Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
------------------------------------
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 000-50426
-----------------------------------------------------
KNBT Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 38-3681905
- --------------------------------- -----------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
90 Highland Avenue, Bethlehem, PA 18017
- --------------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code: 610-861-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _____
Indicate by check mark whether the registrant is an accelerated filer as defined
in rule 12b-2 of the Exchange Act.
YES _ NO __X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: As of May 13, 2004, 30,541,772
shares of the Registrant's common stock were issued and outstanding.
KNBT BANCORP, INC. AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION PAGE NO.
ITEM 1 - Financial Statements
Consolidated Balance Sheets 2
Consoliated Statements of Income 3
Consolidated Statement of Changes in Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
ITEM 3 - Quantitative and Qualitative Discussion About 24
Market Risk
ITEM 4 - Controls and Procedures 24
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 25
ITEM 2 - Changes in Securities, Use of Proceeds and 25
Issuer Purchases of Equity Securities
ITEM 3 - Defaults Upon Senior Securities 25
ITEM 4 - Submission of Matters to a Vote of Security Holders 25
ITEM 5 - Other Information 25
ITEM 6 - Exhibits and Reports on Form 8-K 25
SIGNATURES 26
CERTIFICATIONS 27
1
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
KNBT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
At March 31, At December 31,
2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Cash and Due From Banks $ 42,010 $ 53,555
Interest-Bearing Deposits With Banks 45,242 85,422
---------------- --------------------
Cash and Cash Equivalents 87,252 138,977
Investment Securities Available-for-Sale 866,893 734,087
Federal Home Loan Bank of Pittsburgh Stock 15,791 11,543
Mortgage Loans Held-for-Sale 3,745 4,677
Loans 922,518 890,076
Less: Allowance for Loan Losses (9,000) (7,910)
---------------- --------------------
Net Loans 913,518 882,166
Accrued Interest Receivable 9,274 7,645
Premises and Equipment, Net 38,172 35,867
Bank Owned Life Insurance 58,516 57,849
Goodwill and Other Intangible Assets 46,547 47,448
Other Assets 17,377 21,714
---------------- --------------------
TOTAL ASSETS $ 2,057,085 $ 1,941,973
================ ====================
LIABILITIES
Deposits
Non-interest-bearing deposits $ 112,856 $ 117,270
Interest-bearing deposits 1,181,359 1,172,140
---------------- --------------------
Total deposits 1,294,215 1,289,410
Securities Sold Under Agreements to Repurchase 28,393 24,550
Advances from the Federal Home Loan Bank 308,540 207,153
Subordinated Debentures 15,464 -
Guaranteed Preferred Beneficial Interest in the
Company's Subordinated Debentures - 15,000
Accrued Interest Payable 3,639 3,218
Other Liabilities 8,968 13,562
---------------- --------------------
TOTAL LIABILITIES 1,659,219 1,552,893
---------------- --------------------
SHAREHOLDERS' EQUITY
Preferred Stock, no par
Authorized: 20,000,000 shares - -
Common Stock, Par Value $0.01 a share 296 295
Authorized: 100,000,000 shares
Issued and Outstanding:
30,529,820 shares at March 31, 2004 and 30,419,397 shares
at December 31, 2003
Additional Paid-In Capital 298,455 297,887
Retained Earnings 104,685 100,570
Unallocated Common Stock Held
by Employee Stock Ownership Plan: (15,784) (15,987)
928,222 shares at March 31, 2004 and 940,122 shares at December 31, 2003
Accumulated Other Comprehensive Income 10,214 6,315
---------------- --------------------
TOTAL SHAREHOLDERS' EQUITY 397,866 389,080
---------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,057,085 $ 1,941,973
================ ====================
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2
KNBT BANCORP, INC.. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2004 and 2003
(dollars in thousands)
Three Months Ended March 31,
-------------------------------------
2004 2003
- ----------------------------------------------------------------------------------------------------------------
(unaudited)
INTEREST INCOME
Loans, including fees $ 14,093 $ 10,133
Investment Securities 8,116 3,875
Other Interest 142 131
---------------- -----------------
Total Interest Income 22,351 14,139
---------------- -----------------
INTEREST EXPENSE
Deposits 4,535 4,163
Securities sold under Agreements to Repurchase 35 32
Advances from the Federal Home Loan Bank 2,124 1,108
Subordinated Debentures 181 -
---------------- -----------------
Total Interest Expense 6,875 5,303
---------------- -----------------
NET INTEREST INCOME 15,476 8,836
Provision for Loan Losses 1,500 62
---------------- -----------------
Net Interest Income After Provision
for Loan Losses 13,976 8,774
---------------- -----------------
NON-INTEREST INCOME
Trust 353 -
Brokerage Services 160 87
Deposit Service Charges 1,311 852
Bank Owned Life Insurance 667 355
Net Losses on Sales of Investment Securities (8) -
Net Gains on Sales of Residential Mortgage Loans 159 264
Net Gain on Sale of Credit Card Loans 298 -
Net Gains (Losses) on Sales of Other Real Estate Owned 44 (21)
Other Income 983 644
---------------- -----------------
Total Non-Interest Income 3,967 2,181
---------------- -----------------
NON-INTEREST EXPENSES
Compensation and Employee Benefits 7,245 3,735
Net Occupancy and Equipment Expense 1,825 999
Professional Fees 572 112
Advertising 153 307
Data Processing 531 431
Impairment of Mortgage Servicing Rights 58 365
Amortization of Intangible Assets 547 -
Other Expenses 1,574 957
---------------- -----------------
Total Non-Interest Expenses 12,505 6,906
---------------- -----------------
Income Before Income Taxes 5,438 4,049
Income Taxes 1,323 1,100
---------------- -----------------
NET INCOME $ 4,115 $ 2,949
================ =================
PER SHARE DATA
Net Income - Basic $ 0.14 N/A
================ =================
Net Income - Diluted $ 0.14 N/A
================ =================
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
KNBT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Three Months Ended March 31, 2004 (Unaudited)
(dollars in thousands)
Accumulated
Common Additional Unallocated Other
Common Stock Paid-In Retained ESOP Comprehensive
Shares Value Capital Earnings Shares Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
Balance at January 1, 2004 29,479,275 $ 295 $ 297,887 $ 100,570 $ (15,987) $ 6,315 $ 389,080
Comprehensive Income
Net Income 4,115 4,115
Other Comprehensive Income Net of Taxes
and Reclassification Adjustments 3,899 3,899
----------
Total Comprehensive Income 8,014
Unallocated ESOP Shares Committed to Employees 11,900 5 203 208
Shares Issued upon Exercise of Stock Options 110,423 1 563 564
------------------------------------------------------------------------------------
Balance at March 31, 2004 29,601,598 $ 296 $ 298,455 $ 104,685 $ (15,784) $ 10,214 $ 397,866
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
KNBT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2004 and 2003
(dollars in thousands)
Three Months Ended March 31,
2004 2003
- ----------------------------------------------------------------------------------------------------------
(unaudited)
OPERATING ACTIVITIES
Net Income $ 4,115 $ 2,949
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses 1,500 62
Depreciation and Amortization 1,182 381
Amortization (Accretion) of Security Premiums and Discounts, Net 608 362
(Gain) Loss on Sale of Other Real Estate Owned (44) 21
Losses on Sales of Investment Securities 8 --
Gains on the Sales of Mortgage Loans (159) (264)
Gain on the Sale of Credit Card Loans (298) --
Mortgage Loans Originated for Sale (1,255) (9,859)
Mortgage Loan Sales 2,715 9,859
Changes in Assets and Liabilities:
Increase in Bank Owned Life Insurance (667) (354)
Increase in Accrued Interest Receivable (1,629) (275)
Decrease in Other Assets 2,775 529
(Decrease) Increase in Other Liabilities and Accrued Interest Payable (4,173) 3,862
--------- ---------
Net Cash Provided by Operating Activities 4,678 7,273
--------- ---------
INVESTING ACTIVITIES
Proceeds from Calls and Maturities of Securities Available-for-Sale 32,573 52,217
Proceeds from Sales of Securities Available-for-Sale 249 --
Purchase of Securities Available-for-Sale (160,343) (111,556)
Purchase of Federal Home Loan Bank of Pittsburgh Stock (4,248) (505)
Proceeds from the Sale of Credit Card Receivables 1,831 --
Net (Increase) Decrease in Loans (34,323) 416
Purchase of Premises and Equipment (2,902) (1,086)
Proceeds from Sale of Other Real Estate Owned 161 84
--------- ---------
Net Cash Used in Investing Activities (167,002) (60,430)
--------- ---------
FINANCING ACTIVITIES
Net Increase in Deposits 4,805 25,536
Net Increase in Repurchase Agreements 3,843 1,109
Proceeds from Long-Term Debt 109,562 --
Payments on Long-Term Debt (8,175) (10,000)
Proceeds from the Exercise of Stock Options 564 --
--------- ---------
Net Cash Provided by Financing Activities 110,599 16,645
--------- ---------
Decrease in Cash and Cash Equivalents (51,725) (36,512)
Cash and Cash Equivalents, January 1, 138,977 86,293
--------- ---------
Cash and Cash Equivalents, March 31, $ 87,252 $ 49,781
========= =========
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for
Income Taxes $ -- $ 95
========= =========
Interest on Deposits, Advances and Other Borrowed Money $ 6,454 $ 5,558
========= =========
Supplemental Disclosure of Non-cash Activities
Mortgage Loan Securitizations $ -- $ 47,250
========= =========
Reclassification of Loans Receivable to Other Real Estate Owned $ 97 $ --
========= =========
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
KNBT BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------
(Unaudited)
NOTE A - BASIS OF PRESENTATION
KNBT Bancorp, Inc. ("KNBT" or the "Company") is a Pennsylvania corporation and
registered bank holding company organized in 2003. KNBT's business consists
primarily of being the parent holding company for Keystone Nazareth Bank & Trust
Company, a Pennsylvania chartered savings bank. Keystone Nazareth Bank & Trust
Company (the "Bank") is the stock-form successor to Keystone Savings Bank upon
the mutual-to-stock conversion of Keystone Savings Bank, which was completed on
October 31, 2003. Concurrently with the mutual-to-stock conversion, KNBT
acquired, through a merger, First Colonial Group, Inc. ("First Colonial"), the
parent bank holding company for Nazareth National Bank and Trust Company.
The accompanying consolidated financial statements were prepared in accordance
with instructions to Form 10-Q, and therefore, do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles ("GAAP"). However, all normal, recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of these financial
statements, have been included. These financial statements should be read in
conjunction with the audited financial statements and the notes thereto for the
Company for the year ended December 31, 2003, which are included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003. The
results for the interim period presented are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004.
The financial information presented herein is unaudited; however, in the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the unaudited financial information have been made.
The Company has prepared its accompanying consolidated financial statements in
accordance with GAAP as applicable to the banking industry. Certain amounts in
prior years are reclassified for comparability to current year's presentation.
Such reclassifications, when applicable have no effect on net income. The
consolidated financial statements include the balances of the Company and its
wholly owned subsidiaries. All material intercompany balances and transactions
have been eliminated in consolidation. References to the Company include the
Bank unless otherwise noted.
In preparing the consolidated financial statements, the Company is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of financial condition and revenue
and expense for the period. Actual results could differ significantly from those
estimates. A material estimate that is particularly susceptible to significant
changes in the near-term is the determination of the allowance for loan losses.
In addition to the Bank, KNBT's subsidiaries include KNBT Inv. I founded in
December 2003, KNBT Inv. II and First Colonial Statutory Trust I, both acquired
in October 2003 as a part of the acquisition of First Colonial. The Bank has two
wholly owned subsidiaries KLV, Inc and KLVI, Inc. The Bank is the majority owner
of Traditions Settlement Services, LLC.
NOTE B - CONVERSION AND ACQUISITION
The mutual-to-stock conversion of Keystone Savings Bank coincided with the
completion of the initial public offering of KNBT Bancorp, Inc. KNBT sold
approximately 20.2 million shares of its common stock for an aggregate of $202.0
million to subscribers in its offering, contributed approximately 1.6 million
shares of common stock to the recently created Keystone Nazareth Charitable
Foundation and issued an additional approximately 8.5 million shares to former
shareholders of First Colonial in exchange for their First Colonial shares.
6
On October 31, 2003, KNBT and the Bank completed mergers with First Colonial and
its subsidiary Nazareth National Bank and Trust Company, respectively. Under the
terms of the merger agreement, which was the result of arms-length negotiation,
each of the shares of First Colonial stock was exchanged for 3.7 shares of KNBT
common stock for a total issuance of 8,545,855 shares of common stock. Based on
management's assessment of the anticipated benefits of the acquisition,
including enhanced market share and expansion of its banking franchise; KNBT
entered into the merger agreement and proceeded with its acquisition of First
Colonial. First Colonial stock options outstanding at the date of acquisitions
were converted into 808,157 options to purchase KNBT shares of common stock and
were fully vested at the time of the merger. The transaction was accounted for
under the purchase method of accounting. The acquisition resulted in the
recording of approximately $45.9 million of goodwill and other intangible
assets. KNBT's financial position and results of operations at and for the three
months ended March 31, 2003 do not include First Colonial because the
acquisition was not completed until October 31, 2003.
NOTE C - EARNINGS PER SHARE
The Company calculates earnings per share as provided by the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share (SFAS
128)". Basic and diluted earnings per share for the three months ended March 31,
2004 were calculated as follows:
For the Three Months Ended March 31, 2004
- -----------------------------------------------------------------------------------------------------------------
Net Average
Income Shares Per Share
(numerator) (denominator) Amount
---------------------------------------------------
(dollars in thousands)
Basic Earnings Per Share
Income Available to Common Shareholders $ 4,115 29,555,238 $ 0.14
Effect of Dilutive Securities
Stock Options 456,026 $ 0.00
---------- ----------
Diluted Earnings Per Share
Income Available to Common Shareholders
plus Assumed Exercise of Options $ 4,115 30,011,264 $ 0.14
========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------
Common shares outstanding at March 31, 2004 do not include 928,222 unallocated
shares held by the Employee Stock Ownership Plan ("ESOP"). The exclusion of
these unallocated shares held by the ESOP is in accordance with the provision of
Statement of Position ("SOP") 93-6, "Employer's Accounting for Employee Stock
Ownership Plans", issued by the Accounting Standards Division of the American
Institute of Certified Public Accountants ("AICPA").
KNBT had no shares outstanding in the first quarter of 2003, as KNBT did not
complete its initial public offering until October 31, 2003.
NOTE D - STOCK BASED COMPENSATION
KNBT acquired the stock option plans previously maintained by First Colonial as
a part of the merger. KNBT's stock option plans are accounted for under SFAS No.
123, "Accounting for Stock-Based Compensation." This standard contains a fair
value-based method for valuing stock-based compensation, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually the
vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar instruments under APB Opinion
No. 25. Entities that continue to account for stock options using APB Opinion
No. 25 are required to make pro forma disclosures of net income and earnings per
share, as if the fair value-based method of accounting defined in SFAS No. 123
had been applied. KNBT's stock option plans are accounted for under APB Opinion
No. 25. KNBT had no unvested stock options at March 31, 2004. There were no
options awarded during the first three months of 2004.
On March 31, 2004, the Financial Accounting Standards Board ("FASB") issued a
proposed Statement, "Share-Based Payment an Amendment of FASB Statements No. 123
and APB No 95," that address the
7
accounting for share-based payment transactions in which a enterprise receives
employee services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Under the FASB's proposal, all forms of share-based payments to employees,
including employee stock options, would be treated the same as other forms of
compensation by recognizing the related cost in the income statement. The
expense of the award would generally be measured at fair value at the grant
date. Current accounting guidance requires that the expense relating to
so-called fixed plan employee stock options only be disclosed in the footnotes
to the financial statements. The proposed Statement would eliminate the ability
to account for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees". KNBT is currently evaluating this
proposed statement and its effects on its results of operations.
At its Annual Meeting of Shareholders, held on May 6, 2004, shareholders of KNBT
Bancorp approved the Company's 2004 Stock Option Plan and 2004 Recognition and
Retention Plan. An aggregate of 2,020,118 shares of the Company's common stock,
subject to adjustment, was reserved for issuance under the 2004 Option Plan.
Options granted under the 2004 Stock Option Plan will have an exercise price no
less than the fair market value on the date of grant, generally will vest no
more rapidly than 20% per year and will have a duration of 10 years. The 2004
Recognition and Retention Plan provides for 808,047 shares of Company common
stock, subject to adjustment, which may be granted as restricted shares to the
Company's directors, officers and employees and generally will vest over no less
than five years after the date of grant.
8
NOTE E - INVESTMENT SECURITIES
The amortized cost, unrealized gains and losses and fair value of KNBT's
investment securities available-for-sale at March 31, 2004 (unaudited) and
December 31, 2003 are as follows:
- ---------------------------------------------------------------------------------------------------------
At March 31, 2004 (Unaudited)
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(dollars in thousands)
U. S. Government and agencies $151,533 $ 4,228 $ (11) $155,750
Obligations of states and political
subdivisions 109,714 4,115 (148) 113,681
Mortgage-backed securities
GNMA 1,978 26 -- 2,004
FHLMC 90,478 1,369 (83) 91,764
FNMA 277,960 4,496 (48) 282,408
Other CMOs 187,207 1,216 (450) 187,973
-------- -------- -------- --------
Total Mortgage-backed securities 557,623 7,107 (581) 564,149
Corporate and other debt securities 14,057 506 (1) 14,562
ARM fund 4,939 -- (59) 4,880
Equity securities 13,560 443 (132) 13,871
-------- -------- -------- --------
Total Investment Securities $851,426 $ 16,399 $ (932) $866,893
======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------
At December 31, 2003
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(dollars in thousands)
U. S. Government and agencies $118,037 $ 2,442 $ (99) $120,380
Obligations of states and political
subdivisions 112,228 3,584 (157) 115,655
Mortgage-backed securities
GNMA 2,124 14 -- 2,138
FHLMC 83,737 1,016 (768) 83,985
FNMA 224,802 5,597 (2,861) 227,538
Other CMOs 150,645 628 (576) 150,697
-------- -------- -------- --------
Total Mortgage-backed securities 461,308 7,255 (4,205) 464,358
Corporate and other debt securities 15,068 569 -- 15,637
ARM fund 4,939 -- (59) 4,880
Equity securities 12,939 272 (34) 13,177
-------- -------- -------- --------
Total Investment Securities $724,519 $ 14,122 $ (4,554) $734,087
======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------
9
NOTE F - LOANS
A summary of KNBT's loans receivable at March 31, 2004 (unaudited) and December
31, 2003 follows:
- --------------------------------------------------------------------------------
March 31, December 31,
2004 2003
--------- ---------
(unaudited)
(dollars in thousands)
Real Estate
Residential $ 327,979 $ 346,221
Construction 109,452 112,684
Commercial 168,172 156,563
--------- ---------
Total real estate 605,603 615,468
Consumer loans 266,001 265,541
Commercial (non real estate) 47,255 38,978
States and political subdivisions 1,367 2,334
--------- ---------
Total gross loans 920,226 922,321
Less:
Mortgage loans held-for-sale (3,745) (4,677)
Loans in process 6,365 (27,099)
Deferred fees (costs) (328) (469)
--------- ---------
Total loans 922,518 890,076
Less: Allowance for loan losses (9,000) (7,910)
--------- ---------
Total net loans $ 913,518 $ 882,166
========= =========
- --------------------------------------------------------------------------------
10
The following table shows the amounts of KNBT's non-performing assets, defined
as non-accruing loans, accruing loans 90 days or more past due and other real
estate owned at March 31, 2004 (unaudited) and December 31, 2003.
- ---------------------------------------------------------------------------------------------------------
At March 31, At December 31,
2004 2003
------- -------
(unaudited)
(dollars in thousands)
Non-accrual loans $ 2,747 $ 1,720
Accruing loans 90 days or more past due 7 405
------- -------
Total non-performing loans 2,754 2,125
------- -------
Other real estate owned 153 173
------- -------
Total non-performing assets $ 2,907 $ 2,298
======= =======
- ---------------------------------------------------------------------------------------------------------
Total non-performing loans as a percentage of loans, net 0.30% 0.24%
Total non-performing loans as a percentage of total assets 0.13% 0.11%
Total non-performing assets as a percentage of total assets 0.14% 0.12%
- ---------------------------------------------------------------------------------------------------------
Interest on non-accrual loans which would have been
recorded at the original rate $ 50 $ 50
Interest on non-accrual loans that was reflected in income -- 60
------- -------
Net impact on interest income $ (50) $ 10
======= =======
- ---------------------------------------------------------------------------------------------------------
KNBT's recorded investment in impaired loans was $279,000 at March 31, 2004 and
$217,000 at December 31, 2003. The valuation allowance for loan losses related
to impaired loans is a part of the allowance for loan losses and was $32,000 at
March 31, 2004 and $33,000 at December 31, 2003. The average impaired loan
balance for the three months ended March 31, 2004 was $229,000. During the
quarter ended March 31, 2004, KNBT received principal payments of $3,000 on
impaired loans, which payments are recognized on a cash basis. KNBT recognized
no income on impaired loans in the three-month period ended March 31, 2004.
There were no principal payments and no income recognized on impaired loans in
the first quarter of 2003.
Activity in KNBT's allowance for loan losses during the three-month periods
ended March 31, 2004 and 2003 was as follows:
- --------------------------------------------------------------------------------
Three Months Ended March 31,
2004 2003
------- -------
(unaudited)
(dollars in thousands)
Balance, beginning of period $ 7,910 $ 2,927
Provision charged to operations 1,500 62
Loans charged-off (491) (312)
Recoveries of loans previously charged-off 81 12
------- -------
Balance, end of period $ 9,000 $ 2,689
======= =======
- --------------------------------------------------------------------------------
11
NOTE G - RETIREMENT PLANS
1. Defined Benefit Plan. KNBT participates in a multiple employer defined
benefit pension plan, which covers substantially all employees with 1,000
hours of service during plan years prior to October 2003. In October 2003,
KNBT froze the future accrual of benefits under this plan. KNBT continues
to contribute to this plan for benefits accrued prior to October 2003.
KNBT's contribution to this plan in the three months ended March 31, 2004
was $104,000. During the three months ended March 31, 2003 the contribution
to this plan amounted to $215,000. KNBT currently expects to contribute
approximately $115,000 to this plan during the remainder of 2004.
2. Directors' Deferred Plan. KNBT, as a part of the merger with First
Colonial, assumed, as of October 31, 2003, the First Colonial directors'
deferred plan involving certain former directors of First Colonial. The
plan requires defined annual payments over a fifteen-year period beginning
at age 65. The net periodic defined benefit expense for the three months
ended March 31, 2004 was as follows.
- --------------------------------------------------------------------------------
(dollars in thousands)
Service cost $ --
Interest cost 5
Exepected return on plan assets --
Amortization of unrecognized net
transition asset or obligation --
Amortization of Unrecognized Prior Service Cost --
Amortization of Unrecognized Net Gain or Loss --
-----------
Total Net Periodic Pension Cost for the Quarter $ 5
===========
- --------------------------------------------------------------------------------
KNBT currently expects to contribute approximately $22,000 to this plan in
2004. We are currently evaluating the impact on the Company of the Pension
Funding Equity Act enacted in April 2004 on our projected funding.
NOTE H - VARIABLE INTEREST ENTITY
Management has determined that The First Colonial Statutory Trust I ("Trust I"),
which was created by First Colonial and acquired by KNBT in the merger with
First Colonial, qualifies as a variable interest entity under FASB
Interpretation 46 ("FIN 46"), "Consolidation of Variable Interest Entities," as
revised. Trust I issued mandatorily redeemable preferred stock in July 2002 to
investors and loaned the proceeds to the Company. Trust I is included in KNBT's
consolidated balance sheet and statements of operations as of and for the year
ended December 31, 2003. Subsequent to the issuance of FIN 46 in January 2003,
the FASB issued a revised interpretation, FIN 46(R), the provisions of which
must be applied to certain variable interest entities by March 31, 2004.
KNBT adopted the provisions under the revised interpretation in the first
quarter of 2004. Accordingly, KNBT no longer consolidates Trust I as of March
31, 2004. FIN 46(R) precludes consideration of the call option embedded in the
preferred stock when determining if KNBT has the right to a majority of Trust
I's expected residual returns. The deconsolidation resulted in the investment in
the common stock of Trust I to be included in other assets as of March 31, 2004
and the corresponding increase in outstanding debt of $464,000. In addition, the
income received on KNBT's common stock investment is included in other income.
The adoption of FIN 46(R) had no material impact on the financial position or
results of operation. The banking regulatory agencies have not issued any
guidance that would change the regulatory capital treatment for the
trust-preferred securities issued by Trust I based on the adoption of FIN 46(R).
However, as additional interpretations from the banking regulators related to
entities such as Trust I are issued, management will reevaluate its potential
impact to its Tier I capital calculation under such interpretations.
12
NOTE I - NEW ACCOUNTING PRONOUNCEMENTS
The Securities and Exchange Commission recently released Staff Accounting
Bulletin ("SAB") 105, Application of Accounting Principles to Loan Commitments.
SAB 105 provides guidance regarding the measurement of loan commitments
recognized at fair value under FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SAB 105 also requires companies
to disclose their accounting policy for those loan commitments including methods
and assumptions used to estimate fair value and associated hedging strategies.
SAB 105 is effective for all loan commitments accounted for as derivatives that
are entered into after March 31, 2004. The adoption of SAB 105 is expected to
have no material effect on KNBT's consolidated financial statements.
NOTE J - RECLASSIFICATIONS
Certain reclassifications of prior years' amounts have been made to conform to
the March 31, 2004 presentation.
13
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
In addition to historical information, this Quarterly Report on Form 10-Q
includes certain "forward-looking statements," as defined in the Securities Act
of 1933 and the Securities Exchange Act of 1934, based on current management
expectations. KNBT's actual results could differ materially from those
management expectations. Such forward-looking statements include statements
regarding KNBT's intentions, beliefs or current expectations as well as the
assumptions on which such statements are based. Stockholders and potential
stockholders are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those contemplated by such
forward-looking statements. Factors that could cause future results to vary from
current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary fiscal
policies of the federal government, changes in tax policies, rates and
regulations of federal, state and local tax authorities, changes in interest
rates, deposit flows, cost of funds, demand for loan products, demand for
financial services, difficulties in integrating the data processing or other
systems at KNBT's subsidiary savings bank, competition, changes in the quality
or composition of KNBT's loan and investment portfolios, changes in accounting
principles, policies or guidelines and other economic, competitive, governmental
and technological factors affecting KNBT's operations, markets, products,
services and fees. KNBT undertakes no obligation to update or revise any
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of KNBT conform to accounting principles
generally accepted in the United States of America and general practices within
the financial services industry. The preparation of financial statements
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and the accompanying notes. Actual results
could differ from those estimates.
KNBT considers that the determination of the allowance for loan losses involves
a higher degree of judgment and complexity than its other significant accounting
policies. The allowance for loan losses is calculated with the objective of
maintaining a reserve level believed by management to be sufficient to absorb
estimated probable credit losses. Management's determination of the adequacy of
the allowance is based on periodic evaluations of the loan portfolio and other
relevant factors. However, this evaluation is inherently subjective as it
requires material estimates, including, among others, expected default
probabilities, loss given default, expected commitment usage, the amounts and
timing of expected future cash flows on impaired loans, mortgages, and general
amounts for historical loss experience. The process also considers economic
conditions, uncertainties in estimating losses and inherent risks in the loan
portfolio. All of these factors may be susceptible to significant change. To the
extent actual outcomes differ from management estimates, additional provisions
for loan losses may be required that would adversely impact earnings in future
periods.
KNBT recognizes deferred tax assets and liabilities for future tax effects of
temporary differences, net operating loss carry forwards and tax credits.
Deferred tax assets are subject to management's judgment based upon available
evidence that future realization is more likely than not. If management
determines that KNBT may be unable to realize all or part of net deferred tax
assets in the future, a direct charge to income tax expense may be required to
reduce the recorded value of the net deferred tax asset to the expected
realizable amount.
14
Goodwill, under SFAS No. 142, is subject to impairment testing at least annually
to determine whether write-downs of the recorded balances are necessary. KNBT
tests for impairment based on the goodwill maintained at each defined reporting
unit. A fair value is determined for each reporting unit based on at least one
of three various market valuation methodologies. If the fair values of the
reporting units exceed their book values, no write-down of recorded goodwill is
necessary. If the fair value of the reporting unit is less, an expense may be
required on KNBT's books to write down the related goodwill to the proper
carrying value. KNBT recorded goodwill and other identifiable intangible assets
as a result of the acquisition of First Colonial in October 2003.
Comparison of Financial Condition as of March 31, 2004 and December 31, 2003
Assets. KNBT's total assets were $2.1 billion at March 31, 2004 as compared to
$1.9 billion at December 31, 2003, an increase of $116.3 million or 6.0%. The
increase in assets was principally due to increases in investment securities,
loans receivable, Federal Home Loan Bank stock and premises and equipment. These
increases were offset in part by a reduction in cash and cash equivalents and an
increase in the allowance for loan losses. During the first three months of
2004, KNBT's investment securities increased $132.8 million or 18.1% to $866.9
million at March 31, 2004 compared to $734.1 million at December 31, 2003. The
primary sources of funds used for the increase in investment securities were
additional advances from the Federal Home Loan Bank of Pittsburgh and to a
lesser extent cash and cash equivalents. The Company determined to add leverage
to the balance sheet by taking out $109.6 million of additional Federal Home
Loan Bank advances, which had an average rate of 2.47% and investing such funds
into $109.5 million of investment securities with an average yield of 4.19%.
KNBT's total loans receivable were $922.5 million at March 31, 2004, an increase
of $32.4 million or 3.6% over the December 31, 2003 total of $890.1 million. The
growth in loans receivable was principally due to an $11.6 million or 7.4%
increase in commercial real estate loans, a $8.3 million or 21.2% in other
commercial loans and a $460,000 or 0.2% increase in consumer loans. These loan
increases were offset in part by an $18.2 million or 5.3% decrease in
single-family residential mortgage loans as a result of the sale of $2.7 million
of these loans during the first quarter of 2004, customer repayments and a
reduced level of new mortgage loans because of rising interest rates. During the
first quarter of 2004, KNBT sold all of its $1.8 million of credit card loans
for a gain of $298,000. These credit card loans were sold because of the
relatively low volume and high administrative costs. KNBT will continue to offer
credit cards to its customers through a third party provider and will receive
some fee income through this arrangement. KNBT's investment in the stock of the
Federal Home Loan Bank of Pittsburgh was $15.8 million at March 31, 2004 as
compared to $11.5 million at December 31, 2003. This was an increase of $4.2
million or 36.8%. KNBT's net premises and equipment increased by $2.3 million or
6.4% to $38.2 million at March 31, 2004 compared to $35.9 million at December
31, 2003 principally as a result of the purchase of new computer equipment and
the cost of renovations to the Company's headquarters and operations buildings.
KNBT anticipates that its capital expenditures will be approximately $2 million
for the remainder of 2004. KNBT's cash and cash equivalents were $87.3 million
at March 31, 2004 as compared to $139.0 million at December 31, 2003. This
decrease of $51.7 million or 37.2% was principally the result of the investment
of these funds in investment securities and loans receivable.
15
Allowance for Loan Losses. KNBT's allowance for loan losses increased $1.1
million or 13.8% during the first three months of 2004. The allowance for loan
losses was $9.0 million and $7.9 million at March 31, 2004 and December 31,
2003, respectively. The increase in the allowance for loan losses was the
result of management's analysis of the risks within the loan portfolio. The
allowance for loan losses is established through a provision for loan losses.
KNBT maintains the allowance at a level believed to the best of management's
knowledge, to cover all known and inherent losses in the portfolio that are both
probable and reasonable to estimate at each reporting date. Management reviews
all loans, which are delinquent 60 days or more on a monthly basis, and performs
regular reviews of the allowance no less than quarterly in order to identify
those inherent losses and assess the overall collection probability for the loan
portfolio. Such reviews consist of a quantitative analysis by loan category,
using historical loss experience and consideration of a series of qualitative
loss factors. KNBT's evaluation process includes, among other things, an
analysis of delinquency trends, non-performing loan trends, the level of
charge-offs and recoveries, prior loss experience, total loans outstanding, the
volume of loan originations, the type, size and geographic concentration of its
loans, the value of collateral securing the loan, the borrower's ability to
repay and repayment performance, the number of loans requiring heightened
management oversight, local economic conditions and industry experience. In
addition, in establishing the allowance for loan losses, KNBT's management
considers a ten point internal rating system for all loans originated by the
Commercial Lending department. At the time of origination, each commercial loan
is assigned a rating based on the assumed risk elements of the loan. Such risk
ratings are periodically reviewed by management and revised as deemed
appropriate. The establishment of the allowance for loan losses is significantly
affected by management's judgment and uncertainties and there is a likelihood
that different amounts would be reported under different conditions or
assumptions. Various regulatory agencies, as an integral part of their
examination process, periodically review KNBT's allowance for loan losses. Such
agencies may require the Company to make additional provisions for estimated
loan losses based upon judgments different from those of management. KNBT's
allowance for loan losses was 0.98% and 0.89% of total loans receivable at March
31, 2004 and December 31, 2003, respectively. See "Comparison of Operating
Results for the three months ended March 31, 2004 and 2003 - Provision for Loan
Losses."
Liabilities. KNBT's total liabilities amounted to $1.7 billion at March 31,
2004, an increase of $107.5 million or 6.9% compared to total liabilities at
December 31, 2003 of $1.6 billion. The increase in liabilities was principally
due to a $101.3 million or 48.9% increase in advances from the Federal Home Loan
Bank of Pittsburgh during the first quarter of 2004. These advances total $308.5
million and $207.2 million at March 31, 2004 and December 31, 2003,
respectively. KNBT's deposits increased $4.8 million or 0.4% during the
three-month period ended March 31, 2004. Deposits totaled $1.3 billion at both
March 31, 2004 and December 31, 2003. During the first quarter of 2004, KNBT
adopted FIN 46(R) and, as a result, KNBT deconsolidated Trust I. The $15.5
million of debentures issued by KNBT to Trust I were reflected as subordinated
debentures in the March 31, 2004 consolidated balance sheet. KNBT's investment
in the Trust in the amount of $464,000 was included in other assets in the
consolidated balance sheet of KNBT at March 31, 2004. At December 31, 2003 Trust
I was a consolidated subsidiary and was included in liabilities in the
consolidated balance sheet as "Guaranteed preferred beneficial interest in the
Company's subordinated debentures" and the common stock and the debentures of
Trust I along with the related income effects were eliminated in the
consolidated financial statements. The debentures issued to Trust I, less the
common stock of Trust I, or $15.0 million at March 31, 2004 continue to qualify
as Tier I capital under current guidance issued by the Federal Reserve Board.
Shareholders' Equity. KNBT's shareholders' equity totaled $397.9 million at
March 31, 2004 compared to $389.1 million at December 31, 2003, an increase of
$8.8 million or 2.3%. The increase in shareholders' equity was principally the
result of net income of $4.1 million and an increase in accumulated other
comprehensive income of $3.9 million related to an increase unrealized gains on
investment securities available-for-sale. Also contributing to the increase in
shareholders' equity was the allocation of 11,900 shares of KNBT common stock
pursuant to the ESOP for a value of $209,000 and the issuance of 110,423 common
shares upon the exercise of stock options for proceeds of $564,000. Regulatory
capital ratios for KNBT and the Bank at March 31, 2004 and December 31, 2003 are
shown in the following table.
16
CAPITAL RATIOS
- ------------------------------------------------------------------------------------------------------------------------------------
Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ -------------------------- ------------------------------
(Dollars in Thousands)
At March 31, 2004 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------------
Total Capital
(To Risk-Weighted Assets)
Company $366,183 32.32% $ 90,644 8.00% N/A N/A
Bank $264,438 23.60% $ 89,630 8.00% $112,037 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company $357,183 31.52% $ 45,322 4.00% N/A N/A
Bank $255,438 22.80% $ 44,815 4.00% $ 67,222 6.00%
Tier 1 Capital
(To Average Assets, Leverage)
Company $357,183 18.47% $ 77,342 4.00% N/A N/A
Bank $255,438 13.41% $ 76,184 4.00% $ 95,231 5.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ -------------------------- ------------------------------
(Dollars in Thousands)
At December 31, 2003 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------------
Total Capital
(To Risk-Weighted Assets)
Company $359,522 33.24% $ 86,535 8.00% N/A N/A
Bank $258,441 24.01% $ 86,123 8.00% $107,654 10.00%
Tier 1 Capital
(To Risk-Weighted Assets)
Company $351,612 32.51% $ 43,268 4.00% N/A N/A
Bank $250,499 23.27% $ 43,062 4.00% $ 64,593 6.00%
Tier 1 Capital
(To Average Assets, Leverage)
Company $351,612 19.39% $ 72,525 4.00% N/A N/A
Bank $250,499 13.42% $ 74,646 4.00% $ 93,307 5.00%
- ----------------------------------------------------------------------------------------------------------------------------------
17
Liquidity. KNBT's primary sources of funds are from deposits, amortization of
loans, loan prepayments and the maturity of loans, mortgage-backed securities
and other investments, and other funds provided from operations. While scheduled
payments from the amortization of loans and mortgage-backed securities and
maturing investment securities are relatively predictable sources of funds,
deposit flows and loan prepayments can be greatly influenced by general interest
rates, economic conditions and competition. KNBT also maintains excess funds in
short-term, interest-bearing assets that provide additional liquidity and also
utilizes outside borrowings, primarily from the Federal Home Loan Bank of
Pittsburgh ("FHLB"), as an additional funding source. KNBT uses its liquidity to
fund existing and future loan commitments, to fund maturing certificates of
deposit and demand deposit withdrawals, to invest in other interest-earning
assets, and to meet operating expenses. In addition to cash flow from loan and
securities payments and prepayments as well as from sales of available-for-sale
securities and mortgage loans, KNBT has significant borrowing capacity available
to fund liquidity needs. KNBT has increased its utilization of FHLB borrowings
in recent years as a cost efficient addition to deposits as a source of funds.
The average balance of FHLB borrowings was $248.5 million and $103.0 million for
the three months ended March 31, 2004 and December 31, 2003, respectively.
"GAP" Analysis. The following interest rate sensitivity "GAP" table sets forth
the amounts of KNBT's interest-earning assets and interest-bearing liabilities
outstanding at March 31, 2004, which are expected, based upon certain
assumptions, to reprice or mature in each of the future time periods shown.
Except as stated below, the amount of assets and liabilities shown which reprice
or mature during a particular period were determined in accordance with the
earlier of term to repricing or the contractual maturity of the asset or
liability. The table sets forth an approximation of the projected repricing of
assets and liabilities at March 31, 2004, on the basis of contractual
maturities, anticipated prepayments, and scheduled rate adjustments within a
three-month period and subsequent selected time intervals. The loan amounts in
the table reflect principal balances expected to be repaid and/or repriced as a
result of contractual amortization and anticipated prepayments of
adjustable-rate loans and fixed-rate loans, and as a result of contractual rate
adjustments on adjustable-rate loans. Annual prepayment rates for
adjustable-rate and fixed-rate single-family and multi-family mortgage loans are
assumed to range from 14% to 32%. The annual prepayment rate for mortgage-backed
securities is assumed to range from 14% to 32%. Money market deposit accounts,
savings accounts and interest-bearing checking accounts are assumed to have
annual rates of withdrawal, or "decay rates," of 20%, 15% and 15%, respectively.
18
INTEREST RATE SENSITIVITY "GAP"
- ------------------------------------------------------------------------------------------------------------------------------------
At March 31, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
More than More than More than More than
3 Months 3 Months 6 Months 1 Year 3 Years More than
or Less to 6 Months to 1 Year to 3 Years to 5 Years 5 Years Total
------------ ------------- ------------- ------------- ------------- ------------- -------------
(dollars in thousands)
Interest-earning assets (1):
Deposits at other institutions $ 45,242 $ -- $ -- $ -- $ -- $ -- $ 45,242
Loans receivable (2) 368,778 112,963 160,356 208,511 51,907 17,711 920,226
Investment securities, debt 36,848 39,403 96,736 247,337 165,615 262,454 848,393
Investment securities, equity 10,237 -- -- -- -- 24,054 34,291
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning
assets $ 461,105 $ 152,366 $ 257,092 $ 455,848 $ 217,522 $ 304,219 $1,848,152
========== ========== ========== ========== ========== ========== ==========
Cumulative total interest-
earning assets $ 461,105 $ 613,471 $ 870,563 $1,326,411 $1,543,933 $1,848,152 $1,848,152
========== ========== ========== ========== ========== ========== ==========
Interest-bearing
liabilities:
Savings deposits $ 8,935 $ 8,935 $ 17,870 $ 67,012 $ 67,011 $ 53,607 $ 223,370
Interest-bearing
checking deposits 6,778 6,778 13,556 50,836 50,835 40,401 169,184
Money market deposits 12,278 12,278 24,556 98,224 98,490 -- 245,826
Certificates of deposit 93,807 76,292 152,584 162,744 32,150 25,402 542,979
FHLB advances and other
borrowings 59,023 4,068 20,686 87,594 93,066 87,960 352,397
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing
liabilities $ 180,821 $ 108,351 $ 229,252 $ 466,410 $ 341,552 $ 207,370 $1,533,756
========== ========== ========== ========== ========== ========== ==========
Cumulative total interest-
bearing liabilities $ 180,821 $ 289,172 $ 518,424 $ 984,834 $1,326,386 $1,533,756 $1,533,756
========== ========== ========== ========== ========== ========== ==========
Interest-earning assets
less interest-bearing
liabilities $ 280,284 $ 44,015 $ 27,840 $ (10,562) $ (124,030) $ 96,849 $ 314,396
========== ========== ========== ========== ========== ========== ==========
Cumulative interest-rate
sensitivity gap (3) $ 280,284 $ 324,299 $ 352,139 $ 341,577 $ 217,547 $ 314,396
========== ========== ========== ========== ========== ==========
Cumulative interest-rate
gap as a percentage
of total assets at
March 31, 2004 13.63% 15.76% 17.12% 16.60% 10.58% 15.28%
Cumulative interest-rate
earning assets as a
percentage of
cumulative interest-
bearing liabilities at
March 31, 2004 255.01% 212.15% 167.92% 134.68% 116.40% 120.50%
- --------------------------------------------------------------------------------------------------------------------------------
(1) Interest earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as
a result of anticipated prepayments, scheduled rate adjustment and contractual maturity.
(2) For purposes of the "GAP" analysis, loans receivable includes non-performing loans, gross of the allowance for loan losses,
undisbursed loan funds and deferred loan fees.
(3) Interest-rate sensitivity "GAP" represents the difference between net interest-earning assets and interest-bearing liabilities.
19
Comparison of Operating Results for the Three Months Ended March 31, 2004 and
2003
General. KNBT's net income for the three months ended March 31, 2004 was $4.1
million compared to $2.9 million for the three months ended March 31, 2003, an
increase of $1.2 million or 39.5%. Basic and diluted earnings per share for the
first quarter of 2004 was $0.14. Per share data is not reported for the first
quarter of 2003 as KNBT completed its initial public offering on October 31,
2003. Average basic and diluted shares outstanding during the first quarter of
2004 were 29,555,238 and 30,011,264, respectively. KNBT's increase in net income
in the three months ended March 31, 2004 compared to the three months ended
March 31, 2003 was due to higher levels of net interest income and non-interest
income in the 2004 period which was partially offset by increases in
non-interest expenses and the provision for loan losses. The increase in net
interest income primarily reflects increased interest income in the 2004 period
due to a significant increase in the average balance of interest earning assets
as a result of $196.2 million in net proceeds received in the Company's initial
public offering, the acquisition of First Colonial and the investment of funds
received from Federal Home Loan Bank advances as part of the Company's leverage
strategy. The increases in non-interest income and non-interest expenses in the
2004 period also reflect in large part the Company's significantly increased
operating base and product offerings as a result of the acquisition of First
Colonial. At the time of acquisition, First Colonial had total assets of $666.9
million, including $272.3 million in net loans and $271.8 million in investment
securities, and total deposits of $512.1 million.
Net Interest Income. KNBT's net interest income amounted to $15.5 million for
the three months ended March 31, 2004 compared to $8.8 million for the three
months ended March 31, 2003, an increase of $6.6 million or 75.1%. The major
factors in the increases in both interest income and interest expense were the
acquisition of First Colonial on October 31, 2003, the proceeds from KNBT's
initial public offering on October 31, 2003 and an increase in the advances from
the Federal Home Loan Bank. KNBT's total interest income was $22.4 million for
the first quarter of 2004, an increase of $8.2 million or 58.1% from the $14.1
million earned in the first quarter of 2003. KNBT's average interest earning
assets amounted to $1.8 billion for the first three months of 2004 as compared
to $948.4 million for the first three months of 2003, an increase of $806.8
million or 85.1%. The total interest expense paid by KNBT on deposits and
borrowings was $6.9 million and $5.3 million for the three-month period ended
March 31, 2004 and 2003 respectively. This was an increase in total interest
expense of $1.6 million or 29.6%. Average interest-bearing liabilities were $1.5
billion and $855.7 million for the first quarter of 2004 and 2003, respectively,
an increase of $608.5 million or 71.1%. KNBT's net interest margin was 3.53% for
the three months ended March 31, 2004 as compared to 3.73% for the three months
ended March 31, 2003. On a tax equivalent basis the net interest margin was
3.68% and 3.85% for the three months ended March 31, 2004 and 2003,
respectively. The net interest spread on a tax equivalent basis was 3.36% for
the first quarter of 2004 and 3.61% for the first quarter of 2003. The lower
interest margin and interest spread was the result of a general decline of
interest rates during the past year with the average yield earned by KNBT on its
interest-earning assets declining to a greater degree than the interest paid by
KNBT on its interest-bearing liabilities.
Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The
following table shows for the periods indicated the total dollar amount of
interest from average interest-earning assets and the resulting yields, as well
as the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, and the net interest margin. The table includes
information adjusted to a tax equivalent basis for the Company's tax-exempt
investment securities. The presentation on a tax-equivalent basis may be
considered to include non-GAAP information. Management believes that it is a
standard industry practice in the banking industry to present such information
on a fully tax equivalent basis and that such information is useful to investors
in making peer comparisons. The tax-exempt adjustments and comparable GAAP
information also is included in the table.
20
For the Three Months Ended March 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2004 2003
----------------------------------------- ------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
----------------------------------------- ------------------------------------------
Assets (dollars in thousands)
Interest-Earning Assets
Interest-Bearing Balances with Banks $ 36,390 $ 142 1.56% $ 54,776 $ 131 0.96%
Investment Securities
Taxable (1) 699,329 6,871 3.93 276,662 3,300 4.77
Non-Taxable 116,178 1,886 6.49 47,391 871 7.35
Loans Receivable (2) (3) 911,362 14,104 6.19 572,478 10,133 7.08
Allowance for Loan Losses (8,079) - - (2,896) - -
-------------- ------------ --------------- ------------
Net Loans 903,283 14,104 6.25 569,582 10,133 7.12
-------------- ------------ --------------- ------------
Total Interest-Earning Assets 1,755,180 23,003 5.24 948,411 14,435 6.09
Non-Interest Earning Assets 224,006 - - 55,543 - -
-------------- ------------ --------------- ------------
Total Assets,
Interest Income $ 1,979,186 23,003 $ 1,003,954 14,435
============== ------------ =============== ------------
Liabilities
Interest-Bearing Liabilities
Interest-Bearing Deposits
Demand Deposits $ 178,104 64 0.14 $ 85,801 113 0.53
Money Market Deposits 238,371 542 0.91 153,238 626 1.63
Savings Deposits 224,034 263 0.47 118,604 307 1.04
Certificates of Deposit 536,535 3,666 2.73 387,253 3,117 3.22
-------------- ------------ --------------- ------------
Total Interest-Bearing Deposits 1,177,044 4,535 1.54 744,896 4,163 2.24
Securities Sold Under Agreements
to Repurchase 23,296 35 0.60 7,880 32 1.62
FHLB Advances 248,470 2,124 3.42 102,962 1,108 4.30
Subordinated Debentures 15,464 181 4.68 - - -
-------------- ------------ ---------------
Total Interest-Bearing Liabilitites 1,464,274 6,875 1.88 855,738 5,303 2.48
Non-Interest-Bearing Liabilities
Non-Interest-Bearing Deposits 115,925 - - 34,416 - -
Other Liabilities 5,594 - - 5,657 - -
-------------- ------------ --------------- ------------
Total Liabilities 1,585,793 6,875 895,811 5,303
Shareholders' Equity/
Retained Earnings 393,393 - - 108,143 - -
-------------- ------------ --------------- ------------
Total Liabilities & Shareholders'
Equity, Interest Expense $ 1,979,186 6,875 $ 1,003,954 5,303
============== ------------ =============== ------------
Net Interest Income Tax Equivalent Basis 16,128 9,132
------------ ------------
Net Interest Spread
Tax Equivalent Basis (4) 3.36% 3.61%
Effect of Interest-Free Sources
Used to Fund Earning Assets 0.32 0.24
---------- -----------
Net Interest Margin
Tax Equivalent Basis (5) 3.68% 3.85%
Tax-exempt Adjustment 652 296
------------ ------------
Net Interest Income and Margin $15,476 3.53% $ 8,836 3.73%
============ ========== ============ ===========
Average Interest-Earning Assets
to Average Interest-Bearing Liabilities 119.87% 110.83%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes Federal Home Loan Bank stock.
(2) The indicated interest income and average yields are presented on a taxable
equivalent basis. The taxable equivalent adjustments included above are
$652,000 and $296,000 for the for the three months ended March 31, 2004 and
2003, respectively. The effective tax rate used for the taxable equivalent
adjustment was 34%.
(3) Loan (expenses) fees of $(34,000) and $122,000 for the three months ended
March 31, 2004 and 2003, respectively, are included in interest income.
Average loan balances include non-accruing loans of $2.1 million and $1.9
million, respectively and average loans held-for-sale of $3.3 million $9.0
million, respectively for the three months ended 2004 and 2003.
(4) Net interest spread is the arithmetic difference between yield on
interest-earning assets and the rate paid on interest-bearing liabilities.
(5) Tax equivalent net interest margin is computed by dividing tax equivalent
net interest income by average interest-earning assets.
21
Rate Volume Analysis. The following table shows the extent to which changes in
interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities affected KNBT's interest income and expense during
the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in rate, which is the change in rate multiplied by prior year
volume, and (2) changes in volume, which is the change in volume multiplied by
prior year rate. The combined effect of changes in both rate and volume has been
allocated proportionately to the change due to rate and the change due to
volume.
Three Months Ended March 31, 2004
Compared To
Three Months Ended March 31, 2003
-------------------------------------------
Increase (Decrease)
Due to
---------------------------- Total
Increase
Rate Volume (Decrease)
---------------------------- -------------
(dollars in thousands)
Interest income:
Cash and cash equivalents $ 55 $ (44) $ 11
Investment securities (1,740) 6,326 4,586
Loans receivable, net (1,965) 5,936 3,971
------------- ------------- -------------
Total interest-earning assets (3,650) 12,218 8,568
Interest expense:
Savings deposits (317) 273 (44)
Demand deposits (171) 122 (49)
Money market deposits (432) 348 (84)
Certificates of deposits (652) 1,201 549
------------- ------------- -------------
Total interest-bearing deposits (1,572) 1,944 372
Securities sold under agreements
to repurchase (60) 63 3
FHLB advances (550) 1,566 1,016
Subordinated borrowings - 181 181
------------- ------------- -------------
Total interest-bearing liabilities (2,182) 3,754 1,572
------------- ------------- -------------
Increase (decrease) in net
interest income $ (1,468) $ 8,464 $ 6,996
============= ============= =============
- ------------------------------------------------------------------------------------------------------
22
Provision for Loan Losses. KNBT made provisions for loan losses of $1.5 million
for the three months ended March 31, 2004 as compared to $62,000 for the three
months ended March 31, 2003. During the first quarter of 2004, KNBT's net loan
charge-offs amounted to $410,000 as compared to $300,000 during the first
quarter of 2003. KNBT's total non-performing loans amounted to $2.8 million,
$2.1 million and $2.0 million at March 31, 2004, December 31, 2003 and March 31,
2003, respectively. At March 31, 2004, KNBT's allowance for loan losses was $9.0
million or 0.98% of total loans receivable. At December 31, 2003, KNBT's
allowance for loan losses was $7.9 million or 0.89% of total loans receivable.
Non-Interest Income. KNBT's total non-interest income amounted to $4.0 million
for the three months ended March 31, 2004 compared to $2.2 million for the three
months ended March 31, 2003, an increase of $1.8 million or 81.9%. This increase
was principally the result of an increase in deposit service charges of $459,000
due primarily to a larger number of accounts added as a result of the
acquisition of First Colonial, revenues from the Trust department acquired from
First Colonial of $353,000, a $312,000 increase in earnings on bank owned life
insurance due primarily to a full quarters earnings on the $30 million BOLI
purchased in the fourth quarter of 2003, a gain of $298,000 on the sale of
KNBT's credit card loans receivable, higher revenues from brokerage services of
$73,000 and a $339,000 increase in other non-interest operating income of which
$261,000 was the result of increased debit card and electronic banking fees due
to an increased volume of transactions. These increases in non-interest income
were offset in part by a $105,000 decrease in the gains on the sale of
residential real estate loans and losses on the sale of investment securities
available-for-sale of $8,000.
Non-Interest Expense. KNBT's non-interest expense was $12.5 million for the
three months ended March 31, 2004 compared to $6.9 million for the three months
ended March 31, 2003, an increase of $5.6 million or 81.1%. The primary reason
for the increase in non-interest expense was higher salary and benefit costs,
higher occupancy and equipment expenses, the amortization of intangible assets
and increases in other expenses due principally to the acquisition of First
Colonial. Compensation and benefit expenses for the first quarter of 2004 were
$7.2 million as compared to $3.7 million for the same period in 2003. This was
an increase of $3.5 million or 94.0%. At March 31, 2004, KNBT had 625 employees
compared to 387 at March 31, 2003. The increase in employees was due primarily
to the addition of 245 employees as a result of the merger with First Colonial.
Net occupancy and equipment expense increased by $826,000 or 82.7% to $1.8
million for the first quarter of 2004 from $1.0 million in the first quarter of
2003. The principal factor in the higher occupancy expenses was the acquisition
of First Colonial, which added 20 offices. Since March 31, 2003, KNBT has opened
two branch offices and acquired a 47,000 square foot operations center. The
amortization of intangible assets related to the First Colonial acquisition
amounted to $547,000 for the three months ended March 31, 2004. Professional
fees increase by $460,000 in the first quarter of 2004 to a total of $572,000 as
compared to $112,000 for the first quarter of 2003. The increase in professional
fees was due to increases in accounting, legal and consulting costs principally
incurred in connection with the expansion and systems integration. All other
non-interest expenses including advertising, data processing, supplies, postage,
telephone and other miscellaneous expenses were $2.3 million and $2.1 million
for the first quarter of 2004 and 2003, respectively. This increase of $256,000
or 12.4% was due primarily to the merger and systems integration costs.
Income Tax Expense. KNBT's income tax expense was $1.3 million for the three
months ended March 31, 2004 compared to $1.1 million for the three months ended
March 31, 2003. KNBT's effective Federal tax rate was 24.3% for the three months
ended March 31, 2004 compared to 27.2% for the three months ended March 31,
2003. The principal factors in the lower effective tax rate was the increased
investment in tax-free municipal securities and in BOLI.
23
ITEM 3. Quantitative and Qualitative Discussion About Market Risk
For a discussion of KNBT's asset and liability management policies as well as
the methods used to manage its exposure to the risk of loss from adverse changes
in market prices and interest rates see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" - "Market Risk" and "Interest
Rate Sensitivity" in KNBT's annual report on Form 10-K for the year ended
December 31, 2003. There have been no material changes in KNBT's assessment of
its sensitivity to market risk since December 31, 2003.
ITEM 4. Controls and Procedures
Management evaluated, with the participation of the Chief Executive Officer and
Chief Financial Officer, the effectiveness of the disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchanges Act of 1934) at March 31, 2004. Based on such evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the disclosure
controls and procedures are designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
same time period specified in the SEC's rules and regulations and are operating
in an effective manner.
During the quarter ended March 31, 2004, the Company converted certain of its
operating and accounting functions to a new data processing system. This has
resulted in certain changes in the information gathering, collection and
reporting functions. The Company has adjusted the internal controls
appropriately and none of these changes, or any other changes during the
quarter, have materially affected, or are reasonably likely to materially
affect, the internal control over financial reporting (as defined in Rules 13a -
15(f) or 15(d) - 15(f) under the Securities Exchange Act of 1934).
24
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
There are no matters required to be reported under this item.
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
There are no matters required to be reported under this item.
ITEM 3. Defaults Upon Senior Securities
There are no matters required to be reported under this item.
ITEM 4. Submission of Matters to a Vote of Security Holders
There are no matters required to be reported under this item.
ITEM 5. Other Information
There are no matters required to be reported under this item.
ITEM 6. Exhibits and Reports on Form 8-K
(a) List of exhibits: (filed herewith unless otherwise noted)
31.1 Section 302 Certification of the Chief Executive Officer
31.2 Section 302 Certification of the Chief Financial Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
On January 14, 2003, the Registrant filed an amendment
(Amendment No. 2) to its Current Report on Form 8-K, dated
October 31, 2003, providing under Item 7 certain financial
information.
On February 3, 2004, the Registrant filed a Current Report
on Form 8-K, dated February 2, 2004, providing under Item
12, information with respect to the results of operations
and financial conditions at and the for the year ended
December 31, 2003.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KNBT BANCORP, INC.
DATE: May 17, 2004 BY: /S/ Scott V. Fainor
----------------------- --------------------------------------
Scott V. Fainor
President and Chief Executive
Officer
DATE: May 17, 2004 BY: /S/ Eugene T. Sobol
----------------------- --------------------------------------
Eugene T. Sobol
Senior Executive Vice President
Chief Operating Officer
Chief Financial Officer
26