 |   |   |   |   |   |
| Cumulative                interest-rate gap as a                                                                                                                                                                                                                                        |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| percentage                of total assets at                                                                                                                                                                                                                                            |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| June                30, 2007                                                                                                                                                                                                                                                            |   |                            | 4.47    | % |   |   | 1.78 | % |   |   | (3.68 | %) |   |   | 4.35 | % |   |   | 5.71 | % |   |   | 8.64 | % |   |   |   |   |
| Cumulative                interest-earning assets                                                                                                                                                                                                                                       |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| as                a percentage of                                                                                                                                                                                                                                                       |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| cumulative                interest-bearing                                                                                                                                                                                                                                              |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                at June 30, 2007                                                                                                                                                                                                                                             |   |                            | 136.76  | % |   |   | 109.17 | % |   |   | 88.70 | % |   |   | 108.68 | % |   |   | 108.93 | % |   |   | 110.89 | % |   |   |   |   |
|                                                                                                                                                                                                                                                                                    |   |                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1) Interest-earning                assets are included in the period in which the balances are expected                to be                redeployed and/or repriced as a result of anticipated prepayments,                scheduled rate adjustment and contractual maturity. |   |
| (2) For                purposes of the gap analysis, loans receivable includes non-performing                loans, gross of the allowance for loan losses, undisbursed loan funds                and                deferred loan fees.                                           |   |
| (3) Interest-rate                sensitivity gap represents the difference between net interest-earning                assets and interest-bearing liabilities.                                                                                                                    |   |

----

**Comparison      of Operating Results for the Three and Six Months Ended June 30, 2007 and      2006**

**Results        of        Operations.  **

**Net        Interest        Income.  **

----

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

**Interest      Income.  **

----

**Interest        Expense.**

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

----

|                                                                                                                                                                                 |   | For                the Three Months Ended June 30, |      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|-----------|
|                                                                                                                                                                                 |   | 2007                                               |      |   | 2006 |   |
|                                                                                                                                                                                 |   |                                               |      |   | Interest |   |   | Average |   |   |   |   |   | Interest |   |   | Average |   |
|                                                                                                                                                                                 |   | Average                                            |      |   | Income/ |   |   | Yield/ |   |   | Average |   |   | Income/ |   |   | Yield/ |   |
| *(dollars                in thousands)*                                                                                                                                              |   | Balance                                            |      |   | Expense |   |   | Rate |   |   | Balance |   |   | Expense |   |   | Rate |   |
| Interest-earning                assets                                                                                                                                               |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                balances with banks                                                                                                                                  |   | $                                                  | 23,967    |   |   | $ | 310 |   |   |   | 5.17 | % |   | $ | 14,329 |   |   | $ | 145 |   |   |   | 4.05 | % |
| Federal                funds sold                                                                                                                                                    |   |                                               | 45,293    |   |   |   | 610 |   |   |   | 5.39 | % |   |   | 8,199 |   |   |   | 98 |   |   |   | 4.78 | % |
| Investment                securities                                                                                                                                                 |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                (1)                                                                                                                                                           |   |                                               | 745,363   |   |   |   | 8,806 |   |   |   | 4.73 | % |   |   | 1,048,208 |   |   |   | 12,356 |   |   |   | 4.72 | % |
| Tax-exempt                (2)                                                                                                                                                        |   |                                               | -         |   |   |   | - |   |   |   | - |   |   |   | 48,448 |   |   |   | 877 |   |   |   | 7.24 | % |
| Loans                receivable (2) (3)                                                                                                                                              |   |                                               | 1,747,105 |   |   |   | 28,193 |   |   |   | 6.45 | % |   |   | 1,516,016 |   |   |   | 23,666 |   |   |   | 6.24 | % |
| Allowance                for loan losses                                                                                                                                             |   |                                               | (16,881   | ) |   |   |   |   |   |   |   |   |   |   | (16,102 | ) |   |   |   |   |   |   |   |   |
| Net                loans                                                                                                                                                             |   |                                               | 1,730,224 |   |   |   | 28,193 |   |   |   | 6.52 | % |   |   | 1,499,914 |   |   |   | 23,666 |   |   |   | 6.31 | % |
| Total                interest-earning assets                                                                                                                                         |   |                                               | 2,544,847 |   |   |   | 37,919 |   |   |   | 5.96 | % |   |   | 2,619,098 |   |   |   | 37,142 |   |   |   | 5.67 | % |
| Non-interest-earning                assets                                                                                                                                           |   |                                               | 347,227   |   |   |   | - |   |   |   |   |   |   |   | 356,434 |   |   |   | - |   |   |   |   |   |
| Total                assets, interest income                                                                                                                                         |   | $                                                  | 2,892,074 |   |   |   | 37,919 |   |   |   |   |   |   | $ | 2,975,532 |   |   |   | 37,142 |   |   |   |   |   |
| Interest-bearing                liabilities                                                                                                                                          |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                deposits                                                                                                                                                       |   | $                                                  | 239,374   |   |   | $ | 527 |   |   |   | 0.88 | % |   | $ | 233,862 |   |   | $ | 325 |   |   |   | 0.56 | % |
| Money                market deposits                                                                                                                                                 |   |                                               | 596,137   |   |   |   | 5,640 |   |   |   | 3.78 | % |   |   | 380,712 |   |   |   | 2,780 |   |   |   | 2.92 | % |
| Savings                deposits                                                                                                                                                      |   |                                               | 209,224   |   |   |   | 246 |   |   |   | 0.47 | % |   |   | 257,816 |   |   |   | 292 |   |   |   | 0.45 | % |
| Certificates                of deposit                                                                                                                                               |   |                                               | 706,063   |   |   |   | 7,839 |   |   |   | 4.44 | % |   |   | 784,583 |   |   |   | 7,352 |   |   |   | 3.75 | % |
| Total                interest-bearing deposits                                                                                                                                       |   |                                               | 1,750,798 |   |   |   | 14,252 |   |   |   | 3.26 | % |   |   | 1,656,973 |   |   |   | 10,749 |   |   |   | 2.59 | % |
| Securities                sold under agreements                                                                                                                                      |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                repurchase                                                                                                                                                         |   |                                               | 79,452    |   |   |   | 847 |   |   |   | 4.26 | % |   |   | 48,037 |   |   |   | 434 |   |   |   | 3.61 | % |
| Federal                funds purchased                                                                                                                                               |   |                                               | 40        |   |   |   | 1 |   |   |   | 5.40 | % |   |   | - |   |   |   | - |   |   |   | - |   |
| FHLB                advances                                                                                                                                                         |   |                                               | 440,220   |   |   |   | 4,483 |   |   |   | 4.07 | % |   |   | 646,603 |   |   |   | 6,269 |   |   |   | 3.88 | % |
| Other                debt                                                                                                                                                            |   |                                               | 31,919    |   |   |   | 608 |   |   |   | 7.62 | % |   |   | 38,713 |   |   |   | 689 |   |   |   | 7.12 | % |
| Total                interest-bearing liabilities                                                                                                                                    |   |                                               | 2,302,429 |   |   |   | 20,191 |   |   |   | 3.51 | % |   |   | 2,390,326 |   |   |   | 18,141 |   |   |   | 3.04 | % |
| Non-interest-bearing                liabilities                                                                                                                                      |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing                deposits                                                                                                                                         |   |                                               | 195,409   |   |   |   | - |   |   |   |   |   |   |   | 196,149 |   |   |   | - |   |   |   |   |   |
| Other                liabilities                                                                                                                                                     |   |                                               | 33,686    |   |   |   | - |   |   |   |   |   |   |   | 32,388 |   |   |   | - |   |   |   |   |   |
| Total                liabilities                                                                                                                                                     |   |                                               | 2,531,524 |   |   |   | 20,191 |   |   |   |   |   |   |   | 2,618,863 |   |   |   | 18,141 |   |   |   |   |   |
| Shareholders'                equity                                                                                                                                                  |   |                                               | 360,550   |   |   |   | - |   |   |   |   |   |   |   | 356,669 |   |   |   | - |   |   |   |   |   |
| Total                liabilities                                                                                                                                                     |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                shareholders' equity, interest expense                                                                                                                            |   | $                                                  | 2,892,074 |   |   |   | 20,191 |   |   |   |   |   |   | $ | 2,975,532 |   |   |   | 18,141 |   |   |   |   |   |
|                                                                                                                                                                                 |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income on                                                                                                                                                |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                basis (2)                                                                                                                                              |   |                                               |      |   |   |   | 17,728 |   |   |   |   |   |   |   |   |   |   |   | 19,001 |   |   |   |   |   |
| Net                interest spread on                                                                                                                                                |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                basis (4)                                                                                                                                              |   |                                               |      |   |   |   |   |   |   |   | 2.45 | % |   |   |   |   |   |   |   |   |   |   | 2.64 | % |
| Net                interest margin on                                                                                                                                                |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                basis (5)                                                                                                                                              |   |                                               |      |   |   |   |   |   |   |   | 2.79 | % |   |   |   |   |   |   |   |   |   |   | 2.90 | % |
| Tax-exempt                adjustment                                                                                                                                                 |   |                                               |      |   |   |   | (226 | ) |   |   | (0.04 | %) |   |   |   |   |   |   | (480 | ) |   |   | (0.07 | %) |
|                                                                                                                                                                                 |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income and margin (4) (5)                                                                                                                                |   |                                               |      |   |   | $ | 17,502 |   |   |   | 2.75 | % |   |   |   |   |   | $ | 18,521 |   |   |   | 2.83 | % |
| Average                interest-earning assets                                                                                                                                       |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                average interest-bearing liabilities                                                                                                                               |   |                                               |      |   |   |   |   |   |   |   | 110.53 | % |   |   |   |   |   |   |   |   |   |   | 109.57 | % |
|                                                                                                                                                                                 |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1) Includes                Federal Home Loan Bank stock.                                                                                                                       |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (2) The                indicated interest income and average yields are presented on a                tax-equivalent basis. The tax-equivalent                             |   |
| adjustments                included above are $226,000 and $480,000 for the three months ended                June                30, 2007 and 2006, respectively.                   |   |
| The                effective tax rate used for the tax-equivalent adjustment was                35%.                                                                                 |   |                                               |      |   |   |   |   |   |   |   |   |   |   |
| (3) Loan                expenses of $173,116 and $43,724 for the three months ended June                30, 2007                and 2006, respectively, are                     |   |
| included                in interest income. Average loan balances include non-accruing loans                of                $4.1 million and $6.6 million and                      |   |
| average                loans held-for-sale of $1.4 million and $330,000 for the three months                ended June 30, 2007 and 2006, respectively.                              |   |
| (4) Net                interest spread is the arithmatic difference between yield on                interest-earning assets, adjusted to a tax-equivalent                basis, |   |
| and                the rate paid on interest-bearing liabilities. On a GAAP basis, the                Company's net interest spread was 2.41% and 2.57%                         |   |
| for                the three months ended June 30, 2007 and 2006,                respectively.                                                                                       |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (5) Net                interest margin is computed on a GAAP basis by dividing net interest                income by average interest-earning assets.                           |   |

----

|                                                                                                                                                                                 |   | For                the Six Months Ended June 30, |      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|-----------|
|                                                                                                                                                                                 |   | 2007                                             |      |   | 2006 |   |
|                                                                                                                                                                                 |   |                                             |      |   | Interest |   |   | Average |   |   |   |   |   | Interest |   |   | Average |   |
|                                                                                                                                                                                 |   | Average                                          |      |   | Income/ |   |   | Yield/ |   |   | Average |   |   | Income/ |   |   | Yield/ |   |
| *(dollars                in thousands)*                                                                                                                                              |   | Balance                                          |      |   | Expense |   |   | Rate |   |   | Balance |   |   | Expense |   |   | Rate |   |
| Interest-earning                assets                                                                                                                                               |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                balances with banks                                                                                                                                  |   | $                                                | 13,043    |   |   | $ | 333 |   |   |   | 5.11 | % |   | $ | 18,453 |   |   | $ | 370 |   |   |   | 4.01 | % |
| Federal                funds sold                                                                                                                                                    |   |                                             | 25,336    |   |   |   | 668 |   |   |   | 5.27 | % |   |   | 4,122 |   |   |   | 98 |   |   |   | 4.75 | % |
| Investment                securities                                                                                                                                                 |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                (1)                                                                                                                                                           |   |                                             | 815,990   |   |   |   | 19,628 |   |   |   | 4.81 | % |   |   | 1,079,551 |   |   |   | 25,025 |   |   |   | 4.64 | % |
| Tax-exempt                (2)                                                                                                                                                        |   |                                             | -         |   |   |   | - |   |   |   | - |   |   |   | 57,737 |   |   |   | 2,072 |   |   |   | 7.18 | % |
| Loans                receivable (2) (3)                                                                                                                                              |   |                                             | 1,698,599 |   |   |   | 54,541 |   |   |   | 6.42 | % |   |   | 1,501,634 |   |   |   | 46,438 |   |   |   | 6.18 | % |
| Allowance                for loan losses                                                                                                                                             |   |                                             | (16,952   | ) |   |   |   |   |   |   |   |   |   |   | (15,993 | ) |   |   |   |   |   |   |   |   |
| Net                loans                                                                                                                                                             |   |                                             | 1,681,647 |   |   |   | 54,541 |   |   |   | 6.49 | % |   |   | 1,485,641 |   |   |   | 46,438 |   |   |   | 6.25 | % |
| Total                interest-earning assets                                                                                                                                         |   |                                             | 2,536,016 |   |   |   | 75,170 |   |   |   | 5.93 | % |   |   | 2,645,504 |   |   |   | 74,003 |   |   |   | 5.59 | % |
| Non-interest-earning                assets                                                                                                                                           |   |                                             | 348,506   |   |   |   | - |   |   |   |   |   |   |   | 351,580 |   |   |   | - |   |   |   |   |   |
| Total                assets, interest income                                                                                                                                         |   | $                                                | 2,884,522 |   |   |   | 75,170 |   |   |   |   |   |   | $ | 2,997,084 |   |   |   | 74,003 |   |   |   |   |   |
| Interest-bearing                liabilities                                                                                                                                          |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                deposits                                                                                                                                                       |   | $                                                | 236,768   |   |   |   | 1,031 |   |   |   | 0.87 | % |   | $ | 231,553 |   |   |   | 604 |   |   |   | 0.52 | % |
| Money                market deposits                                                                                                                                                 |   |                                             | 569,191   |   |   |   | 10,608 |   |   |   | 3.73 | % |   |   | 375,759 |   |   |   | 5,394 |   |   |   | 2.87 | % |
| Savings                deposits                                                                                                                                                      |   |                                             | 210,691   |   |   |   | 510 |   |   |   | 0.48 | % |   |   | 259,279 |   |   |   | 577 |   |   |   | 0.45 | % |
| Certificates                of deposit                                                                                                                                               |   |                                             | 709,168   |   |   |   | 15,499 |   |   |   | 4.37 | % |   |   | 776,363 |   |   |   | 13,963 |   |   |   | 3.60 | % |
| Total                interest-bearing deposits                                                                                                                                       |   |                                             | 1,725,818 |   |   |   | 27,648 |   |   |   | 3.20 | % |   |   | 1,642,954 |   |   |   | 20,538 |   |   |   | 2.50 | % |
| Securities                sold under agreements                                                                                                                                      |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                repurchase                                                                                                                                                         |   |                                             | 68,850    |   |   |   | 1,444 |   |   |   | 4.19 | % |   |   | 58,054 |   |   |   | 1,028 |   |   |   | 3.54 | % |
| Federal                funds purchased                                                                                                                                               |   |                                             | 4,238     |   |   |   | 113 |   |   |   | 5.33 | % |   |   | - |   |   |   | - |   |   |   | - |   |
| FHLB                advances                                                                                                                                                         |   |                                             | 467,527   |   |   |   | 9,409 |   |   |   | 4.03 | % |   |   | 670,147 |   |   |   | 12,782 |   |   |   | 3.81 | % |
| Other                debt                                                                                                                                                            |   |                                             | 35,121    |   |   |   | 1,318 |   |   |   | 7.51 | % |   |   | 38,772 |   |   |   | 1,328 |   |   |   | 6.85 | % |
| Total                interest-bearing liabilities                                                                                                                                    |   |                                             | 2,301,554 |   |   |   | 39,932 |   |   |   | 3.47 | % |   |   | 2,409,927 |   |   |   | 35,676 |   |   |   | 2.96 | % |
| Non-interest-bearing                liabilities                                                                                                                                      |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing                deposits                                                                                                                                         |   |                                             | 192,936   |   |   |   | - |   |   |   |   |   |   |   | 190,910 |   |   |   | - |   |   |   |   |   |
| Other                liabilities                                                                                                                                                     |   |                                             | 30,346    |   |   |   | - |   |   |   |   |   |   |   | 32,753 |   |   |   | - |   |   |   |   |   |
| Total                liabilities                                                                                                                                                     |   |                                             | 2,524,836 |   |   |   | 39,932 |   |   |   |   |   |   |   | 2,633,590 |   |   |   | 35,676 |   |   |   |   |   |
| Shareholders'                equity                                                                                                                                                  |   |                                             | 359,686   |   |   |   | - |   |   |   |   |   |   |   | 363,494 |   |   |   | - |   |   |   |   |   |
| Total                liabilities                                                                                                                                                     |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                shareholders' equity, interest expense                                                                                                                            |   | $                                                | 2,884,522 |   |   |   | 39,932 |   |   |   |   |   |   | $ | 2,997,084 |   |   |   | 35,676 |   |   |   |   |   |
|                                                                                                                                                                                 |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income on                                                                                                                                                |   |                                             |      |   |   |   | 35,238 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                basis (2)                                                                                                                                              |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 38,327 |   |   |   |   |   |
| Net                interest spread on                                                                                                                                                |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                basis (4)                                                                                                                                              |   |                                             |      |   |   |   |   |   |   |   | 2.46 | % |   |   |   |   |   |   |   |   |   |   | 2.63 | % |
| Net                interest margin on                                                                                                                                                |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                basis (5)                                                                                                                                              |   |                                             |      |   |   |   |   |   |   |   | 2.78 | % |   |   |   |   |   |   |   |   |   |   | 2.90 | % |
| Tax-exempt                adjustment                                                                                                                                                 |   |                                             |      |   |   |   | (435 | ) |   |   | (0.04 | %) |   |   |   |   |   |   | (1,071 | ) |   |   | (0.08 | %) |
|                                                                                                                                                                                 |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income and margin (4) (5)                                                                                                                                |   |                                             |      |   |   | $ | 34,803 |   |   |   | 2.74 | % |   |   |   |   |   | $ | 37,256 |   |   |   | 2.82 | % |
| Average                interest-earning assets                                                                                                                                       |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                average interest-bearing liabilities                                                                                                                               |   |                                             |      |   |   |   |   |   |   |   | 110.19 | % |   |   |   |   |   |   |   |   |   |   | 109.78 | % |
|                                                                                                                                                                                 |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1) Includes                Federal Home Loan Bank stock.                                                                                                                       |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (2) The                indicated interest income and average yields are presented on a                tax-equivalent basis. The tax-equivalent                             |   |
| adjustments                included above are $435,000 and $1,071,000 for the six months ended                June                30, 2007 and 2006, respectively.                   |   |
| The                effective tax rate used for the tax-equivalent adjustment was                35%.                                                                                 |   |                                             |      |   |   |   |   |   |   |   |   |   |   |
| (3) Loan                (expenses) fees of $(288,224) and $5,468 for the six months ended                June 30,                2007 and 2006, respectively, are               |   |
| included                in interest income. Average loan balances include non-accruing loans                of                $4.3 million and $6.8 million and                      |   |
| average                loans held-for-sale of $1.7 million and $444,000 for the six months                ended                June 30, 2007 and 2006, respectively.                 |   |
| (4) Net                interest spread is the arithmatic difference between yield on                interest-earning assets, adjusted to a tax-equivalent                basis, |   |
| and                the rate paid on interest-bearing liabilities. On a GAAP basis, the                Company's net interest spread was 2.42% and 2.55%                         |   |
| for                the six months ended June 30, 2007 and 2006, respectively.                                                                                                        |   |                                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (5) Net                interest margin is computed on a GAAP basis by dividing net interest                income by average interest-earning assets.                           |   |

----

|                                                                              |   | For                  the Three Months Ended |   |
|-----------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                              |   | June                  30, 2007              |   |   | June                  30, 2006 |   |
|                                                                              |   |                                        |   |   | Average |   |   |   |   |   | Average |   |
| *(dollars                  in thousands)*                                         |   | Interest                                    |   |   | Yield/Cost |   |   | Interest |   |   | Yield/Cost |   |
|                                                                              |   |                                        |   |
| Investment                  securities - nontaxable                               |   | $                                           | -      |   |   |   | - |   |   | $ | 570 |   |   |   | 4.71 | % |
| Tax-equivalent                  adjustments                                       |   |                                        | -      |   |   |   |   |   |   |   | 307 |   |   |   |   |   |
| Investment                  securities - nontaxable to a taxable equivalent yield |   | $                                           | -      |   |   |   | - |   |   | $ | 877 |   |   |   | 7.24 | % |
|                                                                              |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                  receivable - nontaxable                                    |   | $                                           | 420    |   |   |   | 4.24 | % |   | $ | 321 |   |   |   | 3.89 | % |
| Tax-equivalent                  adjustments                                       |   |                                        | 226    |   |   |   |   |   |   |   | 173 |   |   |   |   |   |
| Loans                  receivable - nontaxable to a taxable equivalent yield      |   | $                                           | 646    |   |   |   | 6.52 | % |   | $ | 494 |   |   |   | 5.98 | % |
|                                                                              |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  interest income                                              |   | $                                           | 17,502 |   |   |   |   |   |   | $ | 18,521 |   |   |   |   |   |
| Tax-equivalent                  adjustment                                        |   |                                        | 226    |   |   |   |   |   |   |   | 480 |   |   |   |   |   |
| Net                  interest income, tax equivalent                              |   | $                                           | 17,728 |   |   |   |   |   |   | $ | 19,001 |   |   |   |   |   |
| Net                  interest rate spread, no tax adjustment                      |   |                                        |   |   |   |   | 2.41 | % |   |   |   |   |   |   | 2.57 | % |
| Net                  interest margin, no tax adjustment                           |   |                                        |   |   |   |   | 2.75 | % |   |   |   |   |   |   | 2.83 | % |
|                                                                              |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                              |   | For                  the Six Months Ended   |   |
|                                                                              |   | June                  30, 2007              |   |   | June                  30, 2006 |   |
|                                                                              |   |                                        |   |   |   | Average |   |   |   |   |   |   | Average |   |
| *(dollars                  in thousands)*                                         |   | Interest                                    |   |   | Yield/Cost |   |   | Interest |   |   | Yield/Cost |   |
|                                                                              |   |                                        |   |
| Investment                  securities - nontaxable                               |   | $                                           | -      |   |   |   | - |   |   | $ | 1,348 |   |   |   | 4.67 | % |
| Tax-equivalent                  adjustments                                       |   |                                        | -      |   |   |   |   |   |   |   | 725 |   |   |   |   |   |
| Investment                  securities - nontaxable to a taxable equivalent yield |   | $                                           | -      |   |   |   | - |   |   | $ | 2,073 |   |   |   | 7.18 | % |
|                                                                              |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                  receivable - nontaxable                                    |   | $                                           | 807    |   |   |   | 4.18 | % |   | $ | 644 |   |   |   | 3.90 | % |
| Tax-equivalent                  adjustments                                       |   |                                        | 435    |   |   |   |   |   |   |   | 346 |   |   |   |   |   |
| Loans                  receivable - nontaxable to a taxable equivalent yield      |   | $                                           | 1,242  |   |   |   | 6.43 | % |   | $ | 990 |   |   |   | 6.00 | % |
|                                                                              |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  interest income                                              |   | $                                           | 34,803 |   |   |   |   |   |   | $ | 37,256 |   |   |   |   |   |
| Tax-equivalent                  adjustment                                        |   |                                        | 435    |   |   |   |   |   |   |   | 1,071 |   |   |   |   |   |
| Net                  interest income, tax equivalent                              |   | $                                           | 35,238 |   |   |   |   |   |   | $ | 38,327 |   |   |   |   |   |
| Net                  interest rate spread, no tax adjustment                      |   |                                        |   |   |   |   | 2.42 | % |   |   |   |   |   |   | 2.55 | % |
| Net                  interest margin, no tax adjustment                           |   |                                        |   |   |   |   | 2.74 | % |   |   |   |   |   |   | 2.82 | % |

----

**Rate      Volume      Analysis.  **

|                                                                                                                                                                                                                                                  |   | Three                Months Ended June 30, 2007             |   |   | Six                Months Ended June 30, 2007             |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------|--------|--------|-----------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                  |   | Compared                to Three Months Ended June 30, 2006 |   |   | Compared                to Six Months Ended June 30, 2006 |   |
|                                                                                                                                                                                                                                                  |   | Increase                (Decrease)                          |   |   | Total                                                     |   |   | Increase                (Decrease) |   |   | Total |   |
|                                                                                                                                                                                                                                                  |   | Due                to                                       |   |   | Increase                                                  |   |   | Due                to |   |   | Increase |   |
| *(in                thousands)*                                                                                                                                                                                                                       |   | Rate                                                        |   |   | Volume                                                    |   |   | (Decrease) |   |   | Rate |   |   | Volume |   |   | (Decrease) |   |
| Interest                Income:                                                                                                                                                                                                                       |   |                                                        |   |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                deposits with banks                                                                                                                                                                                                   |   | $                                                           | 67     |   |                                                      | $      | 98 |   |   | $ | 165 |   |   | $ | 71 |   |   | $ | (108 | ) |   | $ | (37 | ) |
| Federal                funds sold                                                                                                                                                                                                                     |   |                                                        | 69     |   |                                                      |   | 443 |   |   |   | 512 |   |   |   | 66 |   |   |   | 504 |   |   |   | 570 |   |
| Investment                securities (1)                                                                                                                                                                                                              |   |                                                        | (188   | )      |                                                      |   | (4,239 | ) |   |   | (4,427 | ) |   |   | 186 |   |   |   | (7,655 | ) |   |   | (7,469 | ) |
| Loans                receivable, net (2)                                                                                                                                                                                                              |   |                                                        | 920    |   |                                                      |   | 3,607 |   |   |   | 4,527 |   |   |   | 2,012 |   |   |   | 6,091 |   |   |   | 8,103 |   |
| Total                interest-earning assets                                                                                                                                                                                                          |   |                                                        | 868    |   |                                                      |   | (91 | ) |   |   | 777 |   |   |   | 2,335 |   |   |   | (1,168 | ) |   |   | 1,167 |   |
| Interest                Expense:                                                                                                                                                                                                                      |   |                                                        |   |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                deposits                                                                                                                                                                                                                        |   |                                                        | 194    |   |                                                      |   | 8 |   |   |   | 202 |   |   |   | 413 |   |   |   | 14 |   |   |   | 427 |   |
| Money                market deposits                                                                                                                                                                                                                  |   |                                                        | 1,287  |   |                                                      |   | 1,573 |   |   |   | 2,860 |   |   |   | 2,437 |   |   |   | 2,777 |   |   |   | 5,214 |   |
| Savings                deposits                                                                                                                                                                                                                       |   |                                                        | 9      |   |                                                      |   | (55 | ) |   |   | (46 | ) |   |   | 41 |   |   |   | (108 | ) |   |   | (67 | ) |
| Certificates                of deposit                                                                                                                                                                                                                |   |                                                        | 1,223  |   |                                                      |   | (736 | ) |   |   | 487 |   |   |   | 2,745 |   |   |   | (1,209 | ) |   |   | 1,536 |   |
| Total                interest-bearing deposits                                                                                                                                                                                                        |   |                                                        | 2,713  |   |                                                      |   | 790 |   |   |   | 3,503 |   |   |   | 5,636 |   |   |   | 1,474 |   |   |   | 7,110 |   |
| Securities                sold under agreements to repurchase                                                                                                                                                                                         |   |                                                        | 129    |   |                                                      |   | 284 |   |   |   | 413 |   |   |   | 225 |   |   |   | 191 |   |   |   | 416 |   |
| FHLB                advances and other borrowings                                                                                                                                                                                                     |   |                                                        | 216    |   |                                                      |   | (2,000 | ) |   |   | (1,784 | ) |   |   | 492 |   |   |   | (3,752 | ) |   |   | (3,260 | ) |
| Other                debt                                                                                                                                                                                                                             |   |                                                        | 39     |   |                                                      |   | (121 | ) |   |   | (82 | ) |   |   | 115 |   |   |   | (125 | ) |   |   | (10 | ) |
| Total                interest-bearing liabilities                                                                                                                                                                                                     |   |                                                        | 3,097  |   |                                                      |   | (1,047 | ) |   |   | 2,050 |   |   |   | 6,468 |   |   |   | (2,212 | ) |   |   | 4,256 |   |
| (Decrease)                increase in net interest income (3)                                                                                                                                                                                         |   | $                                                           | (2,229 | )      |                                                      | $      | 956 |   |   | $ | (1,273 | ) |   | $ | (4,133 | ) |   | $ | 1,044 |   |   | $ | (3,089 | ) |
|                                                                                                                                                                                                                                                  |   |                                                        |   |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1)                Total decrease in interest income on investment securities on a nontaxable                equivalent basis would be $4,120,000 and $6,744,000 for the three                and six                month comparisons, respectively. |   |                                                        |   |   |                                                      |   |   |   |   |   |   |   |   |
| (2)                Total increase in interest income on loans receivable on a nontaxable                equivalent basis would be $4,474,000 and $8,014,000 for the three                and six                month comparisons, respectively. |   |                                                        |   |   |                                                      |   |   |   |   |   |   |   |   |
| (3)                Total decrease in net interest income on a nontaxable equivalent                basis                would be $1,019,000 and $2,453,000 for the three and six month                comparisons, respectively.                      |   |                                                        |   |   |                                                      |   |   |   |   |   |   |   |   |

**Provision      for Loan      Losses.**

----

**Non-Interest      Income.  **

**Non-Interest      Expense.**

----

**Income      Tax      Expense.**

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

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

**Evaluation      of Disclosure      Controls and Procedures.  **

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

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

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

----

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

|   |   |
|--------|--------|

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

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

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

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

|   |   |
|--------|--------|

| Period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | Total                Number of Shares Purchased |   | Average                Price Paid Per                Share |   | Total                Number of Shares Purchased as Part of Publicly Announced Plans or                Programs |   | Maximum                Number of Shares that may yet be Purchased Under the Plan or Program(s)                (1) |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------|
| April                1 - 30, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 46,700                                          |   | $14.40                                                     |   | 46,700                                                                                                         |   | 2,640,568                                                                                                         |
| May                1 - 28, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 107,927                                         |   | $15.18                                                     |   | 107,927                                                                                                        |   | 2,532,641                                                                                                         |
| June                1 - 30, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 284,361                                         |   | $14.99                                                     |   | 284,361                                                                                                        |   | 2,248,280                                                                                                         |
| Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 438,988                                         |   | $14.97                                                     |   | 438,988                                                                                                        |   | N/A                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                            |   |                                                       |   |                                                                                                           |   |                                                                                                              |
| (1)  On                June 26, 2006, the Board of Directors authorized a repurchase                of  2,807,219 shares of which 558,939 shares had been                repurchased as of June 30, 2007.  There is no expiration date                for this program.  Subsequent to June 30, 2007 through August 3,                2007, KNBT repurchased an additional 595,483 shares at an average                price                per share of $13.59. |

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

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

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

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

| **Item                5.** | **Other                Information**  |
|----------------------------|--------------------------------------------|

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

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

| **Item                6.** | **Exhibits**  |
|----------------------------|--------------------|

| (a)   | List                of exhibits: |
|-----------------|----------------------------------|

----

**SIGNATURES**

**KNBT      BANCORP, INC.**

| DATE:  | August                8, 2007 |   | BY:    | /S/  Scott                V. Fainor                   |
|--------|-------------------------------|--------|--------|-----------------------------------------------------------------|
|   |                          |   |   | Scott                V. Fainor                                  |
|   |                          |   |   | President                and Chief Executive Officer            |
|   |                          |   |   |                                                            |
|   |                          |   |   |                                                            |
|   |                          |   |   |                                                            |
| DATE:  | August                8, 2007 |   | BY:    | /S/  Eugene                T. Sobol                   |
|   |                          |   |   | Eugene                T. Sobol                                  |
|   |                          |   |   | Senior                Executive Vice President, Chief Financial |
|   |                          |   |   | Officer                and Treasurer                            |

----