<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ___________ TO ____________ .
COMMISSION FILE NO. 0-22124
NSD BANCORP, INC.
(Exact name of Registrant as specified in its charter)
COMMONWEALTH OF PENNSYLVANIA 25-1616814
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5004 MCKNIGHT ROAD, PITTSBURGH, PENNSYLVANIA 15237
(Address of principal executive offices) (Zip Code)
(412) 231-6900
(Registrant's telephone number, including area code)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<S> <C>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------------------- --------------------------------------------
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $1.00 Par Value
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K __________
The aggregate market value of Common Stock, $1.00 par value, held by
non-affiliates of March 5, 1997, was $40,940,750.
The number of shares outstanding of the Registrant's Common Stock as of
March 5, 1997 was 1,637,630.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1996 are incorporated by reference into Parts I, II and IV.
Portions of the Registrant's Proxy Statement for the Annual Shareholders'
Meeting to be held on April 22, 1997, are incorporated by reference into Part
III.
Number of Pages in this Filing 6
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NSD BANCORP, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................................... 1
Item 2. Properties.................................................................. 1
Item 3. Legal Proceedings........................................................... 2
Item 4. Submission of Matters to a Vote of Security Holders......................... 2
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....... 2
Item 6. Selected Financial Data..................................................... 2
Item 7. Management's Discussion and Analysis of Financial condition and Results of
Operations.................................................................. 2
Item 8. Financial Statements and Supplementary Data................................. 2
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.................................................................. 3
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 3
Item 11. Executive Compensation...................................................... 3
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 3
Item 13. Certain Relationships and Related Transactions.............................. 3
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 3
Signatures.................................................................. 5
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
NSD Bancorp, Inc. (the "Corporation") is a registered bank holding company
organized under the Pennsylvania Business Corporation Law and is registered
under the Bank Holding Company Act of 1956, as amended. The Corporation became a
holding company upon acquiring all of the outstanding shares of NorthSide Bank
through an exchange of stock on August 2, 1993. At December 31, 1996, the
Corporation had total assets, deposits and shareholders' equity of $304,801,854,
$260,986,805 and $27,320,253, respectively. Full-time equivalent employees of
the Corporation were 138 at December 31, 1996.
The Corporation derives substantially all of it's income from banking and
bank-related services provided by its wholly-owned subsidiary, NorthSide Bank
(the Bank). The Bank is a state chartered bank with ten branch locations at
December 31, 1996. The Corporation is subject to periodic examination and
regulation by the Federal Reserve Bank. As a state chartered bank, NorthSide
Bank is subject to periodic examination and regulation by the Pennsylvania
Department of Banking and the FDIC. The Bank is a full-service bank offering
retail banking services, such as demand, savings and time deposits, money market
accounts, secured and unsecured loans, mortgage loans, safe deposit boxes,
holiday club accounts, wire transfers, money orders and traveler's checks.
Services to commercial customers are also offered, including real estate
mortgage loans, lines of credit, inventory and accounts receivable financing and
equipment leasing. NorthSide Bank operates nine automatic teller machines to
provide 24 hour banking services to its customers. The Bank's deposits are
derived from more than 50,000 individual and commercial accounts. There is no
single depositor or group of related depositors, the loss of whom would have a
materially adverse effect on the business of the Bank. The Bank's loans are not
concentrated within a single industry or group of related industries to any
material extent.
The Bank's service area includes the northern portion of Allegheny County
and southern Butler County where it competes with many other banks. The Bank
also competes with regional bank and trust companies, credit unions, savings and
loan associations, consumer finance companies, insurance companies and direct
lending agencies of the government throughout its service area. Banks compete
for all types of deposit and loan accounts, with banks and trust companies
having the additional power to compete for trust accounts. Savings and loan
associations offer savings and time deposit services as well as installment and
mortgage loans.
Credit unions also compete with the Bank for savings and time deposit
accounts and for installment loan accounts. Consumer finance companies provide
personal installment loan services in direct competition with the Bank.
The Bank's business is not seasonal in nature, nor does it depend on any
single customer or a few customers, the loss of any one or more of which would
be a materially adverse effect on its business. A further description of the
Corporation's business and discussion of operations is set forth on page 8 in
the Corporation's 1996 Annual Report to Shareholders included in this Form 10-K
as Exhibit 13 which description is incorporated herein by reference.
ITEM 2. PROPERTIES
The Corporation's principal office is located at 5004 McKnight Road,
Pittsburgh, Pennsylvania. The Bank's main office is located at 100 Federal
Street, Pittsburgh, Pennsylvania. Including the main office, the Bank has a
total of nine branch offices located as listed below and on the following page.
The Bank owns the four-story building located on Federal Street, and a parking
lot adjacent to the building. The Bank also owns its Cranberry Township, Ross
Township, Pine Creek and West View branch offices, although it leases the land
on which the Pine Creek Shopping Center branch office is located. The Bank also
owns the land on which its former Ross Township office was located. The Bank's
Hampton Township, McCandless Township, Allegheny Professional Building, Duncan
Manor and Pittsburgh Cultural District branch offices and the Pine Creek
Shopping Center land are operated under leases that contain various renewal
option periods extending through December, 2005.
1
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LOCATION NAME AND ADDRESS
Pittsburgh-North Side
100 Federal Street
Pittsburgh, PA 15212
Allegheny Professional Building
490 East North Avenue
Pittsburgh, PA 15212
West View
728 Center Avenue
West View, PA 15229
McCandless Township
Perry Highway and Ingomar Road
McCandless, PA 15237
Cranberry Township
Route 19N at St. Francis Way
Cranberry, PA 16046
Hampton Township
Shoppers Plaza at Route 8
Allison Park, PA 15101
Ross Township
5004 McKnight Road
Ross, PA 15237
Pine Creek
Pine Creek Shopping Center
9805 McKnight Road
McCandless, PA 15237
Duncan Manor
Duncan Plaza
1701 Duncan Avenue
Allison Park, PA 15101
Pittsburgh Cultural District
701 Liberty Avenue
Pittsburgh, PA 15222
ITEM 3. LEGAL PROCEEDINGS
The Corporation is subject to a number of asserted and unasserted potential
legal claims encountered in the normal course of business. In the opinion of
both management and legal counsel, there is no present basis to conclude that
the resolution of these claims will have a material adverse effect on the
Corporation's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Corporation to its shareholders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's Common Stock is traded on the NASDAQ National Market
System under the symbol NSDB. The information set forth under the captions
"Regulatory Restrictions" and "Sales Price and Cash Dividends per Share" on
pages 19 and 35, respectively, of the 1996 Annual Report is incorporated herein
by reference. As of March 5, 1997, the Corporation had 439 shareholders of its
Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference is the information presented on page 23 of the
1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference is the information presented on pages 25 to 36 of
the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference is the information presented on pages 4 to 24 of
the 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
2
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference is the information presented on pages 3, 4 and 5
of the Proxy Statement for the Annual Shareholders Meeting to be held April 22,
1997.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference is the information presented on pages 5, 6, 7,
and 8 of the Proxy Statement for the Annual Shareholders Meeting to be held on
April 22, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference is the information presented on pages 2, 8 and 9
of the Proxy Statement for the Annual Shareholders Meeting to be held on April
22, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference is the information presented on pages 8 and 9 of
the Proxy Statement for the Annual Shareholders Meeting to be held on April 22,
1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS FILED:
The consolidated financial statements and report of the Registrant's
independent accountant thereon are incorporated by reference to the pages
indicated in the said Annual Report.
CONSOLIDATED FINANCIAL STATEMENTS:
NSD Bancorp, Inc. and Subsidiary
Consolidated Balance Sheet, page 4
Consolidated Statement of Income, page 5
Consolidated Statement of Cash Flows, page 6
Consolidated Statement of Changes in Shareholders' Equity, page 7
Notes to Consolidated Financial Statements, pages 8-22
Independent Auditor's Report, page 24
3
<PAGE> 6
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Schedules normally required on Form 10-K are omitted since the required
information is either not applicable, not deemed material or is shown in the
respective consolidated financial statements or in the notes thereto.
<TABLE>
<S> <C>
EXHIBITS
3a. Articles of Incorporation of NSD Bancorp, Inc. filed as Exhibit 3a to NSD Bancorp,
Inc.'s Form S-4 filed March 9, 1993 (Registration No. 33-59242), is incorporated
herein by reference.
3b. Bylaws of NSD Bancorp, Inc. filed as Exhibit 3b to NSD Bancorp, Inc.'s Form S-4
filed March 9, 1993 (Registration No. 33-59242), is incorporated herein by
reference.
10A. Employment agreement, dated July 1, 1993 between NSD Bancorp, Inc. and Lloyd Gibson
filed as exhibit 10D to NSD Bancorp, Inc.'s Form 10-K for the fiscal year ended
December 31, 1993 is incorporated herein by reference.
10B. NSD Bancorp, Inc. 1994 Stock Option Plan filed as Exhibit 4.1 to NSD Bancorp,
Inc.'s Form S-8 filed April 27, 1994 is incorporated herein by reference.
10C. NSD Bancorp, Inc. 1994 Non-Employee Director Stock Option Plan filed as Exhibit 4.1
to NSD Bancorp, Inc.'s Form S-8 filed April 27, 1994 is incorporated herein by
reference.
13. 1996 Annual Report to Shareholders is presented within.
21. Subsidiaries of the Registrant are presented within.
23. Consent of Independent Certified Public Accountants is presented within.
</TABLE>
REPORTS ON FORM 8-K
None
4
<PAGE> 7
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NSD BANCORP, INC.
(Registrant)
By /s/ LLOYD G. GIBSON
------------------------------------
Lloyd G. Gibson
President and Chief Executive
Officer
Dated: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 27, 1997:
<TABLE>
<C> <S>
/s/ LAWRENCE R. GAUS Chairman of the Board, Director
- ----------------------------------------
Lawrence R. Gaus
/s/ LLOYD G. GIBSON President and Chief Executive Officer, Director
- ---------------------------------------- (Principal Executive Officer)
Lloyd G. Gibson
/s/ JAMES P. RADICK Treasurer (Principal Financial and Accounting
- ---------------------------------------- Officer)
James P. Radick
/s/ WILLIAM R. BAIERL Director
- ----------------------------------------
William R. Baierl
/s/ GRANT A. COLTON, JR. Director
- ----------------------------------------
Grant A. Colton, Jr.
/s/ NICHOLAS C. GEANOPULOS Director
- ----------------------------------------
Nicholas C. Geanopulos
/s/ POLLY B. LECHNER Director
- ----------------------------------------
Polly B. Lechner
/s/ CHARLES S. LENZNER Director
- ----------------------------------------
Charles S. Lenzner
/s/ DAVID W. MCCONNELL Director
- ----------------------------------------
David W. McConnell
/s/ KENNETH L. RALL Director
- ----------------------------------------
Kenneth L. Rall
/s/ HENRY E. REA, JR. Director
- ----------------------------------------
Henry E. Rea, Jr.
/s/ ARTHUR J. ROONEY, II Director
- ----------------------------------------
Arthur J. Rooney, II
</TABLE>
5
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EXHIBIT 13
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CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 12,493,654 $ 8,897,094
Federal Funds Sold 8,400,000 3,200,000
Securities Available for Sale 55,668,550 43,770,267
Securities Held to Maturity (Market Value of $9,563,505 at December 31,
1996 and $11,330,157 at December 31, 1995) 9,316,952 10,888,223
Loans Available for Sale 2,943,248 5,715,476
Loans, Net of Deferred Fees 211,106,328 182,937,989
Unearned Income (1,212,814) (1,402,670)
Reserve for Loan Losses (2,578,504) (2,676,362)
------------ ------------
Loans, Net 207,315,010 178,858,957
Premises and Equipment, Net 3,686,319 3,746,891
Accrued Interest Receivable 1,992,396 1,815,216
Other Real Estate Owned and Assets Held for Sale 432,687 75,741
Other Assets 2,553,038 1,763,777
------------ ------------
TOTAL ASSETS $304,801,854 $258,731,642
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing $ 50,341,084 $ 44,976,118
Interest Bearing 210,645,721 175,267,017
------------ ------------
Total Deposits 260,986,805 220,243,135
Borrowed Funds:
Repurchase Agreements 1,911,184 1,822,433
Short-Term Borrowings 5,560,000 2,780,000
Long-Term Borrowings 4,000,000 4,600,000
------------ ------------
Total Borrowed Funds 11,471,184 9,202,433
Accrued Interest Payable 4,551,792 3,904,564
Other Liabilities 471,820 517,656
------------ ------------
Total Liabilities 277,481,601 233,867,788
Common Stock $1 Par Value; Authorized 5,000,000 Shares, Issued and
Outstanding 1,637,630 in 1996 and 1,559,849 in 1995
Common Stock 1,637,630 1,559,849
Capital Surplus 6,266,182 4,593,891
Net Unrealized Holding Gains on Securities Available for Sale 1,199,083 969,099
Retained Earnings 18,217,358 17,741,015
------------ ------------
Total Shareholders' Equity 27,320,253 24,863,854
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $304,801,854 $258,731,642
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 2
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CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans, Including Fees $17,518,046 $15,983,482 $13,957,400
Investment Securities:
Taxable 2,894,268 2,121,803 2,104,079
Tax-Exempt 725,016 852,214 917,719
Dividends 113,199 105,484 89,740
Interest Bearing Deposits 8,901 4,510 9,410
Federal Funds Sold 242,152 338,387 116,504
----------- ----------- -----------
Total Interest Income 21,501,582 19,405,880 17,194,852
INTEREST EXPENSE
Interest on Deposits 8,107,572 7,190,619 5,789,339
Federal Funds Purchased 1,046 5,055 10,729
Interest on Repurchase Agreements 96,484 88,077 31,978
Interest on Long-Term Borrowings 519,503 201,680 35,022
----------- ----------- -----------
Total Interest Expense 8,724,605 7,485,431 5,867,068
Net Interest Income 12,776,977 11,920,449 11,327,784
Provision for Loan Losses 650,000 530,000 460,000
----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 12,126,977 11,390,449 10,867,784
OTHER INCOME
Net Investment Securities Gains (Losses) 211,594 32,656 (185,285)
Service Fees 668,785 692,859 565,188
Net Gain on Settlement & Curtailment of Pension Plan -- 510,960 --
Other Operating Income 459,134 505,216 412,360
----------- ----------- -----------
Total Other Income 1,339,513 1,741,691 792,263
OTHER EXPENSES
Salaries and Employee Benefits 4,015,567 3,927,542 3,835,632
Occupancy Expense 766,869 713,639 741,722
Equipment and Supplies 1,021,056 912,795 772,074
Data Processing 507,826 494,825 489,966
FDIC Insurance 2,000 245,061 453,840
Advertising 197,333 167,485 145,632
Other Operating Expenses 1,642,006 1,497,285 1,445,360
----------- ----------- -----------
Total Other Expenses 8,152,657 7,958,632 7,884,226
Income Before Income Taxes 5,313,833 5,173,508 3,775,821
Provision for Income Taxes 1,624,344 1,500,556 964,446
----------- ----------- -----------
NET INCOME $ 3,689,489 $ 3,672,952 $ 2,811,375
=========== =========== ===========
NET INCOME PER COMMON SHARE
Net Income $2.25 $2.24 $1.72
=========== =========== ===========
Common Dividends Declared and Paid Per Share $.89 $0.79 $0.46
=========== =========== ===========
Weighted Average Shares Outstanding 1,640,672 1,637,716 1,637,630
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,689,489 $ 3,672,952 $ 2,811,375
Adjustments to Net Income:
Provision for Loan Losses 650,000 530,000 460,000
(Gains) Losses on Investment Securities (211,595) (32,656) 185,285
(Gains) Losses on Sale of Other Assets 3,321 (71,574) 17,134
Gain on Loan Sales (14,614) -- (41,568)
Gains on Settlement and Curtailment of Pension Plan -- (510,960) --
Depreciation and Amortization 490,463 422,588 341,709
Net Premium Amortization and Discount Accretion on Investment
Securities (164,466) 96,102 47,560
Provision (Benefit) for Deferred Income Taxes 83,577 118,035 (220,051)
(Increase) in Accrued Interest Receivable (177,180) (92,760) (178,893)
Increase in Accrued Interest Payable 645,835 1,005,178 160,515
(Increase) Decrease in Other Assets (639) 35,559 (14,956)
Deferred Loan Fees, Net (37,450) (1,785) 34,629
Increase (Decrease) in Other Liabilities (45,834) (203,157) 612,390
------------ ------------ ------------
Net Cash Provided by Operating Activities 4,910,907 4,967,522 4,215,129
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Investment Securities Available for Sale 10,888,662 6,042,965 2,113,809
Proceeds from Repayments and Maturities of Investment Securities
Available for Sale 17,651,474 8,017,766 3,252,349
Proceeds from Repayments and Maturities of Investment Securities Held
to Maturity 1,575,000 7,929,487 1,514,000
Purchases of Investment Securities Available for Sale (40,036,313) (19,180,199) (4,066,255)
Purchases of Investment Securities Held to Maturity -- (4,249,922) (2,872,813)
Proceeds from Sales of Other Real Estate Owned -- 224,500 535,000
Net Increase in Loans (28,085,772) (16,864,319) (19,368,673)
Proceeds from Loan Sales 1,475,996 -- 2,609,610
Proceeds from Maturities of Interest Bearing Deposits -- -- 1,000,000
Premium on Deposit Account Acquisition (883,005) -- --
Purchases of Premises and Equipment, Net (364,513) (625,262) (870,044)
------------ ------------ ------------
Net Cash Used by Investing Activities (37,778,471) (18,704,984) (16,153,017)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Demand and Savings Deposit Accounts 34,181,574 (7,370,720) (4,364,675)
Net Increase in Certificates of Deposit 6,676,873 13,847,192 14,031,453
Net Increase in Repurchase Agreements 88,751 440,277 1,382,156
Proceeds from Long-Term Borrowings 4,000,000 6,600,000 --
Repayments of Long-Term Borrowings -- (2,000,000) --
Proceeds from Short-Term Borrowings 960,000 6,568,264 --
Repayments of Short-Term Borrowings (2,780,000) (4,568,264) --
Cash Dividends Paid in Lieu of Fractional Shares (4,758) (3,681) --
Cash Dividends Paid (1,458,316) (1,294,675) (750,000)
------------ ------------ ------------
Net Cash Provided by Financing Activities 41,664,124 12,218,393 10,298,934
------------ ------------ ------------
Increase (Decrease) in Cash and Cash Equivalents 8,796,560 (1,519,069) (1,638,954)
Cash and Cash Equivalents at Beginning of Year 12,097,094 13,616,163 15,255,177
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 20,893,654 $12,097,094 $ 13,616,163
============ =========== ============
</TABLE>
For the years ended December 31, 1996, 1995, and 1994, the Corporation paid
interest of $8,077,378, $6,480,252 and $5,695,340, and income taxes of
$1,703,512, $1,694,425 and $857,600, respectively. Non-cash investing activity
consisted of transfers of loans in liquidation to foreclosed assets of
approximately $328,000 for 1996, $472,800 for 1995 and $134,000 for 1994. There
were no loans originated to facilitate the sale of other real estate during
1996. Such loan originations were nominal in 1995 and 1994. Investment
securities with an amortized cost of approximately $25,772,000 were reclassified
from securities held to maturity to securities available for sale during 1995.
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 4
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
COMMON STOCK ISSUED &
OUTSTANDING
-----------------------
CAPITAL RETAINED
SHARES PAR VALUE SURPLUS OTHER EARNINGS
--------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 1,500,000 $1,500,000 $3,194,921 $ 752,337 $14,763,863
Net Income -- -- -- -- 2,811,375
Stock Dividend 60,000 60,000 1,402,500 -- (1,462,500)
Cash Dividends Declared ($.46 per share) -- -- -- -- (750,000)
Net Unrealized Holding Gains on
Securities Available for Sale -- -- -- (323,127) --
--------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1994 1,560,000 1,560,000 4,597,421 429,210 15,362,738
Net Income -- -- -- -- 3,672,952
Fractional Shares (151) (151) (3,530) -- --
Cash Dividends Declared ($.79 per share) -- -- -- -- (1,294,675)
Net Unrealized Holding Gains on
Securities Available for Sale -- -- -- 539,889 --
--------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1995 1,559,849 1,559,849 4,593,891 969,099 17,741,015
Net Income 3,689,489
Stock Dividend 77,781 77,781 1,672,291 (1,750,072)
Cash Paid in Lieu of Fractional Shares (4,758)
Cash Dividends Declared ($.89 per share) (1,458,316)
Net Unrealized Holding Gains on
Securities Available for Sale 229,984
--------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1996 1,637,630 $1,637,630 $6,266,182 $1,199,083 $18,217,358
========= ========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 5
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NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of NSD Bancorp, Inc. (the Corporation)
include the accounts of the Corporation and its wholly owned subsidiary,
NorthSide Bank, a community bank operating ten branch offices located in Western
Pennsylvania, and NorthSide Bank's wholly owned subsidiary, 100 Federal Street,
Inc. Material intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
INVESTMENT SECURITIES:
The investment securities portfolio consists of securities and short-term
investments which are purchased by the Corporation to enhance the overall yield
on earning assets and to contribute to the management of interest rate risk and
liquidity. Investments in debt and equity securities are classified into three
categories: securities held to maturity, trading securities and securities
available for sale.
The Corporation classifies securities as held to maturity when it has both the
ability and positive intent to hold securities to maturity. Securities held to
maturity are stated at cost adjusted for amortization of premium and accretion
of discount, computed primarily under the interest method. The Corporation's
investment policy specifically prohibits the existence of a trading account
portfolio.
Securities not classified as held to maturity are designated as available for
sale. These securities may be sold in response to changes in market interest
rates, changes in prepayment or extension risk, asset-liability management
decisions, income tax considerations or other circumstances identified by
management. Securities available for sale are recorded at estimated market
value, with aggregate unrealized holding gains and losses reported, net of tax
effect, as a separate component of shareholders' equity.
In November, 1995, the Financial Accounting Standards Board (FASB) issued a
Special Report, A Guide to Implementation of Statement 115 for Certain
Investments in Debt and Equity Securities. Concurrent with the initial adoption
of this implementation guidance but no later than December 31, 1995, the FASB
permitted a one-time opportunity to reassess the appropriateness of the
classifications of all securities. Accordingly, the Corporation's reassessment
resulted in the reclassification, effective December 1, 1995 of securities held
to maturity with an amortized cost of approximately $25,772,000 as securities
available for sale. The amount of net unrealized gains associated with this
transfer at December 31, 1995 was approximately $200,000.
On a periodic basis, management evaluates each security where amortized cost
exceeds realizable value. If the decline is judged to be other than temporary,
the cost of the security is written down to estimated net realizable value with
the write-down included in net securities gains. Realized gains and losses are
computed principally under the specific identification method.
LOANS AVAILABLE FOR SALE:
These loans are carried at the lower of cost or aggregate market value obtained
through secondary market bid quotations. Any realized gains and losses on these
loans are included in other operating income.
LOANS AND RESERVE FOR LOAN LOSSES:
Loans are stated at face value, net of unearned income and deferred fees.
Installment loan unearned income is recognized over the loan term using the
interest method. Interest on all other loans is recognized based on the
outstanding principal balance of the loans. The accrual of interest is
discontinued when, in management's judgement, it is determined that the
collectibility of interest, but not necessarily principal, is doubtful. When a
loan is classified as nonaccrual, all previously accrued and unpaid interest is
reversed. Interest receipts on
8
<PAGE> 6
- --------------------------------------------------------------------------------
nonaccrual loans are applied to principal. Net loan fees are deferred and
amortized over the term of the related loan using the interest method.
The reserve for loan losses is maintained at a level considered adequate by
management to provide for potential loan losses. The reserve is increased by
provisions charged to expense and reduced by loan losses net of recoveries. The
amount of reserve is based on management's evaluation of the loan portfolio as
well as prevailing and anticipated economic conditions, specific problem loans
and other factors.
Effective January 1, 1995, the Corporation adopted FASB Statement No. 114,
"Accounting by Creditors for Impairment of a Loan", and Statement No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures," an amendment of Statement No. 114. Statement No. 114 addresses the
accounting by creditors for impairment of loans by specifying how reserves
should be measured for credit losses related to certain loans. Statement No. 118
rescinds Statement No. 114 rules to permit a creditor to use existing methods
for recognizing interest income on impaired loans and eliminated the income
recognition provision of Statement No. 114. Statement No. 114 amends FASB
Statement No. 5, " Accounting for Contingencies", to clarify that a creditor
should evaluate the collectibility of both contractual interest and principal
when assessing the need for an overall allowance for loan losses. The statement
requires that impaired loans for which foreclosure is probable continue to be
accounted for as loans. The Corporation did not have any loans classified as
in-substance foreclosure at December 31, 1994, thus no reclassification was
necessary upon adoption of this Statement. Furthermore, no additional loss
provisions or changes to the overall allowance for loan losses were required as
a result of adopting this Statement.
Within the context of Statement No. 114, a loan is considered to be impaired
when, based upon current information and events, it is probable that the
Corporation will be unable to collect all amounts due for principal and interest
according to the contractual terms of the loan agreement. Impairment is measured
based on the present value of expected future cash flows discounted at a loan's
effective interest rate, or as a practical expedient, the observable market
price or, if the loan is collateral dependent, the fair value of the underlying
collateral. When the measurement of an impaired loan is less than the recorded
investment in the loan, the impairment is recorded in a specific valuation
allowance through a charge to provision for loan losses. This specific valuation
allowance is periodically adjusted for significant changes in the amount or
timing of expected future cash flows, observable market price or fair value of
the collateral. The valuation allowance, or reserve for impaired loan losses, is
part of the total reserve for loan losses. Upon disposition of an impaired loan,
any related allowance is reversed through a charge to the impaired reserve for
loan losses. Cash payments received on impaired loans are recorded as a direct
reduction of the loan principal. Subsequent amounts collected are recognized as
interest income. Impaired loans are not returned to accruing status until all
amounts due, both principal and interest, are current and there has been a
demonstrated, sustained payment history.
Generally, management considers all major nonaccrual loans and certain
renegotiated debt for impairment. The minimum period without payment that
typically can occur before a loan is considered for impairment is ninety days.
Statement No. 114 does not apply to large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. The Corporation
collectively reviews leases and consumer loans under $50,000, and residential
and commercial real estate under $250,000 for impairment.
FORECLOSED ASSETS:
Foreclosed assets are comprised of other real estate owned and repossessed
collateral, which are carried at the lower of the outstanding loan balance or
estimated fair value less estimated costs to sell at the date of foreclosure.
INCOME TAXES:
The Corporation has adopted FASB Statement No. 109, "Accounting for Income
Taxes" which requires the use of the liability method to account for deferred
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
9
<PAGE> 7
- --------------------------------------------------------------------------------
INTANGIBLE ASSETS:
Included in other assets is a deposit premium of approximately $891,339 and
$58,333 net of accumulated amortization, at December 31, 1996 and 1995,
respectively. The premium is amortized using the straight-line method over a
five year period. The Corporation periodically evaluates the carrying value and
the remaining amortization period of the intangible asset for possible
impairment. Adjustments are recorded when the benefit of the related asset to
the corporation decreases due to disposition of deposits relative to the deposit
premium.
CASH EQUIVALENTS:
The Corporation has defined cash equivalents as cash and due from banks and
federal funds sold.
EARNINGS PER SHARE:
Earnings per common share is calculated by dividing net income by the sum of the
weighted average number of shares of common stock outstanding and the number of
shares of common stock which would be issued assuming the exercise of stock
options during each period.
Earnings per share are based on the weighted average number of shares
outstanding, including the retroactive effect of 5% and 4% stock dividends
recorded in 1996 and 1994, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June of 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards based on the control-oriented
"financial-components" approach. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when extinguished. The
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. This
statement is effective for transfers and servicing of financial assets
transactions occurring after December 31, 1996.
In December of 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125." This statement defers the
effective date of FAS 125 by one year to January 1, 1998, for certain transfer
transactions including repurchase agreements; dollar roll, securities lending
and similar arrangements. SFAS No. 127 also delays by one year the provisions of
SFAS No. 125 for recognition of collateral by secured parties in conjunction
with secured borrowings. The Corporation is currently evaluating the effect that
implementation of these standards will have on its results of operations and
financial position.
RECLASSIFICATIONS:
For comparative purposes, reclassifications have been made to certain amounts
previously reported in the Consolidated Financial Statements.
NOTE 2--INVESTMENT SECURITIES
A summary of investment securities available for sale is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED ---------------------- FAIR
COST GAINS LOSSES VALUE
----------- ---------- -------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 9,195,877 $ 43,413 $ 2,854 $ 9,236,436
Obligations of U.S. Government Agencies 25,403,448 68,571 190,325 25,281,694
Mortgage-Backed Securities 17,160,596 71,578 110,330 17,121,844
Obligations of State and Political
Subdivisions 719,948 4,556 1,682 722,822
Marketable Equity Securities 1,377,143 1,928,611 -- 3,305,754
----------- ---------- -------- -----------
$53,857,012 $2,116,729 $305,191 $55,668,550
=========== ========== ======== ===========
</TABLE>
10
<PAGE> 8
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED ---------------------- FAIR
COST GAINS LOSSES VALUE
----------- ---------- -------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $12,246,589 $ 125,475 $ 114 $12,371,950
Obligations of U.S. Government Agencies 13,011,469 47,059 3,119 13,055,409
Mortgage-Backed Securities 10,892,244 52,605 50,646 10,894,203
Obligations of State and Political
Subdivisions 3,513,526 28,069 1,843 3,539,752
Corporate Bonds 999,970 10,950 -- 1,010,920
Marketable Equity Securities 1,638,138 $1,259,895 -- 2,898,033
----------- ---------- -------- -----------
$42,301,936 $1,524,053 $ 55,722 $43,770,267
=========== ========== ======== ===========
</TABLE>
A summary of investment securities held to maturity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED ---------------------- FAIR
COST GAINS LOSSES VALUE
----------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Obligations of State and Political
Subdivisions $ 9,066,952 $ 246,553 $ -- $ 9,313,505
Other Bonds 250,000 -- -- 250,000
----------- ---------- -------- -----------
$ 9,316,952 $ 246,553 $ -- $ 9,563,505
=========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED ---------------------- FAIR
COST GAINS LOSSES VALUE
----------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Obligations of State and Political
Subdivisions $10,638,223 $ 441,934 $ -- $11,080,157
Other Bonds 250,000 -- -- 250,000
----------- ---------- -------- -----------
$10,888,223 $ 441,934 $ -- $11,330,157
=========== ========== ======== ===========
</TABLE>
The amortized cost and estimated market value of the investment portfolio
available for sale and the investment portfolio held to maturity at December 31,
1996, by contractual maturity, are shown below. Mortgage-backed securities are
presented in the schedule below at contractual maturity without consideration
given to scheduled repayments or accelerated prepayments. Expected maturities
will differ from contractual maturities because borrowers have the right to call
or prepay obligations with or without call or prepayment penalties.
The amortized cost and estimated fair value of the investment portfolio
available for sale is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Within one year $ 5,996,931 $ 6,005,150
After one year, but within five years 15,647,024 15,580,483
After five years, but within ten years 12,669,463 12,106,450
After 10 years, includes marketable equity securities 19,543,594 21,976,467
----------- -----------
Total Investments $53,857,012 $55,668,550
=========== ===========
</TABLE>
11
<PAGE> 9
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value of the investment portfolio held to
maturity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Within one year $ 464,986 $ 470,686
After one year, but within five years 4,289,545 4,404,348
After five years, but within ten years 4,491,658 4,610,581
After ten years 70,763 77,890
----------- -----------
Total Investments $ 9,316,952 $ 9,563,505
=========== ===========
</TABLE>
The fair value of securities was based on quoted market prices or bid quotations
received from securities dealers. Proceeds from the sale of available for sale
securities during 1996, 1995 and 1994 were $10,888,662, $6,042,965 and
$2,113,809, respectively. Gross gains of $240,969, $31,593 and $100,211 and
gross losses of $29,146, $20,893 and $285,496 were realized on sales from the
available for sale category in 1996, 1995 and 1994, respectively. There were no
sales of investment securities held to maturity in 1996, 1995 or 1994. Gross
gains of $123 and $21,956 in 1996 and 1995, respectively, and gross losses of
$351 in 1996 were realized on calls from the held to maturity category. There
were no gross gains or losses realized from the held maturity category in 1994.
Investment securities with a total par value of $7,460,000 and $7,700,000 at
December 31, 1996 and 1995, respectively, were pledged as collateral for public
and trust funds, repurchase agreements and long-term borrowings.
As a member of the Federal Home Loan Bank of Pittsburgh (FHLB), the Corporation
is required to maintain a minimum investment in FHLB stock. The minimum amount
is calculated based on the level of assets, residential real estate loans and
outstanding FHLB advances. At December 31, 1996 and 1995, the Corporation held
$772,500 and $921,200 respectively, of FHLB stock.
NOTE 3--LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Consumer Loans to Individuals $ 80,107,845 $ 67,709,305
Mortgage:
Non-Residential 11,636,798 14,326,228
Residential 56,641,022 35,830,068
Commercial, Financial, and Agricultural 48,225,722 50,609,207
Lines of Credit 5,433,560 5,681,628
Lease Financing 8,248,698 8,797,060
Nonaccrual Loans 1,234,467 443,727
------------ ------------
211,528,112 183,397,223
Deferred Fees (421,784) (459,234)
------------ ------------
$211,106,328 $182,937,989
============ ============
</TABLE>
At December 31, 1996 and 1995, the Corporation had $615,466 and $801,743,
respectively, in loans which were 90 days or more past due, but were still
accruing interest. If interest on loans classified as nonaccrual had been
recognized, such income would have approximated $33,884, $48,500 and $38,000 for
the years ended 1996, 1995 and 1994, respectively. The Corporation did not
receive interest on any nonaccrual loans during 1996, 1995 or 1994.
Effective January 1, 1995, the Corporation adopted FASB Statements No. 114 and
No. 118. For further information, see the Summary of Significant Accounting
Policies in Note 1. Generally, management considers all major nonaccrual loans
and certain renegotiated debt for impairment. The minimum period without payment
that typically can occur before a loan is considered for impairment is 90 days.
Statement No. 114 does not
12
<PAGE> 10
- --------------------------------------------------------------------------------
apply to large groups of smaller balance homogeneous loans that are collectively
evaluated for impairment. The Corporation collectively reviews leases and
consumer loans under $50,000, and residential real estate and commercial real
estate loans under $250,000. The Corporation's recorded investment in loans for
which impairment has been recognized in accordance with Statement No. 114
totaled $650,673 in 1996 and $509,153 in 1995, with a corresponding reserve for
loan losses of $154,194 and $207,003 in 1996 and 1995, respectively. There were
no loans considered impaired that have been partially written down through
charge-offs. The average recorded investment in impaired loans was $528,674 and
$490,352 during 1996 and 1995, respectively. The Corporation recognized
approximately $14,000 in 1996 and $32,400 in 1995 of interest on impaired loans
under the accrual method (during the portion of the year that they were
impaired). There was no interest income related to impaired loans recognized on
the cash basis during 1996 or 1995.
NOTE 4--RESERVE FOR LOAN LOSSES
The following is a summary of activity in the reserve for loan losses:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at Beginning of Year $2,676,362 $2,281,598 $1,865,704
Provision for Loan Losses 650,000 530,000 460,000
Losses Charged Against Reserve (842,911) (506,193) (221,058)
Recoveries on Loans Previously Charged-Off 95,053 370,957 176,952
---------- ---------- ----------
Balance at End of Year $2,578,504 $2,676,362 $2,281,598
========== ========== ==========
</TABLE>
NOTE 5--PREMISES AND EQUIPMENT
Premises and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Land $ 997,895 $ 997,895
Buildings 1,943,873 1,943,873
Equipment 3,093,227 2,761,879
Leasehold Improvements 1,062,418 1,036,981
---------- ----------
7,097,413 6,740,628
Accumulated Depreciation and Amortization (3,411,094) (2,993,737)
---------- ----------
Premises and Equipment, Net $3,686,319 $3,746,891
========== ==========
</TABLE>
Depreciation expense, principally calculated using a straight-line method, was
$421,763, $353,888, and $273,008 in 1996, 1995 and 1994, respectively. The
Corporation leases certain offices under various operating leases. These leases
contain various renewal option periods extending through December, 2005. Certain
of the leases require adjustment of the rent based upon cost escalations.
The following is a summary of the future minimum lease payments under these
operating leases:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31,
---------------------------------
<S> <C>
1997 $ 209,876
1998 201,526
1999 193,418
2000 116,116
2001 114,250
and thereafter 269,748
----------
$1,104,934
==========
</TABLE>
Rental expense under all operating leases was $209,667, $196,608 and $190,937
for the years ended December 31, 1996, 1995 and 1994, respectively.
13
<PAGE> 11
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NOTE 6--INCOME TAXES
The provision (benefit) for income taxes is composed of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal $1,523,768 $1,367,465 $1,165,153
State 16,999 15,056 19,344
Deferred 83,577 118,035 (220,051)
---------- ---------- ----------
$1,624,344 $1,500,556 $ 964,446
========== ========== ==========
</TABLE>
Reconciliations of the federal statutory and effective tax rates are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal Statutory Tax Rate $1,806,703 34.0% $1,758,993 34.0% $1,283,779 34.0%
Tax-Exempt Interest Income (265,464) (5.0) (322,560) (6.2) (343,739) (9.1)
Interest Expense Disallowed 29,026 0.5 33,256 0.6 28,260 0.7
State Income Taxes 11,219 0.2 9,937 0.2 12,767 0.3
Other, Net 42,860 0.8 20,930 0.4 (16,621) (0.4)
---------- ------ ---------- ------ ---------- ------
$1,624,344 30.5% $1,500,556 29.0% $ 964,446 25.5%
========== ====== ========== ====== ========== ======
</TABLE>
The tax effects of deductible and taxable differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities,
respectively, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Provision for Loan Losses $681,110 $709,459
Loan Origination Fees/Costs 53,435 62,864
Other 1,129 --
-------- --------
Gross Deferred Tax Assets $735,674 $772,323
Deferred Tax Liabilities:
Net Unrealized Holding Gains on
Securities Available for Sale $615,801 $499,233
Bond Discount Accretion 45,819 39,398
Depreciation 82,428 55,307
Other 47,974 31,657
-------- --------
Gross Deferred Tax Liabilities 792,022 625,595
-------- --------
Net Deferred Tax Assets (Liabilities) $(56,348) $146,728
======== ========
</TABLE>
No valuation allowance was established at December 31, 1996 or 1995 in view of
the Corporation's ability to carryback net deferred tax assets to taxes paid in
previous years and certain tax strategies available to the Corporation such as
liquidation of the appreciation in the Corporation's securities portfolio. Net
deferred tax assets are classified as other assets and net deferred tax
liabilities are classified as other liabilities on the consolidated balance
sheet.
NOTE 7--EMPLOYEE BENEFITS
The Corporation has a profit sharing retirement plan which covers substantially
all of its employees meeting minimum age and service requirements. Expense for
the profit sharing plan was $111,000 in 1996, $110,000 in 1995 and $84,000 in
1994. In 1995, an amendment was made to the profit sharing plan to include a
401(k)
14
<PAGE> 12
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retirement plan provision. The amended profit sharing plan contains provisions
for matching individual employee 401(k) contributions and allows for additional
contributions to be made at the discretion of the Corporation. During 1996 and
1995, respectively, the Corporation expensed $65,613 and $50,055 related to
401(k) plan matching contributions.
Profit sharing assets are primarily invested in mutual funds which are selected
at the discretion of the employee. The plan was also invested in 7,166 shares of
NSD Bancorp, Inc. common stock with a market value of $184,525 at December 31,
1995. Total cash dividends received from plan investments in common stock of the
Corporation were $9,838 in 1995.
The Corporation also maintained a defined benefit pension plan which covered
substantially all of its employees meeting minimum age and service requirements.
As of February 1, 1995, the Corporation terminated its defined benefit plan and
replaced it by amending the aforementioned profit sharing plan to include a
401(k) retirement plan provision. Employees were eligible to receive their
vested benefits from the terminated defined benefit plan in the form of cash
which could be rolled into the profit sharing plan. A net curtailment gain of
$510,960 was recognized during 1995 as a result of the plan termination and
settlement. Benefits of the defined benefit plan were generally based on the
years of service and the employee's compensation during the last five years of
employment. The Corporation's funding policy had been to contribute annually to
the pension plan the maximum amount that could be deducted for federal income
tax purposes. Contributions were intended to provide not only for the benefits
attributed to service to date, but also for those expected to be earned in the
future.
Prior to pension plan termination, prior service cost and the transition credit
were being amortized on a straight-line basis over 20 years and 26 years,
respectively.
Net periodic pension cost for the Corporation's defined benefit pension plan
included the following components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Service Cost-Benefits Earned During Year -- $ -- $ 124,250
Interest Cost -- 128,030 110,529
Actual Return on Plan Assets -- (58,166) (5,098)
Net Amortization and Deferral -- (47,683) (200,289)
-------- -------- ---------
Net Periodic Pension Cost -- $ 22,181 $ 29,392
======== ======== =========
</TABLE>
Assumptions used for pension costs, curtailment gain and funded status amounts
were:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Discount Rate -- 8.00% 8.00%
Rate of Increase in Compensation Levels -- 3.00% 4.50%
Expected Long-Term Return on Assets -- 9.00% 9.00%
</TABLE>
NOTE 8--STOCK OPTION PLANS
The Corporation has two fixed stock option plans. Under the 1994 Employee Stock
Option Plan, the Corporation may grant options to its employees for up to
122,850 shares of common stock. Under the 1994 Non-Employee Director Stock
Option Plan, the Corporation may grant options to its non-employee directors for
up to 40,950 shares of common stock. Under both Plans, the exercise price of
each option is equal to the fair market price of the Corporation's stock on the
date of grant with each option having a maximum term of 10 years. The total
shares reserved for issuance, options granted and the option exercise price per
share have been adjusted for the five percent stock dividend for holders of
record on April 30, 1996 and the four percent stock dividend for holders of
record December 6, 1994, in accordance with the terms of both Plans.
15
<PAGE> 13
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A summary of the status of the Corporations two fixed stock option plans as of
December 31, 1996, 1995 and 1994 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- -------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------------------- ------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at Beginning of
Year 35,889 $22.05 18,564 $22.41 -- --
Granted 16,150 23.82 17,325 21.67 18,564 $22.41
Exercised -- -- -- -- -- --
Forfeited 1,617 22.03 -- -- -- --
------ ------ ------ ------ ------ ------
Outstanding at End of Year 50,422 $22.62 35,889 $22.05 18,564 $22.41
====== ====== ====== ====== ====== ======
Options Exercisable at
Year-End 50,422 35,889 18,564
Weighted-Average Fair Value
of Options Granted During
the Year $10.62 $6.58
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
- -------------------------------------------------------------------------------
NUMBER WEIGHTED-AVERAGE
OUTSTANDING REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$ 21.67 16,800 8.5Years $21.67
22.21 12,012 7.9 22.21
22.76 3,150 9.3 22.76
22.89 5,460 7.3 22.89
24.08 13,000 9.6 24.08
------
50,422
======
</TABLE>
On January 1, 1996, the Corporation adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). As
permitted by SFAS 123, the Bank has chosen to apply APB No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and related Interpretations in accounting
for its Plans. Accordingly, no compensation cost has been recognized for options
granted under either Plan. Had compensation expense included stock option plan
costs determined based on the fair value at the grant dates for options granted
under these plans consistent with SFAS No. 123, proforma net income and earnings
per share would have been as follows:
<TABLE>
<CAPTION>
REPORTED PROFORMA
---------- ----------
<S> <C> <C>
Net Income
1996 $3,689,489 $3,576,261
1995 3,672,952 3,597,677
Fully Diluted Earnings
Per Share
1996 $2.25 $2.18
1995 2.24 2.20
</TABLE>
16
<PAGE> 14
- --------------------------------------------------------------------------------
For purposes of computing proforma results as if the above plans were accounted
for under the fair value method, the Corporation estimated the fair value of
stock options using the Black-Scholes options pricing model with dividends paid
every quarter at the current rate at the date of grant. The following
assumptions were used:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
EMPLOYEE DIRECTOR EMPLOYEE DIRECTOR
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Risk Free Interest Rate 6.82% 6.58% 6.44% 7.00%
Volatility 44.09% 46.77% 23.08% 21.83%
Expected Lives 7 Years 7 Years 7 Years 7 Years
</TABLE>
NOTE 9--TRANSACTIONS WITH RELATED PARTIES
In the ordinary course of business, the Corporation has transactions, including
loans, with the Corporation's employees, principal officers and directors and
their related interests. Approximately 84% of related party loans at December
31, 1996 are with two Board members. A summary of loan activity for directors,
executive officers and their associates with loan balances in excess of $60,000
is as follows:
<TABLE>
<S> <C>
Balance, December 31, 1994 $ 5,135,004
New Loans 3,439,340
Repayments (767,297)
-----------
Balance, December 31, 1995 7,807,047
New Loans 582,640
Repayments (1,690,086)
-----------
Balance, December 31, 1996 $ 6,699,601
===========
</TABLE>
NOTE 10--COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK
The Corporation incurs off-balance sheet risk in the normal course of business
in order to meet financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit which
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated financial statements.
At December 31, 1996, there are various outstanding commitments to extend credit
of approximately $24,197,000 and standby letters of credit of $338,000. The
majority of standby letters of credit expire within the next fifteen months.
Commitments to extend credit are commitments to lend to a customer as long as
there is no violation of any condition established in the loan agreement.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including normal business activities, bond financing and similar transactions.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. The Corporation requires
collateral supporting those commitments as deemed necessary.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Corporation uses the same credit and collateral policies in
making commitments and conditional obligations as for all other lending.
Collateral for these types of commitments is similar to collateral obtained on
other commercial loans.
Additionally, the Corporation is subject to certain asserted and unasserted
potential claims encountered in the normal course of business. In the opinion of
management and legal counsel, neither the resolution of these
17
<PAGE> 15
- --------------------------------------------------------------------------------
claims nor the funding of those credit commitments will have an adverse effect
on the Corporation's consolidated financial position, results of operations or
cash flows.
NOTE 11--CONCENTRATIONS OF CREDIT
The Corporation grants commercial, residential and consumer loans primarily to
customers in the Western Pennsylvania area. The Corporation has a diversified
loan portfolio which is not dependent upon any particular economic sector.
Substantially all of the Corporation's investments in municipal securities are
obligations of state or political subdivisions located within Pennsylvania. As a
whole, the Corporation's loan and investment portfolios could be affected by the
general economic conditions of Pennsylvania. In addition, at December 31, 1996,
a significant portion of the Corporation's "cash and due from banks" and
"federal funds sold" is maintained with a large financial institution located in
southwestern Pennsylvania.
NOTE 12--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate that
value:
CASH AND SHORT-TERM INVESTMENTS:
For those short-term instruments, the carrying amount is a reasonable estimate
of fair value.
INVESTMENT SECURITIES:
The estimated fair value of securities and marketable equity securities is based
on quoted market prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
LOAN RECEIVABLES:
Fair values were estimated for loan portfolios with similar financial
characteristics by discounting contractual cash flows considering prepayments,
credit risk, overhead and other factors.
Assumptions regarding credit risk, cash flows and discount rates were
judgmentally determined using available market and internal information which
management believes to be reasonable. However, because there are no active
markets for many loan types, the Corporation has no basis to determine whether
the estimated fair value presented would be indicative of the value negotiated
in an actual sale.
DEPOSIT LIABILITIES:
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand as of December 31, 1996. The fair value
of the fixed-maturity certificates of deposit is estimated using the rates
currently offered as of December 31, 1996, for deposits of similar maturities.
Fair value estimates do not include the value of depositor relationships or the
value of the low-cost funding provided by deposits.
REPURCHASE AGREEMENTS AND BORROWED FUNDS:
The fair value is estimated using the rates currently offered for borrowings
with similar terms and remaining maturities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL
GUARANTEES:
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
guarantees and letters of credit are based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counter parties at the reporting date.
The fair value of commitments, guarantees and letters of credit is insignificant
after considering the aforementioned factors.
18
<PAGE> 16
- --------------------------------------------------------------------------------
The estimated fair values of the Corporation's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
<S> <C> <C> <C> <C>
1996 1995
--------------------- ---------------------
<CAPTION>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Short-Term Investments $ 20,894 $ 20,894 $ 12,097 $ 12,097
Investment Securities 64,986 65,232 54,658 55,100
Loans 211,603 214,597 187,233 187,561
Less: Reserve for Loan Losses (2,579) -- (2,676) --
-------- -------- -------- --------
$294,904 $300,723 $251,312 $254,758
======== ======== ======== ========
Financial Liabilities:
Deposits $260,987 $262,010 $220,243 $220,837
Repurchase Agreements 1,911 1,911 1,822 1,822
Federal Home Loan Bank Borrowings 9,560 9,495 7,380 7,403
-------- -------- -------- --------
$272,458 $273,416 $229,445 $230,062
======== ======== ======== ========
Off-Balance Sheet Financial Instruments:
Commitments to Extend Credit $ 24,197 -- $ 20,300 --
======== ======== ======== ========
</TABLE>
NOTE 13--REGULATORY RESTRICTIONS
The Corporation is subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by such regulatory authorities.
Neither the Corporation nor its subsidiary is subject to written regulatory
agreements.
Under capital adequacy regulatory guidelines and the regulatory framework for
prompt corrective action, the Corporation must meet specific capital
requirements taking into consideration quantitative measures of assets,
liabilities and certain off-balance sheet items. Such measures are subject to
qualitative judgments by the regulators with regard to composition, risk
weightings and other factors.
Minimum regulatory risk-based capital ratios for Tier I, total capital and
leverage are 4%, 8%, and 4%, respectively. Failure to meet minimum capital
requirements can initiate certain mandatory; and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Management believes,
as of December 31, 1996, that the Corporation meets all capital adequacy
requirements to which it is subject.
As of the most recent notification from the regulators, the Corporation and its
subsidiary were categorized as well capitalized under the regulatory framework
for prompt corrective action. To be considered as well capitalized, an
institution must maintain risk-based capital ratios for Tier I, total capital
and leverage ratios of at least 6%, 10% and 5%, respectively.
19
<PAGE> 17
- --------------------------------------------------------------------------------
The following represents Tier I and total risk-based capital and leverage ratios
for the Corporation and also its subsidiary, NorthSide Bank, as of December 31,
1996 and 1995:
<TABLE>
<CAPTION>
AMOUNT RATIOS
-------------------------- ----------------
1996 1995 1996 1995
----------- ----------- ------ ------
<S> <C> <C> <C> <C>
Risk-Based Capital
------------------
Tier I
NSD Bancorp, Inc. $25,229,831 $23,836,422 12.41% 13.57%
NorthSide Bank 24,445,197 33,209,623 11.95 13.23
Total
NSD Bancorp, Inc. 27,771,577 26,037,529 13.66% 14.83%
NorthSide Bank 27,002,347 25,408,830 13.20 14.48
Leverage
--------
NSD Bancorp, Inc. 9.02% 9.59%
NorthSide Bank 8.78 9.37
</TABLE>
Under regulations of the Federal Reserve, the Corporation is required to
maintain certain average reserve balances which include both cash on hand and
deposits with the Federal Reserve. These deposits are included in cash and due
from banks in the accompanying consolidated balance sheet. At December 31, 1996,
the Corporation was required to maintain $929,000 of such balances.
Dividends and loans to the Holding Company from NorthSide Bank are subject to
regulatory limitations. Dividends are limited to retained earnings of NorthSide
Bank. Loans must be collateralized by specific obligations and cannot exceed 10%
of NorthSide Bank's capital. The maximum amount available to the Holding Company
at December 31, 1996 from NorthSide Bank in the form of dividends and loans,
individually, was approximately $20.6 million and $2.5 million, respectively.
NOTE 14--STOCK DIVIDENDS
On April 23, 1996, the Corporation's Board of directors declared a common stock
dividend payable May 31, 1996 to shareholders of record at April 30, 1996.
On November 23, 1994, the Corporation's Board of Directors declared a common
stock dividend payable January 4, 1995 to shareholders of record at December 6,
1994.
Earnings per share and dividends per share have been restated to reflect the
stock dividends declared.
NOTED 15--TREASURY STOCK
In November, 1995, the Corporation's Board of Directors authorized the
repurchase of up to 10% of the outstanding common stock of the Corporation, to
be made available for issuance pursuant to stock option plans and for general
corporate purposes. There were no shares repurchased during 1995 or 1996.
NOTE 16--BORROWED FUNDS
Borrowed funds at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
WEIGHTED WEIGHTED
BALANCE AVERAGE RATE BALANCE AVERAGE RATE
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Advances Due In: 1996 -- -- $2,780,000 5.41%
1997 5,560,000 5.76% 4,600,000 5.76%
1998 3,000,000 5.67% -- --
1999 1,000,000 5.19% -- --
</TABLE>
20
<PAGE> 18
- --------------------------------------------------------------------------------
Advances in the FHLB are collateralized by qualifying securities and loans.
Qualifying collateral includes U.S. Treasury, government agency and
mortgage-backed securities and real estate loans based upon the amount of
outstanding advances. These advances are subject to restrictions or penalties
related to prepayments.
The Corporation had an unused line of credit with the Federal Home Loan Bank of
approximately $6.1 million at December 31, 1996.
NOTE 17-- CONDENSED FINANCIAL INFORMATION OF NSD BANCORP, INC.
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
BALANCE SHEET 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 302,467 $ 15,496
Securities Available for Sale 2,227,221 1,720,641
Investment in Bank Subsidiary 25,348,190 23,458,084
Other Assets 54,225 71,897
----------- -----------
Total Assets $27,932,103 $25,266,118
=========== ===========
Liabilities
Accounts Payable $ 144 $ 976
Deferred Tax Liability 611,706 401,288
----------- -----------
Total Liabilities 611,850 402,264
Shareholders' Equity 27,320,253 24,863,854
----------- -----------
Total Liabilities and Shareholders' Equity $27,932,103 $25,266,118
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
STATEMENT OF INCOME 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Dividends from Bank Subsidiary $ 1,458,316 $ 1,319,675 $ 775,000
Property Dividends from Bank Subsidiary -- 179,698 360,084
Dividends from Securities Available for Sale 50,412 36,382 1,946
Net Investment Securities Gains (Losses) 180,829 (188) --
Other Expenses 51,326 46,026 44,047
----------- ----------- -----------
Income Before Taxes and Equity in Undistributed Net
Income of Bank Subsidiary 1,638,231 1,489,541 1,092,983
Provision for Income Taxes 17,321 -- 605
----------- ----------- -----------
Income Before Equity in Undistributed Net Income of Bank
Subsidiary 1,620,910 1,489,541 1,092,378
Equity in Undistributed Net Income of Bank Subsidiary 2,068,579 2,183,411 1,718,997
----------- ----------- -----------
Net Income $ 3,689,489 $ 3,672,952 $ 2,811,375
=========== =========== ===========
</TABLE>
21
<PAGE> 19
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
STATEMENT OF CASH FLOWS 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 3,689,489 $ 3,672,952 $ 2,811,375
Adjustments to Net Income
Equity in Net Income of Bank Subsidiary (2,068,579) (2,183,411) (1,718,997)
Property Dividend -- (179,698) (360,084)
(Increase) Decrease in Other Assets 17,670 (3,329) 18,700
(Gains) Losses on Investment Securities (180,829) 188 --
Increase (Decrease) in Other Liabilities (831) 976 (104,032)
----------- ----------- -----------
Net Cash Provided by Operating Activities 1,456,920 1,307,678 646,962
Cash Flows From Investing Activities:
Purchase of Investment Securities Available for Sale -- -- (1,200)
Proceeds from Repayments of Investment Securities
Available for Sale 293,125 412 --
----------- ----------- -----------
Net Cash Provided (Used) by Investing Activities 293,125 412 (1,200)
Cash Flows From Financing Activities:
Cash Dividends Paid (1,458,316) (1,294,675) (750,000)
Cash Dividends Paid in Lieu of Fractional Shares (4,758) (3,681) --
----------- ----------- -----------
Net Cash Used by Financing Activities (1,463,074) (1,298,356) (750,000)
----------- ----------- -----------
Net Increase (Decrease) in Cash 286,971 9,734 (104,238)
Cash at Beginning of Year 15,496 5,762 110,000
----------- ----------- -----------
Cash at End of Year $ 302,467 $ 15,496 $ 5,762
=========== =========== ===========
</TABLE>
22
<PAGE> 20
- --------------------------------------------------------------------------------
COMPARATIVE FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Interest Income $ 21,501,582 $ 19,405,880 $ 17,194,852 $ 16,577,443 $ 17,037,146
Interest Expense 8,724,605 7,485,431 5,867,068 5,798,452 7,115,725
------------ ------------ ------------ ------------ ------------
Net Interest Income 12,776,977 11,920,449 11,327,784 10,778,991 9,921,421
Provision for Loan Losses 650,000 530,000 460,000 471,000 539,000
Non-Interest Income 1,339,513 1,741,691 792,263 926,784 865,222
Non-Interest Expense 8,152,657 7,958,632 7,884,226 7,901,273 7,363,268
------------ ------------ ------------ ------------ ------------
Income Before Taxes and Cumulative Effect
of Accounting Change 5,313,833 5,173,508 3,775,821 3,333,502 2,884,375
Income Taxes 1,624,344 1,500,556 964,446 797,513 659,282
------------ ------------ ------------ ------------ ------------
Income Before Cumulative Effect of
Accounting Change 3,689,489 3,672,952 2,811,375 2,535,989 2,225,093
Cumulative Effect of Accounting Change -- -- -- 97,975 --
------------ ------------ ------------ ------------ ------------
Net Income $ 3,689,489 $ 3,672,952 $ 2,811,375 $ 2,633,964 $ 2,225,093
============ ============ ============ ============ ============
YEAR END BALANCES
Assets $304,801,854 $258,731,642 $242,009,346 $228,449,259 $219,995,031
Loans 214,049,576 188,653,465 172,000,399 155,180,662 135,990,741
Investment Securities 64,985,502 54,658,490 52,464,021 53,126,962 54,772,780
Deposits 260,986,805 220,243,135 213,766,664 203,831,795 198,863,186
Repurchase Agreements 1,911,184 1,822,433 1,382,156 -- --
Short-Term Borrowings 5,560,000 2,780,000 -- -- --
Long-Term Borrowings 4,000,000 4,600,000 780,000 780,000 --
Shareholders' Equity 27,320,253 24,863,854 21,949,369 20,211,121 17,565,820
Number of Shareholders 448 454 452 454 469
AVERAGE BALANCES
Assets $279,854,944 $248,746,561 $231,867,752 $219,410,380 $210,396,180
Loans 198,720,233 176,706,914 160,197,388 144,011,197 133,254,557
Investment Securities 60,999,113 52,489,567 53,512,045 53,421,711 48,266,326
Deposits 240,125,299 215,564,206 235,368,739 196,193,389 189,832,097
Repurchase Agreements 1,873,104 1,577,178 648,308 -- --
Short-Term Borrowings 2,372,240 1,441,545 -- -- --
Long-Term Borrowings 6,900,000 2,127,890 780,000 337,479 --
Shareholders' Equity 26,008,987 23,627,621 21,161,402 18,684,290 16,914,991
PER SHARE DATA (1)
Income Before Cumulative Effect of
Accounting Change $ 2.25 $ 2.24 $ 1.72 $ 1.55 $ 1.36
Cumulative Effect of Accounting Change -- -- -- 0.06 --
Net Income 2.25 2.24 1.72 1.61 1.36
Dividends .89 .79 .46 .45 .38
Book Value 16.65 15.18 13.40 12.34 10.73
RATIOS
Return on Average Assets 1.32% 1.48% 1.21% 1.20% 1.06%
Return on Average Equity (3) 14.19 15.55 13.29 14.10 13.15
Net Interest Margin (2) 5.01 5.31 5.47 5.58 5.35
Equity to Assets 8.96 9.50 9.13 8.52 8.04
Dividend Payout Ratio 39.53 35.32 26.68 28.40 27.97
</TABLE>
- ---------
(1) Adjusted for 5% stock dividend paid in May, 1996, 4% stock dividend paid in
January, 1995, 25% stock dividend paid in June, 1993 and 20% stock dividend
paid in April, 1992.
(2) Tax equivalent basis.
(3) Included in 1996, 1995 and 1994 average equity were net unrealized holding
gains on securities available for sale due to the adoption of FASB Statement
No. 115 as of December 31, 1993. Results for 1996, 1995 and 1994 reflect the
full impact of adopting Statement No. 115.
23
<PAGE> 21
- --------------------------------------------------------------------------------
[COOPERS & LYBRAND'S LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
NSD Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of NSD Bancorp,
Inc. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, cash flows, and changes in shareholders'
equity for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NSD
Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 3 to the consolidated financial statements, in 1995,
NSD Bancorp, Inc. and subsidiary changed its method of accounting for loan
impairment for certain loans by adopting Financial Accounting Standards Board
(FASB) Statement No. 114, Accounting by Creditors for Impairment of a Loan.
/s/ COOPERS & LYBRAND LLP
--------------------------------
Coopers & Lybrand LLP
Pittsburgh, Pennsylvania
January 28, 1997
24
<PAGE> 22
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is an analysis of NSD Bancorp, Inc.'s (the Corporation)
financial condition and results of operations and should be read in conjunction
with the Consolidated Financial Statements.
RESULTS OF OPERATIONS FOR THE YEAR
Net income increased to $3,689,489 or $2.25 per share in 1996, from $3,672,952
or $2.24 in 1995 and $2,811,375 or $1.72 per share in 1994. Net income in 1995
includes a net gain of $510,960 realized on the settlement and curtailment of
NorthSide Bank's pension plan. On a comparable basis, excluding the after-tax
effect of that gain, 1996 net income increased $353,771 over 1995 results.
Contributing to the increase in net income was an increase in net interest
income of $856,528, an increase in net investment securities gains of $178,939
and a decrease in FDIC insurance expense of $243,061. These increases were
offset by an increase to the provision for loan losses of $120,000, an increase
in equipment and supplies expense of $108,261, an increase in other operating
expenses of $144,721 and an increase of $123,788 in the provision for income
taxes. An increase of $861,577 in 1995 net income was due in part to an increase
in net interest income of $592,665 during 1995, a $510,960 net gain recognized
on the settlement and curtailment of the pension plan, a change in net
investment securities gains of $217,941, an increase in service fees of $127,671
and a decrease in FDIC insurance of $208,779. These increases were offset by
increases to the provision for loan losses of $70,000, an increase in equipment
and supplies expense of $140,721 and an increase in the provision for income
taxes of $536,110.
Although net income during 1996 increased over 1995, there was a decline in the
Corporation's return on average assets (ROA) and return on average equity (ROE).
The decline in ROA and ROE is primarily the result of the one time non-cash gain
of $510,960 recognized on the settlement and curtailment of the pension plan
during 1995. The Corporation's ROA for 1996 was 1.32% compared to 1.48% in 1995
and 1.21% in 1994. The ROE for 1996 was 14.19% compared to 15.55% in 1995 and
13.29% in 1994.
NET INTEREST INCOME
The primary component of the Corporation's earnings is net interest income,
which is the difference between interest earned on loans, investments and other
earning assets and the interest expense on deposits and other interest bearing
liabilities which fund those assets. Tax-exempt securities and loans carry
pretax yields lower than comparable taxable assets. Therefore, it is more
meaningful to analyze net interest income on a tax-equivalent basis.
Total interest income increased $2,022,923 during 1996 as the result of a
$29,483,912 increase in average earning assets, offset by a decline in the
average yield on earning assets from 8.49% in 1995 to 8.31% in 1996. Interest
expense increased $1,239,174 as the result of a $19,327,366 increase in the
average level of interest bearing deposits and an increase from 4.10% in 1995 to
4.16% in the average cost of such deposits. Interest expense on long and
short-term borrowings increased $317,823 due to a $5,662,805 increase in average
outstanding levels offset by a slight decline in the average rate paid on such
balances from 5.65% in 1995 to 5.63% in 1996.
Total interest income increased $2,242,040 during 1995 as a result of an
$18,113,366 increase in average earning assets and an increase in the average
yield on earning assets from 8.17% in 1994 to 8.49% in 1995. Interest expense
increased $1,618,363 as a result of an $8,236,426 increase in the average level
of interest bearing deposits, as well as an increase from 3.46% in 1994 to 4.10%
in 1995 in the average rate paid on these deposits. Interest expense on
repurchase agreements increased $56,099, reflecting the effect of the first full
year of employing this funding source. The average level of borrowings from the
Federal Home Loan Bank increased $2,789,435, increasing interest expense by
$166,658.
Net interest income was $13,259,238 at December 31, 1996, compared to
$12,475,490 at December 31, 1995 and $11,851,813 at December 31, 1994. This
consistent improvement has been largely due to increases in average earning
assets, primarily in loans. In 1996, an increase in average investment
securities also contributed to the overall increase in net interest income.
Average earning assets for 1996 were $264,464,251, compared to $234,980,339 and
$216,866,973 in 1995 and 1994, respectively. To provide a more in depth analysis
of net interest income, the following average balance
25
<PAGE> 23
- --------------------------------------------------------------------------------
sheet and net interest income analysis detail the contribution of earning assets
to overall net interest income and the impact of the cost of funds. The
rate/volume analysis shows the portions of the net change in interest income due
to changes in volume or rate on a tax equivalent basis using the statutory
federal income tax rate of 34%. Changes in net interest income due to both rate
and volume in the accompanying rate and volume analysis have been allocated to
changes due to volume and rate in proportion to the absolute amount of the
change in each.
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
FROM 1995 TO 1996 FROM 1994 TO 1995
--------------------------------------- --------------------------------------
CHANGE IN INCOME/ CHANGE IN INCOME/
EXPENSE DUE TO EXPENSE DUE TO
------------------------ TOTAL ----------------------- TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Interest Earning Assets
Loans
Industrial Revenue and Tax-Exempt
Financing $ (46,849) $ 13,647 $ (33,202) $ (26,246) $ (406) $ (26,652)
All Other Loans 1,992,923 (436,445) 1,556,478 1,508,255 535,417 2,043,672
- ---------------------------------------------------------------------------------------------------------------------------
Total Loans 1,946,074 (422,798) 1,523,276 1,482,009 535,011 2,017,020
Investment Securities
Taxable 695,480 86,735 782,215 (17,165) 124,471 107,306
Tax Exempt (213,073) 20,350 (192,723) (63,165) (36,085) (99,250)
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 482,407 107,085 589,492 (80,330) 88,386 8,056
Due From Banks, Interest Earning 7,270 (879) 6,391 (6,526) 1,607 (4,919)
Federal Funds Sold (62,796) (33,439) (96,235) 139,266 82,617 221,883
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets 2,372,955 (350,031) 2,022,924 1,534,419 707,621 2,242,040
Interest Bearing Liabilities
Interest Bearing Deposits
Savings and Interest Bearing
Demand Deposits 292,404 417,069 709,473 (242,764) (51,341) (294,105)
Time Deposits 420,466 (212,986) 207,480 988,125 707,260 1,695,385
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 712,870 204,083 916,953 745,361 655,919 1,401,280
Federal Funds Purchased (2,954) (1,055) (4,009) (5,674) -- (5,674)
Repurchase Agreements 15,619 (7,212) 8,407 56,099 -- 56,099
Short-Term Borrowings 48,990 667 49,657 78,519 -- 78,519
Long-Term Borrowings 270,741 (2,575) 268,166 88,139 -- 88,139
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 1,045,266 193,908 1,239,174 962,444 655,919 1,618,363
- ---------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $1,327,689 $(543,939) $ 783,750 $ 571,975 $ 51,702 $ 623,677
===========================================================================================================================
</TABLE>
(1) Tax exempt income on loans and investments and related yields are shown on a
fully tax equivalent basis computed using the federal statutory rate of 34%.
(2) For purposes of calculating loan yields, average loan balances include
nonaccrual loans.
26
<PAGE> 24
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET/NET INCOME ANALYSIS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995
------------------------------------ ------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Loans
Industrial Revenue and Tax Exempt $ 875,839 $ 90,925 10.38% $ 1,340,039 $ 124,127 9.26%
All other Loans 197,844,394 17,458,036 8.82 175,366,875 15,901,558 9.07
- -------------------------------------------------------------------------------------------------------------------
Total 198,720,233 17,548,961 8.83 176,706,914 16,025,685 9.07
Investment Securities
Taxable 48,392,511 3,083,340 6.37 37,434,268 2,301,125 6.15
Tax-Exempt 12,606,602 1,098,510 8.71 15,055,299 1,291,233 8.58
- -------------------------------------------------------------------------------------------------------------------
Total 60,999,113 4,181,850 6.86 52,489,567 3,592,358 6.84
Due From Banks, Interest Earning 157,515 10,882 6.91 53,995 4,491 8.32
Federal Funds Sold 4,587,391 242,152 5.28 5,729,863 338,387 5.91
- -------------------------------------------------------------------------------------------------------------------
Total Earning Assets 264,464,251 21,983,844 8.31 234,980,339 19,960,921 8.49
Allowance for Loan Losses (2,570,416) (2,553,316)
Cash and Due From Banks 10,285,873 8,917,402
Premises and Equipment 3,712,094 3,546,144
Other Assets 3,963,142 3,835,992
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $279,854,944 $248,746,561
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Deposits
Savings Deposits $ 37,750,180 $ 1,132,591 3.00% $ 41,165,715 1,221,768 2.97%
Interest Checking and Money Market 67,611,775 1,969,363 2.91 52,266,567 1,170,713 2.24
Time Deposits 89,352,483 5,005,618 5.60 81,954,789 4,798,138 5.85
- -------------------------------------------------------------------------------------------------------------------
Total Interest Bearing
Deposits 194,714,438 8,107,572 4.16 175,387,071 7,190,619 4.10
Federal Funds Purchased 24,590 1,046 4.25 88,219 5,055 5.73
Repurchase Agreements 1,873,104 96,484 5.15 1,577,178 88,077 5.58
Short-Term Borrowings 2,332,240 128,176 5.50 1,441,545 78,519 5.45
Long-Term Borrowings 6,900,000 391,327 5.67 2,127,890 123,161 5.79
- -------------------------------------------------------------------------------------------------------------------
Total Interest Bearing
Liabilities 205,844,372 8,724,605 4.24 180,621,903 7,485,431 4.14
Demand Deposits 45,410,862 40,177,135
Other Liabilities 2,590,723 4,319,902
Shareholders' Equity 26,008,987 23,627,621
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $279,844,944 $248,746,561
===================================================================================================================
Net Interest Income $13,259,240 $12,475,490
===================================================================================================================
Interest Spread 4.07% 4.35%
Interest Margin 5.01% 5.31%
<CAPTION>
1994
------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD
<S> <C> <C> <C>
- -------------------------------------------------------------------------
ASSETS
Loans
Industrial Revenue and Tax Exempt $ 1,623,372 $ 150,779 9.29%
All other Loans 158,574,016 13,857,886 8.74
- -------------------------------------------------------------------------
Total 160,197,388 14,008,665 8.74
Investment Securities
Taxable 37,727,449 2,193,819 5.81
Tax-Exempt 15,784,596 1,390,483 8.81
- -------------------------------------------------------------------------
Total 53,512,045 3,584,302 6.70
Due From Banks, Interest Earning 135,895 9,410 6.92
Federal Funds Sold 3,021,645 116,504 3.86
- -------------------------------------------------------------------------
Total Earning Assets 216,866,973 17,718,881 8.17
Allowance for Loan Losses (2,063,965)
Cash and Due From Banks 9,867,196
Premises and Equipment 3,272,723
Other Assets 3,924,825
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $231,867,752
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUIT
Interest Bearing Deposits
Savings Deposits $ 43,779,510 $ 1,300,906 2.97%
Interest Checking and Money Market 59,576,357 1,385,680 2.33
Time Deposits 63,794,778 3,102,753 4.86
- -------------------------------------------------------------------------------------------------------------------
Total Interest Bearing
Deposits 167,150,645 5,789,339 3.46
Federal Funds Purchased 221,712 10,729 4.84
Repurchase Agreements 648,308 31,978 4.93
Short-Term Borrowings -- -- --
Long-Term Borrowings 780,000 35,022 4.49
- -------------------------------------------------------------------------------------------------------------------
Total Interest Bearing
Liabilities 168,800,665 5,867,068 3.48
Demand Deposits 68,218,094
Other Liabilities 3,687,591
Shareholders' Equity 21,161,402
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $231,867,752
===================================================================================================================
Net Interest Income $11,851,813
===================================================================================================================
Interest Spread 4.69%
Interest Margin 5.47%
</TABLE>
(1) Tax exempt income on loans and investments and related yields are shown on a
fully tax equivalent basis computed using a statutory rate of 34%.
(2) For purposes of calculating loan yields, average loan balances include
nonaccrual loans.
(3) Average yields on available for sale investment securities are calculated
based on average estimated market values.
27
<PAGE> 25
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The Corporation's provision for loan losses was $650,000 in 1996, $530,000 in
1995 and $460,000 in 1994. The increase in the provision for loan losses was
primarily due to an increase in average loans during 1996. Net charge-offs for
1996 were $747,858, compared to $135,236 in 1995 and $44,106 in 1994. For
additional information, see the Non-Performing Assets and Reserve for Loan
Losses sections of this discussion.
OTHER INCOME
Other income decreased $402,177 from $1,741,691 in 1995 to $1,339,513 in 1996.
During the first quarter of 1995, a one time non-cash gain of $510,960 was
recognized upon the settlement and curtailment of NorthSide Bank's pension plan.
The sale of investment securities during 1996 resulted in net gains of $211,594,
compared to $32,656 in 1995. Service fees for 1996 decreased to $668,785 from
$692,859 during 1995. Contributing to the decrease in service fees was a $36,749
reduction in the amount of NSF charges received offset by a $7,398 increase in
service charges on savings deposits. Other operating income decreased $46,082.
This decline is largely the result of net gains on the sale of other real estate
of $88,505 recognized in 1995. There were no sales of other real estate during
1996. Loan sales during 1996 resulted in gains of $14,614. There were no loans
sold during 1995. An increase of $24,792 in checkbook commissions, due to
improved fee penetration, was offset by a decline in fees generated from
automated teller transactions of $14,024.
Other income increased $949,428 from $792,263 in 1994 to $1,741,691 in 1995. Net
investment securities gains were $32,656 in 1995 compared to net investment
securities losses of $185,285 in 1994. Service fee income increased $127,671,
from $565,188 in 1994 to $692,859 in 1995. Of this increase, $101,901 and
$24,780, respectively, was attributed to improved NSF charge and checking
account fee penetration. During the first quarter of 1995, a net, non-cash gain
of $510,960 was realized due to the settlement and curtailment of the pension
plan. Other operating income increased from $412,360 in 1994 to $505,216 in
1995. This increase is primarily the result of net gains on the sale of other
real estate of $88,505 during 1995 compared to a net loss of $9,621 in 1994.
Fees generated from automatic teller transactions increased $40,977 during 1995,
which is attributable to increases in service charge rates. An increase in safe
deposit box rent and credit card fees of $14,445 and $13,031, respectively,
during 1995 also contributed to the increase in other operating income. A
decrease in rental income of $17,225 was the result of terminating the
Corporation's relationship with an independent mutual fund sales company during
the second quarter of 1994. During 1994, a net gain of $41,568 resulted from the
sale of loans. There were no loan sales during 1995.
OTHER EXPENSES
Total other expenses increased $194,025 from $7,958,632 in 1995 to $8,152,657 in
1996. Salary and employee benefits increased $88,025 to $4,015,567, compared to
$3,927,542 in 1995. Salary expense increased $56,421 due to normal inflation
adjustments and growth of the organization. Employee health insurance premiums
also increased by $15,509. An increase in the employer portion of payroll taxes
of $6,719 corresponded to the increase in salary expense and an increase in
temporary employee expense of $8,906 also contributed to the overall increase.
Offsetting these increases was a slight decline in retirement plan related
expenses of $7,526.
Occupancy expense increased $53,230 to $766,869 in 1996 from $713,639 in 1995
primarily due to scheduled additional building and parking lot maintenance
performed at several branch locations. Equipment and supplies expense increased
$108,261 during 1996 due to an increase in depreciation expense of $67,874
primarily related to additional platform and automated teller equipment placed
in service during the fourth quarter of 1995 and in the first quarter of 1996.
Also contributing were increases in equipment maintenance contracts, equipment
repairs and office expense of $12,032, $7,180 and $28,559, respectively, during
1996. Data processing expense increased $13,007 to $507,826 for 1996, compared
to $494,825 for 1995. FDIC insurance expense decreased to $2,000 in 1996, down
from $245,061 in 1995. This decrease is due to a reduction in NorthSide Bank's
FDIC insurance premium from $0.23 per $100 in deposits to a nominal quarterly
assessment of $500 as the Bank is classified by regulators as
"well-capitalized." Advertising expense increased $29,848 during 1996, from
$167,485 in 1995 to $197,333 in 1996. This increase is due primarily to greater
emphasis on advertising campaigns to develop market awareness and specific
deposit product promotions. Other operating expenses increased to
28
<PAGE> 26
- --------------------------------------------------------------------------------
$1,642,006 for 1996, up from $1,497,285 for 1995. The increase is the result of
an $11,338 increase in checkbook costs incurred corresponding to the significant
growth in the Bank's Premier Money Market Account product. Also contributing to
the increase in other operating expenses were increases in postage,
subscriptions, legal and entertainment expenses of $12,842, $21,503, $13,385 and
$18,806, respectively. The increase in average shareholders' equity and average
assets during 1996 resulted in an increase in Pennsylvania shares tax of
$17,588. Non-recurring demand deposit account losses, primarily involving three
unrelated transactions, added $40,891 to expense while net teller shortages
increased $18,568. These increases were partially offset by a reduction in asset
recovery expense of $33,813 attributable to expenses incurred in the sale of
other real estate owned during 1995 and a $21,843 reduction in financial
services expense.
Total other expenses increased $74,406 from $7,884,226 for 1994 to $7,958,632
for 1995. Salary and employee benefits increased $91,910 to $3,927,542 in 1995
from $3,835,632 in 1994. Salary expense increased only $38,134 as a result of
management's emphasis on improving Bank efficiency through control of personnel
related costs. Employee health insurance premiums decreased $24,627 during 1995,
as the Corporation negotiated a new contract for health insurance in 1995. A
slight decrease in pension expense of $7,212 was offset by employer
contributions to the 401(k) plan of $50,055. Profit sharing expense increased
$26,000 during 1995 in proportion to the overall increase in net income.
Occupancy expense decreased $28,083 to $713,639 for 1995, from $741,722 to 1994.
This decrease was primarily the result of a decrease in building maintenance
costs during 1995. Equipment and supplies expense increased $140,721 during
1995, which is attributable to a full year's depreciation expense on automated
platform and teller equipment placed in service during the fourth quarter of
1994. Maintenance contracts were purchased for this equipment, which resulted in
an increase in equipment maintenance contract expense of $25,368. Office expense
decreased $26,116 during 1995, which was attributable to continued refinement of
the Corporation's expense allocation process. Due to the sporadic nature of the
Bank's supply purchasing practices, which are largely dependent upon expected
requirements and current market pricing, stationery and supplies expense
increased $52,964 during 1995. Data processing expense increased slightly, from
$489,966 in 1994 to $494,825 in 1995. FDIC insurance expense decreased $208,779
during 1995, which was due to a reduction in the Corporation's FDIC insurance
premium from $.23 to $.04 per $100 in deposits in July of 1995 and a
corresponding partial rebate of premiums paid of $130,551. Advertising expense
increased $21,853 as a result of additional promotions for loans and deposits
during 1995. Also significantly contributing to the increase in advertising
expense were promotions for the relocation of one branch office.
Other operating expenses increased $51,925 during 1995, from $1,445,360 in 1994
to $1,497,285 in 1995. An increase in postage rates during 1995 resulted in an
increase in postage expense of $27,636. The increase in average shareholders'
equity and average assets during 1995 resulted in an increase in Pennsylvania
shares tax of $14,914.
INCOME TAXES
The Corporation recorded an income tax provision of $1,624,344, $1,500,556 and
$964,446 in 1996, 1995 and 1994, respectively. The increase in the tax provision
was the result of higher pre-tax earnings. The effective tax rates for 1996,
1995 and 1994 were 30.5% , 29.0% and 25.5%, respectively. These rates were below
the 34% statutory tax rate primarily due to the tax benefits from tax-exempt
interest income. The increases in the effective tax rates during 1996 and 1995
were primarily the result of reduced tax-exempt earnings.
FINANCIAL CONDITION
The Corporation's total assets increased $40,070,212 from $258,731,642 at
December 31, 1995 to $304,801,854 at December 31, 1996. Securities available for
sale increased $11,898,283 while securities held to maturity decreased
$1,571,271. Loans available for sale declined to $2,943,248 at December 31, 1996
from $5,715,476 at December 31, 1995. During 1996, $1,461,382 in mortgage loans
available for sale were sold and $1,310,486 in mortgage loans were transferred
to the loans held to maturity portfolio. The remainder of loans available for
sale at December 31, 1996 were entirely comprised of student loans. At December
31, 1995, the Corporation included student loans of $2,314,422 and residential
mortgage loans of $3,401,054 as available for sale. Net loans
29
<PAGE> 27
- --------------------------------------------------------------------------------
increased from $178,858,957 at December 31, 1995 to $207,315,010 at December 31,
1996. The significant loan growth was funded primarily by deposit growth during
1996, through borrowings and the acquisition of approximately $11,500,000 in
deposits from another financial institution.
INVESTMENT SECURITIES
The following summarizes the book value (excluding net unrealized holding gains)
and weighted average yields of the Corporation's securities available for sale
at December 31, 1996 by contractual maturity. Mortgage-backed securities are
presented in the schedule below at contractual maturity without consideration
given to scheduled repayments or accelerated prepayments.
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
------------------ -------------------- -------------------- --------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- ----- ----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $4,996,931 5.67% $ 4,198,946 6.13%
Obligations of U.S. Government
Agencies 1,000,000 5.43 11,273,078 6.22 $12,124,515 7.07% $ 1,005,855 8.05%
Mortgage-Backed Securities -- -- -- -- -- -- 17,160,596 7.28
Obligations of State and
Political Subdivisions -- -- 175,000 5.83 544,948 7.67 -- --
Marketable Equity Securities -- -- -- -- 1,377,143 11.18
---------- ----- ----------- ----- ----------- ----- ----------- -----
$5,996,931 5.63% $15,647,024 6.19% $12,669,463 7.10% $19,543,594 7.59%
========== ===== =========== ===== =========== ===== =========== ======
</TABLE>
The following summarizes the book value and weighted average yields of the
Corporation's securities held to maturity at December 31, 1996 by contractual
maturity:
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
------------------ -------------------- -------------------- --------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- ----- ----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of State and
Political Subdivisions $ 464,986 8.16% $ 4,289,545 8.85% $ 4,241,658 9.46% $ 70,763 9.35%
Corporate Bonds -- -- -- -- 250,000 7.87 -- --
---------- ----- ----------- ----- ----------- ----- ----------- -----
$ 464,986 8.16% $ 4,289,545 8.85% $ 4,491,658 9.37% $ 70,763 9.35%
========== ===== =========== ===== =========== ===== =========== ======
</TABLE>
All yields represent weighted average yields computed on the basis of cost,
adjusted for amortization of premium and accretion of discount. For purposes of
calculating yields on obligations of state and political subdivisions and
marketable equity securities, taxable equivalent adjustments were included to
provide a basis for comparison. The taxable equivalent adjustments were
calculated using the current statutory federal income tax rate of 34%. For
federal income tax purposes, corporations were allowed to exclude 70% of
dividend income in 1996.
LOANS
Loans net of deferred fees increased $28,168,339 during 1996, from $182,937,989
at December 31, 1995 to $211,106,328 at December 31, 1996. Residential mortgage
loans increased $20,810,954 during 1996, which was the result of increased
efforts in new business development and increased market demand. A $12,398,540
increase in consumer loans to individuals during 1996 was primarily the result
of improved penetration in the indirect automobile lending market. Also, the
Bank entered the automobile dealer floor plan business in 1996 contributing
$5,010,642 to total loans outstanding. Residential mortgage loans classified as
loans available for sale totaled $3,401,054 at December 31, 1995. There were no
residential mortgage loans classified as available for sale at December 31, 1996
due to the sale of $1,461,382 and reclassification of all remaining mortgage
loans as
30
<PAGE> 28
- --------------------------------------------------------------------------------
held for investments. Non-residential mortgage loans decreased $2,689,430 during
1996, which was attributable to net repayments on such loans.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Residential Mortgage Loans $ 56,641,022 $ 35,830,068 $ 30,906,568 $ 21,331,840 $ 19,153,523
Non-Residential Mortgage Loans 11,636,798 14,326,228 16,963,516 18,162,015 19,206,604
Commercial, Financial and
Agricultural Loans 48,225,722 50,609,207 46,018,913 45,112,605 37,959,377
Consumer Loans to Individuals 80,107,845 67,709,305 63,021,691 59,543,438 52,992,836
Lines of Credit 5,433,560 5,681,628 5,528,808 5,541,594 5,625,915
Lease Financing 8,248,698 8,797,060 8,171,420 5,809,844 1,306,402
Nonaccrual Loans 1,234,467 443,727 516,244 105,716 138,306
------------ ------------ ------------ ------------ ------------
Total Loans 211,528,112 183,397,223 171,127,160 155,607,052 136,382,963
Deferred Fees (421,784) (459,234) (461,020) (426,390) (392,222)
------------ ------------ ------------ ------------ ------------
Loans, Net of Deferred Fees 211,106,328 182,937,989 170,666,140 155,180,662 135,990,741
Unearned Income (1,212,814) (1,402,670) (1,517,598) (1,216,782) (599,888)
------------ ------------ ------------ ------------ ------------
Total Loans, Net of Unearned
Income and Fees 209,893,514 181,535,319 169,148,542 153,963,880 135,390,853
Allowance for Loan Losses (2,578,504) (2,676,362) (2,281,598) (1,865,704) (1,662,334)
------------ ------------ ------------ ------------ ------------
Net Loans $207,315,010 $178,858,957 $166,866,944 $152,098,176 $133,728,519
============ ============ ============ ============ ============
</TABLE>
The following table of commercial financial and agricultural loans shows the
Corporation's loan maturities, net of deferred fees, as of December 31, 1996 (in
thousands).
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS
-------- ---------- ----------
<S> <C> <C> <C>
Commercial, Financial and Agricultural $27,225 $ 10,622 $ 10,379
======= ======== ========
</TABLE>
Commercial, financial and agricultural loans approximating $21.8 million have
floating or adjustable interest rates.
NON-PERFORMING ASSETS
At December 31, 1996, nonaccrual loans were $1,234,467, compared to $443,727 in
1995. The $790,740 increase can be attributed to one commercial loan exposure of
$471,181 which is well secured and with a high probability of full repayment.
The remaining increase is due to management's adoption of a more conservative
policy related to commercial lease classifications. The effect was an increase
in nonaccrual commercial leases of $287,580, distributed over several leases,
which are not expected to have a material impact on the reserve for loan losses.
Other real estate owned increased $328,016 to $371,932 during 1996. The
outstanding amount of other real estate owned is comprised of seven separate
properties. Loans 90 days past due and still accruing interest declined $186,277
during 1996 and represent only .30% of net loans at December 31, 1996.
31
<PAGE> 29
- --------------------------------------------------------------------------------
The current quality of the loan portfolio can be demonstrated by the following
table which details total non-performing loans and past due loans:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans $1,234,467 $ 443,727 $ 516,244 $105,716 $ 138,306
Other Real Estate Owned 371,982 43,966 221,770 570,479 853,873
Other Assets Held for Sale 60,705 31,775 18,137 28,180 37,403
---------- ---------- ---------- -------- ----------
Total Non-Performing Assets 1,667,154 519,468 756,151 704,375 1,029,582
Loans 90 Days Past Due and Still Accruing 615,466 801,743 802,552 292,909 506,221
---------- ---------- ---------- -------- ----------
Total Non-Performing Assets and
Past Due Loans $2,282,620 $1,321,211 $1,558,703 $997,284 $1,535,803
========== ========== ========== ======== ==========
</TABLE>
RESERVE FOR LOAN LOSSES
The Corporation's policies provide for loan loss reserves to adequately protect
against potential unidentified and/or identified loan losses consistent with
sound and prudent banking practice. These policies consider historical data of
actual losses and loans classified by specific loan credit evaluation. They also
consider loan delinquency and economic conditions.
The Corporation follows a loan review program to evaluate the credit risk in its
loan portfolio for substantially all loans greater than $50,000. Through the
loan review process, the Corporation maintains a classified account list which,
along with the delinquency list of loans, helps management assess the overall
quality of the loan portfolio and the adequacy of the reserve for loan losses.
Loans classified as "substandard" are those loans with clear and defined
weaknesses such as highly leveraged positions, unfavorable financial ratios,
uncertain repayment sources or poor financial condition, which may jeopardize
recoverability of the asset. Loans classified as "doubtful" are those loans
which have characteristics similar to substandard accounts but with an increased
risk that a loss may occur, or at least a portion of the loan may require a
charge-off if immediately liquidated. Although loans classified as substandard
do not duplicate loans classified as doubtful, both substandard and doubtful
loans include some loans that are delinquent or on nonaccrual status. As of
December 31, 1996, substandard loans totaled $1,301,470 of which $37,075 were
loans not designated as delinquent or nonaccrual; and doubtful loans totaled
$317,729 all of which were loans designated as delinquent or nonaccrual.
In addition to its classified account list and delinquency list of loans, the
Corporation maintains a separate "watch list" which further aids the Corporation
in monitoring its loan portfolio. Watch list loans show warning elements where
the present status portrays one or more deficiencies that require attention in
the short run or where pertinent ratios of the loan account have weakened to a
point where more frequent monitoring is warranted. These loans do not have all
the characteristics of a classified loan (substandard or doubtful) but do show
weakened elements as compared with those of a satisfactory credit. The
Corporation reviews these loans in assessing the adequacy of the reserve for
loan losses.
In order to determine the adequacy of the reserve for loan losses, management
considers the risk classification or delinquency status of loans and other
factors. Specific reserves are established for credits which management believes
require reserves greater than those allocated according to their classification
or delinquent status. For smaller loans which are not individually reviewed,
management considers delinquencies, historical charge-off experience and
economic conditions in determining the amount to be allocated to the allowance.
The following schedule sets forth the allocation of the reserve for loan losses
among individual loan categories. A portion is allocated to general risk to
protect the Corporation against potential yet undetermined losses and is
32
<PAGE> 30
- --------------------------------------------------------------------------------
based on historical experience. The entire reserve for loan losses is available
to absorb future loan losses in any category.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
% OF % OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Financial and
Agricultural Loans $ 782 30.3 % $ 969 36.2 % $ 891 39.0 % $ 788 42.2 % $ 605 36.4 %
Real Estate Mortgage Loans 358 13.9 388 14.5 385 16.9 350 18.8 416 25.0
Installment Loans 819 31.8 679 25.4 646 28.3 547 29.3 481 29.0
Lease Financing 229 8.9 180 6.7 136 6.0 98 5.3 22 1.3
Allocation to General Risk 391 15.1 460 17.2 224 9.8 83 4.4 138 8.3
------ ------ ------ ------ ------
Total $2,579 $2,676 $2,282 $1,866 $1,662
====== ====== ====== ====== ======
</TABLE>
The Corporation's net charge-offs by loan type and changes in the reserve for
loan losses for each of the past five years were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Reserve for Loan Losses at Beginning of Year $2,676 $2,282 $1,866 $1,662 $1,406
Charge-Offs:
Commercial, Financial and Agricultural Loans 546 155 53 214 146
Real Estate Mortgage Loans -- -- -- 91 10
Installment Loans 261 322 168 167 293
Lease Financing 36 29 -- -- --
------ ------ ------ ------ ------
Total Charge-Offs 843 506 221 472 449
Recoveries:
Commercial, Financial and Agricultural Loans 5 329 72 59 59
Real Estate Mortgage Loans 2 2 2 62 --
Installment Loans 89 38 103 84 107
Lease Financing 0 1 -- -- --
------ ------ ------ ------ ------
Total Recoveries 96 370 177 205 166
------ ------ ------ ------ ------
Net Charge-Offs 747 136 44 267 283
Provision for Loan Losses 650 530 460 471 539
------ ------ ------ ------ ------
Reserve for Loan Losses at End of Year $2,579 $2,676 $2,282 $1,866 $1,662
====== ====== ====== ====== ======
Net Loan Charge-Offs to Average Loans 0.38% 0.08% 0.03% 0.19% 0.21%
Loan Loss Reserve to Non-Performing Assets 154.67% 515.21% 301.74% 264.87% 161.46%
</TABLE>
The Corporation's reserve for loan losses at December 31, 1996 was $2,578,504 or
1.23% of total loans compared to $2,676,362 or 1.47% of total loans at December
31, 1995. Net loan charge-offs to average loans increased to .38% in 1996, from
.08% in 1995. An increase in total charge-offs of approximately $337,000 was
largely attributable to one commercial loan during 1996. The decrease in total
recoveries was primarily the result of one large commercial loan recovery
recorded in 1995. The loan loss reserve as a percent of non-performing assets
decreased to 154.67% compared to 515.21% in 1995, largely due to the increase in
net loan charge-offs and the $790,740 increase in nonaccrual loans. As stated
previously, $471,181 of the increase in nonaccrual loans is related to one
commercial loan relationship, placed on nonaccrual status in 1996, which is well
secured with a high expectation of full repayment. The remainder of the
nonaccrual increase is related to the commercial lease portfolio of which a
substantial portion is collateralized by commercial equipment. Based on internal
and external analysis of the reserve for loan losses, industry trends and
related economic factors, management feels that the quality of the loan
portfolio remains within acceptable risk management guidelines and anticipates
that the reserve for loan losses is adequate to absorb reasonably foreseeable
losses on loans.
33
<PAGE> 31
- --------------------------------------------------------------------------------
LIABILITIES
Total liabilities were $277,481,601 at December 31, 1996, an increase of
$43,613,813 from December 31, 1995. The increase in total deposits of
$40,743,670 and additional borrowings from the Federal Home Loan Bank were used
to fund growth in the loan and investment securities available for sale
portfolios experienced during 1996.
DEPOSITS
Total deposits increased $40,743,670 from $220,243,135 at December 31, 1995 to
$260,986,805 at December 31, 1996. Non-interest bearing deposits increased
$5,364,966 during 1996 due to continued emphasis on the development of small
business relationships. An increase in interest bearing deposits of $35,378,704
was primarily the result of specific liquidity enhancement strategies in the
form of deposit promotions and the acquisition of approximately $11,500,000 in
deposits from another financial institution during the year.
Average deposits and the average cost of deposits for the past three years were
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------------ ------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Non-Interest Bearing Demand $ 45,410,862 -- $ 40,177,135 -- $ 68,218,094 --
Interest Bearing Demand 67,611,775 2.91% 52,266,567 2.24% 59,576,357 2.33%
Savings 37,750,180 3.00 41,165,175 2.97 43,779,510 2.97
Time Deposits 89,352,483 5.60 81,594,789 5.85 63,794,778 4.86
------------ ----- ------------ ----- ------------ -----
Total Deposits $240,125,300 3.38% $215,203,666 3.34% $167,150,645 3.46%
============ ===== ============ ===== ============ =====
</TABLE>
At December 31, 1996, outstanding Certificates of Deposit of $100,000 or more
are scheduled to mature as follows (in thousands):
<TABLE>
<S> <C>
Three Months or Less $ 3,606
Over Three Through Six Months 1,471
Over Six Through Twelve Months 2,379
Over Twelve Months 3,532
-------
Total $10,988
=======
</TABLE>
REPURCHASE AGREEMENTS
At December 31, 1996, repurchase agreements had a weighted average rate of 5.00%
and mature within 60 days. The securities sold under agreement to repurchase
were U.S. Treasury Securities and were with existing customers of the
Corporation.
BORROWED FUNDS
At December 31, 1996, the Corporation had outstanding borrowings of $9,560,000,
of which $5,560,000 is due during 1997. The Corporation borrowed these funds as
part of a community investment program to finance mortgage loans to lower income
borrowers and specific asset-liability management strategies. Advances are
collateralized by qualifying securities and loans and are subject to
restrictions or penalties related to prepayments.
SHAREHOLDERS' EQUITY
Consolidated shareholders' equity increased $2,456,399 from $24,863,854 at
December 31, 1995 to $27,320,253 at December 31, 1996. This increase was the
result of earnings retention and an increase in the net unrealized holding gains
on securities available for sale offset by dividends paid to shareholders.
The Corporation continues to maintain a strong capital position. Risk-based
capital ratios exceed current regulatory requirements. The Corporation's Tier I
risk-based capital ratio at December 31, 1996 was 12.41%
34
<PAGE> 32
- --------------------------------------------------------------------------------
compared to 13.57% at December 31, 1995. The Corporation's total risk-based
capital ratio at December 31, 1996 was 13.66% compared to 14.83% at December 31,
1995. Regulatory requirements for Tier I and total risk-based capital ratios are
4.00% and 8.00%, respectively.
SALES PRICE AND CASH DIVIDENDS PER SHARE
The following table sets forth the high and low sale prices and cash dividends
declared for the Corporation's common stock as reported by the NASDAQ National
Market System. Prices and dividends set forth below have been adjusted to
reflect a 5% stock dividend paid May 31, 1996 to shareholders of record, on
April 30, 1996 and a 4% stock dividend paid January 3, 1995 to shareholders of
record on December 6, 1994.
<TABLE>
<CAPTION>
SALES PRICE CASH DIVIDENDS
------------------ DECLARED
HIGH LOW PER SHARE
------ ------ --------------
<S> <C> <C> <C>
1996
First Quarter $25.72 $22.86 $ 0.19
Second Quarter 25.75 21.43 0.20
Third Quarter 25.00 23.00 0.20
Fourth Quarter 28.25 23.50 0.30
1995
First Quarter $23.57 $20.96 $ 0.12
Second Quarter 22.50 20.96 0.14
Third Quarter 23.81 20.96 0.14
Fourth Quarter 25.00 21.67 0.38
</TABLE>
INTEREST RATE SENSITIVITY
The Corporation has an asset/liability management process in place to monitor
and control risks associated with changing interest rates and the potential
impact on future financial performance. Interest rate risk is managed by
analyzing the maturity and repricing relationships between interest earning
assets and interest bearing liabilities at specific points in time or "GAP"
analysis. Management, however, recognizes that a simplified GAP analysis may not
adequately reflect the degree to which assets and liabilities with similar
repricing characteristics react to changes in market interest rates. In
addition, repricing characteristics identified under a specific GAP position may
vary significantly under different interest rate environments. Therefore,
simulation modeling is also performed to evaluate the extent and direction of
the Corporation's interest rate exposure under upward or downward changes in
interest rates.
Based upon historical trends, the Corporation has typically considered all
demand and savings deposits as core deposits and non-rate sensitive. Due to the
unusual interest rate environment experienced during 1996, interest bearing
demand deposit interest rates were somewhat more rate sensitive than in prior
experience. The following table has been prepared, as required, presenting
interest bearing demand deposits and savings deposits as repricing within the
earliest period. As a result, the table reflects a negative, or liability
sensitive, cumulative interest GAP position of $40,761 in the first one-year
GAP. Results of simulation modeling and historical experience indicate, however,
that the overall potential effect on net interest income should not have an
adverse result on future financial performance.
The following table summarizes the Corporation's interest rate sensitivity or
GAP position, which is the estimated aggregate maturity/repricing structure of
interest earning assets and interest bearing liabilities, at December 31, 1996
(in thousands):
35
<PAGE> 33
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
0-3 OVER 3-6 OVER 6-12 OVER 1-5 OVER 5
MONTHS MONTHS MONTHS YEARS YEARS TOTAL
-------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Loans, Net of Unearned Income $ 41,283 $ 7,904 $ 16,333 $76,572 $70,745 $212,837
Securities Available for Sale -- 1,000 5,005 15,581 34,083 55,669
Securities Held to Maturity 100 15 350 4,289 4,563 9,317
Other Interest Earning Assets 8,662 -- -- -- -- 8,662
Non-Interest Earning Assets -- -- -- -- 18,317 18,317
-------- -------- --------- ------- ------- --------
Total Assets $114,931 $ 7,904 $ 16,333 $76,572 $89,062 $304,802
======== ======== ========= ======= ======= ========
Interest Bearing Demand Deposits $ 79,766 -- -- -- -- $ 79,766
Savings Deposits 38,283 -- -- -- -- 38,283
Time Deposits <$100,000 13,270 15,151 18,526 30,550 4,106 81,609
Time Deposits >$100,000 3,606 1,471 2,379 3,008 524 10,988
Repurchase Agreements 1,911 -- -- -- -- 1,911
Borrowed Funds -- -- -- -- -- 9,560
Other Liabilities -- 960 4,600 4,000 55,365 55,365
Shareholders' Equity -- -- -- -- 27,320 27,320
-------- -------- --------- ------- ------- --------
Total Liabilities and
Shareholders' Equity $136,836 $ 17,588 $ 25,505 $37,558 $87,315 $304,802
======== ======== ========= ======= ======= ========
Period GAP $(21,905) $ (9,684) $ (9,172) $39,014 $ 1,747
Cumulative GAP $(21,905) $(31,589) $(40,761) $(1,747) $ --
</TABLE>
LIQUIDITY AND CASH FLOWS
Liquidity is the ability to generate cash flows or obtain funds at a reasonable
cost to satisfy customer credit needs and the requirements of depositors. Liquid
assets include cash, federal funds sold, investments maturing in less than one
year and loan repayments. The Corporation's ability to obtain deposits and
purchase funds at reasonable rates determines its liability liquidity. As a
result of liquid asset management and the ability to generate liquidity through
deposit funding, management feels that the Corporation maintains overall
liquidity sufficient to satisfy customer needs. In the event that such measures
are not sufficient, the Corporation has established alternative sources of funds
in the form of borrowing and repurchase agreements.
Operating activities provided net cash of $4,027,902 during 1996, compared to
$4,967,522 and $4,215,129 at December 31, 1995 and 1994, respectively. The
primary source of operating cash flows for 1996 was net income adjusted for the
effect of noncash expenses such as the provision for loan losses, depreciation
and the curtailment gain.
Investing activities used cash flows of $36,895,466 during 1996, compared to
$18,704,984 at December 31, 1995 and $16,153,017 at December 31, 1994. A
significant portion of borrowings were used to fund the loan growth experienced
during 1996. Proceeds from the sales, repayments and maturities of investment
securities available for sale and investment securities held to maturity were
reinvested primarily in investment securities available for sale. Cash flows
from investing activities were primarily used to fund the growth in the loan
portfolio during 1995 and 1994.
Financing activities provided cash of $41,664,124, $12,218,393 and $10,298,934
at December 31, 1996, 1995 and 1994, respectively. An increase in demand,
savings, certificate of deposit accounts and borrowings provided cash for 1996.
During 1995, an increase in certificates of deposit and borrowings provided
cash, while cash was used by decreases in demand and savings deposits as a
result of a redirection of funds from interest bearing deposits and money market
accounts to certificates of deposit. Net proceeds from borrowings were used to
fund loan growth experienced during 1996 and 1995.
36
<PAGE> 1
EXHIBIT 21
Subsidiaries of NSD Bancorp, Inc.
As of December 31, 1996
NSD Bancorp, Inc.
5004 McKnight Road
Pittsburgh, PA 15237
Parent Company
NorthSide Bank
100 Federal Street
Pittsburgh, PA 15212
100% Owned Subsidiary
Incorporated in the Commonwealth of Pennsylvania
100 Federal Street, Inc.
100 Federal Street
Pittsburgh, PA 15212
100% Owned Subsidiary of NorthSide Bank
Incorporated in the Commonwealth of Pennsylvania
<PAGE> 1
[LOGO]
EXHIBIT 23
[LETTER HEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
NSD Bancorp, Inc. on Forms S-8 (File Nos. 33-78220 and 33-78222) of our report
dated January 28, 1997, on our audits of the consolidated financial statements
of NSD Bancorp, Inc. and subsidiary, as of December 31, 1996 and 1995, and for
the years ended December 31, 1996, 1995, and 1994, which report is incorporated
by reference in this Annual Report on Form 10-K.
COOPERS & LYBRAND LLP
Pittsburgh, Pennsylvania
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,493,654
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,400,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,668,550
<INVESTMENTS-CARRYING> 9,316,952
<INVESTMENTS-MARKET> 9,563,505
<LOANS> 212,836,762
<ALLOWANCE> 2,578,504
<TOTAL-ASSETS> 304,801,854
<DEPOSITS> 260,986,805
<SHORT-TERM> 7,471,184
<LIABILITIES-OTHER> 5,023,612
<LONG-TERM> 4,000,000
0
0
<COMMON> 1,637,630
<OTHER-SE> 25,682,623
<TOTAL-LIABILITIES-AND-EQUITY> 304,801,854
<INTEREST-LOAN> 17,518,046
<INTEREST-INVEST> 3,732,483
<INTEREST-OTHER> 251,053
<INTEREST-TOTAL> 21,501,582
<INTEREST-DEPOSIT> 8,107,572
<INTEREST-EXPENSE> 8,724,605
<INTEREST-INCOME-NET> 12,776,977
<LOAN-LOSSES> 650,000
<SECURITIES-GAINS> 211,594
<EXPENSE-OTHER> 8,152,657
<INCOME-PRETAX> 5,313,833
<INCOME-PRE-EXTRAORDINARY> 3,689,489
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,689,489
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 2.25
<YIELD-ACTUAL> 5.00
<LOANS-NON> 1,234,467
<LOANS-PAST> 615,466
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,676,362
<CHARGE-OFFS> 842,911
<RECOVERIES> 95,053
<ALLOWANCE-CLOSE> 2,578,504
<ALLOWANCE-DOMESTIC> 2,187,504
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 391,000
</TABLE>
