AGREEMENT AND PLAN OF MERGER

Agreement and Plan of Merger

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NATIONAL PENN BANCSHARES INC | KNBT BANCORP, INC

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Title: AGREEMENT AND PLAN OF MERGER
Governing Law: Pennsylvania Date: 9/7/2007
Industry: Regional Banks Law Firm: Reed Smith Sector: Financial

EXHIBIT 2.1

AGREEMENT AND PLAN OF MERGER

BETWEEN

NATIONAL PENN BANCSHARES, INC.

AND

KNBT BANCORP, INC.

DATED: SEPTEMBER 6, 2007

Table of Contents
		Page
ARTICLE I	GENERAL	2
1.01	Definitions	2
1.02	The Merger	9
1.03	Effective Time and Effective Date; Closing	10
1.04	Bank Merger	10

ARTICLE II	CONSIDERATION AND EXCHANGE PROCEDURES	11
2.01	NPB Common Stock	11
2.02	Conversion of KNBT Common Stock	11
2.03	Treasury Stock and Stock Owned by KNBT	11
2.04	No Fractional Shares	11
2.05	Stock Options	12
2.06	Surrender and Exchange of KNBT Stock Certificates	13
2.07	Anti-Dilution Provisions	15

ARTICLE III	REPRESENTATIONS AND WARRANTIES OF KNBT	15
3.01	Organization	15
3.02	Capitalization	17
3.03	Authority; No Violation	17
3.04	Consents and Approvals	18
3.05	Financial Statements	19
3.06	No Material Adverse Change	19
3.07	Taxes	19
3.08	Contracts	20
3.09	Ownership of Property; Insurance Coverage	22
3.10	Legal Proceedings	23
3.11	Compliance with Applicable Law	23
3.12	ERISA	25
3.13	State Takeover Statutes and KNBT Articles of Incorporation	27
3.14	Brokers and Finders	27
3.15	Environmental Matters	27
3.16	Business of KNBT	28
3.17	CRA Compliance	28
3.18	KNBT Information	29
3.19	Related Party Transactions	29
3.20	Loans	29
3.21	Allowance for Loan Losses	30
3.22	Reorganization	30
3.23	Fairness Opinion	30
3.24	Securities Documents	30
3.25	Well Capitalized	30
3.26	Sarbanes-Oxley Act Compliance	31
3.27	Labor Matters	31

3.28	Quality of Representations	32

ARTICLE IV	REPRESENTATIONS AND WARRANTIES OF NPB	32
4.01	Organization	32
4.02	Capitalization	33
4.03	Authority; No Violation	34
4.04	Consents and Approvals	35
4.05	Financial Statements	35
4.06	No Material Adverse Change	36
4.07	Taxes	36
4.08	Contracts	37
4.09	Ownership of Property; Insurance Coverage	37
4.10	Shares	38
4.11	Legal Proceedings	38
4.12	Compliance with Applicable Law	38
4.13	ERISA	40
4.14	Brokers and Finders	41
4.15	Environmental Matters	42
4.16	Business of NPB	42
4.17	CRA Compliance	42
4.18	Allowance for Loan Losses	43
4.19	NPB Information	43
4.20	Related Party Transactions	43
4.21	Loans	44
4.22	Reorganization	44
4.23	Fairness Opinion	44
4.24	NPB Common Stock	44
4.25	Securities Documents	44
4.26	Rights Agreement	45
4.27	Well Capitalized	45
4.28	Sarbanes-Oxley Act Compliance	45
4.29	Labor Matters	46
4.30	Quality of Representations	46

ARTICLE V	COVENANTS OF THE PARTIES	46
5.01	Conduct of KNBT's Business	46
5.02	Conduct of NPB’s Business	49
5.03	Access; Confidentiality	50
5.04	Regulatory Matters	51
5.05	Taking of Necessary Actions	52
5.06	No Solicitation	52
5.07	Advice of Changes	53
5.08	Other Undertakings by NPB and KNBT	53
5.09	Section 16 Matters	62

ARTICLE VI	CONDITIONS	62
6.01	Conditions to KNBT's Obligations under this Agreement	62

6.02	Conditions to NPB's Obligations under this Agreement	63

ARTICLE VII	TERMINATION	65
7.01	Termination	65
7.02	Effect of Termination	65

ARTICLE VIII	MISCELLANEOUS	66
8.01	Expenses and Other Fees	66
8.02	Non-Survival of Representations and Warranties; Disclosure Schedules	67
8.03	Amendment, Extension and Waiver	67
8.04	Entire Agreement	67
8.05	No Assignment	67
8.06	Notices	68
8.07	Disclosure Schedules	69
8.08	Captions	69
8.09	Counterparts	69
8.10	Severability	69
8.11	Governing Law	69
8.12	Interpretation	69

Exhibits :

Exhibit 1 KNBT Letter Agreement

Exhibit 2 NPB Letter Agreement

Exhibit 3 Amendments to the Amended and Restated Employment Agreements

Exhibit 4 Release, Consulting and Noncompetition Agreement

Schedules :

KNBT Disclosure Schedule

NPB Disclosure Schedule

AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER, dated as of September 6, 2007 (“Agreement”), is made by and between NATIONAL PENN BANCSHARES, INC., a Pennsylvania corporation (“NPB”), and KNBT BANCORP, INC., a Pennsylvania corporation (“KNBT”).

BACKGROUND

1. NPB owns directly all of the outstanding capital stock of National Penn Bank, a national banking association (“NPBank”), as well as all of the outstanding stock or similar interests of certain other Subsidiaries.

2. KNBT owns directly all of the outstanding capital stock of Keystone Nazareth Bank & Trust Company, a Pennsylvania chartered savings bank (“KNBT Bank”), as well as all of the outstanding stock or similar interests of certain other Subsidiaries.

3. NPB and KNBT desire for KNBT to merge with and into NPB (the “Merger”), with NPB surviving such Merger, in accordance with this Agreement and the applicable laws of the Commonwealth of Pennsylvania.

4. As a condition and inducement to NPB to enter into this Agreement, the directors of KNBT and the executive officers of KNBT named in KNBT’s most recent proxy statement are each concurrently executing a Letter Agreement in the form attached hereto as Exhibit 1 (the “KNBT Letter Agreement”).

5. As a condition and inducement to KNBT to enter into this Agreement, the directors of NPB and the executive officers of NPB named in NPB’s most recent proxy statement are each concurrently executing a Letter Agreement in the form attached hereto as Exhibit 2 (the “NPB Letter Agreement” and collectively with the KNBT Letter Agreement, the “Letter Agreements”).

6. As a condition and inducement to each of NPB and KNBT to enter into this Agreement, NPB and KNBT are concurrently entering into amendment agreements with Scott V. Fainor and Sandra L. Bodnyk (collectively, as amended, the “Key KNBT Management Agreements”) regarding the terms of their employment following consummation of the Merger, and NPB, KNBT, NPBank and KNBT Bank are concurrently entering into a release, consulting and non-competition agreement with Eugene T. Sobol (the “Consulting Agreement”).

7. Each of the parties, by signing this Agreement, adopts it as a plan of reorganization as defined in IRC Section 368(a), and intends the Merger to be a reorganization as defined in IRC Section 368(a).

8. NPB and KNBT desire to set forth in this Agreement the terms and conditions governing the Merger and the other transactions contemplated hereby.

NOW THEREFORE, in consideration of the premises and of the mutual covenants, agreements, representations and warranties herein contained, the parties hereto, intending to be legally bound hereby, agree as follows:

ARTICLE I

GENERAL

1.01 Definitions . As used in this Agreement, the following terms shall have the indicated meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

Acquisition Proposal means any inquiry, proposal, indication of interest, offer, signed agreement or disclosure of an intention to do any of the foregoing from any Person or group of Persons relating to any (i) merger, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving KNBT or any Subsidiary of KNBT, where the assets, revenue or income of such Subsidiary constitutes more than 10% of the consolidated assets, net revenue or net income of KNBT, (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets (including for this purpose the outstanding capital stock of any Subsidiary of KNBT and the capital stock of any entity surviving any merger or business combination involving any Subsidiary of KNBT) and/or liabilities where that the assets being disposed of constitute 10% or more of the consolidated assets, net revenue or net income of KNBT and its Subsidiaries taken as a whole, either in a single transaction or series of transactions; (iii) any direct or indirect purchase or other acquisition or tender offer or exchange offer that if consummated would result in a Person or group of Persons acting in concert beneficially owning 15% or more of the outstanding shares of the common stock of KNBT or any Subsidiary of KNBT where that Subsidiary represents more than 10% of the consolidated assets, net revenue or net income of KNBT, in each case other than (x) the transactions contemplated by this Agreement and (y) any transaction referred to in clause (i) or (ii) involving only KNBT and one or more of its Subsidiaries, or involving two or more of its Subsidiaries, provided that any such transaction is not entered into in violation of the terms of this Agreement.

Affiliate means, with respect to any corporation, any Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such corporation and, without limiting the generality of the foregoing, includes any executive officer, director or 10% equity owner of such corporation.

Agreement means this Agreement, including any amendment or supplement hereto.

Application means an application for regulatory approval or regulatory consent which is required for the consummation of the Contemplated Transactions.

Articles of Merger means the articles of merger to be executed by NPB and KNBT and to be filed in the PDS, in accordance with the BCL.

Bank Merger has the meaning given to that term in Section 1.04 of this Agreement.

BCL means the Pennsylvania Business Corporation Law of 1988, as amended.

BHC Act means the Bank Holding Company Act of 1956, as amended.

Business Day means Monday through Friday of each week, except a legal holiday recognized as such by the U.S. Government or any day on which banking institutions in the Commonwealth of Pennsylvania are authorized or obligated to close.

Closing has the meaning given to such term in Section 1.03(b) of this Agreement.

Closing Date has the meaning given to that term in Section 1.03(b) of this Agreement.

Confidentiality Agreement means the confidentiality agreement dated August 15, 2007 between NPB and KNBT.

Consulting Agreement has the meaning given to such term in the Background section of this Agreement.

Contemplated Transactions means (a) the Merger and (b) the Bank Merger.

Continuing Employees has the meaning given to that term in Section 5.08(c)(iii)(B).

CRA means the Community Reinvestment Act of 1977, as amended, and the rules and regulations promulgated from time to time thereunder.

Effective Date means the date on which the Merger is effective, which is the date that the Articles of Merger are filed in the PDS, and shall be the same as the Closing Date or as soon thereafter as is practicable.

Effective Time has the meaning given to such term in Section 1.03(a).

Environmental Law means any federal, state or local law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any Regulatory Authority (any such agreements only as applicable to NPB or KNBT, as the case may be) relating to (i) the protection, preservation or restoration of the environment, including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource, and/or (ii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, whether by type or by quantity, including any material containing any such substance as a component.

ERISA means the Employee Retirement Income Security Act of 1974, as amended.

Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated from time to time thereunder.

Exchange Agent means Mellon Investor Services (or such other agent designated by NPB and reasonably acceptable to KNBT) that will act as the exchange agent for purposes of conducting the exchange procedure described in Section 2.06.

Exchange Ratio has the meaning given to such term in Section 2.02.

FDIC means the Federal Deposit Insurance Corporation.

FRB means the Federal Reserve Board.

GAAP means accounting principles generally accepted in the United States.

HSR Act means Section 7A of the Clayton Act, as added by Title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder.

Indemnified Party has the meaning given to that term in Section 5.08(c)(vi)(A).

IRC means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

IRS means the Internal Revenue Service.

Janney has the meaning given to such term in Section 4.14 of this Agreement.

Key KNBT Management Agreements has the meaning given to such term in the Background section of this Agreement.

KNBT has the meaning given to that term in the introductory paragraph of this Agreement.

KNBT Bank has the meaning given to that term in the Background section of this Agreement.

KNBT Bank Board has the meaning given to that term in Section 5.08(c)(v)(A) of this Agreement.

KNBT Bank Board Member means a director of KNBT immediately prior to the Closing Date who becomes, and on the date of determination is, a member of the KNBT Bank Board.

KNBT Bank Division has the meaning given to that term in Section 5.07(c)(v)(B) of this Agreement.

KNBT Benefit Plans has the meaning given to that term in Section 3.12(a) of this Agreement.

KNBT Certificates has the meaning given to that term in Section 2.06(a) of this Agreement.

KNBT Common Stock has the meaning given to that term in Section 3.02(a) of this Agreement.

KNBT Loans has the meaning given to that term in Section 3.20(a) of this Agreement.

KNBT/NPB Directors has the meaning given to that term in Section 1.02(d) of this Agreement.

KNBT Disclosure Schedule means, collectively, the disclosure schedules delivered by KNBT to NPB at or prior to the execution and delivery of this Agreement.

KNBT ERISA Affiliate has the meaning given to such term in Section 3.12(a) of this Agreement.

KNBT/NPBank Director has the meaning given to that term in Section 5.08(c)(iv)(A) of this Agreement.

KNBT Financials means (a) the audited consolidated financial statements of KNBT as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006, and (b) the unaudited interim consolidated financial statements of KNBT for each calendar quarter after December 31, 2006.

KNBT Letter Agreement has the meaning given to such term in the Background section of this Agreement.

KNBT Regional Board has the meaning given to that term in Section 5.08(c)(v)(D) of this Agreement.

KNBT Shareholders Meeting means the meeting of the holders of KNBT Common Stock to approve this Agreement.

KNBT Stock-Based Awards means the awards granted pursuant to the KNBT Stock Plans and the KNBT 2004 Management Recognition and Retention Plan and Trust Agreement.

KNBT Stock Options means options to acquire shares of KNBT Common Stock issued under the KNBT Stock Plans.

KNBT Stock Plans means the following plans: KNBT Bancorp, Inc. 2004 Stock Option Plan, First Colonial Group, Inc. 1994 Stock Option Plan for Non-Employee Directors, First Colonial Group, Inc. 1996 Employee Stock Option Plan and First Colonial Group, Inc. 2001 Stock Option Plan.

Knowledge of KNBT means the knowledge of KNBT's executive officers and directors.

Knowledge of NPB means the knowledge of NPB's executive officers and directors.

Letter Agreements has the meaning given to such term in the Background section of this Agreement.

Material Adverse Effect means a change, circumstance, event or effect that has or would be reasonably expected to have a material adverse effect on (a) the business, financial condition or results of operations of KNBT on a consolidated basis (when such term is used in Article III hereof) or NPB on a consolidated basis (when such term is used in Article IV hereof) other than, in each case, any change, circumstance, event or effect relating to (i) any change occurring after the date hereof in any federal or state law, rule or regulation or in GAAP, which change affects banking institutions and their holding companies generally, including any change affecting the Deposit Insurance Fund administered by the FDIC, (ii) changes in general economic, legal, regulatory or political conditions affecting banking institutions generally, including, but not limited to, changes in interest rates, (iii) expenses incurred in connection with this Agreement and the transactions contemplated hereby including any liability incurred under Section 5.08(b)(xi), (iv) any action or omission of a party (or any of its Subsidiaries) taken pursuant to the terms of this Agreement or taken or omitted to be taken with the express written permission of the other party including any liability incurred under Section 5.08(b)(xi), (v) any effect with respect to a party hereto caused, in whole or in substantial part, by the other party and (vi) reasonable expenses, including expenses associated with the retention of legal and financial advisors, incurred by KNBT or NPB in connection with the negotiation, execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, or (b) the ability of such party or its banking Subsidiary to consummate the Contemplated Transactions on a timely basis.

Merger has the meaning given to such term in Background section of this Agreement.

Merger Consideration has the meaning given to such term in Section 2.02 of this Agreement.

NASD means the National Association of Securities Dealers, Inc.

Nasdaq means the Global Select Market of The Nasdaq Stock Market operated by the NASD.

NPB means National Penn Bancshares, Inc., a Pennsylvania corporation.

NPB Benefit Plans has the meaning given to that term in Section 4.13(a).

NPB Common Stock means the common stock, without par value, of NPB and, unless the context otherwise requires, related NPB Rights.

NPB Director has the meaning given to that term in Section 1.02(d) of this Agreement.

NPB Disclosure Schedule means, collectively, the disclosure schedules delivered by NPB to KNBT at or prior to the execution and delivery of this Agreement.

NPB ERISA Affiliate has the meaning given to such term in Section 4.13(a) of this Agreement.

NPB Financials means (a) the audited consolidated financial statements of NPB as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006, and (b) the unaudited interim consolidated financial statements of NPB for each calendar quarter after December 31, 2006.

NPB Letter Agreement has the meaning given to such term in the Background section of this Agreement.

NPB Loans has the meaning given to such term in Section 4.21(a) of this Agreement.

NPB Rights means the rights attached to shares of NPB Common Stock pursuant to the Rights Agreement.

NPB Shareholders Meeting means the meeting of the holders of NPB Common Stock to approve this Agreement.

NPB Stock Dividend means the 3% stock dividend, declared by NPB on August 22, 2007, effective September 7, 2007, and to be distributed on September 28, 2007.

NPBank has the meaning given to such term in the Background section of this Agreement.

NPB/NPBank Bylaws Restrictions means the provisions of the NPB and NPBank bylaws that require the retirement of a director as of the annual meeting next following that director's reaching age 72.

OCC means the Office of the Comptroller of the Currency.

PDB means the Department of Banking of the Commonwealth of Pennsylvania.

PDS means the Department of State of the Commonwealth of Pennsylvania.

Person means any individual, bank, corporation, partnership, association, joint-stock company, business trust, limited liability company, unincorporated organization or other organization or firm of any kind or nature.

Prospectus/Proxy Statement means the joint prospectus/proxy statement, together with any supplements thereto, to be sent to holders of KNBT Common Stock in connection with the KNBT Shareholders Meeting and the holders of NPB Common Stock in connection with the NPB Shareholders Meeting.

Registration Statement means the registration statement on Form S-4, which includes the Prospectus/Proxy Statement as a part thereof, and including any pre-effective or post-effective amendments or supplements thereto, as filed with the SEC under the Securities Act with respect to the NPB Common Stock to be issued in connection with the Contemplated Transactions.

Regulatory Agreement has the meaning given to that term in Sections 3.11 and 4.12 of this Agreement.

Regulatory Authority means any agency or department of any federal, state or local government or of any self-regulatory organization, including without limitation the SEC, the PDB, the OCC, the FDIC, the FRB, Nasdaq and the U.S. Department of Justice.

Rights means warrants, options, rights, convertible securities and other capital stock equivalents which obligate an entity to issue its securities.

Rights Agreement means the Rights Agreement dated August 23, 1989, as amended August 21, 1999, between NPB and NPBank, as Rights Agent.

Sandler has the meaning given to such term in Section 3.14 of this Agreement.

SEC means the Securities and Exchange Commission.

Securities Act means the Securities Act of 1933, as amended, and the rules and regulations promulgated from time to time thereunder.

Securities Documents means all registration statements, schedules, statements, forms, reports, proxy material, and other documents required to be filed under the Securities Laws.

Securities Laws means the Securities Act and the Exchange Act and the rules and regulations promulgated from time to time thereunder.

Subsidiary means with respect to any party, any corporation, partnership, joint venture, limited liability company or other entity of which (i) such party or a subsidiary of such party is a general partner or (ii) at least a majority of the capital stock or other ownership interest having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such party.

1.02 The Merger .

(a) Subject to the terms and conditions of this Agreement and in accordance with the BCL, on the Effective Date:

(i) KNBT shall merge with and into NPB in accordance with Section 1921 of the BCL;

(ii) the separate existence of KNBT shall cease; and

(iii) NPB shall survive and continue to exist as a corporation incorporated under the BCL.

(b) Effects of the Merger . At the Effective Time, the effects of the Merger shall be as provided in Section 1929 of the BCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all of the property (real, personal and mixed), rights, powers, duties, obligations and liabilities of KNBT shall be taken and deemed to be transferred to and vested in NPB, as the surviving corporation in the Merger, without further act or deed.

(c) NPB's Articles of Incorporation and Bylaws . On and after the Effective Time, the articles of incorporation and bylaws of NPB, as in effect immediately prior to the Effective Time, shall automatically be and remain the articles of incorporation and bylaws of NPB, as the surviving corporation in the Merger, until thereafter altered, amended or repealed.

(d) NPB's Board of Directors and Officers .

(i) At the Effective Time, the total number of persons serving on the board of directors of NPB shall be fifteen (15). Ten (10) of the fifteen (15) persons to serve initially on the board of directors of NPB at the Effective Time shall be selected solely by and at the absolute discretion of the board of directors of NPB prior to the Effective Time (the “NPB Directors”). Five (5) of the fifteen (15) persons to serve initially on the board of directors of NPB at the Effective Time shall be selected by the current board of directors of KNBT from among their directors who are independent directors, as provided in the Nasdaq Stock Market Marketplace Rules, and such persons must be approved by NPB, such approval not to be unreasonably withheld (the “KNBT/NPB Directors”). In the event that prior to the Effective Time any person so selected to serve on the board of directors of NPB after the Effective Time is unable or unwilling to serve in such position, the board of directors which selected such person shall designate another of its members to serve in such person’s stead in accordance with the provisions of this Section 1.02(d). If at any time during the three years following the Effective Time the number of KNBT/NPB Directors serving, or that would be serving following the next shareholders’ meeting at which NPB directors are to be elected, would be less than five persons, then, subject to the fiduciary duties of the directors of NPB, the board of directors and the Nominating/Corporate Governance Committee thereof shall nominate for election at the next shareholders’ meeting at which directors are to be elected, such person or persons as may be requested by a majority of the KNBT/NPB Directors (provided that each such person would qualify as an independent director, as provided in the Nasdaq Stock Market Marketplace Rules,

and each such person is approved by a majority of the directors of NPB excluding any KNBT/NPB Directors, such approval not to be unreasonably withheld) to ensure that the KNBT/NPB Directors shall continue to hold 5 places on the NPB board of directors, in which event such replacement shall be deemed a KNBT/NPB Director. On and after the Effective Date Mr. Jeffrey P. Feather shall become the Vice Chairman of NPB’s board of directors and shall serve on NPB’s executive committee and shall become the Chairman of NPB’s Nominating/Corporate Governance Committee, to hold those offices and positions until his successor is elected and qualified or otherwise in accordance with applicable law, the articles of incorporation and bylaws of NPB. Each person who serves as a KNBT/NPB Director will be compensated for such service after the Effective Date in the same manner and in the same amounts as all other directors of NPB are compensated.

(ii) On and after the Effective Date, the officers of NPB duly elected and holding office immediately prior to the Effective Date shall be the officers of NPB, as the surviving corporation in the Merger, with the addition of Scott V. Fainor, who shall become Senior Executive Vice President and Chief Operating Officer of NPB on and after the Effective Date, each to hold office until his or her successor is elected and qualified or otherwise in accordance with applicable law, the articles of incorporation and bylaws of NPB

1.03 Effective Time and Effective Date; Closing .

(a) Subject to the satisfaction or waiver of the conditions set forth in Article VI (other than those conditions that by their nature are to be satisfied at the consummation of the Merger, but subject to the fulfillment or waiver of those conditions), NPB and KNBT shall file the Articles of Merger with the PDS on (i) a date selected by NPB after such satisfaction or waiver which is no later than five Business Days following such satisfaction or waiver or (ii) such other date to which NPB and KNBT may mutually agree in writing. The Merger provided for herein shall become effective upon filing of the Articles of Merger or on such later date and time as may be specified therein (the “Effective Time”).

(b) A closing (the “Closing”) shall take place immediately prior to the Effective Time at 10:00 a.m., Eastern Time, at the principal offices of NPB in Boyertown, Pennsylvania, or at such other place, at such other time, or on such other date as NPB and KNBT may mutually agree upon (such date, the “Closing Date”). At the Closing, there shall be delivered to the parties the certificates and other documents required to be delivered under Article VI hereof.

1.04 Bank Merger . NPB and KNBT agree to take all action necessary and appropriate to cause KNBT Bank to merge with and into NPBank (the “Bank Merger”) in accordance with applicable laws and regulations and the terms of an agreement and plan of merger to be entered into by KNBT Bank and NPBank (the “Bank Merger Agreement”) as soon as reasonably practicable after the execution and delivery of this Agreement, it being understood that the first priority of NPB and KNBT is to prepare and submit all Applications related to the Merger. Without limiting the foregoing, as soon as reasonably practicable after the date of this Agreement (taking into account the priority of the Merger Applications) (a) NPB shall (i) cause the Board of Directors of NPBank to approve the Bank Merger Agreement, (ii) cause NPBank to execute and deliver the Bank Merger Agreement and (iii) approve the Bank Merger Agreement in its capacity as the sole shareholder of NPBank, and (b) KNBT shall (i) cause the Board of

Directors of KNBT Bank to approve the Bank Merger Agreement, (ii) cause KNBT Bank to execute and deliver the Bank Merger Agreement and (iii) approve the Bank Merger Agreement in its capacity as the sole shareholder of KNBT Bank. The Bank Merger Agreement shall contain terms that are normal and customary in light of the transactions contemplated hereby and such additional terms as are necessary to carry out the purposes of this Agreement.

ARTICLE II

CONSIDERATION AND EXCHANGE PROCEDURES

2.01 NPB Common Stock .

(a) Outstanding Shares . Each share of NPB Common Stock issued and outstanding immediately prior to the Effective Date shall, on and after the Effective Date, continue to be issued and outstanding as an identical share of NPB Common Stock.

(b) Treasury Stock . Each share of NPB Common Stock issued and held in the treasury of NPB immediately prior to the Effective Date, if any, shall, on and after the Effective Date, continue to be issued and held in the treasury of NPB.

2.02 Conversion of KNBT Common Stock . Subject to Sections 2.03 and 2.04 below with respect to treasury stock and fractional shares, each share of KNBT Common Stock issued and outstanding immediately prior to the Effective Date, shall, on the Effective Date, automatically by reason of the Merger and without any action on the part of the holder thereof, cease to be outstanding and be converted into the right to receive 1.00 share of NPB Common Stock, which shall be increased to 1.03 shares of NPB Common Stock on the effective date of the NPB Stock Dividend (as so adjusted and as may be further adjusted pursuant to Section 2.07, the “Exchange Ratio”). The consideration provided for in this Section 2.02 and in Section 2.04 is referred to herein as the “Merger Consideration.”

2.03 Treasury Stock and Stock Owned by KNBT . Notwithstanding anything in this Agreement to the contrary, each share of KNBT Common Stock which is either issued and held in the treasury of KNBT or issued and held by KNBT or its Subsidiaries (other than shares held in an agency or fiduciary capacity or as a result of debts previously contracted) as of the Effective Date, if any, shall be cancelled, and no cash, stock or other property shall be delivered in exchange therefor.

2.04 No Fractional Shares . Notwithstanding any other provision of this Agreement to the contrary, neither certificates nor scrip for fractional shares of NPB Common Stock shall be issued in the Merger. Each holder of KNBT Common Stock who otherwise would have been entitled to a fraction of a share of NPB Common Stock shall receive in lieu thereof cash (without interest) in an amount determined by multiplying the fractional share interest to which such holder would otherwise be entitled (after taking into account all shares of KNBT Common Stock owned by such holder at the Effective Time) by the average closing price of a share of NPB Common Stock on Nasdaq for the 10 full trading days prior to the Effective Date. No such

holder shall be entitled to dividends, voting rights or any other rights in respect of any fractional share.

2.05 Stock Options .

(a) At the Effective Time, each KNBT Stock Option which is outstanding and unexercised immediately prior to the Effective Time, whether or not then vested and exercisable, shall cease to represent a right to acquire shares of KNBT Common Stock and shall be converted automatically into an option to purchase shares of NPB Common Stock, and NPB shall assume each KNBT Stock Option, in accordance with the terms of the applicable KNBT Stock Plan and stock option or other agreement by which it is evidenced, except that from and after the Effective Time, (i) NPB and the Human Resources Committee of the NPB Board shall be substituted for KNBT and the committee of the KNBT Board (including, if applicable, the entire KNBT Board) administering such KNBT Stock Option Plan, (ii) each KNBT Stock Option assumed by NPB may be exercised solely for shares of NPB Common Stock, (iii) the number of shares of NPB Common Stock subject to such KNBT Stock Option shall be equal to the number of shares of KNBT Common Stock subject to such KNBT Stock Option immediately prior to the Effective Time multiplied by the Exchange Ratio, provided that any fractional shares of NPB Common Stock resulting from such multiplication shall be rounded down to the nearest share, (iv) the per share exercise price under each such KNBT Stock Option shall be adjusted by dividing the per share exercise price under each such KNBT Stock Option by the Exchange Ratio, provided that such exercise price shall be rounded up to the nearest cent, and (v) all outstanding KNBT Options shall become fully vested and exercisable at the Effective Time notwithstanding anything to the contrary in the applicable KNBT Stock Plan or stock option or other agreement by which a KNBT Stock Option is evidenced. Notwithstanding clauses (iii) and (iv) of the preceding sentence, each KNBT Stock Option which is an “incentive stock option” shall be adjusted as required by Sections 409A and 424 of the Code, and the regulations promulgated thereunder, so as not to constitute a modification, extension or renewal of the option within the meaning of Sections 409A and 424(h) of the Code. NPB and KNBT agree to take all necessary steps to effect the foregoing provisions of this Section 2.05 (a), including in the case of NPB taking all corporate action necessary to reserve for issuance a sufficient number of shares of NPB Common Stock for delivery upon exercise of the options to issue shares of NPB Common Stock issued in accordance herewith.

(b) As soon as practicable after the Effective Date, but in no event later than ten (10) Business Days after the Effective Date, NPB shall file a registration statement on Form S-3 or Form S-8, as the case may be (or any successor or other appropriate forms), with respect to the shares of NPB Common Stock subject to the options referred to in paragraph (a) of this Section 2.05 and shall use its reasonable efforts to maintain the current status of the prospectus or prospectuses contained therein for so long as such options remain outstanding in the case of a Form S-8 or, in the case of a Form S-3, until the shares subject to such options may be sold without a further holding period under Rule 144 under the Securities Act.

(c) As soon as practicable after the Effective Date, but in no event later than twenty (20) Business Days after the Effective Date, NPB shall deliver to the holders of KNBT Options at the Effective Time appropriate notices setting forth the effect of the adjustments described in Section

2.05(a) and advising of the registration of the shares of NPB Common Stock issuable upon exercise thereof after consummation of the Merger.

(d) With respect to those individuals who, subsequent to the Merger, will be subject to the reporting requirements under Section 16(a) of the Exchange Act, where applicable, NPB shall administer the KNBT Stock Plans in a manner consistent with the exemptions provided by Rule 16b-3 promulgated under the Exchange Act.

2.06 Surrender and Exchange of KNBT Stock Certificates .

(a) On or prior to the Effective Date, for the benefit of the holders of certificates representing shares of KNBT Common Stock (each, a “KNBT Certificate”), NPB shall (i) provide the Exchange Agent with a letter of instruction, in such form as the Exchange Agent may reasonably require, directing the Exchange Agent to issue a number of shares of NPB Common Stock which comprise the Merger Consideration pursuant to Section 2.02 in the form of book-entry shares to holders of shares of KNBT Common Stock and (ii) deliver to the Exchange Agent an estimated amount of cash sufficient to make all payments pursuant to Section 2.04, in exchange for KNBT Certificates in accordance with this Section 2.06. The Exchange Agent shall not be entitled to vote or exercise any rights of ownership with respect to the shares of NPB Common Stock held by it from time to time hereunder, except that it shall receive and hold all dividends or other distributions paid or distributed with respect to such shares for the account of the person entitled thereto.

(b) As soon as reasonably practicable after the Effective Date, but in any event not later than ten (10) Business Days after KNBT delivers or causes to be delivered a final stock register of the KNBT shareholders, NPB shall cause the Exchange Agent to mail to each holder of one or more KNBT Certificates:

(i) a letter of transmittal which shall specify that delivery shall be effected, and risk of loss and title to the KNBT Certificates shall pass, only upon delivery of the KNBT Certificates to the Exchange Agent, and which letter shall be in customary form and have such other provisions as NPB reasonably may specify; and

(ii) instructions for effecting the surrender of such KNBT Certificates in exchange for the Merger Consideration payable for the shares represented thereby.

Upon surrender of a KNBT Certificate to the Exchange Agent together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, and such other documents as reasonably may be required by the Exchange Agent, the holder of such KNBT Certificate shall be entitled to receive in exchange therefor (i) a statement evidencing book-entry shares representing, in the aggregate the number of whole shares of NPB Common Stock that such holder has the right to receive pursuant to Section 2.02 (after taking into account all shares of KNBT Common Stock held by such at the Effective Time), and (ii) a check representing the amount of cash, if any, payable in lieu of a fractional share of KNBT Common Stock under Section 2.04, and the KNBT Certificate so surrendered shall forthwith be cancelled. Following the issuance of shares of NPB Common Stock in book-entry form pursuant to this

Agreement, each recipient of such shares will receive a Direct Registration System Stock Distribution Statement from NPB’s transfer agent evidencing the credit of shares of NPB Common Stock to an account for such shareholder and containing instructions on how a shareholder may, if desired, request a physical certificate for shares of NPB Common Stock.

(c) Any statement evidencing book-entry shares issued in exchange for KNBT Certificates pursuant to Section 2.06(a) above shall be dated the Effective Date and any holder shall be entitled to dividends and all other rights and privileges pertaining to such shares of stock from the Effective Date. Until surrendered, each KNBT Certificate shall, from and after the Effective Time, evidence solely the right to receive the Merger Consideration.

(d) If a KNBT Certificate is exchanged on a date following one or more record dates after the Effective Date for the payment of dividends or any other distribution on shares of NPB Common Stock, NPB shall pay to such shareholder cash in an amount equal to dividends payable on such shares of NPB Common Stock received in exchange for KNBT Certificates and pay or deliver any other distribution to which such shareholder is entitled. No interest shall accrue or be payable in respect of dividends or any other distribution otherwise payable under this Section 2.06(d) upon surrender of KNBT Certificates. Notwithstanding the foregoing, no party hereto shall be liable to any holder of KNBT Common Stock for any amount paid in good faith to a public official or agency pursuant to any applicable abandoned property, escheat or similar law. Until such time as KNBT Certificates are surrendered to NPB for exchange, NPB shall have the right to withhold dividends or any other distributions on the shares of NPB Common Stock issuable to such shareholder.

(e) Upon the Effective Date, the stock transfer books for KNBT Common Stock will be closed and no further transfers of KNBT Common Stock will thereafter be made or recognized. All KNBT Certificates surrendered pursuant to this Section 2.06 will be cancelled and exchanged for the Merger Consideration as provided herein.

(f) If there is a transfer of ownership of KNBT Common Stock which is not registered in the transfer records of KNBT, a statement of book-entry shares evidencing, in the aggregate, the proper number of shares of NPB Common Stock and any cash in lieu of a fractional share payment to Section 2.04 and dividends or other distributions to which such holder is entitled pursuant to Section 2.06(c), as applicable, may be issued with respect to such KNBT Common Stock to such a transferee if the KNBT Certificate representing such shares of KNBT Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid or are not payable.

(g) If any KNBT Certificate shall have been lost, stolen or destroyed, the Exchange Agent shall deliver in exchange for such lost, stolen or destroyed KNBT Certificate, upon the making of a sworn affidavit of that fact by the holder thereof in form satisfactory to the Exchange Agent, the Merger Consideration required pursuant to this Agreement; provided, however, that the Exchange Agent may, in its sole discretion and as a condition precedent to the delivery of the Merger Consideration to which the holder of such KNBT Certificate is entitled as a result of the Merger, require the owner of such lost, stolen or destroyed KNBT Certificate to

deliver a bond in such amount as it may direct as indemnity against any claim that may be made against KNBT, NPB or the Exchange Agent or any other party with respect to the KNBT Certificate alleged to have been lost, stolen or destroyed.

2.07 Anti-Dilution Provisions . If, in addition to the NPB Stock Dividend, NPB shall, at any time before the Effective Date:

(a) declare a dividend in shares of NPB Common Stock with a record date prior to the Effective Date;

(b) resolve to combine the outstanding shares of NPB Common Stock into a smaller number of shares prior to the Effective Date;

(c) resolve to effect a split or subdivide the outstanding shares of NPB Common Stock with a record date prior to the Effective Date; or

(d) reclassify the shares of NPB Common Stock prior to the Effective Date;

then, in any such event, the number of shares of NPB Common Stock to be delivered to KNBT shareholders in exchange for shares of KNBT Common Stock shall be adjusted so that each KNBT shareholder shall be entitled to receive such number of shares of NPB Common Stock as such shareholder would have been entitled to receive if the Effective Date had occurred prior to the happening of such event. (By way of illustration, if NPB shall declare a stock dividend of 3% payable with respect to a record date on or prior to the Effective Date, the Exchange Ratio shall be adjusted upward by 3%.). In addition, in the event that, prior to the Effective Date, NPB enters into an agreement pursuant to which shares of NPB Common Stock would be converted into shares or other securities or obligations of another corporation, proper provision shall be made in such agreement so that each KNBT shareholder who becomes a shareholder of NPB shall be entitled to receive such number of shares or other securities or amount or obligations of such other corporation as such shareholder would be entitled to receive if the Effective Date had occurred immediately prior to the happening of such event. Furthermore, the number of shares of NPB Common Stock subject to each KNBT Option referenced in Section 2.05(a) and the applicable exercise price shall be appropriately adjusted.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF KNBT

KNBT hereby represents and warrants to NPB as follows:

3.01 Organization .

(a) KNBT is a corporation duly incorporated and validly subsisting under the laws of the Commonwealth of Pennsylvania. KNBT is a bank holding company duly registered under the BHC Act. KNBT has the corporate power and authority to carry on its businesses and operations

as now being conducted and to own and operate the properties and assets now owned and being operated by it. KNBT is duly licensed, registered or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing, registration or qualification necessary, except where the failure to be so licensed, registered or qualified would not have a Material Adverse Effect on KNBT, and all such licenses, registrations and qualifications are in full force and effect in all material respects.

(b) KNBT Bank is a stock savings bank duly organized and validly existing under the laws of the Commonwealth of Pennsylvania. KNBT Bank has the corporate power and authority to carry on its business and operations as now being conducted and to own and operate the properties and assets now owned and being operated by it. KNBT Bank is duly licensed, registered or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing, registration or qualification necessary, except where the failure to be so licensed, registered or qualified would not have a Material Adverse Effect on KNBT, and all such licenses, registrations and qualifications are in full force and effect in all material respects.

(c) The deposits of KNBT Bank are insured by the Deposit Insurance Fund of the FDIC to the extent provided in the Federal Deposit Insurance Act.

(d) KNBT has no Subsidiaries other than KNBT Bank and those identified in KNBT Disclosure Schedule 3.01(d). KNBT Disclosure Schedule 3.01(d) sets forth the type of organization, the state of formation, the owner of its outstanding equity interests and a brief description of the business conducted by each Subsidiary. Each KNBT Subsidiary, other than KNBT Bank (which is covered by Section 3.01(b) above), is duly formed, validly existing and in good standing under the laws of the jurisdiction of its formation. Each such Subsidiary has the corporate or trust power and authority to carry on its businesses and operations as now being conducted and to own and operate the properties and assets now owned and being operated by it. Each such Subsidiary is duly licensed, registered or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing, registration or qualification necessary, except where the failure to be so licensed, registered or qualified would not have a Material Adverse Effect on KNBT, and all such licenses, registrations and qualifications are in full force and effect in all material respects.

(e) The respective minute books of KNBT and each KNBT Subsidiary accurately record, in all material respects, all material corporate actions of their respective shareholders, boards of directors and trustees, including committees, in each case in accordance with normal business practice of KNBT and the KNBT Subsidiary.

(f) KNBT has delivered to NPB true and correct copies of the articles of incorporation and bylaws of KNBT and KNBT Bank, and the articles of incorporation, bylaws, trust agreements and other applicable charter documents of each other KNBT Subsidiary, each as in effect on the date hereof.

3.02 Capitalization .

(a) The authorized capital stock of KNBT consists of (i) 100,000,000 shares of common stock, par value $.01 per share (“KNBT Common Stock”), of which at the date hereof 26,526,407 shares are validly issued and outstanding, fully paid and nonassessable, and free of preemptive rights, and 7,443,739 are held as treasury shares and (ii) 20,000,000 shares of preferred stock, par value $.01 per share, of which at the date hereof, no shares are issued and outstanding. KNBT has not issued nor is KNBT bound by any subscription, option, warrant, call, commitment, agreement or other Right of any character relating to the purchase, sale, or issuance of, or right to receive dividends or other distributions on, any shares of KNBT Common Stock or any other security of KNBT or any securities representing the right to vote, purchase or otherwise receive any shares of KNBT Common Stock or any other security of KNBT, except (i) for KNBT Options for 2,135,246 shares of KNBT Common Stock issued and outstanding under the KNBT Stock Option Plan and (ii) this Agreement.

(b) KNBT owns, directly or indirectly, all of the capital stock of KNBT Bank and the other KNBT Subsidiaries, free and clear of any liens, security interests, pledges, charges, encumbrances, agreements and restrictions of any kind or nature. There are no subscriptions, options, warrants, calls, commitments, agreements or other Rights outstanding with respect to the capital stock of KNBT Bank or any other KNBT Subsidiary. Except for KNBT Bank and the other KNBT Subsidiaries listed on KNBT Disclosure Schedule 3.01(d), KNBT does not possess, directly or indirectly, any material equity interest in any corporation, except for (i) equity interests in KNBT Bank's investment portfolio, (ii) equity interests held by KNBT’s Subsidiaries in a fiduciary capacity, (iii) equity interests held in connection with KNBT Bank's commercial loan activities and (iv) as set forth on KNBT Disclosure Schedule 3.02(b).

(c) To the Knowledge of KNBT, except as set forth on KNBT Disclosure Schedule 3.02(c) or as disclosed in KNBT’s proxy materials for its 2007 annual meeting of shareholders, no person or group is the beneficial owner of 5% or more of the outstanding shares of KNBT Common Stock (the terms “person”, “group” and “beneficial owner” are as defined in Section 13(d) of the Exchange Act, and the rules and regulations thereunder).

3.03 Authority; No Violation .

(a) KNBT has full corporate power and authority to execute and deliver this Agreement and, except for the receipt of the approval of this Agreement by the shareholders of KNBT, to consummate the Contemplated Transactions. The execution and delivery of this Agreement by KNBT and the consummation by KNBT of the Contemplated Transactions have been duly and validly approved by the unanimous vote of the Board of Directors of KNBT and, except for approval by the shareholders of KNBT as required by the BCL, no other corporate proceedings on the part of KNBT are necessary to consummate the Merger. The affirmative vote of a majority of the votes cast by the holders of the KNBT Common Stock at the KNBT Shareholders Meeting is sufficient to adopt this Agreement. This Agreement has been duly and validly executed and delivered by KNBT and constitutes the valid and binding obligation of KNBT, enforceable against KNBT in accordance with its terms, subject to applicable

bankruptcy, insolvency and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity.

(b) None of (i) the execution and delivery of this Agreement by KNBT, subject to receipt of approvals from the KNBT shareholders and the Regulatory Authorities referred to in Section 4.04 hereof and KNBT's and NPB's compliance with any conditions contained therein, the consummation of the Merger, and (ii) compliance by KNBT or any KNBT Subsidiary with any of the terms or provisions hereof:

(A) conflict with or result in a breach of any provision of the respective articles of incorporation, bylaws or other charter document of KNBT or any KNBT Subsidiary;

(B) violate any statute, rule, regulation, judgment, order, writ, decree or injunction applicable to KNBT or any KNBT Subsidiary or any of their respective properties or assets; or

(C) except as described in KNBT Disclosure Schedule 3.03, violate, conflict with, result in a breach of any provisions of, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, or acceleration of, the performance required by, or result in a right of termination or acceleration or the creation of any lien, security interest, charge or other encumbrance upon any of the properties or assets of KNBT or any KNBT Subsidiary under any of the terms or conditions of any note, bond, mortgage, indenture, license, lease, agreement, commitment or other instrument or obligation to which KNBT or any KNBT Subsidiary is a party, or by which they or any of their respective properties or assets may be bound or affected,

excluding from clauses (B) and (C) hereof, such conflicts, violations, breaches, defaults or other events which, individually or in the aggregate, would not have a Material Adverse Effect on KNBT.

3.04 Consents and Approvals .

(a) Except for (i) the required adoption of this Agreement by the shareholders of NPB, (ii) the required adoption of this Agreement by the shareholders of KNBT, (iii) the filing of a notice by NPB of the issuance of shares of NPB Common Stock pursuant to this Agreement with Nasdaq, (iv) the filing of applications and notices, as applicable, with the FRB under the BHC Act and the OCC under the National Bank Act and approval of such applications and notices; (v) the filing with the SEC in definitive form of the Prospectus/Proxy Statement, and the filing with, and declaration of effectiveness by, the SEC of the Registration Statement, (vi) the filing of the Articles of Merger with the PDS in accordance with the BCL, (vii) any notices or filings under the HSR Act, (viii) any application, notice or filing with the Pennsylvania Department of Banking, (ix) a post-Bank Merger notice to the FDIC to be filed by NPBank, (x) the consents and approvals set forth in Section 3.04 of the KNBT Disclosure Schedule and (xi) the consents and approvals of third parties which are not Regulatory Authorities, the failure of which to be obtained will not have and would not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect on KNBT, no consents or approvals of, or filings or

registrations with, any Regulatory Authority or with any other third party are necessary in connection with (A) the execution, delivery and performance by KNBT of this Agreement and (B) the consummation by KNBT of the Merger and KNBT Bank of the Bank Merger.

(b) As of the date of this Agreement, KNBT knows of no reason relating to it why all regulatory approvals from any Regulatory Authority required to consummate the transactions contemplated hereby should not be obtained on a timely basis without the imposition of a condition or restriction of the type referred to in Sections 6.01(d) and Section 6.02(d).

3.05 Financial Statements .

(a) KNBT has delivered to NPB the KNBT Financials, except those pertaining to quarterly periods commencing after June 30, 2007. The KNBT Financials fairly present, in all material respects, the consolidated financial position, results of operations and cash flows of KNBT as of and for the periods ended on the dates thereof, in accordance with GAAP consistently applied, except in each case as may be noted therein, and subject to normal year-end audit adjustments and as permitted by Form 10-Q in the case of unaudited statements.

(b) To the Knowledge of KNBT, KNBT did not, as of the date of the balance sheets referred to above, have any liabilities or obligations of any nature, whether absolute, accrued, contingent or otherwise, which are not fully reflected or reserved against in the balance sheets included in the KNBT Financials at the date of such balance sheets which would have been required to be reflected therein in accordance with GAAP consistently applied or disclosed in a footnote thereto. Since June 30, 2007, KNBT has not incurred any liabilities or obligations of any nature, whether absolute, accrued, contingent or otherwise, except for liabilities and obligations which were incurred in the ordinary course of business consistent with past practice, and except for liabilities and obligations which are within the subject matter of a specific representation and warranty herein or which otherwise have not had a Material Adverse Effect.

3.06 No Material Adverse Change . Neither KNBT nor any KNBT Subsidiary has suffered any adverse change in their respective assets, business, financial condition or results of operations since June 30, 2007 which has had a Material Adverse Effect on KNBT.

3.07 Taxes .

(a) KNBT and the KNBT Subsidiaries are members of the same affiliated group within the meaning of IRC Section 1504(a) of which KNBT is a common parent. KNBT has filed, and will file, all material federal, state and local tax returns required to be filed by, or with respect to, KNBT and the KNBT Subsidiaries on or prior to the Closing Date, except to the extent that any failure to file or any inaccuracies would not, individually or in the aggregate, have a Material Adverse Effect, and has paid or will pay, or made or will make, provisions for the payment of all federal, state and local taxes which are shown on such returns to be due for the periods covered thereby from KNBT or any KNBT Subsidiary to any applicable taxing authority, on or prior to the Closing Date, other than taxes which (i) are not delinquent or are being contested in good faith, (ii) have not been finally determined, or (iii) the failure to pay would not, individually or in the aggregate, have a Material Adverse Effect on KNBT. Such returns or reports are true, complete

and correct in all material respects. KNBT and the KNBT Subsidiaries have paid all taxes and other governmental charges including all applicable interest and penalties set forth in such returns or reports.

(b) There are no liens on the assets of KNBT and the KNBT Subsidiaries relating to or attributable to any taxes (other than taxes not yet due and payable). All federal, state and local taxes and other governmental charges payable by KNBT and the KNBT Subsidiaries have been paid or have been adequately accrued or reserved for on such entity’s books in accordance with GAAP and banking regulations applied on a consistent basis, except where failure to pay or accrue would not have a Material Adverse Effect on KNBT. Until the Effective Date, KNBT and the KNBT Subsidiaries shall continue to reserve sufficient funds for the payment of expected tax liabilities in accordance with GAAP and banking regulations applied on a consistent basis.

(c) To the Knowledge of KNBT, there are no material disputes pending, or claims asserted in writing, for taxes or assessments upon KNBT or any KNBT Subsidiary, nor has KNBT or any KNBT Subsidiary been requested in writing to give any currently effective waivers extending the statutory period of limitation applicable to any federal, state, county or local income tax return for any period.

(d) KNBT and the KNBT Subsidiaries have withheld and paid all taxes required to have been withheld and paid in connection with any amounts paid or owing to any employee, except where failure to withhold or to pay such withholding would not have a Material Adverse Effect.

(e) Neither KNBT nor the KNBT Subsidiaries have constituted a “distributing corporation” or a “controlled corporation” in a distribution of stock qualifying for tax-free treatment under Section 355 of the Code (i) in the two years prior to the date of this Agreement or (ii) in a distribution which could otherwise constitute part of a “plan” or “series of related transactions” (within the meaning of Section 355(e) of the Code) that includes the Merger.

3.08 Contracts .

(a) Except as described in KNBT Disclosure Schedule 3.08(a) or KNBT Disclosure Schedule 3.12, neither KNBT nor any KNBT Subsidiary is a party to or subject to:

(i) any employment, consulting, severance, “change-in-control” or termination contract or arrangement with any officer, director, employee, independent contractor, agent or other person, except for “at will” arrangements;

(ii) any plan, arrangement or contract providing for bonuses, pensions, options, deferred compensation, retirement payments, profit sharing or similar arrangements for or with any officer, director, employee, independent contractor, agent or other person;

(iii) any collective bargaining agreement with any labor union relating to employees;

(iv) any agreement which by its terms limits the payment of dividends by KNBT or any KNBT Subsidiary other than generally applicable regulatory restrictions;

(v) except in the ordinary course of business, any material instrument evidencing or related to indebtedness for borrowed money, whether directly or indirectly, by way of purchase money obligation, conditional sale, lease purchase, guaranty or otherwise, in respect of which KNBT or any KNBT Subsidiary is an obligor to any person, other than deposits, repurchase agreements, bankers acceptances and “treasury tax and loan” accounts established in the ordinary course of business, instruments relating to transactions entered into in the customary course of the banking business of KNBT Bank, and transactions in “federal funds”, or which contains financial covenants or other restrictions, other than those relating to the payment of principal and interest when due, which would be applicable on or after the Closing Date;

(vi) any contract, other than this Agreement, which restricts or prohibits it from engaging in any type of business permissible under applicable law;

(vii) any contract, plan or arrangement which provides for payments or benefits in certain circumstances which, together with other payments or benefits payable to any participant therein or party thereto, might render any portion of any such payments or benefits subject to disallowance of deduction therefor as a result of the application of Section 280G of the IRC;

(viii) except in the ordinary course of business, any lease for real property;

(ix) any contract or arrangement with any broker-dealer or investment adviser;

(x) any investment advisory contract with any investment company registered under the Investment Company Act of 1940; or

(xi) any contract or arrangement with, or membership in, any local clearing house or self-regulatory organization.

(b) All the contracts, plans, arrangements and instruments listed in KNBT Disclosure Schedule 3.08(a) or KNBT Disclosure Schedule 3.12 are in full force and effect on the date hereof, and neither KNBT, any KNBT Subsidiary nor, to the Knowledge of KNBT, any other party to any such contract, plan, arrangement or instrument, has breached any provision of, or is in default under any term of, any such contract, plan, arrangement or instrument the breach of which or default under which will have a Material Adverse Effect, and, except as described in KNBT Disclosure Schedule 3.08(b) no party to any such contract, plan, arrangement or instrument will have the right to terminate any or all of the provisions thereof as a result of the transactions contemplated by this Agreement, the termination of which will have a Material Adverse Effect on KNBT.

(c) Except as otherwise described in KNBT Disclosure Schedule 3.08(a) or KNBT Disclosure Schedule 3.12, no plan, employment agreement, termination agreement or similar agreement or arrangement to which KNBT or any KNBT Subsidiary is a party or by which KNBT or any KNBT Subsidiary may be bound:

(i) contains provisions which permit an employee or an independent contractor to terminate it without cause and continue to accrue future benefits thereunder;

(ii) provides for acceleration in the vesting of benefits thereunder upon the occurrence of a change in ownership or control or merger or other acquisition of KNBT or any KNBT Subsidiary; or

(iii) requires KNBT or any KNBT Subsidiary to provide a benefit in the form of KNBT Common Stock or determined by reference to the value of KNBT Common Stock.

3.09 Ownership of Property; Insurance Coverage .

(a) KNBT and each KNBT Subsidiary has, and will have as to property acquired after the date hereof, good, and as to real property, marketable, title to all material assets and properties owned by KNBT or such KNBT Subsidiary, whether real or personal, tangible or intangible, including securities, assets and properties reflected in the balance sheets contained in the KNBT Financials or acquired subsequent thereto (except to the extent that such securities are held in any fiduciary or agency capacity and except to the extent that such assets and properties have been disposed of for fair value, in the ordinary course of business, or have been disposed of as obsolete since the date of such balance sheets), subject to no encumbrances, liens, mortgages, security interests or pledges, except:

(i) those items that secure liabilities for borrowed money and that are described in KNBT Disclosure Schedule 3.09(a)(i) or permitted under Article V hereof;

(ii) statutory liens for amounts not yet delinquent or which are being contested in good faith;

(iii) liens for current taxes not yet due and payable except as described in KNBT Disclosure Schedule 3.09(a)(iii);

(iv) pledges to secure deposits and other liens incurred in the ordinary course of banking business;

(v) such imperfections of title, easements and encumbrances, if any, as are not material in character, amount or extent; and

(vi) dispositions and encumbrances for adequate consideration in the ordinary course of business.

KNBT and each KNBT Subsidiary have the right under leases of material properties used by KNBT or such KNBT Subsidiary in the conduct of their respective businesses to occupy and use all such properties in all material respects as presently occupied and used by them.

(b) With respect to all agreements pursuant to which KNBT or any KNBT Subsidiary has purchased securities subject to an agreement to resell, if any, KNBT or such KNBT Subsidiary

has a valid, perfected first lien or security interest in the securities or other collateral securing the repurchase agreement, and the value of such collateral equals or exceeds the amount of the debt secured thereby, except to the extent that any failure to obtain such a lien or maintain such collateral would not, individually or in the aggregate, have a Material Adverse Effect on KNBT.

(c) KNBT and each KNBT Subsidiary maintain insurance in amounts considered by KNBT to be reasonable for their respective operations, and such insurance is similar in scope and coverage in all material respects to that maintained by other businesses similarly situated. Neither KNBT nor any KNBT Subsidiary has received notice from any insurance carrier that:

(i) such insurance will be cancelled or that coverage thereunder will be reduced or eliminated; or

(ii) premium costs with respect to such insurance will be substantially increased;

except to the extent such cancellation, reduction, elimination or increase would not have a Material Adverse Effect.

(d) KNBT and each KNBT Subsidiary maintain such fidelity bonds and errors and omissions insurance as may be customary or required under applicable laws or regulations.

3.10 Legal Proceedings . Except as set forth on KNBT Disclosure Schedule 3.10, neither KNBT nor any KNBT Subsidiary is a party to any, and there are no pending or, to the Knowledge of KNBT, threatened, legal, administrative, arbitration or other proceedings, claims, actions, customer complaints, governmental investigations or regulatory inquiries of any nature:

(a) against KNBT or any KNBT Subsidiary;

(b) to which the assets of KNBT or any KNBT Subsidiary are subject;

(d) which could materially adversely affect the ability of KNBT to perform its obligations under this Agreement or the ability of KNBT or KNBT Bank to consummate the Bank Merger;

except for any proceedings, claims, actions, customer complaints, investigations, or inquiries referred to in clauses (a) or (b) which, individually or in the aggregate, would not have a Material Adverse Effect on KNBT.

3.11 Compliance with Applicable Law .

(a) KNBT and each KNBT Subsidiary hold all licenses, franchises, permits and authorizations necessary for the lawful conduct of their respective businesses under, and have complied in all material respects with, applicable laws, statutes, orders, rules or regulations of any Regulatory Authority relating to them, other than where such failure to hold or such noncompliance

will neither result in a limitation in any material respect on the conduct of its businesses nor otherwise have a Material Adverse Effect on KNBT.

(b) KNBT and each KNBT Subsidiary have filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that they were required to file with any Regulatory Authority, and have filed all other reports and statements required to be filed by them, including without limitation any report or statement required to be filed pursuant to the laws, rules or regulations of the United States, any state or any Regulatory Authority, and have paid all fees and assessments due and payable in connection therewith, except where the failure to file such report, registration or statement or to pay such fees and assessments, either individually or in the aggregate, would not have a Material Adverse Effect on KNBT.

(c) No Regulatory Authority has initiated any proceeding or, to the Knowledge of KNBT, investigation into the business or operations of KNBT or any KNBT Subsidiary, except where any such proceedings or investigations will not, individually or in the aggregate, have a Material Adverse Effect on KNBT, or such proceedings or investigations have been terminated or otherwise resolved.

(d) Neither KNBT nor any KNBT Subsidiary has received any notification or communication from any Regulatory Authority:

(i) asserting that KNBT or any KNBT Subsidiary is not in substantial compliance with any of the statutes, regulations or ordinances which such Regulatory Authority enforces, unless such assertion has been waived, withdrawn or otherwise resolved;

(ii) threatening to revoke any license, franchise, permit or governmental authorization which is material to KNBT or any KNBT Subsidiary;

(iii) requiring or threatening to require KNBT or any KNBT Subsidiary, or indicating that KNBT or any KNBT Subsidiary may be required, to enter into a cease and desist order, agreement or memorandum of understanding or any other agreement restricting or limiting, or purporting to restrict or limit, in any manner the operations of KNBT or any KNBT Subsidiary, including without limitation any restriction on the payment of dividends; or

(iv) directing, restricting or limiting, or purporting to direct, restrict or limit, in any manner the operations of KNBT or any KNBT Subsidiary (any such notice, communication, memorandum, agreement or order described in this sentence herein referred to as a “Regulatory Agreement”);

in each case except as set forth in KNBT Disclosure Schedule 3.11(d).

(e) Neither KNBT nor any KNBT Subsidiary has received, consented to, or entered into any Regulatory Agreement, except as heretofore disclosed to NPB.

(f) To the Knowledge of KNBT, except as heretofore disclosed to NPB, there is no unresolved violation, criticism, or exception by any Regulatory Authority with respect to any

Regulatory Agreement which if resolved in a manner adverse to KNBT or any KNBT Subsidiary would have a Material Adverse Effect on KNBT.

(g) There is no injunction, order, judgment or decree imposed upon KNBT or any KNBT Subsidiary or the assets of KNBT or any KNBT Subsidiary which has had, or, to the Knowledge of KNBT, would have, a Material Adverse Effect on KNBT.

3.12 ERISA .

(a) KNBT has delivered to NPB true and complete copies of (or written summaries describing) any written or unwritten employee pension benefit plans within the meaning of ERISA Section 3(2), profit sharing plans, stock purchase plans, deferred compensation and supplemental income plans, supplemental executive retirement plans, annual incentive plans, group insurance plans, and all other employee welfare benefit plans within the meaning of ERISA Section 3(1) (including vacation pay, sick leave, short-term disability, long-term disability, and medical plans) and all other material employee benefit plans, policies, agreements and arrangements, all of which are set forth in KNBT Disclosure Schedule 3.12, currently maintained or contributed to (or maintained or contributed to in any of the past six calendar years) for the benefit of the employees or former employees (including retired employees) and any beneficiaries thereof or directors or former directors of KNBT or any other entity (a “KNBT ERISA Affiliate”) that, together with KNBT, is treated as a single employer under IRC Sections 414(b),(c),(m) or (o) (collectively, the “KNBT Benefit Plans”), together with:

(i) the most recent actuarial (if any) and financial reports relating to those KNBT Benefit Plans which constitute “qualified plans” under IRC Section 401(a);

(ii) the most recent Form 5500 (if any) relating to such KNBT Benefit Plans filed with the IRS;

(iii) the most recent IRS determination letters which pertain to any such KNBT Benefit Plans; and

(iv) any and all written communications since January 1, 2004 between KNBT or a KNBT ERISA Affiliate and any governmental authority, including, without limitation, the IRS, U.S. Department of Labor, the Pension Benefit Guaranty Corporation or the Securities Exchange Commission, regarding any of the tax-qualified KNBT Benefit Plans.

(b) Neither KNBT nor any KNBT ERISA Affiliate, and no pension plan (within the meaning of ERISA Section 3(2)) maintained or contributed to by KNBT or any KNBT ERISA Affiliate, has incurred any liability to the Pension Benefit Guaranty Corporation or to the IRS with respect to any pension plan qualified under IRC Section 401(a), except liabilities to the Pension Benefit Guaranty Corporation pursuant to ERISA Section 4007, all of which have been fully paid, nor has any reportable event under ERISA Section 4043(b) (with respect to which the 30 day notice requirement has not been waived) occurred with respect to any such pension plan.

(c) Neither KNBT nor any KNBT ERISA Affiliate has ever contributed to or otherwise incurred any liability with respect to a multiemployer plan (within the meaning of ERISA Section 3(37)). Except as set forth on KNBT Disclosure Schedule 3.12(c), with respect to each KNBT Benefit Plan that is subject to Section 302 of ERISA, Section 412 of the IRC or Title IV of ERISA, including, without limitation, any plan to which the employees of employers that are not KNBT ERISA Affiliates also participate, (i) none of KNBT or any KNBT Subsidiary, or any KNBT ERISA Affiliate, has received any notification nor has any actual knowledge that if KNBT or any KNBT Subsidiary or any KNBT ERISA Affiliate were to cease to contribute to such plan or terminate participation in such plan, it would incur liability that would be reasonably likely to have a Material Adverse Effect on KNBT; and (ii) there have been no accumulated funding deficiencies (as defined in Section 412 of the Code or Section 302 of ERISA) and no request for a waiver from the IRS with respect to any minimum funding requirement under Section 412 of the Code.

(d) Each KNBT Benefit Plan has been maintained, operated and administered in compliance in all respects with its terms and related documents or agreements and the applicable provisions of all laws, including ERISA and the IRC, except where any such non-compliance would not have a Material Adverse Effect on KNBT.

(e) There is no existing, or, to the Knowledge of KNBT, contemplated, audit of any KNBT Benefit Plan by the IRS, the U.S. Department of Labor, the Pension Benefit Guaranty Corporation or any other governmental authority. In addition, there are no pending or threatened claims by, on behalf of or with respect to any KNBT Benefit Plan, or by or on behalf of any individual participant or beneficiary of any KNBT Benefit Plan, alleging any violation of ERISA or any other applicable laws, or claiming benefits (other than claims for benefits not in dispute and expected to be granted promptly in the ordinary course of business), nor to the Knowledge of KNBT, is there any basis for such claim.

(f) With respect to any services which KNBT or any KNBT Subsidiary may provide as a record-keeper, administrator, custodian, fiduciary, trustee or otherwise for any plan, program, or arrangement subject to ERISA (other than any KNBT Benefit Plan), KNBT and each KNBT Subsidiary:

(i) have correctly computed all contributions, payments or other amounts for which it is responsible;

(ii) have not engaged in any prohibited transactions (as defined in ERISA Section 406 for which an exemption does not exist);

(iii) have not breached any duty imposed by ERISA; and

(iv) have not otherwise incurred any liability to the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation, or to any beneficiary, fiduciary or sponsor of any ERISA plan in the performance (or non-performance) of services;

except where any such action or inaction would not have a Material Adverse Effect on KNBT.

(g) KNBT Disclosure Schedule 3.12(g) sets forth a schedule of all payments and benefits (including the acceleration of any rights or the continuation of any benefits) which will or may be made by KNBT, KNBT Bank or NPB with respect to any employee that will be characterized as an “excess parachute payment,” within the meaning of Section 280G(b)(1) of the IRC, based upon the assumptions set forth in such schedule.

(h) The approval of the transaction contemplated by this Agreement will not result in a breach of fiduciary duty or prohibited transaction under any KNBT Benefit Plan that is an employee stock ownership plan as defined under ERISA. Any KNBT Benefit Plan that is an “employee stock ownership plan” (as defined in Section 407(d)(6) of ERISA and IRC Section 4975(e)(7)) has satisfied all of the applicable requirements of IRC Sections 409 and 4975(e)(7) and the regulations thereunder in all material respects and will not fail to do so as a result of the approval of this transaction. Any assets of any such KNBT Benefit Plan that, as of the end of the plan year, are not allocated to participants’ individual accounts are pledged as security for, and may be applied to satisfy, any securities acquisition indebtedness.

(i) All persons classified by KNBT as independent contractors satisfy and to the Knowledge of KNBT, have at all times satisfied the requirements of applicable law to be so classified; KNBT has fully and accurately reported their compensation on IRS Forms 1099 when required to do so; and, except as set forth in KNBT Disclosure Schedule 3.12(i), KNBT has no obligations to provide benefits with respect to such persons under the KNBT Benefit Plans or otherwise.

3.13. State Takeover Statutes and KNBT Articles of Incorporation .. No “business combination,” “fair price,” “control transaction,” “control share acquisition,” or other similar antitakeover statute or regulation under state or federal law or provision contained in KNBT’s articles of incorporation or bylaws is applicable to the Contemplated Transactions. The Board of Directors of KNBT has unanimously approved this Agreement and, accordingly, the restrictions contained in Article IX of KNBT’s Articles of Incorporation are inapplicable to this Agreement and the transactions contemplated hereby.

3.14 Brokers and Finders . Neither KNBT, any KNBT Subsidiary, nor any of their respective officers, directors, employees, independent contractors or agents, has employed any broker, finder, investment banker or financial advisor, or incurred any liability for any fees or commissions to any such person, in connection with the transactions contemplated by this Agreement, except for Sandler O’Neill & Partners, L.P. (“Sandler”), whose engagement letter with KNBT is included in KNBT Disclosure Schedule 3.14.

3.15 Environmental Matters .

(a) Except as set forth on KNBT Disclosure Schedule 3.15, to the Knowledge of KNBT, neither KNBT nor any KNBT Subsidiary, nor any property owned or operated by KNBT or any KNBT Subsidiary, has been or is in violation of or liable under any Environmental Law, except for such violations or liabilities that, individually or in the aggregate, would not have a Material Adverse Effect. Except as set forth on KNBT Disclosure Schedule 3.15, there are no actions, suits or proceedings, or demands, claims or notices, including without limitation notices, demand letters

or requests for information from any Regulatory Authority, instituted or pending, or to the Knowledge of KNBT, threatened, or any investigation pending, relating to the liability of KNBT or any KNBT Subsidiary with respect to any property owned or operated by KNBT or any KNBT Subsidiary under any Environmental Law, except as to any such actions or other matters which would not result in a Material Adverse Effect on KNBT.

(b) Except as set forth on KNBT Disclosure Schedule 3.15, to the Knowledge of KNBT, no property, now or formerly owned or operated by KNBT or any KNBT Subsidiary or on which KNBT or any KNBT Subsidiary holds or held a mortgage or other security interest or has foreclosed or taken a deed in lieu of foreclosure, has been listed or proposed for listing on the National Priority List (“NPL”) under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (“CERCLA”), is listed on the Comprehensive Environmental Response Compensation and Liabilities Information System (“CERCLIS”), or is listed or proposed to be listed on any state list similar to the NPL or the CERCLIS, or is the subject of federal, state or local enforcement actions or other investigations which may lead to claims against KNBT or any KNBT Subsidiary for response costs, remedial work, investigation, damage to natural resources or for personal injury or property damage, including, but not limited to, claims under CERCLA, which would have a Material Adverse Effect on KNBT.

3.16 Business of KNBT . Except as described in KNBT Disclosure Schedule 3.16, since June 30, 2007, neither KNBT nor any KNBT Subsidiary has, in any material respect:

(a) increased the wages, salaries, compensation, pension or other employee benefits payable to any executive officer, employee or director, except as is permitted in Section 5.01(d) of this Agreement;

(b) eliminated employee benefits;

(d) eliminated a reserve where the liability related to such reserve has remained;

(e) failed to depreciate capital assets in accordance with past practice or to eliminate capital assets which are no longer used in its business; or

(f) had an extraordinary reduction or deferral of ordinary or necessary expenses.

3.17 CRA Compliance . KNBT and KNBT Bank are in material compliance with the applicable provisions of the CRA, and, as of the date hereof, KNBT Bank has received a CRA rating of “satisfactory” or better from the FDIC. To the Knowledge of KNBT, there is no fact or circumstance or set of facts or circumstances which would cause KNBT or KNBT Bank to fail to comply with such provisions in a manner which would have a Material Adverse Effect on KNBT.

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