|
|
 | | | |
- close
- close
- close
- close
| |||||||||
KNBT Bancorp 10-Q 2007 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-Q
____________________________________
(Mark
One)
OR
For
the
transition period from ____________ to ____________
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 o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Indicate
by check mark whether the
registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.
YES oNOx
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practicable date: As of August 3, 2007, 26,243,968
shares of the Registrant’s common stock were outstanding. KNBT
BANCORP, INC. AND SUBSIDIARIES
INDEX
KNBT
BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
1
KNBT
BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
2
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
3
KNBT BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS
4
KNBT
BANCORP, INC. AND SUBSIDIARIES
KNBT
Bancorp, Inc. (“KNBT” or the
“Company”) is a Pennsylvania corporation headquartered in Bethlehem,
Pennsylvania. The Company is the registered bank holding company for Keystone
Nazareth Bank & Trust Company (the “Bank”), a Pennsylvania-chartered savings
bank.
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 used in the United
States (“GAAP”). However, all normal, recurring adjustments that, 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 consolidated financial statements
and the notes thereto for the Company for the year ended December 31, 2006,
which are included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2006 (the “Form 10-K”). The results for the
interim periods presented are not necessarily indicative of the results that
may
be expected for the year ended December 31, 2007.
The
financial information presented
herein is unaudited; however, in the opinion of management, all adjustments
(which include 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 the 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 and both
the Bank’s and the Company’s subsidiaries 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.
The
principal estimates that are particularly susceptible to significant change
in
the near term relate to the allowance for loan losses, the evaluation of
impairment of goodwill and the evaluation of deferred tax asset. The evaluation
of the adequacy of the allowance for loan losses includes an analysis of
the
individual loans and overall risk characteristics and size of the different
loan
portfolios, and takes into consideration current economic and market conditions,
the capability of specific borrowers to pay specific loan obligations, as
well
as current loan collateral values. However, actual losses on specific loans,
which also are encompassed in the analysis, may vary from estimated
losses.
In
addition to the Bank, KNBT’s
subsidiaries include KNBT Inv. I and KNBT Inv. II, and the Bank’s wholly owned
subsidiaries KLVI, Inc., KLV, Inc., KNBT Settlement Services, LLC, Caruso
Benefits Group, Inc. (“Caruso”), Higgins Insurance Associates, Inc. (“Higgins”),
and KNBT Securities, Inc.
5
The
Trust Company of Lehigh Valley
On
February 28, 2006, the Bank
completed its acquisition of Paragon Group, Inc. (“Paragon”), the parent holding
company for the Trust Company of Lehigh Valley (“TCLV”), a
Pennsylvania-chartered non-depository bank located in Allentown,
Pennsylvania. TCLV provided estate, personal trust and investment
management services, estate and financial planning and employee retirement
benefits administration and had approximately $400 million in assets under
administration and management at the time of its acquisition by the
Bank. Paragon and TCLV were merged into the Bank in connection with
the completion of the acquisition. The results of the acquired trust
operations have been included in KNBT’s results since March 1,
2006.
Under
the terms of the definitive
merger agreement, the Bank acquired all of the capital stock of Paragon for
a
purchase price of $5.3 million in cash of which $4.3 million was paid at time
of
closing and $1.0 million was held in escrow. As a result of
satisfaction of certain conditions set forth in the merger agreement, 50% of
the
escrow including interest earned was disbursed on February 28,
2007. Assuming the remaining conditions are met, the balance will be
paid upon the eighteenth-month anniversary of the completion of the acquisition
of Paragon.
The
acquisition price resulted in
the recording of $2.6 million in goodwill, which is the excess cost of the
entity over the net of the amounts assigned to assets acquired and liabilities
assumed and $2.6 million of other intangible assets. The intangible
assets consist of $1.7 million for Paragon’s customer list, $610,000 for a
restrictive covenant agreement with the principals of Paragon and $280,000
for
employment agreements with the principals of Paragon. The amortization periods
for the intangible assets are 15 years, 5 years and 2.7 years, respectively.
Amortization expense relating to these assets was $91,000 and $43,000 for the
three month periods ended June 30, 2007 and 2006, respectively, and $181,000
and
$58,000 for the six month periods ended June 30, 2007 and 2006,
respectively.
Caruso
Benefits Group, Inc.
On
April 1, 2005, the Bank acquired
Caruso, a benefits management firm based in Bethlehem,
Pennsylvania. Caruso specializes in benefits management with an
emphasis on group medical, life and disability. Caruso’s results of operations
have been included in KNBT’s results since the date of
acquisition. Caruso operates as a wholly owned subsidiary of the
Bank.
Under
the terms of the stock purchase
agreement, the Bank acquired all of the capital stock of Caruso for a purchase
price of $28.0 million in cash of which $20.0 million was paid at the time
of
closing with the remaining $8.0 million payable over a three-year period,
subject to Caruso maintaining certain levels of profitability. Caruso
has exceeded profitability targets in each of the first two
years. KNBT paid $2.7 million to Caruso during the second quarter of
2006 and $2.9 million during the second quarter of 2007 that represents the
aggregate obligation through June 30, 2007. The payments were made
pursuant to the terms of the stock purchase agreement relating to the purchase
price contingency.
The
acquisition resulted in the
recording of approximately $13.1 million of goodwill. KNBT also
recorded an identifiable intangible asset for Caruso’s customer list of $9.9
million that is being amortized on a straight line basis over 15
years. The expense related to the amortization of the identifiable
intangible asset arising from the Caruso acquisition totaled $165,000 and
$331,000 for the three and six-month periods ended June 30, 2007 and 2006,
respectively.
Additional
information and
disclosures concerning the Paragon and Caruso acquisitions can be found in
the
Company’s Form 10-K for the year ended December 31, 2006.
6
The
Company calculates earnings per
share as provided by the provisions of SFAS No. 128, “Earnings Per Share” (SFAS
No. 128). Basic and diluted earnings per share for the three and six
months ended June 30, 2007 and 2006 were calculated as follows:
KNBT
had outstanding stock options
for the three and six months ended June 30, 2007 to purchase 1,712,980 and
1,690,648 shares of common stock, respectively, with exercise prices ranging
from $15.41 to $16.56 per share that were anti-dilutive. These
options were not included in the computation of diluted earnings per share
for
the three and six months ended June 30, 2007 because the option exercise
price
was greater than the average market price. KNBT also had outstanding
stock options for the three and six months ended June 30, 2006, to purchase
1,290,400 and 1,266,528 shares of common stock, respectively, at $16.50 to
$16.56 per share that were anti-dilutive.
Common
stock outstanding for the
purpose of calculating basic earnings per share does not include 773,518
and
821,119 unallocated shares held by the Employee Stock Ownership Pan (“ESOP”) at
June 30, 2007 and June 30, 2006, respectively. The exclusion of these
unallocated shares held by the ESOP is in accordance with the provisions
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”).
Unearned
and uncommitted shares of
common stock held in the Management Recognition and Retention Plan (“MRRP”) are
not considered to be outstanding for basic earnings per share
calculations. At June 30, 2007, unearned MRRP shares totaled 378,600
and uncommitted MRRP shares totaled 55,147. At June 30, 2006,
unearned MRRP shares totaled 379,700 and uncommitted MRRP shares totaled
176,547. 7
The
amortized cost, unrealized gains
and losses and fair value of KNBT’s investment securities held-to-maturity and
available-for-sale at June 30, 2007 (unaudited) and December 31, 2006 are as
follows:
Stock
Option Plans
KNBT
maintains the 2004 Stock Option
Plan (“2004 Plan”), as well as the stock option plans assumed in prior
acquisitions. The 2004 Plan allows KNBT to grant options covering up
to an aggregate of 2,020,118 shares of common stock to key employees and
directors. The options have a term of up to ten years when they are
issued and typically vest over a five-year period, except for some options
granted to directors that vest over an eight-year period. The
exercise price of each option is the market price of KNBT’s stock on the date of
grant.
8
On
January 1, 2006, KNBT adopted SFAS
No. 123(R) (revised 2004), “Share-Based Payment”. Statement 123(R)
replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees”. SFAS No. 123(R) established accounting and disclosure
requirements using a fair-value based method of accounting for stock-based
employee compensation plans. Prior to January 1, 2006, KNBT accounted
for stock options using APB Opinion No. 25 and included disclosures of pro
forma
net income and earnings per share, as if the fair value-based method of
accounting defined in SFAS No. 123 had been used. KNBT elected the
modified prospective transition method for adopting SFAS No.
123(R). Under SFAS No. 123(R), all forms of share-based payments to
employees, including stock options, are treated the same as other forms of
compensation by recognizing the related cost in the income
statement. The provisions apply to all awards granted after the
required effective date as well as existing awards not vested, or which are
modified, repurchased, or canceled after that date.
As
of January 1, 2006, KNBT began to
expense these grants as required by SFAS No. 123(R). Stock-based
employee compensation cost pertaining to stock options is reflected in net
income with the fair value of each option being estimated as of the date of
grant using the Black-Scholes option valuation model. The
Black-Scholes model incorporates variable assumptions, which
include: the expected volatility, which is based on the historical
volatility of KNBT’s traded stock and peer group comparisons; the expected term
calculated using the simplified method; the expected dividend yield based on
historical patterns and peer group performance; and the risk free interest
rate,
based on the U.S. Treasury yield curve at the time of the grant. KNBT
used historical data to estimate option exercises and forfeitures within the
valuation model. KNBT used the following assumptions:
During
the three-month periods ended
June 30, 2007 and 2006, KNBT did not grant any new options. For the
six-month periods ended June 30, 2007 and 2006, KNBT granted 180,050 and 217,400
new options to certain employees and directors under the 2004
Plan. These options vest ratably over a five-year
period.
A
summary of all of the stock option
plans as of June 30, 2007 and 2006 and changes during the quarters are as
follows:
9
The
following table summarizes
information concerning KNBT’s stock options outstanding and exercisable at June
30, 2007:
The
aggregate intrinsic value of the
options outstanding as of June 30, 2007 and 2006 was $3.8 million and $5.1
million, respectively. The aggregate intrinsic value represents the total
pre-tax intrinsic value (the difference between KNBT’s closing stock price on
the last trading day of the quarter ended and the exercise price, multiplied
by
the number of options outstanding). The aggregate intrinsic value of options
currently exercisable as of June 30, 2007 was $3.8 million compared to $4.9
million as of June 30, 2006. The weighted average remaining contractual life
is
6.02 years for exercisable options outstanding at June 30, 2007. The total
intrinsic value of stock options exercised during the quarters ended June 30,
2007 and 2006 was $55,662 and $196,291, respectively.
Compensation
cost is generally
recognized over the stated vesting period as provided in terms of the option
grants. As of June 30, 2007, there was $4.2 million of unrecognized
compensation cost related to unvested stock options that is expected to be
recognized over a weighted-average period of approximately 2.29
years.
Management
Recognition and Retention
Plan
The
MRRP, which is a stock-based
incentive plan, provides for the ability to grant up to 808,047 restricted
shares of KNBT’s common stock to the Company’s directors, advisory directors,
officers and employees. KNBT, for the benefit of the MRRP Trust,
purchased 808,047 shares of KNBT common stock at an average price of $16.44
per
share, which was treated as a reduction of additional
paid-in-capital. Shares awarded to date under the MRRP are generally
earned by recipients at a rate of 20% per year beginning on the first
anniversary date of the grant. (Certain grants made in 2006 vest 60%
on the third anniversary and 20% per year thereafter.) On May 6,
2004, 638,000 restricted shares were awarded. For the year ended
December 31, 2005, 10,000 additional MRRP shares were awarded. On
January 26, 2007, 35,000 additional MRRP shares were awarded. Since
the inception of the MRRP, awards covering 29,100 shares were forfeited and
made
available for future grants. Except as discussed below, compensation
expense for this plan is being recorded over the vesting period and is based
on
the market value of KNBT’s stock as of the date the awards were
made. The remaining unearned compensation cost of the MRRP shares
granted is $4.2 million and the periodic amortization of such cost is recorded
as an increase in shareholders’ equity. Expense under this plan for
the three month periods ended June 30, 2007 and 2006 was $531,000 and $534,000,
respectively. Expense under this plan for both the six month periods
ended June 30, 2007 and 2006 was $1.1 million.
10
The
MRRP also provides for the ability
to issue performance-based restricted share awards. There were no
performance-based restricted shares awarded for the six month period ended
June
30, 2007. During the year ended December 31, 2006, the Board of
Directors awarded performance-based restricted share awards covering 85,000
shares subject to increase as described below. These shares are
earned if certain defined corporate performance targets are achieved for fiscal
year 2008. If the targets are achieved, on the third anniversary of
the date of grant, 60% of the shares granted will be earned with the remaining
40% being earned pro rata on the fourth and fifth anniversary dates of the
grant
assuming the recipient remains employed by KNBT at each of such
dates. Furthermore, if the Company exceeds the performance targets
for fiscal year 2008, the awards will increase in the aggregate by 14,000
shares. The grants specifically exclude accelerated vesting in the
event of a change in control. To date, KNBT has not recorded any
compensation expense related to these performance-based restricted share
awards.
In
January 2007, upon further
consideration of the grants of the performance-based restricted share awards,
the grantees agreed to forfeit any right to receive 40% of the shares subject
to
the performance-based MRRP grants made in 2006 that would vest on the fourth
and
fifth anniversary of the grant of such awards (assuming the performance targets
are met). In return for such forfeitures, each grantee agreed to
receive a cash bonus in an amount equal to the fair market value of the
remaining unvested restricted shares on the third anniversary of the grant
date
of the performance-based restricted share awards. Such amount will be
paid in a lump sum within five days of the third anniversary of the grant date
of the performance-based restricted share awards.
A
summary of KNBT’s loans receivable at
June 30, 2007 (unaudited) and December 31, 2006 is as follows:
11
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 June 30, 2007
(unaudited) and December 31, 2006.
KNBT’s
recorded investment in impaired
loans was $1.0 million at June 30, 2007 and $1.6 million at December 31,
2006. The valuation allowance related to impaired loans is a part of
the allowance for loan losses and was $253,000 at June 30, 2007 and $323,000
at
December 31, 2006. The average impaired loan balance for the six
months ended June 30, 2007 was $1.1 million and $2.1 million for the six months
ended June 30, 2006. During the six months ended June 30, 2007 and
2006, KNBT received principal payments on impaired loans of $297,000 and
$584,000, respectively. Income on impaired loans is recognized by
KNBT on a cash basis. KNBT recognized $39,000 in interest income on
impaired loans for the six month period ended June 30, 2007, and $5,000 for
the
six month period ended June 30, 2006.
The
following table shows the
(unaudited) activity in KNBT’s allowance for loan losses during the periods
indicated:
12
KNBT
participates in a multiple
employer defined benefit pension plan, which covered substantially all employees
who had 1,000 hours of service during the plan year ended October
2003. On October 1, 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 six months ended June 30, 2007 and 2006 was $462,000 and $183,000,
respectively, which is included in compensation and employee benefits
expense.
As
part of the Northeast Pennsylvania
Financial Corp., (“NEPF”) merger, KNBT assumed the multiple employer defined
benefit pension plan of NEPF. This plan covered all employees who
were age 21 or older and had one year of service at the time the plan was
frozen. NEPF had amended the plan and froze the benefits for the then
current participants of the plan. For the six months ended June 30,
2007 and 2006, KNBT contributed approximately $249,000 and $239,000,
respectively, to the NEPF pension plan, which is included in compensation and
employee benefits expense.
KNBT
expects to contribute an
additional $230,000 in the aggregate to the two pension plans through December
31, 2007.
KNBT,
as a part of previous
acquisitions, assumed the deferred compensation plan for certain former
directors of First Colonial. This Plan has been subsequently frozen
and no future deferrals are permitted. The plan requires annual
payments for periods of five to fifteen years beginning at age 65 or
death. The annual benefit is based upon the amount deferred plus
interest. KNBT has recorded the deferred compensation liabilities
using the present value method. The net periodic defined benefit
expense for the six months ended June 30, 2007 and June 30, 2006 was as
follows:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
