================================================================================

                                  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, 2004.
                                       OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934 for the transition period from ____________ to ____________.

                        Commission File Number 000-50426
                        --------------------------------

                               [KNBT LOGO OMITTED]
       -----------------------------------------------------------------
                (Name of Registrant as specified in its charter)

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

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

         Registrant's telephone number, including area code: 610-861-5000
             ------------------------------------------------------


   Securities registered pursuant to Section 12 (b) of the Exchange Act: None
     Securities registered pursuant to Section 12 (g) of the Exchange Act:

                          Common Stock, $0.01 Par Value
                          -----------------------------
                                (Title of Class)

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

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X  No ____

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

         Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No ____

         The aggregate market value of the 25,885,403 shares of the Registrant's
common stock held by non-affiliates (30,656,840 shares outstanding less
4,771,437 shares held by affiliates), based upon the closing price of $16.70 for
the Common Stock on June 30, 2004, the last business day in the Registrant's
second quarter, was approximately $432.3 million. Shares of Common Stock held by
each executive officer and director, the Registrant's Employee Stock Ownership
Plan and the Keystone Nazareth Charitable Foundation have been excluded since
such persons may be deemed affiliates. This determination of affiliate status is
not necessarily a conclusive determination for other purposes.

         The number of shares of the Issuer's common stock, par value $0.01 per
share, outstanding as of March 11, 2005 was 30,662,305.

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

                      DOCUMENTS INCORPORATED BY REFERENCE:
     Certain  portions  of  KNBT  Bancorp's  proxy  statement  to  be  filed  in
connection  with its 2005 Annual Meeting of  Stockholders  are  incorporated  by
reference in Part III of this Report. Other documents  incorporated by reference
are listed in the Exhibit Index.


================================================================================


<PAGE>



                               KNBT BANCORP, INC.

                                    Form 10-K

                                Table of Contents

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

                                                                                                               Page
PART I

     Item 1.      Business.............................................................................................. 1
     Item 2.      Properties ...........................................................................................30
     Item 3.      Legal Proceedings.....................................................................................30
     Item 4.      Submission of Matters to a Vote of Security Holders...................................................30

PART II

     Item 5.      Market for Registrant's Common Equity, Related Stockholder Matters and
                  Issuer Purchases of Equity Securities ................................................................30
     Item 6.      Selected Financial Data ..............................................................................32
     Item 7.      Management's Discussion and Analysis of Financial Condition and
                  Results of Operations ................................................................................33
     Item 7A.     Quantitative and Qualitative Disclosures About Market Risk............................................45
     Item 8.      Financial Statements and Supplementary Data ..........................................................46
     Item 9.      Changes in and Disagreements with Accountants on Accounting and
                  Financial Disclosure .................................................................................83
     Item 9A.     Controls and Procedures...............................................................................83
     Item 9B.     Other Information.....................................................................................83

PART III

     Item 10.     Directors and Executive Officers of the Registrant ...................................................86
     Item 11.     Executive Compensation................................................................................86
     Item 12.     Security Ownership of Certain Beneficial Owners and Management and
                  Related Stockholder Matters...........................................................................86
     Item 13.     Certain Relationships and Related Transactions........................................................87
     Item 14.     Principal Accounting Fees and Services................................................................87

                                     PART IV

     Item 15.     Exhibits and Financial Statement Schedules............................................................87

Signatures        ......................................................................................................90

</TABLE>

                                       ii

<PAGE>


           CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

         The  information  contained  in this  Annual  Report  on Form  10-K may
contain forward-looking statements (as defined in the Securities Exchange Act of
1934 and the  regulations  thereunder)  which are not historical  facts or as to
KNBT Bancorp, Inc. ("KNBT" or "Holding Company") management's intentions, plans,
beliefs,  expectations  or opinions or with  respect to the  acquisition  of the
Caruso Benefits Group, Inc.  ("Caruso") and the pending acquisition of Northeast
Pennsylvania  Financial Corp.  ("NEPF").  These statements include,  but are not
limited  to,   financial   projections   and  estimates  and  their   underlying
assumptions;  statements  regarding  plans,  objectives  and  expectations  with
respect to future operations,  products and services;  and statements  regarding
future   performance.   Such   statements  are  subject  to  certain  risks  and
uncertainties,  many of which are difficult to predict and generally  beyond the
control of KNBT and its  management,  that could cause actual  results to differ
materially   from  those   expressed   in,  or  implied  or  projected  by,  the
forward-looking information and statements. The following factors, among others,
could cause actual results to differ materially from the anticipated  results or
other expectations expressed in the forward-looking statements: (1) economic and
competitive  conditions  which  could  affect the  volume of loan  originations,
deposit flows and real estate values; (2) the levels of non-interest  income and
expense and the amount of loan  losses;  (3)  estimated  cost  savings  from the
acquisition of NEPF cannot be fully realized within the expected time frame; (4)
revenues  following the acquisitions of Caruso and NEPF are lower than expected;
(5) competitive pressure among depository institutions increases  significantly;
(6) costs or difficulties  related to the integration of the businesses of KNBT,
NEPF and Caruso are greater  than  expected;  (7) changes in the  interest  rate
environment may reduce interest margins; (8) general economic conditions, either
nationally  or in the  markets in which KNBT is or will be doing  business,  are
less  favorable  than  expected;   (9)  legislation  or  changes  in  regulatory
requirements  adversely affect the business in which KNBT would be engaged; (10)
regulatory  approvals to acquire  Caruso and/or NEPF are not  obtained;  or (11)
factors which result in a condition to the acquisition of Caruso and/or NEPF not
being met as well as other factors discussed in the documents filed by KNBT with
the  Securities  and Exchange  Commission  ("SEC") from time to time.  Copies of
these  documents  may be obtained  from KNBT upon  request  and  without  charge
(except for the exhibits  thereto) or can be accessed at the website  maintained
by the SEC at http://www.sec.gov.  KNBT undertakes no obligation to update these
forward-looking  statements to reflect events or circumstances  that occur after
the date on which such statements were made.


PART I

Item 1.           Business
--------------------------

General

         KNBT is a Pennsylvania  corporation and registered bank holding company
organized  in 2003.  KNBT's  business  consists  primarily  of being the  parent
holding   company   for   Keystone   Nazareth   Bank   &   Trust   Company,    a
Pennsylvania-chartered  savings  bank.  The  Holding  Company  and the  Bank are
collectively  referred  to as "KNBT."  Keystone  Nazareth  Bank & Trust  Company
(which we also refer to as the "Bank") is the  stock-form  successor to Keystone
Savings Bank upon the mutual-to-stock conversion of Keystone Savings Bank, which
was  completed  on  October  31,  2003.  Concurrently  with the  mutual-to-stock
conversion,  KNBT acquired, through a merger, First Colonial Group, Inc. ("First
Colonial"),  the parent  holding  company for Nazareth  National  Bank and Trust
Company,  which  was  merged  with  and into  the  Bank in  connection  with the
acquisition of First  Colonial.  The merger  transaction was accounted for under
the purchase method of accounting. The result of operations for 2003 include the
operations  acquired from First Colonial for the period October 31, 2003 through
December 31, 2003.


                                       1

<PAGE>


         On  November  11,  2004,   KNBT  acquired   Oakwood   Financial   Corp.
("Oakwood"),  a full-service  brokerage  firm based in Allentown,  Pennsylvania.
KNBT paid $650,000 for Oakwood and acquired $121,000 in assets. Oakwood provides
a full menu of securities brokerage,  insurance and investment advisory products
and services.  Oakwood is a wholly owned subsidiary of the Bank and now operates
as  KNBT  Securities,  Inc.  This  purchase  augments  the  Bank's  offering  of
investment and insurance  products  offered to its customers in branch  offices.
Combined with the expertise of KNBT's Trust and Wealth Management professionals,
KNBT Securities  enhances our ability to provide  customers with a full range of
products and services to meet their financial goals.

         On October 27, 2004,  the Board of Directors  authorized the repurchase
of up to 3,062,486 shares or approximately 10% of KNBT's outstanding shares. For
the year ended December 31, 2004, KNBT repurchased  650,000 shares of its common
stock at an average  cost of $17.20 per share.  KNBT did not  declare or pay any
dividends during the year ended December 31, 2003. Cash dividends were initiated
in the second quarter of 2004 with dividends declared and paid of $.05 cents per
share. For year ending December 31, 2004, total dividends of $.15 per share were
declared and paid.

Available Information

         KNBT is a public  company  and  files  annual,  quarterly  and  current
reports, proxy statements and other information with the Securities and Exchange
Commission.  KNBT's  filings are available to the public at the SEC's website at
HTTP://www.sec.gov.  Members of the  public may also read and copy any  document
that KNBT files at the SEC's Public  Reference  Room at 450 Fifth Street,  N.W.,
Washington,  D.C. 20549. You can request copies of these documents by writing to
the  SEC  and  paying  a fee  for  the  copying  cost.  Please  call  the SEC at
1-800-SEC-0330  for more information about the operation of the public reference
room.  In  addition  to the  foregoing,  the  Company  maintains  a  website  of
www.KNBT.com.  KNBT makes available on its Internet website copies of its Annual
Reports on Form 10-K,  Quarterly  Reports on Form 10-Q,  Current Reports on Form
8-K and any amendments to such documents as soon as reasonably practicable after
KNBT electronically files such material with, or furnishes such documents to the
SEC.

Keystone Nazareth Bank & Trust Company

         The   Bank   is   the   successor   to   Keystone   Savings   Bank,   a
Pennsylvania-chartered  mutual savings bank that was organized in 1925. The Bank
has 41 full service offices with 19 located in Northampton County, Pennsylvania,
16 in Lehigh County,  Pennsylvania,  five in Monroe County, Pennsylvania and one
in Carbon  County,  Pennsylvania.  The Bank's  office  network  includes 14 full
service in-store supermarket branch offices. The Bank has ATMs in all but one of
its banking offices and also maintains seven off-site ATMs.

         The Bank is primarily  engaged in attracting  deposits from the general
public  and using  those  funds to invest in loans and  securities.  The  Bank's
principal sources of funds are deposits, repayments of loans and mortgage-backed
securities,  maturation of investments, funds provided from operations and funds
borrowed  from outside  sources such as the Federal Home Loan Bank of Pittsburgh
("FHLB").   The   Bank's   deposit   products   include   interest-bearing   and
non-interest-bearing  checking  accounts,  statement savings accounts,  passbook
savings accounts,  money market accounts,  club accounts,  individual retirement
accounts and  certificates  of deposit.  These funds are primarily  used for the
origination of various loan types including  single-family  residential mortgage
loans,  non-residential  or commercial  real estate  mortgage  loans,  direct or
indirect consumer loans, such as home equity loans,  automobile and recreational
vehicle loans and  commercial  business  lines of credit,  letters of credit and
term loans.  Most of the Bank's  commercial  customers  are small to medium size
businesses operating in the Bank's primary market area.


                                       2


<PAGE>


         The Bank also offers trust and wealth  management  services through its
trust  department  under the name KNBT Trust  Services.  These services  include
acting as executor and trustee under wills and deeds, as guardian, custodian and
as trustee and agent for  pension,  profit  sharing and other  employee  benefit
trusts as well as various investment,  pension and estate planning services. The
market  value of the funds held by the trust  department  was $314.4  million at
December 31, 2004 as compared  with $312.4  million at December  31, 2003.  KNBT
offers a selection  of  investment  and  insurance  products,  including  equity
securities, mutual funds and annuities to its customers in its branch offices.

Subsidiaries

         In addition to the Bank, KNBT Inv. I Inc. and KNBT Inv. II Inc. are
also subsidiaries of KNBT.

         In December 2003, KNBT established a wholly owned subsidiary, KNBT Inv.
Inc., a Delaware  corporation  for the purpose of investing in various  types of
securities. As of December 31, 2004, KNBT Inv. I, Inc. had total assets of $86.3
million,  of which $41.6 million and $25.7 million consists of  interest-bearing
accounts and investment securities, respectively.

         KNBT Inv. II, Inc.,  formerly  known as First C. G. Company,  Inc., was
acquired on October 31, 2003 as part of KNBT's acquisition of First Colonial and
is a  wholly  owned  subsidiary  of KNBT.  KNBT  Inv.  II,  Inc.  is a  Delaware
corporation  established  for the  purpose  of  investing  in  various  types of
securities. As of December 31, 2004, KNBT Inv. II, Inc. had total assets of $6.4
million of which $6.0 million was invested in equity securities with most of the
remaining assets in interest-bearing money market accounts.

          The Bank has four wholly owned  subsidiaries,  KLV, Inc.,  KLVI, Inc.,
Traditions  Settlement Services LLC and KNBT Securities.  KLV, Inc. is inactive.
KLVI, Inc. is a Delaware corporation,  formed in 1997 to hold and manage certain
investment securities.  As of December 31, 2004, KLVI had total assets of $880.3
million of which $14.9 million and $858.0 million  consists of  interest-bearing
accounts and investment  securities,  respectively.  Traditions was organized in
May  2002  and  provides  real  estate  title  and  settlement  services.   KNBT
Securities,  formerly Oakwood Financial Corp., offers a full range of securities
brokerage, insurance and investment products and services.

Pending Acquisitions

         Northeast  Pennsylvania  Financial  Corp.  On  December  9, 2004,  KNBT
announced  entering into an Agreement and Plan of Merger dated as of December 8,
2004 (the  "Merger  Agreement")  with NEPF, a Delaware  corporation,  which sets
forth the terms and  conditions  under  which NEPF will merge with and into KNBT
(the   "Merger").   The  total  cost  of  the  acquisition  is  expected  to  be
approximately $98.0 million.

         Under the terms of the Merger Agreement,  NEPF's shareholders may elect
to receive  either $23.00 of KNBT common stock or $23.00 in cash in exchange for
their shares of NEPF common stock, subject to an overall requirement that 50% of
the total  outstanding  NEPF common stock be exchanged for KNBT common stock and
50% for cash. The stock component of the merger  consideration will be valued at
$23.00 per share based on the average  market  price of KNBT common stock during
the  20-trading  day  period  ending  on the  fifth  business  day  prior to the
completion of the Merger.

         In addition, each director of NEPF entered into a Shareholder Agreement
with KNBT,  pursuant to which each such person  agreed,  among other things,  to
vote his or her shares of NEPF common stock in favor of the Merger  Agreement at
a meeting of  shareholders  of NEPF that has been called to consider and approve
the Merger Agreement.

         The transaction is expected to close during the second quarter of 2005.
It is subject to a number of customary  conditions,  including,  but not limited
to, (a) the approval of the Merger Agreement by shareholders of NEPF and (b) the
receipt of all required  regulatory  approvals by  applicable  federal and state
regulatory agencies.


                                       3

<PAGE>


         Caruso  Benefits  Group Inc.  On  February  28,  2005,  KNBT  announced
entering into an agreement to purchase Caruso, a benefits  management firm based
in Bethlehem, Pennsylvania.

         Caruso  specializes  in benefits  management  with an emphasis on group
medical, life and disability.  Under the terms of the definitive agreement, KNBT
will  acquire  all of the  capital  stock of Caruso for a purchase  price of $28
million  in cash of which $20  million  will be paid at time of  closing  and $8
million payable over a three-year period,  subject to Caruso maintaining certain
levels of profitability.

         Upon  completion  of the  transaction,  Caruso  will  operate as Caruso
Benefits Group,  Inc., a wholly owned subsidiary of the Bank. The acquisition is
subject to customary  conditions  including  receipt of all required  regulatory
approvals and currently is expected to close in the second quarter of 2005.

Market Area and Competition

         KNBT is a community-oriented  banking institution offering a variety of
financial  products  and  services  to meet the needs of its  customers.  KNBT's
lending and deposit gathering is concentrated in the communities surrounding its
41 banking offices.

         The Bank's  market  area  consists of Lehigh,  Northampton,  Carbon and
Monroe Counties,  all of which are located in  Pennsylvania.  The greater Lehigh
Valley area,  which is in eastern  Pennsylvania  approximately 60 miles north of
Philadelphia, is anchored by the cities of Bethlehem,  Allentown and Easton. The
combined  population of Lehigh and Northampton  Counties is in excess of 600,000
and the market includes a mix of urban,  suburban and rural areas.  Between 1990
and 2002,  the combined  population of Lehigh and  Northampton  Counties grew by
approximately  8.3% compared to 3.4% for  Pennsylvania  as a whole.  Over 14,000
companies  operate in the Lehigh Valley along with 11 colleges and universities.
Major  employers in the area include  Federal,  State and local  governments and
local  healthcare  providers  including  Lehigh  Valley  Hospital and St. Luke's
Hospital,  Air Products &  Chemicals,  PPL,  Binney & Smith,  Giant Food Stores,
Agere Systems and Mack Trucks.

         The  Bank  faces  significant  competition  in  originating  loans  and
attracting  deposits.  This competition  stems primarily from commercial  banks,
other savings banks and savings  associations  and  mortgage-banking  companies.
Within the Bank's market area,  more than 50 other banks,  savings  institutions
and  credit  unions  are  operating.  Many of the  financial  service  providers
operating in the Bank's market area are significantly  larger,  and have greater
financial  resources,  than the Bank. The Bank faces additional  competition for
deposits from money market and other mutual funds, and from other non-depository
financial institutions such as brokerage firms and insurance companies.

Lending Activities

         KNBT  primarily  extends  loans to  individuals  and  businesses in the
counties of Northampton, Lehigh, Monroe and Carbon, Pennsylvania.  Historically,
KNBT's   principal   lending   activity  has  been  the   origination  of  loans
collateralized  by  one-to-four-family  residential  real estate  located in its
market area.  In addition,  KNBT  traditionally  has been  actively  involved in
construction    and   land    development    loans,    with   an   emphasis   on
construction/permanent  single-family  residential  mortgage  loans and loans to
local  homebuilders.  The  securitization of some of its residential real estate
loans and the continuing sale of such loans has been a factor in reducing KNBT's
historical  concentration in these types of loans. KNBT also originates  various
types of consumer loans,  primarily home equity loans and lines of credit.  KNBT
has increased its  commercial  lending  activities as a result of the merger and
through staff and product additions.

         KNBT's  one-to-four-family  residential  real estate loans  amounted to
$325.0  million or 32.1% of the total loan  portfolio at December  31, 2004.  At
such date,  commercial  real estate loans amounted to $218.2 million or 21.5% of
the total portfolio, construction and land development loans were $106.4 million
or 10.5% of the total portfolio, commercial business loans were $50.7 million or
5.0% of the total  portfolio and consumer  loans were $297.9 million or 29.4% of
the total portfolio.


                                       4

<PAGE>


         Loan Portfolio Composition. The following table shows the composition
of the loan portfolio by type of loan at the dates indicated.


                                  <TABLE>
<CAPTION>
                                                                      At December 31,
                        -----------------------------------------------------------------------------------------------------------
                                 2004                  2003                  2002                 2001                  2000
                        ---------------------  --------------------  -------------------  --------------------  -------------------
                          Amount       %        Amount       %        Amount       %       Amount       %        Amount       %
                        --------------------------------- ---------  ---------- --------  ---------- ---------  ---------- --------
                                                                   (dollars in thousands)
<S>                         <C>        <C>        <C>        <C>         <C>      <C>         <C>       <C>         <C>      <C>
Real estate loans:
One-to four- family
  residential (1)        $ 324,990    32.06%   $ 332,024    36.00%   $ 361,842   59.34%   $ 513,352    73.27%   $ 509,188   73.20%
Multi-family
  residential               14,493     1.43%      14,197     1.54%       5,377    0.88%       3,823     0.55%       4,020    0.58%
Commercial real
  estate                   218,201    21.52%     156,563    16.97%      29,385    4.82%      12,839     1.83%       6,715    0.97%
Construction and
  land development (2)     106,361    10.49%     112,684    12.22%      59,363    9.74%      54,092     7.72%      59,687    8.58%
                        ----------- ---------  ---------- ---------  ---------- --------  ---------- ---------  ---------- --------
Total real estate
  loans                    664,045    65.50%     615,468    66.73%     455,967   74.78%     584,106    83.37%     579,610   83.33%

Commercial
  business loans            50,691     5.00%      38,978     4.23%      10,050    1.65%       4,399     0.63%       4,166    0.60%
State and political
  subdivision loans          1,170     0.12%       2,334     0.25%           -        -           -         -           -        -
Consumer loans:
  Home equity loans
   and lines of credit     170,762    16.84%     151,603    16.44%     102,275   16.77%      96,702    13.80%      94,317   13.56%
  Automobile and other
   vehicles                119,036    11.74%     102,256    11.09%      31,956    5.24%       5,887     0.84%       8,901    1.28%
  Other                      8,137     0.80%      11,682     1.26%       9,500    1.56%       9,572     1.37%       8,585    1.23%
                        ----------- ---------  ---------- ---------  ---------- --------  ---------- ---------  ---------- --------
Total consumer
  loans                    297,935    29.38%     265,541    28.79%     143,731   23.57%     112,161    16.00%     111,803   16.07%
                        ----------- ---------  ---------- ---------  ---------- --------  ---------- ---------  ---------- --------

Total loans              1,013,841   100.00%     922,321   100.00%     609,748  100.00%     700,666   100.00%     695,579  100.00%
                        ----------- =========  ---------- =========  ---------- ========  ---------- =========  ---------- ========

Less:
Undisbursed portion
  of construction
  loans in process (2)           -               (27,099)              (24,263)             (23,552)              (28,972)
Deferred loan fees              79                  (469)               (3,236)              (5,682)               (6,163)
Allowance for loan
  losses                   (10,461)               (7,910)               (2,927)              (3,386)               (3,337)
                        -----------            ----------            ----------           ----------            ----------
Net loans               $ 1,003,459            $ 886,843             $ 579,322            $ 668,046             $ 657,107
                        ===========            ==========            ==========           ==========            ==========

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

(1)  Includes mortgage loans held-for-sale of $713,000 at December 31, 2004,
     $4.7 million at December 31, 2003, and $23.8 million at December 31, 2002.
     There were no mortgage loans held-for-sale at December 31, 2001 or 2000.
(2)  For the years 2003 and prior, KNBT's core processing system included the
     undisbursed portion of construction loans in process. Total loans had to be
     reduced by this number in order to calculate net loans for the year 2004.
     KNBT's new core processing system no longer includes the undisbursed amount
     in loan totals. Loans in process at December 31, 2004 equaled $36.9
     million.

</TABLE>


         Contractual  Terms to Final  Maturities.  The following table shows the
scheduled contractual maturities of KNBT's loans as of December 31, 2004, before
giving  effect to net items.  Demand loans,  loans having no stated  schedule of
repayments  and no stated  maturity,  and  overdrafts are reported as due in one
year or less. The amounts shown below do not take into account loan prepayments.

<TABLE>
<CAPTION>
                                                                                             State and
                          One-to          Multi-                 Construction  Commercial    Political
                        Four-Family      Family     Commercial     and Land     Business    Subdivision  Consumer
                        Residential     Resdential  Real Estate  Development      Loans        Loans       Loans        Total
                        --------------------------- ----------- ------------- ------------ -----------  ----------- -------------
<S>                            <C>           <C>      <C>           <C>          <C>              <C>     <C>           <C>
                                                                  (dollars in thousands)
Amounts due after
December 31, 2004 in:
One year or less               $ 117         $ 322    $ 17,862      $ 34,310     $ 17,574         $ -     $ 10,536      $ 80,721
After one year through
three years                    1,995         2,215      24,798         1,890        6,063         198       35,989        73,148
After three years
through five years             3,910           686      43,150        15,000       10,589         453      108,828       182,616
After five years
through fifteen years         83,853         7,073      82,930         6,371       10,785         519      124,397       315,928
After fifteen years          235,115         4,197      49,461        48,790        5,680           -       18,185       361,428
                        -------------  ------------ ----------- ------------- ------------ -----------  ----------- -------------
Total                      $ 324,990      $ 14,493   $ 218,201     $ 106,361     $ 50,691     $ 1,170    $ 297,935   $ 1,013,841
                        =============  ============ =========== ============= ============ ===========  =========== =============
</TABLE>


                                       5


<PAGE>


         The  following  table shows the amount of KNBT's  loans at December 31,
2004,  which are due after  December  31, 2005 and  indicates  whether they have
fixed rates of interest or have floating or adjustable rates.


<TABLE>
<CAPTION>
                                                                                    Floating or
                                                              Fixed-Rate          Adjustable Rate              Total
                                                           ------------------    -------------------    --------------------
                                                                                (dollars in thousands)
<S>                                                                <C>                     <C>                    <C>
One-to-four-family residential                                     $ 300,056               $ 24,817               $ 324,873
Multi-family residential                                               7,098                  7,073                  14,171
Commercial real estate                                                95,585                104,754                 200,339
Construction and land development                                     54,300                 17,751                  72,051
Commercial business                                                   21,798                 11,319                  33,117
State and political subdivisions                                         776                    394                   1,170
Consumer                                                             243,533                 43,866                 287,399
                                                           ------------------    -------------------    --------------------
   Total                                                           $ 723,146              $ 209,974               $ 933,120
                                                           ==================    ===================    ====================
</TABLE>



         Loan Originations,  Sales and Servicing.  KNBT's lending activities are
subject to underwriting standards and loan origination procedures established by
its board of directors and  management.  KNBT relies on its staff of retail loan
representatives  and commercial  lenders to originate new loans. These employees
travel  throughout  KNBT's  market area and meet with  customers at their homes,
place of business or in the Bank's offices,  to receive loan requests.  KNBT has
designated certain employees at each of its branch offices to take consumer loan
applications.  KNBT has centralized underwriting for consumer,  residential real
estate and commercial  lending.  All new loan requests received are underwritten
by experienced staff at KNBT's main office or loan operations center.

         KNBT's  single-family  residential mortgage loans generally are written
on  standardized   documents  used  by  either  the  Federal  National  Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). To
manage  interest  rate  risk,   KNBT  generally   sells  its  newly   originated
single-family  residential  mortgage loans that are agency eligible.  KNBT sells
such  newly  originated  loans on a  loan-by-loan  or "flow"  basis as the loans
close.  Excluding the effect of loan  securitizations in 2003 and 2002 involving
$162.6  million of loans,  KNBT sold an  aggregate  of $63.2  million  and $50.3
million of its newly originated single-family  residential mortgage loans in the
years ended December 31, 2004 and 2003, respectively.  At the time of sale, KNBT
recognizes  a gain or loss on the sale based on the  difference  between the net
proceeds  received and the carrying value of the loans sold. KNBT's net gains on
sales of  residential  mortgage  loans were  $774,000,  $246,000 and $900,000 in
2004,  2003 and 2002,  respectively.  These gains are  included in  non-interest
income.  KNBT retains the right to continue to provide  servicing  for all loans
sold.  The income from servicing is included in  non-interest  income as service
fees.

         At December 31, 2004, KNBT was servicing  $321.4 million of residential
real estate loans it had  previously  sold.  Due to the  continuing low interest
rate  environment  and  a  higher  level  of  loan  repayments  than  originally
estimated,  KNBT  recognized  impairments  of its mortgage  servicing  rights of
$415,000,  $1.1 million and $676,000  during the years ended  December 31, 2004,
2003 and 2002,  respectively.  Such  impairments  are  recorded as  non-interest
expense.

         In addition to loan sales, KNBT "securitized"  $47.3 million and $115.3
million of seasoned, single-family residential mortgage loans in the years ended
December 31, 2003 and 2002, respectively. In such transactions,  loans which did
not meet FNMA's  eligibility  standards at the time of  origination,  due to the
lack  of  private  mortgage  insurance  or  other  criteria,  were  able  to  be
securitized  after being in KNBT's portfolio for certain  stipulated  periods of
time, generally 18 to 24 months.  Securitization is the process of packaging and
transferring   residential   mortgage   loans  to  issuers  of   mortgage-backed
securities, such as FNMA, in return for mortgage-backed securities backed by the
mortgage  loans  that  are  transferred.  As  there  is  an  active  market  for
mortgage-backed  securities,  they  generally  can be sold more readily than the
underlying loans in response to changes in interest rates or other factors. KNBT
retained  all of the  securities  from its 2003  securitization  but sold  $61.4
million of the $115.3 million of loans securitized in 2002.


                                       6

<PAGE>


         The following table shows total loans originated, securitized, sold and
repaid at KNBT during the periods indicated.


<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                                     ----------------------------------------------------
                                                                         2004               2003               2002
                                                                     -------------      -------------      --------------
                                                                                   (dollars in thousands)
<S>                                                                     <C>                <C>                 <C>
Loan originations:
    One-to-four-family residential                                      $ 162,320          $ 135,325           $ 109,029
    Consumer                                                              156,209            131,989             114,188
    Other                                                                  89,942            192,864              73,605
                                                                     -------------      -------------      --------------
       Total loan originations                                            408,471            460,178             296,822

Sales, securitizations and loan principal repayments:
    Loans sold:
      One-to-four-family residential                                       63,193             50,286              37,178
                                                                     -------------      -------------      --------------
       Total sold                                                          63,193             50,286              37,178

Loans securitized:
    Securitized and retained                                                    -             47,251              53,897
    Securitized and sold                                                        -                  -              61,438
                                                                     -------------      -------------      --------------
       Total securitized                                                        -             47,251             115,335
                                                                     -------------      -------------      --------------

Loans principal advances/repayments                                       228,741            298,760             205,534
                                                                     -------------      -------------      --------------
Total loans sold, securitized and
  principal repayments                                                    291,934            396,297             358,047
Decrease due to other items, net                                              (79)            27,568              27,499
Loans received in merger with First Colonial                                    -            271,208                   -
                                                                     -------------      -------------      --------------
Net increase (decrease) in loans receivable                             $ 116,616          $ 307,521           $ (88,724)
                                                                     =============      =============      ==============
</TABLE>


         One-to-Four-Family  Residential  Mortgage  Lending.  A primary  lending
activity  of KNBT is the  origination  of loans  secured by first  mortgages  on
one-to-four-family  residences located in its market area.  Traditionally,  KNBT
has been a leading  originator of  single-family  residential  mortgage loans in
Lehigh  and  Northampton  Counties,   and  the  Bank  expects  to  continue  its
single-family  loan  origination  efforts.  At December 31, 2004,  single-family
residential  mortgage  loans amounted to $325.0 million or 32.1% of KNBT's total
loan  portfolio,  which  compares  to $332.0  million or 36.0% of  single-family
residential mortgage loans at December 31, 2003.

         KNBT  originates  fixed-rate,  fully  amortizing  mortgage  loans  with
maturities  ranging  between 10 and 30 years.  Management  establishes  interest
rates   charged  on  loans  based  on  market   conditions.   KNBT  also  offers
adjustable-rate  mortgage  ("ARM")  loans  with  terms of up to 30  years,  with
interest rates based on the one year Constant  Maturity Treasury Bill index plus
a spread,  which  adjusts  annually from the outset of the loan or which adjusts
after a three,  five,  seven or ten year initial  fixed  period.  Interest  rate
adjustments  on such loans are  typically  limited to no more than 2% during any
adjustment  period  or 6%  over  the  life  of the  loan.  Due to  local  market
conditions and the current  interest rate  environment,  KNBT has originated few
ARM loans  during the past three years.  At December  31, 2004,  92.4% of KNBT's
single-family  residential  mortgage  loans maturing after December 31, 2005 had
fixed interest rates and 7.6% had adjustable interest rates.

         KNBT  underwrites  one-to-four-family  residential  mortgage loans with
loan-to-value  ratios of up to 100%,  provided that a borrower  obtains  private
mortgage  insurance  on loans that  exceed 90% of the  appraised  value or sales
price,  whichever  is  less,  of  the  secured  property.   Exceptions  to  such
loan-to-value limits exist for loans originated under special CRA programs. KNBT
also requires that title insurance, hazard insurance and, if appropriate,  flood
insurance be maintained on all properties securing real estate loans. A licensed
appraiser  appraises all properties  securing one-to  four-family first mortgage
loans. Mortgage loans originated by KNBT generally include a due-on-sale clause.
This clause provides the contractual  right to deem the loan immediately due and
payable in the event the borrower  transfers  ownership of the property  without
KNBT's  consent.  Due-on-sale  clauses are an important  means of adjusting  the
yields of fixed-rate  mortgage loans in a portfolio and KNBT generally exercises
its rights under these clauses.


                                       7

<PAGE>


         During 2004,  KNBT's practice was to sell most of its newly originated,
agency eligible single-family  residential mortgage loans with interest rates of
6.5% or less.  Mortgage loans were sold to either FNMA or FHLMC. Such loans were
sold on a non-recourse  basis with servicing  retained.  KNBT recorded  mortgage
servicing  rights of $813,000 and $416,000  during 2004 and 2003,  respectively.
During the years ended December 31, 2004 and 2003, KNBT, excluding sales made as
a part of its  securitization,  sold an  aggregate  of $63.2  million  and $50.3
million, respectively, of single-family residential mortgage loans.

         Consumer Loans. At December 31, 2004, KNBT's consumer loans amounted to
$297.9  million or 29.4% of the total loan  portfolio  as  compared  with $265.5
million or 28.8% at December  31,  2003.  KNBT's  consumer  loans are  comprised
primarily  of  home  equity  loans  and  lines  of  credit  and  automobile  and
recreational  vehicle loans.  KNBT also offers a variety of other consumer loans
including  personal loans and lines of credit,  and home  improvement  loans. At
December  31,  2004,  KNBT's home equity  loans and lines of credit  amounted to
$170.8  million or 16.8% of the total loan  portfolio  as  compared  with $151.7
million or 16.4% at December 31, 2003. Of such amount, $126.1 million were loans
and $44.7 million were lines of credit. In addition, at such date the unadvanced
portion of home equity lines of credit was $51.5 million.  Home equity loans and
lines of credit, like single-family  residential  mortgage loans, are secured by
the equity in the borrower's  residence.  However,  the Bank generally obtains a
second  mortgage  position on a home equity loan or line of credit.  KNBT's home
equity loans typically are structured as fixed-rate  fully amortizing loans with
terms of up to 15 years and loan-to-value  ratios, when combined with any senior
liens,  of up to 100%.  KNBT charges  higher  interest  rates for  loan-to-value
ratios  exceeding 80%. KNBT's home equity lines of credit have adjustable  rates
of  interest  that are  indexed to the prime rate as reported in The Wall Street
Journal.  Generally,  the maximum  loan-to-value  ratio on home equity  lines of
credit,  including the  outstanding  amount of any first  mortgage loan, is 80%,
however, larger loan-to-value loans are granted. A borrower may draw down a home
equity  line of  credit  for a period  of five  years  from the date of the loan
agreement.  During this  period,  the  borrower  has the option of paying,  on a
monthly basis, either principal and interest or only the interest.

         KNBT's automobile and other vehicle loans amounted to $119.0 million at
December 31, 2004 an increase of $16.8  million or 16.4%  compared with December
31, 2003. KNBT's indirect portfolio has increased  significantly  since the Bank
initiated indirect  automobile lending in January 2002. The total automobile and
other  vehicle  loans  included,   at  December  31,  2003,   $26.4  million  of
recreational vehicle loans that were acquired from First Colonial in the merger.
KNBT originates  indirect auto and recreational  vehicle loans through a network
of dealers  located in its market  area and was  actively  doing  business  with
approximately  56 dealers at December  31,  2004.  KNBT  employs an  experienced
indirect  lender  to head its  program  and has  grown  its  dealer  network  by
emphasizing quality service and the development of long-term  relationships with
the owners and managers of dealerships.

         KNBT makes indirect  loans to purchase both new and used vehicles.  The
loans have terms up to six years for loans  secured by new and used autos and 15
years for loans  secured by  recreational  vehicles.  As of December  31,  2004,
approximately  27.1% of  KNBT's  indirect  vehicle  loans  were  secured  by new
vehicles,  50.2%  were  secured  by used  vehicles  and 22.7%  were  secured  by
recreational  vehicles.  KNBT  originated  $61.5  million  and $56.5  million of
indirect loans during 2004 and 2003, respectively.

         To underwrite  its indirect  loans,  KNBT reviews the credit history of
applicants and determines  appropriate  debt to income and loan to value ratios.
KNBT also believes that the quality of its indirect loan portfolio is positively
affected by its efforts to build and  maintain  relationships  with  dealers who
attract  creditworthy  customers.  KNBT tries to identify  such dealers based on
KNBT's knowledge of dealers in its market area.

         Indirect auto and  recreational  vehicle  lending entails greater risks
than owner-occupied residential mortgage lending since borrowers are more likely
to default on those loans than on a  residential  mortgage loan secured by their
primary residence.  Moreover,  automobiles and recreational  vehicles depreciate
rapidly and, in the event of a default,  principal  loss as a percentage  of the
loan balance  depends upon the mileage and  condition of the vehicle at the time
of repossession.


                                       8

<PAGE>


         Consumer loans entail  greater risk than  residential  mortgage  loans,
particularly  in the case of loans  that are  unsecured  or  secured  by rapidly
depreciating  assets such as automobiles  and  recreational  vehicles.  In these
cases, any repossessed  collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the  outstanding  loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not  warrant  further  substantial  collection  efforts  against  the
borrower  beyond  obtaining a deficiency  judgment.  In addition,  consumer loan
collections  are  highly  dependent  upon the  borrower's  continuing  financial
stability,  and thus are more  likely  to be  adversely  affected  by job  loss,
divorce, illness or personal bankruptcy.

         Construction  and Land  Development  Loans.  KNBT  has  been an  active
originator of  construction  and land  development  loans in its market area for
many years. At December 31, 2004, KNBT's construction and land development loans
amounted to $106.4 million or 10.5% of the total loan portfolio as compared with
$112.7  million  or  12.2%  of  the  portfolio  at  December  31,  2003.  KNBT's
construction   lending  includes  both  construction  loans  to  individuals  to
construct personal residences,  which amounted to approximately $32.6 million at
December 31,  2004,  and loans to building  contractors  and  developers,  which
amounted to  approximately  $20.3  million at December 31, 2004 as well as loans
for commercial real estate  construction,  which amounted to approximately $53.5
million at December 31, 2004. At December 31, 2004,  the  unadvanced  portion of
construction loans in process amounted to $54.6 million.

         KNBT's  construction  loans to  individuals  to build their  residences
typically are  structured as  construction/permanent  loans whereby there is one
closing for both the construction loan and the permanent  financing.  During the
construction  phase, which typically lasts for six to nine months,  employees of
KNBT make periodic  inspections of the  construction  site and loan proceeds are
disbursed as construction progresses. Typically,  disbursements are made in five
draws during the  construction  period.  Construction  loans require  payment of
interest  only during the  construction  phase and are  structured to convert to
fixed-rate permanent loans at the end of the construction phase. Prior to making
a commitment  to fund a  construction  loan,  KNBT  requires an appraisal of the
property by independent  fee appraisers or the Bank's in-house  appraisers.  The
Bank's staff also reviews and inspects each project prior to every  disbursement
of funds during the term of the  construction  loan. Loan proceeds are disbursed
based on a percentage of completion.

         KNBT  also  originates  construction  and  site  development  loans  to
contractors and builders  primarily to finance the construction of single-family
homes and subdivisions  and, to a lesser extent,  the construction of commercial
development  projects,  and site  development  projects.  Loans to  finance  the
construction of single-family  homes and  subdivisions are generally  offered to
experienced  builders  in the Lehigh  Valley  with whom KNBT has an  established
relationship.  Residential development loans are typically offered with terms of
up to 24 months.  The maximum  loan-to-value  limit applicable to these loans is
80% of the appraised  post-construction  value.  Construction  loan proceeds are
disbursed   periodically  in  increments  as  construction   progresses  and  as
inspection by KNBT's approved appraisers warrants.  At December 31, 2004, KNBT's
largest  construction  and site  development  loan  totaled $3.1 million and was
secured by a first  mortgage  lien.  This loan was  performing  according to its
original  terms at December  31,  2004.  During 2004,  KNBT  estimates  that the
average  balance of its  construction  loans to  contractors  and developers was
approximately $19.3 million.

         KNBT also makes construction loans for commercial development projects.
The projects  include  multi-family,  apartment,  industrial,  retail and office
buildings.   These  loans   generally   have  an   interest-only   phase  during
construction,  and generally convert to permanent financing when construction is
completed.  Disbursement of funds is at the sole discretion of KNBT and is based
on the progress of construction.  The maximum  loan-to-value limit applicable to
these loans is generally 80% of the appraised  post-construction  value.  KNBT's
largest  commercial  construction loan commitment to a single borrower was $16.8
million at December 31, 2004 for a commercial  construction  development project
located  within KNBT's  primary  market area.  While this loan was performing in
accordance  with all its terms at December 31, 2004,  management  has downgraded
this loan on its internal  classification  system due to construction  overruns.
Additional  funding  has been  provided  by a third  party  and  leasing  of the
remaining space in the property is continuing.


                                       9


<PAGE>


         KNBT also originates land loans to local contractors and developers for
the  purpose  of  improving  the  property,  or for the  purpose  of  holding or
developing the land for sale.  Such loans are secured by a lien on the property,
are limited to 65% of the lower of the acquisition  price or the appraised value
of the land,  and have a term of up to two years with a floating  interest  rate
based on KNBT's internal base rate.  KNBT's land loans are generally  secured by
property in its primary market area.

         Construction  financing  is  generally  considered  to involve a higher
degree of credit risk than long-term financing on improved,  owner-occupied real
estate. Risk of loss on a construction loan depends largely upon the accuracy of
the initial  estimate of the  property's  value at  completion  of  construction
compared to the estimated cost,  including  interest,  of construction and other
assumptions.  Additionally,  if the estimate of value  proves to be  inaccurate,
KNBT may be confronted with a project, when completed,  having a value less than
the loan  amount.  KNBT  attempts to  minimize  these  risks  through  effective
inspection and monitoring procedures.

         Commercial Real Estate Loans and  Multi-Family  Residential Real Estate
Loans.  At December 31, 2004,  KNBT's  commercial  real estate loans amounted to
$218.2  million  or 21.5% of the  total  loan  portfolio.  The  amount of KNBT's
commercial  real estate loans  increased  $61.6  million in 2004 from a total of
$156.6 million at year-end 2003. KNBT's commercial real estate loans are secured
by  mortgages   on  various   commercial   income   producing   properties   and
owner-occupied  commercial  buildings  including  office  buildings,  retail and
industrial properties.  Substantially all of KNBT's commercial real estate loans
are secured by properties located within the Bank's primary market area.

         KNBT offers both adjustable-rate and fixed-rate  commercial real estate
loans. Such loans typically have terms of 15 or 20 years with call options every
5 to 7 years.  Loan-to-value  ratios are generally 80% or less, and debt service
coverage of 1.20 times or better  generally  is  required.  Personal  guarantees
often are required.

         KNBT  performs  extensive  diligence in  underwriting  commercial  real
estate loans.  KNBT attempts to understand  and control the risk in several ways
including  inspection  of all such  properties  and the  review  of the  overall
financial condition of the borrower,  which may include, for example, the review
of the rent rolls and the verification of income.  KNBT reviews a minimum of two
years  of  tax  returns  and  financial   statements  of  the  borrower  in  its
underwriting of commercial real estate loans and these documents must be updated
and provided to the Bank on an annual  basis.  KNBT's  commercial  lending staff
undertakes an extensive  credit review at least annually of each commercial real
estate loan in excess of $500,000. KNBT's largest commercial real estate loan at
December 31, 2004 was a $7.6 million loan secured by  commercial  real estate in
KNBT's  primary  market area.  Such loan was  performing in accordance  with its
terms at December 31, 2004.

         Commercial  real estate loans have  interest  rates which are generally
more sensitive to changes in market interest rates than  residential real estate
loans.  Commercial real estate loans,  however,  entail  significant  additional
credit risk as compared with one-to-four-family residential mortgage lending, as
they typically  involve larger loan balances  concentrated with single borrowers
or  groups  of  related  borrowers.  In  addition,  the  payment  experience  on
commercial real estate loans secured by income producing properties is typically
dependent on the  successful  operation  of the related real estate  project and
thus may be more significantly impacted by adverse conditions in the real estate
market or in the economy generally.

         At December 31, 2004, KNBT's  multi-family  residential  mortgage loans
amounted to $14.5 million or 1.4% of the loan portfolio.  Such loans are secured
by apartment  buildings  with five or more units.  KNBT has not  emphasized  the
origination of  multi-family  residential  mortgage loans but, when  originated,
they are underwritten pursuant to the same policies and procedures as commercial
real estate loans.

         Commercial Business Loans. KNBT's commercial business loans amounted to
$50.7  million  or 5.0% of the  total  loan  portfolio  at  December  31,  2004.
Commercial  business loans increased by $11.7 million between  December 31, 2003
and December 31, 2004. KNBT expects that its commercial  business loan portfolio
will continue to grow.


                                       10

<PAGE>


         KNBT's  commercial  business  loans are typically  extended to small to
mid-sized  businesses with annual revenues  generally not exceeding $100 million
in its  market  area  and  may  be for  working  capital,  equipment  financing,
inventory financing or accounts receivable  financing.  Small business loans may
have  adjustable or fixed rates and  generally  have terms of five years or less
but may go up to 10  years.  KNBT's  commercial  business  loans  generally  are
secured by equipment,  machinery,  real property or other corporate  assets.  In
addition,  KNBT generally obtains personal guarantees from the principals of the
borrower with respect to all commercial  business loans. KNBT's commercial loans
structured,  as advances are made upon perfected  security interests in accounts
receivable  and/or  inventory.  Generally KNBT will advance amounts up to 75% of
accounts receivable and 50% of the value of inventory.

         At December 31, 2004, KNBT's largest commercial  business loan was $5.3
million  extended to a business located in KNBT's primary market area. Such loan
was performing in accordance with its terms at December 31, 2004.

         Commercial  business  loans  generally  are deemed to involve a greater
degree of risk than single-family residential mortgage loans. KNBT is attempting
to aggressively  increase its  originations of commercial  business loans.  KNBT
acquired  additional  experienced  commercial  loan  officers as a result of the
First  Colonial  merger  and  continues  to  hire  experienced  commercial  loan
officers.  KNBT has implemented  policies and procedures for commercial business
lending which management believes are conservative and prudent.

         Loan  Approval  Procedures  and  Authority.  KNBT's  Board of Directors
establishes its lending  policies and  procedures.  KNBT's Loan Policy Manual is
reviewed  on at least an  annual  basis by its  Directors'  Loan  Committee  and
management in order to propose  modifications as a result of market  conditions,
regulatory changes and other factors.  Key modifications must be approved by the
Board of Directors of KNBT.

         The Bank is restricted in the amount of commitments to any one borrower
by its legal  lending  limit.  This amount is equal to 15% of KNBT's  unimpaired
capital and surplus or  approximately  $39.6  million at December 31, 2004.  The
Bank is further  restricted  by its  tiered  in-house  lending  limit to any one
borrower,  which is patterned upon the Bank's ten point  internal  rating system
for loans (see "Allowance for Loan Losses").

         Various officers or combinations of officers of KNBT have the authority
within specifically  identified limits to approve new loans. Larger loan amounts
are approved by an Officer's Loan Committee, Director's Loan Review Committee or
Board of Directors depending upon the customer's total credit exposure.

Non-Performing Assets

         On loans where the  collection  of  principal  or interest  payments is
doubtful,  the accrual of interest income ceases ("non-accrual" loans). On loans
90 days or more past due as to principal and interest  payments,  KNBT's policy,
with certain limited exceptions,  is to discontinue accruing additional interest
and reverse any interest  currently  accrued.  On  occasion,  this action may be
taken  earlier if the  financial  condition of the borrower  raises  significant
concern with regard to the borrower's  ability to service the debt in accordance
with the terms of the loan  agreement.  Interest  income is not accrued on these
loans until the borrower's financial condition and payment record demonstrate an
ability to service the debt.

         Real estate that is acquired as a result of  foreclosure  is classified
as other real estate owned.  Other real estate owned is recorded at the lower of
cost or fair value less estimated selling costs. Costs associated with acquiring
and improving a foreclosed  property are usually  capitalized to the extent that
the carrying  values does not exceed fair value less  estimated  selling  costs.
Holding costs are charged to expense. Gains and losses on the sale of other real
estate owned are credited or charged to operations, as incurred.


                                       11


<PAGE>


         The following table shows the amounts of KNBT's  non-performing  assets
defined as non-accruing loans, accruing loans 90 days or more past due and other
real  estate  owned at the  dates  indicated.  KNBT did not have  troubled  debt
restructurings at any of the dates indicated.


                             <TABLE>
<CAPTION>
                                                                         At December 31,
                                   --------------------------------------------------------------------------------------------
                                       2004                2003               2002                2001                2000
                                   -------------       -------------      --------------      -------------       -------------
                                                                      (dollars in thousands)
<S>                                     <C>                 <C>                 <C>                <C>                   <C>
Non-accruing loans                      $ 4,544             $ 1,720             $ 2,197            $ 1,752               $ 763
Accruing loans 90 days
 or more past due                           511                 405                 298                938                  35
                                   -------------       -------------      --------------      -------------       -------------
     Total non-performing loans           5,055               2,125               2,495              2,690                 798

Other real estate owned                      71                 173                 115                200                 151
                                   -------------       -------------      --------------      -------------       -------------
     Total non-performing assets        $ 5,126             $ 2,298             $ 2,610            $ 2,890               $ 949
                                   =============       =============      ==============      =============       =============

Total non-performing loans
 as a percentage of loans, net            0.50%               0.24%               0.43%              0.40%               0.12%
Total non-performing loans
 as a percentage of total assets          0.21%               0.11%               0.25%              0.29%               0.10%
Total non-performing assets
 as a percentage of total assets          0.21%               0.12%               0.26%              0.31%               0.12%
</TABLE>


         The $2.8 million increase in non-performing  loans between December 31,
2004  and  December  2003  was  primarily  due to a  $1.9  million  increase  in
non-performing  single family  residential  loans and a $1.0 million increase in
non-performing  consumer loans,  primarily  indirect  vehicle  financing.  Since
residential  loans  are  typically  well  secured,   KNBT  anticipates   minimal
charge-offs from this portfolio. The indirect vehicle portfolio represents 11.7%
of the total loan  portfolio,  and includes loans generally with one to six year
maturities and are secured by vehicles,  limiting  charge off potential.  During
the fourth quarter of 2004, KNBT instituted policies limiting vehicle collateral
advance levels based on key credit criteria which management believes will yield
improved portfolio non-accrual and charge-off results.

         The  following  table  shows the effect  non-accrual  loans have had on
interest income for each of the periods indicated.


<TABLE>
<CAPTION>
                                                                               Year ended December 31,
                                                 ------------------------------------------------------------------------------
                                                    2004            2003             2002             2001             2000
                                                 -----------     ------------     ------------     -----------      -----------
                                                                               (dollars in thousands)
<S>                                                   <C>               <C>              <C>             <C>              <C>
Interest which would have been
 recorded at the original rate                        $ 125             $ 50             $ 66            $ 81             $ 43
Interest that was reflected
 in income                                                -               60               45              40               26
                                                 -----------     ------------     ------------     -----------      -----------

Net  impact on interest income                       $ (125)            $ 10            $ (21)          $ (41)           $ (17)
                                                 ===========     ============     ============     ===========      ===========
</TABLE>


         KNBT  accounts for impaired  loans under SFAS No. 114,  "Accounting  by
Creditors for  Impairment  of a Loan, as amended by SFAS No. 118,  Accounting by
Creditors for Impairment of a Loan--Income  Recognition and  Disclosures."  This
standard requires, that a creditor measure impairment based on the present value
of expected future cash flows discounted at the loan's effective  interest rate,
except that as a practical expedient, a creditor may measure impairment based on
a loan's  observable  market price,  or the fair value of the  collateral if the
loan is collateral  dependent.  Regardless of the measurement method, a creditor
must  measure  impairment  based on the fair  value of the  collateral  when the
creditor determines that foreclosure is probable.

         KNBT  identifies a loan as impaired  when it is probable  that interest
and principal will not be collected  according to the  contractual  terms of the
loan  agreement.  The accrual of interest is  discontinued  on such loans and no
income is  recognized  until all recorded  amounts of interest and principal are
recovered in full.


                                       12


<PAGE>


         Loan  impairment  is measured by  estimating  the expected  future cash
flows and  discounting  them at the  respective  effective  interest  rate or by
valuing the underlying collateral. The total principal amount of KNBT's impaired
loans was $424,000 at December  31, 2004 and $217,000 at December 31, 2003.  The
recorded  investment in these loans and the valuation for credit losses  related
to loan impairment at December 31, 2004 and 2003 were as follows:

<TABLE>
<CAPTION>
                                                                   At December 31,
                                                       ---------------------------------
                                                            2004                2003
                                                       -------------       -------------
                                                            (dollars in thousands)
<S>                                                           <C>                 <C>
Principal amount of impaired loans                            $ 424               $ 217
Accrued interest                                                  -                   2
                                                       -------------       -------------
                                                                424                 219
Less valuation allowance at December 31,                         61                  33
                                                       -------------       -------------
                                                              $ 363               $ 186
                                                       =============       =============
</TABLE>



         The activity in KNBT's  allowance  account for credit losses related to
impaired loans for the years ended December 31, 2004 and 2003 were as follows:

<TABLE>
<CAPTION>
                                                              Year ended December 31,
                                                         ----------------------------------
                                                              2004                 2003
                                                         -------------        -------------
                                                              (dollars in thousands)
<S>                                                       <C>                    <C>
Valuation allowance at January 1,                         $         33            $       -
Received in merger                                                   -                   33
Provision for loan impairment                                       28                    -
                                                         -------------        -------------
Valuation allowance at December 31,                       $         61            $      33
                                                         =============        =============
</TABLE>




         Total cash collected on impaired loans by KNBT during 2004 was $77,000,
all of which was credited to the principal  balance  outstanding  on such loans.
KNBT's valuation allowance for impaired loans of $61,000 at December 31, 2004 is
included in its  allowance  for loan losses which  amounted to $10.5  million at
December 31, 2004. KNBT's valuation allowance for impaired loans at December 31,
2003 was $33,000. KNBT did not have impaired loans at December 31, 2002.

         Allowance for Loan Losses. The allowance for loan losses is established
through a provision  for loan losses.  KNBT  maintains  the allowance at a level
believed, to the best of management's knowledge, to cover all known and inherent
losses in the  portfolio  that are both  probable and  reasonable to estimate at
each reporting date. Management reviews all loans that are delinquent 60 days or
more on a monthly  basis and performs  regular  reviews of the allowance no less
than quarterly in order to identify those inherent losses and assess the overall
collection  probability  for the  loan  portfolio.  Such  reviews  consist  of a
quantitative  analysis by loan category,  using  historical  loss experience and
consideration of a series of qualitative loss factors. KNBT's evaluation process
includes, among other things, an analysis of delinquency trends,  non-performing
loan trends,  the level of charge-offs  and recoveries,  prior loss  experience,
total loans  outstanding,  the volume of loan  originations,  the type, size and
geographic  concentration  of its loans,  the value of  collateral  securing the
loan, the borrower's ability to repay and repayment  performance,  the number of
loans requiring heightened management  oversight,  local economic conditions and
industry experience. In addition, in establishing the allowance for loan losses,
KNBT's  management  considers a ten point  internal  rating system for all loans
originated by the Commercial  Lending  department.  At the time of  origination,
each  commercial loan is assigned a rating based on the assumed risk elements of
the loan. Such risk ratings are periodically  reviewed by management and revised
as  deemed  appropriate.  As a result of this risk  assessment,  management  has
identified  $66.3 million of loans at December 31, 2004 which were performing in
accordance  with  their  terms but were  deemed to have  certain  weaknesses  or
increased levels of risk. Included in this amount is one commercial construction
loan in the amount of $16.8 million that was  performing in accordance  with its
terms but management downgraded based on its internal  classification system due
to construction cost overruns.


                                       13

<PAGE>


Additional  funding  has been  provided  by a third  party  and  leasing  of the
remaining  space  in  the  property  is  continuing.  The  establishment  of the
allowance for loan losses is significantly affected by management's judgment and
uncertainties  and there is likelihood that different  amounts would be reported
under different conditions or assumptions.  Various regulatory  agencies,  as an
integral part of their examination process, periodically review KNBT's allowance
for loan losses. Such agencies may require it to make additional  provisions for
estimated loan losses based upon  judgments  different from those of management.
As of December 31,  2004,  KNBT's  allowance  for loan losses was 1.03% of total
loans receivable compared with 0.89% at December 31, 2003.

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


         The following  table shows changes in KNBT's  allowance for loan losses
during the periods presented.

<TABLE>
<CAPTION>
                                                                        At or For the Year ended December 31,
                                                              -------------------------------------------------------
                                                                2004       2003       2002        2001       2000
                                                              ---------- ---------- ----------  ---------- ----------
                                                                                 (dollars in thousands)
<S>                                                             <C>        <C>        <C>         <C>        <C>
Allowance for loan losses, beginning of period                  $ 7,910    $ 2,927    $ 3,386     $ 3,337    $ 3,101
Acquired from merger with First Colonial                              -      3,548          -           -          -
Provision for loan losses                                         4,308      2,951        111         391        442
Charge-offs
   One-to-four family residential                                    92        242        229         154        100
   Multi-family                                                       -          -          -           -          -
   Commercial real estate                                             -          -          -           -          -
   Construction and land development                                  5          -          -           -          -
   Commercial business                                                -        154          -           -          -
   Consumer                                                       1,915      1,207        394         224        146
                                                              ---------- ---------- ----------  ---------- ----------
Total charge offs                                                 2,012      1,603        623         378        246
                                                              ---------- ---------- ----------  ---------- ----------
Recoveries on loans previously charged-off
   One-to-four family residential                                    99         32         37          19         33
   Consumer                                                         152         49          -           -          -
   Commercial business                                                4          6         16          17          7
                                                              ---------- ---------- ----------  ---------- ----------
Total charge offs                                                   255         87         53          36         40
                                                              ---------- ---------- ----------  ---------- ----------
Net loans charged off                                             1,757      1,516        570         342        206
                                                              ---------- ---------- ----------  ---------- ----------

Allowance for loan losses, at period end                        $10,461    $ 7,910    $ 2,927     $ 3,386    $ 3,337
                                                              ========== ========== ==========  ========== ==========

Allowance for loan losses at period end to:
  Average loans (net)                                             1.09%      1.27%      0.47%       0.50%      0.52%
  Total loans at period end                                       1.03%      0.89%      0.52%       0.50%      0.51%
  Non-performing loans                                          206.94%    388.28%    117.31%     125.87%    418.17%
Charge-offs to average loans during period                        0.21%      0.26%      0.10%       0.06%      0.04%
</TABLE>



                                       14

<PAGE>


         The following table shows how KNBT's allowance for loan losses has been
allocated by type of loan at each of the dates indicated.

<TABLE>
<CAPTION>
                                                                      At December 31,
                      -------------------------------------------------------------------------------------------------------------
                              2004                 2003                    2002                  2001                  2000
                      --------------------  --------------------   --------------------  --------------------  --------------------
                                   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
                      Allowance   Loans     Allowance   Loans      Allowance   Loans     Allowance   Loans     Allowance   Loans
                      --------------------  --------------------   --------------------  --------------------  --------------------
                                                                 (dollars in thousands)
<S>                      <C>       <C>        <C>        <C>        <C>         <C>        <C>        <C>        <C>        <C>
One-to-four- family
  residential            $ 553     32.06%     $ 349      36.00%     $ 1,086     59.34%     $2,053     73.27%     $2,291     73.20%
Multi-family
  residential              350       1.43         4        1.54          33       0.88         35       0.55         48       0.58
Commercial real
  estate                 2,140      21.52     1,602       16.97         145       4.82         39       1.83         43       0.97
Construction and
  land development       3,350      10.49     1,826       12.22         451       9.74        291       7.72        106       8.58
Commercial
  business                 454       5.00       712        4.23         500       1.65        464       0.63        115       0.60
State and political
  subdivision                3       0.12         -        0.25           -          -          -          -          -          -
Consumer                 2,804      29.38     2,673       28.79         590      23.57        303      16.00        123      16.07
Unallocated                807          -       744           -         122          -        201          -        611          -
                      ---------  ---------  --------  ----------   ---------  ---------  ---------  ---------  ---------  ---------
Total loans           $ 10,461    100.00%   $ 7,910     100.00%     $ 2,927    100.00%     $3,386    100.00%     $3,337    100.00%
                      =========  =========  ========  ==========   =========  =========  =========  =========  =========  =========
</TABLE>



Investment Activities

         KNBT invests in securities  pursuant to its Investment  Policy.  KNBT's
Investment  Policy is designed  primarily to maintain  liquidity,  to generate a
favorable  return  without  incurring  undue  interest  rate or credit risk,  to
complement its lending  activities,  to manage the interest rate  sensitivity of
its assets and liabilities  and minimize KNBT's tax liability.  KNBT also uses a
leverage investment  strategy for the purpose of enhancing returns.  Pursuant to
this  strategy,  KNBT has  increased  the size of its  investment  portfolio  by
utilizing borrowings to support such investments.

         KNBT   classifies  its  debt  and  marketable   securities  into  three
categories:  held-to-maturity,  available-for-sale  and  trading  at the time of
acquisition. Securities, classified as held-to-maturity are securities that KNBT
has the intent and ability to hold until their contractual maturity date and are
reported at cost. Held-to-maturity securities can be sold prior to maturity only
under  rare  circumstances.  Securities  classified  as  available  for sale are
reported  at  their  fair  value  with  unrealized  gains  and  losses  on these
securities,  net of income tax  provisions,  reflected  in retained  earnings as
accumulated other  comprehensive  income.  Available-for-sale  securities can be
sold at any time based upon needs or market  conditions.  Trading securities are
measured at fair value,  with unrealized gains and losses included in income. At
the present time, KNBT does not have a trading portfolio.

         At December 31, 2004, KNBT's investment  securities  portfolio amounted
to $1.1  billion or 46.1% of total  assets as compared  with  $734.1  million or
37.8% of total  assets at December  31,  2003.  The largest  component of KNBT's
investment securities in recent periods has been mortgage-backed securities that
amounted to $743.7  million or 66.8% of the investment  securities  portfolio at
December 31, 2004 compared with $464.4 million or 63.2% at December 31, 2003. In
addition, KNBT invests in municipal securities, corporate debt obligations, U.S.
government and agency obligations and other securities.  In recent periods, KNBT
has increased the amount of its  investment in municipal  securities  due to the
tax  advantage  provided by such  securities.  Under KNBT's  Investment  Policy,
municipal bonds must be rated in the top three investment  rating  categories at
the time of purchase.  At December 31, 2004, such securities  amounted to $112.1
million.

         Held-to-maturity.   At  December  31,  2004,  KNBT's   held-to-maturity
investment  securities totaled $56.6 million. KNBT has the intent and ability to
hold these  securities  until maturity.  The fair value of these securities were
$57.0 million at December 31, 2004.


                                       15


<PAGE>


         Available-for-sale.    KNBT   had   $1.1    billion    of    securities
available-for-sale at December 31, 2004, as compared with $734.1 at December 31,
2003.  At  December  31,  2004,  the  net  unrealized  gain  recorded  in  other
comprehensive income on these securities was $2.4 million, net of the tax effect
of $1.2 million.  There was a net  unrealized  gain of $6.3 million,  net of tax
effect of $3.3 million, at December 31, 2003.

         Currently, KNBT is not participating in hedging programs, interest rate
swaps,  collars  or other  activities  involving  the use of  off-balance  sheet
financial derivatives.  Also, KNBT does not purchase mortgage-backed  derivative
instruments  that  would be  characterized  "high-risk"  under  Federal  banking
regulations at the time of purchase,  nor does it purchase corporate obligations
that are not rated investment grade.

         KNBT's   mortgage-backed   securities  include  mortgage   pass-through
certificates  issued  by the  GNMA,  FNMA and  FHLMC  as well as  collateralized
mortgage  obligations  ("CMOs")  issued by such  agencies  or  private  issuers.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater than estimated prepayments over the life of the security,  which
may require  adjustments to the  amortization of any premium or accretion of any
discount  relating to such  instruments  thereby  changing the net yield on such
securities.  There is also  reinvestment  risk associated with the cash flows of
such securities or in the event the issuer redeems such securities. In addition,
the market  value of such  securities  may be  adversely  affected by changes in
interest rates.

         CMOs are typically issued by a special-purpose  entity, in KNBT's case,
private issuers or government  agencies,  which may be organized in a variety of
legal forms, such as a trust, a corporation, or a partnership. Substantially all
of the CMOs held in KNBT's  portfolio  consist  of senior  sequential  tranches,
primarily  investments  in the first tranche of the CMOs.  By purchasing  senior
sequential tranches, management attempts to ensure the cash flow associated with
such an  investment.  While  non-agency  private issues are somewhat less liquid
than CMOs issued by GNMA, FNMA or FHLMC, they generally have a higher yield than
agency insured or guaranteed  CMOs. This higher yield reflects,  in part, a lack
of such guarantee or protection and, thus, the  potentially  higher risk of loss
or default  associated  with such assets.  KNBT's  investment  portfolio  policy
requires that all  privately  issued CMOs have a Standard & Poor's rating of AAA
at the time of purchase.

         The following table sets forth the carrying value of KNBT's  securities
at the dates indicated.


                          <TABLE>
<CAPTION>
                                                                           Year ended December 31,
                                          ----------------------------------------------------------------------------------------
                                                      2004                           2003                           2002
                                          ---------------------------     -------------------------      -------------------------
                                           Available-      Held-to-       Available-     Held-to-        Available-     Held-to-
                                            for-Sale       Maturity        for-Sale      Maturity         for-Sale      Maturity
                                          -------------   -----------     -----------   -----------      -----------    ----------
                                                                            (dollars in thousands)
<S>                                          <C>                 <C>        <C>                <C>         <C>                <C>
U.S. Government and
 agency obligations                          $ 175,649           $ -        $120,380           $ -         $ 31,075           $ -
Corporate securities                             9,197             -          15,637             -           35,172             -
Municipal obligations                          106,574         5,510         115,655             -           41,039             -
Mortgage-backed securities:
  GNMA                                           1,460             -           2,138             -            3,327             -
  FHLMC                                        104,654             -          83,985             -           18,348             -
  FNMA                                         310,641        25,893         227,538             -           76,101             -
  CMOs                                         275,882        25,183         150,697             -           84,174             -
                                          -------------   -----------     -----------   -----------      -----------    ----------
Total mortgage-backed
  securities                                   692,637        51,076         464,358             -          181,950             -
Equity securities                               73,052             -          18,057             -            4,914             -
                                          -------------   -----------     -----------   -----------      -----------    ----------
Total investment securities                 $1,057,109      $ 56,586        $734,087           $ -        $ 294,150           $ -
                                          =============   ===========     ===========   ===========      ===========    ==========
</TABLE>



                                       16


<PAGE>


         The following table sets forth the amount of investment securities,  at
amortized  cost,  which  mature  during  each of the periods  indicated  and the
weighted average yields for each range of maturities at the dates indicated.  No
tax-exempt yields have been adjusted to a tax-equivalent basis.


                                  <TABLE>
<CAPTION>
                                                                        At December 31, 2004
                                        ------------------------------------------------------------------------------------
                                                              Over One           Over Five
                                           One Year         Year Through       Years Through     Over Ten
                                           or Less           Five Years          Ten Years         Years          Total
                                        ---------------   -----------------   ----------------   ----------   --------------
                                                                       (dollars in thousands)
<S>                                            <C>                 <C>               <C>          <C>             <C>
Available-for-Sale
   U.S. Government and
     agency obligations
        Fair value                             $     -             $77,320           $ 62,598     $ 35,731        $ 175,649
        Amortized cost                         $     -             $77,664           $ 62,454     $ 34,746        $ 174,864
        Yield                                     -  %               3.06%              3.85%        5.00%            3.81%
   Corporate securities
        Fair value                             $ 4,009             $ 5,188           $      -          $ -          $ 9,197
        Amortized cost                         $ 3,996             $ 5,033           $      -          $ -          $ 9,029
        Yield                                    4.86%               5.72%               -  %         -  %            5.34%
   Municipal obligations
        Fair value                             $     -             $ 1,735           $ 39,776     $ 65,063        $ 106,574
        Amortized cost                         $     -             $ 1,711           $ 39,339     $ 63,426        $ 104,476
        Yield                                     -  %               3.56%              3.77%        4.58%            4.26%
   Mortgage-backed securities
        Fair value                             $     -             $15,333           $117,943     $559,361        $ 692,637
        Amortized cost                         $     -             $15,382           $117,553     $559,365        $ 692,300
        Yield                                     -  %               3.81%              4.15%        4.48%            4.41%
   Equity securities
        Fair value                             $     -             $     -           $      -     $ 73,052        $  73,052
        Amortized cost                         $     -             $     -           $      -     $ 72,853        $  72,853
        Yield                                     -  %                -  %               -  %        4.01%            4.01%
Held-to-Maturity
   Municipal obligations
        Fair value                             $     -             $     -           $      -     $  5,545        $   5,545
        Amortized cost                         $     -             $     -           $      -     $  5,510        $   5,510
        Yield                                     -  %                -  %               -  %        4.86%            4.86%
   Mortgage-backed securities
        Fair value                             $     -             $     -           $  2,815     $ 48,674        $  51,489
        Amortized cost                         $     -             $     -           $  2,799     $ 48,277        $  51,076
        Yield                                     -  %                -  %              4.59%        4.68%            4.68%
Total Securities
        Fair value                             $ 4,009            $ 99,576           $223,132     $787,426       $1,114,143
        Amortized cost                         $ 3,996            $ 99,790           $222,145     $784,177       $1,110,108
        Yield                                    4.86%               3.32%              4.01%        4.48%            4.30%

</TABLE>



                                       17


<PAGE>


         The  following  table sets  forth the  purchases,  sales and  principal
repayments of  mortgage-backed  securities,  at amortized cost, for KNBT for the
periods indicated.


<TABLE>
<CAPTION>
                                                                                    At or For the
                                                                                  Years Ended December 31,
                                                                     ------------------------------------------------
                                                                          2004             2003             2002
<S>                                                                       <C>                   <C>              <C>
Held to maturity:
Purchases                                                                 $ 54,234              $ -              $ -
Repayments                                                                  (3,242)               -                -
Amortizations of premiums and discounts, net                                    84                -                -
                                                                     --------------  ---------------  ---------------
Mortgage-backed securities at end of period                               $ 51,076              $ -              $ -
                                                                     ==============  ===============  ===============

Weighted average yield at end of period                                      4.68%                -                -

Available for sale:
Mortgage-backed securities at beginning of period                        $ 461,308        $ 178,389         $ 75,320
Mortgage-backed securities acquired through merger
with First Colonial                                                              -          151,584                -
Purchase price adjustment of mortgage-backed securities
acquired through merger with First Colonial                                      -           (2,309)               -
Purchases                                                                  380,220          333,675          140,911
Securitized and retained                                                         -           47,251           53,897
Securitized and sold                                                             -                -           61,438
Repayments                                                                (135,540)        (218,339)         (88,850)
Sales                                                                      (10,900)         (25,495)         (63,844)
Amortizations of premiums and discounts, net                                (2,788)          (3,448)            (483)
                                                                     --------------  ---------------  ---------------
Mortgage-backed securities at end of period                              $ 692,300        $ 461,308        $ 178,389
                                                                     ==============  ===============  ===============

Weighted average yield at end of period                                      4.41%            4.05%            5.85%

</TABLE>


Sources of Funds

         Deposits.  Deposits are the primary source of KNBT's funds. KNBT offers
a variety of deposit  accounts with a range of interest rates and terms.  KNBT's
deposits consist of interest-bearing and non-interest bearing checking accounts,
money market, savings and certificate of deposit accounts.  KNBT also offers IRA
accounts.  For  business  customers,  KNBT offers  several  checking and savings
plans,  in addition  to cash  management  services.  Our  customer  relationship
strategy  focuses on relationship  banking for retail and business  customers to
enhance their overall  experience with KNBT.  Deposit  activity is influenced by
state and local economic activity,  changes in interest rates,  internal pricing
decisions  and  competition.  Deposits  are  primarily  obtained  from the areas
surrounding our branch locations.  In order to attract and retain deposits, KNBT
offers  competitive rates,  quality customer service,  on-line banking and other
products to meet the needs of customers

         Total  deposits  increased  to $1.32  billion at December 31, 2004 from
$1.29 billion at December 31, 2003,  an increase of $33.6 million or 2.6%.  Such
increase  reflected,  in part, KNBT's continuing effort to increase the level of
our checking  accounts and other core deposits.  Contributing to the increase in
deposits were increases in money market and checking  products due to the market
penetration of branches that opened in 2003 and KNBT's marketing programs. Total
core deposits which consists of all deposits other than certificates of deposit,
increased by $20.5 million in 2004.


                                       18


<PAGE>


         The following  table shows for KNBT the average balance of each type of
deposit  and the  average  rate paid on each  type of  deposit  for the  periods
indicated.

 <TABLE>
<CAPTION>
                                                           Year Ended December 31,
                        --------------------------------------------------------------------------------------------
                                     2004                            2003                          2002
                        -------------------------------  ----------------------------  -----------------------------
                          Average    Interest   Average   Average   Interest  Average   Average   Interest  Average
                          Balance    Expense   Rate Paid  Balance   Expense  Rate Paid  Balance   Expense   Rate Paid
                        -------------------------------  ----------------------------  -----------------------------
                                                             (dollars in thousands)
<S>                       <C>         <C>        <C>      <C>       <C>        <C>      <C>        <C>        <C>
Savings                   $ 221,027   $ 1,063     0.48%   $182,548  $ 1,315     0.72%   $111,689   $ 1,680     1.50%
Interest-bearing
 checking                   174,698       273     0.16     102,506      298     0.29      81,609       466     0.57
Money market                249,065     2,477     0.99     203,978    2,212     1.08     134,456     2,784     2.07
Certificates of deposit     539,505    14,372     2.66     409,003   12,168     2.98     417,073    18,169     4.36
                        ------------ ---------           ---------- --------           ---------- ---------
Total interest-bearing
 deposits                 1,184,295    18,185     1.54     898,035   15,993     1.78     744,827    23,099     3.10
Non-interest-bearing
 deposits                   119,133         -        -      53,559        -        -      28,881         -        -
                        ------------ ---------           ---------- --------           ---------- ---------
  Total deposits        $ 1,303,428  $ 18,185    1.40%    $951,594  $15,993    1.68%    $773,708   $23,099    2.99%
                        ============ =========           ========== ========           ========== =========

</TABLE>


         The following table shows for KNBT the deposit flows during the periods
indicated.

<TABLE>
<CAPTION>
<S>                                                         <C>                  <C>               <C>
                                                                      Year Ended December 31,
                                                   -----------------------------------------------------------
                                                           2004                 2003               2002
                                                   --------------------- -------------------- ----------------
                                                                       (dollars in thousands)

Deposits assumed in merger                                  $         -          $   512,086       $        -
Total deposits                                               17,564,185           10,938,793        4,352,478
Total withdrawals                                           (17,555,628)         (10,947,524)      (4,373,961)
Interest credited                                                25,086               14,230           21,089
                                                   --------------------- -------------------- ----------------
     Total increase (decrease) in deposits                  $    33,643          $   517,585       $     (394)
                                                   ===================== ==================== ================
</TABLE>

         The  following  table  shows  for KNBT the  amount of  certificates  of
deposit,  by various  interest  rate  categories  and  maturities,  at the dates
indicated.

<TABLE>
<CAPTION>
                                        Balance at December 31, 2004
                                      Maturing in the 12 Months Ending December 31,

Certificates of Deposit:               2005           2006           2007         2008          2009      Thereafter      Total
-----------------------------------------------------------------------------------------------------------------------------------
                                   (dollars in thousands)
<S>                                  <C>           <C>            <C>           <C>           <C>             <C>        <C>
Less than 1%                         $   3,913     $       1      $     137     $      -      $      7        $   -      $   4,058
1.00% - 1.99%                          145,542        33,974             14           27             -            -        179,557
2.00% - 2.99%                           60,448        46,767          5,675        3,722             -          105        116,717
3.00% - 3.99%                           34,002        45,761         56,201       14,090         3,801          113        153,968
4.00% - 4.99%                           25,939        15,478         27,752          139        19,377          550         89,235
5.00% - 5.99%                            1,808         2,310         13,702          138            20            5         17,983
6.00% - 6.99%                              138             -              4            -             -            -            142
7.00% or more                                -             -              -            -             -            -              -
                                   ------------ -------------  ------------- ------------ ------------- ------------ --------------
 Total certificates of deposit       $ 271,790     $ 144,291      $ 103,485     $ 18,116      $ 23,205        $ 773      $ 561,660
                                   ============ =============  ============= ============ ============= ============ ==============
</TABLE>

                                       19


<PAGE>


         The following  table  shows the  maturities of KNBT's  certificates  of
deposit of $100,000 or more at December 31, 2004  indicated by time remaining to
maturity.


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

                                                                                       Weighted
Maturing in Quarter Ending:                                      Amount             Average Rate
------------------------------------------                    --------------      ------------------
                                                         (dollars in thousands)

Three months or less                                                $14,941                2.56%
Over three months to six months                                       8,197                2.15%
Over six through twelve months                                       12,360                2.61%
Over twelve months                                                   52,229                3.20%
                                                              --------------
     Total certificates of deposit with
       balances of $100,000 or more                                 $87,727                2.91%
                                                              ==============          ===========

</TABLE>



         Borrowings.  KNBT, as part of its operating strategy, utilizes advances
from the FHLB of Pittsburgh  as an  alternative  to retail  deposits to fund its
operations.  These FHLB  advances  are  collateralized  primarily  by certain of
KNBT's  mortgage loans and  mortgage-backed  securities  and  secondarily by its
investment  in capital stock of the FHLB of  Pittsburgh.  FHLB advances are made
pursuant to several different credit programs, each of which has it own interest
rate and range of  maturities.  The maximum  amount that the FHLB of  Pittsburgh
will advance to member  institutions,  including  KNBT,  fluctuates from time to
time in accordance with the policies of the FHLB. At December 31, 2004, KNBT had
$660.7  million in  outstanding  FHLB  advances  while at December 31, 2003 FHLB
advances  totaled  $207.2  million,  which  included $20.0 million in short-term
(overnight) borrowings. KNBT had no other short-term (overnight) borrowings from
the FHLB in 2004, 2003 and 2002.

         The weighted  average  interest  rate on KNBT's  advances was 3.30% and
4.21% for the years ended December 31, 2004 and 2003, respectively.

         The  principal  payments  due on  KNBT's  long-term  FHLB  advances  at
December 31, 2004 are as follows:

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

      FHLB Advances
          Due In                   At December 31, 2004
---------------------------      --------------------------
                                  (dollars in thousands)

2005                                             $ 137,005
2006                                               123,364
2007                                               157,682
2008                                                56,949
2009                                               115,168
2010 and thereafter                                 70,506
                                 --------------------------
Total                                            $ 660,674
                                 ==========================

</TABLE>

         In addition to FHLB advances, KNBT's borrowings include securities sold
under agreements to repurchase ("repurchase agreements").  Repurchase agreements
are  contracts  for the sale of  securities  owned or borrowed by KNBT,  with an
agreement to repurchase  those  securities at an agreed upon price and date. The
collateral  for  such  repurchase   agreements  are  U.S.  Treasury  and  agency
securities and municipal  securities.  At December 31, 2004,  KNBT's  repurchase
agreements amounted to $22.6 million and all of such borrowings were short-term,
having  maturities of one year or less.  KNBT's securities sold under repurchase
agreements totaled $24.6 million at December 31, 2003.


                                       20


<PAGE>


         The  following  table  shows  certain   information   regarding  KNBT's
repurchase agreements:

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

                                                        At or For the Year Ended December 31,
                                                       -------------------------------------------------------------------
                                                            2004                     2003                      2002
                                                       ----------------         ----------------          ----------------
                                                                            (dollars in thousands)
Repurchase Agreements:
    Average balance outstanding                               $ 22,579                 $ 11,931                   $ 7,330
    Maximum amount outstanding at
      any month-end during the period                         $ 31,076                 $ 24,550                  $ 10,051
    Balance outstanding at end of period                      $ 22,643                 $ 24,550                   $ 8,904
    Average interest rate during the period                       0.75%                    1.10%                     2.09%
    Weighted average interest rate at
      end of period                                               0.99%                    0.64%                     1.85%

</TABLE>

         In conjunction with the merger with First Colonial,  KNBT assumed $15.0
million of subordinated  debentures  which were issued by First Colonial Trust I
("Trust I") in June 2002, a wholly owned  Connecticut  statutory  business trust
subsidiary  of First  Colonial.  Trust I issued  $15.0  million in pooled  trust
preferred  securities  using the  proceeds to purchase  subordinated  debentures
issued by First Colonial. The subordinated  debentures are the sole asset of the
Trust I. The trust preferred securities are classified as long-term debt for the
financial  statements,  but  are  included  as  Tier I  capital  for  regulatory
purposes.  The interest rate on these securities (5.99% at December 31, 2004) is
variable,  adjusting  quarterly at three-month LIBOR plus 3.45%. The interest is
payable quarterly. The trust preferred securities mature in June 2032 but may be
redeemed in whole or in part  beginning  in June 2007 and may be redeemed at any
time in the event that the deduction of related  interest for federal income tax
purposes is prohibited,  treatment as Tier I capital is no longer permitted,  or
certain other contingencies arise.

Regulation of KNBT Bancorp

         Set forth below is a brief  description of certain laws relating to the
regulation of KNBT Bancorp and the Bank. This description does not purport to be
complete and is qualified  in its entirety by reference to  applicable  laws and
regulations.

         General.  The  Bank  as  a  Pennsylvania-chartered  savings  bank  with
deposits insured by the Savings  Association  Insurance Fund administered by the
Federal  Deposit  Insurance   Corporation   ("FDIC")  is  subject  to  extensive
regulation and examination by the Pennsylvania  Department of Banking and by the
FDIC. The federal and state laws and  regulations  applicable to banks regulate,
among other things, the scope of their business, their investments, the reserves
required  to be  kept  against  deposits,  the  timing  of the  availability  of
deposited funds and the nature and amount of collateral for certain loans.  This
regulatory structure also gives the federal and state banking agencies extensive
discretion in connection with their  supervisory and enforcement  activities and
examination  policies,  including policies with respect to the classification of
assets and the  establishment  of adequate  loan loss  reserves  for  regulatory
purposes.  The laws and  regulations  governing  the Bank  generally  have  been
promulgated  to  protect  depositors  and  not  for the  purpose  of  protecting
stockholders.

         Federal law provides the federal banking regulators, including the FDIC
and the  Federal  Reserve  Board,  with  substantial  enforcement  powers.  This
enforcement authority includes,  among other things, the ability to assess civil
money penalties,  to issue  cease-and-desist  or removal orders, and to initiate
injunctive  actions against  banking  organizations  and  institution-affiliated
parties, as defined. In general,  these enforcement actions may be initiated for
violations  of laws and  regulations  and  unsafe or  unsound  practices.  Other
actions or inactions  may provide the basis for  enforcement  action,  including
misleading or untimely reports filed with regulatory authorities.  Any change in
such regulation,  whether by the Pennsylvania  Department of Banking,  the FDIC,
the Federal Reserve Board or the United States  Congress,  could have a material
impact on KNBT and its operations.


                                       21


<PAGE>


         KNBT is a bank  holding  company  under the Bank  Holding  Company  Act
subject to regulation and  supervision  by the Federal  Reserve Board and by the
Pennsylvania  Department of Banking.  KNBT is required to file annually a report
of its operations  with, and is subject to examination  by, the Federal  Reserve
Board and the Pennsylvania  Department of Banking. This regulation and oversight
is generally intended to ensure that KNBT limits its activities to those allowed
by law and that it operates in a safe and sound manner without  endangering  the
financial health of its subsidiary bank.

         KNBT has  registered  its common stock with the SEC under Section 12(g)
of the Securities  Exchange Act of 1934. KNBT is subject to the proxy and tender
offer rules,  insider  trading  reporting  requirements  and  restrictions,  and
certain other  requirements  under the Securities  Exchange Act of 1934.  KNBT's
common  stock is listed on the Nasdaq  Stock  Market  National  Market under the
symbol "KNBT." The Nasdaq Stock Market listing  requirements  impose  additional
requirements on KNBT, including, among other things, rules relating to corporate
governance and the  composition  and  independence of its Board of Directors and
various committees of the board, such as the audit committee.

         Bank Holding  Company Act Activities and Other  Limitations.  Under the
Bank  Holding  Company Act,  KNBT must obtain the prior  approval of the Federal
Reserve  Board  before it may acquire  control of another  bank or bank  holding
company, merge or consolidate with another bank holding company,  acquire all or
substantially  all of the assets of another  bank or bank  holding  company,  or
acquire direct or indirect ownership or control of any voting shares of any bank
or bank  holding  company if,  after such  acquisition,  KNBT would  directly or
indirectly own or control more than 5% of such shares.

         Federal  statutes impose  restrictions on the ability of a bank holding
company and its non-bank  subsidiaries  to obtain  extensions of credit from its
subsidiary bank, on the subsidiary bank's investments in the stock or securities
of the  holding  company,  and on the  subsidiary  bank's  taking of the holding
company's  stock or securities as collateral  for loans to any borrower.  A bank
holding company and its subsidiaries are also prevented from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services by the subsidiary bank.

         A bank  holding  company is required to serve as a source of  financial
and  managerial  strength  to its  subsidiary  banks  and  may not  conduct  its
operations in an unsafe or unsound manner. In addition,  it is the policy of the
Federal  Reserve  Board that a bank  holding  company  should stand ready to use
available  resources to provide  adequate capital to its subsidiary banks during
periods of financial  stress or  adversity  and should  maintain  the  financial
flexibility  and  capital-raising  capacity to obtain  additional  resources for
assisting its  subsidiary  banks. A bank holding  company's  failure to meet its
obligations  to serve as a source  of  strength  to its  subsidiary  banks  will
generally be considered by the Federal Reserve Board to be an unsafe and unsound
banking  practice or a violation of the Federal  Reserve Board  regulations,  or
both.

         Non-Banking  Activities.  The business  activities  of KNBT,  as a bank
holding company,  are restricted by the Bank Holding Company Act. Under the Bank
Holding  Company  Act and the  Federal  Reserve  Board's  bank  holding  company
regulations, KNBT may only engage in, or acquire or control voting securities or
assets of a company engaged in:

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

         o        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.


                                       22


<PAGE>


         The Federal  Reserve  Board has by regulation  determined  that certain
activities  are  closely  related  to  banking  including  operating  a mortgage
company, finance company, credit card company,  factoring company, trust company
or savings association; performing certain data processing operations; providing
limited  securities  brokerage  services;  acting as an  investment or financial
advisor;  acting as an  insurance  agent  for  certain  types of  credit-related
insurance;  leasing  personal  property on a full-payout,  non-operating  basis;
providing tax planning and preparation services;  operating a collection agency;
and providing certain courier  services.  However,  as discussed below,  certain
other  activities  are  permissible  for a bank  holding  company that becomes a
financial holding company.

         Financial  Modernization.  The  Gramm-Leach-Bliley  Act permits greater
affiliation  among  banks,  securities  firms,  insurance  companies,  and other
companies under a new type of financial  services  company known as a "financial
holding  company." A financial  holding  company  essentially  is a bank holding
company with  significantly  expanded powers.  Financial  holding  companies are
authorized by statute to engage in a number of financial  activities  previously
not permissible for bank holding companies,  including securities  underwriting,
dealing and market making;  sponsoring  mutual funds and  investment  companies;
insurance underwriting and agency; and merchant banking activities. The act also
permits the Federal  Reserve  Board and the  Treasury  Department  to  authorize
additional  activities for financial holding companies if they are "financial in
nature" or  "incidental"  to financial  activities.  A bank holding  company may
become a  financial  holding  company  if each of its  subsidiary  banks is well
capitalized,   well  managed,  and  has  at  least  a  "satisfactory"  Community
Reinvestment Act rating. A financial  holding company must provide notice to the
Federal  Reserve  Board within 30 days after  commencing  activities  previously
determined  by statute or by the Federal  Reserve  Board and  Department  of the
Treasury to be permissible. KNBT has not submitted notice to the Federal Reserve
Board of its intent to be deemed a financial holding company. However, it is not
precluded  from  submitting  a notice in the future  should it wish to engage in
activities only permitted to financial holding companies.

         Regulatory Capital Requirements.  The Federal Reserve Board has adopted
capital  adequacy  guidelines  pursuant  to which it  assesses  the  adequacy of
capital in examining  and  supervising  a bank holding  company and in analyzing
applications  to it under the Bank  Holding  Company  Act.  The Federal  Reserve
Board's  capital  adequacy  guidelines  for KNBT, on a consolidated  basis,  are
similar  to those  imposed  on the Bank by the FDIC.  Prompt  corrective  action
provisions, however, are not applicable to bank holding companies.

         Restrictions on Dividends.  KNBT's ability to declare and pay dividends
may depend in part on dividends received from the Bank. The Pennsylvania Banking
Code  regulates the  distribution  of dividends by savings banks and states,  in
part,  that  dividends  may be  declared  and paid only out of  accumulated  net
earnings and may not be declared or paid unless surplus,  retained earnings,  is
at  least  equal to  contributed  capital.  In  addition,  dividends  may not be
declared or paid if the Bank is in default in payment of any  assessment due the
FDIC.

         The Federal  Reserve  Board  issued a policy  statement  in 1985 on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve  Board's view that a bank holding company should pay cash dividends only
to the  extent  that the  holding  company's  net  income  for the past  year is
sufficient  to cover both the cash  dividends  and a rate of earnings  retention
that is consistent with the holding company's  capital needs,  asset quality and
overall  financial  condition.  The Federal Reserve Board also indicated that it
would be inappropriate for a company  experiencing serious financial problems to
borrow funds to pay dividends.  Furthermore, under the federal prompt corrective
action  regulations,  the  Federal  Reserve  Board may  prohibit a bank  holding
company from paying any dividends if the holding  company's  bank  subsidiary is
classified as "undercapitalized." See - "Regulation of the Bank" below.

         Federal  Securities Laws. KNBT is subject to the proxy and tender offer
rules,  insider trading  reporting  requirements and  restrictions,  and certain
other requirements under the Securities Exchange Act of 1934.


                                       23


<PAGE>


         Sarbanes-Oxley Act of 2002. On July 30, 2002, the President signed into
law  the  Sarbanes-Oxley  Act  of  2002   ("Sarbanes-Oxley   Act")  implementing
legislative  reforms  intended to address  corporate and  accounting  fraud.  In
addition to the  establishment  of a new accounting  oversight  board which will
enforce auditing,  quality control and independence standards and will be funded
by fees from all publicly traded  companies,  the  Sarbanes-Oxley  Act restricts
provision of both  auditing and  consulting  services by  accounting  firms.  To
ensure auditor  independence,  any non-audit services being provided to an audit
client  requires  pre-approval  by the company's  audit  committee  members.  In
addition,  the audit partners must be rotated.  The  Sarbanes-Oxley Act requires
chief executive officers and chief financial officers,  or their equivalent,  to
certify to the accuracy of periodic reports filed with the SEC, subject to civil
and criminal penalties if they knowingly or willfully violate this certification
requirement.  In addition, under the Sarbanes-Oxley Act, counsel are required to
report  evidence of a material  violation of the securities  laws or a breach of
fiduciary  duty by a company to its chief  executive  officer or its chief legal
officer,  and, if such officer does not  appropriately  respond,  to report such
evidence  to the audit  committee  or other  similar  committee  of the board of
directors or the board itself.

         Longer  prison  terms now apply to  corporate  executives  who  violate
federal  securities  laws, the period during which certain types of suits can be
brought against a company or its officers has been extended,  and bonuses issued
to top executives prior to restatement of a company's  financial  statements are
now subject to disgorgement if such restatement was due to corporate misconduct.
Executives  are also  prohibited  from insider  trading during  retirement  plan
"blackout" periods, and loans to company executives are restricted. In addition,
a provision  directs that civil  penalties  levied by the SEC as a result of any
judicial or administrative action under the Sarbanes-Oxley Act be deposited to a
fund for the benefit of harmed  investors.  The Federal  Accounts  for  Investor
Restitution  ("FAIR")  provision  also  requires  the SEC to develop  methods of
improving  collection  rates.  The  legislation  accelerates  the time frame for
disclosures by public companies,  as they must immediately disclose any material
changes in their  financial  condition or  operations.  Directors  and executive
officers  must also  provide  information  for most  changes in  ownership  in a
company's securities within two business days of the change.

         The  Sarbanes-Oxley  Act also  increases the oversight of, and codifies
certain  requirements  relating to audit  committees of public companies and how
they interact with the company's  "registered  public accounting firm" ("RPAF").
Audit  Committee  members  must be  independent  and are barred  from  accepting
consulting,  advisory or other  compensatory  fees from the issuer. In addition,
companies  must  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.
Under the Sarbanes-Oxley  Act, a RPAF is prohibited from performing  statutorily
mandated audit services for a company if such company's chief executive officer,
chief financial  officer,  comptroller,  chief accounting  officer or any person
serving in equivalent  positions has been employed by such firm and participated
in the audit of such company  during the  one-year  period  preceding  the audit
initiation date. The  Sarbanes-Oxley  Act also prohibits any officer or director
of a company or any other person  acting under their  direction  from taking any
action to fraudulently influence,  coerce, manipulate or mislead any independent
public or certified  accountant engaged in the audit of the company's  financial
statements  for the purpose of rendering  the financial  statement's  materially
misleading.  The  Sarbanes-Oxley  Act also  required the SEC to prescribe  rules
requiring  inclusion of an internal  control report and assessment by management
in the annual report to stockholders.  The  Sarbanes-Oxley Act requires the RPAF
that issues the audit report to attest to and report on management's  assessment
of the company's internal controls. In addition, the Sarbanes-Oxley Act requires
that each  financial  report  required  to be prepared in  accordance  with,  or
reconciled to, generally accepted  accounting  principles and filed with the SEC
reflect all material  correcting  adjustments  that are  identified by a RPAF in
accordance  with  generally  accepted  accounting  principles  and the rules and
regulations of the SEC.

Regulation of the Bank

         Pennsylvania  Savings Bank Law. The Pennsylvania  Banking Code contains
detailed provisions governing the organization,  location of offices, rights and
responsibilities  of directors,  officers,  and employees,  as well as corporate
powers,  savings and investment operations and other aspects of the Bank and its
affairs.  The code  delegates  extensive  rule-making  power and  administrative
discretion to the Pennsylvania Department of Banking so that the supervision and
regulation  of  state-chartered  savings  banks  may  be  flexible  and  readily
responsive  to  changes  in  economic  conditions  and in  savings  and  lending
practices.


                                       24


<PAGE>


         The  Pennsylvania  Banking  Code  also  provides  that  state-chartered
savings  banks may  engage in any  activity  permissible  for a federal  savings
association,  subject to regulation by the  Pennsylvania  Department of Banking.
The Federal Deposit Insurance Act,  however,  will prohibit the Bank from making
new  investments,  loans,  or becoming  involved in  activities as principal and
equity investments which are not permitted for national banks unless:

         o        the FDIC determines the activity or investment does not pose a
                  significant risk of loss to the Savings Association  Insurance
                  Fund; and

         o        the Bank meets all applicable capital requirements.

         Accordingly, the additional operating authority provided to the Bank by
the Pennsylvania Banking Code is significantly restricted by the Federal Deposit
Insurance Act.

         Insurance  of  Accounts.  The  deposits  of the Bank are insured to the
maximum extent  permitted by the Savings  Association  Insurance Fund,  which is
administered  by the FDIC, as well as the Bank Insurance Fund as a result of the
assumption of deposit  liabilities  of Nazareth  National Bank and are backed by
the full  faith  and  credit of the U.S.  Government.  As  insurer,  the FDIC is
authorized to conduct  examinations  of, and to require  reporting  by,  insured
institutions.  It also may prohibit any insured institution from engaging in any
activity the FDIC  determines by regulation or order to pose a serious threat to
the FDIC.  The FDIC  also has the  authority  to  initiate  enforcement  actions
against savings institutions.

         Under current FDIC regulations,  Savings Association Insurance Fund and
Bank  Insurance Fund insured  institutions  are assigned to one of three capital
groups which are based  solely on the level of an  institution's  capital  "well
capitalized,"  "adequately capitalized" and "undercapitalized" which are defined
in the same manner as the regulations  establishing the prompt corrective action
system discussed below. These three groups are then divided into three subgroups
which  reflect  varying  levels of  supervisory  concern,  from  those  that are
considered  to be healthy to those  which are  considered  to be of  substantial
supervisory  concern.  The matrix so created  results  in nine  assessment  risk
classifications, with rates during the last six months of 2004 ranging from zero
for well capitalized, healthy institutions, such as the Bank, to 27 basis points
for undercapitalized institutions with substantial supervisory concerns.

         In addition,  all  institutions  with deposits  insured by the FDIC are
required to pay  assessments  to fund  interest  payments on bonds issued by the
Financing Corporation,  a mixed-ownership  government corporation established to
recapitalize  the  predecessor to the Savings  Association  Insurance  Fund. The
assessment rate for the last quarter of 2004 was 0.146% of insured  deposits and
is adjusted  quarterly.  These  assessments  will  continue  until the Financing
Corporation bonds mature in 2019.

         The FDIC may terminate the deposit insurance of any insured  depository
institution,  including  the Bank,  if it  determines  after a hearing  that the
institution has engaged or is engaging in unsafe or unsound practices,  is in an
unsafe  or  unsound  condition  to  continue  operations,  or has  violated  any
applicable law, regulation,  order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance  temporarily  during the hearing
process for the permanent  termination of insurance,  if the  institution has no
tangible  capital.  If insurance of accounts is terminated,  the accounts at the
institution at the time of the termination,  less subsequent withdrawals,  shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.


                                       25


<PAGE>


         Regulatory  Capital  Requirements.  The  FDIC has  promulgated  capital
adequacy  requirements  for  state-chartered  banks that, like the Bank, are not
members of the Federal Reserve Board System. The capital regulations establish a
minimum  3% Tier 1  leverage  capital  requirement  for the  most  highly  rated
state-chartered, non-member banks, with an additional cushion of at least 100 to
200  basis  points  for  all  other  state-chartered,  non-member  banks,  which
effectively  increases the minimum Tier 1 leverage ratio for such other banks to
4% to 5% or more.  Under the FDIC's  regulations,  the  highest  rated banks are
those that the FDIC determines are not anticipating or experiencing  significant
growth and have well  diversified  risk,  including no undue  interest rate risk
exposure,  excellent  asset  quality,  high  liquidity,  good  earnings  and, in
general,  which are considered a strong banking organization,  rated composite 1
under the Uniform  Financial  Institutions  Rating  System.  Tier 1, or leverage
capital,  is  defined  as the  sum of  common  shareholders'  equity,  including
retained earnings, non-cumulative perpetual preferred stock and related surplus,
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain purchased mortgage servicing rights and purchased credit card
relationships.

         The FDIC's  regulations also require that  state-chartered,  non-member
banks meet a  risk-based  capital  standard.  The  risk-based  capital  standard
requires  the  maintenance  of total  capital,  defined  as Tier 1  capital  and
supplementary  (Tier 2) capital,  to risk weighted  assets of 8%. In determining
the amount of risk-weighted  assets, all assets,  plus certain off balance sheet
assets,  are multiplied by a risk-weight  of 0% to 100%,  based on the risks the
FDIC believes are inherent in the type of asset or item.  The components of Tier
1 capital for the  risk-based  standards  are the same as those for the leverage
capital  requirement.  The components of supplementary  (Tier 2) capital include
cumulative  perpetual preferred stock,  mandatory  subordinated debt,  perpetual
subordinated  debt,  intermediate-term  preferred stock, up to 45% of unrealized
gains on equity  securities and a portion of a bank's allowance for loan losses.
Allowance for loan losses  includable in  supplementary  capital is limited to a
maximum of 1.25% of risk-weighted  assets.  Overall, the amount of supplementary
capital  that may be  included  in total  capital  is  limited to 100% of Tier 1
capital.

         A bank that has less than the minimum leverage  capital  requirement is
subject to various  capital plan and activities  restriction  requirements.  The
FDIC's regulations also provide that any insured  depository  institution with a
ratio of Tier 1 capital to total  assets  that is less than 2.0% is deemed to be
operating  in an unsafe or unsound  condition  pursuant  to Section  8(a) of the
Federal Deposit  Insurance Act and could be subject to potential  termination of
deposit insurance.

         The Bank is also subject to minimum capital requirements imposed by the
Pennsylvania   Department  of  Banking  on  Pennsylvania   chartered  depository
institutions.   Under  the   Pennsylvania   Department   of  Banking's   capital
regulations,  a Pennsylvania bank or savings association must maintain a minimum
leverage  ratio  of  Tier  1  capital,  as  defined  under  the  FDIC's  capital
regulations,  to total assets of 4%. In addition, the Pennsylvania Department of
Banking has the  supervisory  discretion to require a higher  leverage ratio for
any institution or association based on inadequate or substandard performance in
any of a number of areas.  The Pennsylvania  Department of Banking  incorporates
the same FDIC risk-based capital requirements in its regulations.

         Prompt  Correction  Action.  The  following  table  shows the amount of
capital associated with the different capital categories set forth in the prompt
correction action regulations.

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

                                                  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%

</TABLE>

                                       26


<PAGE>


         In addition, an institution is "critically  undercapitalized" if it has
a ratio of tangible  equity to total  assets that is equal to or less than 2.0%.
Under  specified  circumstances,  a federal banking agency may reclassify a well
capitalized  institution as adequately capitalized and may require an adequately
capitalized  institution  or an  undercapitalized  institution  to  comply  with
supervisory  actions as if it were in the next lower  category,  except that the
FDIC  may  not  reclassify  a  significantly   undercapitalized  institution  as
critically undercapitalized.

         An institution  generally must file a written capital  restoration plan
which  meets  specified  requirements  within  45  days  of the  date  that  the
institution   receives   notice  or  is  deemed  to  have   notice  that  it  is
undercapitalized, significantly undercapitalized or critically undercapitalized.
A federal  banking  agency must provide the  institution  with written notice of
approval or  disapproval  within 60 days after  receiving a capital  restoration
plan,  subject to extensions by the agency.  An institution  that is required to
submit a  capital  restoration  plan  must  concurrently  submit  a  performance
guaranty  by  each  company  that   controls  the   institution.   In  addition,
undercapitalized  institutions are subject to various  regulatory  restrictions,
and the  appropriate  federal  banking  agency  also  may  take  any  number  of
discretionary supervisory actions.

         At  December  31,  2004,   the  Bank  was  deemed  a   well-capitalized
institution for purposes of the above  regulations and as such is not subject to
the above-mentioned restrictions.

         The  following  table  provides a  comparison  of KNBT's and the Bank's
capital amounts,  risk-based  capital ratios and leverage ratios for the periods
indicated.

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

                                                                              At December 31, 2004
                                           ----------------------------------------------------------------------------------------
                                                                                 Required                  To Be Well Capitalized
                                                                                For Capital               Under Prompt Corrective
                                                    Actual                   Adequacy Purposes               Action Provisions
                                           -------------------------      -------------------------      --------------------------
                                             Amount         Ratio           Amount         Ratio           Amount          Ratio
                                           -------------------------      -------------------------      --------------------------
Total Capital                                                              (dollars in thousands)
      (To risk-weighted assets)
      Company (consolidated)                  $355,857       25.64%         $ 111,042        8.00%           N/A            N/A
      Bank                                    $264,159       19.17%         $ 110,233        8.00%          $137,792        10.00%
Tier I Capital
      (To risk-weighted assets)
      Company (consolidated)                  $345,396       24.88%          $ 55,521        4.00%           N/A            N/A
      Bank                                    $253,698       18.41%          $ 55,117        4.00%          $ 82,675         6.00%
Tier I Capital
      (To average assets, leverage)
      Company (consolidated)                  $345,396       14.66%          $ 55,521        4.00%           N/A            N/A
      Bank                                    $253,698       12.17%          $ 55,117        4.00%          $ 68,896         5.00%

                                                                              At December 31, 2003
                                           ----------------------------------------------------------------------------------------
                                                                                 Required                   To Be Well Capitalized
                                                                                For Capital                Under Prompt Corrective
                                                    Actual                    Adequacy Purposes                Action Provisions
                                           -------------------------      -------------------------      --------------------------
                                             Amount         Ratio           Amount         Ratio           Amount          Ratio
                                           -------------------------      -------------------------      --------------------------
Total Capital                                                              (dollars in thousands)
      (To risk-weighted assets)
      Company (consolidated)                  $359,522       33.24%          $ 86,535        8.00%           N/A            N/A
      Bank                                    $258,441       24.01%          $ 86,123        8.00%          $107,654        10.00%
Tier I Capital
      (To risk-weighted assets)
      Company (consolidated)                  $351,612       32.51%          $ 43,268        4.00%           N/A            N/A
      Bank                                    $250,499       23.27%          $ 43,062        4.00%          $ 64,593         6.00%
Tier I Capital
      (To average assets, leverage)
      Company (consolidated)                  $351,612       19.39%          $ 72,525        4.00%           N/A            N/A
      Bank                                    $250,499       13.42%          $ 74,646        4.00%          $ 93,307         5.00%


</TABLE>

                                       27


<PAGE>


         Affiliate  Transaction  Restrictions.  Federal laws strictly  limit the
ability  of banks to engage in  transactions  with their  affiliates,  including
their bank holding  companies.  Such transactions  between a subsidiary bank and
its parent company or the non-bank  subsidiaries of the bank holding company are
limited to 10% of a bank  subsidiary's  capital and surplus and, with respect to
such parent company and all such non-bank  subsidiaries,  to an aggregate of 20%
of the bank subsidiary's capital and surplus.  Further,  loans and extensions of
credit generally are required to be secured by eligible  collateral in specified
amounts.  Federal law also requires that all transactions between a bank and its
affiliates  be  on  terms  as  favorable  to  the  bank  as  transactions   with
non-affiliates.

         FHLB System.  The Bank is a member of the FHLB of Pittsburgh,  which is
one from a region of 12. Each FHLB  serves as a reserve or central  bank for its
members within its assigned region.  It is funded primarily from funds deposited
by member institutions and proceeds from the sale of consolidated obligations of
the FHLB system.  It makes loans to members (i.e.,  advances) in accordance with
policies and  procedures  established  by the board of directors of the FHLB. At
December 31, 2004, the Bank had $660.7 million in FHLB advances.

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of  Pittsburgh  in an amount  equal to the  greater of 1% of its  aggregate
unpaid   residential   mortgage  loans,  home  purchase   contracts  or  similar
obligations at the beginning of each year or 5% of its outstanding advances from
the FHLB of  Pittsburgh.  At December  31, 2004,  the Bank had $36.5  million in
stock of the FHLB of Pittsburgh, which was in compliance with this requirement.

         Federal  Reserve Board System.  The Federal  Reserve Board requires all
depository  institutions to maintain  non-interest bearing reserves at specified
levels against their transaction accounts,  which are primarily checking and NOW
accounts,  and non-personal time deposits.  The balances  maintained to meet the
reserve  requirements  imposed by the  Federal  Reserve  Board  might be used to
satisfy  the  liquidity  requirements  that  are  imposed  by  the  Pennsylvania
Department of Banking.  At December 31, 2004,  the Bank was in  compliance  with
these reserve requirements.

Federal Taxation

         General.  KNBT and the Bank are subject to federal  income  taxation in
the same general manner as other corporations with some exceptions listed below.
The  following  discussion of federal,  state and local income  taxation is only
intended  to  summarize  certain  pertinent  income  tax  matters  and  is not a
comprehensive description of the tax rules applicable to KNBT and the Bank.

         Method of  Accounting.  For federal  income tax purposes,  KNBT reports
income and expenses on the accrual  method of  accounting  and files its federal
income tax return on a calendar year basis.

         Bad Debt  Reserves.  The  Small  Business  Job  Protection  Act of 1996
eliminated  the use of the reserve method of accounting for bad debt reserves by
savings associations, effective for taxable years beginning after 1995. Prior to
that time,  KNBT was  permitted to establish a reserve for bad debts and to make
additions  to the reserve.  These  additions  could,  within  specified  formula
limits,  be deducted in  arriving  at taxable  income.  As a result of the Small
Business Job Protection Act of 1996, savings  associations must use the specific
charge-off  method in computing  their bad debt  deduction  beginning with their
1996 federal tax return. In addition, federal legislation required the recapture
over a six-year  period of the excess of tax bad debt  reserves at December  31,
1995 over those established as of December 31, 1987.

         Taxable  Distributions  and Recapture.  Prior to the Small Business Job
Protection Act of 1996, bad debt reserves  created prior to January 1, 1988 were
subject to recapture  into taxable  income if KNBT failed to meet certain thrift
asset and  definitional  tests.  Federal  legislation  eliminated  these savings
association  related  recapture  rules.  However,  under  current law,  pre-1988
reserves remain subject to recapture  should the Bank make certain  non-dividend
distributions or cease to maintain a bank charter.


                                       28


<PAGE>


         At  December  31,  2004,  KNBT's  total  federal  pre-1988  reserve was
approximately  $9.8  million.  The reserve  reflects the  cumulative  effects of
federal tax deductions by KNBT for which no federal  income tax provisions  have
been made.

         Alternative   Minimum  Tax.  The  Internal   Revenue  Code  imposes  an
alternative  minimum  tax at a rate of 20% on a base of regular  taxable  income
plus  certain tax  preferences.  The  alternative  minimum tax is payable to the
extent such alternative  minimum tax income is in excess of an exemption amount.
Net  operating  losses,  of which KNBT has none,  can offset no more than 90% of
alternative minimum taxable income.  Certain payments of alternative minimum tax
may be used as credits against regular tax liabilities in future years. KNBT had
a minimum tax credit carryover of $202,000 at December 31, 2004.

         Net Operating Loss  Carryovers.  For net operating  losses in tax years
beginning before August 6, 1997, KNBT may carry back net operating losses to the
three years  preceding the loss year and then forward to fifteen years following
the loss years.  For net  operating  losses in years  beginning  after August 5,
1997,  net operating  losses can be carried back to the two years  preceding the
loss year and forward to the 20 years  following  the loss year. At December 31,
2004, KNBT had a $729,000 net operating loss  carry-forwards  for federal income
tax purposes.

         Corporate  Dividends-Received  Deduction.  KNBT  may  exclude  from its
income 100% of dividends  received from KNBT as a member of the same  affiliated
group of corporations.  The corporate dividends received deduction is 80% in the
case of dividends received from corporations in which a corporate recipient owns
less than 80%, but at least 20% of the  distribution  corporation.  Corporations
which own less than 20% of the stock of a corporation  distributing  a dividend,
may deduct only 70% of dividends received.

State and Local Taxation

         Pennsylvania  Taxation.  KNBT is subject to the Pennsylvania  Corporate
Net Income Tax,  Capital Stock and Franchise Tax. The Corporation Net Income Tax
rate for 2004 was 9.99% and is  imposed  on  unconsolidated  taxable  income for
federal  purposes with certain  adjustments.  In general,  the Capital Stock and
Franchise Tax is a property tax imposed on a  corporation's  capital stock value
at a statutorily  defined rate, such value being determined in accordance with a
fixed formula based upon average net income and net worth.

         The  Bank is  subject  to tax  under  the  Pennsylvania  Mutual  Thrift
Institutions Tax Act, as amended to include thrift  institutions  having capital
stock.  Pursuant to the Mutual Thrift  Institutions  Tax, the tax rate is 11.5%.
The Mutual Thrift  Institutions Tax exempts the Bank from other taxes imposed by
the  Commonwealth  of  Pennsylvania  for state  income tax purposes and from all
local taxation  imposed by political  subdivisions,  except taxes on real estate
and real estate transfers.  The Mutual Thrift Institutions Tax is a tax upon net
earnings, determined in accordance with generally accepted accounting principles
with  certain  adjustments.  The Mutual  Thrift  Institutions  Tax, in computing
income according to generally  accepted  accounting  principles,  allows for the
deduction of interest earned on state and federal obligations, while disallowing
a percentage  of a thrift's  interest  expense  deduction in the  proportion  of
interest income on those  securities to the overall interest income of the Bank.
Net operating losses, if any,  thereafter can be carried forward three years for
Mutual Thrift Institutions Tax purposes.

Employees

         As of December 31, 2004, KNBT had  approximately  633 employees of whom
120 were part-time.  At December 31, 2003, KNBT had  approximately 649 employees
of whom 141 were part-time.  A collective bargaining unit does not represent the
employees. KNBT considers its relationship with its employees to be good.


                                       29


<PAGE>


Item 2.           Properties
----------------------------

         KNBT does not own or lease any  property.  The Bank owns 20  properties
and leases 27 other  properties.  The principal  office of KNBT is located at 90
Highland Avenue,  Bethlehem,  Pennsylvania  18017. The book value of this office
was $3.5 million at December 31, 2004.

         The Bank also owns an  operations  and lending  office at 236  Brodhead
Road, Bethlehem, Pennsylvania 18017. This building was purchased in 2003 and had
a book value of $7.3 million at December 31, 2004.  The Bank  acquired an office
building at 3864 Adler  Place,  Bethlehem,  Pennsylvania  18017 as a part of the
acquisition of First  Colonial.  The Bank will continue to use this facility for
general office space. This building had a book value of $3.3 million at December
31, 2004.

         In addition,  the Bank owns 16 branch banking  facilities and leases 25
other  branch  banking  facilities.  All of which are located  within the Bank's
market area.

         The Bank also owns a garage and parking lot in Nazareth,  Pennsylvania,
a vacant  lot  which is  available  for a  possible  future  branch  in  Easton,
Pennsylvania  and a property for future use as a drive-thru  facility for KNBT's
banking branch office in Palmerton, Pennsylvania.


Item 3.           Legal Proceedings
-----------------------------------

         From time-to-time,  KNBT and the Bank are parties to routine litigation
incidental to their business.

         Neither KNBT, the Bank nor any of their  subsidiaries is subject to any
material  legal   proceedings,   nor  are  any  such  proceedings  known  to  be
contemplated by any governmental authorities.


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

         No matter was  submitted  to a vote of  stockholders  during the fourth
quarter of the fiscal year covered by this report.



PART II


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

         KNBT's  common  stock  trades on the Nasdaq  National  Market under the
trading symbol "KNBT." At the close of business on December 31, 2004, there were
approximately  3,641  stockholders of record not including the number of persons
or entities  holding stock in nominee or street name through various brokers and
banks.

         The following  table  reflects the ranges of high and low bid prices of
KNBT's  common stock and the  dividends  declared per share of KNBT common stock
during the periods presented.  Such bid information reflects inter-dealer prices
without  retail  mark-up,  markdown or commission  and may not represent  actual
transactions.


                                       30

<PAGE>


 The closing market price of the common stock at December 31, 2004 was $16.90.

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

                          Year Ended December 31, 2004
                          ----------------------------

                                                                           High             Low            Dividends
                                                                           ----             ---            ---------

         First Quarter ......................                             $17.96           $16.26        None Declared
         Second Quarter .....................                             $17.64           $14.55            $0.05
         Third Quarter ......................                             $17.52           $15.44            $0.05
         Fourth Quarter .....................                             $17.45           $16.45            $0.05


                          Year Ended December 31, 2003
                          ----------------------------

                                                                           High             Low            Dividends
                                                                           ----             ---            ---------

         First Quarter ......................                                -               -                 -
         Second Quarter .....................                                -               -                 -
         Third Quarter ......................                                -               -                 -
         Fourth Quarter .....................                             $17.70           $15.85        None Declared

</TABLE>

         The  declaration  and payment of dividends is at the sole discretion of
the Board of  Directors,  and the timing and  amount of any such  dividend  will
depend upon the Board of Directors'  consideration  of the  earnings,  financial
condition,  and  capital  needs  of KNBT and  certain  other  factors  including
restrictions  arising from Federal  banking  laws and  regulations.  KNBT common
shares were first sold in KNBT's initial  public  offering as a part of Keystone
Savings  Bank's  mutual-to-stock  conversion on October 31, 2003 at the offering
price of $10.00 per share.  KNBT's common stock began trading on Nasdaq National
Market on November 3, 2003.

         KNBT did not sell any of its equity securities during 2003 or 2004 that
were not registered under the Securities Act of 1933.

         For information regarding KNBT's equity compensation plans, see Item 12
hereto.

         The following table sets forth information regarding KNBT's repurchases
of its common stock during the quarter ended December 31, 2004.

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



                                                                                    Total Number of        Maximum Number
                                                                                   Shares Purchased      of Shares that may
                                                Total Number       Average        as Part of Publicly     yet be Purchased
                                                 of shares        Price Paid        Announced Plans       Under the Plan or
Period                                           Purchased         Per Share          or Programs           Program(s) (1)
--------------------------------------------    --------------    -----------    --------------------    -------------------

October 1 - 31, 2004                                  -               -                   -                 3,062,486 (2)
November 1 - 30, 2004                                 650,000         $17.20                 650,000        2,412,486 (2)
December 1 - 31, 2004                                 -               -                   -                 2,412,486 (2)
                                                --------------    -----------    --------------------
Total                                                 650,000         $17.20                 650,000           N/A
                                                ==============    ===========    ====================

--------------------------------------------
(1)    On October 27, 2004, the Board of Directors  authorized the repurchase of
       up to 3,062,486 shares or approximately 10% of KNBT's outstanding shares.
       Repurchases will be made from time to time,  during the next 12 months or
       longer if necessary as, in the opinion of management,  market  conditions
       warrant.  This plan will continue  until it is completed or terminated by
       the Board of Directors.
(2)    The 2004  Management  Recognition  and Retention Plan and Trust Agreement
       ("MRRP")  was  adopted by the Board of  Directors  and  approved  by KNBT
       stockholders  at  their  Annual  Meeting  on May 6,  2004.  The MRRP is a
       stock-based plan that provides for 808,047 shares of the Company's common
       stock  which  may be  granted  as  restricted  shares  to  the  Company's
       directors, advisory directors, officers and employees. The 808,047 shares
       were  purchased  in May,  2004 at an  average  cost of $16.44 and are not
       included in the amount set forth above.

</TABLE>

                                       31


<PAGE>


Item 6.           Selected Financial Data
-----------------------------------------


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


                                                                   As of and For the Year Ended December 31,
                                                          2004         2003(1)         2002          2001          2000
--------------------------------------------------------------------------------------------------------------------------
                                                                (dollars in thousands, except per share data)
                                                    ----------------------------------------------------------------------
Consolidated Summary of Income
      Interest Income                                   $ 97,291      $ 59,063       $ 59,479      $ 60,493      $ 57,603
      Interest Expense                                    33,446        21,061         26,416        34,064        31,141
                                                    -------------  ------------  -------------  ------------ -------------
      Net Interest Income                                 63,845        38,002         33,063        26,429        26,462
      Provision for Loan Losses                            4,308         2,951            111           391           442
      Total Non-Interest Income                           15,434         9,048          8,814         5,013         3,214
      Total Non-Interest Expense (2)                      52,699        55,119         24,568        19,613        17,999
                                                    -------------  ------------  -------------  ------------ -------------
      Income (Loss) Before Income Taxes (Benefit)         22,272       (11,020)        17,198        11,438        11,235
      Income Taxes (Benefit)                               4,666        (5,264)         5,188         3,326         3,718
                                                    -------------  ------------  -------------  ------------ -------------
      Net Income (Loss) (2)                             $ 17,606      $ (5,756)      $ 12,010       $ 8,112       $ 7,517
                                                    =============  ============  =============  ============ =============

      Net Income Per Share - Diluted (3)                  $ 0.60           N/M            N/M           N/M           N/M
      Net Income Per Share - Basic                        $ 0.61           N/M            N/M           N/M           N/M
      Cash Dividends Declared Per Share                   $ 0.15             -              -             -             -

--------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data
      Total Assets                                   $ 2,415,103   $ 1,941,973    $ 1,015,906     $ 922,045     $ 824,736
      Investment Securities Available-for-Sale         1,057,109       734,087        294,150       156,785       114,077
      Investment Securities Held to Maturity              56,586        -              -             -             -
      Loans Receivable, Net                            1,002,741       882,166        555,526       668,046       657,107
      Mortgage Loans Held-for-Sale                           718         4,677         23,796        -            -
      Deposits                                         1,323,053     1,289,410        771,825       772,226       713,520
      Securities Sold Under Agreements to Repurchase      22,643        24,550          8,904         5,752       -
      FHLB Advances                                      660,674       207,153        113,500        40,500        13,000
      Subordinated Debentures (4)                         15,464        15,000        -              -            -
      Shareholders' Equity/Retained Earnings             377,354       389,080        111,049        95,788        86,204
      Book Value Per Share                                 13.33         13.20            n/a           n/a           n/a
      Full Service Offices                                    41            41             19            16            16

Selected Consolidated Ratios
      Net Income (Loss) To:
        Average Total Assets                               0.81%        (0.46%)         1.25%         0.92%         0.94%
        Average Equity                                     4.57%        (3.58%)        11.46%         8.79%         9.27%
      Net Interest Margin                                  3.27%         3.35%          3.57%         3.14%         3.38%
      Efficiency Ratio (5)                                63.39%       117.15%         58.67%        62.38%        60.65%
      Equity to Assets (6)                                15.62%        20.05%         10.93%        10.39%        10.45%
      Tier 1 Capital to Average Assets (Leverage) (6)     14.66%        19.39%         10.78%        10.50%        10.45%
      Tier 1 Risk-based Capital Ratio (6)                 24.88%        32.51%         18.19%        17.09%        16.99%
      Total Risk-based Capital Ratio (6)                  25.64%        33.24%         18.19%        17.71%        17.65%

--------------------------------------------------------------------------------------------------------------------------
(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  $16.1  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 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)  The calculation of the efficiency ratio for 2003 includes the effect of the  $16.1 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.
(6)  Ratios  for  2004-2003  are for  KNBT  Bancorp.  Ratios  for 2000, 2001 and 2002 are for  Keystone Nazareth Bank & Trust
     Company (formerly Keystone Savings Bank).

</TABLE>

                                       32


<PAGE>


Item 7.           Management's Discussion and Analysis of Financial Condition
--------------------------------------------------------------------------------
                  and Results of Operations
                  -------------------------

General

         The following presents a review of KNBT Bancorp's results of operations
and financial  condition.  This  information  should be read in conjunction with
KNBT's consolidated financial statements and the accompanying notes to financial
statements.   KNBT's  consolidated  earnings  are  derived  primarily  from  the
operations of its wholly owned savings bank subsidiary, Keystone Nazareth Bank &
Trust Company, and its other subsidiaries.

         KNBT's results of operations depend, to a large extent, on net interest
income,  which is the  difference  between  the  income  earned  on its loan and
investment   portfolios  and  interest   expense  on  deposits  and  borrowings.
Non-interest income, non-interest expense and the provision for loan losses also
impact KNBT's results of operations.  Non-interest  income consists primarily of
fees and service charges related to deposits and lending  activities,  fees from
other banking and non-banking operations,  loan servicing and other non-interest
income.  Non-interest  expense  primarily  consists of compensation and employee
benefits,  office occupancy and equipment expense, data processing,  advertising
and business promotion and other expenses. KNBT's results of operations are also
significantly   affected  by  general   economic  and  competitive   conditions,
particularly  changes in  interest  rates,  government  policies  and actions of
regulatory  authorities.  Future  changes  in  applicable  law,  regulations  or
government policies may materially impact KNBT's financial condition and results
of operations.

Critical Accounting Policies, Judgments and Estimates

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

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

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


                                       33


<PAGE>


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

Operating Strategy

         KNBT was organized in 2003 by Keystone  Savings Bank in connection with
its  mutual-to-stock  conversion  and as  the  holding  company  for  the  Bank.
Historically,  Keystone  Savings  Bank  operated as a  traditional  savings bank
primarily providing  single-family  residential  mortgage loans and a variety of
retail products and services to its customers.

         Concurrent with the conversion on October 31, 2003,  First Colonial was
merged  with and into KNBT and  Nazareth  National  Bank and Trust  Company  was
merged into the Bank. Historically, Nazareth National Bank and Trust Company was
a full-service community commercial bank with full trust services. The resulting
Bank, Keystone Nazareth Bank & Trust Company is a  Pennsylvania-chartered  stock
savings bank.  Some of the Bank's key operating  strategies and  characteristics
are described below.

         o        Maintain  current branch network system with 41 branch offices
                  located  throughout  Lehigh,  Northampton,  Monroe  and Carbon
                  Counties,   Pennsylvania  with  consideration  for  additional
                  branches in the future.

         o        Continue to develop as a "relationship  bank" offering a broad
                  array of deposit and loan products as well as  securities  and
                  insurance products and trust services.

         o        Accelerate  core  deposit  growth,  utilizing  strong  deposit
                  market share  particularly  in Northampton and Lehigh Counties
                  in  which  the  Bank  has  the  largest  and  second  largest,
                  respectively,   deposit  market  share.   Overall,   the  Bank
                  estimates that it has the second largest  deposit share in the
                  Lehigh Valley.

         o        Focus on asset generation that continues the Bank's success in
                  growing   commercial  and  consumer  loan  portfolios  without
                  sacrificing credit quality.  Intensify efforts targeting small
                  to mid-sized businesses in the Lehigh Valley.

         o        Ensure customer  satisfaction by delivering unmatched personal
                  service and provide high-quality products and services to meet
                  the changing needs of individuals, families and businesses.

         o        Grow and diversify our operations as a community bank.

         o        Execute capital management strategy.

Comparison of Financial Condition at December 31, 2004 and December 31, 2003

         KNBT had a net income  for 2004 of $17.6  million  compared  with a net
loss of $5.8 million in 2003.  The results for 2003  included  one-time  charges
aggregating   $21.8  million   (pre-tax)   resulting   from  the  $16.1  million
contribution to the Keystone Nazareth Charitable  Foundation and $5.7 million of
merger related and systems  integration  related charges  incurred in connection
with the merger  with  First  Colonial.  KNBT's net income was $12.0  million in
2002.


                                       34


<PAGE>


         KNBT's  return  on  average  assets  was 0.81% in 2004 as  compared  to
(0.46)%  in 2003 and 1.25% in 2002.  The  return on  average  equity  was 4.57%,
(3.58)%, and 11.46% in 2004, 2003 and 2002, respectively.

         KNBT's total  assets  increased by $473.1  million,  or 24.4%,  to $2.4
billion at December 31, 2004 compared to $1.9 billion at December 31, 2003. This
increase  in  total  assets  was due  primarily  to an  increase  in  investment
securities and net loans  receivable  which was partially offset by decreases in
cash  and cash  equivalents.  For the  year  ended  December  31,  2004,  KNBT's
investment  securities  increased by $379.6 million, or 51.7% to $1.1 billion at
December  31,  2004  compared  to $734.1  million at  December  31, 2003 as KNBT
implemented  its   asset/liability   management   strategy.   KNBT's  net  loans
receivable, including mortgage loans held-for-sale, increased by $116.6 million,
or 13.1% to $1.0  billion at  December  31, 2004  compared to $886.8  million at
December 31, 2003. Cash and cash  equivalents  decreased from $52.8 million,  or
38.0%, from $139.0 million at December 31, 2003 to $86.2 million at December 31,
2004. Such decrease primarily reflects KNBT's purchases of investment securities
during the 2004 fiscal year.

         KNBT's total liabilities  increased $484.9 million,  or 31.2% from $1.6
million at December 31, 2003 to $2.0 million at December 31, 2004.  The increase
was primarily due to a $453.5 million, or 218.9% increase in FHLB advances which
were used to fund the  increase in the  investment  securities.  Total  deposits
increased $33.6 million,  or 2.6%, to $1.3 billion at December 31, 2004 compared
to December 31, 2003.

         Shareholders'  equity  totaled  $377.4  million at  December  31,  2004
compared to $389.1  million at December 31, 2003, a decrease of $11.7 million or
3.0%. The decrease in  shareholders'  equity was  principally  the result of the
purchase of 808,047 shares of KNBT's stock to fund the stockholder approved 2004
Management  Recognition and Retention Plan ("MRRP") at an average cost of $16.44
per share combined with the repurchase of 650,000 shares of its common stock, in
connection with the Board of Directors  authorized stock repurchase  program, at
an average cost of $17.20 per share.

Analysis of Net Interest Income

         Net  interest  income  represents  the  difference  between  income  on
interest-earning  assets  and  expense  on  interest-bearing   liabilities.  Net
interest  income also  depends  upon the  relative  amounts of  interest-earning
assets and interest-bearing  liabilities and the interest rate earned or paid on
them. Net interest income is the primary source of earnings for KNBT. Therefore,
changes in net  interest  income are an important  factor in KNBT's  overall net
income.

         Net Interest  Income.  KNBT's net interest income was $63.8 million for
2004, a $25.8 million or 68.0% increase when compared to $38.0 million for 2003.
The major factors in the increases in both interest income and interest  expense
were  the   increased   average   balances   of   interest-earning   assets  and
interest-bearing liabilities due to the acquisition of First Colonial on October
31,  2003,  the use of the net  proceeds  from KNBT's  initial  public  offering
completed on October 31, 2003,  and an increase in FHLB advances which were used
to  fund   the   increase   in  the   investment   portfolio.   KNBT's   average
interest-earning assets totaled $2.0 billion at December 31, 2004 as compared to
$1.1 billion at December 31, 2003.  Total interest  income was $97.3 million for
2004, a $38.2  million or 64.7%  increase  when compared to the $59.1 million in
total interest income for 2003. Average  interest-bearing  liabilities were $1.6
billion at December  31, 2004  compared to $1.0  billion at December  31,  2003.
Total  interest  expense was $33.4  million for 2004,  a $12.4  million or 58.8%
increase when compared to the $21.1 million in total interest expense for 2003.

         Net interest income, in 2003,  increased $4.9 million or 14.9% from the
2002  level of $33.1  million.  This  increase  was  primarily  the result of an
increase in the average balances of investment  securities and  interest-bearing
balances  with  banks   including  a  decrease  in  the  average  rate  paid  on
interest-bearing deposits, partially offset by an increase in FHLB borrowings.


                                       35


<PAGE>


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

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

                                                                       For the Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                     2004                          2003                             2002
                                        -----------------------------  ------------------------------   ----------------------------
                                                   Interest   Average             Interest  Average               Interest   Average
                                         Average    Income/    Yield/   Average    Income/   Yield/      Average   Income/    Yield/
                                         Balance    Expense     Rate    Balance    Expense    Rate       Balance   Expense     Rate
                                        -----------------------------  ------------------------------   ----------------------------
Assets                                      (dollars in thousands)
Interest-Earning Assets
  Interest-Bearing Balances with Banks    $ 31,209     $ 498    1.60%   $ 106,395   $ 1,028   0.97%      $ 30,577     $ 408   1.33%
  Investment Securities
     Taxable (1)                           851,624    33,757    3.96%     345,048    13,334   3.86%       241,475    13,272   5.50%
     Non-Taxable (2)                       109,515     7,188    6.56%      62,508     4,358   6.97%        31,229     2,441   7.82%
   Loans Receivable (2) (3)                967,799    58,338    6.03%     622,525    41,833   6.72%       627,001    44,188   7.05%
   Allowance for Loan Losses                (9,240)                        (3,447)                         (3,021)
                                        ----------- ---------          ----------- ---------            ---------- ---------
   Net Loans                               958,559    58,338    6.09%     619,078    41,833   6.76%       623,980    44,188   7.08%
                                        ----------- ---------          ----------- ---------            ---------- ---------
     Total Interest-Earning Assets       1,950,907    99,781    5.11%   1,133,029    60,553   5.34%       927,261    60,309   6.50%
                                                               ------                        --------                        -------
   Non-Interest-Earning Assets             213,763         -              121,964         -                33,531         -
                                        ----------- ---------          ----------- ---------            ---------- ---------
        Total Assets,
          Interest Income               $2,164,670    99,781           $1,254,993    60,553              $960,792    60,309
                                        =========== ---------          =========== ---------            ========== ---------
Liabilities
Interest-Bearing Liabilities
   Interest-Bearing Deposits
      Demand Deposits                    $ 174,698       273    0.16%   $ 102,506       298   0.29%      $ 81,609       466   0.57%
      Money Market Deposits                249,065     2,477    0.99%     203,978     2,212   1.08%       134,456     2,784   2.07%
      Savings Deposits                     221,027     1,063    0.48%     182,548     1,315   0.72%       111,689     1,680   1.50%
      Certificates of Deposit              539,505    14,372    2.66%     409,003    12,168   2.98%       417,073    18,169   4.36%
                                        ----------- ---------          ----------- ---------            ---------- ---------
        Total Interest-Bearing Deposits  1,184,295    18,185    1.54%     898,035    15,993   1.78%       744,827    23,099   3.10%
                                                               ------                        --------                        -------

   Securities Sold Under Agreements
      to Repurchase                         22,579       170    0.75%      11,931       131   1.10%         7,330       155   2.11%
   FHLB Advances                           425,167    14,316    3.37%     114,520     4,822   4.21%        67,358     3,162   4.69%
   Other Debt                               15,464       775    5.01%       2,507       115   4.59%
                                        ----------- ---------          ----------- ---------            ---------- ---------
        Total Interest-Bearing
         Liabilities                     1,647,505    33,446    2.03%   1,026,993    21,061   2.05%       819,515    26,416   3.22%
                                                               ------                        --------                        -------

Non-Interest-Bearing Liabilities
   Non-Interest-Bearing Deposits           119,133         -           -   53,559         -              - 28,881         -
   Other Liabilities                        12,376         -           -   13,832         -              -  7,603         -
                                        ----------- ---------          ----------- ---------            ---------- ---------
      Total Liabilities                  1,779,014    33,446            1,094,384    21,061               855,999    26,416
   Shareholders' Equity /
      Retained Earnings                    385,656         -           -  160,609         -              -104,793         -
                                        ----------- ---------          ----------- ---------            ---------- ---------
   Total Liabilities and Shareholders'
      Equity, Interest Expense          $2,164,670    33,446           $1,254,993    21,061              $960,792    26,416
                                        =========== ---------          =========== ---------            ========== ---------

Net Interest Income on Tax Equivalent
 Basis (2)                                            66,335                         39,492                          33,893
                                                    ---------                      ---------                       ---------
   Net Interest Spread on
     Tax Equivalent Basis (4)                                   3.08%                         3.29%                           3.28%
   Effect of Interest-Free Sources
      Used to Fund Earning Assets                               0.13%                         0.14%                           0.09%
Net Interest Margin
     Tax Equivalent Basis (5)                                   3.40%                         3.49%                           3.66%
Tax-Exempt Adjustment                                 (2,490)                        (1,490)                           (830)
                                                    ---------                      ---------                       ---------

Net Interest Income and Margin (4)                   $63,845    3.27%               $38,002   3.35%                 $33,063   3.57%
                                                    =========  ======              ========= ========              ========= =======
Average Interest-Earning Assets
      to Average Interest-Bearing
       Liabilities                                            118.42%                       110.32%                         113.15%
                                                              =======                       ========                        ========

------------------------------------------------------------------------------------------------------------------------------------
 (1)   Includes Federal Home Loan Bank stock.
 (2)   The indicated interest income and average yields are presented on a taxable equivalent basis.  The taxable equivalent
       adjustments included above are  $2.5 million, $1.5 million, and $830,000 for the years 2004, 2003, and 2002, respectively.
       The effective tax rate used for the taxable equivalent adjustment was 34%.
 (3)   Loan fees of $678,000, $1.5 million, and $1.2 million for the years 2004, 2003, and 2002, respectively, are included in
       interest income. Average loan  balances include non-accruing loans of $4.9 million, $1.7 million, and $1.2 million and
       average loans held-for-sale of $1.4 million, $3.1 million, and  $4.4 million for the years of 2004, 2003, and 2002,
       respectively.
  (4)  Net interest spread is the arithmatic difference between yield on interest-earning assets and the rate paid on interest-
       bearing liabilities.
  (5)  Net interest margin is computed by dividing net interest income by average interest-earning assets.


</TABLE>

                                       36


<PAGE>


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

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


                                                      2004 Compared to 2003                        2003 Compared to 2002
                                            -----------------------------------------     -------------------------------------
                                               Increase (Decrease)                          Increase (Decrease)
                                                     Due to                 Total                  Due to               Total
                                            --------------------------     Increase      ------------------------     Increase
                                                Rate         Volume       (Decrease)          Rate        Volume     (Decrease)
                                            -------------  -----------   ------------     -----------  -----------  -----------
                                                                            (Dollars in Thousands)
Interest Income:
   Cash and cash equivalents                       $ 196       $ (726)        $ (530)         $ (392)     $ 1,012        $ 620
   Investment securities                            (779)      24,032         23,253          (5,790)       7,769        1,979
   Loans receivable, net                          (6,697)      23,202         16,505          (2,009)        (346)      (2,355)
                                            -------------  -----------   ------------     -----------  -----------  -----------
      Total interest-earning assets               (7,280)      46,508         39,228          (8,191)       8,435          244

Interest Expense:
   Savings deposits                                 (529)         277           (252)           (288)         120         (168)
   Checking deposits                                (235)         210            (25)         (2,011)       1,439         (572)
   Money market deposits                            (224)         489            265          (1,431)       1,066         (365)
   Certificates of deposit                        (1,678)       3,882          2,204          (5,649)        (352)      (6,001)
                                            -------------  -----------   ------------     -----------  -----------  -----------
      Total interest-bearing deposits             (2,666)       4,858          2,192          (9,379)       2,273       (7,106)

   Securities sold under agreements
    to repurchase                                    (78)         117             39            (121)          97          (24)
   FHLB advances and other borrowings             (3,587)      13,081          9,494            (554)       2,214        1,660
   Other debt                                         66          594            660           -              115          115
                                            -------------  -----------   ------------     -----------  -----------  -----------
   Total interest-bearing liabilities             (6,265)      18,650         12,385         (10,054)       4,699       (5,355)

Increase (decrease) in net
   interest income                              $ (1,015)    $ 27,858       $ 26,843         $ 1,863      $ 3,736      $ 5,599
                                            =============  ===========   ============     ===========  ===========  ===========

</TABLE>

         Net interest income, on a fully taxable  equivalent basis,  amounted to
$66.3 million for 2004, an increase of $26.8 million or 68.0% over $39.5 million
in 2003.  As shown in the  "Rate/Volume  Analysis"  table,  the  increase in net
interest income in 2004 was  attributable to higher net interest income of $27.9
million due to changes in volume that more than offset a $1.0 million decline in
net  interest  income due to a decline in the  weighted  average  interest  rate
spread  resulting  from  declines in market  rates.  The  volume-related  change
resulted  primarily from  increases in investment  securities and net loans (see
the  discussion  in  "Business-Lending  Activities"),  an increase in  deposits,
particularly in certificates of deposit,  and an increase in FHLB advances.  The
decrease in the interest rate spread was primarily the result of the decrease in
the yield on investment  securities and loans being greater than the decrease in
the rate paid on deposits and debt.

         The net interest income,  on a fully taxable  equivalent basis, in 2003
increased  $5.6  million or 16.5% over the 2002  figure of $33.9  million.  This
increase was the result of growth in investments and  interest-bearing  balances
with banks reduced in part by a small increase in net loans,  and an increase in
deposits and FHLB advances.


                                       37


<PAGE>


         Net interest margin, a measure of net interest income  performance,  is
determined  by dividing  net  interest  income by the  average  balance of total
interest-earning  assets.  The net interest margin was 3.27% for 2004, 3.35% for
2003 and 3.57% for 2002. The net interest  margin on a tax equivalent  basis was
3.40% for 2004,  3.49% for 2003 and 3.66% for 2002.  The  decrease  in 2004 from
2003 in net interest  margin was due to a 23 basis point drop in average  yields
on  interest-earning  assets versus a 2 basis point decrease in the average rate
paid on  interest  bearing  liabilities.  In  addition  the  average  balance of
non-interest-earning  assets  increased to $213.8 million in 2004 as compared to
$122.0 million in 2003. The decrease in the net interest margin in 2003 compared
to prior year was primarily due to the increase in  non-interest  earning assets
which were $124.6  million at December 31, 2003 versus $33.5 million at December
31, 2002.  The interest  rate spread which is the  difference  between  interest
earned on assets and the  interest  paid on  liabilities,  was 3.08%,  3.29% and
3.28% for 2004, 2003 and 2002, respectively.

         KNBT presents its net interest margin on a tax equivalent basis because
management  believes  that  presentation  of its net  interest  margin  on a tax
equivalent basis provides  information that is useful for a proper understanding
of the operating  results of KNBT's business.  These  disclosures  should not be
viewed as a substitute for operating results  determined in accordance with GAAP
nor are they necessarily comparable to non-GAAP performance measures,  which may
be presented by other companies. Without the adjustment for tax-free income, the
net  interest  margin  would be 3.27%,  3.35%,  and  3.57% for the years  ending
December 31, 2004, 2003 and 2002, respectively.

Provision for Loan Losses

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

         For the year ended  December 31, 2004,  KNBT made a provision  for loan
losses of $4.3 million,  as compared to $3.0 million for the year ended December
31, 2003. A primary factor in the increased  provision over the comparable  2003
period  was the  acquisition  of  $271.2  million  of net  loans  from the First
Colonial acquisition of which commercial loans totaled $61.5 million. Commercial
loans and commercial real estate loans are deemed to have higher levels of known
and  inherent  losses than one to  four-family  residential  loans due to, among
other  things,  the nature of the  collateral  and the  dependency  on  economic
conditions for successful  completion or operation of the project. KNBT has made
provisions  in order to  maintain  the  allowance  for loan  losses  at a level,
management believes, to the best of its knowledge, covers all known and inherent
losses in the  portfolio  that are both  probable and  reasonable to estimate at
this time.

         The  provision  in 2002 was  $111,000,  which  was  prior to the  First
Colonial  merger and against a loan  portfolio of  predominately  consisting  of
residential mortgage loans. Net charge-offs were $1.8 million, $1.5 million, and
$570,000  in 2004,  2003,  and  2002,  respectively.  For more  information  see
"Business - Lending Activities - Non-Performing Assets" in Item 1.

Non-Interest Income

         Non-interest  income  increased  in 2004 by $6.4  million or 70.6% to a
total of $15.4  million  from $9.0  million in 2003.  The increase for 2004 over
2003 was the result of an increase of trust  revenues from the  Company's  Trust
Services Department,  acquired from First Colonial, of $1.3 million or 453.8%, a
$1.1 million or 75.0%  increase in the cash  surrender  value of Bank Owned Life
Insurance  ("BOLI") resulting from a November 2003 purchase of an additional $30
million of such  insurance,  an increase of $435,000 or 10.8% in deposit service
charges due to the addition of accounts from the  acquisition  of First Colonial
and  a  $1.6  million  or  57.8%  increase  in  non-interest  operating  income,
consisting primarily of higher loan fees, fees received for servicing mortgages,
Visa interchange  fees and other fee-based  services.  Non-interest  income also
increased


                                       38


<PAGE>


as a result of an increase in net gain on sales from  investment  securities  of
$645,000,  an increase of $528,000 from sale of residential  mortgage loans, and
gains on sale of  KNBT's  credit  card  portfolio  and  operations  center  that
contributed $298,000 and $213,000, respectively, to non-interest income in 2004.

         Non-interest  income  increased  $234,000 or 2.7% from $8.8  million in
2002 to $9.0  million  in 2003.  The  increase  in  non-interest  income in 2003
compared  with 2002 was the result of an  increase  of $414,000 or 11.4% in fees
for deposit  service  charges and  increased  fees from  non-interest  operating
income of $1.5 million or 123.8%.  These  increases were offset by a decrease of
$1.5  million  on  net  gains  on  sales  of  investment  securities.  The  Bank
securitized a portion of its mortgage portfolio which resulted in the securities
gain in 2002.

Non-Interest Expense

         Non-interest  expense  decreased  to $52.7  million  in 2004 from $55.1
million in 2003, a $2.4 million or 4.4% decrease.  Non-interest expense for 2003
reflected a $16.1  million  contribution  to the KNBT  Charitable  Foundation in
connection with the Bank's  conversion from mutual to stock form as well as $5.7
million of merger expenses  relating to the fourth quarter  acquisition of First
Colonial. Compensation and benefit expenses increased $10.8 million or 58.2% for
the year ended December 31, 2004 as compared to the prior year.  Contributing to
the increase in  compensation  and employee  benefit expense was the addition of
245 employees as a result of the merger with First  Colonial.  Salaries for such
employees  were  included  for two months in 2003  compared  to the full year in
2004.  Benefit expense for the ESOP,  implemented in November 2003, was $867,000
for the year ended  December  31, 2004  compared to $165,000  for the prior year
reflecting  a full year of operation  for the ESOP in 2004.  Net  occupancy  and
equipment  costs increased $3.7 million or 81.2%.  The principal  factors in the
higher  occupancy  expense were the acquisition of First Colonial which added 20
offices,  extensive  building  renovations at the newly acquired  47,000 sq. ft.
operations  center,  at KNBT's  headquarters  and also at the former  operations
center of First  Colonial.  Professional  fees increased $1.2 million or 110.4%.
Compliance with the  Sarbanes-Oxley Act of 2002, an extensive review of our loan
portfolio, outsourcing certain audit functions and increased services due to the
growth  of the  Company,  contributed  to such  increase.  Advertising  expenses
increased  $663,000 or 189.4%. A concerted  campaign to introduce the KNBT brand
in the market was the primary reason for the increase.  Other operating  expense
increased $3.9 million or 72.5%  primarily due to  amortization  of identifiable
intangible assets resulting from the First Colonial acquisition, which accounted
for $2.2 million of the increase in 2004.

         Non-interest  expense in 2003  increased  $30.5  million or 124.4% over
2002. Total  non-interest  expenses were $55.1 million in 2003 and $24.6 million
in 2002. The pre-tax contribution of $16.1 million to the Charitable  Foundation
and merger expenses of $5.7 million were the principal  factors in the increase.
The increase in compensation  and employee benefit expense from 2002 to 2003 was
$5.4  million or 41.0%.  Occupancy  expenses in 2003 were $4.6  million or 49.0%
higher than in 2002.  Contributing to the increase in compensation  and employee
benefit expense were normal salary increases,  additional staff required for the
new  branches  added in 2003,  and  staff  increases  in the  lending  and trust
divisions and a benefit expense of $165,000 for the ESOP.

Income Tax Expense (Benefit)

         KNBT  recorded a $4.7 million  income tax  provision for the year ended
December 31, 2004 compared to an income tax benefit of $5.3 million for the year
ended  December  31,  2003.  The income tax  expense  in 2002  amounted  to $5.2
million.  The tax benefit in 2003 was the result of a net operating loss for the
year.  KNBT's  effective  Federal tax rate was 21.0% for the year ended December
31, 2004  compared to a benefit of (47.8)% for the year ended  December 31, 2003
and a tax rate of 30.2% for the year ended December 31, 2002.


                                       39


<PAGE>


Market Risk

         Market risk is the risk of loss from adverse  changes in market  prices
and rates. KNBT's market risk arises primarily from interest rate risk, which is
inherent in its lending and deposit taking activities.  To that end,  management
actively monitors and manages interest rate risk exposure. In addition to market
risk, KNBT's primary risk is credit risk on its loan portfolio. KNBT attempts to
manage credit risk through its loan  underwriting  and oversight  policies.  See
"Business-Lending Activities".

         The Bank operates as a community banking  institution  primarily in the
Pennsylvania counties of Northampton,  Lehigh, Monroe and Carbon. As a result of
the Bank's  location  and nature of  operations,  KNBT is not subject to foreign
currency  exchange or commodity price risk. The Bank makes real estate and other
loans  primarily in the counties  adjacent to its operations and thus is subject
to risks associated with those local  economies.  At December 31, 2004, the Bank
held a concentration of one-to four family  residential real estate loans (32.1%
of total  loans) and  consumer/installment  loans  (29.4% of total loans) in its
loan portfolio.  Loans for automobiles and other vehicles  represented  40.0% of
the  consumer/installment  loans and 11.7% of total loans at year-end  2004. The
Bank's  loans  are  subject  to  interest  and  economic  risks.  The Bank  also
originates  residential real estate loans for sale in the secondary market. Such
loans are  identified as "Mortgage  Loans  Held-for-Sale"  on the KNBT's balance
sheet and are subject to interest rate risk (see  discussion  on  "Business-Loan
Originations,  Sales and  Servicing").  KNBT does not own any trading assets and
does not have any hedging transactions in place such as interest rate swaps (see
discussion on "Business-Investment Activities").

Interest Rate Sensitivity

         Interest  rate  sensitivity  is a  measure  of the  extent to which net
interest income would change due to changes in the level of interest rates.

         The  principal  objective  of  KNBT's  interest  rate  risk  management
function is to evaluate the interest rate risk embedded in certain balance sheet
accounts, determine the level of risk appropriate,  given its business strategy,
operating  environment,  capital  and  liquidity  requirements  and  performance
objectives,  and manage the risk  consistent with approved  guidelines.  Through
such  management,  KNBT seeks to minimize its exposure to interest rate risk. An
Asset/Liability  Committee  ("ALCO"),  consisting  of key  financial and service
management  personnel,  meet on a monthly  basis.  The ALCO is  responsible  for
reviewing the interest rate  sensitivity of the balance sheet,  formulating  and
overseeing the  implementation  of strategies  regarding  interest rate risk and
examining the effects on net interest income and liquidity.

         KNBT primarily has utilized the following  strategies in its efforts to
manage interest rate risk:

         o        It has emphasized originations for a portfolio of shorter term
                  loans,  particularly  construction loans, commercial loans and
                  consumer loans;

         o        It has been an active  seller in the  secondary  market of its
                  newly  originated,   agency  eligible   long-term   fixed-rate
                  residential  mortgage loans;  KNBT securitized an aggregate of
                  $47.3 million of single-family  residential  mortgage loans in
                  2003 and $115.3 million in 2002; and

         o        It  has  invested  in   securities   with   relatively   short
                  anticipated lives, generally three to five years.

         Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and  liabilities  are  "interest  rate
sensitive" and by monitoring a bank's interest rate sensitivity  "gap." An asset
and  liability  is said to be interest  rate  sensitive  within a specific  time
period if it will mature or reprice  within that time period.  The interest rate
sensitivity   gap  is  defined  as  the   difference   between   the  amount  of
interest-earning  assets maturing or repricing within a specific time period and
the amount of  interest-bearing  liabilities  maturing or repricing  within that
same time period. At December 31, 2004, KNBT's cumulative one-year interest rate
gap,  which is the  difference  between  the amount of  interest-earning  assets
maturing or repricing within one year and interest-bearing  liabilities maturing
or repricing  within one year, as a percentage


                                       40


<PAGE>


of total assets,  was a positive  3.80%.  A gap is considered  positive when the
amount of interest  rate  sensitive  assets  exceeds the amount of interest rate
sensitive liabilities.  A gap is considered negative when the amount of interest
rate sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising  interest  rates,  a negative gap would tend to affect
adversely  net  interest  income while a positive gap would tend to result in an
increase in net interest income. Conversely, during a period of falling interest
rates, a negative gap would tend to result in an increase in net interest income
while a positive gap would tend to affect adversely net interest income.

         The following  table sets forth the amounts of KNBT's  interest-earning
assets and interest-bearing  liabilities outstanding at December 31, 2004, which
are expected,  based upon certain  assumptions,  to reprice or mature in each of
the future time periods shown.  Except as stated below, the amount of assets and
liabilities  shown  which  reprice or mature  during a  particular  period  were
determined  in  accordance  with  the  earlier  of  term  to  repricing  or  the
contractual  maturity  of the  asset  or  liability.  The  table  sets  forth an
approximation  of the projected  repricing of assets and liabilities at December
31, 2004, on the basis of contractual maturities,  anticipated prepayments,  and
scheduled rate adjustments within a three-month  period and subsequent  selected
time  intervals.  The loan  amounts  in the  table  reflect  principal  balances
expected to be repaid and/or  repriced as a result of  contractual  amortization
and anticipated  prepayments of adjustable-rate  loans and fixed-rate loans, and
as a result of contractual rate  adjustments on  adjustable-rate  loans.  Annual
prepayment rates for adjustable-rate and fixed-rate single-family,  multi-family
mortgage loans and  mortgage-backed  securities are assumed to range from 12% to
32%.  Annual  rates of  withdrawal  or "decay  rates" for money  market  deposit
accounts, savings accounts and interest bearing checking accounts are assumed to
be 38%, 8% and 8%, respectively.

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

                                                                              At December 31, 2004
                                     -----------------------------------------------------------------------------------------------
                                                 More than     More than    More than      More than
                                      3 Months    3 Months     6 Months       1 Year        3 Years       More than
                                       or Less  to 6 Months    to 1 Year    to 3 Years     to 5 Years      5 Years         Total
                                     ---------- ------------- ------------ -------------  -------------  -------------  ------------
                                                                         (dollars in thousands)
Interest-earning assets (1):

   Deposits at other institutions      $  56,002  $      -     $      -    $        -    $         -     $        -    $    56,002
   Loans receivable (2)                  140,743    97,755      125,996       314,471        191,251        142,986      1,013,202
   Investment securities, debt           109,897    49,977      101,486       383,751        190,650        272,679      1,108,440
   Investment securities, equity                                                                             41,711         41,711
                                     ------------ --------- ------------ -------------  -------------  -------------  -------------
      Total interest-earning
       assets                          $ 306,642  $147,732     $227,482    $  698,222    $   381,901     $  457,376    $ 2,219,355
                                     ============ ========= ============ =============  =============  =============  =============
Cumulative total interest-
   earning assets                      $ 306,642  $454,374     $681,856    $1,380,078    $ 1,761,979     $2,219,355    $ 2,219,355
                                     ============ ========= ============ =============  =============  =============  =============
Interest-bearing liabilities:
   Savings deposits                    $       -  $  8,410     $  8,410    $   11,214    $    14,017     $  168,206    $   210,257
   Interest-bearing checking deposits          -    10,849        7,232         7,233          3,616        151,881        180,811
   Money market deposits                  31,437    36,274       24,183        32,244         16,122        101,567        241,827
   Certificates of deposit                93,547    73,297      105,712       247,670         41,321            114        561,661
   FHLB advances and other
    borrowings                           110,927    29,126       50,753       276,981        161,513         69,481        698,781
                                     ------------ --------- ------------ -------------  -------------  -------------  -------------
      Total interest-bearing
       liabilities                     $ 235,911  $157,956     $196,290    $  575,342    $   236,589     $  491,249    $ 1,893,337
                                     ============ ========= ============ =============  =============  =============  =============
Cumulative total interest-
   bearing liabilities                 $ 235,911  $393,867     $590,157    $1,165,499    $ 1,402,088     $1,893,337    $ 1,893,337
                                     ============ ========= ============ =============  =============  =============  =============
Interest-earning assets
   less interest-bearing
   liabilities                          $ 70,731  $(10,224)    $ 31,192    $  122,880    $   145,312     $  (33,873)   $   326,018
                                     ============ ========= ============ =============  =============  =============  =============
Cumulative interest-rate
   sensitivity gap (3)                  $ 70,731  $ 60,507     $ 91,699    $  214,579    $   359,891     $  326,018
                                     ============ ========= ============ =============  =============  =============
Cumulative interest-rate gap as a
   percentage of total assets at
   December 31, 2004                       2.93%     2.51%        3.80%         8.88%         14.90%         13.50%
Cumulative interest-earning assets
    as a percentage of
   cumulative interest-bearing
   liabilities at December 31, 2004      129.98%   115.36%      115.54%       118.41%        125.67%        117.22%

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


</TABLE>

                                       41


<PAGE>


         Certain  shortcomings are inherent in the method of analysis  presented
in the foregoing table. For example, although certain assets and liabilities may
have similar  maturities  or periods to  repricing,  they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and  liabilities  may  fluctuate in advance of changes in market
interest  rates,  while  interest rates on other types may lag behind changes in
market rates. Additionally,  certain assets, such as adjustable-rate loans, have
features that restrict  changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate  significantly  from
those assumed in calculating the table.  Finally,  the ability of many borrowers
to service their  adjustable-rate loans may decrease in the event of an interest
rate increase.

         KNBT's interest rate sensitivity is monitored by management through the
use of models that generate  estimates of the change in its net portfolio  value
("NPV") and net interest income ("NII") over a range of interest rate scenarios.
NPV is the present  value of expected cash flows from assets,  liabilities,  and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the
same scenario.  KNBT also analyzes  potential  changes to NII for a twelve-month
period under rising and falling  interest rate  scenarios.  The following  table
sets forth  KNBT's NPV and NII analysis as of December 31, 2004 and reflects the
changes  to NPV and NII as a  result  of  immediate  and  sustained  changes  in
interest rates as indicated.

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

                                               Net Portfolio Value                    Projected
                                               at December 31, 2004          Net Interest Income for 2005
                                          ------------------------------    --------------------------------
                                                             % Change                          % Change
                                                               from                              from
Rate Scenario                                 Amount        Base Case        Amount            Base Case
---------------------------------------   --------------   -------------    -------------   ----------------
                                                                (dollars in thousands)
+ 300 basis point rate shock               $     509,843      -8.1%         $      69,742         5.0%
+ 200 basis point rate shock                     529,905      -4.4%                69,189         4.2%
+ 100 basis point rate shock                     547,637      -1.2%                67,859         2.2%
Static - base case                               554,498        -                  66,411           -
- 100 basis point rate shock                     523,554      -5.6%                61,782        -7.0%
- 200 basis point rate shock                     482,684     -13.0%                54,497       -17.9%
- 300 basis point rate shock                     444,211     -19.9%                47,960       -27.8%


</TABLE>

Liquidity

         KNBT's  primary  sources of funds are from  deposits,  amortization  of
loans,  loan prepayments and the maturity of loans,  mortgage-backed  securities
and other investments, and other funds provided from operations. While scheduled
payments  from the  amortization  of loans and  mortgage-backed  securities  and
maturing  investment  securities  are relatively  predictable  sources of funds,
deposit flows and loan prepayments can be greatly influenced by general interest
rates, economic conditions and competition.  KNBT also maintains excess funds in
short-term,  interest-bearing  assets that provide additional liquidity and also
utilizes  outside  borrowings,  primarily  from  the FHLB of  Pittsburgh,  as an
additional funding source.

         KNBT uses its liquidity to fund  existing and future loan  commitments,
to fund maturing  certificates  of deposit and demand  deposit  withdrawals,  to
invest in other  interest-earning  assets,  and to meet operating  expenses.  In
addition to cash flow from loan and securities  payments and prepayments as well
as from sales of securities and mortgage loans,  KNBT has significant  borrowing
capacity  available to fund liquidity needs.  KNBT has increased its utilization
of FHLB  borrowings  in recent years  especially  in 2004,  as a cost  efficient
alternative  to  deposits  as a source of funds.  The  average  balance  of FHLB
borrowings was $425.2 million,  $114.5 million,  and $67.4 million for the years
ended December 31, 2004, 2003, and 2002, respectively.  To date, KNBT borrowings
have consisted primarily of advances from the FHLB of Pittsburgh.


                                       42


<PAGE>


         Conversion from Mutual-to-Stock Form. The Bank completed its conversion
in October 2003. In connection with the conversion,  KNBT sold 20,201,188 shares
of common  stock at a price of $10.00  per  share for total  proceeds  of $202.0
million. The capitalized expenses for the conversion were $5.8 million resulting
in net  proceeds  of  $196.2  million.  Concurrent  with  the  conversion,  KNBT
established the Keystone Nazareth  Charitable  Foundation with a contribution of
1,616,095 shares of KNBT common stock to the Foundation.

         Also concurrent  with the conversion,  KNBT acquired First Colonial and
in  connection  therewith  issued  8,545,855  shares  of  common  stock  to  the
stockholders of First Colonial in exchange for their First Colonial shares.

         In connection with the conversion,  KNBT also established the ESOP. The
ESOP purchased 949,845 shares in open market transactions at an average price of
$17.01 per share for a total cost of $16.1 million. At December 31, 2004, 57,324
KNBT common shares were allocated to plan participants.

         A significant  amount of capital was raised during the  mutual-to-stock
conversion and capital levels exceeded 25% at year-end 2004.  KNBT's  management
has developed capital  management  strategies to effectively  utilize the excess
capital and improve return on equity and grow earnings per share. KNBT's capital
management  strategy  includes  the  following  components:  1)  payment of cash
dividends, 2) stock repurchases, 3) acquisitions and 4) use of leverage.

         KNBT declared and paid its first cash dividend in the second quarter of
2004 and also declared and paid  dividends for the third and fourth  quarters of
2004.  During the fourth quarter of 2004,  KNBT's Board of Directors  authorized
the  repurchase  of up to  3,062,486  shares  or  approximately  10%  of  KNBT's
outstanding  shares.  During 2004,  KNBT acquired  Oakwood  Financial  Corp.,  a
full-service  brokerage  firm based in Allentown,  PA. Oakwood is a wholly owned
subsidiary of the Bank and  supplements  the Bank's  offering of investment  and
insurance products.

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

         KNBT  has not  used,  and has no  intention  to  use,  any  significant
off-balance  sheet financing  arrangements for liquidity  purposes.  Its primary
financial  instruments with off-balance sheet risk are limited to loan servicing
for  others,  obligations  to fund  loans  to  customers  pursuant  to  existing
commitments and  commitments to sell mortgage  loans. In addition,  KNBT has not
had, and has no intention to have, any significant transactions, arrangements or
other relationships with any unconsolidated, limited purpose entities that could
materially affect its liquidity or capital resources. KNBT has not, and does not
intend to, trade in commodity contracts.

         KNBT  anticipates  that it will continue to have  sufficient  funds and
alternative funding sources to meet its current commitments.

         KNBT's  contractual  cash  obligations  as of December  31, 2004 are as
follows:

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

                                                                               Payments Due by Period:
                                                               ------------------------------------------------------------
                                                                Less Than                                      More Than
                                                   Total          1 Year        1-3 Years      3-5 Years        5 Years
                                                ------------   -------------   ------------   -------------   -------------
                                                                          (dollars in thousands)
Federal Home Loan Bank debt                        $660,674       $ 137,005      $ 281,046       $ 172,117        $ 70,506
Subordinated debt                                    15,464               -              -               -          15,464
Operating leases                                      9,228           1,177          1,723             680           5,648
Severance agreements                                    650             650              -               -               -
Deferred directors' fees and
  officer compensation                                3,403              44             89              92           3,178
                                                ------------   -------------   ------------   -------------   -------------

Total obligations                                  $689,419       $ 138,876      $ 282,858       $ 172,889        $ 94,796
                                                ============   =============   ============   =============   =============
</TABLE>

                                       43



<PAGE>

         KNBT is a party to financial instruments with off-balance-sheet risk in
the normal  course of business  to meet the  financing  needs of its  customers.
These  financial  instruments  include  commitments to extend credit and standby
letters of credit.  Those instruments  involve, to varying degrees,  elements of
credit  risk in excess of the amount  recognized  in the balance  sheet.  KNBT's
exposure  to credit loss in the event of  non-performance  by the other party to
the financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual  notional amount of those  instruments.
KNBT  uses the same  credit  policies  in  making  commitments  and  conditional
obligations as it does for on-balance-sheet instruments.

         KNBT's  contingent  liabilities and commitments as of December 31, 2004
are as follows:

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

                                                                  Less than                                   More than
                                                     Total         1 year        1-3 years     3-5 years       5 years
                                                  -------------  ------------   ------------  -------------  -------------
                                                                          (dollars in thousands)

Lines of credit                                       $155,820      $ 87,344       $ 18,808       $ 27,832       $ 21,836
Standby letters of credit                               23,973        17,175          6,715             83              -
Other commitments to make loans                        116,954        68,611          1,576          9,677         37,090
                                                  -------------  ------------   ------------  -------------  -------------

Total                                                 $296,747      $173,130       $ 27,099       $ 37,592       $ 58,926
                                                  =============  ============   ============  =============  =============
</TABLE>

         Impact of Inflation  and Changing  Prices.  The  financial  statements,
accompanying  notes,  and related  financial data of KNBT presented  herein have
been prepared in accordance with generally accepted accounting principals, which
require the measurement of financial  position and operating results in terms of
historical dollars without  considering the changes in purchasing power of money
over  time due to  inflation.  The  impact  of  inflation  is  reflected  in the
increased cost of operations. Most of KNBT's assets and liabilities are monetary
in nature;  therefore,  the impact of interest rates has a greater impact on its
performance  than the effects of general levels of inflation.  Interest rates do
not  necessarily  move in the same direction or to the same extent as the prices
of goods and services.

         Leverage  Transactions.  Several leverage  transactions  were completed
during the year. KNBT used capital and FHLB borrowings to purchase  investments.
Leverage strategies generally increase the company's interest rate risk exposure
and leverage transactions are carefully monitored and measured as part of active
balance sheet management.

         Regulatory  Capital  Requirements.  KNBT and the Bank  are  subject  to
various  regulatory  capital  requirements  administered  by the Federal banking
agencies.  Failure to meet minimum  capital  requirements  can initiate  certain
mandatory and possible additional  discretionary  actions by regulators that, if
undertaken, could have a direct material effect on KNBT's financial statements.

New Accounting Pronouncements

         On December 16, 2004,  FASB issued  Statement  No. 123 (revised  2004),
Share-Based   Payment  "Statement  123(R)"  replaces  FASB  Statement  No.  123,
Accounting  for  Stock-Based  Compensation  and  supersedes  APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123(R) establishes standards
for which an entity  exchanges its equity  instruments for good or services.  It
also addresses  transactions  in which an entity incurs  liabilities in exchange
for goods and services  that are based on the fair value of the entity's  equity
instruments or that may be settled by the issuance of those equity instruments.

         Under Statement 123(R), all forms of share-based payments to employees,
including  stock  options,   would  be  treated  the  same  as  other  forms  of
compensation  by  recognizing  the  related  cost in the income  statement.  The
expense  of the award  requires  the  entity  to  measure  the cost of  employee
services  received in exchange for an award of equity  instruments  based on the
grant-date fair value of the award. That cost will be recognized over the period
during  which an employee is  required  to provide  service in exchange  for the
award  ("vesting  period").  Fair  value  of  that  award  will  be  re-measured
subsequently at each reporting date through the


                                       44


<PAGE>


settlement date. The grant-date fair value of employee share options and similar
instruments  will be  estimated  using  option-pricing  models  adjusted for the
unique characteristics of those instruments.

         All public  entities  that use the  fair-value  based method for either
recognition or disclosure under Statement 123(R) will apply this Statement using
a modified  version of prospective  application.  Under the  transition  method,
compensation cost is recognized on or after the required  effective date for the
portion of outstanding  awards for which the requisite  service has not yet been
rendered,  based on the grant-date fair value of those awards  calculated  under
Statement  123(R) for either  recognition or pro forma  disclosure.  For periods
before the required effective date, those entities may elect to apply a modified
version of retrospective  application  under which the financial  statements for
prior periods are adjusted on a basis consistent with the pro forma  disclosures
required for those periods by Statement 123(R).

         Statement  123(R) is effective for public companies at the beginning of
the first interim or annual period beginning after June 15, 2005. This Statement
applies  to all awards  granted  after the  required  effective  date  including
existing awards not vested, modified,  repurchased, or canceled after that date.
KNBT is currently  evaluating  the impact of  Statement  123(R) will have on its
financial statements.

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

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

         In October 2003,  the AICPA issued SOP 03-3,  "Accounting  for Loans or
Certain Debt Securities Acquired in a Transfer". SOP 03-3 applies to a loan with
the evidence of  deterioration of credit quality since  origination  acquired by
completion of a transfer for which it is probable at acquisition,  that the Bank
will be unable to collect all contractually  required payments  receivable.  SOP
03-3 is effective for loans  acquired in fiscal years  beginning  after December
31, 2004. Management is currently evaluating the provisions of SOP 03-3 and does
not  anticipate its adoption to have a material  affect on the Bank's  financial
position or results of operations.

Item 7A.          Quantitative and Qualitative Disclosure About Market Risks
----------------------------------------------------------------------------

         Information with respect to quantitative and qualitative  disclosure is
contained in Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations."


                                       45

<PAGE>


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


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors
KNBT Bancorp, Inc.


We have audited the  accompanying  consolidated  balance sheets of KNBT Bancorp,
Inc. (and previously  Keystone Savings Bank) and subsidiaries as of December 31,
2004 and 2003, and the related consolidated statements of income,  stockholders'
equity,  and cash flows for each of the three years in the period ended December
31, 2004.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the consolidated financial position of KNBT Bancorp, Inc.
as of December 31, 2004 and 2003, and the consolidated results of its operations
and its cash flows for the each of the three years in the period ended  December
31, 2004, in conformity with  accounting  principles  generally  accepted in the
United States of America.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the effectiveness of KNBT Bancorp,
Inc.'s internal control over financial  reporting as of December 31, 2004, based
on criteria established in Internal Control--Integrated  Framework issued by the
Committee of Sponsoring  Organizations of the Treadway Commission (COSO) and our
report dated March 16, 2005  expressed an  unqualified  opinion on  management's
assessment of the  effectiveness of internal  controls over financial  reporting
and an  unqualified  opinion  on the  effectiveness  of  internal  control  over
financial reporting.


/s/ Grant Thornton LLP

Philadelphia, Pennsylvania
March 16, 2005


                                       46


<PAGE>


KNBT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

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

                                                                                                At December 31,
                                                                                ---------------------------------------------
                                                                                      2004                       2003
-----------------------------------------------------------------------------------------------------------------------------
                                                                                             (dollars in thousands)
ASSETS
      Cash and Due From Banks                                                       $      30,218              $      55,059

      Interest-Bearing Deposits With Banks                                                 56,002                     83,918
                                                                                ------------------         ------------------
        Cash and Cash Equivalents                                                          86,220                    138,977
      Investment Securities Available-for-Sale                                          1,057,109                    734,087
      Investment Securities Held to Maturity                                               56,586                          -
        (Fair value of $57,034 at December 31, 2004)
      Federal Home Loan Bank of Pittsburgh Stock                                           36,456                     11,543
      Mortgage Loans Held-for-Sale                                                            718                      4,677
      Loans                                                                             1,013,202                    890,076
      Less:  Allowance for Loan Losses                                                    (10,461)                    (7,910)
                                                                                ------------------         ------------------
        Net Loans                                                                       1,002,741                    882,166
      Bank Owned Life Insurance                                                            60,501                     57,849
      Premises and Equipment, Net                                                          40,790                     35,867
      Accrued Interest Receivable                                                           9,509                      7,645
      Goodwill and Other Intangible Assets                                                 53,255                     47,448
      Other Assets                                                                         11,218                     21,714
                                                                                ------------------         ------------------
        TOTAL ASSETS                                                                $   2,415,103              $   1,941,973
                                                                                ==================         ==================

LIABILITIES
      Non-Interest-Bearing Deposits                                                 $     128,498              $     117,270
      Interest-Bearing Deposits                                                         1,194,555                  1,172,140
                                                                                ------------------         ------------------
         Total Deposits                                                                 1,323,053                  1,289,410
      Securities Sold Under Agreements to Repurchase                                       22,643                     24,550
      Advances from the Federal Home Loan Bank                                            660,674                    207,153
      Guaranteed Preferred  Beneficial Interest in the
         Company's Subordinated Debentures                                                      -                     15,000
      Subordinated Debt                                                                    15,464                          -
      Accrued Interest Payable                                                              5,811                      3,218
      Other Liabilities                                                                    10,104                     13,562
                                                                                ------------------         ------------------
        TOTAL LIABILITIES                                                               2,037,749                  1,552,893
                                                                                ------------------         ------------------

SHAREHOLDERS' EQUITY
      Preferred Stock, Par Value $.01 per share
        Authorized:  20,000,000 shares                                                          -                          -
      Common Stock, Par Value $0.01 a share                                                   297                        295
        Authorized:  100,000,000 shares
        Issued and Outstanding:
          30,656,840 shares at December 31, 2004
          30,419,397 shares at December 31, 2003
      Treasury Stock, at cost;  650,000 and 0 shares at
         December 31, 2004 and December 31, 2003, respectively                            (11,179)                         -
      Additional Paid-In Capital                                                          296,403                    297,887
      Retained Earnings                                                                   113,748                    100,570
      Unallocated Common Stock Held
        by Employee Stock Ownership Plan                                                  (15,176)                   (15,987)
      Unearned Common Stock Held
        by Management Recognition and Retention Plan                                       (9,107)                         -
      Accumulated Other Comprehensive Income                                                2,368                      6,315
                                                                                ------------------         ------------------
      TOTAL SHAREHOLDERS' EQUITY                                                          377,354                    389,080
                                                                                ------------------         ------------------

      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                    $   2,415,103              $   1,941,973
                                                                                ==================         ==================

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

</TABLE>

                                       47


<PAGE>


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

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

                                                                                        Year Ended December 31,
                                                                            2004                 2003                  2002
--------------------------------------------------------------------------------------------------------------------------------
                                                                           (dollars in thousands, except per share data)
INTEREST INCOME
   Loans, including fees                                             $        58,292      $        41,823       $        44,188
   Investment Securities                                                      38,501               16,212                14,883
   Other Interest                                                                498                1,028                   408
                                                                    -----------------    -----------------     -----------------
      Total Interest Income                                                   97,291               59,063                59,479
                                                                    -----------------    -----------------     -----------------

INTEREST EXPENSE
   Deposits                                                                   18,185               15,993                23,099
   Securities sold under Agreements to Repurchase                                170                  131                   155
   Advances from the Federal Home Loan Bank                                   14,316                4,822                 3,162
   Subordinated Debt                                                             775                  115
                                                                    -----------------    -----------------     -----------------
      Total Interest Expense                                                  33,446               21,061                26,416
                                                                    -----------------    -----------------     -----------------

NET INTEREST INCOME                                                           63,845               38,002                33,063
   Provision for Loan Losses                                                   4,308                2,951                   111
                                                                    -----------------    -----------------     -----------------

Net Interest Income After Provision
   for Loan Losses                                                            59,537               35,051                32,952
                                                                    -----------------    -----------------     -----------------

NON-INTEREST INCOME
   Trust Revenue                                                               1,545                  279                     -
   Brokerage Services Revenue                                                    673                  465                   420
   Deposit Service Charges                                                     4,477                4,042                 3,628
   Bank Owned Life Insurance                                                   2,652                1,515                 1,435
   Net Gains (Losses) on Sales of Investment Securities                          396                 (249)                1,202
   Net Gains on Sales of Residential Mortgage Loans                              774                  246                   900
   Net Gains on Sales of Credit Card Loans                                       298                    -                     -
   Net Gains on Sale of Assets                                                   191                    -                     -
   Net Gains on Sale of Other Real Estate Owned                                   90                    -                     -
   Non-Interest Operating Income                                               4,338                2,750                 1,229
                                                                    -----------------    -----------------     -----------------

       Total Non-Interest Income                                              15,434                9,048                 8,814
                                                                    -----------------    -----------------     -----------------

NON-INTEREST EXPENSES
   Compensation and Employee Benefits                                         29,478               18,633                13,217
   Net Occupancy and Equipment Expense                                         8,335                4,599                 3,086
   Professional Fees                                                           2,279                1,083                   868
   Advertising                                                                 1,013                  350                   840
   Data Processing                                                             1,782                2,124                 1,712
   Impairment of Mortgage Servicing Rights                                       415                1,068                   676
   Contribution to Charitable Foundation                                           -               16,161
   Merger-Related Expenses                                                         -                5,652
   Other Operating Expenses                                                    9,397                5,449                 4,169
                                                                    -----------------    -----------------     -----------------

       Total Non-Interest Expenses                                            52,699               55,119                24,568
                                                                    -----------------    -----------------     -----------------

Income (Loss) Before Income Taxes (Benefit)                                   22,272              (11,020)               17,198
Income Taxes (Benefit)                                                         4,666               (5,264)                5,188
                                                                    -----------------    -----------------     -----------------

NET INCOME (LOSS)                                                    $        17,606      $        (5,756)      $        12,010
                                                                    =================    =================     =================

PER SHARE DATA
   Net Income - Basic                                                $          0.61            N/M                   N/A
                                                                    =================    =================     =================
   Net Income - Diluted                                              $          0.60            N/M                   N/A
                                                                    =================    =================     =================
   Cash Dividends Per Common Share                                   $          0.15            N/M                   N/A
                                                                    =================    =================     =================

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

</TABLE>

                                       48


<PAGE>


KNBT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

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

                                                                                             Accumulated
                                       Common     Addl              Unallocated  Unearned       Other
                             Common     Stock    Paid In   Retained     ESOP    Compensation Comprehensive Treasury
                             Shares     Value    Capital   Earnings    Shares       MRP         Income       Stock      Total
---------------------------------------------------------------------------------------------------------------------------------
                                                      (dollars in thousands except share data)

Balance December 31, 2001         -     $ -      $   -     $ 94,316   $   -      $    -       $  1,472      $   -      $  95,788

Comprehensive Income
   Net Income                                                12,010                                                       12,010
   Other Comprehensive Income
   Net of Taxes                                                                                  3,251                     3,251
                                                                                                                        --------
Total Comprehensive Income                                                                                                15,261
--------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002      -      -          -       106,326       -           -          4,723          -        111,049

Comprehensive Income
   Net Loss                                                  (5,756)                                                      (5,756)
   Other Comprehensive Income
      Net of Taxes and
      Reclassification Adjustments                                                               1,592                     1,592
                                                                                                                        --------
Total Comprehensive Loss                                                                                                  (4,164)
Proceeds from Sale
 of Common Stock, Net        20,201,188   202   196,059                                                                  196,261
Shares in Merger with
 First Colonial               8,545,855    85    85,374                                                                   85,459
Issuance of Common Stock
 to Charitable Foundation     1,616,095    16    16,145                                                                   16,161
Purchase of Shares for ESOP    (949,845)   (9)                          (16,152)                                         (16,161)
Unallocated ESOP Shares
 Committed to Employees           9,723    (1)                              165                                              164
Shares Issued upon
 Exercise of Stock Options       56,259     1       310                                                                      311
                              ---------------------------------------------------------------------------------------------------
Balance at December
 31, 2003                    29,479,275   295   297,887     100,570     (15,987)     -           6,315          -        389,080

Comprehensive Income
   Net Income                                                17,606                                                       17,606
   Other Comprehensive Income
   Net of Taxes and
   Reclassification Adjustments                                                                 (3,947)                   (3,947)
                                                                                                                         --------
Total Comprehensive Income                                                                                                13,659
Cash Dividends                                               (4,428)                                                      (4,428)
Purchase of Stock for Management
 Recognition and
 Retention Plan (MRRP)                          (13,281)                                                                 (13,281)
Unallocated ESOP Shares
 Committed to Employees          47,601             (16)                    811                                              795
Shares Issued upon
 Exercise of Stock Options      237,443     2     1,286                                                                    1,288
Repurchase of
 common stock (650,000 shares)                                                                                 (11,179)  (11,179)
Establishment of a Management
 Recognition Program(MRRP)                       10,527                            (10,527)                                    -
Amortization of Compensation
 related to MRRP                                                                     1,420                                 1,420
                            ----------------------------------------------------------------------------------------------------
Balance at December
 31, 2004                    29,764,319  $297  $296,403   $ 113,748    $(15,176)  $ (9,107)    $ 2,368       $ (11,179) $377,354
                            ====================================================================================================

</TABLE>

                                       49


<PAGE>


KNBT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

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

                                                                              Year Ended December 31,
                                                                             --------------------------------------
                                                                                2004         2003          2002
-----------------------------------------------------------------------------------------------------   -----------
                                                                                      (Dollars in Thousands)
OPERATING ACTIVITIES
Net Income                                                                      $17,606     $ (5,756)     $ 12,010
Adjustments to Reconcile Net Income to Net Cash
   Provided by Operating Activities:
      Provision for Loan Losses                                                   4,308        2,951           111
      Depreciation and Amortization                                               6,359        3,180         1,317
      Compensation Expense Stock Option Plan                                         16            -             -
      Management Recognition and Retention Plan Expense                           1,404            -             -
      Amortization and Accretion of Security Premiums and Discounts, net          2,521        3,630          (521)
      (Gain) Loss on Sale of Other Real Estate Owned                                (90)          31            28
      Gain on Sales of Investment Securities                                       (396)         249        (1,202)
      Gain on Sale of Credit Card Portfolio                                        (298)           -             -
      Gain on Sale of Other Assets                                                 (191)           -            99
      Gain on Sale of Mortgage Loans                                               (774)        (246)         (900)
      Mortgage Loans Originated for Sale                                        (63,193)     (29,043)      (60,974)
      Mortgage Loan Sales                                                        67,926       50,286        37,178
      Contribution to Charitable Foundation                                           -       16,161             -
  Changes in Assets and Liabilities:                                                  -            -             -
      Increase in Bank Owned Life Insurance                                      (2,652)      (1,515)       (1,435)
      Increase (Decrease) in Accrued Interest Receivable                         (1,864)         283        (1,805)
      Increase (Decrease) in Other Assets                                         2,830       (5,849)       (2,678)
      Increase (Decrease) in Other Liabilities and Accrued Interest Payable        (865)       5,760         2,842
                                                                             -----------  -----------   -----------
Net Cash Provided by Operating Activities                                        32,647       40,122       (15,930)
                                                                             -----------  -----------   -----------
INVESTING ACTIVITIES
Proceeds from Calls and Maturities of Securities Available-for-Sale             172,937      264,030       104,037
Proceeds from Calls and Maturities of Securities Held to Maturity                 3,242            -             -
Proceeds from Sales of Securities Available-for-Sale                             11,478       28,540        63,844
Purchase of Securities Available-for-Sale                                      (516,223)    (462,963)     (184,848)
Purchase of Securities Held to Maturity                                         (59,751)           -             -
Purchase of Federal Home Loan Bank of Pittsburgh Stock                          (26,883)      (3,531)       (1,912)
Redemption of Federal Home Loan Bank of Pittsburgh Stock                          1,970            -             -
Purchase of Bank Owned Life Insurance                                                 -      (30,000)       (4,000)
Proceeds from the Sale of Credit Cards                                            1,831            -             -
Net Increase in Loans                                                          (124,883)     (62,542)       (1,915)
Purchase of Premises and Equipment                                               (8,680)     (13,138)       (1,376)
Proceeds from the Sale of Other Assets                                            1,537            -             -
Proceeds from the Sale of Other Real Estate Owned                                   364          556           791
Cash and Cash Equivalents Acquired through Merger                                     -       45,616             -
                                                                             -----------  -----------   -----------
Net Cash Used in Investing Activities                                          (543,061)    (233,432)      (25,379)
                                                                             -----------  -----------   -----------
FINANCING ACTIVITIES
Net Increase (Decrease) in Deposits                                              33,643        5,499          (394)
Net Increase (Decrease) in Repurchase Agreements                                 (1,907)      (2,113)        3,152
Proceeds from Long-Term Debt                                                    526,827       92,300        73,000
Repayment of Long-Term Debt                                                     (73,306)     (30,103)            -
Purchase of ESOP Shares                                                               -      (16,161)            -
Purchase of Treasury Stock                                                      (11,179)           -             -
Purchase of Stock for the Management Recognition and Retention Plan             (13,281)           -             -
Proceeds from Issuance of Common Stock                                                -      196,261             -
Proceeds From the Exercise of Stock Options                                       1,288          311             -
Cash Dividends Paid                                                              (4,428)           -             -
                                                                             -----------  -----------   -----------
Net Cash Provided by Financing Activities                                       457,657      245,994        75,758
                                                                             -----------  -----------   -----------
Increase (Decrease) in Cash and Cash Equivalents                                (52,757)      52,684        34,449
                                                                             -----------  -----------   -----------
Cash and Cash Equivalents January 1,                                            138,977       86,293        51,844
                                                                             -----------  -----------   -----------
Cash and Cash Equivalents  December 31,                                         $86,220    $ 138,977      $ 86,293
                                                                             ===========  ===========   ===========
Supplemental Disclosure of Cash Flow Information
      Cash Paid During the Year for
              Income Taxes                                                      $ 3,300      $ 3,075       $ 4,075
                                                                             ===========  ===========   ===========
              Interest                                                          $30,853     $ 14,882      $ 26,344
                                                                             ===========  ===========   ===========
Supplemental Disclosure of Non-cash Activities
              Mortgage Loan Securitizations                                         $ -     $ 47,251     $ 115,335
                                                                             ===========  ===========   ===========
              Reclassification of Loans Receivable to Other Real Estate Owned     $ 191        $ 473         $ 998
                                                                             ===========  ===========   ===========

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

</TABLE>

                                       50


<PAGE>


KNBT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - ORGANIZATION

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

         The Bank competes with other banking and financial  institutions in its
primary market  communities,  including  financial  institutions  with resources
substantially greater than its own. Commercial banks, savings banks, savings and
loan  associations,  credit unions and money market funds  actively  compete for
savings and time deposits and for various types of loans. Such institutions,  as
well as consumer finance and insurance companies,  may be considered competitors
of the Bank with respect to one or more of the services it renders.

         KNBT and the Bank are  subject  to  regulations  of  certain  state and
Federal  agencies  and,  accordingly,  they are  periodically  examined by those
regulatory agencies.  As a consequence of the extensive regulation of commercial
banking  activities,  the Bank's business is  particularly  susceptible to being
affected by state and Federal  legislation  and  regulation,  which may have the
effect of increasing the cost of doing business.


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.       Basis of Financial Statement Presentation

         The  accounting  and  reporting  policies of KNBT conform to accounting
principles  generally  accepted in the United States of America and  predominant
practices within the banking industry.  The accompanying  consolidated financial
statements include the accounts of KNBT and its wholly owned  subsidiaries,  the
Bank,  Inv. I, Inv. II, the Bank's wholly owned  subsidiaries  KLVI,  Traditions
Settlement Services, and KNBT Securities.

         In preparing  the  consolidated  financial  statements,  management  is
required to make estimates and assumptions  that affect the reported  amounts of
assets and  liabilities  as of the dates of the balance  sheets and revenues and
expenditures   for  the  periods.   Therefore,   actual   results  could  differ
significantly from those estimates.

         The  principal   estimates   that  are   particularly   susceptible  to
significant  change in the near term relate to the allowance for loan losses and
the evaluation of impairment of goodwill.  The evaluation of the adequacy of the
allowance  for loan losses  includes an  analysis  of the  individual  loans and
overall risk  characteristics  and size of the different  loan  portfolios,  and
takes into consideration current economic and market conditions,  the capability
of specific borrowers to pay specific loan obligations,  as well as current loan
collateral  values.  However,  actual losses on specific  loans,  which also are
encompassed in the analysis, may vary from estimated losses.


                                       51


<PAGE>


2.   Cash and Cash Equivalents

         For reporting cash flows,  cash and cash  equivalents  include cash and
due from banks and  interest-bearing  deposits with banks. The Company maintains
cash deposits in other  depository  institutions  that  occasionally  exceed the
amount of deposit  insurance  available.  Management  periodically  assesses the
financial  condition of these  institutions  and  believes  that the risk of any
possible  credit loss is minimal.  Interest-bearing  deposits in other financial
institutions  consist of short-term  investments  generally having maturities of
less than 30 days.

3.   Investment Securities

         KNBT accounts for its investment securities in accordance with SFAS No.
115,  "Accounting for Certain Investments in Debt and Equity  Securities".  This
standard  requires,  among  other  things,  that  debt  and  equity  securities,
classified  as  held-to-maturity,  are  accounted  for  at  cost,  adjusted  for
amortization  of premiums and  accretion of discount,  using the constant  yield
method,  based  on  KNBT's  intent  and  ability  to hold the  securities  until
maturity. All other securities are included in the  available-for-sale  category
and are reported at fair value,  with unrealized  gains and losses excluded from
earnings and reported,  net of tax, as a component of shareholders'  equity.  At
the time of purchase,  KNBT makes a  determination  as to whether or not it will
hold the  securities to maturity,  based on an evaluation of the  probability of
future  events.  Securities  that KNBT believes may be involved in interest rate
risk,  liquidity  or other  asset/liability  management  decisions,  which might
reasonably result in such securities not being held to maturity,  are classified
as available for sale.  If securities  are sold, a gain or loss is determined by
specific identification and reflected in the operating results in the period the
trade occurs.

         KNBT follows SFAS No. 133 as amended by SFAS No. 138,  "Accounting  for
Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133, as
amended  requires that entities  recognize all  derivatives  as either assets or
liabilities   in  the  statement  of  financial   condition  and  measure  those
instruments at fair value.  KNBT did not have any  derivative  instruments as of
December 31, 2004 and 2003.

         KNBT adopted EITF 03-1, "The Meaning of Other than Temporary Impairment
and Its  Application to Certain  Investments" as of December 31, 2003. EITF 03-1
includes certain disclosures regarding quantitative and qualitative  disclosures
for investment  securities accounted for under SFAS No. 115 that are impaired at
the balance  sheet date,  but an  other-than-temporary  impairment  has not been
recognized. The disclosures under EITF 03-1 are included.

4.  Mortgage Loans Held-for-Sale

         Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of aggregate  cost or estimated  fair value.  Gains and
losses on the sales of loans are also accounted for in accordance  with SFAS No.
134,  "Accounting for Mortgage  Securities Retained after the Securitizations of
Mortgage Loans Held-for-Sale by a Mortgage Banking  Enterprise".  This statement
requires  that an entity  engaged in mortgage  banking  activities  classify the
retained  mortgage-backed  security or other  interest,  which resulted from the
securitization  of a mortgage  loan  held-for-sale,  based upon its  ability and
intent to sell or hold these investments.

         KNBT follows SFAS No. 140,  "Accounting  for Transfers and Servicing of
Financial  Assets  and   Extinguishments  of  Liabilities,"  which  revised  the
standards  for  accounting  for  the  securitizations  and  other  transfers  of
financial  assets and collateral.  Transfers of financial  assets for which KNBT
has  surrendered  control of the financial  assets are accounted for as sales to
the extent that consideration other than beneficial interests in the transferred
assets is received in exchange. Retained interest in a sale or securitization of
financial assets are measured at the date of transfer by allocating the previous
carrying  amount  between  the  assets  transferred  and  based on the  relative
estimated fair values. The fair values of retained debt securities are generally
determined through reference to independent pricing information. The fair values
of retained


                                       52


<PAGE>


servicing  rights and any other retained  interests are determined  based on the
present value of expected future cash flows  associated with those interests and
by reference to market prices for similar assets.

         KNBT adopted SFAS No. 149,  "Amendment  of Statement  133 on Derivative
Instruments and Hedging Activities",  on July 1, 2003. Implementation issue C13,
"When a Loan  Commitment Is Included in the Scope of Statement  133" is included
in SFAS No. 149.  SFAS No. 149 amends SFAS No. 133 to add a scope  exception for
borrowers (all  commitments) and lenders (all commitments  except those relating
to  mortgage  loans  that  will be  held-for-sale).  Statement  149 also  amends
paragraph  SFAS No.  133 to  require a lender to  account  for loan  commitments
related  to  mortgage  loans that will be  held-for-sale  as  derivatives.  KNBT
periodically  enters into  commitments  with its customers,  which it intends to
sell in the future.  KNBT's  commitments to extend credit for loans intended for
resale were not material at December 31, 2004.

5.  Loans and Allowance for Loan Losses

         Loans  that  management  has the  intent  and  ability  to hold for the
foreseeable  future or until  maturity  or payoff  are  stated at the  amount of
unpaid principal and reduced by an allowance for loan losses.  Interest on loans
accrues  and  is  credited  to  operations  based  upon  the  principal  amounts
outstanding.  The allowance for loan losses is  established  through a provision
for loan losses charged to operations.  Loans are charged  against the allowance
for  loan  losses  when  management  believes  that  the  collectibility  of the
principal is unlikely.

         Interest  is  discontinued  when,  in the  opinion of  management,  the
collectibility of such interest becomes doubtful. A loan is generally classified
as nonaccrual when the loan is 90 days or more delinquent. Loan origination fees
and certain direct origination costs are deferred and amortized over the life of
the related loans as an adjustment to the yield on loans  receivable in a manner
which approximates the interest method.

         The allowance  for loan losses is  maintained  at an amount  management
deems  adequate  to cover  estimated  losses.  In  determining  the  level to be
maintained,  management  evaluates  many  factors,  including  current  economic
trends,   industry  experience,   historical  loss  experience,   industry  loan
concentrations,  the borrowers' ability to repay and repayment performance,  and
estimated  collateral  values.  In the opinion of  management,  the allowance at
December  31,  2004,  was  adequate  to  absorb  future  loan  losses  which are
foreseeable and reasonably estimable. While management uses the best information
available to make such evaluations,  future  adjustments to the allowance may be
necessary  based on changes in economic  conditions  or any of the other factors
used in management's determination. In addition, various regulatory agencies, as
an  integral  part of their  examination  process,  periodically  review  KNBT's
allowance  for losses on loans.  Such  agencies  may require  KNBT to  recognize
additions to the allowance based on their judgments about information  available
to them at the time of their examination.  Charge-offs to the allowance are made
when the loan is transferred to real estate owned or some other determination of
impairment is made.

         KNBT accounts for its impaired  loans in accordance  with SFAS No. 114,
"Accounting  by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors of a Loan - Income  Recognition and Disclosures."  This
standard requires that a creditor measure  impairment based on the present value
of expected future cash flows discounted at the loan's  observable market price,
or the  fair  value  of the  collateral  if the  loan is  collateral  dependent.
Regardless of the measurement  method, a creditor must measure  impairment based
on  the  fair  value  of  the  collateral  when  the  creditor  determines  that
foreclosure is probable.

         FASB Interpretation FIN No. 45, "Guarantor's  Accounting and Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others",  requires certain disclosures effective for the year ended December 31,
2002  regarding the nature of the  guarantee,  the maximum  potential  amount of
future  payments  that  the  guarantor  could  be  required  to make  under  the
guarantee,  and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee.  Significant  guarantees that have been entered
into by KNBT include standby and performance  letters of credit. The adoption of
FIN  No.  45 did  not  have a  material  impact  on the  consolidated  financial
statements.


                                       53

<PAGE>


         In October 2003,  the AICPA issued SOP 03-3,  "Accounting  for Loans or
Certain Debt Securities Acquired in a Transfer". SOP 03-3 applies to a loan with
the evidence of  deterioration of credit quality since  origination  acquired by
completion of a transfer for which it is probable at acquisition,  that the Bank
will be unable to collect all contractually  required payments  receivable.  SOP
03-3 is effective for loans  acquired in fiscal years  beginning  after December
31,  2004.  SOP 03-3 did not  have a  material  affect  on  KNBT's  consolidated
financial position or results of operations.

6.  Premises and Equipment

         Premises   and   equipment   are  carried  at  cost  less   accumulated
depreciation, and include expenditures for new facilities, major betterments and
renewals.  Expenditures  of  maintenance  and  repairs are charged to expense as
incurred. Depreciation is computed using the straight-line method based upon the
estimated useful lives of the related assets.

         On January 1, 2002,  KNBT  adopted  SFAS No. 144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets." SFAS No. 144 retains the existing
requirements to recognize and measure the impairment of long-lived  assets to be
held and used or to be disposed of by sale.  The adoption of this  statement did
not have an impact on the  financial  condition or results of  operations of the
Company.

7.  Other Real Estate Owned

         Real estate  acquired  through  foreclosure is classified as other real
estate owned ("OREO").  OREO is carried at the lower of cost (lesser of carrying
value  of the loan or fair  value at date of  acquisition)  or fair  value  less
estimated  costs to sell. Any reductions in value,  at or prior to the dates the
real  estate is  considered  foreclosed,  is charged to the  allowance  for loan
losses. Any subsequent  reductions in value are charged through earnings.  Costs
relating to the  development  or  improvement  of the property are  capitalized;
holding costs are charged to expense.

8.       Goodwill and Intangible Assets

         KNBT adopted SFAS No. 142, "Goodwill and Intangible Assets", on January
1, 2002. This statement  modifies the accounting for all purchased  goodwill and
intangible  assets.  SFAS No. 142  includes  requirements  to test  goodwill and
indefinite  lived  intangible  assets for impairment  rather than amortize them.
Goodwill is subject to impairment testing at least annually to determine whether
write-downs  of the  recorded  balances are  necessary.  In this  testing,  KNBT
employs industry practices in accordance with GAAP. KNBT tests for impairment as
of  September  30 each  year.  KNBT has  tested  the  goodwill  included  on its
consolidated  balance sheet as of September 30, 2004 and has determined  that it
was not impaired as of such date.

         Intangible  assets  are  comprised  of  core  deposit  intangibles  and
goodwill  acquired in business  combinations.  KNBT's  goodwill of $34.9 million
primarily is the result of its  acquisition  of First  Colonial in October 2003.
Additional  goodwill of $531,000 was recorded as a result of the  acquisition of
Oakwood on September 28, 2004.  The balance of goodwill at December 31, 2004 and
2003 was $35.3 million and $29.2 million, respectively. Core deposit intangibles
of $14.9 million (net of accumulated  amortization  of $2.6 million) at December
31, 2004 and $17.1  million at December  31, 2003 are being  amortized  over the
estimated  useful lives of the existing  deposit base of 8 years using a method,
which  approximates the interest method.  Amortization  expense was $2.2 million
are $364,000 for the years ended December 31, 2004 and 2003, respectively.

9.  Income Taxes

         Under the liability  method,  deferred tax assets and  liabilities  are
determined based on the difference between the financial statement and tax bases
of assets and  liabilities as measured by the enacted tax rates which will be in
effect when these temporary  differences are estimated to reverse.  Deferred tax
expense is the result of changes in deferred tax assets and liabilities.


                                       54


<PAGE>


10.  Advertising

         The Company expenses advertising costs as incurred.

11.  Stock Based Compensation

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

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

         The following  table  illustrates the effect on net income and earnings
per share if KNBT had applied the fair value recognition  provisions of SFAS No.
123 to stock-based employee compensation.

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

                                                                            For the Year Ended
                                                                            December 31, 2004
                                                              ---------------------------------------------
                                                              (dollars in thousands except per share data)
Net Income as reported                                                               $ 17,606
Add: Stock-based employee compensation expense
included in reported net income, net                                                       16
of related tax effects
Less: Stock-based compensation cost determined
under fair value method for all awards, net                                               369
                                                                           -------------------
of related tax effects
Pro forma                                                                            $ 17,253
                                                                           ===================

Earnings per share (diluted)
As reported                                                                          $   0.60
Pro forma                                                                            $   0.59
Earnings per share (basic)
As reported                                                                          $   0.61
Pro forma                                                                            $   0.59

</TABLE>

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

         The MRRP, which is a stock-based  incentive plan,  provides the ability
to  award up to  808,047  shares  of the  Company's  common  stock,  subject  to
adjustment,  to  the  Company's  directors,  advisory  directors,  officers  and
employees.  The terms of the grants made to date provide that the shares covered
by the  MRRP  are  earned  by the  participants  at the  rate of 20%  per  year.
Compensation expense for this plan is being recorded over the vested period or a
60-month  period and is based on the market value of the  Company's  stock as of
the date the awards were made.  The Company,  for the benefit of the MRRP Trust,
purchased  808,047 shares of KNBT common stock at an average price of $16.44 per
share, which is shown as reduction of additional paid-in-capital.  The remaining
unamortized cost of the MRRP shares acquired to date is reflected as a reduction
in shareholders' equity.


                                       55


<PAGE>


12.  Employee Benefit Plans

         KNBT has certain  employee  benefit plans  covering  substantially  all
employees.  KNBT expenses such costs as incurred.  KNBT follows SFAS No. 132, as
revised in December  2003,  "Employers'  Disclosures  about  Pensions  and Other
Post-retirement  Benefits".  SFAS No. 132 revised  employers'  disclosures about
pension  and  other  post-retirement   benefit  plans.  It  requires  additional
information about changes in the benefit  obligation and the fair values of plan
assets.   It  also   standardized   the  requirements  for  pensions  and  other
postretirement  benefit plans to the extent possible,  and illustrates  combined
formats for the presentation of pension plan and other  post-retirement  benefit
plan disclosures.

         In November 2003,  KNBT  established  an Employee Stock  Ownership Plan
 ("ESOP") covering all eligible  employees as defined by the ESOP. The ESOP is a
 tax-qualified  plan  designed to invest  primarily in KNBT's  common stock that
 provides  employees with the  opportunity  to receive a KNBT-funded  retirement
 benefit based primarily on the value of KNBT's common stock.  KNBT accounts for
 its ESOP in accordance  with  Statement of Position  ("SOP") 93-6,  "Employer's
 Accounting  for  Employee  Stock  Ownership  Plans",  issued by the  Accounting
 Standards  Division of the American  Institute of Certified Public  Accountants
 ("AICPA").

         To purchase  KNBT's common stock,  the ESOP borrowed $16.1 million from
KNBT to purchase  949,845  shares of KNBT common  stock in the market.  The ESOP
loan is being repaid principally from the Bank's  contributions to the ESOP over
a period of up to 30 years.  Dividends declared on common stock held by the ESOP
and not allocated to the account of a participant can be used to repay the loan.
Compensation  expense is recognized in accordance  with SOP 93-6.  The number of
shares released  annually is based upon the ratio that the current principal and
interest  payment  bears  to the  current  and all  remaining  scheduled  future
principal and interest payments.

         All shares that have not been released for  allocation to  participants
are held in a suspense account by the ESOP for future  allocation as the loan is
repaid.  Unallocated  common  stock  purchased  by the  ESOP  is  recorded  as a
reduction of shareholders' equity at cost.

13.  Bank Owned Life Insurance ("BOLI")

         KNBT has purchased BOLI. BOLI involves the purchasing of life insurance
by the corporation on a chosen group of employees. The proceeds are used to help
defray  employee  benefit  costs.  KNBT  is the  owner  and  beneficiary  of the
policies. The Company originally invested $20.0 million in BOLI in 2001 and made
additional  BOLI  investments of $4.0 million in 2002 and $30.0 million in 2003.
BOLI is recorded on the consolidated  balance sheets at its cash surrender value
and changes in the cash  surrender  value are recorded in  non-interest  income.
BOLI income is tax-exempt.

14.  Trust Assets and Revenue

         Assets held by the Trust  Department of the Bank in fiduciary or agency
capacities for its customers are not included in the  accompanying  consolidated
balance sheets since such assets are not assets of KNBT.  Operating  revenue and
expenses of the Trust Department are included under their respective captions in
the  accompanying  consolidated  statements  of income and are  recorded  on the
accrual basis.

15.  Per Share Information

         KNBT  follows the  provisions  of SFAS No. 128,  "Earnings  Per Share".
Basic  earnings per share  exclude  dilution and is computed by dividing  income
available  to  common  stockholders  by  the   weighted-average   common  shares
outstanding during the period. Diluted earnings per share takes into account the
potential  dilution that could occur if  securities or other  contracts to issue
common stock were exercised and converted into common stock.  Earnings per share
were not  meaningful  in 2003 since KNBT did not  complete  its  initial  public
offering until October 31, 2003.


                                       56


<PAGE>


         Basic and diluted  earnings  per share for the year ended  December 31,
2004 were calculated as follows:

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

                                                                 Net              Average
                                                                Income            Shares           Per Share
                                                             (numerator)       (denominator)        Amount
                                                            ---------------------------------------------------
                                                                  (dollars in thousands)
Basic Earnings Per Share
   Income Available to Common Shareholders                        $ 17,606          29,060,702         $  0.61

Effect of Dilutive Securities
   Stock Options                                                                       416,888
   Management Recognition and Retention Plan                                            89,793
                                                                             ------------------  --------------
     Total Effect of Dilutive Securities                                               506,681         $ (0.01)
Diluted Earnings Per Share
   Income Available to Common Shareholders
   plus Assumed Exercise of Options                               $ 17,606          29,567,383         $  0.60
                                                            ===============  ==================  ==============

</TABLE>

         Common  stock  outstanding  at  December  31,  2004 for the  purpose of
calculating basic earnings per share does not include 892,521 unallocated shares
held by the ESOP.

         Unearned  MRRP  shares  and MRRP  shares  not  subject to grant are not
considered  to be  outstanding  for basic  earnings per share  calculations.  At
December 31, 2004,  unearned MRRP shares totaled  629,500 and  uncommitted  MRRP
shares totaled 178,547.

16.  Financial Instruments

         SFAS No. 107, "Disclosures about Fair Value of Financial  Instruments,"
requires  KNBT to  disclose  the  estimated  fair  value  of  their  assets  and
liabilities  considered  to  be  financial  instruments.  Financial  instruments
requiring disclosure consist primarily of cash and cash equivalents,  investment
securities, loans, deposits and borrowings.

17.  Segment Information

         "SFAS" No.  131,  "Disclosures  About  Segments  of an  Enterprise  and
Related Information," defines how operating segments are determined and requires
disclosures  of certain  financial  and  descriptive  information  about  KNBT's
operating  segments.  Management  has  determined  that  KNBT has one  operating
segment and,  accordingly,  one reportable segment,  "Community Banking." All of
KNBT's activities are interrelated,  and each activity is dependent and assessed
based on how each of the  activities of KNBT  supports the others.  For example,
consumer and residential  mortgage lending is dependent upon the ability of KNBT
to fund itself with retail deposits and other  borrowings and to manage interest
rate and  credit  risk.  All  significant  operating  decisions  are based  upon
analysis of KNBT as one operating segment.


                                       57


<PAGE>


18.  Comprehensive Income

         SFAS No. 130, "Reporting  Comprehensive Income," includes net income as
well as  certain  other  items,  which  result in a change to equity  during the
period.

         The income tax effects allocated to comprehensive  income for the years
ended December 31, 2004, 2003 and 2002 were as follows:

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

                                                                        Tax
                                                    Before tax        benefit         Net of tax
                                                      amount         (expense)          amount
                                                   -----------------------------------------------
                                                                 (dollars in thousands)
Year ended December 31, 2004

Unrealized Gains on Securities:
  Unrealized holding gains (losses) rising             $ (5,584)       $  1,898          $ (3,686)
   during period
  Less reclassification adjustment for
   net realized gains                                      (396)           (135)             (261)
                                                   -----------------------------------------------
Other comprehensive income (loss), net                 $ (5,980)       $  2,033          $ (3,947)
                                                   =============    ============     =============

Year ended December 31, 2003

Unrealized Gains on Securities:
  Unrealized holding gains (losses) rising             $  2,162        $   (734)         $  1,428
   during period
  Less reclassification adjustment for
   net realized gains                                       249              85               164
                                                   -----------------------------------------------
Other comprehensive income (loss), net                 $  2,411        $   (819)         $  1,592
                                                   =============    ============     =============

Year ended December 31, 2002

Unrealized Gains on Securities:
  Unrealized holding gains (losses) rising             $  6,266        $ (2,222)         $  4,044
   during period
  Less reclassification adjustment for
   net realized gains                                    (1,202)           (409)             (793)
                                                   -----------------------------------------------
Other comprehensive income (loss), net                 $  5,064        $ (1,813)         $  3,251
                                                   =============    ============     =============
</TABLE>

19.  Statement of Cash Flows

         KNBT  considers  cash,  due from banks and  Federal  funds sold as cash
equivalents for the purposes of the Consolidated Statement of Cash Flows.

20.  Variable Interest Entities

         In January 2003,  FASB  Interpretation  FIN No. 46,  "Consolidation  of
Variable  Interest  Entities",  was issued.  FIN 46 clarifies the application of
Accounting Research Bulletin 51, "Consolidated Financial Statements", to certain
entities in which voting  rights are not effective in  identifying  the investor
with the controlling  financial interest.  An entity is subject to consolidation
under FIN 46 if the investors  either do not have sufficient  equity at risk for
the entity to finance its activities without additional  subordinated  financial
support, are unable to direct the entity's activities, or are not exposed to the
entity's  losses  or  entitled  to  its  residual  returns  ("variable  interest
entities").  Variable interest entities within the scope of FIN 46 were required
to be consolidated by their primary  beneficiary.  The primary  beneficiary of a
variable  interest  entity is determined to be the party that absorbs a majority
of the entity's expected losses, receives a majority of its expected returns, or
both.


                                       58


<PAGE>


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

         KNBT adopted the  provisions  under the revised  interpretation  in the
first  quarter of 2004.  Accordingly,  KNBT ceased  consolidating  Trust I as of
March 31, 2004. FIN 46(R) precludes consideration of the call option embedded in
the  preferred  stock when  determining  if KNBT has the right to a majority  of
Trust  I's  expected  residual  returns.  The  deconsolidation  resulted  in the
investment  in the common  stock of Trust I to be included in other assets as of
March 31, 2004 and the  corresponding  increase in outstanding debt of $464,000.
In addition,  the income received on KNBT's common stock  investment is included
in other  income.  The  adoption  of FIN  46(R)  had no  material  impact on the
financial position or results of operation. The banking regulatory agencies have
issued no guidance that would change the  regulatory  capital  treatment for the
trust-preferred securities issued by Trust I based on the adoption of FIN 46(R).
The Federal Reserve Board has issued proposed guidance on the regulatory capital
treatment for the trust preferred  securities  issued by KNBT as a result of the
adoption  of FIN 46(R).  The  proposed  rule would  retain the  current  maximum
percentage of total capital permitted for trust preferred securities at 25%, but
would enact other changes to the rules governing trust preferred securities that
affect their use as part of the collection of entities known as "restricted core
capital  elements".  The rule would  take  effect  March 31,  2007;  however,  a
three-year transition period starting March 31, 2004 and leading up to that date
would  allow  bank  holding  companies  to  continue  to count  trust  preferred
securities as Tier I capital after applying FIN 46(R).  Management has evaluated
the effects of the proposed  rule and does not  anticipate a material  impact on
its capital ratios when the proposed rule is finalized.

21.  Reclassifications

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


NOTE C  -  CONVERSION AND ACQUISITION

First Colonial

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

         On October 31,  2003,  KNBT and the Bank  completed  mergers with First
Colonial and its  subsidiary  Nazareth  National Bank,  respectively.  Under the
terms of the merger agreement,  which was the result of arms-length negotiation,
each of the shares of First  Colonial  common stock was exchanged for 3.7 shares
of KNBT common stock for a total  issuance of 8,545,855  shares of common stock.
First Colonial stock options  outstanding  at the date of its  acquisition  were
converted  into  808,157  options to purchase  KNBT common  stock and were fully
vested  at the  time  of the  completion  of the  merger.  The  transaction  was
accounted for under the purchase method of accounting.  The acquisition resulted
in the recording of an aggregate of approximately  $45.9 million of goodwill and
other  intangible  assets.  The transaction was accounted for under the purchase
method of  accounting  and KNBT's  results of  operations  include that of First
Colonial from October 31, 2003 (date of acquisition) through December 31, 2003.


                                       59


<PAGE>


         The following  condensed  consolidated  balance sheet of First Colonial
discloses the amounts assigned to each major asset and liability  caption on the
acquisition date of October 31, 2003.


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

                                                           (dollars in thousands)
Assets
Cash and due from banks                                                   $ 45,616
Investment securities                                                      271,784
Net loans                                                                  272,270
Fair value allocated to premises and equipment                               4,408
Goodwill and core deposit intangible asset                                  46,442
Other assets                                                                26,368
                                                           ------------------------
Total assets                                                             $ 666,888
                                                           ========================

Liabilities
Total deposits                                                            (512,086)
Borrowings                                                                 (64,215)
Other liabilities                                                           (5,128)
                                                           ------------------------
Total liabilities assumed                                                 (581,429)
                                                           ------------------------
Net assets acquired                                                       $ 85,459
                                                           ========================
</TABLE>


         The following represents the unaudited pro forma financial  information
of  KNBT  as if the  acquisition  occurred  on the  first  date  of the  periods
indicated.  The pro forma  information  should be read in  conjunction  with the
related historical  information and is not necessarily indicative of the results
that would have been attained had the transaction actually taken place.

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

                                                         Year ended December 31,
                                            --------------------------------------------
                                               2003             2002           2001
                                            ------------    -------------   ------------
                                                        (dollars in thousands)

Interest Income                                $ 83,713         $ 89,009       $ 90,528
Interest Expense                                 33,896           38,826         48,033
                                            ------------    -------------   ------------
Net Interest Income                              49,817           50,183         42,495
Provision for Loan Losses                         4,001            1,652            971
Non-interest Income                              14,761           15,721         10,620
Non-Interest Expense                             77,911           43,834         37,671
Net (Loss) Income                              $ (9,901)        $ 20,333       $ 10,339

</TABLE>

Oakwood Financial Corp.

         On  November  11,  2004,   KNBT  acquired   Oakwood   Financial   Corp.
("Oakwood"), a full-service brokerage firm based in Allentown, PA, for $650,000.
KNBT acquired $121,000 in assets and recorded  $531,000 of goodwill.  The merger
transaction  was accounted for under the purchase  method of accounting.  KNBT's
results of  operations  include the  operations  acquired  from  Oakwood for the
period November 11, 2004 through December 31, 2004.

         Oakwood  provides a full menu of  securities  brokerage,  insurance and
investment advisory products and services.  Oakwood is a wholly owned subsidiary
of the Bank and now operates as KNBT Securities Inc. This purchase  augments the
Bank's offering of investment and insurance products offered to its customers in
branch offices.


                                       60


<PAGE>


Northeast Pennsylvania Financial Corp.

         On December 8, 2004,  KNBT entered into an Agreement and Plan of Merger
dated  December 8, 2004 (the "Merger  Agreement")  with  Northeast  Pennsylvania
Financial Corp., a Delaware corporation ("NEPF"), which sets forth the terms and
conditions under which NEPF will merge with and into KNBT (the "Merger").

         Under the terms of the Merger Agreement,  NEPF's shareholders may elect
to receive  either $23.00 of KNBT common stock or $23.00 in cash in exchange for
their shares of NEPF common stock, subject to an overall requirement that 50% of
the total  outstanding  NEPF common stock be exchanged for KNBT common stock and
50% for cash. The stock component of the merger  consideration will be valued at
$23.00 per share based on the average  market  price of KNBT common stock during
the  20-trading day period ending on the fifth business day prior to the Merger.
The total cost of the transaction is expected to be approximately $98.0 million.

         In addition, each director of NEPF entered into a Shareholder Agreement
with KNBT,  pursuant to which each such person  agreed,  among other things,  to
vote his or her shares of NEPF common stock in favor of the Merger  Agreement at
a meeting of  shareholders of NEPF which has been called to consider and approve
the Merger Agreement.

         The transaction is expected to close during the second quarter of 2005.
It is subject to a number of customary  conditions,  including,  but not limited
to, (a) the approval of the Merger Agreement by shareholders of NEPF and (b) the
receipt of all required  regulatory  approvals by  applicable  Federal and State
regulatory agencies.

Caruso Benefits Group Inc.

         On February 28, 2005,  KNBT  announced the purchase of 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.  Under the terms of the definitive agreement, KNBT
will  acquire  all of the  capital  stock of Caruso for a purchase  price of $28
million  in cash of which  $20  million  will be paid a time of  closing  and $8
million will be payable over a three-year period,  subject to Caruso maintaining
certain levels of profitability.

         Upon  completion  of the  transaction,  Caruso will operate as a wholly
owned subsidiary of the Bank. The acquisition is subject to customary conditions
including receipt of all required regulatory  approvals and is expected to close
in the second quarter of 2005.


                                       61


<PAGE>


NOTE D - INVESTMENT SECURITIES

         The  amortized  cost,  unrealized  gains and losses,  and fair value of
KNBT's investment  securities  held-to-maturity  and  available-for-sale  are as
follows:

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

                                                                          At December 31, 2004
                                                  -----------------------------------------------------------------
                                                                       Gross            Gross
                                                    Amortized        Unrealized      Unrealized          Fair
                                                      Cost             Gains           Losses            Value
                                                  --------------   ---------------  --------------   --------------
                                                                       (dollars in thousands)
Held to maturity:
 Obligations of states and  political
  subdivisions                                       $    5,510       $        39     $        (4)    $      5,545
 Mortgaged-backed securities
  FNMA                                                   25,893               100               -           25,993
  CMOs                                                   25,183               313                           25,496
                                                  ------------------------------------------------   --------------
     Total mortgage-backed securities                    51,076               413               -           51,489
                                                  --------------   ---------------  --------------   --------------
Total held to maturity                                   56,586               452              (4)          57,034
                                                  --------------   ---------------  --------------   --------------

Available for sale:
 U.S. Government and agencies                           174,864             1,562            (777)         175,649
 Obligations of states and  political
   subdivisions                                         104,476             2,249            (151)         106,574
 Asset-managed funds                                      4,904                 -             (93)           4,811
 Federated Liquid Cash Trust                                 35                 -               -               35
 Mortgaged-backed securities
  GNMA                                                    1,416                44               -            1,460
  FHLMC                                                 104,476               524            (346)         104,654
  FNMA                                                  308,923             2,975          (1,257)         310,641
  CMOs                                                  277,485               522          (2,125)         275,882
                                                  --------------   ---------------  --------------   --------------
 Total mortgage backed securities                       692,300             4,065          (3,728)         692,637
 Corporate and other debt  securities                     9,029               168               -            9,197
 Equity securities                                       67,914             1,093            (801)          68,206
                                                  --------------   ---------------  --------------   --------------
Total available for sale                              1,053,522             9,137          (5,550)       1,057,109
                                                  --------------   ---------------  --------------   --------------

Total investment securities                         $ 1,110,108       $     9,589     $    (5,554)    $  1,114,143
                                                  ==============   ===============  ==============   ==============
</TABLE>

         The   amortized   cost  and  fair  value  of  KNBT's   investment   and
mortgage-backed   securities   available-for-sale   at  December  31,  2003,  by
contractual  maturity,  are shown below.  No securities were held to maturity as
such date.

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

                                                                                  At December 31, 2003
                                                              ----------------------------------------------------------
                                                                                Gross          Gross
                                                               Amortized     Unrealized     Unrealized         Fair
                                                                 Cost           Gains         Losses          Value
                                                              ------------   ------------   ------------   -------------
                                                                                 (dollars in thousands)
U. S. Government and agencies                                    $118,037        $ 2,442          $ (99)       $120,380
Obligations of states and political subdivisions                  112,228          3,584           (157)        115,655
Mortgage-backed securities
  GNMA                                                              2,124             14              -           2,138
  FHLMC                                                            83,737          1,016           (768)         83,985
  FNMA                                                            224,802          5,597         (2,861)        227,538
  CMOs                                                            150,645            628           (576)        150,697
                                                              ------------   ------------   ------------   -------------
Total mortgaged-backed securities                                 461,308          7,255         (4,205)        464,358
Corporate and other debt securities                                15,068            569              -          15,637
ARM fund                                                            4,939              -            (59)          4,880
Equity securities                                                  12,939            272            (34)         13,177
                                                              ------------   ------------   ------------   -------------
Total investment securities                                      $724,519       $ 14,122       $ (4,554)       $734,087
                                                              ============   ============   ============   =============

</TABLE>

                                       62


<PAGE>


         The   amortized   cost  and  fair  value  of  KNBT's   investment   and
mortgage-backed  securities  held-to-maturity and available-for-sale at December
31, 2004, by contractual  maturity,  are shown below.  Expected  maturities will
differ from contractual  maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.

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

                                                              At December 31, 2004
                                                     ---------------------------------------
                                                         Amortized                Fair
                                                            Cost                  Value
                                                     -----------------      ----------------
                                                             (dollars in thousands)
Held to maturity
Investment securities
 Due in one year or  less                              $            -         $           -
 Due after one year through five years                              -                     -
 Due after five years through ten  years                            -                     -
 Due after ten years                                            5,510                 5,545
                                                     -----------------      ----------------
Total investment securities held to maturity                    5,510                 5,545
                                                     -----------------      ----------------
Mortgage-backed securities                                     51,076                51,489
Asset managed funds                                                 -                     -
Equity securities                                                   -                     -
                                                     -----------------      ----------------
Total held to maturity                                         56,586                57,034
                                                     -----------------      ----------------

Available for sale
Investment securities
 Due in one year or less                                        3,996                 4,009
 Due after one year through five years                         84,408                84,243
 Due after five years through ten years                       101,793               102,374
 Due after ten years                                           98,172               100,794
                                                     -----------------      ----------------
Total investment securities available for sale                288,369               291,420
                                                     -----------------      ----------------
Mortgage-backed securities                                    692,300               692,637
Asset managed funds                                             4,939                 4,846
Equity securities                                              67,914                68,206
                                                     -----------------      ----------------
Total available for sale                                    1,053,522             1,057,109
                                                     -----------------      ----------------

Total investment securities                            $    1,110,108         $   1,114,143
                                                     =================      ================

</TABLE>

         Gross gains of $409,000 and losses of $14,000 were realized on sales of
investment  securities  classified as  available-for-sale  during the year ended
December 31, 2004.  Gross gains of $146,000 and losses of $395,000 were realized
on sales of investment securities classified as available-for-sale  for the year
ended  December 31, 2003.  Gross gains of $1.2 million were realized on sales of
investment  securities  classified  as  available-for-sale  for the  year  ended
December  2002.  There were no gross losses  realized on the sale of  investment
securities in 2002.

         As of December 31, 2004 and 2003, FHLB  securities  having a book value
of $337.9  million and $63.8  million  were pledged to secure  public  deposits,
outstanding advances and for other purposes as required by law.


                                       63


<PAGE>


         The table below indicates the length of time individual securities have
been in a continuous unrealized loss position at December 31, 2004.

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

                                      Less than 12 Months             12 Months or Longer                   Total
                                 ------------------------------    --------------------------     ------------------------
Description of Securities        Fair Value     Unrealized Losses  Fair Value  Unrealized Losses  Fair Value  Unrealized Losses
----------------------------------------------  ----------------- -----------  ----------------- -----------  ------------
                                                                    (dollars in thousands)

U.S. Government and agencies      $    82,624    $         (777)    $       -    $          -      $  82,624   $      (777)
Obligations of states and
  political subdivisions               16,240               (37)        7,511            (118)        23,751          (155)
Mortgage-backed securities            343,852            (3,411)       25,870            (318)       369,722        (3,729)
Corporate debt securities              19,956               (69)            -               -         19,956           (69)
                                 -------------  ----------------   -----------  --------------    ----------- -------------
Subtotal, debt securities             462,672            (4,293)       33,381            (436)       496,053        (4,729)
ARM funds                                   -                 -         4,811             (93)         4,811           (93)
Equity securities                       2,950              (327)        5,352            (405)         8,302          (732)
                                 -------------  ----------------   -----------  --------------    ----------- -------------
Total temporarily impaired
 securities                       $   465,622    $       (4,620)    $  43,544    $       (935)     $ 509,166   $    (5,554)
                                 =============  ================   ===========  ==============    =========== =============

</TABLE>

         Management  has reviewed the  securities  listed in the above table and
believes all unrealized  losses to be temporary.  The unrealized  losses are due
primarily to changes in market  interest  rates and other  temporary  changes in
market conditions.  As of December 31, 2004, KNBT held 648 different  securities
of which 181 were in an unrealized loss position.


NOTE E - LOANS

         A summary of KNBT's loans receivable is as follows:

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

                                                                  At December 31,
                                                      --------------------------------------
                                                            2004                   2003
                                                      ---------------        ---------------
                                                              (dollars in thousands)
Real Estate
   Residential                                           $   326,552            $   346,221
   Construction                                              106,361                112,684
   Commercial                                                231,132                156,563
                                                      ---------------        ---------------
     Total real estate                                       664,045                615,468

   Consumer loans                                            297,935                265,541
   Commercial (non real estate)                               50,691                 38,978
   States and political subdivisions                           1,170                  2,334
                                                      ---------------        ---------------
     Total gross loans                                     1,013,841                922,321

Less:
   Mortgage loans held-for-sale                                 (718)                (4,677)
   Undisbursed portion of construction
      loans in process (1)                                         -                (27,099)
   Deferred fees (costs)                                          79                   (469)
                                                      ---------------        ---------------
     Total loans                                           1,013,202                890,076

Less: Allowance for loan losses                              (10,461)                (7,910)
                                                      ---------------        ---------------
     Total net loans                                     $ 1,002,741            $   882,166
                                                      ===============        ===============

(1)  For the years 2003 and prior, KNBT's core processing system included the undisbursed
       portion of construction loans in process.  Total loans had to be reduced by this number
       in order to calculate net loans.  For the year 2004, KNBT's new core processing system
       no longer includes the undisbursed amount in loan totals.  Loans in process at
       December 31, 2004 equaled $36.9 million.

</TABLE>


                                       64


<PAGE>


         The Bank makes loans to its  directors and  executive  officers.  These
loans were made in the ordinary course of business and on substantially the same
terms and conditions as those with other borrowers.

         An analysis of the 2004 activity of these loans follows:

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

                                                             (dollars in thousands)

Balance, January 1, 2004                                                     $ 3,486
   New loans                                                                     152
   Repayments                                                                 (1,533)
                                                             ------------------------
Balance, December 31, 2004                                                   $ 2,105
                                                             ========================

</TABLE>

         KNBT's non-performing loans are as follows:

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

                                                                          At December 31,
                                                         -----------------------------------------------
                                                             2004             2003             2002
                                                         -------------    -------------    -------------
                                                                     ( dollars in thousands )

Non-accrual loans                                             $ 4,544          $ 1,720          $ 2,197

Accruing loans 90 days or more past due                           511              405              298
                                                         -------------    -------------    -------------
     Total non-performing loans                               $ 5,055          $ 2,125          $ 2,495
                                                         =============    =============    =============

Interest income not recognized on
     non-accrual loans                                          $ 125             $ 50             $ 66
                                                         =============    =============    =============

</TABLE>

         KNBT's  recorded  investment in impaired loans was $424,000 at December
31, 2004 and $217,000 at December 31, 2003. KNBT did not have any impaired loans
at December  31,  2002.  The  valuation  allowance  for loan  losses  related to
impaired  loans is a part of the  allowance  for loan  losses and was $61,000 at
December 31, 2004 and $33,000 at December 31, 2003.  The average  impaired  loan
balance for the year ended December 31, 2004 was $446,000 compared with $217,000
for the year ended  December  31,  2003.  KNBT  received  principal  payments of
$64,000 on impaired  loans in 2004.  Income on impaired  loans is  recognized by
KNBT on a cash basis.  KNBT did not  recognized  any income on impaired loans in
2004 and recognized  income of approximately  $34,000 on impaired loans in 2003.
There were no principal  payments and no income  recognized on impaired loans in
2002.

         Activity in the allowance for loan losses is as follows:

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

                                                                           At December 31,
                                                             ------------------------------------------
                                                                2004           2003           2002
                                                             -----------    ------------   ------------
                                                               (dollars in thousands)
Allowance for loan losses,
  beginning of period                                          $  7,910         $ 2,927        $ 3,386
Allowance acquired from merger with First Colonial                    -           3,548              -
Provision for loan losses                                         4,308           2,951            111
Loans charged-off                                                (2,012)         (1,603)          (623)
Recoveries of loans previously charged-off                          255              87             53
                                                             -----------    ------------   ------------
Balance, end of year                                           $ 10,461         $ 7,910        $ 2,927
                                                             ===========    ============   ============

</TABLE>


                                       65


<PAGE>


NOTE F - PREMISES AND EQUIPMENT

         KNBT's premises and equipment are summarized as follows:

<TABLE>
<CAPTION>

<S>                                                               <C>              <C>

                                                                    At December 31,
                                          Estimated         --------------------------------
                                        useful lives            2004              2003
                                        --------------      --------------   ---------------
                                                                (dollars in thousands)

Land                                    Indefinite                $ 3,608          $  3,624
Buildings and leasehold
   improvements                         30-50 years                28,469            25,923
Furniture and fixtures                  3-10 years                 22,102            16,279
Purchase accounting adjusment           20 years                    4,184             4,379
                                                            --------------   ---------------
                                                                   58,363            50,205
Less accumulated depreciation
   and amortization                                               (17,573)          (14,338)
                                                            --------------   ---------------
                                                                 $ 40,790          $ 35,867
                                                            ==============   ===============

</TABLE>

         Construction in process of approximately $600,000 for December 31, 2004
is included in the balances in the above table and will not be depreciated until
the property is put in service.

         Depreciation  expense was $3.6  million,  $1.8 million and $1.3 million
for the years ended December 31, 2004,  2003 and 2002. As a result of the merger
with First Colonial, the premises and equipment of First Colonial were marked to
fair value, which resulted in an intangible amount of $4.4 million. Amortization
of $195,000 and $29,000 of this intangible asset was recorded for the year ended
December  31,  2004  and  2003,  respectively.  The  intangible  related  to the
buildings and leasehold improvements is being amortized over a 20-year period.


NOTE G - ASSET SECURITIZATIONS AND CAPITALIZED SERVICING ASSETS

1.       Asset Securitization

         During  2004,  KNBT  did  not  securitize  any  loans.  In  2003,  KNBT
securitized  approximately  $47.3  million  of  one-to  four-family  residential
mortgage loans in a guaranteed mortgage securitization with the Federal National
Mortgage  Association  ("FNMA").   KNBT  recognized  no  gain  or  loss  on  the
transaction as it retained all of the resulting securities. All of the resulting
securities were classified as investment securities available-for-sale. In 2002,
KNBT securitized  approximately $115.3 million of one-to four-family residential
mortgage loans in a guaranteed mortgage  securitization with the FNMA. KNBT sold
$61.4 million to various  investors and recognized a gain of $1.2 million on the
transaction.  The remaining $53.9 million of loans  securitized were retained by
KNBT and classified as investment securities available-for-sale. No gain or loss
was recognized on the securities retained. KNBT retained the servicing rights on
all of the loans securitized and allocated $736,000 of the carrying value of the
loans to be treated as capitalized servicing assets.

         At December 31, 2004, and December 31, 2003, KNBT's retained securities
had  an  aggregate   amortized   cost  of  $32.0  million  and  $49.0   million,
respectively,  and an aggregate  estimated fair value of $33.2 million and $50.8
million,  respectively. The estimated fair values were obtained from independent
pricing sources and management  does not anticipate that a hypothetical  adverse
change from expected pricing  assumptions would have a significant impact on the
fair value of the  subordinated  debt.  During the years ended December 31, 2004
and 2003,  KNBT  received  $19.5  million and $46.1  million,  respectively,  in
principal  and  interest  payments on the retained  securities  and $103,000 and
$106,000 in servicing  fees from FNMA.  At December  31, 2004,  KNBT held $332.0
million of residential  mortgage  loans,  $9.8 million of which were past due 30
days or more. KNBT had $41,000 in credit losses on residential real estate loans
during the period  ended  December 31,  2004.  At December  31, 2003,  KNBT held
$346.2 million of residential  mortgage  loans,  $4.2 million of which were past
due 30 days or more.  KNBT had $92,000 in credit  losses during the period ended
December 31, 2003.


                                       66


<PAGE>


2.       Capitalized Servicing Assets

         Changes in capitalized servicing assets were as follows:

<TABLE>
<CAPTION>

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

                                               Year ended December 31,
                              --------------------------------------------------------
                                  2004                 2003                2002
                              --------------      ---------------     ----------------
                                              (dollars in thousands)

Balance, beginning                  $ 1,040              $   911                $ 567
Acquired from First Colonial              -                  662                    -
Amortizations                          (415)              (1,068)                (287)
Sales                                   813                  416                1,020
Valuation allowance                       -                  119                 (389)
                              --------------      ---------------     ----------------
Ending balance, net                 $ 1,438              $ 1,040                $ 911
                              ==============      ===============     ================

</TABLE>

NOTE H - DEPOSITS

         KNBT's deposits are as follows:

<TABLE>
<CAPTION>

<S>                                                   <C>                   <C>
                                                              At December 31,
                                               -----------------------------------------
                                                      2004                   2003
                                               -------------------      ----------------
                                                          (dollars in thousands)

Non-interest bearing deposits                         $   128,498           $   117,270
Interest-bearing checking deposits                        180,811               163,749
Savings and club deposits                                 210,257               221,176
Money market deposits                                     241,827               239,521
Time deposits                                             473,933               490,838
Time deposits of $100,000 or more                          87,727                56,856
                                               -------------------      ----------------
                                                      $ 1,323,053           $ 1,289,410
                                               ===================      ================

</TABLE>

         Maturities of time deposits at December 31, 2004 are as follows:


                                      (dollars in thousands)

2005                                              $ 271,790
2006                                                144,291
2007                                                103,485
2008                                                 18,116
2009                                                 23,205
Thereafter                                              773
                                      ----------------------
                                                  $ 561,660
                                      ======================

NOTE I - BORROWINGS

1.  FHLB Advances

         FHLB  ("FHLB")  advances at December  31,  2004 and  December  31, 2003
totaled  $660.7  million and $207.2  million,  respectively.  The  advances  are
collateralized by FHLB stock and otherwise  unencumbered  qualified assets.  The
fair value of such  collateral for these  advances  totaled  approximately  $1.1
billion at December  31, 2004 and $821.7  million at December  31,  2003.  These
advances had a weighted average interest rate of 3.30%,  4.21% and 4.69% for the
years ended December 31, 2004,  2003 and 2002,  respectively.  Advances are made
pursuant to several  different  credit programs offered from time to time by the
FHLB.

                                       67


<PAGE>


         The following  table shows certain  information  regarding  KNBT's FHLB
advances:

      FHLB Advances
          Due In                   At December 31, 2004
---------------------------      ------------------------
                                  (dollars in thousands)

2005                                           $ 137,005
2006                                             123,364
2007                                             157,682
2008                                              56,949
2009                                             115,168
2010 and thereafter                               70,506
                                 ------------------------
Total                                          $ 660,674
                                 ========================

<TABLE>
<CAPTION>

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

                                                             At or For the Year Ended December 31,
                                                      -----------------------------------------------------
                                                          2004               2003                2002
                                                      ---------------   ----------------    ---------------
                                                                      (dollars in thousands)

Average balance outstanding                                $ 425,167          $ 114,520           $ 67,358
Maximum amount outstanding at
   any month-end during the period                         $ 664,228          $ 207,153          $ 113,500
Balance outstanding at end of period                       $ 660,674          $ 207,153          $ 113,500

Average interest rate during the period                        3.37%              4.21%              4.69%
Weighted average interest rate at end of period                3.30%              4.11%              4.40%

</TABLE>

2.  Securities Sold Under Agreements to Repurchase

         KNBT,  pursuant to a designated  cash  management  agreement,  utilizes
securities sold under  agreements to repurchase as vehicles for customers' sweep
and term  investment  products.  Securitizations  under  these  cash  management
agreements are in U.S.  Treasury and agency securities and obligations of states
and political subdivisions securities.

         These  securities  are  held  in a  third  party  custodian's  account,
designated  by  KNBT  under  a  written  custodial   agreement  that  explicitly
recognizes KNBT's interest in the securities.

         The details of securities  sold under  agreements to repurchase  are as
follows:

<TABLE>
<CAPTION>

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

                                                               At or For the Year Ended December 31,
                                                           -----------------------------------------------
                                                              2004                2003            2002
                                                           -----------    ---------------    -------------
                                                                         (dollars in thousands)

Average balance outstanding                                  $ 22,579           $ 11,931         $  7,330
Maximum amount outstanding at any
   month-end during the period                               $ 31,076           $ 29,010         $ 10,051
Balance outstanding at end of period                         $ 22,643           $ 24,550         $  8,904
Average interest rate during the period                         0.75%              1.10%            2.09%
Weighted average interest rate at end of period                 0.99%              0.64%            1.85%

</TABLE>

                                       68


<PAGE>


3. Guaranteed Preferred Beneficial Interest in KNBT's Subordinated Debenture.

         As a result  of the  merger  with  First  Colonial,  the  Company  also
acquired  Trust I and assumed its debt.  Trust I is a  wholly-owned  Connecticut
statutory  business  trust  subsidiary of KNBT organized for the sole purpose of
issuing trust preferred securities that are fully and unconditionally guaranteed
by KNBT. On June 26, 2002,  First Colonial  issued $15.0 million of subordinated
debentures to Trust I and Trust I issued $15.0 million in pooled trust preferred
securities.  The subordinated  debentures are the sole asset of the Trust I. The
trust  preferred  securities  are classified as long-term debt for the financial
statements,  but are  included as Tier I capital for  regulatory  purposes.  The
interest  rate on this  security  (5.99%  at  December  31,  2004) is  variable,
adjusting  quarterly at the three-month  LIBOR rate plus 3.45%.  The interest is
payable quarterly.  The trust preferred  securities mature in June 2032, but may
be  redeemed in whole or in part  beginning  in June 2007 and may be redeemed at
any time in the event that the deduction of related  interest for federal income
tax purposes is prohibited,  treatment as Tier I capital is no longer  permitted
or certain other  contingencies  arise.  The net proceeds of the trust preferred
securities have been used to support the Company's  growth and expansion and for
other general corporate purposes.


NOTE J - INCOME TAXES

         The  components  of KNBT's  income  taxes were as follows for the years
ended:


                                      Year ended December 31,
                         -----------------------------------------------
                            2004             2003              2002
                         ------------     ------------     -------------
                                      (dollars in thousands)
Current:
  Federal                    $ 4,745         $  1,249           $ 5,232
  State                            -                -               128
                         ------------     ------------     -------------
                               4,745            1,249             5,360
Deferred:
  Federal                        (79)          (6,513)              172
                         ------------     ------------     -------------
                             $ 4,666         $ (5,264)          $ 3,326
                         ============     ============     =============

The reconciliation of KNBT's tax computed at the statutory rate is as follows:

<TABLE>
<CAPTION>

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

                                                                   Year ended December 31,
                                                     -----------------------------------------------
                                                        2004             2003              2002
                                                     ------------     ------------     -------------
                                                                  (dollars in thousands)

Tax expense (benefit) at statutory rate of 35%           $ 7,795         $ (3,857)          $ 6,019
Increase (decrease) resulting from:
  Tax-exempt income                                       (3,156)          (1,565)           (1,036)
  State tax expense, net federal benefit                       -                -                84
  Other, net                                                  27              158               121
                                                     ------------     ------------     -------------
    Income tax expense (benefit)                         $ 4,666         $ (5,264)          $ 5,188
                                                     ============     ============     =============

</TABLE>

                                       69


<PAGE>


         Deferred tax assets and liabilities consist of the following:

                                                      At December 31,
                                               ----------------------------
                                                   2004           2003
                                               -------------   ------------
                                                    (dollars in thousands)
Deferred tax assets:
  Deferred compensation                             $ 1,584        $ 1,268
  Allowance for loan losses                           3,661          2,344
  Investment acquisition adjustment                                  2,081
  Charitable contribution                             5,209          5,540
  Other                                               1,165            584
                                               -------------   ------------
                                                     11,619         11,817
                                               -------------   ------------
Deferred tax liabilities:
  Fixed assets                                         2555          2,057
  Core deposit intangible                              5230          5,995
  Mortgage servicing rights                             503            111
  Unrealized gains on securities
    available-for-sale                                 1220          3,253
                                               -------------   ------------
                                                       9508         11,416
                                               -------------   ------------
    Net deferred tax (asset)                        $ 2,111        $   401
                                               =============   ============


         As a result of the  acquisition  of First  Colonial,  KNBT  computed  a
deferred  tax  liability  of $5.1  million and  deferred  tax  liability of $1.5
million  for the core  deposit  intangible  and the step up of the fixed  assets
acquired,  respectively.  KNBT will not be required to  recapture  approximately
$9.8 million of its tax bad debt  reserve  attributable  to bad debt  deductions
taken  prior to 1988 as long as the Bank  continues  to  operate as a bank under
federal  tax law  and  does  not use the  reserve  for  any  other  purpose.  In
accordance  with SFAS No. 109,  KNBT has not recorded any deferred tax liability
on this portion of its tax bad debt reserve.  The tax that would be paid if KNBT
ultimately was required to recapture that portion of the reserve would amount to
approximately $3.4 million.


NOTE K - RETIREMENT PLANS

1.  Defined Benefit Plans

         KNBT  participates in a multiple employer defined benefit pension plan,
which covers  substantially all employees with 1,000 hours of service during the
plan year.  Benefits  are  generally  based on years of service  and the highest
average  compensation  of five  consecutive  years of  employment.  It is KNBT's
policy to fund the amount that  satisfies the statutory  requirements  under the
Employee  Retirement  Income Security Act. KNBT's  contributions to the multiple
employee pension plan for the years ended December 31, 2004, 2003, and 2002 were
approximately $139,000,  $816,000 and $529,000,  respectively.  In October 2003,
KNBT froze the future accrual of benefits under the defined benefit pension plan
and ceased admission of any new  participants.  KNBT will continue to contribute
to this plan for benefits accrued prior to October 2003.

2.  Defined Contribution Plan

         KNBT also has a 401(k) plan which covers  substantially  all employees.
Employees may elect to defer 1% to 20% of their compensation per year. KNBT will
match  50%  of the  contributions  up to 6% of  compensation  per  year.  KNBT's
contributions to the 401(k) plan totaled  approximately  $498,000,  $306,000 and
$222,000 for the years ended December 31, 2004, 2003, and 2002, respectively.

3.  Employee Stock Ownership Plan

         KNBT established an ESOP in November 2003 for all eligible employees as
defined by the ESOP.  KNBT  accounts for its ESOP in  accordance  with SOP 93-6,
"Employers'  Accounting for Employee Stock  Ownership  Plans." The ESOP borrowed
$16.1 million from KNBT which was used to purchase 949,845 shares of KNBT common
stock in the market at an average price of $17.01 per share.


                                       70


<PAGE>


         Under SOP 93-6, unearned ESOP shares are not considered outstanding and
are shown as a  reduction  of  shareholders'  equity as  unearned  compensation.
Dividends on unallocated ESOP shares are considered to be compensation  expense.
KNBT will recognize compensation cost equal to the fair value of the ESOP shares
during the periods in which they become committed to be released.  To the extent
that the fair value of KNBT's ESOP shares  differs from the cost of such shares,
this differential is credited to equity. KNBT will receive a tax deduction equal
to the cost of the shares  released.  As the loan is internally  leveraged,  the
loan extended to the ESOP by KNBT is not reported as an asset nor is the debt of
the ESOP shown as a liability.  Dividends on allocated shares are expected to be
used to pay the ESOP debt. The ESOP  compensation  expense for 2004 was $798,000
which is the fair value of the shares  released in 2004 as provided by SOP 93-6.
Dividends  of $5,000 were paid in 2004 on ESOP shares  held.  ESOP  compensation
expense was  $165,000 for 2003.  At December  31, 2004,  the ESOP had a total of
949,845  shares of KNBT common  stock,  of which  892,521 were  unallocated  and
57,324 were allocated.  At December 31, 2003, ESOP has a total of 949,845 shares
of KNBT stock of which 940,122 were  unallocated  and 9,723 were  allocated.  At
December  31, 2004,  the fair value of the  unreleased  ESOP  shares,  using the
closing quoted market price of $16.90 per share at year-end,  was  approximately
$15.1 million.

4.  Post-Retirement Benefit

         KNBT, as a part of the merger, assumed First Colonial's post-retirement
benefit plan that covers certain First  Colonial  retired  employees.  This plan
generally provides medical insurance benefits to a group of previously qualified
retirees  and  spouses  who were 60 years of age or older on January 1, 1992 and
who have retired after attaining age 65. This plan is unfunded.  As permitted by
SFAS  No.  106,  KNBT  elected  to  delay  the  recognition  of this  transition
obligation  by accruing  $308,000,  which arose from  adopting SFAS No. 106, and
amortizing this amount on a straight-line basis over 20 years.


         The components of the net periodic  post-retirement benefit cost are as
follows:

                                                Year Ended December 31,
                                            --------------------------------
                                                  2004               2003
                                            --------------      ------------
                                                (dollars in thousands)

Interest cost                                        $ 14              $  8
Amortization of transition
  obligation                                           15                15
Amortization of unrecognized gain                       -                (8)
                                            --------------      ------------

Net periodic benefit cost                            $ 29              $ 15
                                            ==============      ============


         The  assumptions  used  to  develop  the net  periodic  post-retirement
benefit cost are as follows:

                                                  Year Ended December 31,
                                            ------------------------------------
                                                 2004                2003
                                            ----------------    ----------------

Discount rate                                    6.00%               6.50%
Medical care cost trend rate                     9.00%               7.00%


         The  medical  care  cost  trend  used  in  the  actuarial   computation
ultimately was increased to 9.0% in 2004 and 6.0% in 2007 and subsequent  years.
This was accomplished by using 1.0% decrements through the year 2007 and later.


                                       71


<PAGE>


         The table of actuarially  computed plan assets and benefit  obligations
for KNBT is presented below.

<TABLE>
<CAPTION>

<S>                                                                       <C>                <C>

Post-Retirement Plan                                                  Year Ended December 31,
                                                                 ----------------------------------
                                                                      2004               2003
                                                                 ---------------     --------------
                                                                        (dollars in thousands)
Change in benefit obligation:
Benefit obligation assumed from merger
  with First Colonial                                                     $ 124              $ 163
Service cost                                                                  -                  -
Interest cost                                                                14                  8
Actual gain                                                                   -                  -
Change due to change in experience                                          105                (31)
Change due to change in assumption                                           16                  -
Benefits paid                                                               (25)               (16)
                                                                 ---------------     --------------
Benefits obligation at end of year                                        $ 234              $ 124
                                                                 ===============     ==============

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                                                             $(234)             $(124)
Unrecognized net transition obligation                                      124                139
Unrecognized net gain (loss)                                                 38                (83)
                                                                 ---------------     --------------
Accrued benefit cost                                                      $ (72)             $ (68)
                                                                 ===============     ==============

</TABLE>


         The effect of a one  percentage  point  increase in each future  year's
  assumed medical care cost trend rate, holding all other assumptions  constant,
  would increase the accumulated  post-retirement  benefit obligation by $14,801
  and the net  post-retirement  benefit  cost by $827.  Decreasing  the  assumed
  health  care cost  trend  rates by one  percentage  point in each  year  would
  decrease the accumulated post-retirement benefit obligation by $13,508 and the
  net post-retirement benefit cost by $758.

         Health care  benefits are provided to certain  retired  employees.  The
cost of providing these benefits was approximately $18,000 in 2004.

Post-Retirement Plan                   Estimated Future Benefit Payments
                                            (dollars in thousands)

1/1/2005 to 12/31/2005                             $ 28,942
1/1/2006 to 12/31/2006                             $ 27,548
1/1/2007 to 12/31/2007                             $ 26,362
1/1/2008 to 12/31/2008                             $ 24,953
1/1/2009 to 12/31/2009                             $ 23,576
1/1/2010 to 12/31/2014                             $ 97,149



5.  Directors' Deferred Plan

         KNBT,  as part of the  merger,  assumed the First  Colonial  directors'
deferred plan involving  certain former  directors of First  Colonial.  The plan
requires  defined annual  payments for five to fifteen years beginning at age 65
or death.  The annual  benefit is based upon the amount  deferred plus interest.
KNBT has recorded the deferred compensation  liabilities using the present value
method.


                                       72


<PAGE>


         The following  table sets forth the changes in benefit  obligations and
plan assets of the directors' deferred plan.

<TABLE>
<CAPTION>

<S>                                                                                <C>                <C>

Directors' Deferred Plan                                                         Year ended December 31,
                                                                           ----------------------------------
                                                                                 2004               2003
                                                                           ---------------    ---------------
                                                                                  (dollars in thousands)
Change in benefit obligation:
Benefit obligation assumed from merger with First Colonial                         $  360             $  389
Service cost                                                                            -                  -
Interest cost                                                                          21                 25
Change due to change in assumptions                                                    10                 10
Change due to plan amendment                                                            -                  -
Actual loss                                                                            (1)               (11)
Benefits paid                                                                         (52)               (53)
                                                                           ---------------    ---------------
Benefits obligation at end of year                                                 $  338             $  360
                                                                           ===============    ===============

Change in plan assets:
Fair value of plan assets received from merger with First Colonial                      -                  -
Actual return on plan assets                                                            -                  -
Employer contribution                                                                  52                 53
Benefits paid                                                                         (52)               (53)
                                                                           ---------------    ---------------
Fair value of plan assets at end of year                                                -                  -

Funded status                                                                      $ (338)            $ (360)
Unrecognized net transition asset                                                       -                  -
Unrecognized net actuarial (gain) loss                                                 40                 31
Unrecognized prior service cost                                                         -                  -
Adjustment to recognize
  additional minimum liability                                                        (40)               (31)
                                                                           ---------------    ---------------
Accrued benefit cost                                                               $ (338)            $ (360)
                                                                           ===============    ===============

</TABLE>


         Actuarial present value of benefit obligations is as follows:


Directors' Deferred Plan                 Year ended December 31,
                                    -------------------------------
                                        2004              2003
                                    -------------     -------------
                                        (dollars in thousands)

Service cost                                 $ -               $ -
Interest cost                                 21                25
Net amortization and
  deferral of prior service costs              -                 -
                                    -------------     -------------
Net Periodic Benefit Cost                   $ 21              $ 25
                                    =============     =============


         The  weighted-average  assumed  discount rates used in determining  the
actuarial present value of the projected  benefit  obligation were 6.25% in 2004
and 6.50% in 2003.  The  weighted-average  expected  long-term rate of return on
assets was 9.0% for 2004 and 2003.

Directors' Deferred Plan                   Estimated Future Benefit Payments
                                                (dollars in thousands)

1/1/2005 to 12/31/2005                                 $ 45,570
1/1/2006 to 12/31/2006                                 $ 37,774
1/1/2007 to 12/31/2007                                 $ 26,143
1/1/2008 to 12/31/2008                                 $ 37,896
1/1/2009 to 12/31/2009                                 $ 37,881
1/1/2010 to 12/31/2014                                 $158,074



                                       73


<PAGE>


6.  Deferred Compensation Plans

         KNBT maintains two deferred  compensation plans. One of these plans was
acquired   through  KNBT's   acquisition  of  First  Colonial.   These  deferred
compensation arrangements permit the directors and certain executive officers to
defer director's fees or salary,  as the case may be, and other  compensation at
the election of the  participants.  At December 31, 2004, there were $320,000 in
accumulated  balances for KNBT's directors (compared to $223,000 at December 31,
2003) and $189,000 in accumulated  balances for former First Colonial  directors
(compared to $224,000 at December 31,  2003) under the acquired  First  Colonial
plan for an aggregate of $509,000.  The weighted-average  earnings for directors
in these  plans in 2004 was 7.0%  under the KNBT plan and 1.4%  under the former
First  Colonial  plan. The  weighted-average  earnings for  director's  deferred
accounts  in 2003  was 4.3% for the  KNBT  plan  and 1.3% for the  former  First
Colonial plan. Deferred fees will be paid out when the participant retires or as
otherwise provided by the plan agreements.  Selected executive officers also are
permitted  to defer  compensation.  The KNBT plan  includes  all funds that were
previously identified as the executive supplemental retirement plan. At December
31,  2004  and  2003,  the  balance   accumulated  for  executive  officers  was
approximately $2.4 million and $1.7 million  respectively.  The weighted-average
earnings on these  deferred  funds for executive  officers was 9.06% in 2004 and
2.0% in 2003. These deferred amounts will be paid out when the executive retires
or as otherwise provided by the plan agreement.


NOTE L - STOCK OPTIONS

Stock Option Plans

         KNBT  maintains the 2004 Stock Option Plan adopted by its  stockholders
at the  2004  annual  meeting,  as well as the  stock  option  plans  previously
maintained  by First  Colonial  acquired as a part of the  acquisition  of First
Colonial in October 2003.  KNBT's stock option plans during 2004 were  accounted
for under  Statement of Financial  Accounting  Standards No. 123 (SFAS No. 123),
"Accounting  for  Stock-Based  Compensation."  This  standard  contains  a  fair
value-based  method  for  valuing  stock-based   compensation,   which  measures
compensation  cost at the  grant  date  based  on the fair  value of the  award.
Compensation is then  recognized  over the service period,  which is usually the
vesting  period.  Alternatively,  the  standard  permits  entities  to  continue
accounting for employee stock options and similar  instruments under APB Opinion
No. 25 using the intrinsic  value method.  Entities that continue to account for
stock  options  using  APB  Opinion  No.  25 are  required  to  make  pro  forma
disclosures  of net income and  earnings per share,  as if the fair  value-based
method  of  accounting  defined  in SFAS No.  123 had been  applied  but are not
required to expense the awards.  The Company has elected to account for options,
except as discussed  below, in accordance with APB Opinion No. 25 until June 30,
2005.

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


                                       74


<PAGE>


         A summary of the stock  option  plans as of December  31, 2004 and 2003
and changes during the year are as follows:

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

                                                    Year ended December 31, 2004                   Year ended December 31, 2003
                                               ---------------------------------------         -----------------------------------
                                                                     Weighted Average                           Weighted Average
                                                   Shares            Exercise Price               Shares         Exercise Price
                                               ---------------     -------------------         -------------   -------------------
Outstanding as of beginning of year                   789,423                  $ 5.63                     -                $    -
Issued                                              1,132,000                   16.50               808,157                  5.62
Exercised                                            (242,002)                   5.66                     -                     -
Forfeited                                             (61,025)                   9.81               (56,259)                 5.51
Expired                                                     -                       -                     -                     -
                                               ---------------     -------------------         -------------   -------------------
Outstanding as of year end                          1,618,396                  $13.07               751,898                $ 5.63
                                               ===============     ===================         =============   ===================

Shares exercisable as of year end                     509,896                  $ 5.61               751,898                $ 5.63
                                               ===============     ===================         =============   ===================

</TABLE>

         The following  table  summarizes  information  concerning  KNBT's stock
options outstanding at December 31, 2004:

<TABLE>
<CAPTION>

<C>     <C>                            <C>                  <C>                <C>                <C>                 <C>

                                                    Options Outstanding                           Options Exercisable
                               -------------------------------------------------------     ----------------------------------
                                                  Weighted Average
Range of                          Stock Options       Remaining       Weighted Average     Stock Options    Weighted Average
Exercise Prices                   Outstanding       Contractual Life   Exercise Price        Exercisable      Exercise Price
--------------------------     ---------------   -------------------------------------     --------------    ----------------
$2.35 - $4.35                          66,272               5.41               $ 4.07             66,272              $ 4.07
$4.36 - $6.36                         358,258               6.82               $ 5.64            358,258              $ 5.64
$6.37 - $8.36                          85,366               7.21               $ 6.67             85,366              $ 6.67
$14.40 - $16.50                     1,108,500               9.35              $ 16.50                  -                   -
                               ---------------                                             --------------
                                    1,618,396                                                    509,896
                               ===============                                             ==============

</TABLE>

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

         In May 2004,  KNBT  granted  22,500  options to purchase  shares of the
Company's common stock at $16.50 to KNBT's advisory directors.  The Company will
recognize compensation expense in accordance with the fair value-based method of
accounting  described in SFAS No. 123. The fair value of each option is expensed
over its vesting period.  Compensation expense of $16,000 was recognized for the
year ended December 31, 2004 for options granted to advisory directors.

         On December 16, 2004,  FASB issued  Statement  No.123  (revised  2004),
"Share-Based   Payment."   Statement  123(R)  replaces  FASB  Statement  No.123,
"Accounting  for  Stock-Based  Compensation"  and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123(R) establishes standards
for which an entity  exchanges its equity  instruments for good or services.  It
also addresses  transactions  in which an entity incurs  liabilities in exchange
for good and services  that are based on the fair value of the  entity's  equity
instruments or that may be settled by the issuance of those equity instruments.

         Under Statement 123(R), all forms of share-based payments to employees,
including stock options, will be treated the same as other forms of compensation
by  recognizing  the related  cost in the income  statement.  The expense of the
award requires the entity to measure the cost of employee  services  received in
exchange for an award of equity  instruments  based on the grant-date fair value
of the  award.  That cost will be  recognized  over the period  during  which an
employee  is  required to provide  service in  exchange  for the award  (vesting
period).  Fair  value of that  award will be  re-measured  subsequently  at each
reporting  date  through  the  settlement  date.  The  grant-date  fair value of
employee  share  options  and  similar   instruments  will  be  estimated  using
option-pricing   models  adjusted  for  the  unique   characteristics  of  those
instruments.


                                       75


<PAGE>


         All public  entities  that use the  fair-value  based method for either
recognition or disclosure under Statement 123(R) will apply this Statement using
a modified  version of prospective  application.  Under the  transition  method,
compensation cost is recognized on or after the required  effective date for the
portion of outstanding  awards for which the requisite  service has not yet been
rendered,  based on the grant-date fair value of those awards  calculated  under
Statement  123(R) for either  recognition or pro forma  disclosure.  For periods
before the required effective date, those entities may elect to apply a modified
version of retrospective  application  under which the financial  statements for
prior periods are adjusted on a basis consistent with the pro forma  disclosures
required for those periods by Statement 123(R).

         Statement  123(R) is effective for public companies at the beginning of
the first interim or annual period beginning after June 15, 2005. This Statement
applies to all awards  granted after the required  effective  date and to awards
modified, repurchased, or canceled after that date. KNBT is currently evaluating
the impact  Statement  123(R) will have on its  financial  statements as well as
awards made prior hereto in which the  requisite  service has not yet been fully
rendered.

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

         The MRRP, which is a stock-based  incentive plan,  provides for 808,047
shares of KNBT's common stock,  subject to  adjustment,  which may be granted as
restricted shares to the Company's directors,  advisory directors,  officers and
employees.  Shares awarded to date by the MRRP are earned by the participants at
the rate of 20% per year. On May 6, 2004, 638,000 restricted shares were awarded
leaving  170,047 shares  available for future grants.  Compensation  expense for
this plan is being recorded over the vesting period or a 60-month  period and is
based on the market  value of KNBT's  stock as of the date the awards were made.
KNBT, for the benefit of the MRRP Trust, purchased 808,047 shares of KNBT common
stock at an average  price of $16.44 per share,  which is shown as  reduction of
additional  paid-in-capital.  The remaining  unamortized cost of the MRRP shares
acquired to date is reflected as a reduction in  shareholders'  equity.  Expense
under this plan for the year ended December 31, 2004 was $1.4 million.


NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS

         SFAS No. 107 requires  disclosure of the estimated fair value of assets
and liabilities  considered to be financial  instruments.  For KNBT, as for most
financial  institutions,   the  majority  of  its  assets  and  liabilities  are
considered financial  instruments as defined in SFAS No. 107. However, many such
instruments lack an available trading market as characterized by a willing buyer
and willing seller engaging in an exchange transaction.  Therefore,  KNBT had to
use  significant  estimations  and present  value  calculations  to prepare this
disclosure, as required by SFAS No. 107. Accordingly,  the information presented
below does not purport to represent the aggregate net fair value of KNBT.

         Changes in the  assumptions  or  methodologies  used to  estimate  fair
values  may  materially  affect  the  estimated  amounts.  Also,  management  is
concerned that there may not be reasonable  comparability  between  institutions
due to the wide range of permitted  assumptions and methodologies in the absence
of  active  markets.  This lack of  uniformity  gives  rise to a high  degree of
subjectivity in estimating financial instrument fair values.

         Estimated  fair  values  have  been   determined  by  KNBT  using  what
management believes to be the best available data and an estimation  methodology
suitable for each category of financial instruments. The estimated methodologies
used, the estimated fair values, and recorded book balances at December 31, 2004
and 2003 are set forth below.

         For cash and due from banks and  interest-bearing  deposits with banks,
the recorded book values of  approximately  $86.2 million and $139.0 million are
deemed to approximate fair values at December 31, 2004 and 2003, respectively.


                                       76


<PAGE>


         The estimated fair values of investment and mortgage-backed  securities
are based on quoted market prices, if available. If quoted market prices are not
available,  then the estimated  fair values are based on quoted market prices of
comparable  instruments.  The fair values of loans are estimated on a discounted
cash flow analysis using interest rates currently offered for loans with similar
terms to  borrowers of similar  credit  quality.  The carrying  value of accrued
interest is deemed to approximate fair value.

<TABLE>
<CAPTION>

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

                                                                                    At December 31,
                                                        ----------------------------------------------------------------
                                                                     2004                              2003
                                                        -----------------------------      ----------------------------
                                                            Carrying       Estimated           Carrying       Estimated
                                                             Amount        Fair Value           Amount        Fair Value
                                                        ---------------------------------------------------------------
                                                                             (dollars in thousands)

Investments and mortgage-backed securities               $ 1,113,695     $ 1,114,143         $ 734,087       $ 734,087
Federal Home Loan Bank of Pittsburgh stock                    36,456          36,456            11,543          11,543
Loans receivable                                           1,002,741       1,013,337           882,166         884,585
Mortgage loans held-for-sale                                     718             718             4,677           4,677


</TABLE>

         The estimated fair values of demand  deposits  (i.e.,  interest-bearing
and non-interest  bearing checking accounts,  passbook savings and certain types
of money market  accounts)  are, by  definition,  equal to the amount payable on
demand at the  reporting  date (i.e.,  their  carrying  amounts).  The  carrying
amounts of  variable-rate,  fixed-term money market accounts and certificates of
deposit  approximate their fair values at the reporting date. The fair values of
fixed-rate  certificates  of deposit are estimated  using a discounted cash flow
calculation that applies interest rates currently being offered to a schedule of
aggregated  expected  monthly time deposit  maturities.  The carrying  amount of
accrued interest payable approximates its fair value.

<TABLE>
<CAPTION>

<S>                                                        <C>             <C>               <C>             <C>
                                                                                    At December 31,
                                                        ----------------------------------------------------------------
                                                                     2004                              2003
                                                        -----------------------------      ----------------------------
                                                            Carrying       Estimated           Carrying       Estimated
                                                             Amount        Fair Value           Amount        Fair Value
                                                        ---------------------------------------------------------------
                                                                             (dollars in thousands)

Time deposits                                              $ 561,660       $ 562,367         $ 547,697       $ 562,174
Securities sold under agreements to repurchase                22,643          22,643            24,550          24,550
Advances from the Federal Home Loan Bank                     660,674         658,308           207,153         212,082

</TABLE>


         KNBT's  subordinated  debt had a  carrying  value of $15.5  million  at
December  31,  2004 and  2003.  The  interest  on this debt is tied to LIBOR and
changes  quarterly.  The  estimated  fair value at  December  31, 2004 was $15.5
million.

         The fair value of  commitments  to extend credit is estimated  based on
the amount of  unamortized  deferred  loan  commitment  fees.  The fair value of
letters of credit is based on the  amount of  unearned  fees plus the  estimated
cost to terminate the letters of credit.  Fair values of unrecognized  financial
instruments including commitments to extend credit and the fair value of letters
of credit are considered immaterial.


NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

         KNBT is a party to financial instruments with off-balance-sheet risk in
the normal  course of business  to meet the  financing  needs of its  customers.
These  financial  instruments  include  commitments to extend credit and standby
letters of credit.  Those instruments  involve, to varying degrees,  elements of
credit  and  interest  rate  risk in  excess  of the  amount  recognized  in the
consolidated  balance  sheet.  KNBT's  exposure  to credit  loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby  letters of credit is represented  by the  contractual
amount  of those  instruments.  KNBT  uses the same  credit  policies  in making
commitments  and  conditional   obligations  as  it  does  for  on-balance-sheet
instruments.


                                       77


<PAGE>


         KNBT  had  the  following   approximate   off-balance-sheet   financial
instruments whose contract amounts represent credit risk.

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

                                                           At December 31,
                                                  ----------------------------------
                                                        2004               2003
                                                  --------------     ---------------
                                                        (dollars in thousands)
Commitments to extend credit Lines of credit:
      Commercial loans                                $  98,804           $  86,664
      Home equity secured by mortgage                    51,476              45,341
      Unsecured consumer including credit card            5,540               7,100
                                                  --------------     ---------------
         Total lines of credit                          155,820             139,105
   Letters of credit                                     23,973              15,297
   Other loan commitments:
      Commercial loans unsecured                         33,190              14,580
      Commercial loans secured                           32,406                   -
      Residential mortgages                              49,160              55,583
      Other mortgages                                         -              51,758
      Consumer (auto, personal)                           2,198               8,881
                                                  --------------     ---------------
         Total other loan commitments                   116,954             130,802
                                                  --------------     ---------------
Total commitments to extend credit                    $ 296,747           $ 285,204
                                                  ==============     ===============

</TABLE>


         Commitments  to extend  credit are  agreements to lend to a customer as
long as there is no  violation of any  condition  established  in the  contract.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent   future   cash   requirements.   KNBT   evaluates   each   customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
deemed  necessary  by KNBT upon  extension of credit,  is based on  management's
credit  evaluation  of the  customer.  Collateral  held  varies but may  include
guarantees,  personal or commercial real estate, accounts receivable,  inventory
and equipment.

         Standby letters of credit are conditional commitments issued by KNBT to
guarantee the performance of a customer to a third party.  Those  guarantees are
primarily issued to support contracts entered into by customers. Most guarantees
extend for one year.  The credit risk  involved in issuing  letters of credit is
essentially the same as that involved in extending loan facilities to customers.
KNBT holds collateral to support these commitments. The Bank had standby letters
of credit of $24.0  million  and $15.3  million at  December  31, 2004 and 2003,
respectively.  These letters of credit expire as follows: $17.2 million in 2005,
$6.7 million in 2006 through 2007, and $83,000 in 2008.

         A substantial  amount of KNBT's loans are secured by real estate in the
Northampton,  Lehigh, Monroe, and Carbon counties of northeastern  Pennsylvania.
Loans purchased from other financial institutions or participation  interests in
loans  originated by other  financial  institutions  constitute  less than 1% of
KNBT's loans outstanding.  Accordingly,  KNBT's primary  concentration of credit
risk is  related  to the real  estate  market  in the four  county  area and the
ultimate  collectibility of this portion of KNBT's loan portfolio is susceptible
to changes in economic conditions in that area.


                                       78


<PAGE>


NOTE O - LEASE COMMITMENTS

         KNBT has entered into several noncancellable operating lease agreements
for its branch banking  facilities.  KNBT is responsible for pro-rata  operating
expense escalations.  The approximate minimum annual rental payments at December
31, 2004 under these leases are as follows:

                        (dollars in thousands)

2005                               $ 1,177
2006                                   989
2007                                   734
2008                                   627
2009                                    53
2010 and Thereafter                  5,648
                            ---------------
                                   $ 9,228
                            ===============


         Lease expense for the years ended December 31, 2004,  2003 and 2002 was
$1.3 million, $769,000, and $474,000, respectively.



NOTE P - REGULATORY MATTERS

         KNBT is subject to various regulatory capital requirements administered
by the federal banking  agencies.  Failure to meet minimum capital  requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on KNBT's
financial  statements.  Under capital  adequacy  guidelines  and the  regulatory
framework  for prompt  corrective  action,  KNBT and the Bank must meet specific
capital guidelines that involve  quantitative  measures of KNBT's and the Bank's
assets,  liabilities  and certain  off-balance-sheet  items as calculated  under
regulatory  accounting  practices.  KNBT's and the Bank's  capital  amounts  and
classifications  are also subject to  qualitative  judgments  by the  regulators
about components, risk weightings and other factors.

         KNBT's  ability  to  declare  and pay  dividends  may depend in part on
dividends  received from the Bank. The  Pennsylvania  Banking Code regulates the
distribution  of dividends by savings banks and states,  in part, that dividends
may be declared  and paid only out of  accumulated  net  earnings and may not be
declared  or paid  unless  surplus,  retained  earnings,  is at  least  equal to
contributed  capital. In addition,  dividends may not be declared or paid if the
Bank is in default in payment of any assessment due the FDIC.

         The Federal  Reserve Board issued a policy  statement on the payment of
cash  dividends  by the bank  holding  companies,  which  expresses  the Federal
Reserve  Board's view that a bank holding company should pay cash dividends only
to the  extent  that the  holding  company's  net  income  for the past  year is
sufficient  to cover both the cash  dividends  and a rate of earnings  retention
that is consistent with the holding company's  capital needs,  asset quality and
overall financial condition.

         Quantitative  measures  established  by  regulations  to ensure capital
adequacy  require KNBT and the Bank to maintain  minimum amounts and ratios (set
forth in the  table  below)  of total  and Tier I  capital  (as  defined  in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier I capital (as
defined) to average assets (as defined).  As of December 31, 2004,  KNBT and the
Bank met all regulatory capital adequacy requirements to which they are subject.

         As of December 31,  2004,  the most recent  notification  from the FDIC
categorized the Bank as  "well-capitalized"  under the regulatory  framework for
prompt corrective action. To be categorized as "adequately capitalized" the Bank
must maintain  minimum total  risk-based,  Tier I risk-based and Tier I leverage
ratios as set forth in the table.  There are no  conditions or events since that
notification  that  management   believes  have  changed  in  the  institution's
category.


                                       79


<PAGE>


         The  following  table  provides a  comparison  of KNBT's and the Bank's
capital amounts,  risk-based  capital ratios and leverage ratios for the periods
indicated.

<TABLE>
<CAPTION>

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

                                                                                At December 31, 2004
                                           ----------------------------------------------------------------------------------------
                                                                                 Required                 To Be Well Capitalized
                                                                                For Capital               Under Prompt Corrective
                                             Actual                          Adequacy Purposes               Action Provisions
                                           -------------------------      -------------------------      --------------------------
                                             Amount         Ratio           Amount         Ratio           Amount          Ratio
                                           -------------------------      -------------------------      --------------------------
Total Capital                                                               (dollars in thousands)
      (To risk-weighted assets)
      Company (consolidated)                  $355,857       25.64%         $ 111,042        8.00%           N/A            N/A
      Bank                                    $264,159       19.17%         $ 110,233        8.00%          $137,792        10.00%
Tier I Capital
      (To risk-weighted assets)
      Company (consolidated)                  $345,396       24.88%          $ 55,521        4.00%           N/A            N/A
      Bank                                    $253,698       18.41%          $ 55,117        4.00%          $ 82,675         6.00%
Tier I Capital
      (To average assets, leverage)
      Company (consolidated)                  $345,396       14.66%          $ 55,521        4.00%           N/A            N/A
      Bank                                    $253,698       12.17%          $ 55,117        4.00%          $ 68,896         5.00%

                                                                                At December 31, 2003
                                           ----------------------------------------------------------------------------------------
                                                                                 Required                 To Be Well Capitalized
                                                                                For Capital               Under Prompt Corrective
                                             Actual                          Adequacy Purposes               Action Provisions
                                           -------------------------      -------------------------      --------------------------
                                             Amount         Ratio           Amount         Ratio           Amount          Ratio
                                           -------------------------      -------------------------      --------------------------
Total Capital                                                               (dollars in thousands)
      (To risk-weighted assets)
      Company (consolidated)                  $359,522       33.24%          $ 86,535        8.00%           N/A            N/A
      Bank                                    $258,441       24.01%          $ 86,123        8.00%          $107,654        10.00%
Tier I Capital
      (To risk-weighted assets)
      Company (consolidated)                  $351,612       32.51%          $ 43,268        4.00%           N/A            N/A
      Bank                                    $250,499       23.27%          $ 43,062        4.00%          $ 64,593         6.00%
Tier I Capital
      (To average assets, leverage)
      Company (consolidated)                  $351,612       19.39%          $ 72,525        4.00%           N/A            N/A
      Bank                                    $250,499       13.42%          $ 74,646        4.00%          $ 93,307         5.00%


</TABLE>

                                       80


<PAGE>


NOTE Q - QUARTERLY FINANCIAL DATA (Unaudited)

         The following  represents  summarized quarterly financial data of KNBT,
which, in the opinion of management,  reflects all adjustments  (comprising only
normal recurring accruals) necessary for a fair presentation.

<TABLE>
<CAPTION>

<S>                                         <C>             <C>            <C>            <C>
                                                                 Three Months Ended
-----------------------------------------   ----------------------------------------------------------
2004                                            Dec. 31         Sept. 30       June 30        March 31
                                            ----------------------------------------------------------
                                                    (dollars in thousands except per share data)

  Interest income                           $     26,973    $     24,772   $     23,195   $     22,351
  Interest expense                                10,476           8,777          7,318          6,875
  Net interest income                             16,497          15,995         15,877         15,476
  Provision for loan losses                        1,095             742            971          1,500
  Non-interest income                              4,189           3,840          3,438          3,967
  Non-interest expense                            13,681          13,496         13,017         12,505
  Income before income taxes                       5,910           5,597          5,327          5,438
  Net income                                       4,736           4,447          4,308          4,115

  Per Common Share Data (1)
-----------------------------------------

  Weighted Average Common Shares- Diluted     29,077,739      29,285,250     29,655,263     30,011,264
  Weighted Average Common Shares- Basic       28,586,796      28,875,080     29,232,941     29,555,238
  Net Income Per Share- Diluted             $       0.16    $       0.15   $       0.15   $       0.14
  Net Income Per Share- Basic               $       0.17    $       0.15   $       0.15   $       0.14
  Book Value                                $      13.33    $      13.35   $      13.04   $      13.44

2003
-----------------------------------------

  Interest income                           $     18,153    $     13,193   $     13,578   $     14,139
  Interest expense                                 6,110           4,657          4,991          5,303
  Net interest income                             12,043           8,536          8,587          8,836
  Provision for loan losses                        2,095             468            326             62
  Non-interest income                              2,447           2,018          2,401          2,182
  Non-interest expense                            33,213           7,852          7,148          6,906
  Income (loss) before income taxes              (20,819)          2,234          3,514          4,050
  Net income (loss)                              (13,087)          1,756          2,626          2,949

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

(1) Per share data is not included for 2003 because no shares were issued prior
to November 2003.

</TABLE>



                                       81


<PAGE>


NOTE R - KNBT BANCORP, INC.
(PARENT COMPANY ONLY)


--------------------------------------------------------------------------------
CONDENSED BALANCE SHEET                          At December 31,
                                                2004        2003
--------------------------------------------------------------------------------
                                              (dollars in thousands)
Assets
   Cash and due from banks                    $   --     $      3
   Interest-bearing deposits with banks            714     94,477
                                              --------   --------
      Total cash and cash equivalents              714     94,480
   Loans receivable                             15,483     15,920
   Investment in banking subsidiary            300,780    302,897
   Investment in other subsidiaries             91,703      5,706
   Other assets                                  7,400      7,380
                                              --------   --------
      Total Assets                            $416,080   $426,383
                                              ========   ========

Liabilities
    Long-term ESOP debt                       $   --     $ 15,920
   Subordinated Debentures                      15,464     15,464
   Other liabilities                            23,262      5,919
                                              --------   --------
      Total Liabilities                         38,726     37,303

Shareholders' Equity                           377,354    389,080
                                              --------   --------
   Total Liability and Shareholders' Equity   $416,080   $426,383
                                              ========   ========



--------------------------------------------------------------------------------
                                           For the Year Ended December 31,
CONDENSED STATEMENT OF OPERATIONS               2004        2003
--------------------------------------------------------------------------------
                                              (dollars in thousands)
Income
   Interest on deposits with banks            $    101    $    264
   Interest on ESOP loan                           507          96
   Statutory trust income                           23           5
   Other income                                      5        --
                                              --------    --------
      Total Income                                 636         365
                                              --------    --------

Expenses
   Interest on long-term ESOP debt                 172          96
   Interest on Subordinated Debt                   775         120
   Contribution to charitable foundation          --        16,161
   Other expenses                                2,340          80
                                              --------    --------
      Total Expenses                             3,287      16,457
                                              --------    --------

   Loss before tax benefit and
    equity in undistributed net
    earnings of subsidiaries                    (2,651)    (16,092)
   Income tax benefit                           (1,445)     (5,632)
                                              --------    --------
   Loss before equity in undistributed
      net earnings of subsidiaries              (1,206)    (10,460)
   Equity in undistributed net
      earnings of subsidiaries                  18,812       4,704
                                              --------    --------
      Net Income (Loss)                       $ 17,606    $ (5,756)
                                              ========    ========


                                       82


<PAGE>

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS                                                            For the Years Ended December 31,
                                                                                                   2004                2003
----------------------------------------------------------------------------------------------------------------------------
Operating Activities                                                                           (dollars in thousands)
<S>                                                                                            <C>                 <C>
   Net income (loss)                                                                           $ 17,606            $ (5,756)
   Adjustments to reconcile net loss to net cash provided by operating activities
     Distribution in excess of undistributed net loss of subsidiaries                           (18,812)             (4,704)
     Contribution to charitable foundation                                                                           16,161
     Changes in assets and liabilities
        Increase in other assets                                                                  1,489              (7,380)
        Increase in other liabilities                                                            17,360               5,842
     Management Recognition and Retention Plan expense                                            1,404                   -
                                                                                         ---------------     ---------------
Net Cash Provided by Operating Activities                                                        19,047               4,163
                                                                                         ---------------     ---------------

Investing Activities
   Proceeds from repayment of ESOP loan                                                             437                   -
   Investment in subsidiaries                                                                   (85,650)            106,225
                                                                                         ---------------     ---------------
Net Cash Used In Investing Activities                                                           (85,213)            106,225

Financing Activities
   Net proceeds from issuance of common stock                                                         -             196,261
   Proceeds from the exercise of stock options                                                    1,288                 311
   Dividend payments on common stock                                                             (4,428)                  -
   Purchase of treasury stock                                                                   (11,179)                  -
   Purchase of MRRP stock                                                                       (13,281)                  -
                                                                                         ---------------     ---------------
Net Cash Provided by (used in) Financing Activities                                             (27,600)            196,572
                                                                                         ---------------     ---------------

Increase (decrease) in cash and cash equivalents                                                (93,766)             94,480
Cash and cash equivalents, January 1                                                             94,480                   -
                                                                                         ---------------     ---------------
Cash and cash equivalents, December 31                                                            $ 714            $ 94,480
                                                                                         ===============     ===============
</TABLE>


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

           None


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

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

         Changes in Internal  Control  Over  Financial  Reporting.  No change in
KNBT's internal control over financial  reporting (as defined in Rules 13a-15(f)
or 15d-15(f)  under the  Securities  Exchange Act of 1934, as amended)  occurred
during the quarter ended  December 31, 2004 that has  materially  affected or is
reasonably likely to materially  affect,  KNBT's internal control over financial
reporting.

                                       83


<PAGE>


Management's Report on Internal Control Over Financial Reporting

         The management of KNBT is responsible for  establishing and maintaining
adequate internal control over financial reporting.

         KNBT's internal control over financial  reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial  statements for external purposes in accordance
with generally  accepted  accounting  principles and includes those policies and
procedures that:

         o        Pertain to the  maintenance  of records  that,  in  reasonable
                  detail,  accurately  and fairly reflect the  transactions  and
                  dispositions of the assets of KNBT.

         o        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

         o        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.

         Because of its inherent  limitations,  internal  control over financial
reporting  may not prevent or detect  misstatements.  Also,  projections  of any
evaluation of  effectiveness to future periods are subject to risk that controls
may become inadequate because of changes in conditions or because of declines in
the degree of compliance with the policies or procedures.

         KNBT's  management  assessed the  effectiveness of its internal control
over  financial  reporting as of December 31, 2004.  In making this  assessment,
KNBT's  management  used the criteria set forth by the  Committee of  Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated
Framework.

         As of December  31,  2004,  based on  management's  assessment,  KNBT's
internal control over financial reporting was effective.


                                       84


<PAGE>


Report of Independent Registered Public Accounting Firm


Board of Directors and Shareholders
KNBT Bancorp, Inc.

We  have  audited   management's   assessment,   included  in  the  accompanying
Management's  Report on Internal  Control Over  Financial  Reporting,  that KNBT
Bancorp,  Inc. maintained effective internal control over financial reporting as
of   December   31,   2004,   based  on   criteria   established   in   Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations of the Treadway Commission (COSO). KNBT Bancorp, Inc.'s management
is  responsible  for  maintaining  effective  internal  control  over  financial
reporting and for its assessment of the  effectiveness  of internal control over
financial reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the company's internal control
over financial reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinion.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
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 the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion,  management's  assessment  that KNBT  Bancorp,  Inc.  maintained
effective internal control over financial  reporting as of December 31, 2004, is
fairly  stated,  in all  material  respects,  based on criteria  established  in
Internal  Control--Integrated  Framework  issued by the  Committee of Sponsoring
Organizations  of the Treadway  Commission  (COSO).  Also in our  opinion,  KNBT
Bancorp, Inc. maintained,  in all material respects,  effective internal control
over financial  reporting as of December 31, 2004 based on criteria  established
in Internal Control--Integrated  Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the consolidated balance sheets of
KNBT Bancorp,  Inc. and  subsidiaries  as of December 31, 2004 and 2003, and the
related consolidated statements of income,  stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2004 and our report
dated  March 16,  2005  expressed  an  unqualified  opinion  on those  financial
statements.


 /s/ Grant Thornton LLP

Philadelphia, Pennsylvania
March 16, 2005


                                       85


<PAGE>


Item 9B.          Other Information
-----------------------------------

           None


PART III


Item 10.          Directors and Executive Officers of the Registrant
--------------------------------------------------------------------

         The  information  required  by Item 10 of Form  10-K  with  respect  to
directors and executive  officers is  incorporated by reference from the section
captioned  "Information  with  Respect  to  Nominees  for  Director,  Continuing
Directors and Executive  Officers" in KNBT's  definitive proxy statement for the
annual  meeting  of  stockholders  to be  held  on  May  5,  2005,  (the  "Proxy
Statement")  to be filed with the Securities  and Exchange  Commission  prior to
April 30, 2005.

         KNBT has  adopted a Code of  Conduct  and  Ethics  that  applies to its
principal  executive officer and principal  financial officer,  as well as other
officers  and  employees of KNBT and the Bank. A copy of the Code of Conduct and
Ethics may be found on KNBT's website at www.KNBT.com.


Item 11.          Executive Compensation
----------------------------------------

         The  information  required by Item 11 of Form 10-K is  incorporated  by
reference from the sections captioned "Management  Compensation," "Report of the
Human  Resources  Committee  of  KNBT"  and  "Performance  Graph"  in the  Proxy
Statement.


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

         The  information  required by Item 12 of Form 10-K is  incorporated  by
reference from the section  captioned  "Beneficial  Ownership of Common Stock by
Certain Beneficial Owners and Management."


Equity Compensation Plan Information

         The following  table provides  information as of December 31, 2004 with
respect to shares of common stock that may be issued  under our existing  equity
compensation  plans,  which  consist  of the  2004  Stock  Option  Plan and 2004
Recognition and Retention Plan, both of which were approved by our stockholders.

         The table does not include information with respect to shares of common
stock subject to outstanding  options  granted under equity  compensation  plans
assumed  by us in  connection  with the  acquisition  of First  Colonial,  which
originally  granted  these  options.  Note 2 to the table  sets  forth the total
number of shares of common stock  issuable upon the exercise of assumed  options
as of  December  31,  2004  and the  weighted  average  exercise  price of those
options. No additional options may be granted under those assumed plans.


                                       86


<PAGE>


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

                                                                                              Number of securities
                                  Number of securities to be                                remaining available for
                                    issued upon exercise of        Weighted-average       future issuance under equity
                                     outstanding options,         exercise price of      compensation plans (excluding
                                           warrants              outstanding options,       securities reflected in
                                          and rights             warrants and rights              column (a))
         Plan Category                        (a)                        (b)                          (c)
--------------------------------  ---------------------------  ------------------------  ------------------------------

Equity compensation plans
   approved by security holders           1,738,000 (1)                 $16.50 (1)                   1,090,165 (3)
Equity compensation plans not
   approved by security holders                --                         --                             --
                                  ---------------------------  ------------------------  ------------------------------
     Total                                1,738,000 (2)                 $16.50                       1,090,165
                                          =========                     ======                       =========
___________________
(1)  Includes  629,500 shares subject to restricted  stock grants which were not
     vested  as of  December  31,  2004.  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, 2004, a total of
     509,896  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 $5.61 per share. No additional options may
     be granted under any assumed plans.
(3)  Includes 178,547 shares available for grant pursuant to the MRRP.

</TABLE>


Item 13.          Certain Relationships and Related Transactions
----------------------------------------------------------------

         The  information  required by Item 13 of Form 10-K is  incorporated  by
reference from the section captioned "Management  Compensation - Indebtedness of
Management and Related Party Transactions" in the Proxy Statement.


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

         The  information  required by Item 14 of Form 10-K is  incorporated  by
reference from the section captioned  "Ratification of Appointment of Auditors -
Audit Fees" in the Proxy Statement.


PART IV

Item 15.          Exhibits and Financial Statement Schedules
-------------------------------------------------------------

       (a)    Documents Filed as Part of this Report:

                  Financial Statements: The Consolidated Financial Statements of
                  KNBT  Bancorp,  Inc. and the Report of  Independent  Certified
                  Public Accountants  thereon,  as listed below, have been filed
                  under "Item 8, Financial Statements and Supplementary Data".

                  Report of Independent Registered Public Accounting Firm

                  Consolidated  Balance  Sheets for the Years Ended 12/31/04 and
                  12/31/03

                  Consolidated   Statements   of  Income  for  the  Years  Ended
                  12/31/04, 12/31/03 and 12/31/02

                  Consolidated  Statement of Changes in Shareholders' Equity for
                  the Years Ended 12/31/04, 12/31/03 and 12/31/02

                  Consolidated  Statements  of Cash  Flows for the  Years  Ended
                  12/31/04, 12/31/03 and 12/31/02

                  Notes to Consolidated Financial Statements


                                       87


<PAGE>


       (b)    Exhibits

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

Exhibit No.       Description                                                                             Location
-----------       -----------                                                                             --------

2.1               Agreement and Plan of Merger between KNBT Bancorp, Inc. and Northeast Pennsylvania
                  Financial Corp., dated December 8, 2004.                                                      (1)

3.1               Articles of Incorporation of KNBT Bancorp, Inc.                                               (2)

3.2               Amended and Restated Bylaws of KNBT Bancorp, Inc.
                                                                                                           Filed herewith

4.0               Form of Stock Certificate of KNBT Bancorp, Inc.                                               (2)

10.1              Employment Agreement between Keystone Savings Bank, KNBT Bancorp and Scott V. Fainor          (2)

10.2              Amendment No. 1 to the Employment Agreement between KNBT Bancorp, Inc., Keystone
                  Nazareth Bank & Trust Company, and Scott V. Fainor.                                           (3)

10.3              Employment Agreement between Keystone Savings Bank, KNBT Bancorp and Eugene T. Sobol          (2)

10.4              Amendment No. 1 to the Employment Agreement between KNBT Bancorp, Inc., Keystone
                  Nazareth Bank & Trust Company, and Eugene T. Sobol.                                           (3)

10.5              Keystone Savings Bank Supplemental Executive Retirement Plan                                  (2)

10.6              Keystone Savings Bank Trustee and Executive Deferred Compensation Program                     (2)

10.7              First Colonial Group, Inc. 1994 Stock Option Plan for Non-Employee Directors                  (4)

10.8              First Colonial Group, Inc. 1996 Employee Stock Option Plan                                    (5)

10.9              First Colonial Group, Inc. 2001 Stock Option Plan                                             (6)

10.10             Nazareth National Bank Directors' Deferred Compensation Plan #2                               (7)

10.11             KNBT Bancorp, Inc. 2004 Stock Option Plan                                                     (8)

10.12             KNBT Bancorp, Inc. 2004 Recognition and Retention Plan and Trust Agreement                    (8)

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


                                       88


<PAGE>


32.0              Section 1350 Certifications                                                              Filed herewith
____________
(1)   Incorporated by reference from KNBT's Current Report on Form 8-K/A filed on December 14, 2004 with the Securities
      and Exchange Commission (File No. 000-50426).
(2)   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).
(3)   Incorporated  by reference  from KNBT's Current Report on Form 8-K/A filed on January 27, 2005, with the Securities and
      Exchange Commission (File No. 000-50426).
(4)   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).
(5)   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).
(6)   Incorporated by reference from First Colonial's quarterly report on Form 10-Q, for the quarter ended June 30, 2001
      (File No. 000-11526).
(7)   Incorporated by reference from KNBT's Annual Report on Form 10-K, for the fiscal year ended December 31, 2003 (File
      No. 000-50426).
(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).

</TABLE>


(c)   Financial Statement Schedules

     All financial statement  schedules are omitted as the required  information
     is not applicable or presented in the consolidated  financial statements or
     related notes included in Item 8, "Financial  Statements and  Supplementary
     Data."


                                       89


<PAGE>


                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                      KNBT BANCORP, INC.

Dated:  March 16, 2005                By:  /s/  Scott V. Fainor
                                         ----------------------------------
                                           SCOTT V. FAINOR, President and
                                           Chief Executive Officer


         In accordance  with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities as of
March 16, 2005.


By:       /s/ Jeffrey P. Feather
          -----------------------------------------------------------
          JEFFREY P. FEATHER
          Chairman of the Board
          and Director
          March 16, 2005

By:       /s/  Scott V. Fainor
          -----------------------------------------------------------
          SCOTT V. FAINOR
          President, Chief Executive Officer
          and Director (Principal Executive Officer)
          March 16, 2005

By:       /s/  Eugene T. Sobol
          -----------------------------------------------------------
          EUGENE T. SOBOL
          Senior Executive Vice President and Treasurer
          (Principal Financial Officer and
          Principal Accounting Officer)
          March 16, 2005

By:       /s/ Michael J. Gausling
          -----------------------------------------------------------
          MICHAEL J. GAUSLING
          Director
          March 16, 2005

By:       /s/ Donna D. Holton
          -----------------------------------------------------------
          DONNA D. HOLTON
          Director
          March 16, 2005

By:       /s/  Christian F. Martin, IV
          -----------------------------------------------------------
          CHRISTIAN F. MARTIN, IV
          Director
          March 16, 2005


                                       90


<PAGE>


By:       /s/ John A. Mountain
          -----------------------------------------------------------
          JOHN A. MOUNTAIN
          Director
          March 16, 2005

By:       /s/ Daniel B. Mulholland
          -----------------------------------------------------------
          DANIEL B. MULHOLLAND
          Director
          March 16, 2005

By:       /s/ R. Chadwick Paul, Jr.
          -----------------------------------------------------------
          R. CHADWICK PAUL, JR.
          Director
          March 16, 2005

By:       /s/ Charles J. Peischl, Esquire
          -----------------------------------------------------------
          CHARLES J. PEISCHL, ESQUIRE
          Director
          March 16, 2005

By:       /s/ Robert R. Scholl
          -----------------------------------------------------------
          ROBERT R. SCHOLL
          Director
          March 16, 2005

By:       /s/ Kenneth R. Smith
          -----------------------------------------------------------
          KENNETH R. SMITH
          Director
          March 16, 2005

By:       /s/ R. Charles Stehly
          -----------------------------------------------------------
          R. CHARLES STEHLY
          Director
          March 16, 2005

By:       /s/ Richard Stevens, III
          -----------------------------------------------------------
          RICHARD STEVENS, III
          Director
          March 16, 2005

By:       /s/ Richard L. Strain
          -----------------------------------------------------------
          RICHARD L. STRAIN
          Director
          March 16, 2005

By:       /s/ Maria Z. Thulin
          -----------------------------------------------------------
          MARIA Z. THULIN
          Director
          March 16, 2005


                                       91


<PAGE>