----

**UNITED          STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,          D.C., 20549**

**FORM          10-K**

|  x | Annual                    Report pursuant to Section 13 or 15(d) of the Securities Exchange                    Act of                    1934 **For                    the fiscal year ended December 31, 2006**. |
|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**OR**

|  o | Transition                    Report pursuant to Section 13 or 15(d) of the Securities Exchange                    Act of                    1934 |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------------|

**Commission          File Number 000-50426**

|                                                                                              |
|----------------------------------------------------------------------------------------------|
| (Exact                    name of registrant as specified in its                    charter) |

| Pennsylvania                                       |   | 38-3681905                                              |
|----------------------------------------------------|--------|---------------------------------------------------------|
| (State                    or other jurisdiction of |   | (I.R.S.                    Employer Identification No.) |
| incorporation                    or organization)  |   |                                                    |

| **90                    Highland Avenue, Bethlehem, Pennsylvania                    18017** |
|---------------------------------------------------------------------------------------------|
| (Address                    of principal executive offices) (Zip                    Code)   |

**610-861-5000**

| **Title                    of Each Class**  | **Name                    of exchange on which registered** |
|--------------------------------------------------|-------------------------------------------------------------|
| COMMON                    STOCK, $0.01 PAR VALUE | THE                    NASDAQ STOCK MARKET                  |

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

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**KNBT          BANCORP, INC.**

**Form          10-K **

**Table          of Contents**

|   |   |   | Page |
|--------|--------|--------|------|

| **PART                    I**   |
|---------------------------------|
|                            |   |   |   |
|                            | Item                    1. | Business | 2 |
|                            | Item                    1A. | Risk                    Factors | 31 |
|                            | Item                    1B. | Unresolved                    Staff Comments | 34 |
|                            | Item                    2. | Properties | 34 |
|                            | Item                    3. | Legal                    Proceedings | 35 |
|                            | Item                    4. | Submission                    of Matters to a Vote of Security Holders | 35 |
|                            |   |   |   |
| **PART                    II**  |
|                            |   |   |   |
|                            | Item                    5. | Market                    for Registrant’s Common Equity, Related Stockholder Matters                    and | 35 |
|                            |   | Issuer                    Purchases of Equity Securities |   |
|                            | Item                    6. | Selected                    Financial Data | 38 |
|                            | Item                    7. | Management’s                    Discussion and Analysis of Financial Condition and | 39 |
|                            |   | Results                    of Operations |   |
|                            | Item                    7A. | Quantitative                    and Qualitative Disclosures About Market Risk | 53 |
|                            | Item                    8. | Financial                    Statements and Supplementary Data | 54 |
|                            | Item                    9. | Changes                    in and Disagreements with Accountants on Accounting and | 99 |
|                            |   | Financial                    Disclosure |   |
|                            | Item                    9A. | Controls                    and Procedures | 99 |
|                            | Item                    9B. | Other                    Information | 102 |
|                            |   |   |   |
| **PART                    III** |
|                            |   |   |   |
|                            | Item                    10. | Directors,                    Executive Officers and Corporate Governance | 102 |
|                            | Item                    11. | Executive                    Compensation | 102 |
|                            | Item                    12. | Security                    Ownership of Certain Beneficial Owners and Management and | 102 |
|                            |   | Related                    Stockholder Matters |   |
|                            | Item                    13. | Certain                    Relationships and Related Transactions and Director                    Independence | 103 |
|                            | Item                    14. | Principal                    Accounting Fees and Services | 103 |
|                            |   |   |   |
| **PART                    IV**  |
|                            |   |   |   |
|                            | Item                    15. | Exhibits,                    Financial Statement Schedules | 104 |
|                            | Signatures |   |  |
|                            |   |

*i*

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**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,                      if any, 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**

*1*

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**PART            I**

| **Item                      1*****.*** | **Business** |
|----------------------------------------|--------------|

**General**

|   | • |   | ***Oakwood                      Financial Corp.***On                      November 11, 2004, KNBT acquired Oakwood Financial Corp. (“Oakwood”), a                      full-service securities brokerage firm based in Allentown,                      Pennsylvania.                      The acquisition of Oakwood, now operating as “KNBT Securities”, provides                      KNBT with a full menu of investment, insurance and securities                      brokerage                      products and services. The addition of KNBT Securities brought                      together                      the resources of a large community bank with experienced professionals                      of                      a full-service securities brokerage firm. This alliance is                      evidence of                      KNBT’s commitment to providing our clients with a full range of                      products                      and services to meet their financial                      goals. |
|--------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | ***Caruso                      Benefits Group.***On                      April 1, 2005, KNBT acquired Caruso Benefits Group, Inc. (“Caruso”), a                      benefits management firm based in Bethlehem, Pennsylvania.                      Caruso                      specializes in benefits management with an emphasis on group                      medical,                      life, and disability insurance. The Caruso acquisition was                      a strategic                      initiative designed to enhance KNBT’s financial services by providing                      quality-based and cost-effective group benefit solutions. The                      addition of                      Caruso’s benefit management expertise provides KNBT an opportunity                      to                      broaden the array of services it can provide to support corporate                      and                      small business customers and their                      employees. |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | ***Northeast                      Pennsylvania Financial Corp.***On                      May 19, 2005, KNBT completed its acquisition of Northeast Pennsylvania                      Financial Corp. (“NEPF”), a thrift holding company headquartered in                      Hazleton, Pennsylvania with approximately $784.7 million in                      assets at such                      date. The acquisition resulted in the addition of 17 full-service                      community bank offices in five counties in northeastern Pennsylvania,                      expanding the Bank’s franchise into Luzerne, Schuylkill and Columbia                      counties and enhancing its presence in Carbon and Monroe counties.                      The                      NEPF acquisition also complemented KNBT’s strategy of growing its consumer                      and commercial lines of business by leveraging the opportunities                      presented                      by Higgins Insurance Associates, Inc., which previously operated                      as a                      subsidiary of NEPF providing commercial, property and casualty,                      and                      employee benefit lines of                      insurance. |
|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | ***The                      Trust Company of Lehigh Valley.**** *On                      February 28, 2006, KNBT completed its acquisition of the Paragon                      Group,                      Inc. (“Paragon”), the parent holding company for The Trust Company of                      Lehigh Valley (“TCLV”), a Pennsylvania-chartered non-depository bank                      located in Allentown, Pennsylvania. TCLV provided estate, personal                      trust                      and investment management services, estate and financial planning                      and                      employee retirement benefits administration and had approximately                      $400                      million in assets under administration and management at the                      time of its                      acquisition by KNBT. |
|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*2*

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**2006            Highlights**

|   | • |   | KNBT                      is one of the largest bank holding companies headquartered                      in eastern                      Pennsylvania. At December 31, 2006, the Company operated 57                      bank branches                      throughout 6 counties in Northeastern                      Pennsylvania. |
|--------|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | At                      December 31, 2006, KNBT had total assets of $2.9 billion, total                      gross                      loans of $1.6 billion, total deposits of $1.9 billion and total                      shareholders’ equity of $356.0                      million. |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | For                      the year ended December 31, 2006, KNBT reported net income                      of $23.6                      million compared to net income of $20.8 million for the year                      ended                      December 31, 2005, an increase of                      13.3%. |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | Diluted                      earnings per share for the year ended December 31, 2006 were                      $0.87, an                      increase of 22.5% compared to $0.71 per share for the year                      ended December                      31, 2005. |
|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | KNBT                      paid annual aggregate cash dividends of $0.31 per share in                      2006, which                      represents a 29.2% increase over annual aggregate cash dividends                      per share                      of $0.24 paid in 2005. |
|--------|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | In                      July 2006, KNBT completed its second share repurchase plan                      authorized by                      the Board of Directors. KNBT has repurchased a total of 6,213,783                      common                      shares through its first two repurchase programs. On June 26,                      2006, the                      Board of Directors authorized its third repurchase program                      covering an                      additional 2,807,219 shares. At December 31, 2006, a total                      of 71,559                      shares had been purchased pursuant to the third share repurchase                      program. |
|--------|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | During                      2006, KNBT completed its acquisition of Paragon, the parent                      holding                      company of TCLV. At December 31, 2006, KNBT had total trust                      assets under                      management of $935.4 million compared to $492.8** **million                      at December 31, 2005. |
|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | Gross                      aggregate revenues of KNBT Securities, Higgins Insurance Associates,                      Inc.                      and Caruso, subsidiaries of the Bank, increased 43.8% to $12.1                      million at                      December 31, 2006 compared to $8.4 million during the year                      ended December                      31, 2005. All three subsidiaries were obtained by acquisitions                      by                      KNBT. |
|--------|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Market            Area and Competition**

*3*

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**Business              Strategy**

***Enhancing              Customer Service***

*4*

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***Growing                the Loan Portfolio***

***Developing                Fee Income***

***Continuing                the Growth of KNBT.***

**Lending                Activities**

***General.***

***Loan                Approval Procedures and Authority.***

*5*

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***Loan                  Portfolio Composition.***

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **At                            December 31,** |          |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|---------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **2006**                                       |          | 2005 |   | 2004 |   | 2003 |   | 2002 |   |
| ***(dollars                            in thousands)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | **Amount**                                     |          | **Percent** |   | Amount |   | Percent |   | Amount |   | Percent |   | Amount |   | Percent |   | Amount |   | Percent |   |
| Real                            estate loans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                           |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One-to                            four-family                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                           |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| residential                            (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **$**                                          | **492,652**   |   |   | **30.39** | **%** | $ | 452,903 |   |   | 30.55 | % | $ | 324,990 |   |   | 32.06 | % | $ | 332,024 |   |   | 36.00 | % | $ | 361,842 |   |   | 59.34 | % |
| Multi-family                            residential                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                           | **22,555**    |   |   | **1.39** |   |   | 20,529 |   |   | 1.38 |   |   | 14,493 |   |   | 1.43 |   |   | 14,197 |   |   | 1.54 |   |   | 5,377 |   |   | 0.88 |   |
| Commercial                            real estate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                           | **340,850**   |   |   | **21.03** |   |   | 316,820 |   |   | 21.38 |   |   | 218,201 |   |   | 21.52 |   |   | 156,563 |   |   | 16.97 |   |   | 29,385 |   |   | 4.82 |   |
| Construction                            and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                           |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| land                            development (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                           | **61,288**    |   |   | **3.78** |   |   | 71,631 |   |   | 4.83 |   |   | 106,361 |   |   | 10.49 |   |   | 112,684 |   |   | 12.22 |   |   | 59,363 |   |   | 9.74 |   |
| Total                            real estate loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                           | **917,345**   |   |   | **56.59** |   |   | 861,883 |   |   | 58.14 |   |   | 664,045 |   |   | 65.50 |   |   | 615,468 |   |   | 66.73 |   |   | 455,967 |   |   | 74.78 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                           |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                            and industrial loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                           | **181,103**   |   |   | **11.17** |   |   | 116,465 |   |   | 7.86 |   |   | 50,691 |   |   | 5.00 |   |   | 38,978 |   |   | 4.23 |   |   | 10,050 |   |   | 1.65 |   |
| State                            and political subdivision loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                           | **13,056**    |   |   | **0.81** |   |   | 12,295 |   |   | 0.83 |   |   | 1,170 |   |   | 0.12 |   |   | 2,334 |   |   | 0.25 |   |   | - |   |   | 0.00 |   |
| Consumer                            loans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                           |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Home                            equity loans and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                           |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| lines                            of credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                           | **337,936**   |   |   | **20.85** |   |   | 289,956 |   |   | 19.56 |   |   | 170,762 |   |   | 16.84 |   |   | 151,603 |   |   | 16.44 |   |   | 102,275 |   |   | 16.77 |   |
| Automobile                            and other vehicles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                           | **126,788**   |   |   | **7.82** |   |   | 178,225 |   |   | 12.02 |   |   | 119,036 |   |   | 11.74 |   |   | 102,256 |   |   | 11.09 |   |   | 31,956 |   |   | 5.24 |   |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                           | **44,831**    |   |   | **2.77** |   |   | 23,434 |   |   | 1.58 |   |   | 8,137 |   |   | 0.80 |   |   | 11,682 |   |   | 1.26 |   |   | 9,500 |   |   | 1.56 |   |
| Total                            consumer loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                           | **509,555**   |   |   | **31.43** |   |   | 491,615 |   |   | 33.17 |   |   | 297,935 |   |   | 29.38 |   |   | 265,541 |   |   | 28.79 |   |   | 143,731 |   |   | 23.57 |   |
| Total                            loans (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                           | **1,621,059** |   |   | **100.00** | **%** |   | 1,482,258 |   |   | 100.00 | % |   | 1,013,841 |   |   | 100.00 | % |   | 922,321 |   |   | 100.00 | % |   | 609,748 |   |   | 100.00 | % |
| Undisbursed                            portion of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                           |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| construction                            loans in process (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                           | **-**         |   |   |   |   |   | - |   |   |   |   |   | - |   |   |   |   |   | (27,099 | ) |   |   |   |   | (24,263 | ) |   |   |   |
| Deferred                            loan fees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                           | **1,101**     |   |   |   |   |   | 26 |   |   |   |   |   | 79 |   |   |   |   |   | (469 | ) |   |   |   |   | (3,236 | ) |   |   |   |
| Allowance                            for loan losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                           | **(17,044**   | **)** |   |   |   |   | (15,964 | ) |   |   |   |   | (10,461 | ) |   |   |   |   | (7,910 | ) |   |   |   |   | (2,927 | ) |   |   |   |
| Net                            loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **$**                                          | **1,605,116** |   |   |   |   | $ | 1,466,320 |   |   |   |   | $ | 1,003,459 |   |   |   |   | $ | 886,843 |   |   |   |   | $ | 579,322 |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                           |          |   |   |   |   |   |  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1)                            Includes mortgage loans held-for-sale of $2.0 million                            at December 31,                            2006, $556,000 at December 31, 2005, $718,000 at December                            31, 2004, and                            $4.7 million at December 31, 2003, and $23.8 million                            at December 31,                            2002.                                                                                                                                                                                                                                                                                                                                                                                                        |
| (2)                            For the years 2003 and prior, KNBT's core processing                            system included the                            undisbursed portion of construction loans in process                            ("LIP"). Total loans                            had to be reduced by the amount of LIP in order to calculate                            net loans.                            KNBT's core processing system, implemented in 2004, no                            longer includes the                            undisbursed amount of LIP in loan totals. LIP at December                            31, 2006, 2005                            and 2004 equaled $40.1 million, $37.1 million and $36.9                            million,                            respectively. |
| (3)                            Reflects the effect of the completion of the merger with                            First Colonial                            Group, Inc. in November 2003 and with Northeast Pennsylvania                            Financial                            Corp.in May 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

***Contractual                  Terms to Final Maturities***
*.*

|                                                   |   |            |    |             |   |                                         |   |                                      |    | **Commercial** |   | **State                              and** |   |         |    |      |   |
|--------------------------------------------------------|--------|-----------------|---------|------------------|--------|----------------------------------------------|--------|-------------------------------------------|---------|----------------|--------|--------------------------------------------|--------|--------------|---------|-----------|--------|
|                                                   |   | **One-to**      |    |             |   |                                         |   | **Construction**                          |    | **and**        |   | **Political**                              |   |         |    |      |   |
|                                                   |   | **Four-Family** |    | **Multi-Family** |   | **Commercial**                               |   | **and                              Land** |    | **Industrial** |   | **Subdivision**                            |   | **Consumer** |    |      |   |
| ***(in                              thousands)***      |   | **Residential** |    | **Residential**  |   | **Real                              Estate** |   | **Development**                           |    | **Loans**      |   | **Loans**                                  |   | **Loans**    |    | **Total** |   |
| Amounts                              due after         |   |            |
| December                              31, 2006 in:     |   |            |    |             |   |                                         |   |                                      |    |           |   |                                       |   |         |    |      |   |   |   |   |   |   |   |   |   |
| One                              year or less          |   | $               | 711     |             | $      | 1,481                                        |   | $                                         | 42,689  |           | $      | 23,724                                     |   | $            | 35,735  |      | $      | 33 |   | $ | 12,378 |   | $ | 116,751 |   |
| After                              one year through    |   |            |    |             |   |                                         |   |                                      |    |           |   |                                       |   |         |    |      |   |   |   |   |   |   |   |   |   |
| three                              years               |   |            | 2,877   |             |   | 1,071                                        |   |                                      | 58,836  |           |   | 4,705                                      |   |         | 12,843  |      |   | 2,706 |   |   | 66,658 |   |   | 149,696 |   |
| After                              three years through |   |            |    |             |   |                                         |   |                                      |    |           |   |                                       |   |         |    |      |   |   |   |   |   |   |   |   |   |
| five                              years                |   |            | 3,699   |             |   | 1,681                                        |   |                                      | 28,778  |           |   | 2,140                                      |   |         | 39,920  |      |   | 569 |   |   | 121,245 |   |   | 198,032 |   |
| After                              five years through  |   |            |    |             |   |                                         |   |                                      |    |           |   |                                       |   |         |    |      |   |   |   |   |   |   |   |   |   |
| fifteen                              years             |   |            | 96,179  |             |   | 8,580                                        |   |                                      | 114,804 |           |   | 4,802                                      |   |         | 76,708  |      |   | 922 |   |   | 228,580 |   |   | 530,575 |   |
| After                              fifteen years       |   |            | 389,186 |             |   | 9,742                                        |   |                                      | 95,743  |           |   | 25,917                                     |   |         | 15,897  |      |   | 8,826 |   |   | 80,694 |   |   | 626,005 |   |
| Total                                                  |   | $               | 492,652 |             | $      | 22,555                                       |   | $                                         | 340,850 |           | $      | 61,288                                     |   | $            | 181,103 |      | $      | 13,056 |   | $ | 509,555 |   | $ | 1,621,059 |   |

*6*

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |           |      | **Floating                            or**     |   |      |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|-----------|------------------------------------------------|--------|-----------|--------|
| ***(in                            thousands)***                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **Fixed-Rate** |      | **Adjustable                            Rate** |   | **Total** |   |
| One-to                            four-family residential (1)                                                                                                                                                                                                                                                                                                                                                                                                              |   | $              | 425,046   |                                           | $      | 66,895    |   | $ | 491,941 |   |
| Multi-family                            residential                                                                                                                                                                                                                                                                                                                                                                                                                        |   |           | 6,188     |                                           |   | 14,886    |   |   | 21,074 |   |
| Commercial                            real estate                                                                                                                                                                                                                                                                                                                                                                                                                          |   |           | 89,574    |                                           |   | 208,587   |   |   | 298,161 |   |
| Construction                            and land development (1)                                                                                                                                                                                                                                                                                                                                                                                                           |   |           | 16,087    |                                           |   | 21,477    |   |   | 37,564 |   |
| Commercial                            and industrial (1)                                                                                                                                                                                                                                                                                                                                                                                                                   |   |           | 43,457    |                                           |   | 101,911   |   |   | 145,368 |   |
| State                            and political subdivisions                                                                                                                                                                                                                                                                                                                                                                                                                |   |           | 4,051     |                                           |   | 8,972     |   |   | 13,023 |   |
| Consumer                            (1)                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |           | 417,739   |                                           |   | 79,438    |   |   | 497,177 |   |
| Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $              | 1,002,142 |                                           | $      | 502,166   |   | $ | 1,504,308 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |           |      |                                           |   |      |   |   |   |   |
| (1)                            Loan intangibles, established as a result of the NEPF                            acquisition, were                            not included. The intangibles were, by category, one-to-four-family                            residential, $198,000, construction and land development,                            $20,000,                            commercial and industrial, $80,000 and consumer,                            $241,000. |

***Loan                  Originations, Sales and Servicing***
*.*

***One-to                  Four-Family Residential Mortgage Lending.***
** **

*7*

----

***Consumer                  Loans.***

***Construction                  and Land Development Loans.***
** **

*8*

----

***Commercial                  Real Estate Loans and Multi-Family Residential Real Estate                  Loans.***

***Commercial                  and Industrial Loans.***

*9*

----

**Non-Performing                  Assets**

|                                                       |   | **At                            December 31,** |      |
|------------------------------------------------------------|--------|------------------------------------------------|-----------|
| ***(dollars                            in thousands )***   |   | **2006**                                       |      | 2005 |   | 2004 |   | 2003 |   | 2002 |   |
| Non-accruing                            loans              |   | **$**                                          | **4,869** |   | $ | 6,839 |   | $ | 4,544 |   | $ | 1,720 |   | $ | 2,197 |   |
| Accruing                            loans 90 days          |   |                                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| or                            more past due                |   |                                           | **1,058** |   |   | 2,167 |   |   | 511 |   |   | 405 |   |   | 298 |   |
| Total                            non-performing loans      |   |                                           | **5,927** |   |   | 9,006 |   |   | 5,055 |   |   | 2,125 |   |   | 2,495 |   |
|                                                       |   |                                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                            real estate owned         |   |                                           | **32**    |   |   | 162 |   |   | 71 |   |   | 173 |   |   | 115 |   |
| Total                            non-performing assets     |   | **$**                                          | **5,959** |   | $ | 9,168 |   | $ | 5,126 |   | $ | 2,298 |   | $ | 2,610 |   |
|                                                       |   |                                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                            non-performing loans      |   |                                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| as                            a percentage of loans, net   |   |                                           | **0.37**  | **%** |   | 0.61 | % |   | 0.50 | % |   | 0.24 | % |   | 0.43 | % |
| Total                            non-performing loans      |   |                                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| as                            a percentage of total assets |   |                                           | **0.20**  | **%** |   | 0.29 | % |   | 0.21 | % |   | 0.11 | % |   | 0.25 | % |
| Total                            non-performing assets     |   |                                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| as                            a percentage of total assets |   |                                           | **0.21**  | **%** |   | 0.30 | % |   | 0.21 | % |   | 0.12 | % |   | 0.26 | % |

|                                                                           |   | **Year                            Ended December 31,** |     |
|--------------------------------------------------------------------------------|--------|--------------------------------------------------------|----------|
| ***(in                            thousands)***                                |   | **2006**                                               |     | 2005 |   | 2004 |   | 2003 |   | 2002 |   |
| Interest                            on non-accrual loans which would have been |   |                                                   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| recorded                            at the original rate                       |   | **$**                                                  | **459**  |   | $ | 301 |   | $ | 125 |   | $ | 50 |   | $ | 66 |   |
| Interest                            on non-accrual loans that was reflected    |   |                                                   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| in                            income                                           |   |                                                   | **46**   |   |   | 48 |   |   | - |   |   | 60 |   |   | 45 |   |
| Net                            decrease in interest income                     |   | **$**                                                  | **(413** | **)** | $ | (253 | ) | $ | (125 | ) | $ | 10 |   | $ | (21 | ) |

*10*

----

|                                                                |   | **At                            December 31,** |      |
|---------------------------------------------------------------------|--------|------------------------------------------------|-----------|
| ***(in                            thousands)***                     |   | **2006**                                       |      | 2005 |   |
| Principal                            amount of impaired loans       |   | **$**                                          | **1,552** |   | $ | 1,819 |   |
| Less                            valuation allowance at December 31, |   |                                           | **(323**  | **)** |   | (304 | ) |
|                                                                |   | **$**                                          | **1,229** |   | $ | 1,515 |   |

|                                                                |   | **Year                            Ended December 31,**  |
|----------------------------------------------------------------|--------|--------------------------------------------------------------|
| ***(in                            thousands)***                |   |                                                         | **2006** |   |   | 2005 |   |   | 2004 |   |
| Valuation                            allowance at January 1,   |   | **$**                                                        | **304** |   | $ | 61 |   | $ | 33 |   |
| Provision                            for loan impairment       |   |                                                         | **19** |   |   | 243 |   |   | 28 |   |
| Valuation                            allowance at December 31, |   | **$**                                                        | **323** |   | $ | 304 |   | $ | 61 |   |

**Allowance                  for Loan Losses**

*11*

----

|                                                                            |   | **At                            or For the Year Ended December 31,** |       |
|---------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|------------|
| ***(dollars                            in thousands)***                         |   | **2006**                                                             |       | 2005 |   | 2004 |   | 2003 |   | 2002 |   |
| Allowance                            for loan losses, beginning of period       |   | **$**                                                                | **15,964** |   | $ | 10,461 |   | $ | 7,910 |   | $ | 2,927 |   | $ | 3,386 |   |
| Acquired                            from merger with First Colonial Group, Inc. |   |                                                                 | **-**      |   |   | - |   |   | - |   |   | 3,548 |   |   | - |   |
| Acquired                            from acquisition of NEPF                    |   |                                                                 | **-**      |   |   | 5,281 |   |   | - |   |   | - |   |   | - |   |
| Provision                            for loan losses                            |   |                                                                 | **3,329**  |   |   | 2,780 |   |   | 4,308 |   |   | 2,951 |   |   | 111 |   |
| Charge-offs                                                                     |   |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One-to                            four-family residential                       |   |                                                                 | **74**     |   |   | 60 |   |   | 92 |   |   | 242 |   |   | 229 |   |
| Construction                            and land development                    |   |                                                                 | **71**     |   |   | 4 |   |   | 5 |   |   | - |   |   | - |   |
| Commercial                            and industrial                            |   |                                                                 | **350**    |   |   | 6 |   |   | - |   |   | 154 |   |   | - |   |
| Consumer                                                                        |   |                                                                 | **2,213**  |   |   | 2,814 |   |   | 1,915 |   |   | 1,207 |   |   | 394 |   |
| Total                            charge offs                                    |   |                                                                 | **2,708**  |   |   | 2,884 |   |   | 2,012 |   |   | 1,603 |   |   | 623 |   |
| Recoveries                            on loans previously charged-off           |   |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One-to                            four-family residential                       |   |                                                                 | **45**     |   |   | 13 |   |   | 99 |   |   | 32 |   |   | 37 |   |
| Consumer                                                                        |   |                                                                 | **171**    |   |   | 217 |   |   | 152 |   |   | 49 |   |   | - |   |
| Commercial                            and industrial                            |   |                                                                 | **243**    |   |   | 96 |   |   | 4 |   |   | 6 |   |   | 16 |   |
| Total                            recoveries                                     |   |                                                                 | **459**    |   |   | 326 |   |   | 255 |   |   | 87 |   |   | 53 |   |
| Net                            loans charged off                                |   |                                                                 | **2,249**  |   |   | 2,558 |   |   | 1,757 |   |   | 1,516 |   |   | 570 |   |
|                                                                            |   |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance                            for loan losses, at period end             |   | **$**                                                                | **17,044** |   | $ | 15,964 |   | $ | 10,461 |   | $ | 7,910 |   | $ | 2,927 |   |
|                                                                            |   |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance                            for loan losses at period end to:          |   |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average                            loans (net)                                  |   |                                                                 | **1.11**   | **%** |   | 1.25 | % |   | 1.09 | % |   | 1.27 | % |   | 0.47 | % |
| Total                            loans at period end                            |   |                                                                 | **1.05**   | **%** |   | 1.08 | % |   | 1.03 | % |   | 0.89 | % |   | 0.52 | % |
| Non-performing                            loans                                 |   |                                                                 | **287.57** | **%** |   | 177.26 | % |   | 206.94 | % |   | 388.28 | % |   | 117.31 | % |
| Net                            charge-offs to average loans (net) during period |   |                                                                 | **0.15**   | **%** |   | 0.20 | % |   | 0.18 | % |   | 0.24 | % |   | 0.09 | % |

*12*

----

|                                                           |   | **At                              December 31,** |       |
|----------------------------------------------------------------|--------|--------------------------------------------------|------------|
|                                                           |   | **2006**                                         |       | 2005 |   | 2004 |   | 2003 |   | 2002 |   |
|                                                           |   |                                             |       | **Loan** |   |   |   | Loan |   |   |   | Loan |   |   |   | Loan |   |   |   | Loan |   |
|                                                           |   |                                             |       | **Category** |   |   |   | Category |   |   |   | Category |   |   |   | Category |   |   |   | Category |   |
|                                                           |   | **Amount**                                       |       | **as                              a %** |   | Amount |   | as                              a % |   | Amount |   | as                              a % |   | Amount |   | as                              a % |   | Amount |   | as                              a % |   |
|                                                           |   | **of**                                           |       | **of                              Total** |   | of |   | of                              Total |   | of |   | of                              Total |   | of |   | of                              Total |   | of |   | of                              Total |   |
| ***(dollars                              in thousands)***      |   | **Allowance**                                    |       | **Loans** |   | Allowance |   | Loans |   | Allowance |   | Loans |   | Allowance |   | Loans |   | Allowance |   | Loans |   |
| One-to                              four-family residential    |   | **$**                                            | **1,697**  |   |   | **30.39** | **%** | $ | 857 |   |   | 30.55 | % | $ | 553 |   |   | 32.06 | % | $ | 349 |   |   | 36.00 | % | $ | 1,086 |   |   | 59.34 | % |
| Multi-family                              residential          |   |                                             | **477**    |   |   | **1.39** |   |   | 581 |   |   | 1.38 |   |   | 350 |   |   | 1.43 |   |   | 4 |   |   | 1.54 |   |   | 33 |   |   | 0.88 |   |
| Commercial                              real estate            |   |                                             | **4,363**  |   |   | **21.03** |   |   | 5,763 |   |   | 21.38 |   |   | 2,140 |   |   | 21.52 |   |   | 1,602 |   |   | 16.97 |   |   | 145 |   |   | 4.82 |   |
| Construction                              and land development |   |                                             | **1,313**  |   |   | **3.78** |   |   | 1,260 |   |   | 4.83 |   |   | 3,350 |   |   | 10.49 |   |   | 1,826 |   |   | 12.22 |   |   | 451 |   |   | 9.74 |   |
| Commercial                              and industrial         |   |                                             | **2,276**  |   |   | **11.17** |   |   | 1,725 |   |   | 7.86 |   |   | 454 |   |   | 5.00 |   |   | 712 |   |   | 4.23 |   |   | 500 |   |   | 1.65 |   |
| State                              and political subdivision   |   |                                             | **55**     |   |   | **0.81** |   |   | 32 |   |   | 0.83 |   |   | 3 |   |   | 0.12 |   |   | - |   |   | 0.25 |   |   | - |   |   | - |   |
| Consumer                                                       |   |                                             | **4,785**  |   |   | **31.44** |   |   | 4,785 |   |   | 33.17 |   |   | 2,804 |   |   | 29.38 |   |   | 2,673 |   |   | 28.79 |   |   | 590 |   |   | 23.57 |   |
| Unallocated                                                    |   |                                             | **2,078**  |   |   | **-** |   |   | 961 |   |   | - |   |   | 807 |   |   | - |   |   | 744 |   |   | - |   |   | 122 |   |   | - |   |
| Total                              loans                       |   | **$**                                            | **17,044** |   |   | **100.00** | **%** | $ | 15,964 |   |   | 100.00 | % | $ | 10,461 |   |   | 100.00 | % | $ | 7,910 |   |   | 100.00 | % | $ | 2,927 |   |   | 100.00 | % |

**Investment                  Activities**

*13*

----

***Held-to-maturity.***

***Available-for-sale.***
** **

|                                                                   |   | **Year                            Ended December 31,** |        |
|------------------------------------------------------------------------|--------|--------------------------------------------------------|-------------|
|                                                                   |   | **2006**                                               |        | 2005 |   | 2004 |   |
|                                                                   |   | **Available-**                                         |        | **Held-to-** |   | Available- |   | Held-to- |   | Available- |   | Held-to- |   |
| ***(in                            thousands)***                        |   | **for-Sale**                                           |        | **Maturity** |   | for-Sale |   | Maturity |   | for-Sale |   | Maturity |   |
| U.S.                            Government and agency obligations      |   | **$**                                                  | **94,576**  |   | **$** | **-** |   | $ | 157,408 |   | $ | 472 |   | $ | 175,649 |   | $ | - |   |
| Corporate                            securities                        |   |                                                   | **68,638**  |   |   | **-** |   |   | 73,981 |   |   | - |   |   | 9,197 |   |   | - |   |
| Municipal                            obligations                       |   |                                                   | **-**       |   |   | **-** |   |   | 65,165 |   |   | 5,497 |   |   | 106,574 |   |   | 5,510 |   |
| Mortgage-backed                            securities:                 |   |                                                   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| GNMA                                                                   |   |                                                   | **1,607**   |   |   | **-** |   |   | 2,392 |   |   | - |   |   | 1,460 |   |   | - |   |
| FHLMC                                                                  |   |                                                   | **147,665** |   |   | **-** |   |   | 136,861 |   |   | - |   |   | 104,654 |   |   | - |   |
| FNMA                                                                   |   |                                                   | **316,637** |   |   | **16,101** |   |   | 395,362 |   |   | 20,603 |   |   | 310,641 |   |   | 25,893 |   |
| CMOs                                                                   |   |                                                   | **222,583** |   |   | **17,431** |   |   | 268,799 |   |   | 20,796 |   |   | 275,882 |   |   | 25,183 |   |
| Total                            mortgage-backed securities            |   |                                                   | **688,492** |   |   | **33,532** |   |   | 803,414 |   |   | 41,399 |   |   | 692,637 |   |   | 51,076 |   |
| Equity                            securities and asset management fund |   |                                                   | **7,148**   |   |   | **-** |   |   | 19,305 |   |   | - |   |   | 73,052 |   |   | - |   |
| Total                            investment securities                 |   | **$**                                                  | **858,854** |   | **$** | **33,532** |   | $ | 1,119,273 |   | $ | 47,368 |   | $ | 1,057,109 |   | $ | 56,586 |   |

*14*

----

|                                                                                         |   | **At                            December 31, 2006** |       |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|------------|
|                                                                                         |   |                                                |       | **Over                            One** |   | **Over                            Five** |   |   |   |   |   |
|                                                                                         |   | **One                            Year**             |       | **Year                            Through** |   | **Years                            Through** |   | **Over                            Ten** |   |   |   |
| ***(dollars                            in thousands)***                                      |   | **or                            Less**              |       | **Five                            Years** |   | **Ten                            Years** |   | **Years** |   | **Total** |   |
| **Available-for-Sale**                                                                       |   |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.                            Government and agency                            obligations |   |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair                            value                                                        |   | $                                                   | 29,569     |   | $ | 17,385 |   | $ | 36,132 |   | $ | 11,490 |   | $ | 94,576 |   |
| Amortized                            cost                                                    |   | $                                                   | 29,900     |   | $ | 17,672 |   | $ | 36,359 |   | $ | 11,592 |   | $ | 95,523 |   |
| Weighted                            average yield                                            |   |                                                | 3.58       | % |   | 4.14 | % |   | 4.82 | % |   | 5.51 | % |   | 4.39 | % |
| Corporate                            securities                                              |   |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair                            value                                                        |   | $                                                   | -          |   | $ | - |   | $ | - |   | $ | 68,638 |   | $ | 68,638 |   |
| Amortized                            cost                                                    |   | $                                                   | -          |   | $ | - |   | $ | - |   | $ | 68,461 |   | $ | 68,461 |   |
| Weighted                            average yield                                            |   |                                                | -          | % |   | - | % |   | - | % |   | 6.41 | % |   | 6.41 | % |
| Mortgage-backed                            securities                                        |   |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair                            value                                                        |   | $                                                   | -          |   | $ | 72,588 |   | $ | 99,136 |   | $ | 516,768 |   | $ | 688,492 |   |
| Amortized                            cost                                                    |   | $                                                   | -          |   | $ | 74,230 |   | $ | 101,283 |   | $ | 528,135 |   | $ | 703,648 |   |
| Weighted                            average yield                                            |   |                                                | -          | % |   | 4.26 | % |   | 4.45 | % |   | 4.73 | % |   | 4.64 | % |
| Equity                            securities                                                 |   |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair                            value                                                        |   | $                                                   | -          |   | $ | - |   | $ | - |   | $ | 7,148 |   | $ | 7,148 |   |
| Amortized                            cost                                                    |   | $                                                   | -          |   | $ | - |   | $ | - |   | $ | 7,262 |   | $ | 7,262 |   |
| Weighted                            average yield                                            |   |                                                | -          | % |   | - | % |   | - | % |   | 4.00 | % |   | 4.00 | % |
| **Held-to-Maturity**                                                                         |   |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed                            securities                                        |   |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair                            value                                                        |   | $                                                   | -          |   | $ | 1,784 |   | $ | - |   | $ | 31,264 |   | $ | 33,048 |   |
| Amortized                            cost                                                    |   | $                                                   | -          |   | $ | 1,800 |   | $ | - |   | $ | 31,732 |   | $ | 33,532 |   |
| Weighted                            average yield                                            |   |                                                | -          | % |   | 4.75 | % |   | - | % |   | 4.54 | % |   | 4.55 | % |
| **Total                            Securities**                                              |   |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Fair                            value**                                                    |   | **$**                                               | **29,569** |   | **$** | **91,757** |   | **$** | **135,268** |   | **$** | **635,308** |   | **$** | **891,902** |   |
| **Amortized                            cost**                                                |   | **$**                                               | **29,900** |   | **$** | **93,702** |   | **$** | **137,642** |   | **$** | **647,182** |   | **$** | **908,426** |   |
| **Weighted                            average yield**                                        |   |                                                | **3.58**   | **%** |   | **4.25** | **%** |   | **4.55** | **%** |   | **4.87** | **%** |   | **4.71** | **%** |

|                                                                                                               |   | **At                            or For the**            |         |
|--------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------------|
|                                                                                                               |   | **Years                            Ended December 31,** |         |
| ***(dollars                            in thousands)***                                                            |   | **2006**                                                |         | 2005 |   | 2004 |   |
| **Held                            to maturity:**                                                                   |   |                                                    |         |   |   |   |   |   |   |   |
| Mortgage-backed                            securities at beginning of period                                       |   | **$**                                                   | **41,399**   |   | $ | 51,076 |   | $ | - |   |
| Purchases                                                                                                          |   |                                                    | **-**        |   |   | - |   |   | 54,234 |   |
| Repayments                                                                                                         |   |                                                    | **(7,981**   | **)** |   | (9,853 | ) |   | (3,242 | ) |
| Amortizations                            of premiums and discounts, net                                            |   |                                                    | **114**      |   |   | 176 |   |   | 84 |   |
| Mortgage-backed                            securities at end of period                                             |   | **$**                                                   | **33,532**   |   | $ | 41,399 |   | $ | 51,076 |   |
|                                                                                                               |   |                                                    |         |   |   |   |   |   |   |   |
| Weighted                            average yield at end of period                                                 |   |                                                    | **4.55**     | **%** |   | 4.61 | % |   | 4.68 | % |
|                                                                                                               |   |                                                    |         |   |   |   |   |   |   |   |
| **Available                            for sale:**                                                                 |   |                                                    |         |   |   |   |   |   |   |   |
| Mortgage-backed                            securities at beginning of period                                       |   | **$**                                                   | **819,857**  |   | $ | 692,300 |   | $ | 461,308 |   |
| Mortgage-backed                            securities acquired through merger with                            NEPF |   |                                                    | **-**   |   |   | 278,803 |   |   |   |   |
| Purchases                                                                                                          |   |                                                    | **15,264**   |   |   | 60,674 |   |   | 380,220 |   |
| Securitized                            and retained                                                                |   |                                                    | **25,149**   |   |   | - |   |   | - |   |
| Repayments                                                                                                         |   |                                                    | **(145,218** | **)** |   | (194,428 | ) |   | (135,540 | ) |
| Sales                                                                                                              |   |                                                    | **(11,459**  | **)** |   | (16,279 | ) |   | (10,900 | ) |
| Amortizations                            of premiums and discounts, net                                            |   |                                                    | **55**       |   |   | (1,213 | ) |   | (2,788 | ) |
| Mortgage-backed                            securities at end of period                                             |   | **$**                                                   | **703,648**  |   | $ | 819,857 |   | $ | 692,300 |   |
|                                                                                                               |   |                                                    |         |   |   |   |   |   |   |   |
| Weighted                            average yield at end of period                                                 |   |                                                    | **4.64**     | **%** |   | 4.57 | % |   | 4.41 | % |

*15*

----

**Sources                  of Funds**

***Deposits.***
** **

|                                                         |   | **Year                              Ended December 31,** |          |
|--------------------------------------------------------------|--------|----------------------------------------------------------|---------------|
|                                                         |   | **2006**                                                 |          | 2005 |   | 2004 |   |
|                                                         |   | **Average**                                              |          | **Interest** |   | **Average** |   | Average |   | Interest |   | Average |   | Average |   | Interest |   | Average |   |
| ***(dollars                              in thousands)***    |   | **Balance**                                              |          | **Expense** |   | **Rate                              Paid** |   | Balance |   | Expense |   | Rate                              Paid |   | Balance |   | Expense |   | Rate                              Paid |   |
| Savings                                                      |   | **$**                                                    | **245,484**   |   | **$** | **1,122** |   |   | **0.46** | **%** | $ | 255,810 |   | $ | 1,112 |   |   | 0.43 | % | $ | 221,027 |   | $ | 1,063 |   |   | 0.48 | % |
| Demand                              deposits                 |   |                                                     | **233,547**   |   |   | **1,512** |   |   | **0.65** |   |   | 211,556 |   |   | 622 |   |   | 0.29 |   |   | 174,698 |   |   | 273 |   |   | 0.16 |   |
| Money                              market                    |   |                                                     | **423,861**   |   |   | **13,709** |   |   | **3.23** |   |   | 301,727 |   |   | 6,133 |   |   | 2.03 |   |   | 249,065 |   |   | 2,477 |   |   | 0.99 |   |
| Certificates                              of deposit         |   |                                                     | **769,365**   |   |   | **29,914** |   |   | **3.89** |   |   | 681,827 |   |   | 20,756 |   |   | 3.04 |   |   | 539,505 |   |   | 14,372 |   |   | 2.66 |   |
| Total                              interest-bearing deposits |   |                                                     | **1,672,257** |   |   | **46,257** |   |   | **2.77** |   |   | 1,450,920 |   |   | 28,623 |   |   | 1.97 |   |   | 1,184,295 |   |   | 18,185 |   |   | 1.54 |   |
| Non-interest-bearing                              deposits   |   |                                                     | **193,447**   |   |   | **-** |   |   | **-** |   |   | 161,032 |   |   | - |   |   | - |   |   | 119,133 |   |   | - |   |   | - |   |
| Total                              deposits                  |   | **$**                                                    | **1,865,704** |   | **$** | **46,257** |   |   | **2.48** | **%** | $ | 1,611,952 |   | $ | 28,623 |   |   | 1.78 | % | $ | 1,303,428 |   | $ | 18,185 |   |   | 1.40 | % |

|                                                                                                                              |   | **Year                            Ended December 31,** |            |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|-----------------|
| ***(in                            thousands)***                                                                                   |   | **2006**                                               |            | 2005 |   | 2004 |   |
| Deposits                            assumed in NEPF merger                                                                        |   | **$**                                                  | **-**           |   | $ | 449,474 |   | $ | - |   |
| Deposits                            assumed by First Columbia Bank in sale of Columbia County                            branches |   |                                                   | **(34,205**     | **)** |   | - |   |   | - |   |
| Total                            deposits                                                                                         |   |                                                   | **25,963,634**  |   |   | 18,300,053 |   |   | 17,564,185 |   |
| Total                            withdrawals                                                                                      |   |                                                   | **(25,914,200** | **)** |   | (18,245,817 | ) |   | (17,555,628 | ) |
| Interest                            credited                                                                                      |   |                                                   | **40,067**      |   |   | 25,488 |   |   | 25,086 |   |
| Net                            increase in deposits                                                                               |   | **$**                                                  | **55,296**      |   | $ | 529,198 |   | $ | 33,643 |   |

*16*

----

|                                                     |   | **Balance                            at December 31, 2006**                  |    |
|----------------------------------------------------------|--------|------------------------------------------------------------------------------|---------|
|                                                     |   | **Maturing                            in the 12 Months Ending December 31,** |    |
| ***(in                            thousands)***          |   | **2007**                                                                     |    | **2008** |   | **2009** |   | **2010** |   | **2011** |   | **Thereafter** |   | **Total** |   |
| Certificates                            of deposit:      |   |                                                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Less                            than 1%                  |   | $                                                                            | 21      |   | $ | 1 |   | $ | - |   | $ | 1 |   | $ | - |   | $ | - |   | $ | 23 |   |
| 1.00%                            - 1.99%                 |   |                                                                         | 862     |   |   | 1 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 863 |   |
| 2.00%                            - 2.99%                 |   |                                                                         | 12,457  |   |   | 4,936 |   |   | 1,034 |   |   | 79 |   |   | - |   |   | 5 |   |   | 18,511 |   |
| 3.00%                            - 3.99%                 |   |                                                                         | 167,020 |   |   | 50,935 |   |   | 15,930 |   |   | 1,045 |   |   | 20 |   |   | 30 |   |   | 234,980 |   |
| 4.00%                            - 4.99%                 |   |                                                                         | 283,475 |   |   | 10,413 |   |   | 21,296 |   |   | 17,238 |   |   | 3,349 |   |   | 474 |   |   | 336,245 |   |
| 5.00%                            - 5.99%                 |   |                                                                         | 89,453  |   |   | 28,870 |   |   | 259 |   |   | 538 |   |   | 168 |   |   | 1,173 |   |   | 120,461 |   |
| 6.00%                            - 6.99%                 |   |                                                                         | 53      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 53 |   |
| 7.00%                            or more                 |   |                                                                         | 99      |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 99 |   |
| Total                            certificates of deposit |   | $                                                                            | 553,440 |   | $ | 95,156 |   | $ | 38,519 |   | $ | 18,901 |   | $ | 3,537 |   | $ | 1,682 |   | $ | 711,235 |   |

|                                                            |   |       |    | **Weighted**                                  |   |
|-----------------------------------------------------------------|--------|------------|---------|-----------------------------------------------|--------|
| ***(dollars                              in thousands)***       |   | **Amount** |    | **Average                              Rate** |   |
| Maturing                              in quarter ending:        |   |       |    |                                          |   |   |   |
| Three                              months or less               |   | $          | 50,952  |                                          |   | 4.65 | % |
| Over                              three months to six months    |   |       | 29,090  |                                          |   | 4.52 | % |
| Over                              six through twelve months     |   |       | 27,500  |                                          |   | 4.51 | % |
| Over                              twelve months                 |   |       | 24,798  |                                          |   | 4.35 | % |
| Total                              certificates of deposit with |   |       |    |                                          |   |   |   |
| balances                              of $100,000 or more       |   | $          | 132,340 |                                          |   | 4.54 | % |

***Borrowings.***
** **

| ***(in                            thousands)***                                                                                   |   | **At                            December 31, 2006** |    |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|---------|
| FHLB                            advances due in (1)                                                                               |   |                                                |    |   |
| 2007                                                                                                                              |   | $                                                   | 209,182 |   |
| 2008                                                                                                                              |   |                                                | 91,449  |   |
| 2009                                                                                                                              |   |                                                | 110,168 |   |
| 2010                                                                                                                              |   |                                                | 21,135  |   |
| 2011                                                                                                                              |   |                                                | 31,193  |   |
| Thereafter                                                                                                                        |   |                                                | 53,178  |   |
| Total                                                                                                                             |   | $                                                   | 516,305 |   |
|                                                                                                                              |   |                                                |    |   |
| (1)                              Schedule does not include intangible assets of $2.9                            million |   |                                                |    |   |
| acquired                            in the NEPF acquisition. Amortization expense was                                             |
| ($247,421)                            for the year ended December                            31,2006.                             |

*17*

----

|                                                               |   | **At                            or For the Year Ended December 31,** |       |
|--------------------------------------------------------------------|--------|----------------------------------------------------------------------|------------|
| ***(dollars                            in thousands)***            |   | **2006**                                                             |       | 2005 |   | 2004 |   |
| Repurchase                            agreements:                  |   |                                                                 |       |   |   |   |   |   |   |   |
| Average                            balance outstanding             |   | **$**                                                                | **55,055** |   | $ | 51,011 |   | $ | 22,579 |   |
| Maximum                            amount outstanding at           |   |                                                                 |       |   |   |   |   |   |   |   |
| any                            month-end during the period         |   | **$**                                                                | **73,885** |   | $ | 76,932 |   | $ | 31,076 |   |
| Balance                            outstanding at end of period    |   | **$**                                                                | **45,296** |   | $ | 76,932 |   | $ | 22,643 |   |
| Average                            interest rate during the period |   |                                                                 | **3.82**   | **%** |   | 3.27 | % |   | 0.75 | % |
| Weighted                            average interest rate at       |   |                                                                 |       |   |   |   |   |   |   |   |
| end                            of period                           |   |                                                                 | **4.12**   | **%** |   | 3.94 | % |   | 0.99 | % |

*18*

----

**Regulation                  of KNBT Bancorp**

***General***
*.                  *

*19*

----

***Bank                  Holding Company Act Activities and Other Limitations***

***Non-Banking                  Activities***

|   | • |   | banking                                or managing or controlling banks and other subsidiaries                                authorized under                                the Bank Holding Company Act; and   |
|--------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | any                                Bank Holding Company Act activity the Federal Reserve                                Board has determined                                to be so closely related that it is incidental to                                banking or managing or                                controlling banks.  |
|--------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*20*

----

***Financial                  Modernization***

***Regulatory                  Capital Requirements***

***Restrictions                  on Dividends***

***Federal                  Securities Laws***

***The                  Sarbanes-Oxley Act of 2002***

|   | • |   | the                              creation of an independent accounting oversight board;  |
|--------|---------|--------|-----------------------------------------------------------------------------------------------|

|   | • |   | auditor                              independence provisions that restrict non-audit services                              that accountants                              may provide to their audit clients;  |
|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*21*

----

|   | • |   | additional                              corporate governance and responsibility measures, including                              the                              requirement that the chief executive officer and chief                              financial officer                              certify financial statements;  |
|--------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | a                              requirement that companies establish and maintain a                              system of internal                              control over financial reporting and that a company’s management provide                              an annual report regarding its assessment of the effectiveness                              of such                              internal control over financial reporting to the company’s independent                              accountants and that such accountants provide an attestation                              report with                              respect to management’s assessment of the effectiveness of the company’s                              internal control over financial reporting;  |
|--------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | the                              forfeiture of bonuses or other incentive-based compensation                              and profits                              from the sale of an issuer’s securities by directors and senior officers                              in the twelve month period following initial publication                              of any financial                              statements that later require restatement;  |
|--------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | an                              increase in the oversight of, and enhancement of certain                              requirements                              relating to audit committees of public companies and                              how they interact                              with the company’s independent auditors;  |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | the                              requirement that audit committee members must be independent                              and are                              absolutely barred from accepting consulting, advisory                              or other                              compensatory fees from the issuer; |
|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | the                              requirement that companies disclose whether at least                              one member of the                              committee is a “financial expert” (as such term is defined by the SEC) and                              if not, why not; |
|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | expanded                              disclosure requirements for corporate insiders, including                              accelerated                              reporting of stock transactions by insiders and a prohibition                              on insider                              trading during pension blackout                              periods; |
|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | a                              prohibition on personal loans to directors and officers,                              except certain                              loans made by insured financial institutions in compliance                              with Regulation                              O; |
|--------|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | disclosure                              of a code of ethics and the requirement of filing of                              a Form 8-K for a                              change or waiver of such code; |
|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | mandatory                              disclosure by analysts of potential conflicts of interest;                              and |
|--------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | a                              range of enhanced penalties for fraud and other                              violations. |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------|

**Regulation                  of the Bank**

***Pennsylvania                  Savings Bank Law***

*22*

----

|   | • |   | the                              FDIC determines the activity or investment does not                              pose a significant                              risk of loss to the Deposit Insurance Fund; and |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | the                              Bank meets all applicable capital                              requirements. |
|--------|---------|--------|---------------------------------------------------------------------------------------------------------------|

***Insurance                  of Accounts***

***Deposit                  Insurance Reform***

|   | • |   | merging                              the Savings Association Insurance Fund and Bank Insurance                              Fund, which                              became effective March 31,                              2006; |
|--------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*23*

----

|   | • |   | maintaining                              basic deposit and municipal account insurance coverage                              at $100,000 but                              providing for a new basic insurance coverage for retirement                              accounts of                              $250,000. Insurance coverage for basic deposit and                              retirement accounts                              could be increased for inflation every five years in                              $10,000 increments                              beginning in 2011; |
|--------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | providing                              the FDIC with the ability to set the designated reserve                              ratio within a                              range of between 1.15% and 1.50%, rather than maintaining                              1.25% at all                              times regardless of prevailing economic                              conditions; |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | providing                              a one-time assessment credit of $4.7 billion to banks                              and savings                              associations in existence on December 31, 1996, which                              may be used to                              offset future premiums with certain limitations;                              and |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | requiring                              the payment of dividends of 100% of the amount that                              the insurance fund                              exceeds 1.5% of the estimated insured deposits and                              the payment of 50% of                              the amount that the insurance fund exceeds 1.35% of                              the estimated insured                              deposits (when the reserve is greater than 1.35% but                              no more than                              1.5%). |
|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

** **

***Regulatory                  Capital Requirements***

*24*

----

***Prompt                  Correction Action***

|                                                        |   | **Total**                                 |   | **Tier                              1**   |   | **Tier                              1**   |
|-------------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|
|                                                        |   | **Risk-Based**                            |   | **Risk-Based**                            |   | **Leverage**                              |
| **Capital                              Category**           |   | **Capital**                               |   | **Capital**                               |   | **Capital**                               |
| Well                              capitalized               |   | 10%                              or more  |   | 6%                              or more   |   | 5%                              or more   |
| Adequately                              capitalized         |   | 8%                              or more   |   | 4%                              or more   |   | 4%                              or more   |
| Undercapitalized                                            |   | Less                              than 8% |   | Less                              than 4% |   | Less                              than 4% |
| Significantly                              undercapitalized |   | Less                              than 6% |   | Less                              than 3% |   | Less                              than 3% |

*25*

----

|                                                           | **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%** |
|                                                           |                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                           | At                              December 31, 2005     |
|                                                           |                                                  |   |   |   |   | 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)            | $                              312,731                |   | 16.95% |   |   | $                              147,617 |   | 8.00% |   |   | N/A |   | N/A |
| Bank                                                           | $                              281,866                |   | 15.16% |   |   | $                              148,727 |   | 8.00% |   |   | $                              185,908 |   | 10.00% |
| Tier                              I Capital                    |                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| (To                              risk-weighted assets)         |                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| Company                              (consolidated)            | $                              296,543                |   | 16.07% |   |   | $                              73,809 |   | 4.00% |   |   | N/A |   | N/A |
| Bank                                                           | $                              265,902                |   | 14.30% |   |   | $                              74,363 |   | 4.00% |   |   | $                              111,545 |   | 6.00% |
| Tier                              I Capital                    |                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| (To                              average assets, leverage)     |                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| Company                              (consolidated)            | $                              296,543                |   | 9.84% |   |   | $                              120,599 |   | 4.00% |   |   | N/A |   | N/A |
| Bank                                                           | $                              265,902                |   | 8.80% |   |   | $                              120,895 |   | 4.00% |   |   | $                              151,119 |   | 5.00% |

***Affiliate                  Transaction Restriction***

*26*

----

***USA                  PATRIOT Act.***

***FHLB                  System***

***Federal                  Reserve Board System***

**Regulation                  of KNBT Securities, Inc.**

***General.***

*27*

----

***Net                  Capital Requirements.***

** **

*28*

----

**Federal                  Taxation**

***General***
*.*

***Method                  of Accounting***
*.*

***Bad                  Debt Reserves***
*.*

***Taxable                  Distributions and Recapture***
*.*

***Alternative                  Minimum Tax***
*.*

***Net                  Operating Loss Carryovers.***

***Corporate                  Dividends-Received Deduction***

*29*

----

**State                  and Local Taxation**

***Pennsylvania                  Taxation***
*.*

**Subsidiary                  Activities**

**Employees**

*30*

----

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

**Operation                  in a Highly Competitive Industry and Market Area May Limit KNBT’s Growth and                  Profitability.**

**Governmental                  Regulation and Legislation Could Limit KNBT’s Future                  Growth.**

**An                  Economic Downturn Could Adversely Affect KNBT’s Financial                  Results.**

**KNBT’s                  Low Return on Equity May Cause Its Common Stock Price to                  Decline.**

*31*

----

**Growth                  from Past and Potential Acquisitions May Limit KNBT’S Ability to Successfully                  Expand Operations and may Dilute Stockholder Value.**

**KNBT                  is Subject to Increased Lending Risk Within Its Commercial                  Portfolio.**

**Changes                  in the Value of Goodwill Could Reduce Our Earnings.**

*32*

----

**Violation                  of Information Security Could Negatively Impact KNBT’s                  Earnings.**

**Failure                  Within the Internal Control Environment.**

**Market                  Rates of Interest Could Hurt Profitability.**

**Various                  Factors May Make Takeover Attempts More Difficult to                  Achieve**

*33*

----

|   | • |   | that                            no person can acquire or offer to acquire more than 10%                            of the issued and                            outstanding shares of any class of equity securities                            of KNBT; |
|--------|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | that                            any merger or similar transaction be approved by a super-majority                            vote of                            shareholders unless it has previously been approved by                            at least two-thirds                            of its directors;  |
|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | that                            its board of directors is divided into classes with staggered                            three year                            terms;  |
|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | that                            special meetings of shareholders may be called only by                            the board of                            directors of KNBT;  |
|--------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | that                            shareholders generally must provide advance notice of                            shareholder                            proposals and director nominations and provide specified                            related                            information; and  |
|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | that                            the board of directors of KNBT has the authority to issue                            shares of                            authorized but unissued common stock and preferred stock                            and to establish                            the terms of any one or more series of preferred stock,                            including voting                            rights, without additional shareholder approval.  |
|--------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **Item                            1B.** | **Unresolved                            Staff Comments** |
|-----------------------------------------|----------------------------------------------------------|

| **Item                            2.** | **Properties** |
|----------------------------------------|----------------|

*34*

----

| **Item                              3.** | **Legal                              Proceedings** |
|------------------------------------------|----------------------------------------------------|

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

**PART                  II**

| **Item                            5.** | **Market                            for Registrant’s Common Equity, Related Stockholder Matters and Issuer                            Purchases of Equity                            Securities** |
|----------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*35*

----

**KNBT            Bancorp, Inc.**

|                                                    |   | **Period                      Ending** |   |
|---------------------------------------------------------|--------|----------------------------------------|--------|
| **Index**                                               |   | **11/03/03**                           |   | **12/31/03** |   | **12/31/04** |   | **12/31/05** |   | **12/31/06** |   |
| KNBT                      Bancorp, Inc.                 |   | $                                      | 100.00 |   | $ | 104.15 |   | $ | 101.04 |   | $ | 98.93 |   | $ | 103.56 |   |
| NASDAQ                      Composite                   |   |                                   | 100.00 |   |   | 101.90 |   |   | 111.22 |   |   | 113.64 |   |   | 126.00 |   |
| KNBT                      Peer Group                    |   |                                   | 100.00 |   |   | 101.50 |   |   | 117.25 |   |   | 109.58 |   |   | 116.79 |   |
| KNBT                      Recently-Converted Peer Group |   |                                   | 100.00 |   |   | 98.91 |   |   | 99.60 |   |   | 100.79 |   |   | 108.89 |   |

*36*

----

| **Year                        Ended December 31, 2006** |
|---------------------------------------------------------|
|                                                    | ***High*** | ***Low*** | ***Dividends*** |
| **First                        Quarter**                | **$16.85** | **$15.61** | **$0.07** |
| **Second                        Quarter**               | **$17.02** | **$15.42** | **$0.08** |
| **Third                        Quarter**                | **$16.66** | **$15.09** | **$0.08** |
| **Fourth                        Quarter**               | **$17.52** | **$15.79** | **$0.08** |

| Year                        Ended December 31, 2005 |
|-----------------------------------------------------|
|                                                | *High* | *Low* | *Dividends* |
| First                        Quarter                | $17.65 | $14.46 | $0.05 |
| Second                        Quarter               | $15.58 | $13.24 | $0.06 |
| Third                        Quarter                | $16.95 | $14.95 | $0.06 |
| Fourth                        Quarter               | $16.96 | $14.15 | $0.07 |

| **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)** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| October                        1 - 31, 2006                                                                                                                                                                                                                                                                                                           |   | 10,500                                                      |   | $15.94                                                                            |   | 10,500                                                                                                                                                    |   | 2,735,660                                                                                                                                                    |
| November                        1 - 30, 2006                                                                                                                                                                                                                                                                                                          |   | 0                                                           |   | $0.00                                                                             |   | 0                                                                                                                                                         |   | 2,735,660                                                                                                                                                    |
| December                        1 - 31, 2006                                                                                                                                                                                                                                                                                                          |   | 0                                                           |   | $0.00                                                                             |   | 0                                                                                                                                                         |   | 2,735,660                                                                                                                                                    |
| Total                                                                                                                                                                                                                                                                                                                                                 |   | 10,500                                                      |   | $15.94                                                                            |   | 10,500                                                                                                                                                    |   | N/A                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                  |   |                                                        |   |                                                                              |   |                                                                                                                                                      |   |                                                                                                                                                         |
| (1)                        On June 26, 2006, the Board of Directors authorized a repurchase                        of                        2,807,219 shares of which 71,559 shares had been repurchased                        as of                        December 31, 2006. There is no expiration date for this                        program. |

*37*

----

| **Item                          6.** | **Selected                          Financial Data** |
|--------------------------------------|------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | **As                        of and For the Year Ended December 31,** |          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|---------------|
| ***(dollars                        in thousands, except per share data)***                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **2006**                                                             |          | 2005 |   | 2004 |   | 2003(1) |   | 2002 |   |
| **Consolidated                        Summary of Income**                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                 |          |
| Interest                        income                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | **$**                                                                | **148,421**   |   | $ | 132,150 |   | $ | 97,291 |   | $ | 59,063 |   | $ | 59,479 |   |
| Interest                        expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                                                 | **75,557**    |   |   | 58,619 |   |   | 33,446 |   |   | 21,061 |   |   | 26,416 |   |
| Net                        interest income                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                                 | **72,864**    |   |   | 73,531 |   |   | 63,845 |   |   | 38,002 |   |   | 33,063 |   |
| Provision                        for loan losses                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                 | **3,329**     |   |   | 2,780 |   |   | 4,308 |   |   | 2,951 |   |   | 111 |   |
| Total                        non-interest income                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                                 | **42,071**    |   |   | 26,426 |   |   | 15,434 |   |   | 9,048 |   |   | 8,814 |   |
| Total                        non-interest expense (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                                 | **77,904**    |   |   | 67,195 |   |   | 52,699 |   |   | 55,119 |   |   | 24,568 |   |
| Income                        (loss) before income taxes (benefit)                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                                                 | **33,702**    |   |   | 29,982 |   |   | 22,272 |   |   | (11,020 | ) |   | 17,198 |   |
| Income                        taxes (benefit)                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                 | **10,099**    |   |   | 9,156 |   |   | 4,666 |   |   | (5,264 | ) |   | 5,188 |   |
| Net                        income (loss) (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **$**                                                                | **23,603**    |   | $ | 20,826 |   | $ | 17,606 |   | $ | (5,756 | ) | $ | 12,010 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                 |          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        income per share - diluted (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | **$**                                                                | **0.87**      |   | $ | 0.71 |   | $ | 0.60 |   |   | N/M |   |   | N/M |   |
| Net                        income per share - basic (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **$**                                                                | **0.87**      |   | $ | 0.72 |   | $ | 0.61 |   |   | N/M |   |   | N/M |   |
| Cash                        dividends declared per share (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **$**                                                                | **0.31**      |   | $ | 0.24 |   | $ | 0.15 |   |   | - |   |   | - |   |
| **Consolidated                        Balance Sheet Data**                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                                 |               |   |   |  |   |   |  |   |   |  |   |   |  |   |
| Total                        assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **$**                                                                | **2,898,827** |   | $ | 3,081,810 |   | $ | 2,419,198 |   | $ | 1,941,973 |   | $ | 1,015,906 |   |
| Investment                        securities available-for-sale                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                 | **858,854**   |   |   | 1,119,273 |   |   | 1,057,109 |   |   | 734,087 |   |   | 294,150 |   |
| Investment                        securities held to maturity                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                 | **33,532**    |   |   | 47,368 |   |   | 56,586 |   |   | - |   |   | - |   |
| Loans                        receivable, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                                 | **1,603,122** |   |   | 1,465,764 |   |   | 1,002,741 |   |   | 882,166 |   |   | 555,526 |   |
| Mortgage                        loans held-for-sale                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                                 | **1,994**     |   |   | 556 |   |   | 718 |   |   | 4,677 |   |   | 23,796 |   |
| Deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                                                 | **1,907,547** |   |   | 1,852,251 |   |   | 1,323,053 |   |   | 1,289,410 |   |   | 771,825 |   |
| Securities                        sold under agreements to repurchase                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                                 | **45,296**    |   |   | 76,932 |   |   | 22,643 |   |   | 24,550 |   |   | 8,904 |   |
| FHLB                        advances                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                 | **519,161**   |   |   | 705,125 |   |   | 660,674 |   |   | 207,153 |   |   | 113,500 |   |
| Subordinated                        debentures (4)                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                                                 | **38,406**    |   |   | 38,872 |   |   | 15,464 |   |   | 15,000 |   |   | - |   |
| Shareholders'                        equity/retained earnings                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                 | **356,026**   |   |   | 376,552 |   |   | 377,354 |   |   | 389,080 |   |   | 111,049 |   |
| Book                        value per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                 | **13.52**     |   |   | 13.19 |   |   | 13.33 |   |   | 13.20 |   |   | n/a |   |
| Full                        service offices                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                 | **57**        |   |   | 58 |   |   | 41 |   |   | 41 |   |   | 19 |   |
| **Selected                        Consolidated Ratios**                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                                                 |               |   |   |  |   |   |  |   |   |  |   |   |  |   |
| Net                        income (loss) to:                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                                 |          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average                        total assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                 | **0.79**      | **%** |   | 0.73 | % |   | 0.81 | % |   | (0.46 | )% |   | 1.25 | % |
| Average                        equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                                 | **6.63**      | **%** |   | 5.37 | % |   | 4.57 | % |   | (3.58 | )% |   | 11.46 | % |
| Net                        interest margin (5)                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                 | **2.84**      | **%** |   | 2.96 | % |   | 3.40 | % |   | 3.49 | % |   | 3.66 | % |
| Efficiency                        ratio (6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                 | **65.94**     | **%** |   | 64.66 | % |   | 63.39 | % |   | 117.15 | % |   | 58.67 | % |
| Equity                        to assets (7)                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                 | **12.28**     | **%** |   | 12.22 | % |   | 15.62 | % |   | 20.05 | % |   | 10.93 | % |
| Tier                        1 capital to average assets (leverage) (7)                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                 | **9.77**      | **%** |   | 9.84 | % |   | 14.66 | % |   | 19.39 | % |   | 10.78 | % |
| Tier                        1 risk-based capital ratio (7)                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                                 | **13.96**     | **%** |   | 16.07 | % |   | 24.88 | % |   | 32.51 | % |   | 18.19 | % |
| Total                        risk-based capital ratio (7)                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                 | **14.83**     | **%** |   | 16.95 | % |   | 25.64 | % |   | 33.24 | % |   | 18.19 | % |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                 |          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1)                        On October 31, 2003, KNBT completed the mutual-to-stock conversion                        of the                        Bank and the related subscription stock offering and the                        acquisition of                        First Colonial. See "Business - General" in Item 1.                                                                                                                                                                                |
| (2)                        Included in the non-interest expenses for the year ended                        December 31, 2003                        are a $16.2 million contribution to the Keystone Nazareth                        Charitable                        Foundation and $5.7 million of merger and systems integration                        costs as a                        result of the acquisition of First Colonial.                                                                  |
| (3)                        Per share data is not included for 2003 and 2002 because                        no shares were                        issued prior to November 2003.                                                                                                                                                                                                                                                                                                                             |
| (4)                        Previously reported as "Guaranteed Preferred Beneficial Interest                        in the                        Company's subordinated debentures" prior to the adoption                        of FIN                        46(R).                                                                                                                                                                                                                                       |
| (5)                        Net interest margin is computed by dividing net interest                        income by average                        interest-earning assets on a tax equivalent basis. See "Management's                        Discussion and Analysis of Financial Condition and Results                        of Operations -                        Interest Expense-Tax Equivalent" under Item 7 for a non-GAAP                        to GAAP                        reconciliation. |
| (6)                        The calculation of the efficiency ratio for 2003 includes                        the effect of                        the $16.2 million contribution to the Keystone Nazareth Charitable                        Foundation and $5.7 million of merger and systems integration                        costs as a                        result of the acquisition of First Colonial Group.                                                                                        |
| (7)                        Ratios for the period 2006 through 2003 are for KNBT. Ratios                        for 2002 are                        for Keystone Nazareth Bank & Trust Company (formerly Keystone Savings                        Bank).                                                                                                                                                                                                                                                  |

*38*

----

| **Item                          7.** | **Management’s                          Discussion and Analysis of Financial Condition and Results                          of                          Operations** |
|--------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**General**

**Critical              Accounting Policies, Judgments and Estimates**

*39*

----

*40*

----

**Comparison              of Financial Condition at December 31, 2006 and December 31,              2005**

*41*

----

**Net              Interest Income**

*42*

----

**Interest              Income**

**Interest              Expense**

*43*

----

*44*

----

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **For                          the Year Ended December 31,** |          |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|---------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **2006**                                                     |          | 2005 |   | 2004 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                         |          | **Interest** |   | **Average** |   |   |   | Interest |   | Average |   |   |   | Interest |   | Average |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **Average**                                                  |          | **Income/** |   | **Yield/** |   | Average |   | Income/ |   | Yield/ |   | Average |   | Income/ |   | Yield/ |   |
| ***(dollars                          in thousands)***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | **Balance**                                                  |          | **Expense** |   | **Rate** |   | Balance |   | Expense |   | Rate |   | Balance |   | Expense |   | Rate |   |
| **Interest-earning                          assets**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                          balances with banks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **$**                                                        | **12,593**    |   | **$** | **545** |   |   | **4.33** | **%** | $ | 76,309 |   | $ | 2,387 |   |   | 3.13 | % | $ | 31,209 |   | $ | 498 |   |   | 1.60 | % |
| Federal                          Funds Sold                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                                         | **18,283**    |   |   | **963** |   |   | **5.27** | **%** |   | - |   |   | - |   |   |   |   |   | - |   |   | - |   |   |   |   |
| Investment                          securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                          (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                         | **1,022,329** |   |   | **48,521** |   |   | **4.75** | **%** |   | 1,124,309 |   |   | 48,192 |   |   | 4.29 | % |   | 851,624 |   |   | 33,757 |   |   | 3.96 | % |
| Tax-exempt                          (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                         | **29,192**    |   |   | **2,113** |   |   | **7.24** | **%** |   | 92,615 |   |   | 6,167 |   |   | 6.66 | % |   | 109,515 |   |   | 7,188 |   |   | 6.56 | % |
| Loans                          receivable (2) (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                         | **1,547,803** |   |   | **97,730** |   |   | **6.31** | **%** |   | 1,291,123 |   |   | 77,847 |   |   | 6.03 | % |   | 967,799 |   |   | 58,338 |   |   | 6.03 | % |
| Allowance                          for loan losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                         | **(16,319**   | **)** |   | **-** |   |   |   |   |   | (13,784 | ) |   | **-** |   |   |   |   |   | (9,240 | ) |   | **-** |   |   |   |   |
| Net                          loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                         | **1,531,484** |   |   | **97,730** |   |   | **6.38** | **%** |   | 1,277,339 |   |   | 77,847 |   |   | 6.09 | % |   | 958,559 |   |   | 58,338 |   |   | 6.09 | % |
| Total                          interest-earning assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                         | **2,613,881** |   |   | **149,872** |   |   | **5.73** | **%** |   | 2,570,572 |   |   | 134,593 |   |   | 5.24 | % |   | 1,950,907 |   |   | 99,781 |   |   | 5.11 | % |
| Non-interest-earning                          assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                         | **355,100**   |   |   | **-** |   |   |   |   |   | 294,875 |   |   | - |   |   |   |   |   | 213,763 |   |   | - |   |   |   |   |
| Total                          assets, interest income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **$**                                                        | **2,968,981** |   |   | **149,872** |   |   |   |   | $ | 2,865,447 |   |   | 134,593 |   |   |   |   | $ | 2,164,670 |   |   | 99,781 |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing                          liabilities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                          deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **$**                                                        | **233,547**   |   | **$** | **1,512** |   |   | **0.65** | **%** | $ | 211,556 |   | $ | 622 |   |   | 0.29 | % | $ | 174,698 |   | $ | 273 |   |   | 0.16 | % |
| Money                          market deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                         | **423,861**   |   |   | **13,709** |   |   | **3.23** | **%** |   | 301,727 |   |   | 6,133 |   |   | 2.03 | % |   | 249,065 |   |   | 2,477 |   |   | 0.99 | % |
| Savings                          deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                         | **245,484**   |   |   | **1,122** |   |   | **0.46** | **%** |   | 255,810 |   |   | 1,112 |   |   | 0.43 | % |   | 221,027 |   |   | 1,063 |   |   | 0.48 | % |
| Certificates                          of deposit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                         | **769,365**   |   |   | **29,914** |   |   | **3.89** | **%** |   | 681,827 |   |   | 20,756 |   |   | 3.04 | % |   | 539,505 |   |   | 14,372 |   |   | 2.66 | % |
| Total                          interest-bearing deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                         | **1,672,257** |   |   | **46,257** |   |   | **2.77** | **%** |   | 1,450,920 |   |   | 28,623 |   |   | 1.97 | % |   | 1,184,295 |   |   | 18,185 |   |   | 1.54 | % |
| Securities                          sold under agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                          repurchase                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                         | **55,055**    |   |   | **2,104** |   |   | **3.82** | **%** |   | 51,011 |   |   | 1,551 |   |   | 3.04 | % |   | 22,579 |   |   | 170 |   |   | 0.75 | % |
| FHLB                          advances                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                         | **619,957**   |   |   | **24,406** |   |   | **3.94** | **%** |   | 755,448 |   |   | 26,643 |   |   | 3.53 | % |   | 425,167 |   |   | 14,316 |   |   | 3.37 | % |
| Other                          debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                         | **38,650**    |   |   | **2,790** |   |   | **7.22** | **%** |   | 30,116 |   |   | 1,802 |   |   | 5.98 | % |   | 15,464 |   |   | 775 |   |   | 5.01 | % |
| Total                          interest-bearing liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                                         | **2,385,919** |   |   | **75,557** |   |   | **3.17** | **%** |   | 2,287,495 |   |   | 58,619 |   |   | 2.56 | % |   | 1,647,505 |   |   | 33,446 |   |   | 2.03 | % |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Non-interest-bearing                          liabilities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing                          deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                                         | **193,447**   |   |   | **-** |   |   |   |   |   | 161,032 |   |   | - |   |   |   |   |   | 119,133 |   |   | - |   |   |   |   |
| Other                          liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                                         | **33,389**    |   |   | **-** |   |   |   |   |   | 28,764 |   |   | - |   |   |   |   |   | 12,376 |   |   | - |   |   |   |   |
| Total                          liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                                         | **2,612,755** |   |   | **75,557** |   |   |   |   |   | 2,477,291 |   |   | 58,619 |   |   |   |   |   | 1,779,014 |   |   | 33,446 |   |   |   |   |
| Shareholders'                          equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                         | **356,226**   |   |   | **-** |   |   |   |   |   | 388,156 |   |   | - |   |   |   |   |   | 385,656 |   |   | - |   |   |   |   |
| Total                          liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                          shareholders' equity, interest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **$**                                                        | **2,968,981** |   |   | **75,557** |   |   |   |   | $ | 2,865,447 |   |   | 58,619 |   |   |   |   | $ | 2,164,670 |   |   | 33,446 |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                          interest income on                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax                          equivalent basis (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                         |          |   |   | **74,315** |   |   |   |   |   |   |   |   | 75,974 |   |   |   |   |   |   |   |   | 66,335 |   |   |   |   |
| Net                          interest spread on                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                          basis (4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                         |          |   |   |   |   |   | **2.56** | **%** |   |   |   |   |   |   |   | 2.67 | % |   |   |   |   |   |   |   | 3.08 | % |
| Net                          interest margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| tax-equivalent                          basis (5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                         |          |   |   |   |   |   | **2.84** | **%** |   |   |   |   |   |   |   | 2.96 | % |   |   |   |   |   |   |   | 3.40 | % |
| Tax-exempt                          adjustment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                         |          |   |   | **(1,451** | **)** |   | **(0.06** | **%)** |   |   |   |   | (2,443 | ) |   | (0.10 | %) |   |   |   |   | (2,490 | ) |   | (0.13 | %) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                          interest income and margin (4) (5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                         |          |   | **$** | **72,864** |   |   | **2.79** | **%** |   |   |   | $ | 73,531 |   |   | 2.86 | % |   |   |   | $ | 63,845 |   |   | 3.27 | % |
| Average                          interest-earning assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                          average interest-bearing liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                         |          |   |   |   |   |   | **109.55** | **%** |   |   |   |   |   |   |   | 112.37 | % |   |   |   |   |   |   |   | 118.42 | % |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1)                          Includes Federal Home Loan Bank stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (2)                          The indicated interest income and average yields are presents                          on a taxable                          equivalent basis. The taxable equivalent adjustments included                          above are                          $1.5 million, $2.4 million, and $2.5 million for the years                          2006, 2005 and                          2004, respectively. The effective tax rate used for the                          taxable equivalent                          adjustment was 35%.                                                               |
| (3)                          Loan fees of ($229,912), $(121,000), and $678,000 for the                          years 2006, 2005                          and 2004, respectively, are included in interest income.                          Average loan                          balances include non-accruing loans of $4.9 million, $6.8                          million and $4.5                          million and average loans held-for-sale of $518,000, $1.2                          million and $1.4                          million for the years 2006, 2005, and 2004,                          respectively. |
| (4)                          Net interest spread is the arithmetic 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 2.51%, 2.57% and 2.95% at December                          31, 2006, 2005 and                          2004, respectively.                                                                        |
| (5)                          Net interest margin is computed on a GAAP basis by dividing                          net interest                          income by average interest-earning                          assets.                                                                                                                                                                                                                                                                                                                                                                                                    |

*45*

----

***Rate              Volume Analysis.***

|                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | **2006                        Compared to 2005** |       | 2005                        Compared to 2004 |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|------------|----------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | **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                                                                                                                                                                                                                                                                                                                                                                            |   | **$**                                            | **151**    |                                         | **$**  | **(1,993** | **)** | **$** | **(1,842** | **)** | $ | 1,169 |   | $ | 720 |   | $ | 1,889 |   |
| Federal                        funds sold                                                                                                                                                                                                                                                                                                                                                                                              |   |                                             | **-**      |                                         |   | **963** |   |   | **963** |   |   | - |   |   | - |   |   | - |   |
| Investment                        securities (1)                                                                                                                                                                                                                                                                                                                                                                                       |   |                                             | **3,663**  |                                         |   | **(7,388** | **)** |   | **(3,725** | **)** |   | 2,517 |   |   | 10,897 |   |   | 13,414 |   |
| Loans                        receivable, net (2)                                                                                                                                                                                                                                                                                                                                                                                       |   |                                             | **4,407**  |                                         |   | **15,476** |   |   | **19,883** |   |   | 19 |   |   | 19,490 |   |   | 19,509 |   |
| Total                        interest-earning assets                                                                                                                                                                                                                                                                                                                                                                                   |   |                                             | **8,221**  |                                         |   | **7,058** |   |   | **15,279** |   |   | 3,705 |   |   | 31,107 |   |   | 34,812 |   |
| **Interest                        Expense:**                                                                                                                                                                                                                                                                                                                                                                                           |   |                                             |       |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                        deposits                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                             | **825**    |                                         |   | **65** |   |   | **890** |   |   | 291 |   |   | 58 |   |   | 349 |   |
| Money                        market deposits                                                                                                                                                                                                                                                                                                                                                                                           |   |                                             | **5,093**  |                                         |   | **2,483** |   |   | **7,576** |   |   | 3,132 |   |   | 524 |   |   | 3,656 |   |
| Savings                        deposits                                                                                                                                                                                                                                                                                                                                                                                                |   |                                             | **55**     |                                         |   | **(45** | **)** |   | **10** |   |   | (118 | ) |   | 167 |   |   | 49 |   |
| Certificates                        of deposit                                                                                                                                                                                                                                                                                                                                                                                         |   |                                             | **6,493**  |                                         |   | **2,665** |   |   | **9,158** |   |   | 2,593 |   |   | 3,791 |   |   | 6,384 |   |
| Total                        interest-bearing deposits                                                                                                                                                                                                                                                                                                                                                                                 |   |                                             | **12,466** |                                         |   | **5,168** |   |   | **17,634** |   |   | 5,898 |   |   | 4,540 |   |   | 10,438 |   |
| Securities                        sold under agreements                                                                                                                                                                                                                                                                                                                                                                                |   |                                             |       |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| to                        repurchase                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                             | **430**    |                                         |   | **123** |   |   | **553** |   |   | 1,167 |   |   | 214 |   |   | 1,381 |   |
| FHLB                        advances and other borrowings                                                                                                                                                                                                                                                                                                                                                                              |   |                                             | **2,541**  |                                         |   | **(4,778** | **)** |   | **(2,237** | **)** |   | 1,206 |   |   | 11,121 |   |   | 12,327 |   |
| Other                        debt                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                             | **477**    |                                         |   | **511** |   |   | **988** |   |   | 293 |   |   | 734 |   |   | 1,027 |   |
| Total                        interest-bearing liabilities                                                                                                                                                                                                                                                                                                                                                                              |   |                                             | **15,914** |                                         |   | **1,024** |   |   | **16,938** |   |   | 8,564 |   |   | 16,609 |   |   | 25,173 |   |
| Increase                        (decrease) in net                                                                                                                                                                                                                                                                                                                                                                                      |   |                                             |       |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| interest                        income (3)                                                                                                                                                                                                                                                                                                                                                                                             |   | **$**                                            | **(7,693** | **)**                                        | **$**  | **6,034** |   | **$** | **(1,659** | **)** | $ | (4,859 | ) | $ | 14,498 |   | $ | 9,639 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                             |       |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1)                        Total decrease in interest income on investment securities                        on a nontaxable                        equivalent basis for the year ended December 31, 2006 would                        be $(2,368)                        and the total increase on a nontaxable equivalent basis for                        the year ended                        December 31, 2005 would be $13,761. |
| (2)                        Total increase in interest income on loans receivable on                        a nontaxable                        equivalent basis for the year ended December 31, 2006 would                        be $19,518 and                        for the year ended December 31, 2005 would be $19,209.                                                                                                         |
| (3)                        Total (decrease) increase in net interest income on a nontaxable                        equivalent basis for the year ended December 31, 2006 would                        be $(667) and                        for the year ended December 31, 2005 would be                        $9,686.                                                                                                                |

***Tax              Equivalent.***

|                                                                                    |   | **For                        the Twelve Months Ended** |       |                                     |   |                                     |   |
|-----------------------------------------------------------------------------------------|--------|--------------------------------------------------------|------------|------------------------------------------|--------|------------------------------------------|--------|
|                                                                                    |   | **December                        31, 2006**           |       | December                        31, 2005 |   | December                        31, 2004 |   |
|                                                                                    |   |                                                   |       | **Average**                              |   |                                     |   | Average |   |   |   | Average |   |
| ***(dollars                        in thousands)***                                     |   | **Interest**                                           |       | **Yield/Cost**                           |   | Interest                                 |   | Yield/Cost |   | Interest |   | Yield/Cost |   |
| Investment                        securities - nontaxable                               |   | **$**                                                  | **1,373**  |                                     |   | **4.70%**                                |   | $ | 4,070 |   |   | 4.39% |   | $ | 4,745 |   |   | 4.33% |   |
| Tax                        equivalent adjustments                                       |   |                                                   | **740**    |                                     |   |                                     |   |   | 2,097 |   |   |   |   |   | 2,444 |   |   |   |   |
| Investment                        securities - nontaxable to a taxable equivalent yield |   | **$**                                                  | **2,113**  |                                     |   | **7.24%**                                |   | $ | 6,167 |   |   | 6.66% |   | $ | 7,189 |   |   | 6.56% |   |
|                                                                                    |   |                                                   |       |                                     |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                        receivable - nontaxable                                    |   | **$**                                                  | **1,320**  |                                     |   | **3.93%**                                |   | $ | 672 |   |   | 4.17% |   | $ | 88 |   |   | 3.88% |   |
| Tax                        equivalent adjustments                                       |   |                                                   | **711**    |                                     |   |                                     |   |   | 346 |   |   |   |   |   | 46 |   |   |   |   |
| Loans                        receivable - nontaxable to a taxable equivalent yield      |   | **$**                                                  | **2,031**  |                                     |   | **6.05%**                                |   | $ | 1,018 |   |   | 6.32% |   | $ | 134 |   |   | 5.91% |   |
|                                                                                    |   |                                                   |       |                                     |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                        interest income                                              |   | **$**                                                  | **72,864** |                                     |   |                                     |   | $ | 73,531 |   |   |   |   | $ | 63,845 |   |   |   |   |
| Tax                        equivalent adjustment                                        |   |                                                   | **1,451**  |                                     |   |                                     |   |   | 2,443 |   |   |   |   |   | 2,490 |   |   |   |   |
| Net                        interest income, tax equivalent                              |   | **$**                                                  | **74,315** |                                     |   |                                     |   | $ | 75,974 |   |   |   |   | $ | 66,335 |   |   |   |   |
| Net                        interest rate spread, no tax adjustment                      |   |                                                   |       |                                     |   | **2.51%**                                |   |   |   |   |   | 2.57% |   |   |   |   |   | 2.95% |   |
| Net                        interest margin, no tax adjustment                           |   |                                                   |       |                                     |   | **2.79%**                                |   |   |   |   |   | 2.86% |   |   |   |   |   | 3.27% |   |

*46*

----

**Provision              for Loan Losses**

**Non-Interest              Income**

*47*

----

**Non-Interest              Expense**

**Income              Tax Expense **

**Market              Risk**

*48*

----

**Interest              Rate Sensitivity**

|   | • |   | It                        emphasizes origination of shorter term loans, particularly                        construction                        loans, commercial and industrial loans and consumer loans.                        This positions                        its loan portfolio to increase yields in times of rising                        interest                        rates. |
|--------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | It                        is an active seller in the secondary market of its newly                        originated,                        agency eligible long-term fixed-rate residential mortgage                        loans. This                        helps insulate KNBT from the interest rate risk associated                        with these                        fixed-rate assets. |
|--------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | It                        leverages capital effectively through the investment and                        loan                        portfolio. |
|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | It                        emphasizes the growth of core                        deposits. |
|--------|---------|--------|------------------------------------------------------------------------------------------|

|   | • |   | It                        invests in securities with relatively short anticipated lives,                        generally                        three to five years. |
|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Gap              Analysis***
**.**

*49*

----

|                                                                                                                                                                                                                                                                                                                                                             |   | **At                        December 31, 2006** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                             |   |                                            |    | **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                                                                                                                                                                                                                                                                                                            |   | $                                               | 6,971   |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   | $ | - |   | $ | 6,971 |   |
| Loans                        receivable (2)                                                                                                                                                                                                                                                                                                                      |   |                                            | 308,332 |   |   | 103,043 |   |   | 162,156 |   |   | 438,671 |   |   | 257,938 |   |   | 334,984 |   |   | 1,605,124 |   |
| Investment                        securities, debt                                                                                                                                                                                                                                                                                                               |   |                                            | 100,610 |   |   | 56,955 |   |   | 138,080 |   |   | 284,187 |   |   | 173,647 |   |   | 136,842 |   |   | 890,321 |   |
| Investment                        securities, equity                                                                                                                                                                                                                                                                                                             |   |                                            | -       |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 32,789 |   |   | 32,789 |   |
| Total                        interest-earning assets                                                                                                                                                                                                                                                                                                             |   | $                                               | 415,913 |   | $ | 159,998 |   | $ | 300,236 |   | $ | 722,858 |   | $ | 431,585 |   | $ | 504,615 |   | $ | 2,535,205 |   |
| Cumulative                        total interest-                                                                                                                                                                                                                                                                                                                |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| earning                        assets                                                                                                                                                                                                                                                                                                                            |   | $                                               | 415,913 |   | $ | 575,911 |   | $ | 876,147 |   | $ | 1,599,005 |   | $ | 2,030,590 |   | $ | 2,535,205 |   | $ | 2,535,205 |   |
| **Interest-bearing                        liabilities:**                                                                                                                                                                                                                                                                                                         |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings                        deposits                                                                                                                                                                                                                                                                                                                          |   | $                                               | 729     |   | $ | 8,569 |   | $ | 8,569 |   | $ | 11,425 |   | $ | 14,281 |   | $ | 171,376 |   | $ | 214,949 |   |
| Interest-bearing                        checking deposits                                                                                                                                                                                                                                                                                                        |   |                                            | -       |   |   | 14,494 |   |   | 9,663 |   |   | 9,663 |   |   | 4,832 |   |   | 202,915 |   |   | 241,567 |   |
| Money                        market deposits                                                                                                                                                                                                                                                                                                                     |   |                                            | 53,283  |   |   | 63,939 |   |   | 42,626 |   |   | 71,043 |   |   | 35,522 |   |   | 266,411 |   |   | 532,824 |   |
| Certificates                        of deposit                                                                                                                                                                                                                                                                                                                   |   |                                            | 196,556 |   |   | 165,823 |   |   | 188,559 |   |   | 133,676 |   |   | 24,939 |   |   | 1,682 |   |   | 711,235 |   |
| FHLB                        advances and other                                                                                                                                                                                                                                                                                                                   |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| borrowings                                                                                                                                                                                                                                                                                                                                                       |   |                                            | 197,874 |   |   | 65,236 |   |   | 79,751 |   |   | 154,720 |   |   | 52,500 |   |   | 52,783 |   |   | 602,864 |   |
| Total                        interest-bearing                                                                                                                                                                                                                                                                                                                    |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                                                                                                                                                                                                                                                                                                                                                      |   | $                                               | 448,442 |   | $ | 318,061 |   | $ | 329,168 |   | $ | 380,527 |   | $ | 132,074 |   | $ | 695,167 |   | $ | 2,303,439 |   |
| Cumulative                        total interest-                                                                                                                                                                                                                                                                                                                |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| bearing                        liabilities                                                                                                                                                                                                                                                                                                                       |   | $                                               | 448,442 |   | $ | 766,503 |   | $ | 1,095,671 |   | $ | 1,476,198 |   | $ | 1,608,272 |   | $ | 2,303,439 |   | $ | 2,303,439 |   |
| Interest-earning                        assets                                                                                                                                                                                                                                                                                                                   |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| less                        interest-bearing                                                                                                                                                                                                                                                                                                                     |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                                                                                                                                                                                                                                                                                                                                                      |   | $                                               | (32,529 | ) | $ | (158,063 | ) | $ | (28,932 | ) | $ | 342,331 |   | $ | 299,511 |   | $ | (190,552 | ) | $ | 231,766 |   |
| Cumulative                        interest-rate                                                                                                                                                                                                                                                                                                                  |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| sensitivity                        gap (3)                                                                                                                                                                                                                                                                                                                       |   | $                                               | (32,529 | ) | $ | (190,592 | ) | $ | (219,524 | ) | $ | 122,807 |   | $ | 422,318 |   | $ | 231,766 |   |   |   |   |
| Cumulative                        interest-rate gap as a                                                                                                                                                                                                                                                                                                         |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| percentage                        of total assets at                                                                                                                                                                                                                                                                                                             |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December                        31, 2006                                                                                                                                                                                                                                                                                                                         |   |                                            | (1.12   | %) |   | (6.57 | %) |   | (7.57 | %) |   | 4.24 | % |   | 14.57 | % |   | 8.00 | % |   |   |   |
| Cumulative                        interest-earning assets                                                                                                                                                                                                                                                                                                        |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| as                        a percentage of                                                                                                                                                                                                                                                                                                                        |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| cumulative                        interest-bearing                                                                                                                                                                                                                                                                                                               |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| liabilities                        at December 31, 2006                                                                                                                                                                                                                                                                                                          |   |                                            | 92.75   | % |   | 75.13 | % |   | 79.96 | % |   | 108.32 | % |   | 126.26 | % |   | 110.06 | % |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                             |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (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.                                                                                                                                    |

*50*

----

|                                                |   | **Net                        Portfolio Value**  |    | **Projected**                                           |   |
|-----------------------------------------------------|--------|-------------------------------------------------|---------|---------------------------------------------------------|--------|
|                                                |   | **at                        December 31, 2006** |    | **Net                        Interest Income for 2007** |   |
|                                                |   |                                            |    | **%                        Change**                     |   |   |   | **%                        Change** |   |
|                                                |   |                                            |    | **from**                                                |   |   |   | **from** |   |
| ***(dollars                        in thousands)*** |   | **Amount**                                      |    | **Base                        Case**                    |   | **Amount** |   | **Base                        Case** |   |
| Rate                        Scenario                |   |                                            |    |                                                    |   |   |   |
| +                        300 basis point rate shock |   | $                                               | 497,056 |                                                    |   | -4.9% |   | $ | 72,120 |   |   | -7.1% |   |
| +                        200 basis point rate shock |   |                                            | 510,459 |                                                    |   | -2.3% |   |   | 74,861 |   |   | -3.6% |   |
| +                        100 basis point rate shock |   |                                            | 521,040 |                                                    |   | -0.3% |   |   | 77,532 |   |   | -0.1% |   |
| Static                        - base case           |   |                                            | 522,551 |                                                    |   | - |   |   | 77,619 |   |   | - |   |
| -                        100 basis point rate shock |   |                                            | 512,351 |                                                    |   | -2.0% |   |   | 77,115 |   |   | -0.6% |   |
| -                        200 basis point rate shock |   |                                            | 470,945 |                                                    |   | -9.9% |   |   | 73,171 |   |   | -5.7% |   |
| -                        300 basis point rate shock |   |                                            | 408,044 |                                                    |   | -21.9% |   |   | 67,146 |   |   | -13.5% |   |

|                                                |   | **Net                        Portfolio Value**  |    | **Projected**                                           |   |
|-----------------------------------------------------|--------|-------------------------------------------------|---------|---------------------------------------------------------|--------|
|                                                |   | **at                        December 31, 2005** |    | **Net                        Interest Income for 2006** |   |
|                                                |   |                                            |    | **%                        Change**                     |   |   |   | **%                        Change** |   |
|                                                |   |                                            |    | **from**                                                |   |   |   | **from** |   |
| ***(dollars                        in thousands)*** |   | **Amount**                                      |    | **Base                        Case**                    |   | **Amount** |   | **Base                        Case** |   |
| Rate                        Scenario                |   |                                            |    |                                                    |   |   |   |
| +                        300 basis point rate shock |   | $                                               | 446,849 |                                                    |   | -18.7% |   | $ | 77,077 |   |   | 2.5% |   |
| +                        200 basis point rate shock |   |                                            | 480,502 |                                                    |   | -12.6% |   |   | 76,688 |   |   | 1.9% |   |
| +                        100 basis point rate shock |   |                                            | 515,387 |                                                    |   | -6.2% |   |   | 76,068 |   |   | 1.1% |   |
| Static                        - base case           |   |                                            | 549,488 |                                                    |   | - |   |   | 75,223 |   |   | - |   |
| -                        100 basis point rate shock |   |                                            | 576,106 |                                                    |   | 4.8% |   |   | 74,272 |   |   | -1.3% |   |
| -                        200 basis point rate shock |   |                                            | 629,737 |                                                    |   | 14.6% |   |   | 72,119 |   |   | -4.1% |   |
| -                        300 basis point rate shock |   |                                            | 431,759 |                                                    |   | -21.4% |   |   | 62,557 |   |   | -16.8% |   |

*51*

----

**Liquidity**

**Contractual              Obligations, Commitments, Contingent Liabilities and Off-Balance-Sheet              Obligations**

|                                                                   |   |      |      | **Payments                        Due by Period:** |   |
|------------------------------------------------------------------------|--------|-----------|-----------|----------------------------------------------------|--------|
|                                                                   |   |      |      |                                               |   | **After                        one** |   | **After                        three** |   |   |   |
|                                                                   |   |      |      | **Less                        Than**               |   | **year                        to** |   | **years                        to** |   | **More                        Than** |   |
| ***(in                        thousands)***                            |   | **Total** |      | **One                        Year**                |   | **three                        years** |   | **five                        years** |   | **5                        Years** |   |
| Time                        deposits                                   |   | $         | 711,235   |                                               | $      | 553,440 |   | $ | 133,675 |   | $ | 22,438 |   | $ | 1,682 |   |
| FHLB                        debt                                       |   |      | 516,305   |                                               |   | 209,182 |   |   | 201,617 |   |   | 52,328 |   |   | 53,178 |   |
| Subordinated                        debt                               |   |      | 38,406    |                                               |   | 38,406 |   |   | - |   |   | - |   |   | - |   |
| Operating                        leases                                |   |      | 12,253    |                                               |   | 1,639 |   |   | 2,646 |   |   | 1,958 |   |   | 6,010 |   |
| Deferred                        director fees and officer compensation |   |      | 3,659     |                                               |   | 49 |   |   | 82 |   |   | 83 |   |   | 3,445 |   |
| Total                        obligations                               |   | $         | 1,281,858 |                                               | $      | 802,716 |   | $ | 338,020 |   | $ | 76,807 |   | $ | 64,315 |   |

*52*

----

|                                                       |   |      |    |                                 |   | **After                        one**   |   | **After                        three** |   |                                 |   |
|------------------------------------------------------------|--------|-----------|---------|--------------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                       |   |      |    | **Less                        Than** |   | **year                        to**     |   | **years                        to**    |   | **More                        Than** |   |
| ***(in                        thousands)***                |   | **Total** |    | **One                        Year**  |   | **three                        years** |   | **five                        years**  |   | **5                        Years**   |   |
| Lines                        of credit                     |   | $         | 303,475 |                                 | $      | 130,641                                |   | $                                      | 50,661 |                                 | $      | 80,282 |   | $ | 41,891 |   |
| Standby                        letters of credit           |   |      | 33,151  |                                 |   | 28,875                                 |   |                                   | 4,236  |                                 |   | 40 |   |   | - |   |
| Contingent                        payments for acquisition |   |      | 5,334   |                                 |   | 2,667                                  |   |                                   | 2,667  |                                 |   | - |   |   | - |   |
| Other                        commitments to make loans     |   |      | 89,598  |                                 |   | 806                                    |   |                                   | 3,611  |                                 |   | 28,632 |   |   | 56,549 |   |
| Total                                                      |   | $         | 431,558 |                                 | $      | 162,989                                |   | $                                      | 61,175 |                                 | $      | 108,954 |   | $ | 98,440 |   |

***Impact              of Inflation and Changing Prices***
**.              **

***Regulatory              Capital Requirements.***

| **Item                        7A.** | **Quantitative                        and Qualitative Disclosure About Market                        Risk** |
|-------------------------------------|-------------------------------------------------------------------------------------------------------------|

*53*

----

| **Item                        8.** | **Financial                        Statements and Supplementary                        Data** |
|------------------------------------|-----------------------------------------------------------------------------------------------|

**REPORT              OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

*Share                  Based Payments*
*Employers’                  Accounting for Defined Benefit Pension and Other Postretirement                  Plans - An                  Amendment of FASB Statements No. 87, 88, 106 and 132(R)*

*54*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED              BALANCE SHEETS**

|                                                                                                                                                       |   | **At                        December 31,** |          |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------------|
| ***(dollars                        in thousands, except share data)***                                                                                     |   | **2006**                                   |          | 2005 |   |
| **ASSETS**                                                                                                                                                 |   |                                       |          |   |   |
| Cash                        and due from banks                                                                                                             |   | **$**                                      | **53,202**    |   | $ | 47,989 |   |
| Interest-bearing                        deposits with banks                                                                                                |   |                                       | **2,171**     |   |   | 58,270 |   |
| Federal                        funds sold                                                                                                                  |   |                                       | **4,800**     |   |   | - |   |
| Cash                        and cash equivalents                                                                                                           |   |                                       | **60,173**    |   |   | 106,259 |   |
| Investment                        securities available-for-sale                                                                                            |   |                                       | **858,854**   |   |   | 1,119,273 |   |
| Investment                        securities held to maturity                                                                                              |   |                                       |          |   |   |   |   |
| (Fair                        value of $33,048 and $47,074 for 2006 and 2005,                        respectively)                                          |   |                                       | **33,532**    |   |   | 47,368 |   |
| FHLBank                        Pittsburgh stock                                                                                                            |   |                                       | **30,724**    |   |   | 40,239 |   |
| Mortgage                        loans held-for-sale                                                                                                        |   |                                       | **1,994**     |   |   | 556 |   |
| Loans                                                                                                                                                      |   |                                       | **1,620,166** |   |   | 1,481,728 |   |
| Less:                        Allowance for loan losses                                                                                                     |   |                                       | **(17,044**   | **)** |   | (15,964 | ) |
| Net                        loans                                                                                                                           |   |                                       | **1,603,122** |   |   | 1,465,764 |   |
| Bank                        owned life insurance                                                                                                           |   |                                       | **78,361**    |   |   | 75,087 |   |
| Premises                        and equipment, net                                                                                                         |   |                                       | **48,228**    |   |   | 47,104 |   |
| Accrued                        interest receivable                                                                                                         |   |                                       | **10,293**    |   |   | 11,252 |   |
| Goodwill                                                                                                                                                   |   |                                       | **105,854**   |   |   | 101,496 |   |
| Other                        intangible assets, net                                                                                                        |   |                                       | **29,387**    |   |   | 30,840 |   |
| Other                        assets                                                                                                                        |   |                                       | **38,305**    |   |   | 36,572 |   |
| TOTAL                        ASSETS                                                                                                                        |   | **$**                                      | **2,898,827** |   | $ | 3,081,810 |   |
| **LIABILITIES**                                                                                                                                            |   |                                       |          |   |   |   |   |
| Non-interest-bearing                        deposits                                                                                                       |   | **$**                                      | **206,972**   |   | $ | 194,549 |   |
| Interest-bearing                        deposits                                                                                                           |   |                                       | **1,700,575** |   |   | 1,657,702 |   |
| Total                        deposits                                                                                                                      |   |                                       | **1,907,547** |   |   | 1,852,251 |   |
| Securities                        sold under agreements to repurchase                                                                                      |   |                                       | **45,296**    |   |   | 76,932 |   |
| Short-Term                        Debt                                                                                                                     |   |                                       |          |   |   |   |   |
| Advances                        from the Federal Home Loan Bank                                                                                            |   |                                       | **519,161**   |   |   | 705,125 |   |
| Subordinated                        debt                                                                                                                   |   |                                       | **38,406**    |   |   | 38,872 |   |
| Accrued                        interest payable                                                                                                            |   |                                       | **11,924**    |   |   | 9,659 |   |
| Other                        liabilities                                                                                                                   |   |                                       | **20,467**    |   |   | 22,419 |   |
| TOTAL                        LIABILITIES                                                                                                                   |   |                                       | **2,542,801** |   |   | 2,705,258 |   |
| **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,                        33,963,910                        and  |   |                                       |          |   |   |   |   |
| 33,925,529                        shares issued at December 31, 2006 and 2005, respectively                                                                |   |                                       | **330**       |   |   | 330 |   |
| Additional                        paid-in capital                                                                                                          |   |                                       | **338,406**   |   |   | 342,144 |   |
| Retained                        earnings, substantially restricted                                                                                         |   |                                       | **142,519**   |   |   | 127,471 |   |
| Treasury                        stock, at cost; 6,285,342 and 3,861,000 shares at                                                                          |   |                                       |          |   |   |   |   |
| December                        31, 2006 and 2005, respectively                                                                                            |   |                                       | **(101,247**  | **)** |   | (61,999 | ) |
| Unallocated                        common stock held by Employee Stock Ownership Plan                                                                      |   |                                       | **(13,556**   | **)** |   | (14,366 | ) |
| Unearned                        common stock held by Management Recognition and Retention                        Plan                                      |   |                                       | **-**         |   |   | (7,130 | ) |
| Accumulated                        other comprehensive loss, net                                                                                           |   |                                       | **(10,426**   | **)** |   | (9,898 | ) |
| TOTAL                        SHAREHOLDERS' EQUITY                                                                                                          |   |                                       | **356,026**   |   |   | 376,552 |   |
|                                                                                                                                                       |   |                                       |          |   |   |   |   |
| TOTAL                        LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                          |   | **$**                                      | **2,898,827** |   | $ | 3,081,810 |   |
|                                                                                                                                                       |   |                                       |          |   |   |   |   |
| The                        accompanying notes are an integral part of these financial                        statements.                                   |   |                                       |          |   |   |   |   |

*55*

----

**KNBT              BANCORP, INC., AND SUBSIDIARIES**

**CONSOLIDATED              STATEMENTS OF INCOME**

|                                                                                                                     |   |  **Year                        Ended December 31,** |        |
|--------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|-------------|
|                                                                                                                     |   |                                                |        |   |   |   |   |
| ***(in                        thousands, except per share data)***                                                       |   |  **2006**                                           |        | 2005 |   | 2004 |   |
| **INTEREST                        INCOME**                                                                               |   |                                                |        |
| Loans,                        including fees                                                                             |   | **$**                                                    | **97,019**  |   | $ | 77,501 |   | $ | 58,292 |   |
| Investment                        securities:                                                                            |   |                                                     |        |   |   |   |   |   |   |   |
| Taxable                                                                                                                  |   |                                                     | **48,521**  |   |   | 48,192 |   |   | 33,757 |   |
| Tax-exempt                                                                                                               |   |                                                     | **1,373**   |   |   | 4,070 |   |   | 4,744 |   |
| Other                        interest                                                                                    |   |                                                     | **1,508**   |   |   | 2,387 |   |   | 498 |   |
| Total                        interest income                                                                             |   |                                                     | **148,421** |   |   | 132,150 |   |   | 97,291 |   |
| **INTEREST                        EXPENSE**                                                                              |   |                                                     |        |   |   |   |   |   |   |   |
| Deposits                                                                                                                 |   |                                                     | **46,257**  |   |   | 28,623 |   |   | 18,185 |   |
| Securities                        sold under agreements to repurchase                                                    |   |                                                     | **2,104**   |   |   | 1,551 |   |   | 170 |   |
| Advances                        from FHLBank Pittsburgh                                                                  |   |                                                     | **24,406**  |   |   | 26,643 |   |   | 14,316 |   |
| Subordinated                        debt                                                                                 |   |                                                     | **2,790**   |   |   | 1,802 |   |   | 775 |   |
| Total                        interest expense                                                                            |   |                                                     | **75,557**  |   |   | 58,619 |   |   | 33,446 |   |
| **NET                        INTEREST INCOME**                                                                           |   |                                                     | **72,864**  |   |   | 73,531 |   |   | 63,845 |   |
| Provision                        for loan losses                                                                         |   |                                                     | **3,329**   |   |   | 2,780 |   |   | 4,308 |   |
| Net                        interest income after provision for loan losses                                               |   |                                                     | **69,535**  |   |   | 70,751 |   |   | 59,537 |   |
| **NON-INTEREST                        INCOME**                                                                           |   |                                                     |        |   |   |   |   |   |   |   |
| Trust                        revenue                                                                                     |   |                                                     | **4,967**   |   |   | 2,064 |   |   | 1,545 |   |
| Brokerage                        services revenue                                                                        |   |                                                     | **3,530**   |   |   | 2,597 |   |   | 673 |   |
| Benefit                        services revenue                                                                          |   |                                                     | **5,684**   |   |   | 4,088 |   |   | - |   |
| Insurance                        services revenue                                                                        |   |                                                     | **2,917**   |   |   | 1,753 |   |   | - |   |
| Deposit                        service charges                                                                           |   |                                                     | **5,995**   |   |   | 5,439 |   |   | 4,477 |   |
| Lending                        fees                                                                                      |   |                                                     | **1,154**   |   |   | 1,077 |   |   | 526 |   |
| Check                        card/ATM card fees                                                                          |   |                                                     | **3,417**   |   |   | 2,770 |   |   | 2,123 |   |
| Bank                        owned life insurance                                                                         |   |                                                     | **3,274**   |   |   | 2,937 |   |   | 2,652 |   |
| Net                        gain on sale of investment securities                                                         |   |                                                     | **3,181**   |   |   | 770 |   |   | 396 |   |
| Net                        gain on sale of residential mortgage loans                                                    |   |                                                     | **394**     |   |   | 690 |   |   | 774 |   |
| Net                        gain on sale of credit card loans                                                             |   |                                                     | **-**       |   |   | - |   |   | 298 |   |
| Net                        gain (loss) on sale of assets                                                                 |   |                                                     | **12**      |   |   | (77 | ) |   | 191 |   |
| Net                        gain on sale of other real estate owned                                                       |   |                                                     | **12**      |   |   | 12 |   |   | 90 |   |
| Net                        gain on sale of branches                                                                      |   |                                                     | **3,502**   |   |   | - |   |   | - |   |
| Net                        gain on extinguishment of debt                                                                |   |                                                     | **1,179**   |   |   | - |   |   | - |   |
| Other                        non-interest operating income                                                               |   |                                                     | **2,853**   |   |   | 2,306 |   |   | 1,689 |   |
| Total                        non-interest income                                                                         |   |                                                     | **42,071**  |   |   | 26,426 |   |   | 15,434 |   |
| **NON-INTEREST                        EXPENSE**                                                                          |   |                                                     |        |   |   |   |   |   |   |   |
| Compensation                        and employee benefits                                                                |   |                                                     | **44,259**  |   |   | 37,583 |   |   | 29,478 |   |
| Net                        occupancy and equipment expense                                                               |   |                                                     | **12,297**  |   |   | 10,519 |   |   | 8,335 |   |
| Professional                        fees                                                                                 |   |                                                     | **3,416**   |   |   | 2,688 |   |   | 2,279 |   |
| Advertising                                                                                                              |   |                                                     | **1,504**   |   |   | 1,366 |   |   | 1,013 |   |
| Data                        processing                                                                                   |   |                                                     | **2,664**   |   |   | 2,207 |   |   | 1,782 |   |
| Telecommunication                                                                                                        |   |                                                     | **1,387**   |   |   | 1,297 |   |   | 975 |   |
| Office                        supplies and postage                                                                       |   |                                                     | **2,231**   |   |   | 2,058 |   |   | 1,797 |   |
| Amortization                        of mortgage servicing rights                                                         |   |                                                     | **381**     |   |   | 422 |   |   | 415 |   |
| Amortization                        of intangible assets                                                                 |   |                                                     | **3,668**   |   |   | 3,069 |   |   | 2,187 |   |
| Other                        operating expenses                                                                          |   |                                                     | **6,097**   |   |   | 5,986 |   |   | 4,438 |   |
| Total                        non-interest expense                                                                        |   |                                                     | **77,904**  |   |   | 67,195 |   |   | 52,699 |   |
|                                                                                                                     |   |                                                     |        |   |   |   |   |   |   |   |
| Income                        before income taxes                                                                        |   |                                                     | **33,702**  |   |   | 29,982 |   |   | 22,272 |   |
| Income                        tax expense                                                                                |   |                                                     | **10,099**  |   |   | 9,156 |   |   | 4,666 |   |
| NET                        INCOME                                                                                        |   | **$**                                                    | **23,603**  |   | $ | 20,826 |   | $ | 17,606 |   |
|                                                                                                                     |   |                                                     |        |   |   |   |   |   |   |   |
| **PER                        SHARE DATA**                                                                                |   |                                                     |        |   |   |   |   |   |   |   |
| Net                        income- basic                                                                                 |   | **$**                                                    | **0.87**    |   | $ | 0.72 |   | $ | 0.61 |   |
| Net                        income- diluted                                                                               |   | **$**                                                    | **0.87**    |   | $ | 0.71 |   | $ | 0.60 |   |
| Cash                        dividends per common share                                                                   |   | **$**                                                    | **0.31**    |   | $ | 0.24 |   | $ | 0.15 |   |
|                                                                                                                     |   |                                                     |        |   |   |   |   |   |   |   |
| The                        accompanying notes are an integral part of these financial                        statements. |   |                                                     |        |   |   |   |

*56*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

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

| ***(dollars                          in thousands, except share data)***                                                                                         |   | **2006** |           | 2005   |   | 2004       |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|----------------|--------|--------|------------|--------|
| Common                          stock number of shares                                                                                                           |   |     |           |   |   |       |   |
| Balance                          at beginning of year                                                                                                            |   |     | **33,080,609** |   |   | 29,764,319 |   |   | 29,479,275 |   |
| Unallocated                          Employee Stock Ownership Plan shares                                                                                        |   |     | **47,601**     |   |   | 47,601     |   |   | 47,601 |   |
| Shares                          issued upon exercise of stock options                                                                                            |   |     | **38,381**     |   |   | 41,958     |   |   | 237,443 |   |
| Issuance                          of common stock for purchase accounting acquisition                                                                            |   |     | **-**          |   |   | 3,226,731  |   |   | **-** |   |
| Balance                          as end of year                                                                                                                  |   |     | **33,166,591** |   |   | 33,080,609 |   |   | 29,764,319 |   |
|                                                                                                                                                             |   |     |           |   |   |       |   |   |   |   |
| Treasury                          stock number of shares                                                                                                         |   |     |           |   |   |       |   |   |   |   |
| Balance                          at beginning of year                                                                                                            |   |     | **(3,861,000** | **)**  |   | (650,000   | )      |   | **-** |   |
| Repurchase                          of common stock                                                                                                              |   |     | **(2,424,342** | **)**  |   | (3,211,000 | )      |   | (650,000 | ) |
| Balance                          at end of year                                                                                                                  |   |     | **(6,285,342** | **)**  |   | (3,861,000 | )      |   | (650,000 | ) |
|                                                                                                                                                             |   |     |           |   |   |       |   |   |   |   |
| Common                          stock value                                                                                                                      |   |     |           |   |   |       |   |   |   |   |
| Balance                          at beginning of year                                                                                                            |   | **$**    | **330**        |   | $      | 297        |   | $ | 295 |   |
| Shares                          issued upon exercise of stock options                                                                                            |   |     | **-**          |   |   | 1          |   |   | 2 |   |
| Issuance                          of common stock for purchase accounting acquisition                                                                            |   |     | **-**          |   |   | 32         |   |   | - |   |
| Balance                          at end of year                                                                                                                  |   |     | **330**        |   |   | 330        |   |   | 297 |   |
|                                                                                                                                                             |   |     |           |   |   |       |   |   |   |   |
| Additional                          paid in capital                                                                                                              |   |     |           |   |   |       |   |   |   |   |
| Balance                          at beginning of year                                                                                                            |   |     | **342,144**    |   |   | 296,403    |   |   | 297,887 |   |
| Reclass                          of unearned compensation upon adoption of SFAS 123R                                                                             |   |     | **(7,130**     | **)**  |   | -          |   |   | - |   |
| Purchase                          of common stock for Management Recognition and Retention                          Plan                                         |   |     | **-**          |   |   | -          |   |   | (13,281 | ) |
| Unallocated                          Employee Stock Ownership Plan shares                                                                                        |   |     | **(69**        | **)**  |   | (85        | )      |   | (16 | ) |
| Shares                          issued upon exercise of stock options                                                                                            |   |     | **206**        |   |   | 222        |   |   | 1,286 |   |
| Share-based                          compensation expense                                                                                                        |   |     | **1,120**      |   |   | -          |   |   | - |   |
| Issuance                          of common stock for purchase accounting acquisition                                                                            |   |     | **-**          |   |   | 45,432     |   |   | - |   |
| Establishment                          of Management Recognition and Retention Plan                                                                              |   |     | **-**          |   |   | 151        |   |   | 10,527 |   |
| Amortization                          of compensation of advisory directors options                                                                              |   |     | **-**          |   |   | 21         |   |   | - |   |
| Amortization                          of compensation related to the Management Recognition and                          Retention                          Plan |   |     | **2,135**      |   |   | -          |   |   | - |   |
| Balance                          at end of year                                                                                                                  |   |     | **338,406**    |   |   | 342,144    |   |   | 296,403 |   |
|                                                                                                                                                             |   |     |           |   |   |       |   |   |   |   |
| Retained                          earnings, substantially restricted                                                                                             |   |     |           |   |   |       |   |   |   |   |
| Balance                          at beginning of year                                                                                                            |   |     | **127,471**    |   |   | 113,748    |   |   | 100,570 |   |
| Net                          income                                                                                                                              |   |     | **23,603**     |   |   | 20,826     |   |   | 17,606 |   |
| Cash                          dividends paid                                                                                                                     |   |     | **(8,555**     | **)**  |   | (7,103     | )      |   | (4,428 | ) |
| Balance                          at end of year                                                                                                                  |   |     | **142,519**    |   |   | 127,471    |   |   | 113,748 |   |
|                                                                                                                                                             |   |     |           |   |   |       |   |   |   |   |
| Unallocated                          Employee Stock Ownership Plan shares                                                                                        |   |     |           |   |   |       |   |   |   |   |
| Balance                          at beginning of year                                                                                                            |   |     | **(14,366**    | **)**  |   | (15,176    | )      |   | (15,987 | ) |
| Plan                          shares issued                                                                                                                      |   |     | **810**        |   |   | 810        |   |   | 811 |   |
| Balance                          at end of year                                                                                                                  |   |     | **(13,556**    | **)**  |   | (14,366    | )      |   | (15,176 | ) |
|                                                                                                                                                             |   |     |           |   |   |       |   |   |   |   |
| Unearned                          common stock held by the Management Recognition and Retention                          Plan                                    |   |     |           |   |   |       |   |   |   |   |
| Balance                          at beginning of year                                                                                                            |   |     | **(7,130**     | **)**  |   | (9,107     | )      |   | - |   |
| Establishment                          of the plan                                                                                                               |   |     | **-**          |   |   | (151       | )      |   | (10,527 | ) |
| Amortization                          of compensation related to the Management Recognition and                          Retention                          Plan |   |     | **-**          |   |   | 2,128      |   |   | 1,420 |   |
| Reclass                          of unearned compensation upon adoption of SFAS 123R                                                                             |   |     | **7,130**      |   |   | -          |   |   | - |   |
| Balance                          at end of year                                                                                                                  |   |     | **-**          |   |   | (7,130     | )      |   | (9,107 | ) |
|                                                                                                                                                             |   |     |           |   |   |       |   |   |   |   |
| Accumulated                          other comprehensive income (loss)                                                                                           |   |     |           |   |   |       |   |   |   |   |
| Balance                          at beginning of year                                                                                                            |   |     | **(9,898**     | **)**  |   | 2,368      |   |   | 6,315 |   |
| Other                          comprehensive loss net of taxes and reclassification                          adjustments                                         |   |     | **(528**       | **)**  |   | (12,266    | )      |   | (3,947 | ) |
| Balance                          at end of year                                                                                                                  |   |     | **(10,426**    | **)**  |   | (9,898     | )      |   | 2,368 |   |
|                                                                                                                                                             |   |     |           |   |   |       |   |   |   |   |
| Treasury                          stock                                                                                                                          |   |     |           |   |   |       |   |   |   |   |
| Balance                          at beginning of year                                                                                                            |   |     | **(61,999**    | **)**  |   | (11,179    | )      |   | - |   |
| Repurchase                          of common stock                                                                                                              |   |     | **(39,248**    | **)**  |   | (50,820    | )      |   | (11,179 | ) |
| Balance                          at end of year                                                                                                                  |   |     | **(101,247**   | **)**  |   | (61,999    | )      |   | (11,179 | ) |
|                                                                                                                                                             |   |     |           |   |   |       |   |   |   |   |
| Total                          Shareholders' Equity                                                                                                              |   | **$**    | **356,026**    |   | $      | 376,552    |   | $ | 377,354 |   |
|                                                                                                                                                             |   |     |           |   |   |       |   |   |   |   |
| The                          accompanying notes are an integral part of these financial                          statements.                                     |   |     |           |   |   |       |   |   |   |   |

*57*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**CONSOLIDATED              STATEMENTS OF CASH FLOWS**

|                                                                                                                            |   | **For                        the Year Ended December 31,** |         |
|---------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|--------------|
| ***(dollars                        in thousands)***                                                                             |   | **2006**                                                   |         | 2005 |   | 2004 |   |
| **OPERATING                        ACTIVITIES:**                                                                                |   |                                                       |         |   |   |   |   |
| Net                        income                                                                                               |   | **$**                                                      | **23,603**   |   | $ | 20,826 |   | $ | 17,606 |   |
| Adjustments                        to reconcile net income to net cash provided by operating                        activities: |   |                                                       |         |   |   |   |   |   |   |   |
| Provision                        for loan losses                                                                                |   |                                                       | **3,329**    |   |   | 2,780 |   |   | 4,308 |   |
| Depreciation                        and amortization                                                                            |   |                                                       | **9,087**    |   |   | 8,408 |   |   | 6,359 |   |
| Compensation                        expense, stock option plan                                                                  |   |                                                       | **1,120**    |   |   | 21 |   |   | 16 |   |
| Management                        Recognition and Retention Plan expense                                                        |   |                                                       | **2,135**    |   |   | 2,128 |   |   | 1,404 |   |
| ESOP                        expense                                                                                             |   |                                                       | **741**      |   |   | 725 |   |   | 795 |   |
| Amortization                        and accretion of securities premiums and discounts, net                                     |   |                                                       | **(343**     | **)** |   | 1,070 |   |   | 2,521 |   |
| Gain                        on sale of other real estate owned                                                                  |   |                                                       | **(12**      | **)** |   | (12 | ) |   | (90 | ) |
| Gain                        on sales of investment securities, net                                                              |   |                                                       | **(3,181**   | **)** |   | (770 | ) |   | (396 | ) |
| Gain                        on sale of credit card portfolio                                                                    |   |                                                       | **-**        |   |   | - |   |   | (298 | ) |
| (Gain)                        loss on sale of other assets                                                                      |   |                                                       | **(12**      | **)** |   | 77 |   |   | (191 | ) |
| Gain                        on sale of mortgage loans                                                                           |   |                                                       | **(394**     | **)** |   | (690 | ) |   | (774 | ) |
| Gain                        on extinguishment of debt                                                                           |   |                                                       | **(1,179**   | **)** |   | - |   |   | - |   |
| Mortgage                        loans originated for sale                                                                       |   |                                                       | **(37,253**  | **)** |   | (56,482 | ) |   | (63,193 | ) |
| Mortgage                        loan sales                                                                                      |   |                                                       | **36,209**   |   |   | 57,334 |   |   | 67,926 |   |
| Changes                        in assets and liabilities:                                                                       |   |                                                       |         |   |   |   |   |   |   |   |
| Increase                        in bank owned life insurance                                                                    |   |                                                       | **(3,274**   | **)** |   | (2,937 | ) |   | (2,652 | ) |
| Decrease                        (increase) in accrued interest receivable                                                       |   |                                                       | **959**      |   |   | 1,131 |   |   | (1,864 | ) |
| Increase                        (decrease) in other assets                                                                      |   |                                                       | **(2,845**   | **)** |   | 2,332 |   |   | 2,035 |   |
| Increase                        (decrease) in other liabilities and accrued interest                        payable             |   |                                                       | **(165**     | **)** |   | 1,706 |   |   | (865 | ) |
| Net                        cash provided by operating activities                                                                |   |                                                       | **28,525**   |   |   | 37,647 |   |   | 32,647 |   |
| **INVESTING                        ACTIVITIES:**                                                                                |   |                                                       |         |   |   |   |   |   |   |   |
| Proceeds                        from calls and maturities of securities available-for-sale                                      |   |                                                       | **211,304**  |   |   | 209,234 |   |   | 172,937 |   |
| Proceeds                        from calls and maturities of securities held-to-maturity                                        |   |                                                       | **9,021**    |   |   | 10,153 |   |   | 3,242 |   |
| Proceeds                        from sales of securities available-for-sale                                                     |   |                                                       | **111,180**  |   |   | 98,806 |   |   | 11,478 |   |
| Proceeds                        from sales of securities held-to-maturity                                                       |   |                                                       | **5,488**    |   |   | - |   |   | - |   |
| Purchase                        of securities available-for-sale                                                                |   |                                                       | **(60,024**  | **)** |   | (92,201 | ) |   | (516,223 | ) |
| Purchase                        of securities held to maturity                                                                  |   |                                                       | **(553**     | **)** |   | (765 | ) |   | (59,751 | ) |
| Purchase                        of FHLBank Pittsburgh stock                                                                     |   |                                                       | **(1,436**   | **)** |   | (786 | ) |   | (26,883 | ) |
| Redemption                        of FHLBank Pittsburgh stock                                                                   |   |                                                       | **10,951**   |   |   | 9,053 |   |   | 1,970 |   |
| Proceeds                        from the sale of credit card loans                                                              |   |                                                       | **-**        |   |   | - |   |   | 1,831 |   |
| Net                        increase in loans                                                                                    |   |                                                       | **(158,929** | **)** |   | (91,765 | ) |   | (124,883 | ) |
| Cash                        paid for acquisitions                                                                               |   |                                                       | **(8,034**   | **)** |   | (65,452 | ) |   | - |   |
| Cash                        and cash equivalents obtained through acquisitions                                                  |   |                                                       | **1,249**    |   |   | 54,696 |   |   | - |   |
| Cash                        paid in branch sales, net                                                                           |   |                                                       | **(16,205**  | **)** |   | - |   |   | - |   |
| Purchase                        of premises and equipment                                                                       |   |                                                       | **(6,871**   | **)** |   | (6,546 | ) |   | (8,680 | ) |
| Proceeds                        from the sale of other assets                                                                   |   |                                                       | **1,602**    |   |   | 2,426 |   |   | 1,537 |   |
| Proceeds                        from the sale of other real estate owned                                                        |   |                                                       | **430**      |   |   | 460 |   |   | 364 |   |
| Net                        cash provided by (used in) investing activities                                                      |   |                                                       | **99,173**   |   |   | 127,313 |   |   | (543,061 | ) |
| **FINANCING                        ACTIVITIES:**                                                                                |   |                                                       |         |   |   |   |   |   |   |   |
| Net                        increase in deposits                                                                                 |   |                                                       | **89,501**   |   |   | 79,724 |   |   | 33,643 |   |
| Net                        increase (decrease) in repurchase agreements                                                         |   |                                                       | **9,410**    |   |   | 14,072 |   |   | (1,907 | ) |
| Payment                        on extinguishment of debt, net                                                                   |   |                                                       | **(49,595**  | **)** |   | - |   |   | - |   |
| Proceeds                        from long -term debt                                                                            |   |                                                       | **92,000**   |   |   | 98,500 |   |   | 526,827 |   |
| Payments                        on long -term debt                                                                              |   |                                                       | **(267,503** | **)** |   | (279,517 | ) |   | (73,306 | ) |
| Purchase                        of treasury stock                                                                               |   |                                                       | **(39,248**  | **)** |   | (50,820 | ) |   | (11,179 | ) |
| Proceeds                        from the exercise of stock options                                                              |   |                                                       | **206**      |   |   | 223 |   |   | 1,288 |   |
| Purchase                        of stock for the Management Recognition and Retention Plan                                      |   |                                                       | **-**        |   |   | - |   |   | (13,281 | ) |
| Cash                        dividends paid                                                                                      |   |                                                       | **(8,555**   | **)** |   | (7,103 | ) |   | (4,428 | ) |
| Net                        cash provided by (used in) financing activities                                                      |   |                                                       | **(173,784** | **)** |   | (144,921 | ) |   | 457,657 |   |
| Increase                        (decrease) in cash and cash equivalents                                                         |   |                                                       | **(46,086**  | **)** |   | 20,039 |   |   | (52,757 | ) |
| Cash                        and cash equivalents January 1,                                                                     |   |                                                       | **106,259**  |   |   | 86,220 |   |   | 138,977 |   |
| Cash                        and cash equivalents December 31,                                                                   |   | **$**                                                      | **60,173**   |   | $ | 106,259 |   | $ | 86,220 |   |
|                                                                                                                            |   |                                                       |         |   |   |   |   |   |   |   |
| Supplemental                        disclosure of cash flow information                                                         |   |                                                       |         |   |   |   |   |   |   |   |
| Cash                        paid during the period for                                                                          |   |                                                       |         |   |   |   |   |   |   |   |
| Income                        taxes                                                                                             |   | **$**                                                      | **7,699**    |   | $ | 5,517 |   | $ | 3,300 |   |
| Interest                        on deposits, advances and other borrowed money                                                  |   | **$**                                                      | **73,292**   |   | $ | 54,771 |   | $ | 30,853 |   |
| Supplemental                        disclosure of non-cash activities                                                           |   |                                                       |         |   |   |   |   |   |  |   |
| Reclassification                        of loans receivable to other real estate owned                                          |   | **$**                                                      | **368**      |   | $ | 1,870 |   | $ | 191 |   |
| Mortgage                        loan securitizations                                                                            |   | **$**                                                      | **25,149**   |   | $ | - |   | $ | - |   |
|                                                                                                                            |   |                                                       |         |   |   |  |   |   |  |   |
| The                        accompanying notes are an integral part of these financial                        statements.        |   |                                                       |         |   |   |   |   |   |   |   |

*58*

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**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| **1.** | **SUMMARY                        OF SIGNIFICANT ACCOUNTING                        POLICIES** |
|--------|----------------------------------------------------------------------------------------------|

**Organization**

**Basis              of Financial Statement Presentation**

*59*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

**Cash              and Cash Equivalents**

**Investment              Securities**

*60*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

* *
*.*

**Mortgage              Loans Held-for-Sale**

**Loans**

*61*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

**Allowance              for Loan Losses**

*”*

**Premises              and Equipment**

*62*

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**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

**Other              Real Estate Owned**

**Goodwill              and Intangible Assets**

|                                                                   |   | **For                        Years Ended December 31,** |        |
|------------------------------------------------------------------------|--------|---------------------------------------------------------|-------------|
| ***(in                        thousands)***                            |   | **2006**                                                |        | 2005 |   |
| Goodwill                        from First Colonial acquisition        |   | **$**                                                   | **36,345**  |   | $ | 36,345 |   |
| Goodwill                        from Oakwood acquisition               |   |                                                    | **478**     |   |   | 531 |   |
| Goodwill                        from Caruso Benefits Group acquisition |   |                                                    | **13,107**  |   |   | 10,374 |   |
| Goodwill                        from NEPF acquisition                  |   |                                                    | **54,438**  |   |   | 54,246 |   |
| Goodwill                        from Paragon acquisition               |   |                                                    | **1,486**   |   |   | - |   |
| Goodwill                        at December 31,                        |   | **$**                                                   | **105,854** |   | $ | 101,496 |   |

|                                                        |   | **December                          31, 2006** |       | December                          31, 2005 |   |
|-------------------------------------------------------------|--------|------------------------------------------------|------------|--------------------------------------------|--------|
|                                                        |   | **Gross**                                      |       |                                       |   | Gross |   |   |   |
|                                                        |   | **Carrying**                                   |       | **Accumulated**                            |   | Carrying |   | Accumulated |   |
| ***(in                          thousands)***               |   | **Amount**                                     |       | **Amortization**                           |   | Amount |   | Amortization |   |
| Amortizing                          intangible assets:      |   |                                           |       |                                       |   |   |   |   |   |
| Core                          deposit intangible            |   | **$**                                          | **24,118** |                                       |   | **($8,422** | **)** | $ | 24,118 |   |   | ($5,124 | ) |
| Customer                          lists from Caruso         |   |                                           | **9,924**  |                                       |   | **(1,158** | **)** |   | 9,924 |   |   | (496 | ) |
| Employment                          agreements from Paragon |   |                                           | **890**    |                                       |   | **(144** | **)** |   | **-** |   |   | **-** |   |
| Customer                          list from Paragon         |   |                                           | **1,680**  |                                       |   | **-** |   |   | **-** |   |   | **-** |   |
| Total                                                       |   | **$**                                          | **36,612** |                                       |   | **($9,724** | **)** | $ | 34,042 |   |   | ($5,620 | ) |

*63*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

|       | ***(in                          thousands)*** |   |
|------------|-----------------------------------------------|--------|
|       |                                          |   |   |
| 2007       |                                          |   | 3,820 |   |
| 2008       |                                          |   | 3,799 |   |
| 2009       |                                          |   | 3,692 |   |
| 2010       |                                          |   | 3,692 |   |
| 2011       |                                          |   | 3,225 |   |
| Thereafter |                                          |   | 8,660 |   |
|       |                                          | $      | 26,888 |   |

**Income              Taxes **

**Advertising**

*64*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

**Stock              Based Compensation**

*Stock              Option Plans*

|                                                                                                             |   | **For                        the Year Ended December 31,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|--------|
| ***(in                        thousands, except per share data)***                                               |   | 2005                                                       |   | 2004 |   |
| Net                        income as reported                                                                    |   | $                                                          | 20,826 |   | $ | 17,606 |   |
| Add:                        Stock-based employee compensation expense                                            |   |                                                       |   |   |   |   |   |
| included                        in reported net income, net of related tax effects                               |   |                                                       | 24     |   |   | 16 |   |
| Less:                        Stock-based compensation cost determined                                            |   |                                                       |   |   |   |   |   |
| under                        fair value method for all awards, net of related tax                        effects |   |                                                       | 661    |   |   | 369 |   |
| Pro                        forma, net income                                                                     |   | $                                                          | 20,189 |   | $ | 17,253 |   |
|                                                                                                             |   |                                                       |   |   |   |   |   |
| Earnings                        per share (diluted):                                                             |   |                                                       |   |   |   |   |   |
| As                        reported                                                                               |   | $                                                          | 0.71   |   | $ | 0.60 |   |
| Pro                        forma                                                                                 |   | $                                                          | 0.69   |   | $ | 0.59 |   |
| Earnings                        per share (basic):                                                               |   |                                                       |   |   |   |   |   |
| As                        reported                                                                               |   | $                                                          | 0.72   |   | $ | 0.61 |   |
| Pro                        forma net income                                                                      |   | $                                                          | 0.69   |   | $ | 0.59 |   |

*65*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

*Management              Recognition and Retention Plan (“MRRP”)*

**Employee              Benefit Plans**

*66*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

**Bank              Owned Life Insurance (“BOLI”)**

**Trust              Assets and Revenue**

**Per              Share Information**

|                                                 |   | **2006**        |       | 2005              |   | 2004                                 |   |
|------------------------------------------------------|--------|-----------------|------------|-------------------|--------|--------------------------------------|--------|
|                                                 |   | **Net**         |       | **Average**       |   |                                 |   | Net |   | Average |   |   |   | Net |   | Average |   |   |   |
| ***(in                        thousands,***          |   | **Income**      |       | **Shares**        |   | **Per                        Share** |   | Income |   | Shares |   | Per                        Share |   | Income |   | Shares |   | Per                        Share |   |
| ***except                        per share data)***  |   | **(numerator)** |       | **(denominator)** |   | **Amount**                           |   | (numerator) |   | (denominator) |   | Amount |   | (numerator) |   | (denominator) |   | Amount |   |
| Basic                        earnings per share      |   |            |       |              |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                        available to           |   |            |       |              |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| common                        shareholders           |   | **$**           | **23,603** |              |   | **27,015,241**                       |   | **$** | **0.87** |   | $ | 20,826 |   |   | 29,052,097 |   | $ | 0.72 |   | $ | 17,606 |   |   | 29,060,702 |   | $ | 0.61 |   |
| Effect                        of dilutive securities |   |            |       |              |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock                        options                 |   |            |       |              |   | **148,770**                          |   |   | **-** |   |   |   |   |   | 204,106 |   |   | - |   |   |   |   |   | 416,888 |   |   | - |   |
| Management                                           |   |            |       |              |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition                                          |   |            |       |              |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                        Retention Plan            |   |            |       |              |   | **82,575**                           |   |   | **-** |   |   |   |   |   | 182,713 |   |   | - |   |   |   |   |   | 89,793 |   |   | - |   |
| Total                        effect of               |   |            |       |              |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| dilutive                        securities           |   |            |       |              |   | **231,345**                          |   |   | **-** |   |   |   |   |   | 386,819 |   |   | (0.01 | ) |   |   |   |   | 506,681 |   |   | (0.01 | ) |
| Diluted                        earnings per share    |   |            |       |              | **-**  |                                 |   |   |   |   |   |   |   | - |   |   |   |   |   |   |   |   | - |   |
| Income                        available to           |   |            |       |              |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| common                        shareholders           |   |            |       |              |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| plus                        assumed                  |   |            |       |              |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| exercise                        of options           |   | **$**           | **23,603** |              |   | **27,246,586**                       |   | **$** | **0.87** |   | $ | 20,826 |   |   | 29,438,916 |   | $ | 0.71 |   | $ | 17,606 |   |   | 29,567,383 |   | $ | 0.60 |   |

*67*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

**Financial              Instruments**

**Segment              Information**

*68*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

|                                                  |   | **Community** |          |      |   |             |   |
|-------------------------------------------------------|--------|---------------|---------------|-----------|--------|------------------|--------|
| ***(in                        thousands)***           |   | **Banking**   |          | **Other** |   | **Consolidated** |   |
| ***December                        31, 2006***        |   |          |          |      |   |             |   |
| **Total                        assets**               |   | **$**         | **2,359,766** |      | **$**  | **539,061**      |   | **$** | **2,898,827** |   |
| **Total                        deposits**             |   |          | **1,907,547** |      |   | **-**            |   |   | **1,907,547** |   |
| **Net                        interest income (loss)** |   |          | **74,945**    |      |   | **(2,081**       | **)**  |   | **72,864** |   |
| **Total                        non-interest income**  |   |          | **29,338**    |      |   | **12,733**       |   |   | **42,071** |   |
| **Total                        non-interest expense** |   |          | **65,513**    |      |   | **12,391**       |   |   | **77,904** |   |
| **Net                        income (loss)**          |   |          | **25,077**    |      |   | **(1,474**       | **)**  |   | **23,603** |   |
|                                                  |   |          |          |      |   |             |   |   |   |   |
| *December                        31, 2005*            |   |          |          |      |   |             |   |   |   |   |
| Total                        assets                   |   | $             | 2,536,696     |      | $      | 545,114          |   | $ | 3,081,810 |   |
| Total                        deposits                 |   |          | 1,852,251     |      |   | -                |   |   | 1,852,251 |   |
| Net                        interest income (loss)     |   |          | 74,853        |      |   | (1,322           | )      |   | 73,531 |   |
| Total                        non-interest income      |   |          | 17,554        |      |   | 8,872            |   |   | 26,426 |   |
| Total                        non-interest expense     |   |          | 58,568        |      |   | 8,627            |   |   | 67,195 |   |
| Net                        income (loss)              |   |          | 21,766        |      |   | (940             | )      |   | 20,826 |   |
|                                                  |   |          |          |      |   |             |   |   |   |   |
| *December                        31, 2004*            |   |          |          |      |   |             |   |   |   |   |
| Total                        assets                   |   | $             | 1,997,445     |      | $      | 421,753          |   | $ | 2,419,198 |   |
| Total                        deposits                 |   |          | 1,323,053     |      |   | -                |   |   | 1,323,053 |   |
| Net                        interest income (loss)     |   |          | 64,160        |      |   | (315             | )      |   | 63,845 |   |
| Total                        non-interest income      |   |          | 15,192        |      |   | 242              |   |   | 15,434 |   |
| Total                        non-interest expense     |   |          | 50,130        |      |   | 2,569            |   |   | 52,699 |   |
| Net                        income (loss)              |   |          | 18,803        |      |   | (1,197           | )      |   | 17,606 |   |

**Comprehensive              Income**

|                                                                                                      |   |                                  |       | **Tax**       |   |                                  |   |
|-----------------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|---------------|--------|---------------------------------------|--------|
|                                                                                                      |   | **Before                        tax** |       | **benefit**   |   | **Net                        of tax** |   |
| ***(in                        thousands)***                                                               |   | **amount**                            |       | **(expense)** |   | **amount**                            |   |
| ***Year                        Ended December 31, 2006***                                                 |   |                                  |       |
| **Unrealized                        gains on securities:**                                                |   |                                  |       |          |   |                                  |   |
| **Unrealized                        holding gains (losses)**                                              |   | **$**                                 | **2,369**  |          | **$**  | **(829**                              | **)**  | **$** | **1,540** |   |
| **Less                        reclassification adjustment for net realized                        gains** |   |                                  | **(3,181** | **)**         |   | **(1,113**                            | **)**  |   | **(2,068** | **)** |
| **Other                        comprehensive income (loss), net**                                         |   | **$**                                 | **(812**   | **)**         | **$**  | **284**                               |   | **$** | **(528** | **)** |
|                                                                                                      |   |                                  |       |          |   |                                  |   |   |   |   |
| *Year                        Ended December 31, 2005*                                                     |   |                                  |
| Unrealized                        gains on securities:                                                    |   |                                  |       |          |   |                                  |   |   |   |   |
| Unrealized                        holding gains (losses)                                                  |   | $                                     | (17,815    | )             | $      | 6,057                                 |   | $ | (11,758 | ) |
| Less                        reclassification adjustment for net realized gains                            |   |                                  | (770       | )             |   | (262                                  | )      |   | (508 | ) |
| Other                        comprehensive income (loss), net                                             |   | $                                     | (18,585    | )             | $      | 6,319                                 |   | $ | (12,266 | ) |
|                                                                                                      |   |                                  |       |          |   |                                  |   |   |   |   |
| *Year                        ended December 31, 2004*                                                     |   |                                  |
| Unrealized                        gains on securities:                                                    |   |                                  |       |          |   |                                  |   |   |   |   |
| Unrealized                        holding gains (losses)                                                  |   | $                                     | (5,584     | )             | $      | 1,898                                 |   | $ | (3,686 | ) |
| Less                        reclassification adjustment for net realized losses                           |   |                                  | (396       | )             |   | (135                                  | )      |   | (261 | ) |
| Other                        comprehensive income (loss), net                                             |   | $                                     | (5,980     | )             | $      | 2,033                                 |   | $ | (3,947 | ) |

*69*

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**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

**Statement              of Cash Flows**

**Variable              Interest Entities **

*”,*
*”*

**Reclassifications**

*70*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

**New              Accounting Pronouncements**

*71*

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**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| **2.** | **ACQUISITIONS** |
|--------|------------------|

***Oakwood              Financial Corp.***

*72*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

***Caruso              Benefits Group, Inc.***

***Northeast              Pennsylvania Financial Corp.***

*73*

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**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| ***(in                        thousands)***                     |   | At                        May 19, 2005 |    |
|-----------------------------------------------------------------|--------|----------------------------------------|---------|
| Cash                        and cash equivalents                |   | $                                      | 51,078  |   |
| Investment                        securities available for sale |   |                                   | 301,751 |   |
| Loans                                                           |   |                                   | 379,397 |   |
| Less:                        allowance for loan losses          |   |                                   | (5,281  | ) |
| Net                        loans                                |   |                                   | 374,116 |   |
| Other                        assets                             |   |                                   | 57,768  |   |
| Total                        assets                             |   |                                   | 784,713 |   |
|                                                            |   |                                   |    |   |
| Liabilities:                                                    |   |                                   |    |   |
| Non-interest                        bearing deposits            |   |                                   | 47,281  |   |
| Interest-bearing                        deposits                |   |                                   | 403,130 |   |
| FHLB                        advances and other borrowings       |   |                                   | 290,154 |   |
| Other                        liabilities                        |   |                                   | 6,300   |   |
| Total                        liabilities                        |   |                                   | 746,865 |   |
|                                                            |   |                                   |    |   |
| Net                        assets acquired                      |   | $                                      | 37,848  |   |

| ***(in                        thousands)***                                                                      |   |   |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Purchase                        price :                                                                          |   |   |   |
| Purchase                        price for shares exchanged for common stock                                      |   | $      | 45,465 |   |
| Purchase                        price for shares exchanged for cash                                              |   |   | 45,452 |   |
| Total                        purchase price                                                                      |   |   | 90,917 |   |
| Net                        assets acquired:                                                                      |   |   |   |   |
| Seller's                        shareholders' equity, net of intangible assets                                   |   |   | 37,848 |   |
| Excess                        purchase price                                                                     |   |   | 53,069 |   |
| Estimated                        adjustments to reflect assets acquired at fair value:                           |   |   |   |   |
| Investments                        (amortized over the actual life of the securities)                            |   |   | (77    | ) |
| Loans                        (five year weighted average life)                                                   |   |   | (78    | ) |
| Core                        deposit intangible (ten year amortization)                                           |   |   | (6,626 | ) |
| Premises                        (twenty year amortization)                                                       |   |   | 2,778  |   |
| Estimated                        adjustments to reflect liabilities acquired at fair value:                      |   |   |   |   |
| Deposits                        (amortized over a five year weighted average life)                               |   |   | 938    |   |
| FHLB                        advances (amortized over an eight year weighted average                        life) |   |   | 3,908  |   |
| Other                        borrowings (amortized over a two year weighted average life)                        |   |   | 2,967  |   |
| Deferred                        taxes                                                                            |   |   | (2,441 | ) |
| Goodwill                        impact of purchase accounting adjustments                                        |   |   | 1,369  |   |
| Goodwill                        resulting from merger                                                            |   | $      | 54,438 |   |

*74*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

|                                                              |   | **Years                        Ended December 31,** |    |
|-------------------------------------------------------------------|--------|-----------------------------------------------------|---------|
| ***(in                        thousands except per share data)*** |   | 2005                                                |    | 2004 |   |
| Interest                        income                            |   | $                                                   | 144,557 |   | $ | 136,237 |   |
| Interest                        expense                           |   |                                                | 64,675  |   |   | 50,754 |   |
| Net                        interest income                        |   |                                                | 79,882  |   |   | 85,484 |   |
| Provision                        for loan losses                  |   |                                                | 2,780   |   |   | 5,075 |   |
| Non-interest                        income                        |   |                                                | 30,873  |   |   | 35,930 |   |
| Non-interest                        expense                       |   |                                                | 93,414  |   |   | 87,438 |   |
| Pro                        forma net income                       |   | $                                                   | 10,292  |   | $ | 22,389 |   |
|                                                              |   |                                                |    |   |   |   |   |
| Pro                        forma earnings per share               |   |                                                |    |   |   |   |   |
| Basic                                                             |   | $                                                   | 0.35    |   |   | 0.72 |   |
| Diluted                                                           |   | $                                                   | 0.35    |   |   | 0.71 |   |

**Paragon              Group**

*75*

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**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| **3.** | **INVESTMENT                        SECURITIES** |
|--------|--------------------------------------------------|

|                                                              |   | **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** |   |

|                                                                      |   | **At                          December 31, 2005** |      |
|---------------------------------------------------------------------------|--------|---------------------------------------------------|-----------|
|                                                                      |   |                                              |      | **Gross** |   | **Gross** |   |   |   |
|                                                                      |   | **Amortized**                                     |      | **Unrealized** |   | **Unrealized** |   | **Fair** |   |
| ***(in                          thousands)***                             |   | **Cost**                                          |      | **Gains** |   | **Losses** |   | **Value** |   |
| **Held                          to maturity:**                            |   |                                              |      |   |   |   |   |   |   |
| U.S.                          Government and agencies                     |   | $                                                 | 472       |   | $ | - |   | $ | - |   | $ | 472 |   |
| Obligations                          of states and political subdivisions |   |                                              | 5,497     |   |   | 210 |   |   | - |   |   | 5,707 |   |
| Mortgage-backed                          securities                       |   |                                              | 41,399    |   |   | - |   |   | (504 | ) |   | 40,895 |   |
| Total                          investments held to maturity               |   |                                              | 47,368    |   |   | 210 |   |   | (504 | ) |   | 47,074 |   |
| **Available                          for sale:**                          |   |                                              |      |   |   |   |   |   |   |   |   |   |   |
| U.S.                          Government and agencies                     |   |                                              | 158,819   |   |   | 203 |   |   | (1,614 | ) |   | 157,408 |   |
| Obligations                          of states and political subdivisions |   |                                              | 63,181    |   |   | 2,015 |   |   | (31 | ) |   | 65,165 |   |
| Asset-managed                          funds                              |   |                                              | 4,904     |   |   | - |   |   | (157 | ) |   | 4,747 |   |
| Mortgage-backed                          securities                       |   |                                              | 819,857   |   |   | 490 |   |   | (16,933 | ) |   | 803,414 |   |
| Corporate                          and other debt securities              |   |                                              | 73,605    |   |   | 452 |   |   | (76 | ) |   | 73,981 |   |
| Equity                          securities                                |   |                                              | 13,904    |   |   | 805 |   |   | (151 | ) |   | 14,558 |   |
| Total                          investments available for sale             |   |                                              | 1,134,270 |   |   | 3,965 |   |   | (18,962 | ) |   | 1,119,273 |   |
| Total                          investment securities                      |   | $                                                 | 1,181,638 |   | $ | 4,175 |   | $ | (19,466 | ) | $ | 1,166,347 |   |

*76*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

|                                                                              |   | **At                        December 31, 2006** |    |
|-----------------------------------------------------------------------------------|--------|-------------------------------------------------|---------|
|                                                                              |   | **Amortized**                                   |    | **Fair** |   |
| ***(in                        thousands)***                                       |   | **Cost**                                        |    | **Value** |   |
| Investment                        securities held to maturity                     |   |                                            |    |   |   |
| Mortgage-backed                        securities                                 |   | $                                               | 33,532  |   | $ | 33,048 |   |
| Total                        held to maturity                                     |   |                                            | 33,532  |   |   | 33,048 |   |
|                                                                              |   |                                            |    |   |   |   |   |
| Investment                        securities available for sale                   |   |                                            |    |   |   |   |   |
| Due                        in one year or less                                    |   |                                            | 29,900  |   |   | 29,569 |   |
| Due                        after one year through five years                      |   |                                            | 17,672  |   |   | 17,385 |   |
| Due                        after five years through ten years                     |   |                                            | 36,359  |   |   | 36,132 |   |
| Due                        after ten years                                        |   |                                            | 80,053  |   |   | 80,128 |   |
| Total                        investment securities available for sale             |   |                                            | 163,984 |   |   | 163,214 |   |
| Mortgage-backed                        securities                                 |   |                                            | 703,648 |   |   | 688,492 |   |
| Asset                        managed funds                                        |   |                                            | 5,171   |   |   | 5,004 |   |
| Equity                        securities                                          |   |                                            | 2,091   |   |   | 2,144 |   |
| Total                        available for sale                                   |   |                                            | 874,894 |   |   | 858,854 |   |
|                                                                              |   |                                            |    |   |   |   |   |
| Total                        investment securities and mortgage-backed securities |   | $                                               | 908,426 |   | $ | 891,902 |   |

|                                                         |   | **Less                        than 12 Months** |   | **12                        Months or Longer** |   | **Total**                             |   |
|--------------------------------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------|--------|---------------------------------------|--------|
| ***(in                        thousands)***                  |   | **Fair                        Value**          |   | **Unrealized                        Losses**   |   | **Fair                        Value** |   | **Unrealized                        Losses** |   | **Fair                        Value** |   | **Unrealized                        Losses** |   |
| U.S.                        Government and agencies          |   | $                                              | 5,782  |                                           | $      | (70                                   | )      | $ | 77,895 |   | $ | (879 | ) | $ | 83,677 |   | $ | (949 | ) |
| Mortgage-backed                        securities            |   |                                           | 39,686 |                                           |   | (676                                  | )      |   | 641,554 |   |   | (15,403 | ) |   | 681,240 |   |   | (16,079 | ) |
| Corporate                        debt securities             |   |                                           | -      |                                           |   | -                                     |   |   | 5,554 |   |   | (100 | ) |   | 5,554 |   |   | (100 | ) |
| Subtotal,                        debt securities             |   |                                           | 45,468 |                                           |   | (746                                  | )      |   | 725,003 |   |   | (16,382 | ) |   | 770,471 |   |   | (17,128 | ) |
| Asset                        managed funds                   |   |                                           | -      |                                           |   | -                                     |   |   | 4,737 |   |   | (167 | ) |   | 4,737 |   |   | (167 | ) |
| Equity                        securities                     |   |                                           | 55     |                                           |   | (1                                    | )      |   | 254 |   |   | (25 | ) |   | 309 |   |   | (26 | ) |
| Total                        temporarily impaired securities |   | $                                              | 45,523 |                                           | $      | (747                                  | )      | $ | 729,994 |   | $ | (16,574 | ) | $ | 775,517 |   | $ | (17,321 | ) |

*77*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

|                                                         |   | **Less                        than 12 Months** |    | **12                        Months or Longer** |   | **Total**                             |   |
|--------------------------------------------------------------|--------|------------------------------------------------|---------|------------------------------------------------|--------|---------------------------------------|--------|
| ***(in                        thousands)***                  |   | **Fair                        Value**          |    | **Unrealized                        Losses**   |   | **Fair                        Value** |   | **Unrealized                        Losses** |   | **Fair                        Value** |   | **Unrealized                        Losses** |   |
| U.S.                        Government and agencies          |   | $                                              | 70,194  |                                           | $      | (799                                  | )      | $ | 49,937 |   | $ | (815 | ) | $ | 120,131 |   | $ | (1,614 | ) |
| Obligations                        of states and             |   |                                           |    |                                           |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| political                        subdivisions                |   |                                           | 4,320   |                                           |   | (21                                   | )      |   | 373 |   |   | (10 | ) |   | 4,693 |   |   | (31 | ) |
| Mortgage-backed                        securities            |   |                                           | 509,007 |                                           |   | (8,477                                | )      |   | 285,517 |   |   | (8,960 | ) |   | 794,524 |   |   | (17,437 | ) |
| Corporate                        debt securities             |   |                                           | 5,678   |                                           |   | (76                                   | )      |   | - |   |   | - |   |   | 5,678 |   |   | (76 | ) |
| Subtotal,                        debt securities             |   |                                           | 589,199 |                                           |   | (9,373                                | )      |   | 335,827 |   |   | (9,785 | ) |   | 925,026 |   |   | (19,158 | ) |
| Asset                        managed funds                   |   |                                           | -       |                                           |   | -                                     |   |   | 4,747 |   |   | (157 | ) |   | 4,747 |   |   | (157 | ) |
| Equity                        securities                     |   |                                           | 1,990   |                                           |   | (8                                    | )      |   | 7,947 |   |   | (143 | ) |   | 9,937 |   |   | (151 | ) |
| Total                        temporarily impaired securities |   | $                                              | 591,189 |                                           | $      | (9,381                                | )      | $ | 348,521 |   | $ | (10,085 | ) | $ | 939,710 |   | $ | (19,466 | ) |

| **4.** | **LOANS** |
|--------|-----------|

|                                                     |   | **At                        December 31,** |          |
|----------------------------------------------------------|--------|--------------------------------------------|---------------|
| ***(in                        thousands)***              |   | **2006**                                   |          | 2005 |   |
| Real                        estate                       |   |                                       |          |   |   |
| Residential                                              |   | **$**                                      | **492,652**   |   | $ | 452,903 |   |
| Multi-family                        residential          |   |                                       | **22,555**    |   |   | 20,529 |   |
| Commercial                                               |   |                                       | **340,850**   |   |   | 316,820 |   |
| Construction                                             |   |                                       | **61,288**    |   |   | 71,631 |   |
| Total                        real estate                 |   |                                       | **917,345**   |   |   | 861,883 |   |
| Consumer                        loans                    |   |                                       | **509,555**   |   |   | 491,615 |   |
| Commercial                        (non-real estate)      |   |                                       | **181,103**   |   |   | 116,465 |   |
| States                        and political subdivisions |   |                                       | **13,056**    |   |   | 12,295 |   |
| Total                        gross loans                 |   |                                       | **1,621,059** |   |   | 1,482,258 |   |
| Mortgage                        loans held-for-sale      |   |                                       | **(1,994**    | **)** |   | (556 | ) |
| Deferred                        fees                     |   |                                       | **1,101**     |   |   | 26 |   |
| Total                        loans                       |   |                                       | **1,620,166** |   |   | 1,481,728 |   |
| Allowance                        for loan losses         |   |                                       | **(17,044**   | **)** |   | (15,964 | ) |
| Total                        net loans                   |   | **$**                                      | **1,603,122** |   | $ | 1,465,764 |   |

*78*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

|                                             |   | **For                        Years Ended December 31,** |       |
|--------------------------------------------------|--------|---------------------------------------------------------|------------|
| ***(in                        thousands)***      |   | **2006**                                                |       | **2005** |   | **2004** |   |
| Balance                        at January 1,     |   | **$**                                                   | **4,156**  |   | $ | 2,105 |   | $ | 3,486 |   |
| Changes                        in insider status |   |                                                    | **387**    |   |   | 60 |   |   | - |   |
| New                        loans                 |   |                                                    | **2,994**  |   |   | 2,654 |   |   | 152 |   |
| Repayments                                       |   |                                                    | **(1,059** | **)** |   | (663 | ) |   | (1,533 | ) |
| Balance                        at December 31,   |   | $                                                       | **6,478**  |   | $ | 4,156 |   | $ | 2,105 |   |

|                                                                       |   | **At                        December 31,** |      |
|----------------------------------------------------------------------------|--------|--------------------------------------------|-----------|
| ***(in                        thousands)***                                |   | **2006**                                   |      | 2005 |   | 2004 |   |
| Non-accrual                        loans                                   |   | **$**                                      | **4,869** |   | $ | 6,839 |   | $ | 4,544 |   |
| Accruing                        loans 90 days or more past due             |   |                                       | **1,058** |   |   | 2,167 |   |   | 511 |   |
| Total                        non-performing loans                          |   | **$**                                      | **5,927** |   | $ | 9,006 |   | $ | 5,055 |   |
|                                                                       |   |                                       |      |   |   |   |   |   |   |   |
| Interest                        income not recognized on non-accrual loans |   | **$**                                      | **459**   |   | $ | 301 |   | $ | 125 |   |

|                                                                  |   | **Year                        Ended December 31,** |       |
|-----------------------------------------------------------------------|--------|----------------------------------------------------|------------|
| ***(in                        thousands)***                           |   | **2006**                                           |       | 2005 |   | 2004 |   |
| Allowance                        for loan losses, beginning of period |   | **$**                                              | **15,964** |   | $ | 10,461 |   | $ | 7,910 |   |
| Allowance                        acquired from acquisition of NEPF    |   |                                               | **-**      |   |   | 5,281 |   |   | - |   |
| Provision                        for loan losses                      |   |                                               | **3,329**  |   |   | 2,780 |   |   | 4,308 |   |
| Loans                        charged-off                              |   |                                               | **2,708**  |   |   | 2,884 |   |   | 2,012 |   |
| Recoveries                        on loans previously charged-off     |   |                                               | **459**    |   |   | 326 |   |   | 255 |   |
| Balance,                        end of year                           |   | **$**                                              | **17,044** |   | $ | 15,964 |   | $ | 10,461 |   |

*79*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| **5.** | **ASSET                          SECURITIZATION AND CAPITALIZED SERVICING                          ASSETS** |
|--------|-------------------------------------------------------------------------------------------------------------|

|                                                                             |   | **Year                        Ended December 31,** |      |
|----------------------------------------------------------------------------------|--------|----------------------------------------------------|-----------|
| ***(in                        thousands)***                                      |   | **2006**                                           |      | 2005 |   | 2004 |   |
| Balance,                        beginning                                        |   | **$**                                              | **2,418** |   | $ | 1,438 |   | $ | 1,040 |   |
| Acquired                        from NEPF                                        |   |                                               | **-**     |   |   | 713 |   |   | - |   |
| Amortization                                                                     |   |                                               | **(381**  | **)** |   | (422 | ) |   | (415 | ) |
| Sales                                                                            |   |                                               | **338**   |   |   | 689 |   |   | 813 |   |
| Ending                        balance, net (included in other intangible assets) |   | **$**                                              | **2,375** |   | $ | 2,418 |   | $ | 1,438 |   |

| **6.** | **PREMISES                            AND EQUIPMENT** |
|--------|-------------------------------------------------------|

|                                                                  |   | **At                        December 31,** |        | **Estimated** |   |
|-----------------------------------------------------------------------|--------|--------------------------------------------|-------------|---------------|--------|
| ***(dollars                        in thousands)***                   |   | **2006**                                   |        | 2005          |   | **useful                        lives** |   |
| Land                                                                  |   | **$**                                      | **6,593**   |          | $      | 5,461 |   |   | Indefinite |   |
| Buildings                        and leasehold improvements           |   |                                       | **39,701**  |          |   | 36,188 |   |   | 5                        - 50 years |   |
| Furniture                        and fixtures                         |   |                                       | **28,623**  |          |   | 26,939 |   |   | 3                        - 10 years |   |
| Fair                        value adjustment                          |   |                                       | **1,496**   |          |   | 1,289 |   |   | 20                        years |   |
| Total                        cost basis of premises and equipment     |   |                                       | **76,413**  |          |   | 69,877 |   |   |   |   |
| Less                        accumulated depreciation and amortization |   |                                       | **(28,185** | **)**         |   | (22,773 | ) |   |   |   |
| Total                        premises and equipment, net              |   | **$**                                      | **48,228**  |          | $      | 47,104 |   |   |   |   |

*80*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| **7.** | **DEPOSITS** |
|--------|--------------|

|                                                      |   | **At                        December 31,** |          |
|-----------------------------------------------------------|--------|--------------------------------------------|---------------|
| ***(in                        thousands)***               |   | **2006**                                   |          | 2005 |   |
| Non-interest                        bearing deposits      |   | **$**                                      | **206,972**   |   | $ | 194,549 |   |
| Interest-bearing                        checking deposits |   |                                       | **241,567**   |   |   | 233,520 |   |
| Money                        market deposits              |   |                                       | **532,824**   |   |   | 264,223 |   |
| Savings                        and club deposits          |   |                                       | **214,949**   |   |   | 395,893 |   |
| Time                        deposits                      |   |                                       | **578,895**   |   |   | 630,389 |   |
| Time                        deposits of $100,000 or more  |   |                                       | **132,340**   |   |   | 133,677 |   |
|                                                      |   | **$**                                      | **1,907,547** |   | $ | 1,852,251 |   |

| ***(in                        thousands)*** |   |   |    |
|---------------------------------------------|--------|--------|---------|
| 2007                                        |   | $      | 553,440 |   |
| 2008                                        |   |   | 95,156  |   |
| 2009                                        |   |   | 38,519  |   |
| 2010                                        |   |   | 18,901  |   |
| 2011                                        |   |   | 3,537   |   |
| Thereafter                                  |   |   | 1,682   |   |
|                                        |   | $      | 711,235 |   |

| **8.** | **BORROWINGS** |
|--------|----------------|

**FHLB              Advances**

*81*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

|                                                                   |   | **At                        or For the Year Ended December 31,** |        |
|------------------------------------------------------------------------|--------|------------------------------------------------------------------|-------------|
| ***(dollars                        in thousands)***                    |   | **2006**                                                         |        | 2005 |   | 2004 |   |
| Average                        balance of FHLB advances outstanding    |   | **$**                                                            | **617,555** |   | $ | 753,483 |   | $ | 425,167 |   |
| Maximum                        amount outstanding at                   |   |                                                             |        |   |   |   |   |   |   |   |
| any                        month-end during the period                 |   | **$**                                                            | **696,130** |   | $ | 869,585 |   | $ | 664,228 |   |
| Balance                        outstanding at end of period            |   | **$**                                                            | **516,305** |   | $ | 702,022 |   | $ | 660,674 |   |
| Average                        interest rate during the period         |   |                                                             | **3.95**    | **%** |   | 3.56 | % |   | 3.37 | % |
| Weighted                        average interest rate at end of period |   |                                                             | **4.00**    | **%** |   | 3.64 | % |   | 3.30 | % |

| ***(in                        thousands)*** |   | **At                        December 31, 2006** |    |
|---------------------------------------------|--------|-------------------------------------------------|---------|
| FHLB                        advances due in |   |                                            |    |
| 2007                                        |   | $                                               | 209,182 |   |
| 2008                                        |   |                                            | 91,449  |   |
| 2009                                        |   |                                            | 110,168 |   |
| 2010                                        |   |                                            | 21,135  |   |
| 2011                                        |   |                                            | 31,193  |   |
| Thereafter                                  |   |                                            | 53,178  |   |
| Total                                       |   | $                                               | 516,305 |   |

**Securities              Sold Under Agreements to Repurchase**

|                                                           |   | **At                        or For the Year Ended December 31,** |       |
|----------------------------------------------------------------|--------|------------------------------------------------------------------|------------|
| ***(dollars                        in thousands)***            |   | **2006**                                                         |       | 2005 |   | 2004 |   |
| Average                        balance outstanding             |   | **$**                                                            | **55,055** |   | $ | 51,011 |   | $ | 22,579 |   |
| Maximum                        amount outstanding at           |   |                                                             |       |   |   |   |   |   |   |   |
| any                        month-end during the period         |   | **$**                                                            | **73,885** |   | $ | 76,932 |   | $ | 31,076 |   |
| Balance                        outstanding at end of period    |   | **$**                                                            | **45,296** |   | $ | 76,932 |   | $ | 22,643 |   |
| Average                        interest rate during the period |   |                                                             | **3.82**   | **%** |   | 3.27 | % |   | 0.75 | % |
| Weighted                        average interest rate at       |   |                                                             |       |   |   |   |   |   |   |   |
| end                        of period                           |   |                                                             | **4.12**   | **%** |   | 3.94 | % |   | 0.99 | % |

*82*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

**Guaranteed              Preferred Beneficial Interest in KNBT’s Subordinated              Debenture**

** **

| **9.** | **EXTINGUISHMENT                          OF DEBT** |
|--------|-----------------------------------------------------|

*83*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| **10.** | **INCOME                          TAXES** |
|---------|-------------------------------------------|

|                                                      |   | **Year                          Ended December 31,** |       |
|-----------------------------------------------------------|--------|------------------------------------------------------|------------|
| ***(in                          thousands)***             |   | **2006**                                             |       | 2005 |   | 2004 |   |
| **Federal:**                                              |   |                                                 |       |   |   |   |   |
| Current                                                   |   | **$**                                                | **7,684**  |   | $ | 5,927 |   | $ | 4,745 |   |
| Deferred                                                  |   |                                                 | **1,971**  |   |   | 2,885 |   |   | (79 | ) |
| Total                          federal income tax expense |   | **$**                                                | **9,655**  |   | $ | 8,812 |   | $ | 4,666 |   |
| **State:**                                                |   |                                                 |       |   |   |   |   |   |   |   |
| Current                                                   |   |                                                 | **444**    |   |   | - |   |   | - |   |
| Deferred                                                  |   |                                                 | -          |   |   | 344 |   |   | - |   |
| Total                          income tax expense         |   | **$**                                                | **10,099** |   | $ | 9,156 |   | $ | 4,666 |   |

|                                                                           |   | **Year                          Ended December 31,** |       |
|--------------------------------------------------------------------------------|--------|------------------------------------------------------|------------|
| ***(in                          thousands)***                                  |   | **2006**                                             |       | 2005 |   | 2004 |   |
| Expected                          income tax expense (benefit)                 |   | **$**                                                | **11,796** |   | $ | 10,494 |   | $ | 7,795 |   |
| Increase                          (decrease) resulting from:                   |   |                                                 |       |   |   |   |   |   |   |   |
| Tax-exempt                          income                                     |   |                                                 | **(2,092** | **)** |   | (2,793 | ) |   | (3,156 | ) |
| State                          income tax expense, net of federal tax benefits |   |                                                 | **289**    |   |   | 223 |   |   | - |   |
| Establish                          valuation for NOL                           |   |                                                 | -          |   |   | 1,100 |   |   | - |   |
| Other,                          net                                            |   |                                                 | **106**    |   |   | 132 |   |   | 27 |   |
| Income                          tax expense (benefit)                          |   | **$**                                                | **10,099** |   | $ | 9,156 |   | $ | 4,666 |   |

|                                                                        |   | **At                          December 31,** |       |
|-----------------------------------------------------------------------------|--------|----------------------------------------------|------------|
| ***(in                          thousands)***                               |   | **2006**                                     |       | 2005 |   |
| **Deferred                          tax assets:**                           |   |                                         |       |   |   |
| Accrued                          Pension and deferred compensation          |   | **$**                                        | **3,060**  |   | $ | 2,544 |   |
| Allowance                          for loan losses                          |   |                                         | **5,965**  |   |   | 5,587 |   |
| Charitable                          contribution                            |   |                                         | **3,284**  |   |   | 4,427 |   |
| Net                          operating loss carryovers                      |   |                                         | **5,422**  |   |   | 6,157 |   |
| Unrealized                          losses on securities available-for-sale |   |                                         | **5,614**  |   |   | 5,099 |   |
| Fair                          value attributable to borrowings              |   |                                         | **1,091**  |   |   | 1,522 |   |
| Investments                                                                 |   |                                         | **1,846**  |   |   | - |   |
| Other                                                                       |   |                                         | **129**    |   |   | 229 |   |
| Deferred                          tax assets                                |   |                                         | **26,411** |   |   | 25,565 |   |
| **Deferred                          tax liabilities:**                      |   |                                         |       |   |   |   |   |
| Fair                          value attributable to fixed assets            |   |                                         | **847**    |   |   | 838 |   |
| Core                          deposit intangible                            |   |                                         | **5,526**  |   |   | 6,568 |   |
| Fair                          value attributable to loans                   |   |                                         | **132**    |   |   | 208 |   |
| Tax                          deductible goodwill                            |   |                                         | **444**    |   |   | 202 |   |
| Customer                          list intangible                           |   |                                         | **607**    |   |   | 19 |   |
| Mortgage                          servicing rights                          |   |                                         | **830**    |   |   | 846 |   |
| Non-compete                          intangible                             |   |                                         | **279**    |   |   | - |   |
| Deferred                          tax liabilities                           |   |                                         | **8,665**  |   |   | 8,681 |   |
| Valuation                          allowance                                |   |                                         | **(1,100** | **)** |   | (1,100 | ) |
| Net                          deferred income tax asset (liability)          |   | **$**                                        | **16,646** |   | $ | 15,784 |   |

*84*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| **11.** | **TREASURY                          STOCK** |
|---------|---------------------------------------------|

*85*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| **12.** | **RETIREMENT                          PLANS** |
|---------|-----------------------------------------------|

**Defined              Benefit Plans**

**Defined              Contribution Plan**

**Employee              Stock Ownership Plan**

*86*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

**Post-Retirement              Benefit**

|                                                         |   | **Year                        Ended December 31,** |   |
|--------------------------------------------------------------|--------|----------------------------------------------------|--------|
| ***(in                        thousands)***                  |   | **2006**                                           |   | 2005 |   |
| Interest                        cost                         |   | **$**                                              | **10** |   | $ | 10 |   |
| Amortization                        of transition obligation |   |                                               | **16** |   |   | 15 |   |
| Amortization                        of unrecognized gain     |   |                                               | **-**  |   |   | - |   |
| Net                        periodic benefit cost             |   | **$**                                              | **26** |   | $ | 25 |   |

|                                                | **Year                        Ended December 31,** |
|-----------------------------------------------------|----------------------------------------------------|
|                                                | **2006**                                           |   | 2005 |
| Discount                        rate                | **5.75%**                                          |   | 5.75% |
| Medical                        care cost trend rate | **7.00%**                                          |   | 8.00% |

|                                                                              |   | **Year                        Ended December 31,** |     |
|-----------------------------------------------------------------------------------|--------|----------------------------------------------------|----------|
| ***(in                        thousands)***                                       |   | **2006**                                           |     | 2005 |   |
| Change                        in benefit obligation:                              |   |                                               |     |   |   |
| Benefit                        obligation assumed from merger with First Colonial |   | **$**                                              | **170**  |   | $ | 234 |   |
| Service                        cost                                               |   |                                               | **-**    |   |   | - |   |
| Interest                        cost                                              |   |                                               | **10**   |   |   | 10 |   |
| Benefits                        paid                                              |   |                                               | **(7**   | **)** |   | (19 | ) |
| Change                        due to change in experience                         |   |                                               | **23**   |   |   | (57 | ) |
| Change                        due to change in assumptions                        |   |                                               | **(115** | **)** |   | 2 |   |
| Benefits                        obligation at end of year                         |   |                                               | **81**   |   |   | 170 |   |
|                                                                              |   |                                               |     |   |   |   |   |
| Change                        in plan assets:                                     |   |                                               |     |   |   |   |   |
| Fair                        value of plan assets at beginning of year             |   |                                               | **-**    |   |   | - |   |
| Actual                        return on plan assets                               |   |                                               | **-**    |   |   | - |   |
| Employer                        contribution                                      |   |                                               | **-**    |   |   | - |   |
| Benefits                        paid                                              |   |                                               | **-**    |   |   | - |   |
| Fair                        value of plan assets at end of year                   |   |                                               | **-**    |   |   | - |   |
| Funded                        status                                              |   | **$**                                              | **(81**  | **)** | $ | (170 | ) |
|                                                                              |   |                                               |     |   |   |   |   |
| Unrecognized                        items of benefit cost:                        |   |                                               |     |   |   |   |   |
| Net                        transition obligation                                  |   | **$**                                              | **92**   |   | $ | 108 |   |
| Net                        gain                                                   |   |                                               | **(109** | **)** |   | (17 | ) |
| Unrecognized                        component of benefit cost                     |   | **$**                                              | **(17**  | **)** | $ | 91 |   |

*87*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

|                                            |  **Estimated                          Future Benefit Payments** |
|-------------------------------------------------|----------------------------------------------------------------------|
| 1/1/2007                          to 12/31/2007 |                                                                 | $ | 8,558 |   |
| 1/1/2008                          to 12/31/2008 |                                                                 | $ | 8,896 |   |
| 1/1/2009                          to 12/31/2009 |                                                                 | $ | 8,964 |   |
| 1/1/2010                          to 12/31/2010 |                                                                 | $ | 8,902 |   |
| 1/1/2011                          to 12/31/2011 |                                                                 | $ | 8,715 |   |
| 1/1/2012                          to 12/31/2016 |                                                                 | $ | 37,253 |   |

**Directors’              Deferred Plan**

|                                                                              |   | **Year                        Ended December 31,** |     |
|-----------------------------------------------------------------------------------|--------|----------------------------------------------------|----------|
| ***(in                        thousands)***                                       |   | **2006**                                           |     | 2005 |   |
| Change                        in benefit obligation:                              |   |                                               |     |   |   |
| Benefit                        obligation assumed from merger with First Colonial |   | **$**                                              | **318**  |   | $ | 338 |   |
| Service                        cost                                               |   |                                               | **-**    |   |   | - |   |
| Interest                        cost                                              |   |                                               | **17**   |   |   | 19 |   |
| Benefits                        paid                                              |   |                                               | **(27**  | **)** |   | (41 | ) |
| Actual                        gain                                                |   |                                               | **(3**   | **)** |   | (2 | ) |
| Change                        due to plan amendment                               |   |                                               | **-**    |   |   | - |   |
| Change                        due to change in assumptions                        |   |                                               | **-**    |   |   | 4 |   |
| Benefits                        obligation at end of year                         |   |                                               | **305**  |   |   | 318 |   |
|                                                                              |   |                                               |     |   |   |   |   |
| Change                        in plan assets:                                     |   |                                               |     |   |   |   |   |
| Fair                        value of plan assets at beginning of year             |   |                                               | **-**    |   |   | - |   |
| Actual                        return on plan assets                               |   |                                               | **-**    |   |   | - |   |
| Employer                        contribution                                      |   |                                               | **27**   |   |   | 41 |   |
| Benefits                        paid                                              |   |                                               | **(27**  | **)** |   | (41 | ) |
| Fair                        value of plan assets at end of year                   |   |                                               | **-**    |   |   | - |   |
|                                                                              |   |                                               |     |   |   |   |   |
| Funded                        status                                              |   | **$**                                              | **(305** | **)** | $ | (318 | ) |
|                                                                              |   |                                               |     |   |   |   |   |
| Unrecognized                        items of benefit cost:                        |   |                                               |     |   |   |   |   |
| Net                        transition obligation                                  |   | **$**                                              | **-**    |   | $ | - |   |
| Net                        loss                                                   |   |                                               | **37**   |   |   | 41 |   |
| Unrecognized                        component of benefit cost                     |   | **$**                                              | **37**   |   | $ | 41 |   |

*88*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

|                                                   |   | **Year                        Ended December 31,** |   |
|--------------------------------------------------------|--------|----------------------------------------------------|--------|
| ***(in                        thousands)***            |   | **2006**                                           |   | 2005 |   |
| Service                        cost                    |   | **$**                                              | **-**  |   | $ | - |   |
| Interest                        cost                   |   |                                               | **17** |   |   | 19 |   |
| Net                        amortization and            |   |                                               |   |   |   |   |   |
| deferral                        of prior service costs |   |                                               | **-**  |   |   | - |   |
| Amortization                        of net loss        |   |                                               | **1**  |   |   | - |   |
| Net                        periodic benefit cost       |   | **$**                                              | **18** |   | $ | 19 |   |

|                                            |  **Estimated                          Future Benefit Payments** |
|-------------------------------------------------|----------------------------------------------------------------------|
| 1/1/2007                          to 12/31/2007 |                                                                 | $ | 34,437 |   |
| 1/1/2008                          to 12/31/2008 |                                                                 | $ | 37,475 |   |
| 1/1/2009                          to 12/31/2009 |                                                                 | $ | 37,475 |   |
| 1/1/2010                          to 12/31/2010 |                                                                 | $ | 37,475 |   |
| 1/1/2011                          to 12/31/2011 |                                                                 | $ | 37,475 |   |
| 1/1/2012                          to 12/31/2016 |                                                                 | $ | 116,030 |   |

**Deferred              Compensation Plans**

*89*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| **13.** | **STOCK                          OPTIONS** |
|---------|--------------------------------------------|

**Stock              Option Plans**

|                                                                                                                                                                               |   | **For                        the Years Ended December 31,** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------|
|                                                                                                                                                                               |   | **2006**                                                    |   | 2005 |   | 2004 |
| Expected                        dividend yield                                                                                                                                     |   | **2.50%**                                                   |   | 2.00% |   | 2.00% |
| Expected                        volatility                                                                                                                                         |   | **22.63%**                                                  |   | 25.00% |   | 25.00% |
| Range                        of risk-free interest rates (1)                                                                                                                       |   | **4.31%                        to 4.61%**                   |   | 3.91%                        to 4.21% |   | 3.73%                        to 4.21% |
| Range                        of expected option life (1)                                                                                                                           |   | **6.5                        to 7 years**                   |   | 7                        to 9 years |   | 7                        to 10 years |
| Range                        of fair values (1)                                                                                                                                    |   | **$3.77                        to $3.85**                   |   | $3.99                        to $4.38 |   | $4.24                        to $4.53 |
|                                                                                                                                                                               |   |                                                        |   |   |   |   |
| (1)                        The factors relating to these variables represent averages                        for grants                        issued during the respective years. |

*90*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

|                                                       |   | Year                        Ended            |          |
|------------------------------------------------------------|--------|----------------------------------------------|---------------|
|                                                       |   | **December                        31, 2006** |          | December                        31, 2005 |   | December                        31, 2004 |   |
|                                                       |   |                                         |          | **Weighted** |   |   |   | Weighted |   |   |   | Weighted |   |
|                                                       |   |                                         |          | **Average** |   |   |   | Average |   |   |   | Average |   |
|                                                       |   |                                         |          | **Exercise** |   |   |   | Exercise |   |   |   | Exercise |   |
|                                                       |   | **Shares**                                   |          | **Price** |   | Shares |   | Price |   | Shares |   | Price |   |
| Outstanding                        as of beginning of year |   |                                         | **1,796,338** |   | **$** | **13.58** |   |   | 1,618,396 |   | $ | 13.07 |   |   | 789,423 |   | $ | 5.63 |   |
| Issued                                                     |   |                                         | **217,400**   |   |   | **16.51** |   |   | 231,650 |   |   | 15.79 |   |   | 1,132,000 |   |   | 16.50 |   |
| Exercised                                                  |   |                                         | **(38,381**   | **)** |   | **5.38** |   |   | (41,958 | ) |   | 5.30 |   |   | (242,002 | ) |   | 5.66 |   |
| Forfeited                                                  |   |                                         | **(13,925**   | **)** |   | **13.08** |   |   | (11,750 | ) |   | 16.43 |   |   | (61,025 | ) |   | 9.81 |   |
| Expired                                                    |   |                                         | **-**         |   |   | **-** |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Outstanding                        as of year end          |   |                                         | **1,961,432** |   | **$** | **14.07** |   |   | 1,796,338 |   | $ | 13.58 |   |   | 1,618,396 |   | $ | 13.58 |   |
|                                                       |   |                                         |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shares                        exercisable as of year end   |   |                                         | **811,984**   |   | **$** | **10.79** |   |   | 642,538 |   | $ | 8.59 |   |   | 509,896 |   | $ | 5.61 |   |

|                                   |   | 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   |   |                                       | 48,197    |                                       |   | 4.33 |   | $ | 4.20 |   |   | 48,197 |   | $ | 4.20 |   |
| $4.36                        - $6.37   |   |                                       | 315,425   |                                       |   | 4.97 |   | $ | 5.67 |   |   | 315,425 |   | $ | 5.67 |   |
| $6.38                        - $8.36   |   |                                       | 61,380    |                                       |   | 5.04 |   | $ | 6.72 |   |   | 61,380 |   | $ | 6.72 |   |
| $11.35                        - $16.56 |   |                                       | 1,536,430 |                                       |   | 7.70 |   | $ | 16.40 |   |   | 386,982 |   | $ | 16.42 |   |
|                                   |   |                                       | 1,961,432 |                                       |   | 7.10 |   |   |   |   |   | 811,984 |   |   |   |   |

*91*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

*Management              Recognition and Retention Plan*

| **14.** | **FAIR                          VALUE OF FINANCIAL                          INSTRUMENTS** |
|---------|-------------------------------------------------------------------------------------------|

*92*

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**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

|                                                              | **At                        December 31,** |
|-------------------------------------------------------------------|--------------------------------------------|
|                                                              | **2006**                                   |   | 2005 |
| ***(in                        thousands)***                       | **Carrying                        Amount** | **Estimated                        Fair Value** |   | Carrying                        Amount | Estimated                        Fair Value |
| Investments                        and mortgage-backed securities | **$                        892,386**       | **$                        891,902** |   | $                        1,166,641 | $                        1,166,347 |
| FHLBank                        Pittsburgh stock                   | **30,724**                                 | **30,724** |   | 40,239 | 40,239 |
| Loans                        receivable net                       | **1,603,122**                              | **1,582,180** |   | 1,465,764 | 1,453,059 |
| Mortgage                        loans held-for-sale               | **1,994**                                  | **1,994** |   | 556 | 556 |
| Bank                        owned life insurance                  | **78,361**                                 | **78,361** |   | 75,087 | 75,087 |

|                                                                  | **At                        December 31,** |
|-----------------------------------------------------------------------|--------------------------------------------|
|                                                                  | **2006**                                   |   |   | 2005 |
| ***(in                        thousands)***                           | **Carrying                        Amount** | **Estimated                        Fair Value** |   | Carrying                        Amount | Estimated                        Fair Value |
| Time                        deposits                                  | **$                        711,235**       | **$                        705,833** |   |   | $                        764,066 | $                        754,857 |
| Securities                        sold under agreements to repurchase | **45,296**                                 | **45,296** |   |   | 76,932 | 76,932 |
| Advances                        from the Federal Home Loan Bank       | **519,161**                                | **510,398** |   |   | 705,125 | 688,295 |

*93*

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**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| **15.** | **FINANCIAL                          INSTRUMENTS WITH OFF-BALANCE-SHEET                          RISK** |
|---------|---------------------------------------------------------------------------------------------------------|

|                                                            |   | **At                        December 31,** |        |
|-----------------------------------------------------------------|--------|--------------------------------------------|-------------|
| ***(in                        thousands)***                     |   | **2006**                                   |        | 2005 |   |
| Commitments                        to extend credit             |   |                                       |        |   |   |
| Lines                        of credit:                         |   |                                       |        |   |   |
| Commercial                        loans                         |   | **$**                                      | **161,477** |   | $ | 141,627 |   |
| Home                        equity secured by mortgage          |   |                                       | **128,793** |   |   | 90,340 |   |
| Unsecured                        consumer including credit card |   |                                       | **13,205**  |   |   | 14,277 |   |
| Total                        lines of credit                    |   |                                       | **303,475** |   |   | 246,244 |   |
| Letters                        of credit                        |   |                                       | **33,151**  |   |   | 31,379 |   |
| Other                        loan commitments:                  |   |                                       |        |   |   |   |   |
| Commercial                        loans unsecured               |   |                                       | **17,788**  |   |   | 14,740 |   |
| Commercial                        loans secured                 |   |                                       | **35,969**  |   |   | 32,916 |   |
| Residential                        mortgages                    |   |                                       | **34,000**  |   |   | 46,960 |   |
| Consumer                        (auto, personal)                |   |                                       | **1,841**   |   |   | 1,832 |   |
| Total                        other loan commitments             |   |                                       | **89,598**  |   |   | 96,448 |   |
| Total                        commitments to extend credit       |   | **$**                                      | **426,224** |   | $ | 374,071 |   |

*94*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| **16.** | **COMMITMENTS                          AND CONTINGENCIES** |
|---------|------------------------------------------------------------|

|       |  ***(in                        thousands)*** |
|------------|---------------------------------------------------|
| 2007       |                                              | 1,639 |   |
| 2008       |                                              | 1,398 |   |
| 2009       |                                              | 1,248 |   |
| 2010       |                                              | 1,077 |   |
| 2011       |                                              | 881 |   |
| Thereafter |                                              | 6,010 |   |
|       |                                              | $                        12,253 |   |

| **17.** | **REGULATORY                          MATTERS** |
|---------|-------------------------------------------------|

**-              **
**-              **

*95*

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**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

|                                                         | **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%** |
|                                                         |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                         | At                            December 31, 2005     |
|                                                         |                                                |   |   |   |   | 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)            | $                            312,731                |   | 16.95% |   |   | $                            147,617 |   | 8.00% |   |   | N/A |   | N/A |
| Bank                                                         | $                            281,866                |   | 15.16% |   |   | $                            148,727 |   | 8.00% |   |   | $                            185,908 |   | 10.00% |
| Tier                            I Capital                    |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| (To                            risk-weighted assets)         |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Company                            (consolidated)            | $                            296,543                |   | 16.07% |   |   | $                            73,809 |   | 4.00% |   |   | N/A |   | N/A |
| Bank                                                         | $                            265,902                |   | 14.30% |   |   | $                            74,363 |   | 4.00% |   |   | $                            111,545 |   | 6.00% |
| Tier                            I Capital                    |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| (To                            average assets, leverage)     |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Company                            (consolidated)            | $                            296,543                |   | 9.84% |   |   | $                            120,599 |   | 4.00% |   |   | N/A |   | N/A |
| Bank                                                         | $                            265,902                |   | 8.80% |   |   | $                            120,895 |   | 4.00% |   |   | $                            151,119 |   | 5.00% |

*96*

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**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| **18.** | **SALE                          OF BRANCHES** |
|---------|-----------------------------------------------|

| **19.** | **QUARTERLY                          FINANCIAL DATA (Unaudited)** |
|---------|-------------------------------------------------------------------|

|                                                               |   | **Three                        Months Ended** |           |
|--------------------------------------------------------------------|--------|-----------------------------------------------|----------------|
| ***(in                        thousands except per share data)***  |   | **Dec.                        31**            |           | **Sept.                        30** |   | **June                        30** |   | **March                        31** |   |
| **2006**                                                           |   |                                          |           |   |   |   |   |   |   |
| **Interest                        income**                         |   | **$**                                         | **37,719**     |   | **$** | **37,769** |   | **$** | **36,661** |   | **$** | **36,272** |   |
| **Interest                        expense**                        |   |                                          | **20,087**     |   |   | **19,794** |   |   | **18,140** |   |   | **17,536** |   |
| **Net                        interest income**                     |   |                                          | **17,632**     |   |   | **17,975** |   |   | **18,521** |   |   | **18,736** |   |
| **Provision                        for loan losses**               |   |                                          | **1,014**      |   |   | **365** |   |   | **1,200** |   |   | **750** |   |
| **Non-interest                        income**                     |   |                                          | **12,369**     |   |   | **10,173** |   |   | **10,449** |   |   | **9,080** |   |
| **Non-interest                        expense**                    |   |                                          | **19,787**     |   |   | **19,203** |   |   | **19,400** |   |   | **19,514** |   |
| **Income                        before income taxes**              |   |                                          | **9,200**      |   |   | **8,580** |   |   | **8,370** |   |   | **7,552** |   |
| **Net                        income**                              |   |                                          | **6,306**      |   |   | **5,911** |   |   | **5,906** |   |   | **5,480** |   |
|                                                               |   |                                          |           |   |   |   |   |   |   |   |   |   |   |
| **Per                        Common Share Data**                   |   |                                          |           |   |   |   |   |   |   |   |   |   |   |
| **Weighted                        average common shares- diluted** |   |                                          | **26,578,083** |   |   | **26,540,660** |   |   | **27,805,107** |   |   | **28,425,764** |   |
| **Weighted                        average common shares- basic**   |   |                                          | **26,303,917** |   |   | **26,355,973** |   |   | **27,381,824** |   |   | **28,045,012** |   |
| **Net                        income per share- diluted**           |   | **$**                                         | **0.24**       |   | **$** | **0.22** |   | **$** | **0.21** |   | **$** | **0.19** |   |
| **Net                        income per share- basic**             |   | **$**                                         | **0.24**       |   | **$** | **0.22** |   | **$** | **0.22** |   | **$** | **0.20** |   |
|                                                               |   |                                          |           |   |   |   |   |   |   |   |   |   |   |
| 2005                                                               |   |                                          |           |   |   |   |   |   |   |   |   |   |   |
| Interest                        income                             |   | $                                             | 37,129         |   | $ | 36,444 |   | $ | 31,611 |   | $ | 26,966 |   |
| Interest                        expense                            |   |                                          | 17,959         |   |   | 16,282 |   |   | 13,551 |   |   | 10,827 |   |
| Net                        interest income                         |   |                                          | 19,170         |   |   | 20,162 |   |   | 18,060 |   |   | 16,139 |   |
| Provision                        for loan losses                   |   |                                          | 852            |   |   | 660 |   |   | 534 |   |   | 734 |   |
| Non-interest                        income                         |   |                                          | 7,666          |   |   | 7,762 |   |   | 6,556 |   |   | 4,442 |   |
| Non-interest                        expense                        |   |                                          | 18,422         |   |   | 18,378 |   |   | 16,970 |   |   | 13,425 |   |
| Income                        before income taxes                  |   |                                          | 7,562          |   |   | 8,886 |   |   | 7,112 |   |   | 6,422 |   |
| Net                        income                                  |   |                                          | 5,451          |   |   | 5,307 |   |   | 5,238 |   |   | 4,830 |   |
|                                                               |   |                                          |           |   |   |   |   |   |   |   |   |   |   |
| Per                        Common Share Data                       |   |                                          |           |   |   |   |   |   |   |   |   |   |   |
| Weighted                        average common shares- diluted     |   |                                          | 29,635,769     |   |   | 29,734,426 |   |   | 29,630,725 |   |   | 28,537,778 |   |
| Weighted                        average common shares- basic       |   |                                          | 28,927,609     |   |   | 29,681,764 |   |   | 29,358,352 |   |   | 28,226,035 |   |
| Net                        income per share- diluted               |   | $                                             | 0.19           |   | $ | 0.18 |   | $ | 0.18 |   | $ | 0.17 |   |
| Net                        income per share- basic                 |   | $                                             | 0.19           |   | $ | 0.18 |   | $ | 0.18 |   | $ | 0.17 |   |

*97*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| **20.** | **KNBT                          BANCORP, INC.** |
|---------|-------------------------------------------------|

|   | **(PARENT                          COMPANY ONLY)** |
|--------|----------------------------------------------------|

| **CONDENSED                        BALANCE SHEET**              |   | **At                        December 31,** |        |
|-----------------------------------------------------------------|--------|--------------------------------------------|-------------|
| ***(dollars                        in thousands)***             |   | **2006**                                   |        | 2005 |   |
| **Assets**                                                      |   |                                       |        |   |   |
| Cash                        and due from banks                  |   | **$**                                      | **-**       |   | $ | - |   |
| Interest-bearing                        deposits with banks     |   |                                       | **3,681**   |   |   | 5,213 |   |
| Total                        cash and cash equivalents          |   |                                       | **3,681**   |   |   | 5,213 |   |
| Investments                        available for sale           |   |                                       | **72**      |   |   | 68 |   |
| Loans                        receivable                         |   |                                       | **14,327**  |   |   | 14,917 |   |
| Investment                        in banking subsidiary         |   |                                       | **360,998** |   |   | 381,993 |   |
| Investment                        in other subsidiaries         |   |                                       | **92,567**  |   |   | 92,034 |   |
| Goodwill                                                        |   |                                       | **642**     |   |   | 642 |   |
| Other                        assets                             |   |                                       | **31,986**  |   |   | 23,034 |   |
| Total                        assets                             |   | **$**                                      | **504,273** |   | $ | 517,901 |   |
|                                                            |   |                                       |        |   |   |   |   |
| **Liabilities**                                                 |   |                                       |        |   |   |   |   |
| Subordinated                        debentures                  |   |                                       | **38,406**  |   |   | 38,872 |   |
| Due                        to subsidiaries                      |   |                                       | **108,690** |   |   | 101,155 |   |
| Other                        liabilities                        |   |                                       | **1,151**   |   |   | 1,322 |   |
| Total                        liabilities                        |   |                                       | **148,247** |   |   | 141,349 |   |
| Shareholders'                        equity                     |   |                                       | **356,026** |   |   | 376,552 |   |
| Total                        liability and shareholders' equity |   | **$**                                      | **504,273** |   | $ | 517,901 |   |

| **CONDENSED                        STATEMENT OF OPERATIONS**                    |   | **For                        the Year ended December 31,** |       |
|---------------------------------------------------------------------------------|--------|------------------------------------------------------------|------------|
| ***(in                        thousands)***                                     |   | **2006**                                                   |       | 2005 |   | 2004 |   |
| **Income**                                                                      |   |                                                       |       |   |   |   |   |
| Interest                        on deposits with banks                          |   | **$**                                                      | **20**     |   | $ | 15 |   | $ | 101 |   |
| Interest                        on investment securities                        |   |                                                       | **1**      |   |   | - |   |   | - |   |
| Interest                        on ESOP loan                                    |   |                                                       | **332**    |   |   | 401 |   |   | 507 |   |
| Statutory                        trust income                                   |   |                                                       | **40**     |   |   | 32 |   |   | 23 |   |
| Equity                        in net earnings of subsidiaries                   |   |                                                       | **28,068** |   |   | 23,807 |   |   | 18,812 |   |
| Other                        income                                             |   |                                                       | **26**     |   |   | 53 |   |   | 5 |   |
| Total                        income                                             |   |                                                       | **28,487** |   |   | 24,308 |   |   | 19,448 |   |
|                                                                            |   |                                                       |       |   |   |   |   |   |   |   |
| **Expenses**                                                                    |   |                                                       |       |   |   |   |   |   |   |   |
| Interest                        on long-term ESOP debt                          |   |                                                       | **-**      |   |   | - |   |   | 172 |   |
| Interest                        on Subordinated Debt                            |   |                                                       | **2,790**  |   |   | 1,802 |   |   | 775 |   |
| Other                        expense                                            |   |                                                       | **4,502**  |   |   | 3,290 |   |   | 2,340 |   |
| Total                        expense                                            |   |                                                       | **7,292**  |   |   | 5,092 |   |   | 3,287 |   |
|                                                                            |   |                                                       |       |   |   |   |   |   |   |   |
| Income                        before income tax benefit                         |   |                                                       |       |   |   |   |   |   |   |   |
| and                        equity in undistributed net earnings of subsidiaries |   |                                                       | **21,195** |   |   | 19,216 |   |   | 16,161 |   |
| Income                        tax benefit                                       |   |                                                       | **(2,408** | **)** |   | (1,610 | ) |   | (1,445 | ) |
| Net                        income                                               |   | **$**                                                      | **23,603** |   | $ | 20,826 |   | $ | 17,606 |   |

*98*

----

**KNBT              BANCORP, INC. AND SUBSIDIARIES**

**Notes              to Consolidated Financial Statements **

| **CONDENSED                          STATEMENT OF CASH FLOWS**               |   | **For                          the Years Ended December 31,** |        |
|------------------------------------------------------------------------------|--------|---------------------------------------------------------------|-------------|
| ***(in                          thousands)***                                |   | **2006**                                                      |        | 2005 |   | 2004 |   |
| **Operating                          activities**                            |   |                                                          |        |   |   |   |   |
| Net                          income                                          |   | **$**                                                         | **23,603**  |   | $ | 20,826 |   | $ | 17,606 |   |
| Adjustments                          to reconcile net income to              |   |                                                          |        |   |   |   |   |   |   |   |
| net                          cash provided by (used in) operating activities |   |                                                          |        |   |   |   |   |   |   |   |
| Net                          earnings of subsidiaries                        |   |                                                          | **(28,068** | **)** |   | (23,807 | ) |   | (18,812 | ) |
| Changes                          in assets and liabilities                   |   |                                                          |        |   |   |   |   |   |   |   |
| Decrease                          (increase) in other assets                 |   |                                                          | **(9,420**  | **)** |   | (16,274 | ) |   | 678 |   |
| Increase                          (decrease) in other liabilities            |   |                                                          | **(171**    | **)** |   | (6,485 | ) |   | 17,360 |   |
| Compensation                          expense stock option plan              |   |                                                          | **1,120**   |   |   | 21 |   |   | 16 |   |
| ESOP                          expense                                        |   |                                                          | **741**     |   |   | 725 |   |   | 795 |   |
| Management                          Recognition and Retention Plan expense   |   |                                                          | **2,135**   |   |   | 2,128 |   |   | 1,404 |   |
| Net                          cash provided by (used in) operating activities |   |                                                          | **(10,060** | **)** |   | (22,866 | ) |   | 19,047 |   |
|                                                                         |   |                                                          |        |   |   |   |   |   |   |   |
| **Investing                          activities**                            |   |                                                          |        |   |   |   |   |   |   |   |
| Capital                          distribution from subsidiaries              |   |                                                          | **48,000**  |   |   | 35,000 |   |   | - |   |
| Proceeds                          from repayment of ESOP loan                |   |                                                          | **590**     |   |   | 566 |   |   | 437 |   |
| Cash                          paid to acquire businesses                     |   |                                                          | **-**       |   |   | (45,452 | ) |   | - |   |
| Investment                          in subsidiaries                          |   |                                                          | **-**       |   |   | 9,251 |   |   | (85,650 | ) |
| Net                          cash provided by (used in) investing activities |   |                                                          | **48,590**  |   |   | (635 | ) |   | (85,213 | ) |
|                                                                         |   |                                                          |        |   |   |   |   |   |   |   |
| **Financing                          activities**                            |   |                                                          |        |   |   |   |   |   |   |   |
| Borrowings                          from subsidiary                          |   |                                                          | **7,535**   |   |   | 85,700 |   |   | - |   |
| Proceeds                          from the exercise of stock options         |   |                                                          | **206**     |   |   | 223 |   |   | 1,288 |   |
| Dividend                          payments on common stock                   |   |                                                          | **(8,555**  | **)** |   | (7,103 | ) |   | (4,428 | ) |
| Purchase                          of treasury stock                          |   |                                                          | **(39,248** | **)** |   | (50,820 | ) |   | (11,179 | ) |
| Purchase                          of MRRP stock                              |   |                                                          | **-**       |   |   | - |   |   | (13,281 | ) |
| Net                          cash provided by (used in) financing activities |   |                                                          | **(40,062** | **)** |   | 28,000 |   |   | (27,600 | ) |
|                                                                         |   |                                                          |        |   |   |   |   |   |   |   |
| Increase                          (decrease) in cash and cash equivalents    |   |                                                          | **(1,532**  | **)** |   | 4,499 |   |   | (93,766 | ) |
| Cash                          and cash equivalents, January 1                |   |                                                          | **5,213**   |   |   | 714 |   |   | 94,480 |   |
| Cash                          and cash equivalents, December 31              |   | **$**                                                         | **3,681**   |   | $ | 5,213 |   | $ | 714 |   |

| **Item                        9.** | **Changes                        in and Disagreements with Accountants on Accounting and Financial                        Disclosure** |
|------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|

| **Item                          9A.** | **Controls                          and Procedures** |
|---------------------------------------|------------------------------------------------------|

**Evaluation              of Disclosure Controls and Procedures. **

*99*

----

**Management’s              Report on Internal Control Over Financial Reporting**

|   | • |   | Pertain                              to the maintenance of records that, in reasonable detail,                              accurately and                              fairly reflect the transactions and dispositions of                              the assets of                              KNBT; |
|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | Provide                              reasonable assurance that transactions are recorded                              as necessary to permit                              preparation of financial statements in accordance with                              generally accepted                              accounting principles, and that receipts and expenditures                              of KNBT are                              being made only in accordance with authorizations of                              management and the                              board of directors of KNBT; and |
|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • |   | Provide                              reasonable assurance regarding prevention or timely                              detection of                              unauthorized acquisition, use, or disposition of KNBT’s assets that could                              have a material effect on the financial                              statements. |
|--------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*100*

----

**Report                of Independent Registered Public Accounting Firm**

*101*

----

| **Item                          9B.** | **Other                          Information** |
|---------------------------------------|------------------------------------------------|

**PART              III**

| **Item                        10.** | **Directors,                        Executive Officers and Corporate                        Governance** |
|-------------------------------------|----------------------------------------------------------------------------------------------------------|

| **Item                        11.** | **Executive                        Compensation** |
|-------------------------------------|---------------------------------------------------|

| **Item                        12.** | **Security                        Ownership of Certain Beneficial Owners and Management and                        Related                        Stockholder Matters** |
|-------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Equity              Compensation Plan Information**

*102*

----

|      Plan                      Category                |  Number                      of securities to be issued upon exercise of outstanding options,                      warrants                      and rights |   Weighted-average                      exercise price of outstanding options, warrants and rights | Number                      of securities remaining available for future issuance under                      equity                      compensation plans (excluding securities reflected in column                      (a)) |
|---------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Equity                      compensation plans approved by security holders (2) | 2,012,660                      (1)                                                                                                                          | $16.40                      (1) (3)                                                                     | 564,365                                                                                                                                                                                                                    |
| Equity                      compensation plans not approved by security holders | --                                                                                                                                                          | --                                                                                                      | --                                                                                                                                                                                                                         |
| Total                                                                      | 2,012,660                                                                                                                                                        | $16.40                                                                                                       | 564,365                                                                                                                                                                                                                         |

| (1) | Includes                      shares subject to restricted stock grants which were not vested                      as of                      December 31, 2006. The weighted-average exercise price excludes                      such                      restricted stock grants. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | The                      table does not include information for equity compensation                      plans assumed                      by us in connection with the acquisition of First Colonial                      which                      originally established those plans. As of December 31, 2006,                      a total of                      425,002 shares of Common Stock were issuable upon exercise                      of outstanding                      options under those assumed plans and the weighted average                      exercise price                      of those outstanding options was $5.64 per share. No additional                      options                      may be granted under any assumed                      plans. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Includes                      80,747 shares which may be granted in connection with restricted                      stock                      awards pursuant to the 2004 Recognition and Retention                      Plan. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **Item                    13.** | **Certain                    Relationships and Related Transactions and Director                    Independence** |
|---------------------------------|--------------------------------------------------------------------------------------------------------------------|

| **Item                    14.** | **Principal                    Accounting Fees and                    Services** |
|---------------------------------|----------------------------------------------------------------------------------|

*103*

----

**PART          IV**

| **Item                    15.** | **Exhibits,                    Financial Statement                    Schedules** |
|---------------------------------|-----------------------------------------------------------------------------------|

|   | **(1)** | **Financial                    Statements** |
|--------|---------|---------------------------------------------|

|   | • | Consolidated                    Balance Sheets for the years ended December 31, 2006 and                    2005; |
|--------|---------|-------------------------------------------------------------------------------------------------------------------|

|   | • | Consolidated                    Statements of Income for the years ended December 31, 2006, 2005                    and                    2004; |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Consolidated                    Statement of Changes in Shareholders’ Equity for the years ended December                    31, 2006, 2005 and 2004; |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Consolidated                    Statements of Cash Flows for the Years Ended December 31, 2006,                    2005 and                    2004; |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Notes                    to Consolidated Financial Statements;                    and |
|--------|---------|---------------------------------------------------------------------------------------|

|   | • | Report                    of Independent Registered Public Accounting                    Firm |
|--------|---------|-----------------------------------------------------------------------------------------------|

|   | **(2)** | **Exhibits** |
|--------|---------|--------------|

| Exhibit                    No.  | Description  | Location                                                                                                                                                                  |
|--------------------------------------|-------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |              |                                                                                                                                                                      |   |
| 3.1                                  |              | Articles                    of Incorporation of KNBT Bancorp, Inc.                                                                                                        | (1) |
|                                 |              |                                                                                                                                                                      |   |
| 3.2                                  |              | Amended                    and Restated Bylaws of KNBT Bancorp, Inc.                                                                                                      | (2) |
|                                 |              |                                                                                                                                                                      |   |
| 4.0                                  |              | Form                    of Stock Certificate of KNBT Bancorp, Inc.                                                                                                        | (1) |
|                                 |              |                                                                                                                                                                      |   |
| 10.1                                 |              | Amended                    and Restated Employment Agreement between Keystone Nazareth Bank&                    Trust Company, KNBT Bancorp, Inc. and Scott V. Fainor | (3) |
|                                 |              |                                                                                                                                                                      |   |
| 10.2                                 |              | Amended                    and Restated Employment Agreement between Keystone Nazareth Bank&                    Trust Company, KNBT Bancorp, Inc. and Eugene T. Sobol | (3) |
|                                 |              |                                                                                                                                                                      |   |
| 10.3                                 |              | Employment                    Agreement between Keystone Nazareth Bank & Trust Company, KNBT                    Bancorp, Inc. and Sandra L. Bodnyk                    | (3) |
|                                 |              |                                                                                                                                                                      |   |
| 10.4                                 |              | Keystone                    Savings Bank Supplemental Executive Retirement Plan                                                                                           | (1) |
|                                 |              |                                                                                                                                                                      |   |
| 10.5                                 |              | Keystone                    Savings Bank Trustee and Executive Deferred Compensation                    Program                                                           | (4) |

*104*

----

| 10.6   |   | First                      Colonial Group, Inc. 1994 Stock Option Plan for Non-Employee                      Directors                                                                                                                                                                                                                                                                                                         | (5)                                 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.7   |   | First                      Colonial Group, Inc. 1996 Employee Stock Option Plan                                                                                                                                                                                                                                                                                                                                                | (6)                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.8   |   | First                      Colonial Group, Inc. 2001 Stock Option Plan                                                                                                                                                                                                                                                                                                                                                         | (7)                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.9   |   | Nazareth                      National Bank Directors' Deferred Compensation Plan #2                                                                                                                                                                                                                                                                                                                                           | (4)                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.10  |   | KNBT                      Bancorp, Inc. 2004 Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                 | (8)                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.11  |   | KNBT                      Bancorp, Inc. 2004 Recognition and Retention Plan and Trust                      Agreement                                                                                                                                                                                                                                                                                                           | (8)                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.12  |   | Termination                      and Release Agreement, dated December 8, 2004, by and among                      KNBT,                      Northeast Pennsylvania Financial Corp., First Federal Bank                      and Thomas L.                      Kennedy                                                                                                                                                        | (9)                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.13  |   | Amended                      and Restated KNBT Executive Annual Incentive Plan                                                                                                                                                                                                                                                                                                                                                 | (10)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.14  |   | Form                      of Executive Annual Incentive Plan Agreement                                                                                                                                                                                                                                                                                                                                                         | (10)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.15  |   | 2006                      Executive Annual Incentive Plan Targets for the Chief Executive                      Officer                      and Chief Financial Officer.                                                                                                                                                                                                                                                       | (11)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.16  |   | 2006                      Executive Annual Incentive Plan targets for other named executive                      officers.                                                                                                                                                                                                                                                                                                     | (12)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.17  |   | First                      Federal Bank Supplemental Executive Retirement Plan                                                                                                                                                                                                                                                                                                                                                 | (13)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.18  |   | Keystone                      Nazareth Bank & Trust Severance Benefits Plan                                                                                                                                                                                                                                                                                                                                                | (14)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.19  |   | Form                      of Agreement with respect to forfeitures of shares covered                      by                      performance-based restricted stock award between KNBT Bancorp,                      Inc. and                      Scott V. Fainor, Eugene T. Sobol, Sandra L. Bodnyk, Debroah                      R. Goldsmith,                      John T. Andreacio, David B. Kennedy and Carl F. Kovacs | Filed                      herewith |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.20  |   | 2007                      Executive Annual Incentive Plan Targets                                                                                                                                                                                                                                                                                                                                                              | Filed                      herewith |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.21  |   | Employment                      Agreement between Keystone Nazareth Bank & Trust Company and G. Allen                      Weiss                                                                                                                                                                                                                                                                                           | (15)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.22  |   | Form                      of 2006 Executive Annual Incentive Plan Agreement                                                                                                                                                                                                                                                                                                                                                    | (15)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 10.23  |   | Form                      of 2006 Performance Share Award Agreement pursuant to the 2004                      Recognition                      and Retention Plan                                                                                                                                                                                                                                                              | (15)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 21.0   |   | Subsidiaries                      of the Registrant - Reference is made to "Item 1. Business"                      for the                      required information                                                                                                                                                                                                                                                           |                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 23.0   |   | Consent                      of Grant Thornton LLP                                                                                                                                                                                                                                                                                                                                                                             | Filed                      herewith |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 31.1   |   | Rule                      13a-14(a) Certification of the Chief Executive Officer                                                                                                                                                                                                                                                                                                                                               | Filed                      herewith |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                |
| 31.2   |   | Rule                      13a-14(a) Certification of the Chief Financial Officer                                                                                                                                                                                                                                                                                                                                               | Filed                      herewith |

*105*

----

|   |   |                                             |                                |
|--------|--------|--------------------------------------------------|-------------------------------------|
| 32.0   |   | Section                      1350 Certifications | Filed                      herewith |

|  ____________ |
|--------------------|

| (1)   | Incorporated                    by reference from KNBT's Registration Statement on Form S-1 filed                    on June                    6, 2003, as amended, and declared effective on August 12, 2003                    (Registration No. 333-105899). |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | (2)Incorporated                    by reference from KNBT’s Annual Report on Form 10-K for the fiscal year                    ended December 31, 2004 as filed with the Securities and Exchange                    Commission on March 16, 2005 (File No.                    000-50426). |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | Incorporated                    by reference from KNBT’s Current Report on Form 8-K dated as of December                    28, 2006 and filed with the Securities and Exchange Commission                    on January                    5, 2007 (File No. 000-50426). |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4)   | Incorporated                    by reference from KNBT's Annual Report on Form 10-K, for the                    fiscal year                    ended December 31, 2003 filed on March 26, 2004 (File No.                    000-50426). |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5)   | Incorporated                    by reference from First Colonial's Annual Report on Form 10-KSB,                    for the                    fiscal year ended December 31, 1994 (File No.                    000-11526). |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6)   | Incorporated                    by reference from First Colonial's Annual Report on Form 10-KSB,                    for the                    fiscal year ended December 31, 1995 (File No.                    000-11526). |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7)   | Incorporated                    by reference from First Colonial's quarterly report on Form 10-Q,                    for the                    quarter ended June 30, 2001 (File No.                    000-11526). |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8)   | Incorporated                    by reference from KNBT’s Definitive Schedule 14A filed on April 2, 2004                    with the Securities and Exchange Commission (File No.                    000-50426). |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (9)   | Incorporated                    by reference from Exhibit 10.2 of the amended Current Report                    on Form 8-K/A                    dated as of December 8, 2004 and filed by Northeast Pennsylvania                    Financial                    Corp. with the Securities and Exchange Commission on December                    16, 2004                    (File No. 0-49952). |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (10)   | Incorporated                    by reference from the Current Report on Form 8-K dated as of                    September 26,                    2005 and filed by KNBT with the Securities and Exchange Commission                    on                    September 29, 2005 (File No.                    000-50426) |
|------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (11)   | Incorporated                    by reference from the Current Report on Form 8-K dated as of                    January 23,                    2006 and filed by KNBT with the Securities and Exchange Commission                    on                    January 27, 2006 (File No.                    000-50426) |
|------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (12)   | Incorporated                    by reference from the Current Report on Form 8-K dated as of                    May 4, 2006                    and filed by KNBT with the Securities and Exchange Commission                    on May 23,                    2006 (File No. 000-50426). |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (13)   | Incorporated                    by reference from Northeast Pennsylvania Financial Corp. Annual                    Report on                    Form 10-K for the fiscal year ended September 30, 2003 (File                    No.                    000-49952). |
|------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (14)   | Incorporated                    by reference from KNBT’s Current Report on Form 8-K dated as of December                    18, 2006 and filed by KNBT with the Securities and Exchange Commission                    on                    December 22, 2006 (File No.                    000-50426). |
|------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (15)   | Incorporated                    by reference from KNBT’s Quarterly Report on Form 10-Q for the quarter                    ended September 30, 2006 as filed with the Securities and Exchange                    Commission on November 9, 2006 (File No.                    000-50426). |
|------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*106*

----

**SIGNATURES**

| Date:                    March 16, 2007 | /s/                    Scott V. Fainor                     |
|-----------------------------------------|------------------------------------------------------------|
|                                    | Scott                    V. Fainor                         |
|                                    | *President                    and Chief Executive Officer* |

| By:    | /s/                    Jeffrey P. Feather                                                                                                                                                                                                   |   | /s/                    R. Chadwick Paul, Jr.                                            |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|
|   | JEFFREY                    P. FEATHERChairman                    of the Boardand                    DirectorMarch                    16, 2007                                                                                               |   | R.                    CHADWICK PAUL, JR.DirectorMarch                    16, 2007       |
|   |                                                                                                                                                                                                                                        |   |                                                                                    |
| By:    | /s/                    Scott V. Fainor                                                                                                                                                                                                      |   | /s/                    Charles J. Peischl, Esquire                                      |
|   | SCOTT                    V. FAINORPresident,                    Chief Executive Officerand                    Director (Principal Executive Officer)March                    16, 2007                                                       |   | CHARLES                    J. PEISCHL, ESQUIREDirectorMarch                    16, 2007 |
|   |                                                                                                                                                                                                                                        |   |                                                                                    |
| By:    | /s/                    Eugene T. Sobol                                                                                                                                                                                                      |   | /s/                    Kenneth R. Smith                                                 |
|   | EUGENE                    T. SOBOLSr.                    Executive Vice President, Chief Financial Officer and                    Treasurer(Principal                    Financial and Accounting Officer)March                    16, 2007 |   | KENNETH                    R. SMITHDirectorMarch                    16, 2007            |
|   |                                                                                                                                                                                                                                        |   |                                                                                    |
| By:    | /s/                    Michael J. Gausling                                                                                                                                                                                                  |   | /s/                    R. Charles Stehly                                                |
|   | MICHAEL                    J. GAUSLINGDirectorMarch                    16, 2007                                                                                                                                                             |   | R.                    CHARLES STEHLYDirectorMarch                    16, 2007           |
|   |                                                                                                                                                                                                                                        |   |                                                                                    |
| By:    | /s/                    Donna D. Holton                                                                                                                                                                                                      |   | /s/                    Richard Stevens, III                                             |
|   | DONNA                    D. HOLTONDirectorMarch                    16, 2007                                                                                                                                                                 |   | RICHARD                    STEVENS, IIIDirectorMarch                    16, 2007        |
|   |                                                                                                                                                                                                                                        |   |                                                                                    |
| By:    | /s/                    Thomas L. Kennedy                                                                                                                                                                                                    |   | /s/                    Maria Z. Thulin                                                  |
|   | THOMAS                    L. KENNEDYDirectorMarch                    16, 2007                                                                                                                                                               |   | MARIA                    Z. THULINDirectorMarch                    16, 2007             |
|   |                                                                                                                                                                                                                                        |   |                                                                                    |
| By:    | /s/                    Christian F. Martin, IV                                                                                                                                                                                              |   |                                                                                    |
|   | CHRISTIAN                    F. MARTIN, IVDirectorMarch                    16, 2007                                                                                                                                                         |   |                                                                                    |