<PAGE> 1
================================================================================
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, 1997.
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)
<TABLE>
<S> <C>
COMMONWEALTH OF PENNSYLVANIA 25-1616814
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
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 (section 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 2, 1998, was $85,370,967.
The number of shares outstanding of the Registrant's Common Stock as of
March 2, 1998 was 2,586,999.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1997 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 28, 1998, are incorporated by reference into Part
III.
Number of Pages in this Filing 6
================================================================================
<PAGE> 2
NSD BANCORP, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 1997
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 7a. Quantitative and Qualitative Disclosure About Market Risk... 2
Item 8. Financial Statements and Supplementary Data................. 3
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, 1997, the
Corporation had total assets, deposits and shareholders' equity of $320,329,570,
$268,726,614 and $30,339,571, respectively. Full-time equivalent employees of
the Corporation were 143 at December 31, 1997.
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, 1997. 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 1997 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
<PAGE> 4
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
Hampton, 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 18 and 33, respectively, of the 1997 Annual Report is incorporated herein
by reference. As of March 2, 1998, the Corporation had 435 shareholders of its
Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference is the information presented on pages 22 and 25
of the 1997 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 24 to 36 of
the 1997 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Incorporated by reference to the information presented on pages 34 to 35 of
the 1997 Annual Report attached as Exhibit 13 hereto.
2
<PAGE> 5
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference is the information presented on pages 4 to 23 of
the 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Incorporated by reference herein to Form 8-K Filed March 18, 1998.
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 28,
1998.
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 28, 1998.
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
28, 1998.
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 28,
1998.
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 23
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.
3
<PAGE> 6
REPORTS ON FORM 8-K
Item 4. Changes in Registrant's Certifying Accountant and related exhibits
are incorporated by reference.
<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.
11. Statement re: Computation of Earnings Per Share
(incorporated by reference to p. 10 of 1997 Annual Report,
attached as Exhibit 13, hereto.)
13. 1997 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.
27. Financial Data Schedule
27.1 Financial Data Schedule restatement for the quarters ended
June 30, 1997 and September 30, 1997.
</TABLE>
REPORTS ON FORM 8-K
NSD Bancorp's form 8-K, filed March 18, 1998 for notification of a change
in certifying accountant, is incorporated herein by reference.
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, 1998
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, 1998:
<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
<PAGE> 1
Exhibit 13
NSD BANCORP
---------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 13,638,396 $ 12,493,654
Federal Funds Sold 2,000,000 8,400,000
Securities Available for Sale 58,179,424 55,668,550
Securities Held to Maturity (Market Value of $5,459,499 at
December 31, 1997 and $9,563,505 at December 31, 1996) 5,287,319 9,316,952
Loans Available for Sale 3,419,440 2,943,248
Loans, Net of Deferred Fees 233,039,784 211,106,328
Unearned Income (1,290,389) (1,212,814)
Reserve for Loan Losses (2,914,329) (2,578,504)
------------ ------------
Loans, Net 228,835,066 207,315,010
Premises and Equipment, Net 3,095,629 3,686,319
Accrued Interest Receivable 2,116,439 1,992,396
Other Real Estate Owned and Assets Held for Sale 369,416 432,687
Other Assets 3,388,441 3,164,744
------------ ------------
TOTAL ASSETS $320,329,570 $305,413,560
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing $ 57,112,908 $ 50,341,084
Interest Bearing 211,613,706 210,645,721
------------ ------------
Total Deposits 268,726,614 260,986,805
Borrowed Funds:
Repurchase Agreements -- 1,911,184
Short-Term Borrowings 6,000,000 5,560,000
Long-Term Borrowings 9,000,000 4,000,000
------------ ------------
Total Borrowed Funds 15,000,000 11,471,184
Accrued Interest Payable 4,783,086 4,551,792
Other Liabilities 1,480,299 1,083,526
------------ ------------
Total Liabilities 289,989,999 278,093,307
Common Stock $1 Par Value; Authorized 5,000,000 Shares,
Issued and Outstanding 2,586,999 in 1997 and 1,637,630 in
1996 2,586,999 1,637,630
Capital Surplus 7,633,361 6,266,182
Net Unrealized Holding Gains on Securities Available for
Sale 1,906,683 1,199,083
Retained Earnings 18,212,528 18,217,358
------------ ------------
Total Shareholders' Equity 30,339,571 27,320,253
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $320,329,570 $305,413,560
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 2
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans, Including Fees $19,506,012 $17,518,046 $15,983,482
Investment Securities:
Taxable 3,636,691 2,894,268 2,121,803
Tax-Exempt 443,534 725,016 852,214
Dividends 127,418 113,199 105,484
Interest Bearing Deposits 4,117 8,901 4,510
Federal Funds Sold 94,966 242,152 338,387
----------- ----------- -----------
Total Interest Income 23,812,738 21,501,582 19,405,880
INTEREST EXPENSE
Interest on Deposits 9,129,539 8,107,572 7,190,619
Federal Funds Purchased 84,065 1,046 5,055
Interest on Repurchase Agreements 56,818 96,484 88,077
Interest on Borrowings 710,154 519,503 201,680
----------- ----------- -----------
Total Interest Expense 9,980,576 8,724,605 7,485,431
Net Interest Income 13,832,162 12,776,977 11,920,449
Provision for Loan Losses 720,000 650,000 530,000
----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 13,112,162 12,126,977 11,390,449
OTHER INCOME
Net Investment Securities Gains (Losses) 220,250 211,594 32,656
Service Fees 710,755 668,785 692,859
Net Gain on Settlement of Pension Plan -- -- 510,960
Other Operating Income 655,409 459,134 505,216
----------- ----------- -----------
Total Other Income 1,586,414 1,339,513 1,741,691
OTHER EXPENSES
Salaries and Employee Benefits 4,153,371 4,015,567 3,927,542
Occupancy Expense 783,068 766,869 713,639
Equipment and Supplies 1,043,300 1,021,056 912,795
Data Processing 575,845 507,826 494,825
FDIC Insurance 40,233 2,000 245,061
Advertising 150,708 197,333 167,485
Other Operating Expenses 2,203,891 1,642,006 1,497,285
----------- ----------- -----------
Total Other Expenses 8,950,416 8,152,657 7,958,632
Income Before Income Taxes 5,748,160 5,313,833 5,173,508
Provision for Income Taxes 1,843,450 1,624,344 1,500,556
----------- ----------- -----------
NET INCOME $ 3,904,710 $ 3,689,489 $ 3,672,952
=========== =========== ===========
NET INCOME PER COMMON SHARE (1)
Net Income--Basic $1.51 $1.43 $1.42
=========== =========== ===========
Net Income--Diluted $1.50 $1.43 $1.42
=========== =========== ===========
Common Dividends Declared and Paid Per Share $0.66 $0.57 $0.50
=========== =========== ===========
Weighted Average Shares Outstanding--Basic 2,579,473 2,579,268 2,579,600
=========== =========== ===========
Weighted Average Shares Outstanding--Diluted 2,597,737 2,582,310 2,579,682
=========== =========== ===========
</TABLE>
(1) Adjusted for a 3-for-2 stock split in 1997 and 5% stock dividends in 1997
and 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 3
NSD BANCORP
---------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,904,710 $ 3,689,489 $ 3,672,952
Adjustments to Net Income:
Provision for Loan Losses 720,000 650,000 530,000
(Gain) Loss on Calls of Investment Securities Held to
Maturity (7,860) 228 (21,956)
Gain on Sale of Investment Securities Available for Sale (212,391) (211,823) (10,700)
(Gain) Losses on Sale of Other Assets 6,250 3,321 (71,574)
Gains on Settlement and Curtailment of Pension Plan -- -- (510,960)
Gain on Disposition of Premises and Equipment (168,462) -- --
Depreciation and Amortization 644,399 490,463 422,588
Net Premium Amortization and Discount
Accretion on Investment Securities 60,835 (164,466) 96,102
(Benefit) Provision for Deferred Income Taxes (138,915) 83,577 118,035
(Increase) in Accrued Interest Receivable (124,043) (177,180) (92,760)
Increase in Accrued Interest Payable 231,294 645,835 1,005,178
(Increase) Decrease in Other Assets (236,903) (639) 35,559
Deferred Loan Fees, Net (18,430) (37,450) (1,785)
Increase (Decrease) in Other Liabilities 19,061 (45,834) (203,157)
------------ ------------ ------------
Net Cash Provided by Operating Activities 4,679,545 4,910,907 4,967,522
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Investment Securities Available for
Sale 13,938,578 10,888,662 6,042,965
Proceeds from Repayments and Maturities of Investment
Securities Available for Sale 16,929,934 17,651,474 8,017,766
Proceeds from Repayments and Maturities of Investment
Securities Held to Maturity 4,041,000 1,575,000 7,929,487
Purchases of Investment Securities Available for Sale (32,197,537) (40,036,313) (19,180,199)
Purchases of Investment Securities Held to Maturity -- -- (4,249,922)
Proceeds from Sales of Other Real Estate Owned 318,124 -- 224,500
Net Increase in Loans (22,958,922) (28,085,772) (16,864,319)
Proceeds from Loan Sales -- 1,475,996 --
Premium on Deposit Account Acquisition -- (883,005) --
Proceeds from the Disposition of Premises and Equipment 510,751 -- --
Purchases of Premises and Equipment (192,363) (364,513) (625,262)
------------ ------------ ------------
Net Cash Used by Investing Activities (19,610,435) (37,778,471) (18,704,984)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Demand and Savings Deposit
Accounts 8,140,836 34,181,574 (7,370,720)
Net Increase (Decrease) in Certificates of Deposit (401,027) 6,676,873 13,847,192
Net Increase (Decrease) in Repurchase Agreements (1,911,184) 88,751 440,277
Proceeds from Long-Term Borrowings 11,000,000 4,000,000 6,600,000
Repayments of Long-Term Borrowings (2,600,000) -- (2,000,000)
Proceeds from Short-Term Borrowings 9,500,000 960,000 6,568,264
Repayments of Short-Term Borrowings (12,460,000) (2,780,000) (4,568,264)
Proceeds from the Exercise of Common Stock Options 117,247 -- --
Cash Dividends Paid in Lieu of Fractional Shares (11,499) (4,758) (3,681)
Cash Dividends Paid (1,698,741) (1,458,316) (1,294,675)
------------ ------------ ------------
Net Cash Provided by Financing Activities 9,675,632 41,664,124 12,218,393
------------ ------------ ------------
Increase (Decrease) in Cash and Cash Equivalents (5,255,258) 8,796,560 (1,519,069)
Cash and Cash Equivalents at Beginning of Year 20,893,654 12,097,094 13,616,163
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 15,638,396 $ 20,893,654 $ 12,097,094
============ ============ ============
</TABLE>
For the years ended December 31, 1997, 1996, and 1995, the Corporation paid
interest of $9,749,282, $8,077,378 and $6,480,252, and income taxes of
$1,811,450, $1,703,512 and $1,694,425, respectively. Non-cash investing activity
consisted of transfers of loans in liquidation to foreclosed assets of
approximately $261,100 for 1997, $328,000 for 1996 and $472,800 for 1995. There
were no loans originated to facilitate the sale of other real estate during 1997
or 1996. Such loan originations were nominal in 1995. 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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
COMMON STOCK ISSUED &
OUTSTANDING
----------------------
CAPITAL RETAINED
SHARES PAR VALUE SURPLUS OTHER EARNINGS
--------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 1,560,000 $1,560,000 $4,597,421 $ 429,210 $15,362,738
Net Income -- -- -- -- 3,672,952
Fractional Shares (151) (151) (3,530) -- --
Cash Dividends Declared ($.50 per
share)(1) -- -- -- -- (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 ($.57 per
share)(1) -- -- -- -- (1,458,316)
Net Unrealized Holding Gains on
Securities
Available for Sale -- -- -- 229,984 --
--------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1996 1,637,630 1,637,630 6,266,182 1,199,083 18,217,358
Net Income -- -- -- -- 3,904,710
Stock Dividend 81,656 81,656 2,129,143 -- (2,210,799)
Stock Split 859,503 859,503 (859,503) -- --
Cash Paid in Lieu of Fractional Shares -- -- (11,499) -- --
Cash Dividends Declared ($.66 per
share)(1) -- -- -- -- (1,698,741)
Stock Options Exercised, Net of Tax
Benefit 8,210 8,210 109,038 -- --
Net Unrealized Holding Gains on
Securities
Available for Sale -- -- -- 707,600 --
--------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1997 2,586,999 $2,586,999 $7,633,361 $1,906,683 $18,212,528
========= ========== ========== ========== ===========
</TABLE>
(1) Adjusted for a 3-for-2 stock split in 1997 and 5% stock dividends in 1997
and 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) At December 31
<S> <C>
1993 7.81
1994 8.48
1995 9.61
1996 10.56
1997 11.73
</TABLE>
7
<PAGE> 5
NSD BANCORP
---------------------------------------------------------------------
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, the disclosure of
contingent assets and contingent liabilities at the date of the financial
statements, and the reported 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.
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:
At December 31, 1997 and also at December 31, 1996, loans available for sale
consisted of student loans. 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 judgment, 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 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.
8
<PAGE> 6
- --------------------------------------------------------------------------------
Within the context of Statement No. 114, "Accounting by Creditors for Impairment
of a Loan," 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 loans 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.
PREMISES AND EQUIPMENT:
Premises and equipment are carried at original cost less accumulated
depreciation. Premises and equipment are depreciated over their estimated useful
lives using either the straight-line or an accelerated method. Leasehold
improvements are amortized over the terms of the respective lease or the
estimated useful lives of the improvements, whichever is shorter. Costs for
maintenance and repairs are expensed currently. Major improvements are
capitalized. When premises and equipment are disposed of, the accounts are
relieved of the cost and accumulated depreciation or amortization, and any
resulting gains or losses are credited to or charged against income.
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:
Deferred income taxes result primarily from temporary differences between
financial and tax reporting. The Corporation uses 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.
INTANGIBLE ASSETS:
Included in other assets is a deposit premium of approximately $706,404 and
$891,339 net of accumulated amortization, at December 31, 1997 and 1996,
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.
9
<PAGE> 7
NSD BANCORP
---------------------------------------------------------------------
EARNINGS PER SHARE:
The Corporation adopted Statement of Financial Accounting Standard (SFAS) No.
128, "Earnings Per Share," which was issued in February, 1997. This statement
requires the disclosure of basic and diluted earnings per share and revised the
method required to calculate these amounts.
Basic earnings per common share is calculated by dividing net income by the sum
of the weighted average number of shares of common stock outstanding during each
period. Diluted 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.
Basic and diluted earnings per share calculations include the retroactive effect
of a 3-for-2 stock split in 1997 and 5% stock dividends recorded in 1997 and
1996.
RECENT ACCOUNTING PRONOUNCEMENTS:
In September, 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
This standard will require the display of comprehensive income and its
components in the financial statements. Implementation of this standard is
required for the fiscal year 1998.
In January, 1998, SFAS No. 132, "Employers' Disclosures About Pensions and Other
Post-Retirement Benefits," was issued. This standard will require certain
footnote disclosure requirements related to pension and other retiree benefits.
Implementation of this standard is required for the fiscal year 1998.
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, 1997
-------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED --------------------- FAIR
COST GAINS LOSSES VALUE
----------- ---------- -------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 6,199,308 $ 30,403 $ 1,413 $ 6,228,298
Obligations of U.S. Government Agencies 20,657,983 174,423 21,163 20,811,243
Mortgage-Backed Securities 26,385,529 204,861 44,073 26,546,317
Obligations of State and Political
Subdivisions 544,955 3,694 -- 548,649
Marketable Equity Securities 1,502,737 2,542,180 -- 4,044,917
----------- ---------- -------- -----------
$55,290,512 $2,955,561 $ 66,649 $58,179,424
=========== ========== ======== ===========
</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
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
- --------------------------------------------------------------------------------
A summary of investment securities held to maturity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED --------------------- FAIR
COST GAINS LOSSES VALUE
----------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Obligations of State and Political
Subdivisions $ 5,037,319 $ 172,180 $ -- $ 5,209,499
Other Bonds 250,000 -- -- 250,000
----------- ---------- -------- -----------
$ 5,287,319 $ 172,180 $ -- $ 5,459,499
=========== ========== ======== ===========
</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
Subdivisions $ 9,066,952 $ 246,553 $ -- $ 9,313,505
Other Bonds 250,000 -- -- 250,000
----------- ---------- -------- -----------
$ 9,316,952 $ 246,553 $ -- $ 9,563,505
=========== ========== ======== ===========
</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,
1997, 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, 1997
--------------------------
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Within one year $ 3,003,283 $ 3,001,870
After one year, but within five years 14,191,144 14,232,038
After five years, but within ten years 9,167,516 9,286,364
After 10 years, includes marketable equity securities 28,928,569 31,659,152
----------- -----------
Total Investments $55,290,512 $58,179,424
=========== ===========
</TABLE>
The amortized cost and estimated fair value of the investment portfolio held to
maturity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Within one year $ 24,966 $ 25,263
After one year, but within five years 2,825,000 2,906,219
After five years, but within ten years 2,437,353 2,528,017
----------- -----------
Total Investments $ 5,287,319 $ 5,459,499
=========== ===========
</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 1997, 1996 and 1995 were $13,938,578, $10,888,662 and
$6,042,965, respectively. Gross gains of $233,835, $240,969 and $31,593 and
gross losses of $21,444, $29,146 and $20,893 were realized on sales from the
available for sale category in 1997, 1996 and 1995, respectively. There were no
sales of investment securities held to maturity in 1997, 1996 or 1995. Gross
gains of $8,062, $123 and $21,956 in 1997, 1996 and 1995, respectively, and
gross losses of $202 and $351 in 1997 and 1996 were realized on calls from the
held to maturity category. There were no gross losses realized from the held to
maturity category in 1995. Investment securities with a total par value of
$6,200,000 and $7,460,000 at
11
<PAGE> 9
NSD BANCORP
---------------------------------------------------------------------
December 31, 1997 and 1996, 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, 1997 and 1996, the Corporation held
$910,100 and $772,500, respectively, of FHLB stock.
NOTE 3--LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Consumer Loans to Individuals $ 95,357,873 $ 80,107,845
Mortgage:
Non-Residential 29,385,042 29,470,461
Residential 55,125,240 56,641,022
Commercial, Financial, and Agricultural 37,831,540 30,392,059
Lines of Credit 5,487,417 5,433,560
Lease Financing 8,900,409 8,248,697
Nonaccrual Loans 1,355,617 1,234,467
------------ ------------
233,443,138 211,528,112
Deferred Fees (403,354) (421,784)
------------ ------------
$233,039,784 $211,106,328
============ ============
</TABLE>
At December 31, 1997 and 1996, the Corporation had $1,213,225 and $615,466,
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 $97,558, $33,884 and $48,500 for
the years ended 1997, 1996 and 1995, respectively. The Corporation did not
receive interest on any nonaccrual loans during 1997, 1996 or 1995.
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 $471,181 in 1997 and
$650,673 in 1996, with a corresponding reserve for loan losses of $235,591 and
$154,194 in 1997 and 1996, respectively. There were no loans considered impaired
that have been partially written down through charge-offs. The average recorded
investment in impaired loans was $574,362 and $528,674 during 1997 and 1996,
respectively. The Corporation recognized approximately $2,500 in 1997 and
$14,000 in 1996 of interest on impaired loans under the accrual method (during
the portion of the year that they were impaired).
NOTE 4--RESERVE FOR LOAN LOSSES
The following is a summary of activity in the reserve for loan losses:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance at Beginning of Year $2,578,504 $2,676,362 $2,281,598
Provision for Loan Losses 720,000 650,000 530,000
Losses Charged Against Reserve (522,934) (842,911) (506,193)
Recoveries on Loans Previously Charged-Off 138,759 95,053 370,957
---------- ---------- ----------
Balance at End of Year $2,914,329 $2,578,504 $2,676,362
========== ========== ==========
</TABLE>
12
<PAGE> 10
- --------------------------------------------------------------------------------
NOTE 5--PREMISES AND EQUIPMENT
Premises and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Land $ 671,987 $ 997,895
Buildings 1,943,873 1,943,873
Equipment 3,247,977 3,093,227
Leasehold Improvements 1,070,560 1,062,418
---------- ----------
6,934,397 7,097,413
Accumulated Depreciation (3,838,768) (3,411,094)
---------- ----------
Premises and Equipment, Net $3,095,629 $3,686,319
========== ==========
</TABLE>
During 1997, the Corporation sold land with a book value of $325,908 for
$492,908 resulting in a gain of $166,999 which has been included in other
operating income in the consolidated statement of income. Depreciation expense,
principally calculated using a straight-line method, was $440,764, $421,763 and
$353,888 in 1997, 1996 and 1995, 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>
1998 $ 229,270
1999 216,734
2000 140,093
2001 135,162
2002 135,162
and thereafter 145,295
----------
$1,001,716
==========
</TABLE>
Rental expense under all operating leases was $250,386, $209,667 and $196,608
for the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 6--INCOME TAXES
The provision (benefit) for income taxes is composed of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal $1,940,915 $1,523,768 $1,367,465
State 41,450 16,999 15,056
Deferred (138,915) 83,577 118,035
---------- ---------- ----------
$1,843,450 $1,624,344 $1,500,556
========== ========== ==========
</TABLE>
13
<PAGE> 11
NSD BANCORP
---------------------------------------------------------------------
Reconciliations of the federal statutory and effective tax rates are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal Statutory Tax Rate $1,954,374 34.0% $1,806,703 34.0% $1,758,993 34.0%
Tax-Exempt Interest Income (164,475) (2.9) (265,464) (5.0) (322,560) (6.2)
Interest Expense Disallowed 17,779 .3 29,026 0.5 33,256 0.6
State Income Taxes 27,357 .4 11,219 0.2 9,937 0.2
Other, Net 8,415 .2 42,860 0.8 20,930 0.4
---------- ---- ---------- ---- ---------- ----
$1,843,450 32.0% $1,624,344 30.5% $ 964,446 29.0%
========== ==== ========== ==== ========== ====
</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,
------------------------
1997 1996
---------- --------
<S> <C> <C>
Deferred Tax Assets:
Provision for Loan Losses $ 795,290 $681,110
Loan Origination Fees/Costs 43,973 53,435
Other 35,074 1,129
---------- --------
Gross Deferred Tax Assets $ 874,337 $735,674
Deferred Tax Liabilities:
Net Unrealized Holding Gains on
Securities Available for Sale $ 982,230 $615,801
Bond Discount Accretion 61,354 45,819
Depreciation 92,291 82,428
Other 31,437 47,974
---------- --------
Gross Deferred Tax Liabilities $1,167,312 $792,022
---------- --------
Net Deferred Tax Assets (Liabilities) $ (292,975) $(56,348)
========== ========
</TABLE>
No valuation allowance was established at December 31, 1997 or 1996 in view of
the Corporation's ability to carry back 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 investment 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 maintains 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 $117,000 in 1997, $111,000 in 1996 and
$110,000 in 1995. In 1995, an amendment was made to the profit sharing plan to
include a 401(k) 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 1997, 1996 and 1995, respectively, the Corporation expensed
$63,584, $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 6,667 shares of
NSD Bancorp, Inc. common stock with a market value of $217,291 at December 31,
1997. Total cash dividends received from plan investments in common stock of the
Corporation were $4,445 in 1997.
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
14
<PAGE> 12
- --------------------------------------------------------------------------------
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.
NOTE 8--STOCK OPTION PLANS
The Corporation has two fixed option plans. Under the 1994 Employee Stock Option
Plan, the Corporation may grant options to its employees for up to 193,488
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 64,496
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 3-for-2 stock split for holders of record on December 1, 1997,
the five percent stock dividend for holders of record on April 30, 1997 and the
five percent stock dividend for holders of record on April 30, 1996, in
accordance with the terms of both Plans.
A summary of the status of the Corporation's two fixed stock option plans as of
December 31, 1997, 1996 and 1995 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
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 79,415 $14.36 56,524 $14.00 29,238 $14.23
Granted 23,095 18.92 25,436 15.13 27,286 13.76
Exercised 8,210 14.28 -- -- -- --
Forfeited 2,547 13.91 2,545 13.99 -- --
------ ------ ------ ------ ------ ------
Outstanding at End of Year 91,753 $15.53 79,415 $14.36 56,524 $14.00
Options Exercisable at Year-
End 91,753 79,415 56,524
Weighted-Average Fair Value
of Options Granted During
the Year $18.92 $6.74 $4.18
====== ====== ======
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
- ----------------------------------------------------------------------------
NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$13.76-$14.55 50,549 7.2 Years $14.07
15.29 18,109 8.6 15.29
18.37-19.07 23,095 9.5 18.92
------
91,753
======
</TABLE>
On January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock
Based Compensation." As permitted by SFAS No. 123, the Bank has chosen to apply
Accounting Pronouncements Bulletin (APB) No. 25, "Accounting for Stock Issued to
Employees" 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
15
<PAGE> 13
NSD BANCORP
---------------------------------------------------------------------
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
1997 $3,904,710 $3,727,731
1996 3,689,489 3,576,261
1995 3,672,952 3,597,677
Diluted Earnings Per Share
1997 $1.50 $1.43
1996 1.43 1.38
1995 1.42 1.39
</TABLE>
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>
1997 1996 1995
-------------------- -------------------- --------------------
EMPLOYEE DIRECTOR EMPLOYEE DIRECTOR EMPLOYEE DIRECTOR
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Risk Free Interest Rate 6.15% 6.80% 6.82% 6.58% 6.44% 7.00%
Volatility 87.00% 87.00% 44.09% 46.77% 23.08% 21.83%
Expected Lives 7 Years 7 Years 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 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, 1995 $ 7,807,047
New Loans 582,640
Repayments (1,690,086)
-----------
Balance, December 31, 1996 6,699,601
New Loans 701,809
Repayments (1,482,349)
-----------
Balance, December 31, 1997 $ 5,919,061
===========
</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, 1997, there are various outstanding commitments to extend credit
of approximately $27,971,000 and standby letters of credit of $683,000. 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
16
<PAGE> 14
- --------------------------------------------------------------------------------
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 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, 1997,
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 FEDERAL FUNDS SOLD:
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, 1997. The fair value
of the fixed-maturity certificates of deposit is estimated using the rates
currently offered as of December 31, 1997, 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.
17
<PAGE> 15
NSD BANCORP
---------------------------------------------------------------------
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 counter-parties. 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 the letters of credit is 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.
The estimated fair values of the Corporation's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
<S> <C> <C> <C> <C>
1997 1996
------------------- -------------------
<CAPTION>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Federal Funds Sold $ 15,638 $ 15,638 $ 20,894 $ 20,894
Investment Securities 63,467 63,639 64,986 65,232
Loans 234,215 236,198 211,603 214,597
Less: Reserve for Loan Losses (2,914) -- (2,579) --
-------- -------- -------- --------
$310,406 $315,475 $294,904 $300,723
======== ======== ======== ========
Financial Liabilities:
Deposits $268,727 $268,934 $260,987 $262,010
Repurchase Agreements 0 0 1,911 1,911
Federal Home Loan Bank Borrowings 15,000 14,893 9,560 9,495
-------- -------- -------- --------
$283,727 $283,827 $272,458 $273,416
======== ======== ======== ========
Off-Balance Sheet Financial Instruments:
Commitments to Extend Credit $ 27,971 $ -- $ 24,197 $ --
======== ======== ======== ========
</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, 1997, 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.
18
<PAGE> 16
- --------------------------------------------------------------------------------
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,
1997 and 1996:
<TABLE>
<CAPTION>
AMOUNT RATIOS
------------------------- ---------------
1997 1996 1997 1996
----------- ----------- ------ ------
<S> <C> <C> <C> <C>
Risk-Based Capital
Tier I
NSD Bancorp, Inc. $27,726,483 $25,229,831 12.53% 12.41%
NorthSide Bank 26,687,786 24,445,197 12.11 11.95
Total
NSD Bancorp, Inc. 30,493,837 27,771,577 13.78 13.66
NorthSide Bank 29,444,116 27,002,347 13.36 13.20
Leverage
NSD Bancorp, Inc. 8.90 9.02
NorthSide Bank 8.64 8.78
</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, 1997,
the Corporation was required to maintain $1,449,000 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, 1997 from NorthSide Bank in the form of dividends and loans,
individually, was approximately $22.7 million and $2.8 million, respectively.
NOTE 14--STOCK DIVIDENDS AND STOCK SPLITS
On November 25, 1997, the Corporation's Board of Directors declared a 3-for-2
common stock split payable on December 31, 1997 to shareholders of record at
December 1, 1997.
On April 22, 1997, the Corporation's Board of Directors declared a common stock
dividend payable May 30, 1997 to shareholders of record at April 30, 1997.
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.
Earnings per share and dividends per share have been restated to reflect the
stock dividends and stock split declared.
NOTE 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 1997 or 1996.
NOTE 16--BORROWED FUNDS
Borrowed funds at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
WEIGHTED WEIGHTED
BALANCE AVERAGE RATE BALANCE AVERAGE RATE
---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C>
Advances Due In: 1997 -- -- $5,560,000 5.76%
1998 $6,000,000 5.80% 3,000,000 5.67
1999 1,000,000 5.19 1,000,000 5.19
2002 8,000,000 5.48 -- --
</TABLE>
19
<PAGE> 17
NSD BANCORP
---------------------------------------------------------------------
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 $8.1 million at December 31, 1997.
NOTE 17-- CONDENSED FINANCIAL INFORMATION OF NSD BANCORP, INC.
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
BALANCE SHEET 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 582,342 $ 302,467
Securities Available for Sale 2,714,297 2,227,221
Investment in Bank Subsidiary 27,784,050 25,348,190
Other Assets 66,932 54,225
----------- -----------
Total Assets $31,147,621 $27,932,103
=========== ===========
Liabilities
Accounts Payable $ 26,658 $ 144
Deferred Tax Liability 781,393 611,706
----------- -----------
Total Liabilities 808,051 611,850
Shareholders' Equity 30,339,570 27,320,253
----------- -----------
Total Liabilities and Shareholders' Equity $31,147,621 $27,932,103
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
STATEMENT OF INCOME 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Dividends from Bank Subsidiary $ 1,698,741 $ 1,458,316 $ 1,319,675
Property Dividends from Bank Subsidiary -- -- 179,698
Dividends from Securities Available for Sale 58,908 50,412 36,382
Net Investment Securities Gains (Losses) 179,391 180,829 (188)
Other Expenses (78,534) (51,326) (46,026)
----------- ----------- -----------
Income Before Taxes and Equity in Undistributed Net
Income of Bank Subsidiary 1,858,506 1,638,231 1,489,541
Provision for Income Taxes (11,450) (17,321) --
----------- ----------- -----------
Income Before Equity in Undistributed Net Income of
Bank Subsidiary 1,847,056 1,620,910 1,489,541
Equity in Undistributed Net Income of Bank Subsidiary 2,057,654 2,068,579 2,183,411
----------- ----------- -----------
Net Income $ 3,904,710 $ 3,689,489 $ 3,672,952
=========== =========== ===========
</TABLE>
20
<PAGE> 18
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
STATEMENT OF CASH FLOWS 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income $ 3,904,710 $ 3,689,489 $ 3,672,952
Adjustments to Net Income
Equity in Net Income of Bank Subsidiary (2,057,654) (2,068,579) (2,183,411)
Property Dividend -- -- (179,698)
(Increase) Decrease in Other Assets (12,691) 17,670 (3,329)
(Gains) Losses on Investment Securities (179,391) (180,829) 188
Increase (Decrease) in Other Liabilities 26,514 (831) 976
----------- ----------- -----------
Net Cash Provided by Operating Activities 1,681,488 1,456,920 1,307,678
Cash Flows From Investing Activities
Proceeds from Repayments of Investment Securities
Available for Sale 191,380 293,125 412
----------- ----------- -----------
Net Cash Provided by Investing Activities 191,380 293,125 412
Cash Flows From Financing Activities
Proceeds from Issuance of Common Stock 117,247 -- --
Cash Dividends Paid (1,698,741) (1,458,316) (1,294,675)
Cash Dividends Paid in Lieu of Fractional Shares (11,499) (4,758) (3,681)
----------- ----------- -----------
Net Cash Used by Financing Activities (1,592,993) (1,463,074) (1,298,356)
----------- ----------- -----------
Net Increase in Cash 279,875 286,971 9,734
Cash at Beginning of Year 302,467 15,496 5,762
----------- ----------- -----------
Cash at End of Year $ 582,342 $ 302,467 $ 15,496
=========== =========== ===========
</TABLE>
21
<PAGE> 19
NSD BANCORP
---------------------------------------------------------------------
COMPARATIVE FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Interest Income $ 23,812,738 $ 21,501,582 $ 19,405,880 $ 17,194,852 $ 16,577,443
Interest Expense 9,980,576 8,724,605 7,485,431 5,867,068 5,798,452
------------ ------------ ------------ ------------ ------------
Net Interest Income 13,832,162 12,776,977 11,920,449 11,327,784 10,778,991
Provision for Loan Losses 720,000 650,000 530,000 460,000 471,000
Non-Interest Income 1,586,414 1,339,513 1,741,691 792,263 926,784
Non-Interest Expense 8,950,416 8,152,657 7,958,632 7,884,226 7,901,273
------------ ------------ ------------ ------------ ------------
Income Before Taxes and Cumulative Effect
of Accounting Change 5,748,160 5,313,833 5,173,508 3,775,821 3,333,502
Income Taxes 1,843,450 1,624,344 1,500,556 964,446 797,513
------------ ------------ ------------ ------------ ------------
Income Before Cumulative Effect of
Accounting Change 3,904,710 3,689,489 3,672,952 2,811,375 2,535,989
Cumulative Effect of Accounting Change -- -- -- -- 97,975
------------ ------------ ------------ ------------ ------------
Net Income $ 3,904,710 $ 3,689,489 $ 3,672,952 $ 2,811,375 $ 2,633,964
============ ============ ============ ============ ============
YEAR END BALANCES
Assets $320,329,570 $305,413,560 $259,132,930 $242,071,525 $228,449,295
Loans 236,459,224 214,049,576 188,653,465 172,000,399 155,180,662
Investment Securities 63,466,743 64,985,502 54,658,490 52,464,021 53,126,962
Deposits 268,726,614 260,986,805 220,243,135 213,766,664 203,831,795
Repurchase Agreements -- 1,911,184 1,822,433 1,382,156 --
Short-Term Borrowings 6,000,000 5,560,000 2,780,000 -- --
Long-Term Borrowings 9,000,000 4,000,000 4,600,000 780,000 780,000
Shareholders' Equity 30,339,571 27,320,253 24,863,854 21,949,369 20,211,121
Number of Shareholders 453 448 454 452 454
AVERAGE BALANCES
Assets $312,219,529 $279,854,944 $248,746,561 $231,867,752 $219,410,380
Loans 226,006,573 198,720,233 176,706,914 160,197,388 144,011,197
Investment Securities 66,767,405 60,999,113 52,489,567 53,512,045 53,421,711
Deposits 261,385,203 240,125,299 215,564,206 235,368,739 196,193,389
Repurchase Agreements 1,088,017 1,873,104 1,577,178 648,308 --
Short-Term Borrowings 9,390,000 2,372,240 1,441,545 -- --
Long-Term Borrowings 2,964,466 6,900,000 2,127,890 780,000 337,479
Shareholders' Equity 28,739,768 26,008,987 23,627,621 21,161,402 18,684,290
PER SHARE DATA (1)
BASIC
Income Before Cumulative Effect of
Accounting Change $ 1.51 $ 1.43 $1.42 $1.09 $ .98
Cumulative Effect of Accounting Change -- -- -- -- .04
Net Income 1.51 1.43 1.42 1.09 1.02
DILUTED
Income Before Cumulative Effect of
Accounting Change $ 1.50 $ 1.43 $1.42 $1.09 $ .98
Cumulative Effect of Accounting Change -- -- -- -- .04
Net Income 1.50 1.43 1.42 1.09 1.02
Dividends .66 .57 .50 .29 .29
Book Value 11.73 10.56 9.61 8.48 7.81
RATIOS
Return on Average Assets 1.25% 1.32% 1.48% 1.21% 1.20%
Return on Average Equity (3) 13.59 14.19 15.55 13.29 14.10
Net Interest Margin (2) 4.81 5.01 5.31 5.47 5.58
Equity to Assets 9.47 8.95 9.60 9.07 8.85
Dividend Payout Ratio 43.50 39.53 35.32 26.68 28.40
</TABLE>
- ---------
(1) Adjusted for 3-for-2 stock split in December, 1997, 5% stock dividend in May
1997, 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 1997, 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 1997, 1996, 1995 and
1994 reflect the full impact of adopting Statement No. 115.
22
<PAGE> 20
- --------------------------------------------------------------------------------
COOPERS & LYBRAND [logo] COOPERS & LYBRAND L.L.P.
a professional services firm
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, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made be 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period December 31, 1997, in conformity with generally
accepted accounting principles.
/S/ COOPERS & LYBRAND LLP
Pittsburgh, Pennsylvania
January 26, 1998
Coopers & Lybrand is a member of Coopers & Lybrand International, a limited
liability association incorporated in Switzerland.
23
<PAGE> 21
NSD BANCORP
---------------------------------------------------------------------
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 $3,904,710 or $1.51 (basic) per share in 1997, from
$3,689,489 or $1.43 in 1996 and $3,672,952 or $1.42 per share in 1995.
Contributing to the increase in net income were increases in net interest income
of $1,055,185, net gains on investment securities of $8,656, service fee income
of $41,970, a gain on the sale of land of $166,999, and a decrease in
advertising expense of $46,625. These increases were offset by increases to the
provision for loan losses of $70,000, equipment and supplies expense of $22,244,
data processing costs of $68,019, salary and benefit expense of $137,804 and an
increase of $219,106 in the provision for income taxes. Also impacting earnings
was a $289,000 loss recognized on the merchant credit card portfolio. The
remaining accounts were subsequently sold to a third party. Excluding the
after-tax effect of a $510,960 net gain recognized on the settlement and
curtailment of the pension plan in 1995, 1996 net income represented a $353,771
increase over the previous year's net income. Contributing to this increase was
an increase in net interest income of $856,528, an increase in net gains on
investment securities of $178,939 and a decrease in FDIC insurance expense of
$243,061. These were offset by increases to the provision for loan losses of
$120,000, equipment and supplies expense of $108,261, operating expenses of
$144,721 and provision for income taxes of $123,788.
Although net income during 1997 increased over 1996, 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 reflects the impact of a decline in net interest
margin from 5.01% in 1996 to 4.81% in 1997 and also the merchant card loss
recognized during 1997. The Corporations's ROA for 1997 was 1.25%, compared to
1.32% in 1996 and 1.48% in 1995. The ROE for 1997 was 13.59% compared to 14.19%
in 1996 and 15.55% in 1995. The decline in ROA and ROE from 1995 to 1996 was
primarily the result of the one-time noncash gain of $510,960 recognized on the
settlement and curtailment of the pension plan during 1995.
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 $2,168,959 during 1997 as the result of a
$30,336,038 increase in average earning assets offset by a decline in average
yield on earning assets from 8.31% in 1996 to 8.19% in 1997. Interest expense on
deposits increased $1,021,967 as the result of a $17,526,025 increase in the
average level of interest bearing deposits and an increase from 4.16% in 1996 to
4.30% in 1997 in the average cost of such deposits. Interest expense on long and
short-term borrowings increased $234,004 due to a $3,783,050 increase in average
outstanding levels and an increase in the average rate paid on such balances
from 5.63% in 1996 to 5.71% in 1997.
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 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.
Net interest income was $14,171,227 at December 31, 1997, compared to
$13,259,239 at December 31, 1996 and $12,475,490 at December 31, 1995. This
consistent improvement has been largely due to increases in average
24
<PAGE> 22
- --------------------------------------------------------------------------------
earning assets, primarily in loans. In 1997 and 1996, increases in average
investment securities also contributed to the overall increases in net interest
income.
Average earning assets for 1997 were $294,800,289 compared to $264,464,251 and
$234,980,339 in 1996 and 1995, respectively. To provide a more in depth analysis
of net interest income, the following average balance 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 1996 TO 1997 FROM 1995 TO 1996
----------------------------------- -----------------------------------
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 $ (29,519) $ 4,851 $ (24,668) $ (46,849) $ 13,647 $ (33,202)
All Other Loans 2,386,457 (382,210) 2,004,247 1,992,923 (436,445) 1,556,478
- ---------------------------------------------------------------------------------------------------------------
Total Loans 2,356,938 (377,359) 1,979,579 1,946,074 (422,798) 1,523,276
Investment Securities
Taxable 688,918 81,044 769,962 695,480 86,735 782,215
Tax Exempt (414,880) (11,609) (426,489) (213,073) (20,350) (192,723)
- ---------------------------------------------------------------------------------------------------------------
Total Investment Securities 274,038 69,435 343,473 482,407 107,085 589,492
Due From Banks (1,390) (5,518) (6,908) 7,270 (879) 6,391
Federal Funds Sold (134,780) (12,406) (147,186) (62,796) (33,439) (96,532)
- ---------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets 2,494,806 (325,848) 2,168,958 2,372,955 (350,031) 2,022,924
Interest Bearing Liabilities
Interest Bearing Deposits
Savings and Interest Bearing
Demand Deposits 376,097 67,309 443,406 292,404 417,069 709,473
Time Deposits 309,807 269,054 578,861 420,466 (212,986) 207,480
- ---------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 685,904 336,363 1,022,267 712,871 204,082 916,953
Federal Funds Purchased 82,536 483 83,019 (2,954) (1,055) (4,009)
Repurchase Agreements (40,981) 1,315 (39,666) 15,619 (7,212) 8,407
Short-Term Borrowings 535,500 -- 535,500 48,990 667 49,657
Long-Term Borrowings (354,446) 9,597 (344,849) 270,741 (2,574) 268,166
- ---------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 908,513 347,758 1,256,271 1,045,266 193,908 1,239,174
- ---------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $1,586,293 $(673,606) $ 912,687 $1,327,689 $(543,939) $ 783,750
===============================================================================================================
</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.
25
<PAGE> 23
NSD BANCORP
---------------------------------------------------------------------
AVERAGE BALANCE SHEET/NET INCOME ANALYSIS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996
------------------------------------ ------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
ASSETS
Loans
Industrial Revenue and
Tax Exempt $ 604,370 $ 66,257 10.96% $ 875,839 $ 90,925 10.38%
All Other Loans 225,402,203 19,462,283 8.63 197,844,394 17,458,036 8.82
- -----------------------------------------------------------------------------------------------------------
Total 226,006,573 19,528,540 8.64 198,720,233 17,548,961 8.83
Investment Securities
Taxable 58,961,980 3,853,302 6.54 48,392,511 3,083,340 6.37
Tax-Exempt 7,795,425 672,021 8.62 12,606,602 1,098,510 8.71
- -----------------------------------------------------------------------------------------------------------
Total 66,757,405 4,525,323 6.78 60,999,113 4,181,849 6.86
Due From Banks, Interest
Earning 134,777 3,974 2.94 157,515 10,882 6.91
Federal Funds Sold 1,901,534 94,966 4.99 4,587,391 242,152 5.28
- -----------------------------------------------------------------------------------------------------------
Total Earning Assets 294,800,289 24,152,803 8.19 264,464,251 21,983,844 8.31
Allowance for Loan Losses (2,771,915) (2,570,416)
Cash and Due From Banks 10,762,215 10,285,873
Premises and Equipment 3,368,864 3,712,094
Other Assets 6,060,077 3,963,142
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $312,219,529 $279,854,944
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Deposits
Savings Deposits $ 37,025,880 $ 994,503 2.69% $ 37,750,180 $ 1,132,591 2.97%
Interest Checking and
Money Market 80,482,448 2,550,857 3.17 67,611,775 1,969,363 2.91
Time Deposits 94,732,134 5,584,179 5.89 89,352,483 5,005,618 5.60
- -----------------------------------------------------------------------------------------------------------
Total Interest
Bearing Deposits 212,240,462 9,129,539 4.30 194,714,438 8,107,572 4.16
Federal Funds Purchased 1,470,501 84,065 5.72 24,590 1,046 4.25
Repurchase Agreements 1,088,017 56,818 5.22 1,873,104 96,484 5.15
Short-Term Borrowings 9,390,000 535,500 5.70 2,332,240 128,176 5.50
Long-Term Borrowings 2,964,466 174,654 5.89 6,900,000 391,327 5.67
- -----------------------------------------------------------------------------------------------------------
Total Interest
Bearing
Liabilities 227,153,446 9,980,576 4.39 205,844,372 8,724,605 4.24
Demand Deposits 49,144,741 45,410,862
Other Liabilities 7,181,574 2,590,723
Shareholders' Equity 28,739,768 26,008,987
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $312,219,529 $279,844,944
===========================================================================================================
Net Interest Income $14,172,227 $13,259,239
===========================================================================================================
Interest Spread 3.80% 4.07%
Interest Margin 4.81% 5.01%
<CAPTION>
1995
-----------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD
<S> <C> <C> <C>
- -------------------------------------------------------------------
ASSETS
Loans
Industrial Revenue and
Tax Exempt $ 1,340,039 $ 124,127 9.26%
All Other Loans 175,366,875 15,901,558 9.07
- -------------------------------------------------------------------
Total 176,706,914 16,025,685 9.07
Investment Securities
Taxable 37,434,268 2,301,125 6.51
Tax-Exempt 15,055,299 1,291,233 8.58
- -------------------------------------------------------------------
Total 52,489,567 3,592,358 6.84
Due From Banks, Interest
Earning 53,995 4,491 8.32
Federal Funds Sold 5,729,863 338,387 5.91
- -------------------------------------------------------------------
Total Earning Assets 234,980,339 19,960,921 8.49
Allowance for Loan Losses (2,553,316
Cash and Due From Banks 8,917,402
Premises and Equipment 3,546,144
Other Assets 3,835,992
- -------------------------------------------------------------------
TOTAL ASSETS $248,746,561
===================================================================
LIABILITIES AND SHAREHOLDE
Interest Bearing Deposits
Savings Deposits $ 41,165,715 $ 1,221,768 2.97%
Interest Checking and
Money Market 52,266,567 1,170,713 2.24
Time Deposits 81,594,789 4,798,138 5.85
- -------------------------------------------------------------------
Total Interest
Bearing Deposits 175,387,071 7,190,619 4.10
Federal Funds Purchased 88,219 5,055 5.73
Repurchase Agreements 1,577,178 88,077 5.58
Short-Term Borrowings 1,441,545 78,519 5.45
Long-Term Borrowings 2,127,890 123,161 5.79
- ---------------------------------------- --------------------------
Total Interest
Bearing
Liabilities 180,621,903 7,485,431 4.14
Demand Deposits 40,177,135
Other Liabilities 4,319,902
Shareholders' Equity 23,627,621
- -------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $248,746,561
===================================================================
Net Interest Income $12,475,490
===================================================================
Interest Spread 4.35%
Interest Margin 5.31%
</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 for the years 1997, 1996 and 1995.
26
<PAGE> 24
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The Corporation's provision for loan losses was $720,000 in 1997, $650,000 in
1996 and $530,000 in 1995. The increase in the provision for loan losses was
primarily due to an increase in average loans during 1997. Net charge-offs for
1997 were $384,175, compared to $747,858 in 1996 and $135,236 in 1995. For
additional information, see the Non-Performing Assets and Reserve for Loan
Losses sections of this discussion.
OTHER INCOME
Other income increased $246,901 from $1,339,513 in 1996 to $1,586,414 in 1997.
Contributing to this increase was a one-time gain on the sale of land of
$167,000, an increase in net gains on investment securities of $8,656, an
increase in service fee income of $41,970 and increases in net gains on the
sales of lease assets and other assets of $7,173 and $19,785, respectively.
Loans sold in 1996 resulted in a gain of $14,614. There were no loans sold in
1997 resulting in an offset to the increase in 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 EXPENSES
Total other expenses increased $797,759 from $8,152,657 in 1996 to $8,950,416 in
1997. Salary and benefits increased $137,804 to $4,153,371 from $4,015,567 in
1996. Included in 1997 expenses were slight increases in the cost of health and
life insurance premiums of $17,122 and $2,876, respectively, and an increase in
the contribution to the employee profit sharing plan of $6,050. Salary expense
increased $140,668 due to normal inflation adjustments resulting in a
corresponding increase in the employer portion of payroll taxes of $10,024. This
overall increase was offset slightly by a decline in temporary employee expense
of $10,349.
Occupancy expense increased $16,199 from $766,869 in 1996 to $783,068 in 1997
primarily due to the costs associated with the addition and operation of the
Bank's downtown Pittsburgh branch office opened in December, 1996. Equipment and
supplies expense increased $22,244 during 1997 due primarily to increases in
depreciation expense, equipment maintenance contracts, equipment rent expense
and vehicle expense of $19,001, $35,200, $12,248 and $4,293, respectively,
offset by a decrease in equipment repair expense of $25,572. Data processing
expense increased $68,019 due primarily to the addition of an on-line collection
system and higher ATM network expenses. FDIC insurance increased $38,233 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
$46,625 to $150,708 from $197,333 for the same period in 1996. Other operating
expenses increased $561,885 from $1,642,006 in 1996 to $2,203,891 in 1997. A
significant portion of this increase is attributable to approximately $289,000
in unrecoverable charges recognized from transactions with two of NorthSide
Bank's merchant credit card customers. Although additional losses may be
incurred, it is anticipated that any future charges related to these customers
will not have any 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 $134,935 related to deposits acquired
from another financial institution in December, 1996 and an increase in dealer
reserves and commissions of $120,893 resulting from the increased volume of
indirect automobile loans originated in 1997. Increases in postage, telephone,
legal expenses, promotions, Pennsylvania shares tax and Federal Reserve service
charges of $18,133, $18,596, $17,292, $21,400, $18,426 and $30,315,
respectively, also contributed to the overall increase. These increases were
partially offset by decreases in lease dealer commissions,
27
<PAGE> 25
NSD BANCORP
---------------------------------------------------------------------
asset recovery expense, demand deposit account losses and teller shortages of
$33,396, $8,925, $16,542 and $9,800, respectively.
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 regulator's 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 $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.
In 1997, the Corporation initiated the process of analyzing its information
systems and vendor supplied application systems to address any year 2000 issues
relating to its business or operations. The process involves internal testing or
obtaining certification of compliance then, if necessary, modifying or replacing
certain hardware and software systems maintained by the Corporation as well as
those provided by outside vendors. Management expects to have substantially all
systems and applications compliant or near completion of any necessary remedial
actions by the end of 1998. Failure of third parties or the Corporation to
adequately resolve year 2000 issues could cause a disruption of operations
resulting in additional unanticipated operating costs. Credit quality could by
affected to the extent customer's financial positions are weakened as a result
of year 2000 issues.
It is estimated that the total cumulative cost of this process will approximate
$570,000 which includes costs associated with modifying systems as well as the
cost of purchasing or leasing certain hardware and software. Purchased hardware
and software will be capitalized in accordance with normal policy. Personnel and
all other costs related to this process are being expensed as incurred.
INCOME TAXES
The Corporation recorded an income tax provision of $1,843,450, $1,624,344 and
$1,500,556 in 1997, 1996 and 1995, respectively. The increase in the tax
provision was the result of higher pre-tax earnings. The effective tax rates for
1997, 1996 and 1995 were 31.4%, 30.5% and 29.0% 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 1997
and 1996 were primarily the result of reduced tax-exempt earnings.
28
<PAGE> 26
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
The Corporation's total assets increased $14,916,010 from $305,413,560 at
December 31, 1996 to $320,329,570 at December 31, 1997. Securities available for
sale increased $2,510,874 while securities held to maturity decreased
$4,029,633. Loans available for sale increased to $3,419,440 at December 31,
1997 from $2,943,248 at December 31, 1996. The loans available for sale at
December 31, 1997 and 1996 were entirely comprised of student loans. Net loans
increased from $207,315,010 at December 31, 1996 to $228,835,066 at December 31,
1997. The significant loan growth was funded primarily by deposit growth and
borrowings during 1997.
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, 1997 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 $3,003,283 5.79% $ 3,196,025 6.24% -- -- -- --
Obligations of U.S. Government
Agencies -- -- 10,995,119 6.51 $8,622,561 6.72% -- --
Mortgage-Backed Securities -- -- -- -- -- -- $27,425,832 7.16%
Obligations of State and
Political Subdivisions -- -- -- -- 544,955 5.07 -- --
Marketable Equity Securities -- -- -- -- 1,502,737 11.54
---------- ---- ----------- ---- ---------- ---- ----------- -----
$3,003,283 5.79% $14,191,144 6.45% $9,167,516 6.62% $28,928,569 7.38%
========== ==== =========== ==== ========== ==== =========== =====
</TABLE>
The following summarizes the book value and weighted average yields of the
Corporation's securities held to maturity at December 31, 1997 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 $ 24,966 6.19% $ 2,825,000 5.95% $2,187,353 6.00% -- --
Corporate Bonds -- -- -- -- 250,000 7.50 -- --
---------- ---- ----------- ---- ---------- ---- ----------- -----
$ 24,966 6.19% $ 2,825,000 5.95% $2,437,353 6.15% -- --
========== ==== =========== ==== ========== ==== =========== =====
</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 1997.
LOANS
Loans net of deferred fees, increased $21,933,456 during 1997, from $211,106,328
at December 31, 1996 to $233,039,784 at December 31, 1997. Improved commercial
loan development resulted in an increase of $7,439,451 in commercial, financial
and agricultural loans during 1997. Partially contributing to this increase was
an increase of $1,755,742 in automobile dealer floor plan loans during 1997.
Increases in indirect automobile loans contributed the majority of the overall
in increase in consumer loans to individuals of $15,250,028 during
29
<PAGE> 27
NSD BANCORP
---------------------------------------------------------------------
1997. The overall increase in loans, net of deferred fees was offset slightly by
a decrease of $1,515,782 in residential mortgage loans during 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Residential Mortgage Loans $ 55,125,240 $ 56,641,022 $ 35,830,068 $ 30,906,568 $ 21,331,840
Non-Residential Mortgage Loans 29,082,042 29,167,461 30,300,560 28,283,368 28,870,838
Commercial, Financial and
Agricultural Loans 38,134,540 30,695,089 35,037,875 34,699,061 34,403,782
Consumer Loans to Individuals 95,357,873 80,107,845 67,709,305 63,021,691 59,543,438
Lines of Credit 5,487,417 5,433,560 5,681,628 5,528,808 5,541,594
Lease Financing 8,900,409 8,248,698 8,797,060 8,171,420 5,809,844
Nonaccrual Loans 1,355,617 1,234,467 443,727 516,244 105,716
------------ ------------ ------------ ------------ ------------
Total Loans 233,443,138 211,528,112 183,397,223 171,127,160 155,607,052
Deferred Fees (403,354) (421,784) (459,234) (461,020) (426,390)
------------ ------------ ------------ ------------ ------------
Loans, Net of Deferred Fees 233,039,784 211,106,328 182,937,989 170,666,140 155,180,662
Unearned Income (1,290,389) (1,212,814) (1,402,670) (1,517,598) (1,216,782)
------------ ------------ ------------ ------------ ------------
Total Loans, Net of Unearned
Income and Fees 231,749,395 209,893,514 181,535,319 169,148,542 153,963,880
Allowance for Loan Losses (2,914,329) (2,578,504) (2,676,352) (2,281,598) (1,865,704)
------------ ------------ ------------ ------------ ------------
Net Loans $228,835,066 $207,315,010 $178,858,957 $166,866,944 $152,098,176
============ ============ ============ ============ ============
</TABLE>
The following table of commercial financial and agricultural loans shows the
Corporation's loan maturities, net of deferred fees, as of December 31, 1997 (in
thousands).
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS
-------- ---------- ----------
<S> <C> <C> <C>
Commercial, Financial and Agricultural $24,558 $16,739 $16,368
</TABLE>
Commercial, financial and agricultural loans approximating $20 million have
floating or adjustable interest rates.
NON-PERFORMING ASSETS
At December 31, 1997, nonaccrual loans were $1,355,617, compared to $1,234,467
in 1996. The $121,150 increase during 1997 is considered to be normal given the
increase in outstanding loans during 1997. Other real estate owned decreased
$189,849 to $182,133 during 1997 from $371,982 in 1996. Loans 90 days past due
and still accruing interest increased $597,759 during 1997 and represent only
.5% of net loans at December 31, 1997.
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,
------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans $1,355,617 $1,234,467 $ 443,727 $ 516,244 $105,716
Other Real Estate Owned 182,133 371,982 43,966 221,770 570,479
Other Assets Held for Sale 69,710 60,705 31,775 18,137 28,180
---------- ---------- ---------- ---------- --------
Total Non-Performing Assets 1,607,460 1,667,154 519,468 756,151 704,375
Loans 90 Days Past Due and Still Accruing 1,213,225 615,466 801,743 802,552 292,909
---------- ---------- ---------- ---------- --------
Total Non-Performing Assets and
Past Due Loans $2,820,685 $2,282,620 $1,321,211 $1,558,703 $997,284
========== ========== ========== ========== ========
</TABLE>
30
<PAGE> 28
- --------------------------------------------------------------------------------
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, 1997, substandard loans totaled $761,061 and doubtful loans totaled
$899,718. All substandard and doubtful loans were designated as delinquent or
nonaccrual as of December 31, 1997.
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 to assist 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 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,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
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 $ 926 31.8% $ 782 30.3% $ 969 36.2% $ 891 39.0% $ 788 42.2%
Real Estate Mortgage Loans 320 11.0 358 13.9 388 14.5 350 16.9 350 18.8
Installment Loans 991 34.0 819 31.8 679 25.4 646 28.3 547 29.3
Lease Financing 239 8.2 229 8.9 180 6.7 136 6.0 98 5.3
Allocation to General Risk 438 15.0 391 15.1 460 17.2 224 9.8 83 4.4
------ ------ ------ ------ ------
Total $2,914 $2,579 $2,676 $2,282 $1,866
====== ====== ====== ====== ======
</TABLE>
31
<PAGE> 29
NSD BANCORP
---------------------------------------------------------------------
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>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Reserve for Loan Losses at Beginning of Year $2,579 $2,676 $2,282 $1,866 $1,662
Charge-Offs:
Commercial, Financial and Agricultural Loans 78 546 155 53 214
Real Estate Mortgage Loans 30 -- -- -- 91
Installment Loans 367 262 321 168 167
Lease Financing 48 36 29 -- --
------ ------ ------ ------ ------
Total Charge-Offs 523 844 505 221 472
Recoveries:
Commercial, Financial and Agricultural Loans 95 5 329 72 59
Real Estate Mortgage Loans 2 2 2 2 62
Installment Loans 42 89 38 103 84
Lease Financing -- -- 1 -- --
------ ------ ------ ------ ------
Total Recoveries 139 96 370 177 205
------ ------ ------ ------ ------
Net Charge-Offs 384 748 135 44 267
Provision for Loan Losses 720 650 530 460 471
------ ------ ------ ------ ------
Reserve for Loan Losses at End of Year $2,914 $2,579 $2,676 $2,282 $1,866
====== ====== ====== ====== ======
Net Loan Charge-Offs to Average Loans 0.17% 0.38% 0.08% 0.03% 0.19%
Loan Loss Reserve to Non-Performing Assets 181.30% 154.67% 515.21% 301.74% 264.87%
</TABLE>
LIABILITIES
Total liabilities were $289,989,999 at December 31, 1997, an increase of
$11,896,692 from December 31, 1996. The increases in total deposits and total
borrowed funds of $7,739,809 and $3,528,816, respectively, were used to fund
growth in the loan portfolio experienced during 1997.
DEPOSITS
Total deposits increased $7,739,809 from $260,986,805 at December 31, 1996 to
$268,726,614 at December 31, 1997. Non-interest bearing deposits increased
$6,771,824 during 1997 due to continued emphasis on the development of small
business relationships. The Corporation experienced a slight increase of
$967,985 in interest bearing deposits during 1997.
Average deposits and the average cost of deposits for the past three years were
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------------ ---- ------------ ---- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
Non-Interest Bearing Demand $ 49,144,741 -- $ 45,410,862 -- $ 40,177,135 --
Interest Bearing Demand 80,482,448 3.17% 67,611,775 2.91% 52,266,567 2.24%
Savings 37,025,880 2.69 37,750,180 3.00 41,165,175 2.97
Time Deposits 94,732,134 5.90 89,352,483 5.60 81,594,789 5.85
------------ ---- ------------ ---- ------------ ----
Total Deposits $261,385,203 3.49% $240,125,300 3.38% $215,203,666 3.34%
============ ==== ============ ==== ============ ====
</TABLE>
32
<PAGE> 30
- --------------------------------------------------------------------------------
At December 31, 1997, outstanding Certificates of Deposit of $100,000 or more
are scheduled to mature as follows (in thousands):
<TABLE>
<S> <C>
Three Months or Less $ 4,377
Over Three Through Six Months 1,079
Over Six Through Twelve Months 1,721
Over Twelve Months 3,685
-------
Total $10,862
=======
</TABLE>
REPURCHASE AGREEMENTS
At December 31, 1997, the Corporation had no outstanding repurchase agreements.
BORROWED FUNDS
At December 31, 1997, the Corporation had outstanding borrowings of $15,000,000,
of which $6,000,000 is due during 1998. The Corporation borrowed these funds as
part of a community investment program to finance mortgage loans to lower income
borrowers and to provide liquidity for specific asset-liability management
strategies. Advances from the Federal Home Loan Bank are collateralized by
qualifying securities and loans and are subject to restrictions or penalties
related to prepayments.
SHAREHOLDERS' EQUITY
Consolidated shareholders' equity increased $3,019,318 from $27,320,253 at
December 31, 1996 to $30,339,571 at December 31, 1997. This increase was the
result of earnings retention, the issuance of new shares of common stock for the
exercise of employee/director stock options 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, 1997 was 12.53% compared to 12.41% at
December 31, 1996. The Corporation's total risk-based capital ratio at December
31, 1997 was 13.78% 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.
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 3-for-2 stock split paid on December 31, 1997 to shareholders of
record on December 1, 1997, a 5% stock dividend paid on May 30, 1997 to
shareholders of record on April 30, 1997 and a 5% stock dividend paid on May 31,
1996 to shareholders of record on April 30, 1996.
<TABLE>
<CAPTION>
SALES PRICE CASH DIVIDENDS
--------------- DECLARED
HIGH LOW PER SHARE
---- --- ---------
<S> <C> <C> <C>
1997
First Quarter $18.89 $16.51 $0.159
Second Quarter 19.92 16.67 0.167
Third Quarter 22.83 18.33 0.167
Fourth Quarter 35.00 21.50 0.166
1996
First Quarter $16.33 $14.51 $0.121
Second Quarter 16.35 13.61 0.127
Third Quarter 15.87 14.60 0.127
Fourth Quarter 17.94 14.92 0.190
</TABLE>
33
<PAGE> 31
NSD BANCORP
---------------------------------------------------------------------
MARKET RISK
The Corporation operates as a traditional commercial banking institution
investing in securities and loans with funding primarily provided by retail
deposits and wholesale borrowings. The primary source of revenue is the net
spread between interest earned on investments and the cost of related funding.
Inherent in this business is market risk or the risk of an adverse impact on
earnings from changes in market interest rates. Other types of market risks such
as foreign currency exchange rate risk and commodity price risk do not arise in
the normal course of the Corporation's business activities. 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. Management's objective is to provide an optimum return
while maintaining an appropriate mix of earning assets and funding sources
consistent with acceptable exposure to market risk. Ultimately, the Corporation
seeks to produce consistent profitability in all interest rate environments.
Simulation modeling enables management to quantify the extent of the
Corporation's interest rate exposure by forecasting how net interest income, and
consequently net income, varies under alternative interest rate scenarios based
on the Corporation's current position. At December 31, 1997, a simulation
analysis assuming a one-time 200 basis point increase in interest rates, results
in a negative impact of less than 1.5% or approximately $200,000 on projected
net interest income over a one-year period. Conversely, a 200 basis point
decrease in interest rates results in an increase in projected net interest
income by slightly more than 1.0% or approximately $160,000 over the same
period. These findings are the result of normal projected growth in interest
earning assets and interest related liability levels based on the Corporation's
position at December 31, 1997. The results reflect the impact of a relatively
short repricing or rate adjustment period of the Corporation's loan products and
the effect of investment security prepayments matched with the relative short
term nature of interest sensitive deposit and borrowing liabilities. In a rising
rate environment, the increased cost of funding would be offset by increases in
yields on prime rate, LIBOR and Treasury indexed loans and securities and the
repricing of significant cashflow in the consumer loan portfolio. In a declining
rate environment, the declining yield on loans and securities due to prepayments
and index adjustments would be offset by a shortening of deposit maturities and
the repricing of a significant interest bearing demand deposit portfolio. In any
event, a sudden, substantial and protracted shift in interest rates may
adversely impact the Corporation's earnings to the extent that the interest
rates on interest earning assets and interest earning liabilities change at
varying frequencies and market forces may limit the ability to appropriately
respond to such changes.
Interest rate risk is also analyzed by comparing 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
asset 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 relatively non-rate sensitive.
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 $63,431 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.
34
<PAGE> 32
- --------------------------------------------------------------------------------
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, 1997
(in thousands):
<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 $ 24,685 $ 15,951 $ 20,395 $ 64,447 $106,777 $232,255
Securities Available for Sale 6,093 5,740 4,013 18,858 23,475 58,179
Securities Held to Maturity -- 10 215 2,995 2,067 5,287
Other Interest Earning Assets 2,000 -- -- -- -- 2,000
Non-Interest Earning Assets -- -- -- -- 22,609 22,609
-------- -------- -------- -------- -------- --------
Total Assets $ 32,778 $ 21,701 $ 24,623 $ 86,300 $154,928 $320,330
======== ======== ======== ======== ======== ========
Interest Bearing Demand Deposits $ 25,325 $ 11,141 $ 26,023 $ 20,189 -- $ 82,678
Savings Deposits 7,348 3,674 3,674 22,043 -- 36,739
Time Deposits <$100,000 17,266 15,306 13,777 30,172 3,714 80,235
Time Deposits >$100,000 5,477 1,079 1,721 3,170 515 11,962
Repurchase Agreements -- -- -- -- -- --
Borrowed Funds 1,000 5,000 -- 9,000 -- 15,000
Other Liabilities -- -- 4,722 -- 58,654 63,376
Shareholders' Equity -- -- -- -- 30,340 30,340
-------- -------- -------- -------- -------- --------
Total Liabilities and
Shareholders' Equity $ 56,416 $ 36,200 $ 49,917 $ 84,574 $ 93,223 $320,330
======== ======== ======== ======== ======== ========
Period GAP $(23,638) $(14,499) $(25,294) $ 1,726 $(61,705)
Cumulative GAP $(23,638) $(38,137) $(63,431) $(61,705) $ --
</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 $4,679,545 during 1997, compared to
$4,910,907 and $4,967,522 at December 31, 1996 and 1995, respectively. The
primary source of operating cash flows for 1997 was net income adjusted for the
effect of noncash expenses such as the provision for loan losses, depreciation
of premises and equipment and amortization of intangible assets.
Investing activities used cash flows of $19,610,435 during 1997, compared to
$37,778,471 at December 31, 1996 and $18,704,984 at December 31, 1995. A
significant portion of borrowings were used to fund the loan growth experienced
during 1997. 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 also primarily used to fund the growth in the
loan portfolio during 1996 and 1995.
Financing activities provided cash of $9,675,632, $41,664,124 and $12,218,393 at
December 31, 1997, 1996 and 1995, respectively. An increase in demand deposits,
savings and borrowings provided cash for 1997 while cash was used by payments of
cash dividends, repayment of repurchase agreements and a slight decrease in
certificates of deposit. During 1996, an increase in demand deposits, savings,
certificates of deposit and borrowings provided cash, while cash was used by
payments of cash dividends. Net proceeds from borrowings were used to fund loan
growth experienced during 1997 and 1996.
35
<PAGE> 1
EXHIBIT 21
Subsidiaries of NSD Bancorp, Inc.
As of December 31, 1997
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
Exhibit 23
COOPERS COOPERS & LYBRAND L.P.P.
& LYBRAND
a professional services firm
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 26, 1998, on our audits of the consolidated financial statements
of NSD Bancorp, Inc. and subsidiary, as of December 31, 1997 and 1996, and for
the years ended December 31, 1997, 1996, and 1995, which report is incorporated
by reference in this Annual Report on Form 10-K.
COOPERS & LYBRAND LLP
Pittsburgh, Pennsylvania
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL INFORMATION INCORPORATED BY REFERENCE TO THE 1997 FOURTH
QUARTER INCORPORATE FINANCIAL REVIEW AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,638,396
<INT-BEARING-DEPOSITS> 211,613,706
<FED-FUNDS-SOLD> 2,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,179,424
<INVESTMENTS-CARRYING> 5,287,319
<INVESTMENTS-MARKET> 5,459,499
<LOANS> 235,168,835
<ALLOWANCE> 2,914,329
<TOTAL-ASSETS> 320,329,571
<DEPOSITS> 268,726,614
<SHORT-TERM> 6,000,000
<LIABILITIES-OTHER> 6,263,385
<LONG-TERM> 9,000,000
0
0
<COMMON> 2,586,999
<OTHER-SE> 27,752,572
<TOTAL-LIABILITIES-AND-EQUITY> 320,329,570
<INTEREST-LOAN> 19,506,012
<INTEREST-INVEST> 4,207,643
<INTEREST-OTHER> 99,083
<INTEREST-TOTAL> 23,812,738
<INTEREST-DEPOSIT> 9,129,539
<INTEREST-EXPENSE> 9,980,576
<INTEREST-INCOME-NET> 13,832,162
<LOAN-LOSSES> 720,000
<SECURITIES-GAINS> 220,250
<EXPENSE-OTHER> 8,950,416
<INCOME-PRETAX> 5,748,160
<INCOME-PRE-EXTRAORDINARY> 3,904,710
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,904,710
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.50
<YIELD-ACTUAL> 4.86
<LOANS-NON> 1,355,617
<LOANS-PAST> 1,213,225
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (2,578,504)
<CHARGE-OFFS> 522,934
<RECOVERIES> 138,759
<ALLOWANCE-CLOSE> (2,914,329)
<ALLOWANCE-DOMESTIC> (2,914,329)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 438,000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the consolidated
financial information incorporated by reference to the 1997 Fourth Quarter
Incorporate Financial Review and is qualified in its entirety by reference to
such financial information.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997
<CASH> 13,486,175 13,699,126
<INT-BEARING-DEPOSITS> 210,939,843 213,544,183
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 57,002,436 61,402,204
<INVESTMENTS-CARRYING> 6,117,899 6,936,722
<INVESTMENTS-MARKET> 6,303,308 9,563,505
<LOANS> 232,606,786 231,244,375
<ALLOWANCE> 2,911,966 2,746,810
<TOTAL-ASSETS> 315,364,373 320,329,903
<DEPOSITS> 259,443,567 267,371,761
<SHORT-TERM> 16,000,000 14,899,000
<LIABILITIES-OTHER> 6,533,882 6,508,346
<LONG-TERM> 4,000,000 1,000,000
0 0
0 0
<COMMON> 1,719,286 1,719,286
<OTHER-SE> 27,667,638 26,856,206
<TOTAL-LIABILITIES-AND-EQUITY> 315,365,373 320,329,903
<INTEREST-LOAN> 14,450,589 9,406,820
<INTEREST-INVEST> 3,204,895 2,128,550
<INTEREST-OTHER> 74,707 70,145
<INTEREST-TOTAL> 17,730,191 11,605,515
<INTEREST-DEPOSIT> 6,827,200 4,495,654
<INTEREST-EXPENSE> 7,451,532 4,884,770
<INTEREST-INCOME-NET> 10,278,660 6,720,746
<LOAN-LOSSES> 525,000 330,000
<SECURITIES-GAINS> 95,803 94,931
<EXPENSE-OTHER> 6,781,719 4,571,678
<INCOME-PRETAX> 4,150,307 2,676,093
<INCOME-PRE-EXTRAORDINARY> 2,802,557 1,837,093
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,802,557 1,837,093
<EPS-PRIMARY> 1.63 1.07
<EPS-DILUTED> 1.62 1.06
<YIELD-ACTUAL> 4.86 4.80
<LOANS-NON> 1,319,640 1,319,640
<LOANS-PAST> 1,093,577 1,093,577
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 2,578,504 2,578,504
<CHARGE-OFFS> 304,795 220,983
<RECOVERIES> 113,287 59,289
<ALLOWANCE-CLOSE> 2,911,996 2,746,810
<ALLOWANCE-DOMESTIC> 2,567,996 2,746,810
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 344,000 393,000
</TABLE>
