<PAGE> 1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1997
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission File No. 0-22124
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NSD Bancorp, Inc.
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(Exact name of Registrant as specified in its charter)
Commonwealth of Pennsylvania 25-1616814
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5004 McKnight Road, Pittsburgh, Pennsylvania 15237
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(Address of principal executive offices) (ZIP Code)
(412) 231-6900
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(Registrant's telephone number, including area code)
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
----- -----
The number of shares outstanding of the Registrant's common stock
as of July 31, 1997 was:
Common Stock, $1.00 par value - 1,719,286 shares outstanding
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NSD BANCORP, INC.
FORM 10-Q
For the Quarter Ended September 30, 1997
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 1997
and December 31, 1996 3
Consolidated Statement of Income - For the Nine and Three
Months Ended September 30, 1997 and 1996 4
Consolidated Statement of Cash Flows - For the Nine
Months Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II - Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NSD BANCORP, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30,
1997 December 31,
ASSETS (UNAUDITED) 1996
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<S> <C> <C>
Cash and Due From Banks $ 13,486,175 $ 12,493,654
Federal Funds Sold -- 8,400,000
Securities Available for Sale 57,002,436 55,668,550
Securities Held to Maturity (Market Value of $6,303,308
at September 30, 1997 and $9,563,505
at December 31, 1996) 6,117,899 9,316,952
Loans Available for Sale 3,227,134 2,943,248
Loans, Net of Deferred Fees 230,593,568 211,106,328
Unearned Income (1,213,915) (1,212,814)
Reserve for Loan Losses (2,911,996) (2,578,504)
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Loans, Net 229,694,791 210,258,258
Premises and Equipment, Net 3,203,932 3,686,319
Accrued Interest Receivable 2,009,983 1,992,396
Other Real Estate Owned and Assets
Held for Sale 276,837 432,687
Other Assets 3,572,320 2,553,038
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TOTAL ASSETS $ 315,364,373 $ 304,801,854
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing $ 48,503,724 $ 50,341,084
Interest Bearing 210,939,843 210,645,721
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Total Deposits 259,443,567 260,986,805
Borrowed Funds:
Repurchase Agreements and Fed Funds Purchased 0 1,911,184
Short-Term Borrowings 16,000,000 5,560,000
Long-Term Borrowings 4,000,000 4,000,000
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Total Borrowed Funds 20,000,000 11,471,184
Accrued Interest Payable 4,763,560 4,551,792
Other Liabilities 1,770,322 471,820
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Total Liabilities 285,977,449 277,481,601
Common Stock $1 Par Value; Authorized
5,000,000 Shares, Issued and
Outstanding 1,719,286 1,719,286 1,637,630
Capital Surplus 8,389,237 6,266,182
Net Unrealized Holding Gains on Securities Available for Sale 1,738,273 1,199,083
Retained Earnings 17,540,128 18,217,358
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Total Shareholders' Equity 29,386,924 27,320,253
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 315,364,373 $ 304,801,854
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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NSD BANCORP, INC
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
Septmeber 30, September 30,
NET INTEREST INCOME ------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loans, Including Fees $14,450,589 $12,931,942 $5,043,769 $4,462,012
Investment Securities:
Taxable 2,754,708 2,087,305 943,006 755,461
Tax-Exempt 361,376 576,111 102,657 182,575
Dividends 88,811 70,294 30,681 18,494
Interest Bearing Deposits 3,790 6,772 989 1,616
Federal Funds Sold 70,917 195,652 3,574 39,258
----------- ----------- ---------- ----------
Total Interest Income 17,730,191 15,868,076 6,124,676 5,459,416
Interest on Deposits 6,827,199 5,950,957 2,331,546 2,078,083
Interest on Borrowed Funds:
Repurchase Agreements 149,137 72,135 99,165 23,530
Short-Term Borrowings 157,332 49,154 123,347 3,529
Long-Term Borrowings 317,863 334,966 12,704 136,678
----------- ----------- ---------- ----------
Total Interest Expense 7,451,531 6,407,212 2,566,762 2,241,820
Net Interest Income 10,278,660 9,460,864 3,557,914 3,217,596
Provision for Loan Losses 525,000 450,000 195,000 150,000
----------- ----------- ---------- ----------
Net Interest Income After Provision for Loan Losses 9,753,660 9,010,864 3,362,914 3,067,596
OTHER INCOME
Net Investment Securities Gains 95,803 74,885 872 2,679
Service Fees 515,384 501,993 184,186 162,058
Other Operating Income 567,178 360,792 136,282 108,035
----------- ----------- ---------- ----------
Total Other Income 1,178,365 937,670 321,340 272,772
OTHER EXPENSES
Salaries and Employee Benefits 3,144,669 3,041,323 1,057,785 1,024,328
Occupancy Expense 583,716 584,209 198,408 184,665
Equipment and Supplies 760,096 748,277 262,523 266,445
Data Processing 410,150 380,332 136,035 127,315
FDIC Insurance 38,201 1,500 11,134 500
Advertising 116,152 147,569 55,320 51,101
Other Operating Expenses 1,728,734 1,190,561 488,835 412,016
----------- ----------- ---------- ----------
Total Other Expenses 6,781,718 6,093,771 2,210,040 2,066,370
Income Before Income Taxes 4,150,307 3,854,763 1,474,214 1,273,998
Provision for Income Taxes 1,347,750 1,134,155 508,750 383,586
----------- ----------- ---------- ----------
NET INCOME $ 2,802,557 $ 2,720,608 $ 965,464 $ 890,412
=========== ========== ========== ==========
NET INCOME PER COMMON SHARE $1.62 $1.58 $0.56 $0.52
=========== =========== ========== ==========
Common Dividends Declared and Paid Per Share $0.74 $0.39 $0.25 $0.20
=========== =========== ========== ==========
Weighted Average Shares Outstanding 1,730,271 1,722,530 1,735,198 1,722,656
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
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NSD BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For The Nine Months Ended
September 30,
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1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,802,557 $ 2,720,608
Adjustments to Net Income:
Provision for Loan Losses 525,000 450,000
Gains on Investment Securities (95,803) (74,884)
Loss on Sale of Other Assets 3,965 3,321
Gain on Loan Sales -- (14,614)
Gain on Sale of Land (167,000) --
Depreciation and Amortization 482,835 358,297
Net Premium Amortization and Discount
Accretion on Investment Securities 42,987 139,685
(Increase) in Accrued Interest Receivable (17,587) (51,523)
Increase in Accrued Interest Payable 211,822 162,791
Increase in Other Assets (889,807) (365,407)
Deferred Loan Fees, Net (12,363) (33,572)
Increase in Other Liabilities 556,412 236,373
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Net Cash Provided by Operating Activities 3,443,018 3,531,075
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Investment Securities Available for Sale 9,960,691 10,700,412
Proceeds from Repayments and Maturities of Investment
Securities Available for Sale 12,568,226 11,077,814
Proceeds from Repayments and Maturities of Investment
Securities Held to Maturity 3,185,000 905,000
Purchases of Investment Securities Available for Sale (23,000,897) (29,675,018)
Proceeds from Sales of Other Real Estate Owned 185,259 --
Net Increase in Loans (19,949,169) (22,868,891)
Proceeds from Sales of Loans -- 1,475,996
Disposition (Aquisition) of Premises and Equipment, Net 489,828 (258,612)
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Net Cash Used by Investing Activities (16,561,062) (28,643,299)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net (Decrease) Increase in Demand and Savings
Deposit Accounts (3,121,278) 26,959,350
Net Increase (Decrease) in Certificates of Deposit 1,578,040 (2,380,666)
Net (Decrease) Increase in Repurchase Agreements (1,911,184) 80,929
Proceeds from Short-Term Borrowings 20,500,000 960,000
Proceeds from Long-Term Borrowings 3,000,000 4,000,000
Repayments of Short-Term Borrowings (13,060,000) (2,780,000)
Cash Dividends Paid in Lieu of Fractional Shares (6,026) (4,617)
Cash Dividends Paid (1,268,987) (967,025)
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Net Cash Provided by Financing Activities 5,710,565 25,867,971
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(Decrease) Increase in Cash and Cash Equivalents (7,407,479) 755,747
Cash and Cash Equivalents at Beginning of Year 20,893,654 12,097,094
------------ ------------
Cash and Cash Equivalents at End of Period $ 13,486,175 $ 12,852,841
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
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NSD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. 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 (the Bank), and the Bank's wholly owned
subsidiary, 100 Federal Street, Inc. Material intercompany accounts and
transactions have been eliminated. In the opinion of management, the
accompanying consolidated financial statements include all normal recurring
adjustments necessary for a fair presentation of the financial position and
results of operations for the periods presented.
2. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares
outstanding and common stock equivalents in each period. Weighted average
shares outstanding include common stock equivalents under NSD Bancorp,
Inc.'s Employee Stock Option Plan and NSD Bancorp, Inc.'s Non-Employee
Director Stock Option Plan. On May 27, 1997, the Corporation's Board of
Directors declared a 5% common stock dividend payable on June 30, 1997 to
shareholders of record on June 16, 1997. Earnings per share and dividends
per share have been restated to reflect this dividend. The effect of the
dividend increased shares outstanding by 81,656 shares and caused a
transfer of $2,123,056 from retained earnings to capital surplus.
3. STOCK BASED COMPENSATION
As of January 1, 1996, the Corporation adopted the provisions of Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock Based
Compensation." This Statement encourages, but does not require, companies
to recognize compensation expense for grants of stock, stock options and
other equity instruments to employees based on the new fair value
accounting rules and requires certain new disclosures. The Corporation did
not adopt the optional measurement provisions of this statement, and
accordingly, has determined that such adoption would not have a material
adverse effect on the consolidated financial statements or results of
operation of the Corporation.
4. 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
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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.
During the first quarter of 1997, the Corporation adopted both
pronouncements, neither of which is anticipated to have any material effect
on the financial statements.
In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
This statement specifies the computation, presentation, and disclosure
requirements for EPS. SFAS No. 128 is designed to improve the EPS
information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements, and
increasing the comparability of EPS data on an international basis. Under
the provisions of SFAS No. 128, primary and fully diluted earnings per
share will be replaced with basic and diluted earnings per share amounts.
In February of 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure," effective for financial statement for
periods ending after December 15, 1997. This statement requires disclosure
of rights and privileges of various securities outstanding. The Corporation
will adopt the disclosure provisions of this statement for the year ending
December 31, 1997.
In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. This
Statement establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income includes net income and all
other changes in shareholders' equity except those resulting from
investments and distributions to owners. The Corporation is currently
evaluating the effect that implementation of this standard will have on its
results of operation and financial position.
7
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Item 2. 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 for the nine months ended
September 30, 1997, compared to the nine months ended September 30, 1996.
RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 1997, was $2,802,557, an
increase of $81,949 from $2,720,608 for the nine months ended September 30,
1996. Net interest income, net investment securities gains, service fees and
other operating income increased $817,796, $20,918, $13,391 and $206,386,
respectively, for the nine months ended September 30, 1997. Also contributing to
net income were declines in occupancy expense of $493 and advertising expense of
$31,417. These additional contibutions to income were partially offset by
increases in the provision for loan losses of $75,000 and increases in salaries
and employee benefits, equipment and supplies, data processing, FDIC insurance,
other operating expenses, and the provision for income taxes of $103,346,
$11,819, $29,818, $36,701, $538,173 and $213,595, respectively, during the first
nine months of 1997. The Corporation's ROA for the first nine months of 1997 was
1.23% compared to 1.32% for the first nine months of 1996. ROE for the first
nine months of 1997 was 13.49% compared to 14.19% for the first nine months of
1996.
Net income for the third quarter of 1997 was $965,464, an increase of $75,052
from $890,412 for the third quarter of 1996. This improvement in earnings is
primarily the result of increases of $340,318, $22,128 and $28,247,
respectively, in net interest income, service fees and other operating income
over the prior year's third quarter. Partially offsetting these contributions to
income during the three months ended September 30, 1997, was a decrease in net
investment securities gains of $1,807 and increases in the provision for loan
losses of $45,000, salaries and employee benefits of $33,457, FDIC insurance of
$10,634, other operating expenses of $76,819 and the provision for income taxes
of $125,164.
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 $1,796,288 during the nine months ended
September 30, 1997, as compared to the same period in 1996. This increase was
due to a significant increase in average earning assets of $32,716,994 offset by
a decrease in the yield on earning assets to 8.20% at September 30, 1997, from
8.30% at September 30, 1996. Average loans increased $28,703,580 to $223,786,904
at September 30, 1997. The average yield on loans decreased to 8.64% at
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September 30, 1997, compared to 8.87% at September 30, 1996. Average investment
securities increased $7,079,696 while the average yield increased from 6.80% at
September 30, 1996 to 6.83% at September 30, 1997. Interest expense increased
$1,044,319 during the first nine months of 1997 as a result of an increase in
total interest-bearing funds of $24,197,862 coupled with an increase in the
average cost of funds from 4.21% at September 30, 1996, to 4.38% at September
30, 1997. Average interest bearing deposits increased $20,393,810 mainly in the
area of certificates of deposit and money market accounts. Average borrowed
funds increased $3,804,052 at September 30, 1997, contributing an additional
$168,078 in interest expense.
During the third quarter of 1997, interest income increased $594,547 as compared
to the third quarter of 1996. Contributing to the increase in interest income
was an increase in average earning assets of $29,457,116 offset by a decline in
the yield on earning assets from 8.21% during the third quarter of 1996 to 8.17%
during the third quarter of 1997. Average loans increased $26,103,246 while the
yield on loans for both the third quarter of 1997 and 1996 was 8.63%. Average
investments increased $6,096,271 during the three months ended September 30,
1997, and the average yield declined to 6.60% during the third quarter of 1997
from 6.77% during the third quarter of 1996. Interest expense increased $324,942
during the third quarter of 1997 as a result of an increase in interest bearing
funds of $22,438,341 coupled with an increase in the average cost of funds from
4.30% during the third quarter of 1996 to 4.43% during the third quarter of
1997. Average interest bearing deposits increased $18,639,756 during the third
quarter, mainly in certificate of deposit and money market accounts. Also
increasing during the third quarter of 1997 were average borrowed funds by
$3,798,585 contributing an additional $71,479 to interest expense.
The Corporation's net interest margin decreased from 5.02% for the nine months
ended September 30, 1996 to 4.80% for the same period of 1997. This was caused
by a decrease in the yield on interest bearing assets combined with an increase
in the cost of funds of interest-bearing liabilities. Net interest margin for
the third quarter of 1997 decreased to 4.80% from 4.90% for the third quarter of
1996. This decrease was predominantly due to an increase in the yield on cost of
funds and a decline in the yield on interest-bearing assets.
PROVISION FOR LOAN LOSSES
The Corporation's provision for loan losses was $525,000 for the nine months
ended September 30, 1997, compared to $450,000 for the nine months ended
September 30, 1996. The Corporation's provision for loan losses was $195,000 for
the third quarter of 1997 compared to $150,000 for the third quarter of 1996.
This increase is largely related to an increase in the average loans outstanding
during the first nine months of 1997. The Corporation had net charge-offs of
$191,508 during the first nine months of 1997 compared to net charge-offs of
$718,467 during the first nine months of 1996. This change is primarily the
result of a charge-off during the first nine months of 1996 of commercial loans
related to one borrower.
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The Corporation's net charge-offs by loan type and changes in the reserve for
loan losses were as follows:
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1997 1996
---------- ----------
Reserve for Loan Losses at Beginning of Year $2,578,504 $2,676,362
Charge-Offs:
Commercial, Financial and Agricultural Loans 23,338 546,426
Real Estate Mortgage Loans 29,932 --
Installment Loans 214,257 213,884
Lease Financing 37,268 35,994
---------- ----------
Total Charge-Offs 304,795 796,304
Recoveries:
Commercial, Financial and Agricultural Loans 80,133 4,472
Real Estate Mortgage Loans 1,350 1,200
Installment Loans 31,804 72,165
---------- ----------
Total Recoveries 113,287 77,837
---------- ----------
Net Charge-Offs 191,508 718,467
Provision for Loan Losses 525,000 450,000
---------- ----------
Reserve for Loan Losses at End of Period $2,911,996 $2,407,895
========== ==========
OTHER INCOME
Other income increased $240,695 from $937,670 for the nine months ended
September 30, 1996, to $1,178,365 for the nine months ended September 30, 1997.
Net gains recognized upon the sale of certain fixed income bonds and marketable
equity securities available for sale increased $20,918 during the first nine
months of 1997 compared to the same period in 1996. Service fees increased to
$515,384 for the first nine months of 1997, from $501,993 for the first nine
months of 1996. This increase is primarily due to improved NSF/Overdraft
penetration. Other operating income increased $206,386 to $567,178 for the nine
months ended September 30, 1997. This increase is primarily due to a $36,863
gain on the sale of the merchant credit card portfolio during the third quarter
of 1997 and a $167,000 gain recognized upon the sale of land owned by the Bank
during the second quarter of 1997. The property was sold upon the exercise of a
third party's option, expiring by the end of the third quarter in 1997, to
purchase the property.
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Other income increased $48,568 during the third quarter, from $272,772 in 1996
to $321,340 in 1997. Service fees increased $22,128 primarily due to improved
NSF fee penetration. Other operating income increased $28,247 for the three
months ended September 30, 1997, compared to the same period in 1996. This
increase is largely the result of the $36,863 gain on the sale of the merchant
credit cards during the third quarter, as previously discussed, offset by a
decline in ATM service charges and other immaterial charges in accounts. The
increase in total other income was slightly offset by a decline in net
investment securities gains of $1,807 from the third quarter of 1996 to the
third quarter of 1997.
OTHER EXPENSES
Total other expenses for the first nine months of 1997 increased $687,947 to
$6,781,718 from $6,093,771 for the first nine months of 1996. Salaries and
employee benefits increased $103,346, which is attributable to normal salary and
benefit increases and additional staffing to support the growth of the
Corporation.
Occupancy expense decreased $493. This decrease is comprised of a $17,481
reduction in building maintenance costs related to nonrecurring projects
scheduled during the first nine months of 1996 and a decline in property taxes
of $17,035 offset by an increase in rent expense of $32,295 related to the
addition of the Bank's downtown Pittsburgh branch office in December, 1996.
Equipment and supplies expense increased $11,819 due to an increase in
depreciation expense of $21,254 related to replacement and upgrading of existing
equipment during the first nine months of 1997 and an increase in equipment
rental expense of $13,162 as the Corporation replaced capitalized photocopy
machines with leased equipment during 1996, offset by a reduction in equipment
repairs of $26,471 due to nonrecurring expenses recognized during the first nine
months of 1996. Data processing expense increased $29,818 largely due to costs
incurred during conversion of acquired branch deposits and with the significant
increase in item volume processing resulting from deposit and loan account
growth. FDIC insurance expense increased $36,701 as the Federal Deposit
Insurance Corporation levied additional assessments on the deposits of all banks
insured by its Bank Insurance Fund and also due to premiums on acquired SAIF
insured deposits. Advertising expense decreased $31,174 to $116,152 from
$147,569 for the same period in 1996. Other operating expenses increased to
$1,728,734 for the first nine months of 1997, up from $1,190,561. A significant
portion of this increase is attributable to $281,000 in unrecoverable charges
recognized from transactions with one of NorthSide Bank's merchant credit card
customers. Although additional losses may be incurred, it is anticipated that
any future charges, related to this customer, will not have a material effect on
the Corporation's financial results. Also contributing to the increase in other
operating expenses was an increase in deposit premium amortization expense of
$103,284 related to deposits acquired from another financial institution in
December, 1996. Asset recovery expense increased $19,211 as additional costs
were incurred in the process of resolving several individual workout situations
during the first nine months of 1997. Increases in postage, telephone, legal
expenses, promotions, Pennsyvania shares tax and Federal Reserve service charges
of $18,062, $13,212, $13,376, $17,733, $13,441, and $23,222, respectively, also
contributed to the overall increase in other operating expenses.
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Total other expenses increased $143,670 during the third quarter, from
$2,066,370 in 1996 to $2,210,040 in 1997. Salaries and employee benefits
increased due to normal salary and benefit increases and additional staffing to
support the growth of the Corporation. Occupancy expense increased $13,743
largely due to an increase of $11,492 in rent expense related to the operation
of an additional branch office opened in December of 1996. Data processing
expense increased to $136,035 during the three months ended September 30, 1997,
from $127,315 for the same period in 1996 in conjunction with an increase in the
volume of items processed resulting from deposit and loan growth. FDIC insurance
expense increased $10,634 as the Federal Deposit Insurance Corporation levied
additional assessments on the deposits of all banks insured by its Bank
Insurance Fund and also due to assessments related to SAIF insured deposits
acquired in December of 1996. Advertising expense increased $4,219 to $55,320
for the third quarter of 1997, from $51,101 for the same period in 1996 due to a
home equity loan promotion in the third quarter of 1997.
Other operating expenses increased to $488,835 during the three months ended
September 30, 1997, from $412,016 during the three months ended September 30,
1996. An increase in deposit premium amortization expense of $31,650 was related
to the premium paid on deposits acquired in December of 1996. Also contributing
to the overall increase was an additional $13,673 in Federal Reserve service
charges incurred as the result of a temporary agreement to clear daily cash
letters through the Federal Reserve, along with slight increases in Pennsylvania
shares tax of $4,867, postage expense of $4,694 and charitable donations of
$6,468 offset by a decrease in DDA losses of $10,907.
INCOME TAXES
The Corporation recorded an income tax provision of $1,347,750 for the nine
months ended September 30, 1997, compared to $1,134,155 for the nine months
ended September 30, 1996. This increase in the tax provision during the first
nine months of 1997 is the result of a reduction in interest earned on tax free
earning assets and an increase in pre-tax earnings. The Corporation recorded an
income tax provision of $508,750 and $383,586 for the three months ended
September 30, 1997, and 1996, respectively. This increase was also due to a
reduction in tax-free interest earned on assets offset by an increase in pre-tax
earnings.
FINANCIAL CONDITION
The Corporation's total assets were $315,364,373 at September 30, 1997, an
increase of $10,562,519 from December 31, 1996. The purchase of securities
available for sale resulted in an increase of $1,333,886 at September 30, 1997.
The maturity and call of investment securities held to maturity resulted in a
decline of $3,199,053. Net loans increased $19,436,533, from $210,258,258 at
December 31, 1996 to $229,694,791 at September 30, 1997. Cash and due from banks
increased $992,521 and federal funds sold decreased $8,400,000 at September 30,
1997.
12
<PAGE> 13
INVESTMENT SECURITIES
Investment securities available for sale increased $1,333,886. This is the
result of the purchase of $23,000,897 in securities offset by the sales,
maturities or calls of $22,433,114 in securities.
A summary of investment securities available for sale is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------------------------
GROSS UNREALIZED HOLDING
AMORTIZED ------------------------ FAIR
COST GAINS LOSSES VALUE
------------ ---------- -------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 4,198,298 $ 27,965 $ 1,227 $ 4,225,036
Obligations of U.S. Government Agencies 23,625,964 143,813 53,313 23,716,464
Mortgage-Backed Securities 24,490,736 157,115 50,413 24,597,438
Obligations of State and Political 544,955 3,738 -- 548,693
Subdivisions
Marketable Equity Securities 1,508,737 2,406,068 -- 3,914,805
----------- ---------- -------- -----------
$54,368,690 $2,738,699 $104,953 $57,002,436
=========== ========== ======== ===========
</TABLE>
<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 719,948 4,556 1,682 722,822
Subdivisions
Marketable Equity Securities 1,377,143 1,928,611 -- 3,305,754
----------- ---------- -------- -----------
$53,857,012 $2,116,729 $305,191 $55,668,550
=========== ========== ======== ===========
</TABLE>
13
<PAGE> 14
A summary of investment securities held to maturity is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED --------------------- FAIR
COST GAINS LOSSES VALUE
----------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Obligations of State and Political $5,867,899 $185,409 -- $6,053,308
Subdivisions
Corporate Bonds 250,000 -- -- 250,000
---------- -------- ------- ----------
$6,117,899 $185,409 -- $6,303,308
========== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED --------------------- FAIR
COST GAINS LOSSES VALUE
---------- -------- --------- -----------
<S> <C> <C> <C> <C>
Obligations of State and Political $9,066,952 $246,553 -- $9,313,505
Subdivisions
Corporate Bonds 250,000 -- -- 250,000
---------- -------- ---------- ----------
$9,316,952 $246,553 -- $9,563,505
========== ======== ========== ==========
</TABLE>
LOANS
Loans available for sale increased to $3,227,134 at September 30, 1997, up from
$2,943,248 at December 31, 1996. At September 30, 1997, loans classified as
available for sale were comprised entirely of student loans. Loans, net of
deferred fees, increased to $230,593,568 at September 30, 1997. This increase
was primarily achieved through increased sales calling efforts in small business
and indirect automobile sectors during the first nine months of 1997. Consumer
loans to individuals and commercial, financial and agricultural loans increased
$15,835,099 and $6,388,207, respectively, at September 30, 1997. Nonaccrual
loans increased to $1,322,228 at September 30, 1997, from $1,234,467 at December
31, 1996.
14
<PAGE> 15
The composition of loans is shown in the following table:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, INCREASE
1997 1996 (DECREASE)
------------ ------------ -----------
<S> <C> <C> <C>
Consumer Loans to Individuals $ 95,942,944 $ 80,107,845 $15,835,099
Mortgage
Non-Residential 10,424,622 11,636,798 (1,212,176)
Residential 54,764,988 56,641,022 (1,876,034)
Commercial, Financial and Agricultural 54,613,929 48,225,722 6,388,207
Lines of Credit 5,558,404 5,433,560 124,844
Lease Financing 8,375,874 8,248,698 127,176
Nonaccrual Loans 1,322,228 1,234,467 87,761
------------ ------------ -----------
231,002,989 211,528,112 19,474,877
Deferred Fees (409,421) (421,784) 12,363
------------ ------------ -----------
$230,593,568 $211,106,328 $19,487,240
============ ============ ===========
</TABLE>
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 contracted terms of the
loan agreement. At September 30, 1997, the Corporation's recorded investment in
loans for which impairment has been recognized in accordance with FASB Statement
No. 114 totaled $543,465 compared to $650,673 at December 31, 1996. The
corresponding reserve for loan losses was $100,729 at September 30, 1997,
compared to $154,194 at December 31, 1996. One loan considered to be impaired
was written-down through charge-offs during the third quarter of 1997. The
average recorded investment in impaired loans was $605,317 during the first nine
months of 1997. All loans considered impaired at September 30, 1997 were on
nonaccrual status, therefore, the Corporation did not recognize any interest on
impaired loans during the first nine months of 1997. There was no interest
income related to impaired loans recognized on the cash basis during the nine
months ended September 30, 1997. There was no additional reserve required for
impaired loans during the first nine months of 1997.
NON-PERFORMING ASSETS
Non-performing assets decreased from $1,667,154 at December 31, 1996 to
$1,654,426 at September 30, 1997, due to an increase in nonaccrual loans of
$85,173 and an increase in other assets held for sale of $91,948 offset by a
decrease in other real estate owned of $189,849.
15
<PAGE> 16
The following table presents the composition of non-performing assets and past
due loans:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
<S> <C> <C>
Nonaccrual Loans $1,322,228 $1,234,467
Other Real Estate Owned 182,133 371,982
Other Assets Held For Sale 94,704 60,705
---------- ----------
Total Non-Performing Assets 1,599,065 1,667,154
Loans Past Due 90 Days or More and Still
Accruing 1,093,464 615,466
---------- ----------
Total Non-Performing Assets and Past Due
Loans $2,692,529 $2,282,620
========== ==========
</TABLE>
RESERVE FOR LOAN LOSSES
The Corporation's loan loss reserve at September 30, 1997 was $2,911,996 or
1.25% of total loans compared to $2,578,504 or 1.23% of total loans at December
31, 1996. Management anticipates that the reserve for loan losses is adequate to
absorb reasonably foreseeable losses on loans.
The following table details the activity in the loan loss reserve for the nine
months ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
---------- ----------
<S> <C> <C>
Beginning Balance $2,578,504 $2,676,362
Provision 525,000 450,000
Net Charge-Off 191,508 718,467
---------- ----------
Ending Balance $2,911,996 $2,407,895
========== ==========
Loan Loss Reserve to Loans 1.25% 1.17%
</TABLE>
LIABILITIES
Total liabilities were $285,977,449 at September 30, 1997, an increase of
$8,495,848 from $277,481,601 at December 31, 1996. The increase in total
liabilities was primarily the result of an $8,528,816 increase in borrowings at
September 30, 1997 compared to December 31, 1996.
16
<PAGE> 17
DEPOSITS
Total deposits decreased $1,543,238 from $260,986,805 at December 31, 1996 to
$259,443,567 at September 30, 1997. This decrease was predominantly the result
of a decline in non-interest bearing deposits of $1,837,360 since December 31,
1996.
The composition of deposits is shown in the following table:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, INCREASE
1997 1996 (DECREASE)
------------ ------------- -----------
<S> <C> <C> <C>
Non-Interest Bearing Demand Deposits $ 48,503,724 $ 50,341,084 $(1,837,360)
Interest Bearing Demand Deposits 24,898,211 29,601,513 (4,703,302)
Savings Deposits 36,492,322 38,177,186 (1,684,864)
Money Market Deposit Accounts 54,864,718 50,280,413 4,584,305
Time Deposits > $100,000 12,773,024 11,230,900 1,542,124
Time Deposits < $100,000 81,911,568 81,355,709 555,859
------------ ------------- -----------
$259,443,567 $ 260,986,805 $(1,543,238)
============ ============= ===========
</TABLE>
REPURCHASE AGREEMENTS
Repurchase agreements decreased from $1,911,184 at December 31, 1996 to $0 at
September 30, 1997. Securities sold under agreement to repurchase were U.S.
Treasury securities. Such agreements mature within 30 to 90 days. The decrease
was the result of matured repurchase agreements which were not renewed.
BORROWED FUNDS
At September 30, 1997, the Corporation had outstanding borrowings of
$20,000,000, of which $8,000,000 were fed funds purchased. The remainder were
borrowed by the Corporation as part of a community investment program to finance
mortgage loans to lower income borrowers and for specific asset-liability
management strategies. Borrowings are collateralized by qualifying securities
and loans. These advances are subject to restrictions or penalties related to
prepayments. Of the $12,000,000 in advances, $8,000,000 will mature within 12
months.
SHAREHOLDERS' EQUITY
Consolidated shareholders' equity increased $2,066,671 from $27,320,253 at
December 31, 1996 to $29,386,924 at September 30, 1997. This increase is the
result of the retention of earnings offset by dividends paid to shareholders and
a increase in the net unrealized holding gains on securities available for sale.
17
<PAGE> 18
The Corporation continues to maintain a strong capital position in excess of
current regulatory requirements. The Corporation's tier I risk-based capital
ratio at September 30, 1997 was 11.90% compared to 12.41% at December 31, 1996.
The Corporation's total risk-based capital ratio at September 30, 1997 was
13.15% compared to 13.66% at December 31, 1996. Regulatory requirements for
tier I and total risk-based capital ratios are 4.00% and 8.00%, respectively.
INTEREST RATE SENSITIVITY AND LIQUIDITY
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.
Liquidity is the ability to generate cash or obtain funds at reasonable costs 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 is dependent upon the ability to obtain
deposits and purchase funds at reasonable rates. As a result of liquid asset
management and the ability to generate liquidity through deposit funding,
management believes 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 $3,443,018 during the first nine
months of 1997 compared to $3,531,075 during the first nine months of 1996. The
primary source of operating cash flows are net income adjusted for the effect of
noncash expenses such as the provision for loan losses and depreciation.
Investing activities used net cash of $16,561,062 during the first nine months
of 1997 compared to $28,643,299 during the first nine months of 1996. During the
first nine months of 1997 and 1996 cash was provided by sales, repayments, and
maturities of investment securities and used cash by reinvesting in investment
securities available for sale and funding the net increase in loan volume.
Proceeds from the sale of other real estate owned and land also provided cash
during the first nine months of 1997. Proceeds from the sale of loans during the
first nine months of 1996 also provided cash, while a net increase in premises
and equipment used cash.
Financing activities provided net cash of $5,710,565 during the first nine
months of 1997 compared to $25,867,971 during the first nine months of 1996.
During the first nine months of 1997, cash was provided by a net increase in
borrowed funds and certificates of deposit while
18
<PAGE> 19
cash was used by decreases in non-interest bearing deposits and repurchase
agreements and cash dividends paid to shareholders. During the first nine months
of 1996, cash was provided by an increase in net demand and savings deposit
accounts resulting largely from the promotion of a new money market product.
Cash was also provided by repurchase agreements and net borrowings and used to
pay dividends to shareholders.
19
<PAGE> 20
PART II - OTHER INFORMATION
Items 1-3. Not applicable pursuant to the instructions to Part II.
Item 4. Submission of Matters for a Vote of Security Holders
An annual meeting of shareholders of the Corporation was held on April 22,
1997, for the purpose of (a) electing five directors, (b) ratifying the
appointment of Coopers & Lybrand, L.L.P., Certified Public Accountants, as
independent auditors and accountants for the Corporation.
All five nominees were elected and the votes for and against/withheld were
as follows:
AGGREGATE VOTES
Nominee For Against/Withheld
------- --- ----------------
William R. Baierl 1,347,808 815
Grant A. Colton, Jr. 1,347,273 1,350
L. R. Gaus 1,347,864 759
Polly B. Lechner 1,347,864 759
Arthur J. Rooney, II 1,322,669 25,954
The appointment of Coopers & Lybrand, L.L.P., as independent auditors and
accountant was ratified with a vote of 1,346,940 for and 1683 against,
withhold or abstaining.
With respect to the above matters, each holder of the Corporation's common
stock was entitled to one vote per share. The number of shares of Common
Stock outstanding and entitled to vote as of March 11, 1997, the record
date was 1,631,845.
Item 5. Not applicable pursuant to the instructions to Part II.
Items 6. Exhibits and Reports on Forms 8-K.
(a) Exhibits
10.1 Employment agreement, dated July 1, 1993 between NSD Bancorp,
Inc. and Lloyd G. Gibson filed as Exhibit 10D to NSD Bancorp,
Inc.'s 10K for the fiscal year ended December 31, 1993 is
incorporated herein by reference.
20
<PAGE> 21
10.2 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.
10.3 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.
27 Financial Data Schedule
(b) Reports on Form 8-K: None.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NSD BANCORP, INC.
----------------------------
(Registrant)
Dated: November 14, 1997 /s/ LLOYD G. GIBSON
----------------------------
Lloyd G. Gibson
President and Chief
Executive Officer
Dated: November 14, 1997 /s/ JAMES P. RADICK
----------------------------
James P. Radick
Vice President, Treasurer
(Principal Financial and
Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial information incorporated by reference to the 1997 Third
Quarter Incorporate Financial Review and is qualified in its entirety by
reference to such financial information
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 13,486,175
<INT-BEARING-DEPOSITS> 210,939,843
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 57,002,436
<INVESTMENTS-CARRYING> 6,117,899
<INVESTMENTS-MARKET> 6,303,308
<LOANS> 232,606,786
<ALLOWANCE> 2,911,966
<TOTAL-ASSETS> 315,364,373
<DEPOSITS> 259,443,567
<SHORT-TERM> 16,000,000
<LIABILITIES-OTHER> 6,533,882
<LONG-TERM> 4,000,000
0
0
<COMMON> 1,719,286
<OTHER-SE> 27,667,638
<TOTAL-LIABILITIES-AND-EQUITY> 315,364,373
<INTEREST-LOAN> 14,450,589
<INTEREST-INVEST> 3,204,895
<INTEREST-OTHER> 74,707
<INTEREST-TOTAL> 17,730,191
<INTEREST-DEPOSIT> 6,827,200
<INTEREST-EXPENSE> 7,451,532
<INTEREST-INCOME-NET> 10,278,660
<LOAN-LOSSES> 525,000
<SECURITIES-GAINS> 95,803
<EXPENSE-OTHER> 6,781,719
<INCOME-PRETAX> 4,150,307
<INCOME-PRE-EXTRAORDINARY> 2,802,557
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,802,557
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.62
<YIELD-ACTUAL> 4.86
<LOANS-NON> 1,319,640
<LOANS-PAST> 1,093,577
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,578,504
<CHARGE-OFFS> 304,795
<RECOVERIES> 113,287
<ALLOWANCE-CLOSE> 2,911,996
<ALLOWANCE-DOMESTIC> 2,567,996
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 344,000
</TABLE>
