KNBT Bancorp, Inc. (KNBT)
Interview with:
Scott Fainor, President and CEO
Eugene Sobol, Senior Exec. VP, COO/CFO & Treasurer
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their
world-class community bank, Keystone Nazareth Bank & Trust Company, headquartered in Bethlehem, Pennsylvania.

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KNBT believes in world class community banking - listening to the customer, delivering better customer service with a better level of technology and meeting customers needs

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Regional Banks

KNBT Bancorp, Inc.

90 Highland Avenue
Bethlehem, PA 18017
Phone: 610-861-5000

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Scott Fainor
President & CEO

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Eugene Sobol
Senior Executive Vice President
COO/CFO & Treasurer

Interview conducted by:
Lynn Fosse
Senior Editor
July 2004

Company Profile:
KNBT Bancorp, Inc. (NASD: KNBT) is the holding company for Keystone Nazareth Bank & Trust Company. Keystone Nazareth Bank & Trust Company, headquartered in Bethlehem, Pennsylvania, operates 41 branch locations in Lehigh, Northampton, Carbon and Monroe Counties, Pennsylvania.

KNBT was formed as a result of Keystone Savings Bank and Nazareth Bank – two of the area’s oldest and best-known community banks - coming together to create a world-class community bank. The foundation for KNBT’s strength and success is based on a combined 184 years of service excellence from these two former banking institutions. KNBT’s employees, headquarters and decision-making are local, so they can remain flexible and responsive to your financial needs. KNBT’s Vision is to be the financial partner of choice, with a commitment to world class community banking, that will build lasting relationships by delivering unmatched, personal service and value to their customers, employees, community and shareholders.

KNBT is the largest, local community bank, serving individuals, families and businesses throughout the greater Lehigh Valley region with 41 branch offices throughout the Lehigh, Northampton, Carbon and Monroe Counties. The bank is continuously looking for opportunities to grow and expand its branch and ATM network and many branch locations deliver full-service banking convenience 7 days a week inside local supermarket locations. As a true community bank, KNBT gives back to the community by supporting their local civic, charitable and cultural organizations. The Board of Directors and employees volunteer their time and resources toward local community projects.

KNBT’s Personal Banking products and services are designed to offer you flexibility, convenience and value for your money. Their personal checking accounts offer great savings, convenience and value. They also offer a variety of additional banking services, including online banking. With this free, convenient service, you can access all your KNBT accounts through your personal computer and a secure Internet connection 24 hours a day. Telephone banking helps you manage your accounts with ease and you can enjoy fee-free transactions 24 hours a day at KNBT ATM locations with a KNBT Visa Check Card or ATM Card. Plus, the convenience of check imaging is provided at no charge for all checking customers. KNBT makes saving money convenient and easy with our personal savings and money market accounts. Plus, you’ll feel secure knowing that your savings is FDIC insured, up to the legal limits.

CEOCFOinterviews: Mr. Fainor, KNBT is a relatively new entity due to a couple of mergers. Will you give us a sense of where you are today?-

Mr. Fainor: “Keystone Savings Bank started in 1925 and was a mutual savings bank with a long history of serving the community and the citizens of the Lehigh Valley, which includes the Bethlehem, Allentown and Easton area. It started in West Bethlehem and has grown to a billion dollars in assets before the acquisition of First Colonial Group, which was announced 3/6/03 and consummated 10/31/03.  It was the largest community bank in the Lehigh Valley serving consumers and businesses. It entered into the commercial banking realm and ultimately had 21 branch offices serving the community. It announced the acquisition of First Colonial Group and Nazareth National Bank, which was a commercial bank chartered in 1897 that was involved in commercial banking and in consumer and community banking around residential mortgages and consumer deposits. Nazareth was smaller than Keystone, approximately 600 million in assets with 20 offices across the Lehigh Valley. It was headquartered in Nazareth, with a presence in the Northhampton County and Monroe County areas. When the bank was consolidated under KNBT Bancorp, Inc. on 10/31/03, Keystone also announced its conversion from a mutual savings bank, which is owned by the depositors. This was to convert to a stock institution and with KNBT, the depositors of Keystone had an opportunity to buy stocks in the newly formed company KNBT Bancorp, upon which the IPO was initiated on 11/3/03 and was very successful in its opening day.”

CEOCFOinterviews: Why did KNBT feel the need to go public?

Mr. Fainor: “The board of directors at Keystone Savings Bank wanted to unlock the full potential of Keystone Savings Bank as a community bank and allow it to raise the capital so it will continue to grow, be a larger community bank as well as form a charitable foundation for the community, which will give out gifts to invest in the community as well as raise more capital to continue its expansion as a super community bank.”

Mr. Sobol: “Part of the conversion factor was commitment to the community. We contributed 1.6 million shares of KNBT Bancorp Inc. common stock to the formation of the Keystone Nazareth Charitable Foundation, which is worth approximately 25 million dollars. In bringing the two community banks together, we wanted to differentiate between an outside acquisition, and we thought a 25 million dollar foundation would send that message to the community.”

CEOCFOinterviews: How have the upturns and downturns affected the economy in your area of service?

Mr. Sobol: “The markets that KNBT Bancorp, Inc. and its bank subsidiary Keystone Nazareth Bank and Trust serve are Lehigh, Northampton, Monroe, and Carbon Counties with the majority of our banking branches and bank business in the Lehigh Valley. The economy has been very strong in regards to growth in Lehigh, Northampton and Monroe Counties. Carbon County has been relatively flat. Monroe County has been growing with an influx to the population from the New York and Northern New Jersey marketplaces. People are relocating to increase their quality of life and the same is happening in the Lehigh Valley. Population has been growing and there have been people moving from Philadelphia as well as New York and New Jersey to the Lehigh Valley. That has created a robust housing market and it has continued to bring small business to bear in the market place, which has been very good for KNBT. We can see that the economy is going to stay relatively strong in regard to Pennsylvania in general, in these markets and we are here to capture that increased economic upturn and turn it into more customers that want to do business with our bank.”

CEOCFOinterviews: How do you attract new customers?

Mr. Fainor: “We have a sales force that is trained around doing what is right for the customer. We are looking at corporate customers from small businesses to mid-sized corporations. We are looking at retail customers in providing home mortgages and consumer loans as well as deposits. We also have an investment management group and a trust division, which is looking to manage pension funds and people’s individual money. We believe that we have the community bank spirit, people that have a “can do” attitude around delivering for the customers and we are all here from the local area, we live here and were raised here. We think it is a bright future together.”

CEOCFOinterviews: Will you tell us about the current advertising campaign?

Mr. Sobol: “We started with a teaser campaign to introduce two individuals to our marketplace, a male and a female both named “Chris”. For several weeks prior to the completion of our computer convervsions, newspaper and outdoor advertisements featured these characters and how much they loved their bank.  About a week after our covnversion was completed, we revealed the KNBT brand and incorporated the “Chris and Chris” characters in TV and radio advertisements. We started out non-product specific, focusing on the convenience of banking with KNBT.  More recently, we have incorporated home equity and CD promotions.  It has been received very well.”

CEOCFOinterviews: How do you utilize the new name to get your customers more interested?

Mr. Fainor: “It was very important for Gene and I, as well as our board of directors, that our customers identify with Keystone and Nazareth, two long-time banks within our community.    That is why our new name, Keystone Nazareth Bank & Trust (KNBT), incorporates the history and strenghth of the Keystone and Nazareth brands.  To reinforce our new name and build brand identity, the holding company’s name is KNBT Bancorp, the stock symbol is KNBT, the internet banking site is"

CEOCFOinterviews: Part of your vision is world class community banking. What makes KNBT world class, and what are you striving to do to continue that?

Mr. Fainor: “Keystone and Nazareth banks, before the merger, were viewed by their customers as being very friendly and very knowledgeable and going the extra mile for customer service. Our number one value is excellence in customer service. We have gone through the computer system conversion and we are listening to our customers.  World class community banking is about listening to the customer and trying to deliver on a better level of customer service. It is about delivering on a better level of technology and ultimately, meeting our customers needs through a wider-span, super community bank. We know that we are not there yet, but our vision is set high and our mission is to achieve it.  That is our goal.”

CEOCFOinterviews: How do you break down between commercial and consumer customers and would you like to see that change?

Mr. Fainor: “We are probably about one third commercial and two thirds consumer. We would like to see that be 50/50, but we are going to let our customers decide.  We have said this publicly, that there are 12,000 small business customers in our footprint that have less than ten employees and those small businesses are going to grow. We would like to be there to capture more than our share of those small businesses. Although we have one third commercial and two thirds consumer, we are going to continue to focus in on that small business customer and their employees over the next several years.”

CEOCFOinterviews: Are there services that you are not offering now that you feel you want to start offering?

Mr. Fainor: “We would like to continue to add new investment management products on our trust and financial advisors division and we would like to add more commercial banking products to our cash management system. From a consumer standpoint, we have actually tried to streamline our products and services. The goal will be to keep listening to our customers and add products that we believe the customers will want.”

CEOCFOinterviews: How do you get feedback from the customers, and now that you are a large bank, how do you know what the teller at any branch is experiencing?

Mr. Sobol: “Our 41 branch network is broken down into regions and the regional managers meet with the branch managers on a very regular basis to pass that kind of information up.”

Mr. Fainor: “We are continuously keeping a hand on the pulse of our branch network, which starts with two-way communication through our regional managers.   As an example, for the month of April after we came out of our computer system conversion, we were on conference calls daily to make sure we were getting customer information back and forth so that we could make very quick and concise decisions about policy and so on. I would say we are probably better than average on responding to customers.”

CEOCFOinterviews: On the commercial side, how do you attract customers, and will you tell us about the loan policy of the bank?

Mr. Fainor: “Our Office of the President team did branch visits right after the integration so we are continuously visiting our branches for feedback. On the commercial side, we are are adding new commercial bankers and they bring new customers with them. They also are connected with centers of influence; accounting, attorneys, community leaders. As we continue to make calls in the commercial business world, ultimately those bankers are going to attract customers so that we can put proposals in front of them to get them to make the appropriate decision.”

CEOCFOinterviews: Is online banking a big factor for you?

Mr. Fainor: “Online banking is probably a bigger factor than many banks would like to admit. It is even going to get bigger in the future. We believe that a bank in general is not only going to have to offer online banking, but more of the ATM 24 hour banking machines, and more convenient service. For example, of our 41 branches, 15 of them are open seven days a week. We are already open on Sundays; many banks have not gone to that model yet but we think that is a big competitive advantage for us.”

CEOCFOinterviews: Do you find that people are doing a lot of banking on Sundays?

Mr. Fainor: “We believe that once a customer knows they can access the branch management on Saturday and Sunday that they will use that more frequently when they know that is available to them. As we keep marketing KNBT, we keep telling them we are open and we believe more people will continue to utilize it over the weekend. They will also use us with their internet banking and ATM machines; they want a full service network to do banking whenever they want. We are going to have to get our customers more educated about these services.”

CEOCFOinterviews: How do let your customers know about the services that are available?

Mr. Fainor: “We do it by training our employees that are leading our teams to make sure they are asking the appropriate questions when customers are coming in. It is not just asking for a loan and a deposit, it is asking that if they want to open up a checking account, or if they have direct deposit for their payroll. It is asking if we can connect them to online banking, or how would they like to try our online bill pay, or to consolidate their credit cards to a home equity line of credit. There are many more questions, which we are training our people to ask through the branch network and through our commercial banking.”

CEOCFOinterviews: How have you fared with the current interest rate environment and are you ready for what certainly will be rising rates?

Mr. Sobol: “We have had very stable net interest income and we have avoided extending the maturity on our loan or investment portfolio. We avoided sacrificing credit quality on the loan side and the investment side. We have done some leverage strategies all with very short duration.   The fact that interest rates may rise, if you look at our 10-k you will find that our net interest income actually performs better with rates up than it does with rates down.”

CEOCFOinterviews: How big a part do mortgages play for you, and given the fact that everybody is offering mortgages today, why are people coming to you?

Mr. Fainor: “We have a good product.  KNBT offers construction loans to permanent financing as one turnkey operation. We get many referrals from builders to their customers around doing mortgage business with us here at KNBT. We have a good product that is different from our competitors and that gives us a competitive advantage. There is not the refinancing market out there that there was; it is off by 50%. Our teams know how to turn on a dime to make sure that we are out marketing through our branches, doing the advertising we need and going to our referral sources to bring the new purchased money products in. I think that is a big advantage that we have. With a mortgage customer, we are not just asking for the mortgage, we are talking about whether he wants his payment automatically deducted from his checking account. So we look for a checking account, we ask if he would like internet banking, the ability to have bill pay, and we talk to him about direct deposit payroll. We are looking to increase the amount of products that we are cross selling, but we are doing it with a very home town community bank feel.”

CEOCFOinterviews: Will you tell us about your fee-based services such as trust and wealth management and financial services, and how are you increasing customers for that end?

Mr. Fainor: “We hired several individuals that are very knowledgeable in trust and wealth management and then we hired a director of our brokerage arm, which is our financial services division. We brought these higher caliber people in to start to build the relationship teams that we need to go out and start to blend our services. Now that the stock market is starting to work its way back and people are becoming more confident, we believe that the referrals to this group will continue to build. If we have the expertise with the people that are servicing the customers, we believe we will be able to capture more than our fair share of that business. It is fragmented, there are many people doing financing and investing, so we believe we have a very good referral network in our branch system. Many of our customers are very confident in the services we are providing, so on top of that, we believe that we can capture the investment management piece of their business.”

CEOCFOinterviews: Why are people coming to you and not your competition?

Mr. Fainor: “We are branding ourselves as being local, making local decisions with local board members and local management. Gene and I have been in the local bank environment; I have been here for 24 years and Gene has been year for more than 30 years. Our knowledge of the Lehigh Valley is one of where people know us and they feel comfortable. We lead by example, so we are trying to get our teams to understand that we have a field here where we can get things done because of the policies and decision making capabilities. We are not just a bank that has five or six branches located in one community; we spread out with our branches across our community, and ultimately, that makes us not only able to move with decision making, but it also makes us very convenient. If we start adding more qualified bankers to the team, which we already have in place, we are going to see more business come our way to the bank. It is all about local decisions, and local people working in the local community, that is going to make the difference with our bank.”

CEOCFOinterviews: Will you tell us about community involvement, and how do you decide where to focus?

Mr. Fainor: “The bank does its own philanthropy and the foundation is going to do a great deal more. The whole reason for setting up the foundation is to make a greater impact on investment in our community around social services, the arts, education, and economic development. We believe that the history of the bank has been warmed behind being one with its community. Our employees love to hear that we end up giving more to our community thorough philanthropy. It is a morale booster to our employees because they volunteer a great deal, so it is a way to add money back to the volunteering that goes on. If we say that we are a community bank, what better way to do it than to invest in organizations that are in the not-for-profit segment. We are trying to make an impact on education of our youth. We are trying to make social services better with adding value to programs that enhance the quality of life. We are looking at our ability to make an impact with affordable housing. We want to invest in urban areas to make them more diverse and healthy. I think it goes hand in hand with being a community bank and we are proud of that.”

CEOCFOinterviews: Why should investors be interested and what should they know that perhaps they do not realize when they first look at the company?

Mr. Sobol: “We just announced our first quarter earnings. After an IPO and a conversion, it is hard to get a feel for the company. We announced a dividend with our first quarter earnings of five cents a share and we look at that to be the quarterly dividend that we are paying. We continue to maintain relatively conservative policies as far as loan quality, and interest rate risk, with the idea that we can continue to do this for the future.”

CEOCFOinterviews: What are the challenges you see going forward?

Mr. Sobol: “Obviously competition is a serious challenge. You know what is happening in the finance industry as far as the coming together of the products; you asked about the products earlier and KNBT has been able to build its own niche with construction mortgages. There are serious competitors out there, which every community bank is going to have to face. We can differentiate ourselves and price ourselves properly, that customers are going to be able to appreciate the service that we offer. That is probably the biggest challenge that we have.”

CEOCFOinterviews: How do go about differentiating yourself from the competition?

Mr. Fainor: “It is all about people; it is a people business. There are going to be more competitors and different competitors. We have to make sure we have the right people managing the right business. Gene and I spend a lot of time on making sure that our office of the president, which is our senior team, is appropriately positioned to be able to execute their job. We believe that we put together a dynamite team of local bankers, some have been with the company a long time and others have been brought in from other large banks. I come from Wachovia, but I go all the way back to the Merchants Bank days at Allentown. Gene started in public accounting and then he was the CFO of Merchants; that is how we got to know one another, and then he came over to Keystone, seven or eight years ago. We have a mix of people that are all experienced experts within their fields. I think if we can keep adding those kinds of people, that is what will make us different from others that are bringing people in from the outside. We have created something exciting of which people in the local community want to be linked. We have many people that are telling us they want to come and work for us.”

CEOCFOinterviews: In closing, what would you like readers to remember about KNBT Bancorp?

Mr. Fainor: “This is a great opportunity for us. We are a 2.1 billion dollar bank now and we just reported our first quarter’s earnings. We delivered on a dividend and ultimately we are going to keep executing our plan around our retail businesses, our branch networks, our trust and wealth management and commercial services group, and our commercial bank. If we continue to execute on that plan, we should be able to see growth in the future in many different venues.”


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