<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1999
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________
Commission File No. 0-22124
-------
NSD Bancorp, Inc.
-----------------
(Exact name of Registrant as specified in its charter)
Commonwealth of Pennsylvania 25-1616814
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5004 McKnight Road, Pittsburgh, Pennsylvania 15237
(Address of principal executive offices) (ZIP Code)
(412) 231-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of the Registrant's common stock as of April
30, 1999 was:
Common Stock, $1.00 par value - 2,834,832 shares outstanding
<PAGE> 2
NSD BANCORP, INC.
FORM 10Q
For the Quarter Ended March 31, 1999
INDEX
Page
----
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet March 31, 1999
and December 31, 1998 3
Consolidated Statement of Income For the Three Months
Ended March 31, 1999 and 1998 4
Consolidated Statement of Cash Flows For the Three
Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II Other Information
Item 6. Exhibits and Reports on Form 8K 15
<PAGE> 3
<TABLE>
<CAPTION>
NSD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 14,370,471 $ 19,778,095
Federal Funds Sold 0 2,500,000
Investment Securities Available for Sale at Market Value (Amortized Cost of
$103,469,109 at March 31, 1999 and $90,125,932 at December 31, 1998) 105,668,206 92,789,341
Investment Securities Held to Maturity at Amortized Cost (Market Value of $3,526,802
at March 31, 1999 and $3,621,208 at December 31, 1998) 3,372,848 3,437,580
Loans Held for Sale 4,112,265 3,995,483
Loans, Net of Deferred Fees 233,491,135 230,937,044
Unearned Income (1,979,807) (1,984,393)
Reserve for Loan Losses (2,846,663) (2,756,502)
- ----------------------------------------------------------------------------------------------------------------------------------
Loans, Net 228,664,665 226,196,149
Premises and Equipment, Net 2,430,734 2,728,434
Accrued Interest Receivable 2,243,444 2,115,343
Other Real Estate Owned and Assets Held for Sale 376,148 306,620
Other Assets 3,397,665 3,320,947
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $364,636,446 $357,167,992
==================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest Bearing $ 55,627,860 $ 60,317,643
Interest Bearing 220,610,395 219,797,517
- ----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 276,238,255 280,115,160
Borrowed Funds:
Advances from Federal Home Loan Bank and Other Borrowings 41,000,000 33,000,000
Fed Funds Purchased 7,900,000 0
- ----------------------------------------------------------------------------------------------------------------------------------
Total Borrowed Funds 48,900,000 33,000,000
Accrued Interest Payable 4,951,702 4,977,580
Other Liabilities 2,182,470 6,680,887
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 332,272,427 324,773,627
Common Stock $1 Par Value; 10,000,000 shares authorized, 2,872,580 issued and
2,835,610 outstanding at March 31, 1999 and 2,604,172 issued and 2,586,410
outstanding at December 31, 1998 2,872,580 2,604,172
Treasury Stock at cost, 36,970 shares at March 31, 1999 and 17,762 shares at December
31, 1998 (867,517) (457,950)
Capital Surplus 13,612,252 7,885,041
Accumulated Other Comprehensive Income 1,458,005 1,757,851
Retained Earnings 15,288,699 20,605,251
- ----------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 32,364,019 32,394,365
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $364,636,446 $357,167,992
==================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
NSD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Loans, Including Fees $4,718,109 $4,903,305
Investment Securities
Taxable 1,362,844 779,263
Tax-exempt 60,377 77,243
Dividends 48,562 37,011
Interest Bearing Deposits 1,024 4,809
Federal Funds Sold 17,539 186,999
- -------------------------------------------------------------------------------------------
Total Interest Income 6,208,455 5,988,630
INTEREST EXPENSE
Deposits 2,123,818 2,220,693
Federal Funds Purchased and Repurchase Agreements 15,883 --
FHLB Advances and Other Borrowings 444,529 302,556
- -------------------------------------------------------------------------------------------
Total Interest Expense 2,584,230 2,523,249
Net Interest Income 3,624,225 3,465,381
Provision for Loan Losses 210,000 195,000
- -------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 3,414,225 3,270,381
- -------------------------------------------------------------------------------------------
OTHER INCOME
Net Investment Securities Gains 69 26,752
Service Fees 200,259 181,515
Other Operating Income 191,548 188,610
- -------------------------------------------------------------------------------------------
Total Other Income 391,876 396,877
OTHER EXPENSES
Salaries and Employee Benefits 1,119,964 1,092,485
Occupancy Expense 179,798 197,952
Equipment and Supplies 245,902 261,444
Data Processing 169,925 160,202
FDIC Insurance 9,363 9,450
Advertising 21,463 29,603
Other Operating Expenses 464,039 542,955
- -------------------------------------------------------------------------------------------
Total Other Expenses 2,210,454 2,294,091
Income Before Income Taxes 1,595,647 1,373,167
Provision for Income Taxes 549,250 422,900
- -------------------------------------------------------------------------------------------
NET INCOME 1,046,397 950,267
===========================================================================================
Other Comprehensive Income, net of tax (299,846) 18,611
- -------------------------------------------------------------------------------------------
Net Comprehensive Income $ 746,551 $ 968,878
NET INCOME PER COMMON SHARE (1)
Net Income - Basic $0.37 $0.33
Net Income - Diluted $0.36 $0.33
Common Dividends Declared and Paid Per Share $0.17 $0.15
Weighted Average Shares Outstanding - Basic 2,840,248 2,852,433
Weighted Average Shares Outstanding - Diluted 2,867,881 2,901,986
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
NSD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
----------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,046,397 $ 950,267
Adjustments to Net Income:
Provision for Loan Losses 210,000 195,000
Loss (Gain) on Sale of Investment Securities Available for Sale 755 (26,752)
Loss (Gain) on Sale of Other Assets 32,827 (1,780)
Gain on Disposition of Premises and Equipment (41,014) --
Depreciation and Amortization 152,342 159,520
Net Premium Amortization (Discount Accretion) 56,453 27,124
(Increase) Decrease in Accrued Interest Receivable (128,101) 261,299
Decrease in Accrued Interest Payable (25,877) (200,640)
Decrease (Increase) in Other Assets 66,011 (108,794)
Deferred Loan Fees, Net 4,268 (12,439)
(Decrease) Increase in Other Liabilities (4,533,734) 165,967
- ---------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Operating Activities (3,159,673) 1,408,772
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Investment Securities Available for Sale 998,978 4,532,988
Proceeds from Repayments and Maturities of Investment 9,039,592 13,389,238
Securities Available for Sale
Proceeds from Repayments and Maturities of Investment 65,000 456,000
Securities Held to Maturity
Purchases of Investment Securities (23,429,225) (13,602,253)
Proceeds from Sales of Other Real Estate Owned 109,886 49,001
Net (Increase) Decrease in Loans (3,011,805) 4,116,022
Dispositions (Purchases) of Premises and Equipment, Net 230,522 (33,945)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Investing Activities (15,997,052) 8,907,051
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Demand and Savings Accounts (2,174,739) (4,414,674)
Net Decrease in Certificates of Deposit (1,702,166) (388,830)
Increase in Federal Funds Purchased 7,900,000 10,000,000
Proceeds from Federal Home Loan Bank Advances and Other Borrowings 9,000,000 --
Repayment of Federal Home Loan Bank Advances and Other Borrowings (1,000,000) (1,000,000)
Proceeds from the Exercise of Common Stock Options 127,838 128,072
Cash Paid in Lieu of Fractional Shares (3,922) --
Treasury Stock Purchased (409,568) --
Cash Dividends Paid (488,342) (440,833)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 11,249,101 3,883,735
- ---------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Cash Equivalents (7,907,624) 14,199,558
Cash and Cash Equivalents at Beginning of Year 22,278,095 15,638,396
- ---------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 14,370,471 $ 29,837,954
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
NSD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of NSD Bancorp, Inc. (the "Corporation")
include the accounts of the Corporation and 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.
2. EARNINGS PER SHARE:
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.
3. RECENT ACCOUNTING PRONOUNCEMENTS:
In October 1998, Statement of Financial Accounting Standard (SFAS) No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" was issued which
establishes the accounting and reporting standards for enterprises involved in
the business of securitizing mortgage loans held for sale. This statement
requires that these instruments be classified as trading securities and reported
at fair value. The Corporation is not in the business of securitizing mortgage
loans and, therefore, will not implement this statement at this time.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is an analysis of NSD Bancorp, Inc.'s (the
"Corporation") financial condition and results of operations for the three
months ended March 31, 1999 compared to the three months ended March 31, 1998.
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 1999 was $1,046,397, an increase
of $96,130 from $950,267 for the three months ended March 31, 1998. This
increase is the result of increases in net interest income after provision for
loan losses, service fees and other operating income of $143,844, $18,744 and
$2,938, respectively, and decreases in occupancy expense, equipment and
supplies, advertising and other operating expenses of $18,154, $15,542, $8,140
and $78,916, respectively, for the first three months of 1999 compared to the
same period of 1998. The overall increase was offset by a decrease in net
investment securities gains of $26,683 and increases in salaries and employee
benefits and data processing expense of $27,479 and $9,723, respectively. The
Corporation's annualized return on average assets (ROA) for the first three
months of 1999 was 1.20% compared to 1.22% for the first three months of 1998.
This decrease reflects the impact of net interest margin compression combined
with significant growth in average assets. Annualized return on average equity
(ROE) was 13.16% for the first quarter of 1999 compared to 12.70% for the same
period of 1998. This increase is the result of lower average equity for the
first quarter of 1999 compared to the same period in 1998 and was offset by net
interest margin compression.
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 tax assets. Therefore, it is more meaningful
to analyze net interest income on a tax-equivalent basis.
Total interest income increased $191,513 during the three months ended March 31,
1999 as compared to the same period in 1998 as a result of a $30,346,629
increase in average earning assets offset by a decline in the average yield on
earning assets to 7.54% at March 31, 1999 from 8.04% at March 31, 1998. The
increase in average earning assets is the result of an increase in average
investment securities of $42,228,842 offset by a decrease in average federal
funds sold of $12,301,556 for the first quarter of 1999 compared to the first
quarter of 1998. Average loans remained relatively flat on a first quarter
comparative basis.
Total interest expense increased $60,981 during the three months ended March 31,
1999 compared to the three months ended March 31, 1998 as a result of a
$22,549,131 increase in average interest bearing liabilities offset by a decline
in the average cost of interest bearing liabilities to 4.08% at March 31, 1999
from 4.37% at March 31, 1998. The increase in average interest bearing
liabilities was comprised of increases in average interest bearing deposits,
federal funds purchased and FHLB advances of $6,125,242, $1,346,111 and
$15,077,778, respectively.
Economic conditions have continued to result in compression of net interest
margins and lower average rates in all interest earning and interest bearing
categories. For the first quarter of 1999 compared to the first quarter of 1998,
the net interest margin decreased .26% to 4.43% while declines in average rates
were experienced in every interest related category.
PROVISION FOR LOAN LOSSES
The Corporation's provision for loan losses was $210,000 as of March 31, 1999,
compared to $195,000 as of March 31, 1998. The increase in the provision for
loan losses was primarily due to an anticipated increase in average loans during
1999. Net charge-offs for the first quarter of 1999 were $119,839 compared to
$211,126 for the first quarter of 1998.
7
<PAGE> 8
The Corporation's net charge-offs by loan type and changes in the reserve for
loan losses were as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
- ---------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Reserve for Loan Losses at Beginning of Year $2,756,502 $2,914,329
Charge-offs:
Commercial, Financial, and Agricultural Loans 32,000 25,000
Real Estate Mortgage Loans -- --
Installment Loans 102,244 167,871
Lease Financing 3,036 25,747
- ---------------------------------------------------------------------------------------------------
Total Charge-offs 137,280 218,618
Recoveries:
Commercial, Financial, and Agricultural Loans -- --
Real Estate Mortgage Loans -- --
Installment Loans 16,641 7,492
Lease Financing 800 --
- ---------------------------------------------------------------------------------------------------
Total Recoveries 17,441 7,492
- ---------------------------------------------------------------------------------------------------
Net Charge-offs 119,839 211,126
Provision for Loan Losses 210,000 195,000
- ---------------------------------------------------------------------------------------------------
Reserve for Loan Losses at End of Year $2,846,663 $2,898,203
===================================================================================================
</TABLE>
OTHER INCOME
Other income decreased $5,001 from $396,877 for the three months ended March 31,
1998 to $391,876 for the three months ended March 31, 1998. A decrease in the
net gains recognized on the sales of investment securities available for sale
and calls of investment securities held to maturity contributed to this
decrease. Offsetting the overall decrease were increases in service fees and
other operating income of $18,744 and $2,938, respectively. The increase in
service fees was primarily the result of more aggressive collection efforts
related to NSF/Overdraft fees which added $21,191 to income over the first
quarter of 1998. The increase in other operating income was primarily the result
of a gain recognized on the sale of land of $100,814 offset by the partial
writedown of fixed assets in connection with installation of a new local area
network and branch teller/platform system of $60,000 and a $33,633 loss
recognized due to an appraised value adjustment of one property held in other
real estate owned.
OTHER EXPENSES
Total other expenses for the first quarter of 1999 decreased $83,637 to
$2,210,454 from $2,294,091 for the first quarter of 1998. Contributing to this
decrease were decreases in occupancy expense, equipment and supplies,
advertising and other expenses of $18,154, $15,542, $8,140 and $78,916,
respectively, offset by increases in salaries and employee benefits and data
processing expense of $27,479 and $9,723, respectively. Salary and employee
benefits increased due to normal inflation adjustments and growth of the
organization. Occupancy expense decreased primarily as a result of a reduction
in property tax expense accruals of $9,710 and a decrease in depreciation
expense of $2,503. Equipment and supplies decreased primarily as a result of
decreases in stationary and supplies expense and general office expense of
$8,842 and $6,006, respectively. Data processing expense increased as a result
of increases in ATM network charges and costs incurred related to the
telephone/personal computer bill payment system. The reduction in advertising
expense for the first quarter of 1999 versus the same period in 1998 was due to
special promotions that occurred in 1998 causing 1998 to be higher than normally
expected. Contributing to the decrease in other expenses were decreases in legal
expense, subscriptions, protection, asset recovery expense, promotions,
entertainment, ATM over/short, general loss, directors fees and teller
over/short of $3,744, $2,769, $15,738, $11,318, $22,728, $3,622, $11,681,
$11,085, $14,957 and $6,154, respectively, offset by increases in postage,
student loan processing fees, PA Shares tax and correspondent bank service
charges of $5,095, $10,878, $10,338 and $3,354, respectively.
8
<PAGE> 9
INCOME TAXES
The Corporation recorded an income tax provision of $549,250 for the three
months ended March 31, 1999 compared to $422,900 for the three months ended
March 31, 1998. The increase in the tax provision was the result of higher
pretax earnings. The effective tax rates for the first quarters of 1999 and 1998
were 34.4% and 30.8%, respectively. The increase in the effective tax rate
during the first quarter of 1999 was primarily the result of reduced tax-exempt
earnings.
FINANCIAL CONDITION
The Corporation's total assets increased $7,468,454 from $357,167,992 at
December 31, 1998 to $364,636,446 at March 31, 1999. Securities available for
sale increased $12,878,865 while securities held to maturity decreased $64,732.
Loans available for sale increased to $4,112,265 at March 31, 1999 from
$3,995,483 at December 31, 1998. The loans available for sale at March 31, 1999
and December 31, 1998 were entirely comprised of student loans. Net loans
increased from $226,196,149 at December 31, 1998 to $228,664,665 at March 31,
1999.
INVESTMENT SECURITIES
Investment securities available for sale increased $12,878,865 during the first
quarter of 1999. Increases of U.S. Government agencies, mortgage-backed
securities and obligations of state and political subdivisions of $5,774,433,
$4,868,562 and $1,524,680, respectively were due to normal purchasing activity
while there were very few sales or calls as evidenced by a net gain on
securities of only $69. Investment securities held to maturity decreased $64,732
due to normal maturity and call activity as all new purchases are being
categorized as available for sale. As a member of the Federal Home Loan Bank
(FHLB), the Corporation is required to maintain a minimum investment in FHLB
stock which is calculated based on the level of assets, residential real estate
loans and outstanding FHLB advances. Marketable equity securities increased
$662,466 during the first quarter of 1999 which was due almost entirely to an
increase in the level of FHLB stock.
A summary of investment securities available for sale is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
- --------------------------------------------------------------------------------------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED COST GAINS LOSSES FAIR VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 5,217,085 $ 17,708 $ 2,553 $ 5,232,240
Obligations of U.S. Government Agencies 32,199,641 28,930 208,114 32,020,457
Mortgage-Backed Securities 54,236,363 115,816 492,942 53,859,237
Obligations of State and Political Subdivisions 2,086,781 7,383 6,374 2,087,790
Other Bonds 6,803,176 72,638 102,574 6,773,240
Marketable Equity Securities 2,926,063 2,779,179 -- 5,705,242
- --------------------------------------------------------------------------------------------------------------------------------
$103,469,109 $3,021,654 $812,557 $105,678,206
================================================================================================================================
<CAPTION>
DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED COST GAINS LOSSES FAIR VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 5,225,749 $ 30,280 $ 2,823 $ 5,253,206
Obligations of U.S. Government Agencies 26,187,451 92,554 33,981 26,246,024
Mortgage-Backed Securities 49,140,324 170,208 319,857 48,990,675
Obligations of State and Political Subdivisions 553,529 9,581 -- 563,110
Other Bonds 6,802,815 14,724 123,989 6,693,550
Marketable Equity Securities 2,216,064 2,826,712 -- 5,042,776
- --------------------------------------------------------------------------------------------------------------------------------
$ 90,125,932 $3,144,059 $480,650 $ 92,789,341
================================================================================================================================
</TABLE>
9
<PAGE> 10
A summary of investment securities held to maturity is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
- ----------------------------------------------------------------------------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of State and Political Subdivisions $3,122,848 $ 135,169 $ -- $3,258,017
Other Bonds 250,000 18,785 -- 268,785
- -----------------------------------------------------------------------------------------------------------------------
$3,372,848 $ 153,954 $ -- $3,526,802
=======================================================================================================================
<CAPTION>
DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of State and Political Subdivisions $3,187,580 $ 162,355 $ -- $3,349,935
Other Bonds 250,000 21,273 -- 271,273
- ----------------------------------------------------------------------------------------------------------------------
$3,437,580 $ 183,628 $ -- $3,621,208
=======================================================================================================================
</TABLE>
LOANS
Loans, net of deferred fees, increased to $233,491,135 at March 31, 1999 from
$230,937,044 at December 31, 1998. Commercial loan development efforts resulted
in an increase of $3,793,516 in nonresidential mortgages which offset a net
decline of $3,740,439 in commercial, financial and agricultural loans due to
paydowns. Increased production of indirect automobile loans was the primary
reason for the $2,030,031 increase in consumer loans to individuals and
increased equipment leasing production efforts resulted in an increase of
$503,950. Other loan categories experienced only slight changes in outstanding
volume during the first quarter of 1999.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, INCREASE
1999 1998 (DECREASE)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consumer Loans to Individuals $ 94,030,295 $ 92,000,264 $ 2,030,031
Mortgage:
Nonresidential 31,854,383 28,060,867 3,793,516
Residential 52,903,401 52,695,286 208,115
Commercial, Financial and Agricultural 36,704,610 40,445,049 (3,740,439)
Lines of Credit 5,234,513 5,376,848 (142,335)
Lease Financing 12,414,704 11,910,754 503,950
Nonaccrual Loans 690,881 785,360 (94,479)
- --------------------------------------------------------------------------------------------------------
Total Loans 233,832,787 231,274,428 2,558,359
Deferred Fees (341,652) (337,384) (4,268)
- --------------------------------------------------------------------------------------------------------
Loans, Net of Deferred Fees $233,491,135 $230,937,044 $2,554,091
========================================================================================================
</TABLE>
A loan is considered impaired when, based upon current information and events,
it is probable that the Corporation will be unable to collect all amounts due
for principal and interest according to the contracted terms of the loan
agreement. At March 31, 1999, the Corporation had no recorded investment in
loans for which impairment has been recognized in accordance with SFAS No. 114.
There were no loans considered impaired that have been partially written down
through charge-offs. The average recorded investment in impaired loans was $0
for the first three months of 1999. Therefore, no interest was recognized on
impaired loans and no additional reserve was required for impaired loans during
the first quarter of 1999.
10
<PAGE> 11
NON-PERFORMING ASSETS
Non-performing assets increased from $1,905,658 at December 31, 1998 to
$1,981,649 at March 31, 1999 due to increases in other real estate owned, other
assets held for sale and loans 90 days past due and still accruing of $41,403,
$28,124 and $100,943, respectively, offset by a decrease in nonaccrual loans of
$94,479.
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>
MARCH 31, DECEMBER 31,
1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual Loans $ 690,881 $ 785,360
Other Real Estate Owned 232,955 191,552
Other Assets Held for Sale 143,193 115,069
- -------------------------------------------------------------------------------------------
Total Non-Performing Assets 1,067,029 1,091,981
Loans 90 Days Past Due and Still Accruing 914,620 813,677
- -------------------------------------------------------------------------------------------
Total Non-Performing Assets and Past Due Loans $1,981,649 $1,905,658
===========================================================================================
</TABLE>
RESERVE FOR LOAN LOSSES
The Corporation's loan loss reserve at March 31, 1999 was $2,846,663 or 1.21% of
total loans compared to $2,898,203 or 1.25% of total loans at March 31, 1998.
Management anticipates that the reserve for loan losses is adequate to absorb
reasonably foreseeable losses on loans.
The following is a summary of activity in the reserve for loan losses:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning Balance $2,756,502 $2,914,329
Provision 210,000 195,000
Net Charge-offs 119,839 211,126
- -------------------------------------------------------------------------------------------
Ending Balance $2,846,663 $2,898,203
===========================================================================================
Reserve for Loan Losses to Total Loans 1.21% 1.25%
</TABLE>
LIABILITIES
Total liabilities were $332,272,427 at March 31, 1999, an increase of $7,498,800
from December 31, 1998. An increase in total borrowed funds of $15,900,000
offset by decreases in total deposits and other liabilities of $3,876,905 and
$4,498,417, respectively. The increase in borrowed funds was used to offset the
decrease in deposits, to fund loan growth and to increase the investment
portfolio as part of an overall leverage strategy.
DEPOSITS
Total deposits decreased $3,876,905 from $280,115,160 at December 31, 1998 to
$276,238,255 at March 31, 1999. Contributing to the overall decrease were
decreases in noninterest bearing demand deposits, interest bearing demand
deposits and time deposits of $4,689,783, $3,097,163 and $1,702,166,
respectively, offset by increases in savings deposits and money market deposits
of $1,187,138 and $4,425,069, respectively.
11
<PAGE> 12
The composition of deposits is shown in the following table:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, INCREASE
1999 1998 (DECREASE)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest Bearing Demand Deposits $ 55,627,860 $ 60,317,643 $(4,689,783)
Interest Bearing Demand Deposits 28,602,826 31,699,989 (3,097,163)
Savings Deposits 38,893,668 37,706,530 1,187,138
Money Market Deposit Accounts 61,040,965 56,615,896 4,425,069
Time Deposits equal to or more than $100,000 12,387,610 14,139,323 (1,751,713)
Time Deposits less than $100,000 79,685,326 79,635,779 49,547
- ----------------------------------------------------------------------------------------------------------
Total Deposits $276,238,255 $280,115,160 $(3,876,905)
==========================================================================================================
</TABLE>
TOTAL BORROWED FUNDS
At March 31, 1999, the Corporation had total borrowed funds of $48,900,000, of
which $11,900,000 will mature within the next 12 months. The Corporation
borrowed these funds to provide liquidity for specific asset-liability
management strategies. At March 31, 1999, total borrowed funds was comprised of
advances from the Federal Home Loan Bank which are collateralized by qualifying
securities and loans and are subject to restrictions or penalties related to
prepayments of $41,000,000 and federal funds purchased of $7,900,000.
SHAREHOLDERS' EQUITY
Consolidated shareholders' equity decreased $30,346 from $32,394,365 at December
31, 1998 to $32,364,019 at March 31, 1999. This decrease was the result of the
retention of earnings offset by the purchase of treasury stock, payment of cash
dividends to shareholders and a decline in accumulated other comprehensive
income which is comprised entirely of unrealized holding gains/losses on
investment securities.
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 March 31, 1999 was 12.29% compared to 12.36% at
December 31, 1998. The Corporation's total risk-based capital ratio at March 31,
1999 was 13.95% compared to 14.02% at December 31, 1998. Regulatory requirements
for Tier I and total risk-based capital ratios are 4.00% and 8.00%,
respectively.
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, 1998, a simulation
analysis assuming a one-time 200 basis point increase in interest rates, results
in a negative impact of less than 1.2% or approximately $179,000 on projected
net interest income over a one-year period. Conversely, a 200 basis point
decrease in interest rates resulted in a slight increase in projected net
interest income of .1% or approximately $19,000 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, 1998. 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
12
<PAGE> 13
prime rate, LIBOR and Treasury indexed loans and securities and the repricing of
significant cash flow 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 bearing 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 of "GAP" analysis. Management, however, recognizes
that a simplified GAP analysis may not adequately reflect the degree to which
assets and liabilities with similar repricing characteristics react to changes
in market interest rates. In addition, repricing characteristics identified
under a specific GAP position may vary significantly under different interest
rate environments. Therefore, simulation modeling is also performed to evaluate
the extent and direction of the Corporation's interest rate exposure under
upward and 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 negative, or liability sensitive, cumulative
interest GAP position of $78,982 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.
There have been no shifts in asset/liability composition or repricing
characteristics of individual portfolios which would materially affect the
results of the analysis performed as of December 31, 1998. Therefore, such
analysis is regarded as a fair presentation of the Corporation's market risk as
of March 31, 1999.
YEAR 2000 CONSIDERATIONS
In 1997, the Corporation initiated the process of analyzing its information
systems and vendor supplied application systems to identify and resolve any year
2000 issues concerning its business or operations. Senior management views this
initiative as one of the highest priorities of the Corporation. With oversight
from the Board of Directors, the Corporation is aggressively pursuing
appropriate solutions and assurances with regard to compliance of all
applications affected by the year 2000. As of December 31, 1998, the Corporation
had completed its assessment of all hardware, software, core business
applications and data exchange interfaces and is well into the process of
renovating systems and applications and validating year 2000 readiness.
Management expects to achieve compliance for all critical systems and
substantially all non-critical systems by the end of the second quarter of 1999.
Non-information technology systems such as the elevator, HVAC, security systems
etc., have been reviewed to determine if there any significant year 2000 issues.
Any non-compliant system or related equipment has either already been replaced
or is in the process of being replaced before the year 2000.
It is estimated that the total cumulative cost to the Corporation of this
process will approximate $750,000 which includes costs associated with modifying
existing systems, purchasing or leasing certain hardware and software and the
acceleration of depreciation on items which will be disposed prematurely due to
noncompliance. The majority of such costs will be incurred during 1999.
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.
Although the Corporation believes that it will be year 2000 compliant, any
unforeseen system failures could result in a compromise in the Corporation's
ability to service customers and could have a potentially adverse impact on NSD
Bancorp's financial condition or results of operations. A Contingency and
Business Resumption Plan is in the process of being developed to help insure
that the Corporation is prepared in the event of an automated information system
failure and to address liquidity concerns due to possible public demands for
cash.
All commercial loan customers with significant loan exposures have been
contacted to emphasize the importance of adequately preparing for year 2000
issues and to assess the state of their year 2000 readiness. The Corporation
could experience losses due to the interruption of a loan customer's business
caused by year 2000 related problems. As of
13
<PAGE> 14
December 31, 1998, there appears to be no significant additional exposure to
loan losses due to year 2000 related issues. There is, however, no assurance
that customers will not experience a year 2000 related business interruption
resulting in a potentially material adverse effect on NSD Bancorp's financial
condition or results of operation. Management intends to continue its monitoring
and assessments throughout 1999 to mitigate any such losses.
INTEREST RATE SENSITIVITY, LIQUIDITY AND CASH FLOWS
The Corporation has an asset /liability management process in place to monitor
and control risks associated with changing interest rates and the potential
impact on future financial performance. Interest rate risk is managed by
analyzing the maturity and repricing relationships between interest earning
assets and interest bearing liabilities at specific points in time of "GAP"
analysis. Management, however, recognizes that a simplified GAP analysis may not
adequately reflect the degree to which assets and liabilities with similar
repricing characteristics react to changes in market interest rates. In
addition, repricing characteristics identified under a specific gap position may
vary significantly under different interest rate environments. Therefore,
simulation modeling is also performed to evaluate the extent and direction of
the Corporation's interest rate exposure under upward of downward changes in
interest rates.
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 wholesale borrowings and repurchase agreements.
Operating activities used net cash of $3,159,673 during the first quarter of
1999, compared to providing cash of $1,408,772 during the first quarter of 1998.
The primary source of operating cash flows for 1999 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 net cash of $15,997,052 during the first quarter of
1999, compared to providing cash of $8,907,051 during the first quarter of 1998.
A significant portion of borrowings were invested in investment securities
available for sale as part of an overall leverage strategy. Proceeds from the
sales, repayments and maturities of investment securities available for sale and
held to maturity were reinvested primarily in investment securities available
for sale although some cash was used to fund loan growth.
Financing activities provided cash of $11,249,101 and $3,883,735 for the first
quarters of 1999 and 1998, respectively. A net increase in total borrowed funds
provided cash and was used by a decrease in total deposits, payment of cash
dividends to shareholders and purchases of treasury stock.
14
<PAGE> 15
Part II - Other Information
Items 1-5. Not applicable pursuant to the instructions to Part II.
Item 6. Exhibits and Reports on Forms 8-K.
(a) Exhibits
27 Financial Data Schedule
15
<PAGE> 16
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NSD BANCORP, INC.
-----------------
(Registrant)
Dated: May 14, 1999 /s/ LLOYD G. GIBSON
------------------------------------
Lloyd G. Gibson
President and Chief
Executive Officer
Dated: May 14, 1999 /s/ JAMES P. RADICK
------------------------------------
James P. Radick
Senior Vice President
and Treasurer (Principal
Financial and Accounting
Officer)
16
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL INFORMATION INCORPORATED BY REFERENCE TO THE 1999 FIRST
QUARTER INCORPORATE FINANCIAL REVIEW AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,370,471
<INT-BEARING-DEPOSITS> 220,610,395
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,372,848
<INVESTMENTS-CARRYING> 105,668,206
<INVESTMENTS-MARKET> 3,621,208
<LOANS> 235,623,592
<ALLOWANCE> 2,846,663
<TOTAL-ASSETS> 364,636,446
<DEPOSITS> 276,238,255
<SHORT-TERM> 11,900,000
<LIABILITIES-OTHER> 7,134,172
<LONG-TERM> 37,000,000
0
0
<COMMON> 2,872,580
<OTHER-SE> 29,491,439
<TOTAL-LIABILITIES-AND-EQUITY> 364,636,446
<INTEREST-LOAN> 4,718,109
<INTEREST-INVEST> 1,471,783
<INTEREST-OTHER> 18,563
<INTEREST-TOTAL> 6,208,455
<INTEREST-DEPOSIT> 2,123,818
<INTEREST-EXPENSE> 2,584,230
<INTEREST-INCOME-NET> 3,624,225
<LOAN-LOSSES> 210,000
<SECURITIES-GAINS> 69
<EXPENSE-OTHER> 2,210,455
<INCOME-PRETAX> 1,595,647
<INCOME-PRE-EXTRAORDINARY> 1,046,397
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,046,397
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 4.43
<LOANS-NON> 690,881
<LOANS-PAST> 914,620
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (2,756,502)
<CHARGE-OFFS> 137,280
<RECOVERIES> 17,441
<ALLOWANCE-CLOSE> (2,846,663)
<ALLOWANCE-DOMESTIC> (2,846,663)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 533,000
</TABLE>
