<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, 1998.
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from to .
------------- --------------
Commission File No. 0-22124
-------
NSD Bancorp, Inc.
-----------------
(Exact name of Registrant as specified in its charter)
Commonwealth of Pennsylvania 25-1616814
(State or other jurisdiction of (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)
<TABLE>
<CAPTION>
<S> <C>
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange 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 (ss.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, 1999, was $65,336,330.
The number of shares outstanding of the Registrant's Common Stock as of March 2,
1999 was 2,840,710.
Documents Incorporated By Reference:
Portions of the Registrant's Annual Report to Shareholders for the year ended
December 31, 1998 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 27, 1999, 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, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I
Item 1. Business 1
Item 2. Properties 2
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 3
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 3
Item 6. Selected Financial Data 3
Item 7. Management's Discussion and Analysis of Financial condition
and Results of Operations 3
Item 7a. Quantitative and Qualitative Disclosure About Market Risk 3
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 4
Item 11. Executive Compensation 4
Item 12. Security Ownership of Certain Beneficial Owners and
Management 4
Item 13. Certain Relationships and Related Transactions 4
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 4
Signatures 6
</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, 1998, the
Corporation had total assets, deposits and shareholders' equity of $357,167,992,
$280,115,160 and $32,394,365, respectively. Full-time equivalent employees of
the Corporation were 137 at December 31, 1998.
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, 1998. 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 1998 Annual Report to Shareholders included in this Form 10-K
as Exhibit 13 which description is incorporated herein by reference.
1
<PAGE> 4
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 ten
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'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 September, 2005.
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 16066
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
2
<PAGE> 5
ITEM 3. LEGAL PROCEEDINGS
The Corporation is subject to a number of asserted and unasserted potential
legal claims encountered in the normal course of business. In the opinion of
both management and legal counsel, there is no present basis to conclude that
the resolution of these claims will have a material adverse effect on the
Corporation's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Corporation to its shareholders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's Common Stock is traded on the NASDAQ National Market System
under the symbol NSDB. The information set forth under the captions "Regulatory
Restrictions" and "Sales Price and Cash Dividends per Share" on pages 19 and 37,
respectively, of the 1998 Annual Report is incorporated herein by reference. As
of March 16, 1999, the Corporation had 437 shareholders of its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference is the information presented on pages 25 and 28 of the
1998 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 27 to 39 of the
1998 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Incorporated by reference to the information presented on pages 37 to 38 of the
1998 Annual Report attached as Exhibit 13 hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference is the information presented on pages 4 to 26 of the
1998 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
3
<PAGE> 6
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 27, 1999.
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
27, 1999.
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 27,
1999.
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 27,
1999.
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 8-25
Independent Auditor's Report, page 26
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.
4
<PAGE> 7
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 1998 Annual Report, attached as
Exhibit 13, hereto.)
13. 1998 Annual Report to Shareholders is presented within.
21. Subsidiaries of the Registrant are presented within.
23.1 Consent of Deloitte & Touche LLP, Independent Certified
Public Accountants is presented within.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Certified
Public Accountants is presented within.
REPORTS ON FORM 8-K
None.
5
<PAGE> 8
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)
Dated: March 26, 1999 By /S/ Lloyd G. Gibson
---------------------------
Lloyd G. Gibson
President and Chief
Executive Officer
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 26, 1999:
<TABLE>
<CAPTION>
<S> <C>
/S/ Lawrence R. Gaus Lawrence R. Gaus, Chairman of the Board, Director
- ---------------------------------
/S/ Lloyd G. Gibson Lloyd G. Gibson, President and Chief Executive
- --------------------------------- Officer, Director
(Principal Executive Officer)
/S/ James P. Radick James P. Radick, Treasurer
- --------------------------------- (Principal Financial and Accounting Officer)
/S/ William R. Baierl William R. Baierl, Director
- ---------------------------------
/S/ Grant A. Colton Jr. Grant A. Colton, Jr., Director
- ---------------------------------
/S/ Nicholas C. Geanopulos Nicholas C. Geanopulos, Director
- ---------------------------------
/S/ Charles S. Lenzner Charles S. Lenzner, Director
- ---------------------------------
/S/ Kenneth L. Rall Kenneth L. Rall, Director
- ---------------------------------
/S/ Arthur J. Rooney II Arthur J. Rooney, II, Director
- ---------------------------------
</TABLE>
6
<PAGE> 1
Exhibit 13
NSD Bancorp
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 19,778,095 $ 13,638,396
Federal Funds Sold 2,500,000 2,000,000
Investment Securities Available for Sale at Market Value
(Amortized Cost of $90,125,932 at December 31, 1998 and
$55,290,512 at December 31, 1997) 92,789,341 58,179,424
Investment Securities Held to Maturity at Amortized Cost
(Market Value of $3,621,208 at December 31, 1998 and
$5,459,499 at December 31, 1997) 3,437,580 5,287,319
Loans Held for Sale 3,995,483 3,419,440
Loans, Net of Deferred Fees 230,937,044 233,039,784
Unearned Income (1,984,393) (1,290,389)
Reserve for Loan Losses (2,756,502) (2,914,329)
- ------------------------------------------------------------------------------------------
Loans, Net 226,196,149 228,835,066
Premises and Equipment, Net 2,728,434 3,095,629
Accrued Interest Receivable 2,115,343 2,116,439
Other Real Estate Owned and Assets Held for Sale 306,620 369,416
Other Assets 3,320,947 3,388,441
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $357,167,992 $320,329,570
==========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing $ 60,317,643 $ 57,112,908
Interest Bearing 219,797,517 211,613,706
- ------------------------------------------------------------------------------------------
Total Deposits 280,115,160 268,726,614
Borrowed Funds:
Advances from Federal Home Loan Bank and Other Borrowings 33,000,000 15,000,000
- ------------------------------------------------------------------------------------------
Total Borrowed Funds 33,000,000 15,000,000
Accrued Interest Payable 4,977,580 4,783,086
Other Liabilities 6,680,887 1,480,299
- ------------------------------------------------------------------------------------------
Total Liabilities 324,773,627 289,989,999
Common Stock $1 Par Value; 10,000,000 shares authorized,
2,604,172 issued and 2,586,410 outstanding at December 31,
1998 and 2,586,999 issued and outstanding at December 31,
1997 2,604,172 2,586,999
Treasury Stock at cost, 17,762 shares at December 31, 1998 (457,950) --
Capital Surplus 7,885,041 7,644,860
Accumulated Other Comprehensive Income 1,757,851 1,906,683
Retained Earnings 20,605,251 18,201,029
- ------------------------------------------------------------------------------------------
Total Shareholders' Equity 32,394,365 30,339,571
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $357,167,992 $320,329,570
==========================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 2
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, Including Fees $19,495,192 $19,506,012 $17,518,046
Investment Securities:
Taxable 3,774,062 3,636,691 2,894,268
Tax-Exempt 257,182 443,534 725,016
Dividends 165,729 127,418 113,199
Interest Bearing Deposits 17,128 4,117 8,901
Federal Funds Sold 691,750 94,966 242,152
- -------------------------------------------------------------------------------------------------------
Total Interest Income 24,401,043 23,812,738 21,501,582
INTEREST EXPENSE
Deposits 8,889,771 9,129,539 8,107,572
Federal Funds Purchased and Repurchase Agreements -- 140,883 97,530
FHLB Advances and Other Borrowings 1,234,125 710,154 519,503
- -------------------------------------------------------------------------------------------------------
Total Interest Expense 10,123,896 9,980,576 8,724,605
Net Interest Income 14,277,147 13,832,162 12,776,977
Provision for Loan Losses 780,000 720,000 650,000
- -------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 13,497,147 13,112,162 12,126,977
- -------------------------------------------------------------------------------------------------------
OTHER INCOME
Net Investment Securities Gains 233,027 220,250 211,594
Service Fees 766,737 710,755 668,785
Other Operating Income 650,139 655,409 459,134
- -------------------------------------------------------------------------------------------------------
Total Other Income 1,649,903 1,586,414 1,339,513
OTHER EXPENSES
Salaries and Employee Benefits 4,273,754 4,153,371 4,015,567
Occupancy Expense 846,579 783,068 766,869
Equipment and Supplies 1,023,837 1,043,300 1,021,056
Data Processing 629,397 575,845 507,826
FDIC Insurance 37,492 40,233 2,000
Advertising 158,070 150,708 197,333
Other Operating Expenses 2,058,515 2,203,891 1,642,006
- -------------------------------------------------------------------------------------------------------
Total Other Expenses 9,027,644 8,950,416 8,152,657
Income Before Income Taxes 6,119,406 5,748,160 5,313,833
Provision for Income Taxes 1,951,715 1,843,450 1,624,344
- -------------------------------------------------------------------------------------------------------
NET INCOME 4,167,691 3,904,710 3,689,489
=======================================================================================================
Other Comprehensive Income, net of tax (148,831) 707,600 229,984
- -------------------------------------------------------------------------------------------------------
Net Comprehensive Income 4,018,860 4,612,310 3,919,473
NET INCOME PER COMMON SHARE (1)
Net Income--Basic $1.46 $1.38 $1.30
Net Income--Diluted $1.44 $1.37 $1.30
Common Dividends Declared and Paid Per Share $0.62 $0.60 $0.51
Weighted Average Shares Outstanding--Basic 2,852,409 2,837,420 2,837,195
Weighted Average Shares Outstanding--Diluted 2,896,279 2,857,511 2,840,541
</TABLE>
(1) Adjusted for a 10% stock dividend declared January 26, 1999, a 3-for-2 stock
split in 1997, a 5% stock dividend in 1997 and a 5% stock dividend in 1996.
See notes to consolidated financial statements.
5
<PAGE> 3
NSD Bancorp
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,167,691 $ 3,904,710 $ 3,689,489
Adjustments to Net Income:
Provision for Loan Losses 780,000 720,000 650,000
Gain on Sale of Investment Securities Available for Sale (233,027) (220,250) (211,594)
(Gain) Loss on Sale of Other Assets (90,075) 6,250 3,321
Gain on Loan Sales -- -- (14,614)
Loss (Gain) on Disposition of Premises and Equipment 6,270 (168,462) --
Depreciation and Amortization 623,339 644,399 490,463
Net Premium Amortization (Discount Accretion) 32,019 60,835 (164,466)
(Benefit) Provision for Deferred Income Taxes 23,289 (138,915) 83,577
Decrease (Increase) in Accrued Interest Receivable 1,096 (124,043) (177,180)
Increase in Accrued Interest Payable 194,493 231,294 645,835
Decrease (Increase) in Other Assets 7,309 (236,904) (640)
Deferred Loan Fees, Net (65,969) (18,430) (37,450)
Increase (Decrease) in Other Liabilities 5,127,479 19,061 (45,834)
- --------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 10,573,914 4,679,545 4,910,907
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Investment Securities Available for
Sale 11,028,644 13,938,578 10,888,662
Proceeds from Repayments and Maturities of Investment
Securities Available for Sale 40,884,132 16,929,934 17,651,474
Proceeds from Repayments and Maturities of Investment
Securities Held to Maturity 1,856,000 4,041,000 1,575,000
Purchases of Investment Securities (86,553,449) (32,197,537) (40,036,313)
Proceeds from Sales of Other Real Estate Owned 913,168 318,124 --
Net Decrease (Increase) in Loans 586,154 (22,958,922) (28,085,772)
Proceeds from Loan Sales -- -- 1,475,996
Premium on Deposit Account Acquisition -- -- (883,005)
(Purchases) Dispositions of Premises and Equipment, Net (73,345) 318,388 (364,513)
- --------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (31,358,696) (19,610,435) (37,778,471)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Demand and Savings Accounts 9,809,702 8,140,836 34,181,574
Net Increase (Decrease) in Certificates of Deposit 1,578,844 (401,027) 6,676,873
Net Increase (Decrease) in Repurchase Agreements -- (1,911,184) 88,751
Proceeds from Borrowings 29,000,000 20,500,000 4,960,000
Repayments of Borrowings (11,000,000) (15,060,000) (2,780,000)
Proceeds from the Exercise of Common Stock Options 257,354 117,247 --
Cash Dividends Paid in Lieu of Fractional Shares -- (11,499) (4,758)
Treasury Stock Purchased (457,950) -- --
Cash Dividends Paid (1,763,469) (1,698,741) (1,458,316)
- --------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 27,424,481 9,675,632 41,664,124
- --------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 6,639,699 (5,255,258) 8,796,560
Cash and Cash Equivalents at Beginning of Year 15,638,396 20,893,654 12,097,094
- --------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 22,278,095 $ 15,638,396 $ 20,893,654
========================================================================================================
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, the Corporation paid
interest of $9,929,402, $9,749,282 and $8,077,378 and income taxes of
$1,957,715, $1,811,450 and $1,703,512, respectively. Non-cash investing activity
consisted of transfers of loans in liquidation to foreclosed assets of
approximately $763,000 for 1998, $261,000 for 1997 and $328,000 for 1996.
See notes to consolidated financial statements.
6
<PAGE> 4
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Other
Common Treasury Capital Comprehensive Retained
Stock Stock Surplus Income Earnings
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 1,559,849 -- $ 4,593,891 $ 969,099 $ 17,741,015
Net Income -- -- -- -- 3,689,489
Stock Dividend 77,781 -- 1,672,291 -- (1,750,072)
Cash Paid in Lieu of Fractional
Shares -- -- -- -- (4,758)
Cash Dividends Declared ($.51 per
share)(1) -- -- -- -- (1,458,316)
Change in Unrealized Appreciation
(Depreciation) in Securities
Available for Sale, net of tax -- -- -- 229,984 --
- -----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 1,637,630 -- 6,266,182 1,199,083 18,217,358
Net Income -- -- -- -- 3,904,710
Stock Dividend 81,656 -- 2,129,143 -- (2,210,799)
Stock Split 859,503 -- (859,503) -- --
Cash Paid in Lieu of Fractional
Shares -- -- -- -- (11,499)
Cash Dividends Declared ($.60 per
share)(1) -- -- -- -- (1,698,741)
Stock Options Exercised, Net of Tax
Benefit 8,210 -- 109,038 -- --
Change in Unrealized Appreciation
(Depreciation) in Securities
Available for Sale, net of tax -- -- -- 707,600 --
- -----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 2,586,999 -- 7,644,860 1,906,683 18,201,029
Net Income -- -- -- -- 4,167,691
Cash Dividends Declared ($.62 per
share)(1) -- -- -- -- (1,763,469)
Stock Options Exercised, Net of Tax
Benefit 17,173 -- 240,181 -- --
Treasury Stock Purchased (17,762
shares) -- $ (457,950) -- -- --
Change in Unrealized (Depreciation)
Appreciation in Securities
Available for Sale, net of tax -- -- -- (148,832) --
- -----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 2,604,172 $ (457,950) $ 7,885,041 $ 1,757,851 $ 20,605,251
===========================================================================================================
</TABLE>
(1) Adjusted for 10% stock dividend declared January 26, 1999, a 3-for-2 stock
split in 1997, a 5% stock dividend in 1997 and a 5% stock dividend in 1996.
See notes to consolidated financial statements.
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 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 principals 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, securities available for sale and
trading securities.
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.
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 the aggregate unrealized holding gains and losses reported, net of
tax effect, as a separate component of shareholders' equity.
The Corporation's investment policy specifically prohibits the existence of a
trading account portfolio.
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 (losses). Realized gains and
losses are computed principally under the specific identification method.
LOANS HELD FOR SALE:
At December 31, 1998 and December 31, 1997, loans held for sale were comprised
entirely of student loans. These loans are carried at the lower of cost or
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 loan losses. The reserve is increased by provisions
charged to expense and reduced by loan losses net of recoveries. The amount
8
<PAGE> 6
- --------------------------------------------------------------------------------
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.
Within the context of Statement of Financial Accounting Standards (SFAS) 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.
SFAS No. 114 does not apply to large groups of smaller balance, homogenous 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 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 from temporary differences between financial and
tax reporting. 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 statutory tax rates.
INTANGIBLE ASSETS:
Included in other assets is a deposit premium of approximately $529,803 and
$706,404, net of accumulated amortization, at December 31, 1998 and 1997,
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.
9
<PAGE> 7
NSD Bancorp
- --------------------------------------------------------------------------------
CASH EQUIVALENTS:
The Corporation has defined cash equivalents as cash and due from banks and
federal funds sold.
EARNINGS PER SHARE:
The Corporation adopted 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 10% stock dividend declared January 26, 1999, a 3-for-2 stock split in
1997, a 5% stock dividend in 1997 and a 5% stock dividend in 1996.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, SFAS No. 131, "Disclosure About Segments of an Enterprise and
Related Information" was issued. This standard redefines how operating segments
are determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Corporation has determined
that it only has one operating segment which is the operation of a bank.
Therefore, the Corporation will not be presenting any further segment
information.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It applies to all
entities and requires that any entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. Under SFAS No. 133, the change in fair value is
reflected in the income statement or as an element of other comprehensive
income. Management is currently in the process of evaluating the impact of this
statement on the consolidated financial statements.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued which
requires businesses to disclose comprehensive income and its components in their
general-purpose financial statements. This standard requires the reporting of
all items of comprehensive income in a financial statement that is displayed
with the same prominence as other financial statements. This statement is
effective for fiscal years beginning after December 15, 1997, with
reclassification of comparative financial statements, and is applicable to
interim periods. The Corporation has chosen to disclose comprehensive income in
the income statement, in which the components of comprehensive income are
displayed net of income taxes.
10
<PAGE> 8
- --------------------------------------------------------------------------------
The Corporation currently has one component of other comprehensive income which
is the change in unrealized gains (losses) on securities available for sale and
is detailed as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the
period $ 7,524 $1,292,371 $560,055
Less: reclassification adjustment for gain realized in
net income 233,027 220,250 211,594
- --------------------------------------------------------------------------------------------
Net unrealized (losses) gains (225,503) 1,072,121 348,461
- --------------------------------------------------------------------------------------------
Other Comprehensive Income (225,503) 1,072,121 348,461
Tax Expense (Income) at 34% (76,672) 364,521 118,477
- --------------------------------------------------------------------------------------------
Other Comprehensive Income, net $(148,831) $ 707,600 $229,984
============================================================================================
</TABLE>
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, 1998
-------------------------------------------------
Gross Unrealized
Holding
---------------------
Amortized Fair
Cost Gains Losses 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>
<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
Other Bonds -- -- -- --
Marketable Equity Securities 1,502,737 2,542,180 -- 4,044,917
- ----------------------------------------------------------------------------------------------
$55,290,512 $2,955,561 $ 66,649 $58,179,424
==============================================================================================
</TABLE>
11
<PAGE> 9
NSD Bancorp
- --------------------------------------------------------------------------------
A summary of investment securities held to maturity is as follows:
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------
Gross Unrealized
Holding
---------------------
Amortized Fair
Cost Gains Losses 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>
<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>
The amortized cost and estimated market value of the investment portfolio
available for sale and the investment portfolio held to maturity at December 31,
1998, 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 contractual maturity of the investment portfolio available for sale is as
follows:
<TABLE>
<CAPTION>
December 31, 1998
--------------------------
Amortized Fair
Cost Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 5,225,749 $ 5,253,206
After one year, within five years 10,831,056 10,859,294
After five years, within ten years 15,744,491 15,746,272
After ten years 58,324,636 60,930,569
- -------------------------------------------------------------------------------------
$90,125,932 $92,789,341
=====================================================================================
</TABLE>
The contractual maturity of the investment portfolio held to maturity is as
follows:
<TABLE>
<CAPTION>
December 31, 1998
--------------------------
Amortized Fair
Cost Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 600,000 $ 612,778
After one year, within five years 2,488,486 2,624,137
After five years, within ten years 349,094 384,293
After ten years -- --
- -------------------------------------------------------------------------------------
$ 3,437,580 $ 3,621,208
=====================================================================================
</TABLE>
The fair value of securities is based on quoted market prices or bid quotations
received from securities dealers. Proceeds from the sale of available for sale
securities during 1998, 1997 and 1996 were $11,028,644, $13,938,578 and
$10,888,662, respectively. Gross gains of $202,063, $233,835 and $240,969 and
gross losses of $319,
12
<PAGE> 10
- --------------------------------------------------------------------------------
$21,444 and $29,146 were realized on sales of available for sale securities in
1998, 1997 and 1996, respectively. There were no sales of investment securities
held to maturity in 1998, 1997 or 1996. Gross gains of $73,062, $8,062 and $123
in 1998, 1997 and 1996, respectively, and gross losses of $875, $202 and $351 in
1998, 1997 and 1996, respectively, were realized on calls of investment
securities. Investment securities with a total par value of $5,200,000 and
$6,200,000 at December 31, 1998 and 1997, respectively, were pledged as
collateral for public and trust funds 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, 1998 and 1997, the Corporation held
$1,650,000 and $910,100, respectively, of FHLB stock.
NOTE 3-LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Loans to Individuals $ 92,000,264 $ 95,357,873
Mortgage:
Non-Residential 28,060,867 29,385,042
Residential 52,695,286 55,125,240
Commercial, Financial, and Agricultural 40,445,049 37,831,540
Lines of Credit 5,376,848 5,487,417
Lease Financing 11,910,754 8,900,409
Nonaccrual Loans 785,360 1,355,617
- ------------------------------------------------------------------------------------
Total Loans 231,274,428 233,443,138
Deferred Fees (337,384) (403,354)
- ------------------------------------------------------------------------------------
Total Loans, net of Deferred Fees $230,937,044 $233,039,784
====================================================================================
</TABLE>
At December 31, 1998 and 1997, the Corporation had $813,677 and $1,213,225,
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 $68,929, $97,558 and $33,884 for
the years ended 1998, 1997 and 1996, respectively. The Corporation did not
record interest on any nonaccrual loans during 1998, 1997 or 1996.
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 had no recorded investment in loans for which impairment has been
recognized in accordance with SFAS No. 114 as of December 31, 1998. As of
December 31, 1997, this amount was $471,181 with a corresponding loan loss
reserve of $235,591. There were no loans considered impaired that have been
partially written down through charge-offs. The average recorded investment in
impaired loans was $217,468 and $574,362 during 1998 and 1997, respectively. The
Corporation did not recognize any interest on impaired loans during 1998. During
1997, approximately $2,500 of interest was recognized on impaired loans under
the accrual method (during the portion of the year which they were recognized as
impaired).
13
<PAGE> 11
NSD Bancorp
- --------------------------------------------------------------------------------
NOTE 4-RESERVE FOR LOAN LOSSES
The following is a summary of activity in the reserve for loan losses:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Year $2,914,329 $2,578,504 $2,676,362
Provision for Loan Losses 780,000 720,000 650,000
Losses Charged Against Reserve (974,348) (522,934) (842,911)
Recoveries on Loans Previously Charged-Off 36,521 138,759 95,053
- --------------------------------------------------------------------------------------------
Balance at End of Year $2,756,502 $2,914,329 $2,578,504
============================================================================================
</TABLE>
NOTE 5-PREMISES AND EQUIPMENT
Premises and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 671,987 $ 671,987
Buildings 1,943,873 1,943,873
Equipment 2,828,916 3,145,090
Leasehold Improvements 1,006,763 1,003,189
- ------------------------------------------------------------------------------------
6,451,539 6,764,139
Accumulated Depreciation (3,723,105) (3,668,510)
- ------------------------------------------------------------------------------------
Premises and Equipment, Net $2,728,434 $3,095,629
====================================================================================
</TABLE>
There were no significant gains or losses on disposals of premises and equipment
during 1998. During 1997, the Corporation sold land with a book value of
$325,908 for $492,908 resulting in a gain of $167,000 which has been included in
other operating income in the consolidated statement of income. Depreciation
expense, principally calculated using a straight-line method, was $434,271,
$440,764 and $421,763 in 1998, 1997 and 1996, respectively. The Corporation
leases certain offices under various operating leases. These leases contain
various renewal option periods extending through September, 2005. Certain leases
require adjustment of the rent based on 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>
1999 $298,115
2000 151,437
2001 136,118
2002 120,701
2003 78,961
thereafter 68,436
--------
$853,768
========
</TABLE>
Rental expense under all operating leases was $261,840, $250,386 and $209,667
for the years ended December 31, 1998, 1997 and 1996, respectively.
14
<PAGE> 12
- --------------------------------------------------------------------------------
NOTE 6-INCOME TAXES
The provision (benefit) for income taxes is composed of the following:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $1,909,711 $1,940,915 $1,523,768
State 18,715 41,450 16,999
Deferred 23,289 (138,915) 83,577
- ------------------------------------------------------------------------------------
$1,951,715 $1,843,450 $1,624,344
====================================================================================
</TABLE>
Reconciliations of the federal statutory and effective tax rates are as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
AMOUNT PERCENT Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal Statutory Tax Rate $2,080,598 34.0% $1,954,374 34.0% $1,806,703 34.0%
Tax-Exempt Interest Income (98,267) (1.6) (164,475) (2.9) (265,464) (5.0)
Interest Expense Disallowed 11,174 0.2 17,779 0.3 29,026 0.5
State Income Taxes 12,352 0.2 27,357 0.4 11,219 0.2
Other, Net (54,142) (0.9) 8,415 0.2 42,860 0.8
- ---------------------------------------------------------------------------------------------------------
$1,951,715 31.9% $1,843,450 32.0% $1,624,344 30.5%
=========================================================================================================
</TABLE>
The tax effects of deductible and taxable differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities,
respectively, are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Provision for Loan Losses $ 741,629 $ 795,290
Loan Origination Fees/Costs 34,510 43,973
Other 71,674 35,074
- ------------------------------------------------------------------------------------
Gross Deferred Tax Assets 847,813 874,337
Deferred Tax Liabilities:
Net Unrealized Holding Gains on
Securities Available for Sale 905,559 982,230
Bond Discount Accretion 95,643 61,354
Depreciation 70,771 92,291
Other 15,432 31,437
- ------------------------------------------------------------------------------------
Gross Deferred Tax Liabilities 1,087,405 1,167,312
- ------------------------------------------------------------------------------------
Net Deferred Tax Liabilities $ (239,592) $ (292,975)
====================================================================================
</TABLE>
Net deferred tax assets are classified as other assets and net deferred tax
liabilities are classified as other liabilities on the Consolidated Balance
Sheets.
NOTE 7-EMPLOYEE BENEFITS
The Corporation maintains a profit sharing retirement plan which covers
substantially all employees meeting minimum age and service requirements.
Expense for the profit sharing plan was $117,000 in 1998, $117,000 in 1997 and
$111,000 in 1996. During 1998, 1997 and 1996, respectively, the Corporation
expensed $58,001, $63,584 and $65,613 related to 401(k) plan matching
contributions.
15
<PAGE> 13
NSD Bancorp
- --------------------------------------------------------------------------------
Profit sharing assets are primarily invested in mutual funds which are selected
at the discretion of the employee. The plan was also invested in 9,724 shares of
NSD Bancorp, Inc. common stock with a market value of $255,255 at December 31,
1998. Total cash dividends received from plan investments in common stock of the
Corporation were $6,612 in 1998.
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 212,837
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 70,945
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 ten percent stock dividend declared January 26, 1999 for
holders of record on February 2, 1999, 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, 1998 , 1997 and 1996 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- -------------------------
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 100,928 $14.12 87,357 $13.06 62,176 $12.73
Granted 24,750 31.88 25,405 17.20 27,980 13.75
Exercised 18,889 13.62 9,031 12.98 -- --
Forfeited 330 31.47 2,802 12.65 2,800 12.72
- --------------------------------------------------------------------------------------------------------------------
Outstanding at End of Year 106,459 $18.28 100,929 $14.12 87,356 $13.06
Options Exercisable at Year-End 106,459 100,929 87,356
Weighted-Average Fair Value of
Options Granted During the
Year $13.89 $17.20 $ 6.13
====================================================================================================================
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
- -----------------------------------------------------------------------------------
Weighted-Average
Number Outstanding Remaining
Range of and Exercisable at Contractual Life Weighted-Average
Exercise Prices 12/31/98 (in Years) Exercise Price
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
$12.51-$13.23 44,186 6.2 $12.79
13.90 14,724 7.6 13.90
16.70-17.33 23,129 8.5 17.22
31.47-31.95 24,420 9.5 31.89
- -----------------------------------------------------------------------------------
$12.51-$31.95 106,459 7.7 $18.28
===================================================================================
</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
16
<PAGE> 14
- --------------------------------------------------------------------------------
stock option plan costs, determined based on the fair value at the grant date
for options granted under these plans consistent with SFAS No. 123, proforma net
income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
Reported Proforma
- -------------------------------------------------------------------------------------
<S> <C> <C>
Net Income
1998 $4,167,691 $3,940,793
1997 3,904,710 3,727,731
1996 3,689,489 3,576,261
Basic Earnings Per Share
1998 $1.46 $1.38
1997 1.38 1.31
1996 1.30 1.26
Diluted Earnings Per Share
1998 $1.44 $1.36
1997 1.37 1.30
1996 1.30 1.26
=====================================================================================
</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 the grant. The following
assumptions were used:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
EMPLOYEE Director Employee Director Employee Director
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk Free Interest Rate 5.56% 5.86% 6.15% 6.80% 6.82% 6.58%
Volatility 46.05% 46.48% 87.00% 87.00% 44.09% 46.77%
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 75% 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>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $ 5,919,061 $ 6,699,601
New Loans 1,392,957 701,809
Repayments (1,437,236) (1,482,349)
- -------------------------------------------------------------------------------------
Balance, December 31 $ 5,874,782 $ 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, 1998, there are various outstanding commitments to extend credit
of approximately $40,125,000 and standby letters of credit of approximately
$401,000. 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
17
<PAGE> 15
NSD Bancorp
- --------------------------------------------------------------------------------
other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Corporation evaluates each customer's creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including normal business activities, bond financing and similar transactions.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. The Corporation requires
collateral supporting those commitments as deemed necessary.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Corporation uses the same credit and collateral policies in
making commitments and conditional obligations as for all other lending.
Collateral for these types of commitments is similar to collateral obtained on
other commercial loans.
Additionally, the Corporation is subject to certain asserted and unasserted
potential claims encountered in the normal course of business. In the opinion of
management and legal counsel, neither the resolution of these 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, 1998,
a significant portion of the Corporation's "cash and due from banks" and
"federal funds sold" are 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, 1998. The fair value
of the fixed-maturity certificates of deposit is estimated using the
18
<PAGE> 16
- --------------------------------------------------------------------------------
rates currently offered as of December 31, 1998 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:
The fair value is estimated using the rates currently offered for borrowings
with similar terms and remaining maturities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL
GUARANTEES:
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
guarantees and letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties 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,
-----------------------------------------
1998 1997
------------------- -------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Federal Funds Sold $ 22,278 $ 22,278 $ 15,638 $ 15,638
Investment Securities 96,227 96,411 63,467 63,639
Loans 232,948 239,729 235,169 237,134
Less: Reserve for Loan Losses (2,757) -- (2,914) --
- ----------------------------------------------------------------------------------------------
$348,696 $358,418 $311,360 $316,411
==============================================================================================
Financial Liabilities:
Deposits $280,115 $281,072 $268,727 $268,934
Federal Home Loan Bank Borrowings 33,000 33,086 15,000 14,893
- ----------------------------------------------------------------------------------------------
$313,115 $314,158 $283,727 $283,827
==============================================================================================
Off-Balance Sheet Financial Instruments:
Commitments to Extend Credit $ 40,125 -- $ 27,971 --
==============================================================================================
</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 possible 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, 1998, that the Corporation meets all capital adequacy
requirements to which it is subject.
19
<PAGE> 17
NSD Bancorp
- --------------------------------------------------------------------------------
The Corporation and subsidiary were considered to be well capitalized under the
regulatory framework for prompt corrective action. To be considered 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.
The following represents tier I, total risk-based capital and leverage ratios
for the Corporation and also its subsidiary, Northside Bank, as of December 31,
1998 and 1997:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
---------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
NSD Bancorp, Inc.
Tier I Capital (to Risk Weighted
Assets) $30,106,711 12.36% $ 9,740,052 4.00% $14,610,077 6.00%
Total Capital (to Risk Weighted
Assets) 34,135,234 14.02 19,480,103 8.00 24,350,128 10.00
Tier 1 Capital (to Average Assets) 30,106,711 9.21 13,078,168 4.00 16,347,711 5.00
NorthSide Bank
Tier I Capital (to Risk Weighted
Assets) 29,095,457 12.15 9,578,703 4.00 14,368,055 6.00
Total Capital (to Risk Weighted
Assets) 31,993,021 13.36 19,157,406 8.00 23,946,758 10.00
Tier 1 Capital (to Average Assets) 29,095,457 8.98 12,964,175 4.00 16,205,218 5.00
As of December 31, 1997:
NSD Bancorp, Inc.
Tier I Capital (to Risk Weighted
Assets) 27,726,483 12.53 8,849,653 4.00 13,274,479 6.00
Total Capital (to Risk Weighted
Assets) 30,493,837 13.78 17,699,305 8.00 22,124,131 10.00
Tier I Capital (to Average Assets) 27,726,483 8.90 12,456,792 4.00 15,570,991 5.00
NorthSide Bank
Tier I Capital (to Risk Weighted
Assets) 26,687,786 12.11 8,813,936 4.00 13,220,904 6.00
Total Capital (to Risk Weighted
Assets) 29,444,116 13.36 17,627,873 8.00 22,034,841 10.00
Tier I Capital (to Average Assets) 26,687,786 8.64 12,358,235 4.00 15,447,794 5.00
</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, 1998,
the Corporation was required to maintain $2,454,000 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 by collateralized by specific obligations and cannot exceed 10%
of NorthSide Bank's capital. The maximum amount available to the Holding Company
at December 31, 1998 from NorthSide Bank in the form of dividends and loans,
individually, was approximately $24.9 million and $2.9 million, respectively.
NOTE 14-STOCK DIVIDENDS AND STOCK SPLITS
On January 26, 1999, the Corporation's Board of Directors declared a stock
dividend payable on March 3, 1999 to shareholders of record at February 1, 1999.
On November 27, 1997, the Corporation's Board of Directors declared a 3-for-2
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 stock
dividend payable on May 30, 1997 to shareholders of record at April 30, 1997.
On April 23, 1996, the Corporation's Board of Directors declared a stock
dividend payable on May 31, 1996 to shareholders of record at April 30, 1996.
Earnings per share and dividends per share have been restated to reflect all of
the above described stock dividends and stock splits.
20
<PAGE> 18
- --------------------------------------------------------------------------------
NOTE 15-TREASURY STOCK
In September of 1998, the Corporation's Board of Directors authorized the
repurchase of up to 4.9% 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 17,762 shares purchased during 1998.
NOTE 16-BORROWED FUNDS
Borrowed funds at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- -------------------------
Weighted Weighted
BALANCE Average Rate Balance Average Rate
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Advances Due In: 1998 -- -- $6,000,000 5.80%
1999 $ 1,000,000 5.19% 1,000,000 5.19
2002 8,000,000 5.50 8,000,000 5.48
2008 24,000,000 4.67 -- --
=================================================================================================
</TABLE>
Advances from the Federal Home Loan Bank (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.
At December 31, 1998, the Corporation had approximately $85.1 million in
available credit under its collateralized borrowing agreement with the Federal
Home Loan Bank.
NOTE 17-CONDENSED FINANCIAL INFORMATION OF NSD BANCORP, INC. (PARENT COMPANY
ONLY)
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------------------
BALANCE SHEET 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 635,060 $ 582,342
Securities Available for Sale at Market Value (Amortized
Cost of $389,508 at December 31, 1998 and $416,082 at
December 31, 1997) 2,902,751 2,714,297
Investment in Bank Subsidiary 30,015,120 27,405,844
Other Assets -- 66,932
- ----------------------------------------------------------------------------------------
Total Assets $33,552,931 $30,769,415
- ----------------------------------------------------------------------------------------
Liabilities
Accounts Payable $ -- $ 26,658
Deferred Tax Liability 867,816 781,393
- ----------------------------------------------------------------------------------------
Total Liabilities 867,816 808,051
Shareholders' Equity 32,685,115 29,961,364
- ----------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $33,552,931 $30,769,415
========================================================================================
</TABLE>
21
<PAGE> 19
NSD Bancorp
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
- ----------------------------------------------------------------------------------------------------
STATEMENT OF INCOME 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Dividends from Bank Subsidiary $ 1,766,404 $ 1,698,741 $ 1,458,316
Dividends from Securities Available for Sale 69,930 58,908 50,412
Net Investment Securities Gains (Losses) 201,942 179,391 180,829
Other Expenses 96,260 78,534 51,326
- ----------------------------------------------------------------------------------------------------
Income Before Taxes and Equity in Undistributed Net
Income of Bank Subsidiary 1,942,016 1,858,506 1,638,231
Provision for Income Taxes 5,395 11,450 17,321
- ----------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Net Income of
Bank Subsidiary 1,936,621 1,847,056 1,620,910
Equity in Undistributed Net Income of Bank Subsidiary 2,231,070 2,057,654 2,068,579
- ----------------------------------------------------------------------------------------------------
Net Income $ 4,167,691 $ 3,904,710 $ 3,689,489
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
- ----------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,167,691 $ 3,904,710 $ 3,689,489
Adjustments to Net Income
Equity in Undistributed Net Income of
Subsidiary (2,231,070) (2,057,654) (2,068,579)
(Increase) Decrease in Other Assets 66,932 (12,691) 17,670
Gains on Investment Securities (201,942) (179,391) (180,829)
Increase (Decrease) in Other Liabilities (13,345) 26,514 (831)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,788,266 1,681,488 1,456,920
- ----------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES
Proceeds from Sale of Investment Securities
Available for Sale 228,517 191,380 293,125
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Common Stock 257,354 117,247 --
Cash Dividends Paid (1,763,469) (1,698,741) (1,458,316)
Treasury Stock Purchased (457,950) -- --
Cash Dividends Paid in Lieu of Fractional Shares -- (11,499) (4,758)
- ----------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (1,964,065) (1,592,993) (1,463,074)
- ----------------------------------------------------------------------------------------------------
Net Increase in Cash 52,718 279,875 286,971
Cash at Beginning of Year 582,342 302,467 15,496
- ----------------------------------------------------------------------------------------------------
Cash at End of Year $ 635,060 $ 582,342 $ 302,467
====================================================================================================
</TABLE>
22
<PAGE> 20
- --------------------------------------------------------------------------------
NOTE 18-EARNINGS PER SHARE
Income and shares in thousands:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ---------------------------
Per Share Per Share Per Share
INCOME SHARES Amount Income Shares Amount Income Shares Amount
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per share:
Income available to
shareholders $4,168 2,852 $1.46 $3,905 2,837 $1.38 $3,689 2,837 $1.30
Effect of dilutive
securities:
Stock options -- 44 -- -- 21 -- -- 4 --
- --------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income Available to
shareholders $4,168 2,896 $1.44 $3,095 2,858 $1.37 $3,689 2,841 $1.30
====================================================================================================================
</TABLE>
'1994' 0.99
'1995' 1.18
'1996' 1.30
'1997' 1.38
'1998' 1.46
'1994' 7.73
'1995' 8.76
'1996' 9.63
'1997' 10.66
'1998' 11.39
23
<PAGE> 21
NSD Bancorp
- --------------------------------------------------------------------------------
NOTE 19-QUARTERLY EARNINGS SUMMARY (UNAUDITED)
Quarterly earnings for the years ended December 31, 1998 and 1997 are as follows
(in thousands):
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income $5,989 $6,035 $6,126 $6,251
Interest Expense 2,524 2,489 2,531 2,580
- --------------------------------------------------------------------------------------------------------
Net Interest Income 3,465 3,546 3,595 3,671
Provision for Loan Losses 195 195 195 195
- --------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan
Losses 3,270 3,351 3,400 3,476
Other Income 397 431 349 473
Other Expenses 2,294 2,260 2,239 2,234
- --------------------------------------------------------------------------------------------------------
Income Before Taxes 1,373 1,522 1,510 1,715
Income Taxes 423 497 486 546
- --------------------------------------------------------------------------------------------------------
Net Income $950 $1,025 $1,024 $1,169
========================================================================================================
Per Share: (1)
Net Income (basic) $0.33 $0.36 $0.36 $0.41
Dividends $.155 $.155 $.155 $.155
Weighted Average Shares Outstanding (basic) 2,852,433 2,852,433 2,860,092 2,844,679
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income $5,631 $5,975 $6,125 $6,083
Interest Expense 2,380 2,505 2,567 2,529
- --------------------------------------------------------------------------------------------------------
Net Interest Income 3,251 3,470 3,558 3,554
Provision for Loan Losses 150 180 195 195
- --------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan
Losses 3,101 3,290 3,363 3,359
Other Income 311 546(2) 321 408
Other Expenses 2,162 2,410(3) 2,210 2,169
- --------------------------------------------------------------------------------------------------------
Income Before Taxes 1,250 1,426 1,474 1,598
Income Taxes 398 441 509 496
- --------------------------------------------------------------------------------------------------------
Net Income $852 $985 $965 $1,102
========================================================================================================
Per Share (1)
Net Income (basic) $0.30 $0.35 $0.34 $0.39
Dividends $.144 $.152 $.152 $.151
Weighted Average Shares Outstanding (basic) 2,836,668 2,836,668 2,836,668 2,839,679
</TABLE>
- ---------------
(1) Adjusted for 10% stock dividend declared January 26, 1999, a 3-for-2 stock
split in 1997 and a 5% stock dividend in 1997.
(2) Includes gain of $167,000 recognized on the sale of land.
(3) Includes loss recognized on merchant credit card portfolio of approximately
$289,000.
24
<PAGE> 22
- --------------------------------------------------------------------------------
COMPARATIVE FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Interest Income $ 24,401,043 $ 23,812,738 $ 21,501,582 $ 19,405,880 $ 17,194,852
Interest Expense 10,123,896 9,980,576 8,724,605 7,485,431 5,867,068
- ------------------------------------------------------------------------------------------------------------------
Net Interest Income 14,277,147 13,832,162 12,776,977 11,920,449 11,327,784
Provision for Loan Losses 780,000 720,000 650,000 530,000 460,000
Other Income 1,649,903 1,586,414 1,339,513 1,741,691 792,263
Other Expense 9,027,644 8,950,416 8,152,657 7,958,632 7,884,226
- ------------------------------------------------------------------------------------------------------------------
Income Before Taxes 6,119,406 5,748,160 5,313,833 5,173,508 3,775,821
Income Taxes 1,951,715 1,843,450 1,624,344 1,500,556 964,446
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 4,167,691 $ 3,904,710 $ 3,689,489 $ 3,672,952 $ 2,811,375
==================================================================================================================
YEAR END BALANCES
- ------------------------------------------------------------------------------------------------------------------
Assets $357,167,992 $320,329,570 $305,413,560 $259,132,930 $242,071,525
Loans, net 234,932,527 236,459,224 214,049,576 188,653,465 172,000,399
Investment Securities 96,226,921 63,466,743 64,985,502 54,658,490 52,464,021
Deposits 280,115,160 268,726,614 260,986,805 220,243,135 213,766,664
Repurchase Agreements and Federal Funds
Purchased -- -- 1,911,184 1,822,433 1,382,156
FHLB Advances and Other Borrowings 33,000,000 15,000,000 9,560,000 7,380,000 780,000
Shareholders' Equity 32,394,365 30,339,571 27,320,253 24,863,854 21,949,369
Number of Shareholders 431 453 448 454 452
AVERAGE BALANCES
- ------------------------------------------------------------------------------------------------------------------
Assets $327,576,185 $312,219,530 $279,854,944 $248,746,561 $231,867,852
Loans 228,648,794 226,006,573 198,720,233 176,706,914 160,197,388
Investment Securities 68,665,948 66,767,405 60,999,113 52,489,567 53,512,045
Deposits 265,197,427 261,385,203 240,125,300 215,564,206 235,368,739
Repurchase Agreements and Federal Funds
Purchased -- 2,558,518 1,897,694 1,665,397 648,308
FHLB Advances and Other Borrowings 23,523,288 12,354,466 9,232,240 3,569,435 780,000
Shareholders' Equity 31,729,974 28,739,768 26,008,987 23,627,621 21,161,402
PER SHARE DATA (1)
- ------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $1.46 $1.38 $1.30 $1.29 $0.99
Basic Weighted Average
Shares Outstanding 2,852,409 2,837,420 2,837,195 2,837,560 2,837,835
Diluted Earnings Per Share $1.44 $1.37 $1.30 $1.29 $0.99
Diluted Weighted Average
Shares Outstanding 2,896,279 2,857,511 2,840,541 2,837,650 2,839,773
Dividends $ 0.61 $ 0.59 $0.51 $0.45 $0.26
Book Value $11.39 $10.66 $9.63 $8.76 $7.73
RATIOS
- ------------------------------------------------------------------------------------------------------------------
Return on Average Assets 1.27% 1.25% 1.32% 1.48% 1.21%
Return on Average Equity 13.13 13.59 14.19 15.55 13.29
Net Interest Margin (2) 4.69 4.81 5.01 5.31 5.47
Equity to Assets 9.07 9.47 8.95 9.60 9.07
Dividend Payout Ratio 42.31 43.50 39.53 35.32 26.68
</TABLE>
- ---------------
(1) Adjusted for a 10% stock dividend declared January 26, 1999, a 3-for-2 stock
split in 1997, a 5% stock dividend in 1997, a 5% stock dividend in 1996 and
a 4% stock dividend in 1994.
(2) Tax equivalent basis.
25
<PAGE> 23
NSD Bancorp
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
NSD Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of NSD Bancorp, Inc.
and subsidiary as of December 31, 1998, and the related consolidated statements
of income and comprehensive income, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of the
Corporation for the years ended December 31, 1997 and 1996, were audited by
other auditors whose report, dated January 26, 1998, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1998 consolidated financial statements present fairly, in
all material respects, the financial position of NSD Bancorp, Inc. and
subsidiary at December 31, 1998, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
January 29, 1999
26
<PAGE> 24
- --------------------------------------------------------------------------------
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 $4,167,691 or $1.46 (basic) per share in 1998, from
$3,904,710 or $1.38 in 1997 and $3,689,489 or $1.30 in 1996. Contributing to the
increase in net income were increases in net interest income of $444,985, net
investment securities gains of $12,777 and service fee income of $55,982 and
decreases in equipment and supplies expense of $19,463, FDIC insurance of $2,741
and other operating expenses of $145,376. These contributions to the overall
increase were offset by decreases in other operating income of $5,270 and
increases in the provision for loan losses of $60,000, salary and employee
benefits of $120,383, occupancy expense of $63,511, data processing costs of
$53,552, advertising of $7,362 and the provision for income taxes of $108,265.
Impacting 1997 earnings was a $289,000 loss recognized on the merchant credit
card portfolio and a $167,000 gain on the sale of land. Contributing to the
increase in 1997 net income over 1996 were increases in net interest income of
$1,055,185, net investment securities gains of $8,656, service fee income of
$41,970, other operating income of $196,275 (which includes the gain on sale of
land) and a decrease in advertising expense of $46,625. These contributions to
the overall increase were offset by increases in the provision for loan losses
of $70,000, equipment and supplies expense of $22,244, data processing costs of
$68,019, salary and employee benefits of $137,804 and the provision for income
taxes of $219,106.
Return on average assets (ROA) was 1.27% for 1998 compared to 1.25% for 1997 and
1.32% for 1996. Both the increase from 1997 to 1998 and the decrease from 1996
to 1997 is primarily due to the 1997 earnings being affected by the loss on the
merchant credit card portfolio offset by the gain on the sale of land. ROA
increased from 1997 to 1998 despite a decline in net interest margin from 4.81%
in 1997 to 4.69% in 1998. Return on average equity was 13.13% for 1998 compared
to 13.59% for 1997 and 14.19% for 1996. The decrease in ROE reflects the impact
of net interest margin compression and also higher average capital levels during
1998 compared to 1997.
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 $530,802 during 1998 as a result of a
$15,744,524 increase in average earning assets offset by a decline in average
yield on earning assets from 8.19% in 1997 to 7.95% in 1998. Interest expense on
deposits decreased $239,769 as a result of a decrease in the average cost of
deposits to 4.19% in 1998 from 4.30% in 1997. Interest expense on borrowings
increased $523,971 due to an increase of $11,168,822 in average outstanding
levels offset by a decrease in the average rate paid on such balances from 5.75%
in 1997 to 5.25% in 1998.
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
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 5.75% in 1997.
Net interest income was $14,559,710 at December 31, 1998, compared to
$14,171,227 at December 31, 1997 and $13,259,239 at December 31, 1996. This
consistent improvement has been largely due to increases in average earning
assets.
27
<PAGE> 25
NSD Bancorp
- --------------------------------------------------------------------------------
Average earning assets for 1998 were $310,544,813 compared to $294,800,289 and
$264,464,252 in 1997 and 1996, 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 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 1997 to 1998 From 1996 to 1997
--------------------------------- -----------------------------------
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 $ 43,278 $ (9,342) $ 33,936 $ (29,519) $ 4,851 $ (24,668)
All Other Loans 214,797 (248,016) (33,219) 2,386,457 (382,210) 2,004,247
- --------------------------------------------------------------------------------------------------------------
Total Loans 258,075 (257,358) 717 2,356,938 (377,359) 1,979,579
Investment Securities
Taxable 157,673 44,826 202,499 688,918 81,044 769,962
Tax-Exempt (291,946) 9,594 (282,352) (414,880) (11,609) (426,489)
- --------------------------------------------------------------------------------------------------------------
Total Investment Securities (134,273) 54,420 (79,853) 274,038 69,435 343,473
Due From Banks 13,087 67 13,154 (1,390) (5,518) (6,908)
Federal Funds Sold 587,009 9,775 596,784 (134,780) (12,406) (147,186)
- --------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets 723,898 (193,096) 530,802 2,494,806 (325,848) 2,168,958
Interest Bearing Liabilities
Interest Bearing Deposits Savings and
Interest Bearing Demand Deposits 92,001 (59,643) 32,358 376,097 67,309 443,406
Time Deposits (167,232) (104,895) (272,127) 309,807 269,054 578,861
- --------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits (75,231) (164,538) (239,769) 685,904 336,363 1,022,267
Federal Funds Purchased and
Repurchase Agreements (70,441) (70,441) (140,882) 41,555 1,798 43,353
FHLB Advances and Other Borrowings 596,356 (72,385) 523,971 181,054 9,597 190,651
- --------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 450,684 (307,364) 143,320 908,513 347,758 1,256,271
- --------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 273,214 $ 114,268 $ 387,482 $1,586,293 $(673,606) $ 912,687
==============================================================================================================
</TABLE>
(1) Tax exempt income on loans and investments and related yields are shown on a
fully tax equivalent basis computed using the statutory rate of 34%.
(2) For purposes of calculating loan yields, average loan balances include
nonaccrual loans.
28
<PAGE> 26
NSD Bancorp
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET/NET INCOME ANALYSIS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------ ------------------------------------ --------------------------
AVERAGE Average Average Average Average
BALANCE INTEREST Yield Balance Interest Yield Balance Interest
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans
Industrial Revenue
and Tax Exempt $ 1,047,119 $ 100,193 9.57% $ 604,370 $ 66,257 10.96% $ 875,839 $ 90,925
All Other Loans 227,601,675 19,429,064 8.54 225,402,203 19,462,283 8.63 197,844,394 17,458,036
- -----------------------------------------------------------------------------------------------------------------------------------
Total 228,648,794 19,529,257 8.54 226,006,573 19,528,540 8.64 198,720,233 17,548,961
Investment Securities
Taxable 64,210,313 4,055,801 6.32 58,961,980 3,853,302 6.54 48,392,511 3,083,340
Tax-Exempt 4,455,635 389,669 8.75 7,795,425 672,021 8.62 12,606,602 1,098,510
- -----------------------------------------------------------------------------------------------------------------------------------
Total 68,665,948 4,445,470 66,757,405 4,525,323 6.78 60,999,113 4,181,850
Due from Banks,
Interest Earning 571,441 17,128 3.00 134,777 3,974 2.94 157,515 10,882
Federal Funds Sold 12,658,630 691,750 5.46 1,901,534 94,966 4.99 4,587,391 242,152
- -----------------------------------------------------------------------------------------------------------------------------------
Total Earning
Assets 310,544,813 24,683,605 7.95 294,800,289 24,152,803 8.19 264,464,252 21,983,845
Reserve for Loan Losses (2,804,488) (2,771,915) (2,570,416)
Cash and Due From Banks 11,058,342 10,762,215 10,285,873
Premises and Equipment 2,928,189 3,368,864 3,712,094
Other Assets 5,849,328 6,060,077 3,963,141
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $327,576,184 $312,219,530 $279,854,944
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing
Deposits
Savings Deposits $ 37,620,135 $ 984,447 2.62% $ 37,025,880 $ 994,503 2.69% $ 37,750,180 $ 1,132,591
Interest Checking and
Money Market 82,908,733 2,593,271 3.13 80,482,448 2,550,857 3.17 67,611,775 1,969,363
Time Deposits 91,861,612 5,312,052 5.78 94,732,134 5,584,179 5.89 89,352,483 5,005,618
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest
Bearing
Deposits 212,390,480 8,889,770 4.19 212,240,462 9,129,539 4.30 194,714,438 8,107,572
Federal Funds Purchased
and Repurchase
Agreements -- -- -- 2,558,518 140,883 5.51 1,897,694 97,530
FHLB Advances and Other
Borrowings 23,523,288 1,234,125 5.25 12,354,466 710,145 5.75 9,232,240 519,503
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest
Bearing
Liabilities 235,913,768 10,123,895 4.29 227,153,446 9,980,567 4.39 205,844,372 8,724,605
Demand Deposits 52,806,947 49,144,741 45,410,862
Other Liabilities 7,125,495 7,181,575 2,590,723
Shareholders' Equity 31,729,974 28,739,768 26,008,987
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND
SHAREHOLDERS'
EQUITY $327,576,184 $312,219,530 $279,854,944
===================================================================================================================================
Net Interest Income
Interest Spread 3.66% 3.80%
Interest Margin 4.69% 4.81%
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1996
-------
Average
Yield
<S> <C>
- -----------------------------------
ASSETS
Loans
Industrial Revenue
and Tax Exempt 10.38%
All Other Loans 8.82
- -----------------------------------
Total 8.83
Investment Securities
Taxable 6.37
Tax-Exempt 8.71
- -----------------------------------
Total 6.86
Due from Banks,
Interest Earning 6.91
Federal Funds Sold 5.28
- -----------------------------------
Total Earning
Assets 8.31
Reserve for Loan Losses
Cash and Due From Banks
Premises and Equipment
Other Assets
- -----------------------------------
TOTAL ASSETS
===================================
LIABILITIES AND SHAREHO
Interest Bearing
Deposits
Savings Deposits 2.97%
Interest Checking and
Money Market 2.91
Time Deposits 5.60
- -----------------------------------
Total Interest
Bearing
Deposits 4.16
Federal Funds Purchased
and Repurchase
Agreements 5.14
FHLB Advances and Other
Borrowings 5.63
- -----------------------------------
Total Interest
Bearing
Liabilities 4.24
Demand Deposits
Other Liabilities
Shareholders' Equity
- -----------------------------------
TOTAL LIABILITIES
AND
SHAREHOLDERS'
EQUITY
===================================
Net Interest Income
Interest Spread 4.07%
Interest Margin 5.01%
- -----------------------------------
</TABLE>
NOTES:
(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 1998, 1997 and 1996.
29
<PAGE> 27
NSD Bancorp
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The Corporation's provision for loan losses was $780,000 in 1998, $720,000 in
1997 and $650,000 in 1996. The increase in the provision for loan losses was
primarily due to an increase in average loans during 1998. Net charge-offs for
1998 were $937,827, compared to $384,175 for 1997 and $747,858 in 1996.
Approximately $361,000 of the total charge-off amount for 1998 was attributable
to one customer. For additional information, see the Non-Performing Assets and
Reserve for Loan Losses sections of this discussion.
OTHER INCOME
Other income increased $63,489 from $1,586,414 in 1997 to $1,649,903. This
increase is attributable to an increase in net gains on the sale of investment
securities of $12,777 and an increase in service fees of $56,182 predominantly
due to increased efforts in the collection of NSF/overdraft fees which added
$35,454 to income over 1997. These increases were offset by a decrease in other
operating income of $5,270 which was mainly attributable to a one-time gain of
$167,000 on the sale of land in 1997. Offsetting the 1997 gain was the
introduction in 1998 of ATM surcharge fees which added $117,000 in other income
for 1998 over 1997 and an increase in gains on the sale of other assets of
$83,987 over 1997.
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 EXPENSES
Total other expenses increased $77,228 from $8,950,416 in 1997 to $9,027,644 in
1998. Salary and benefits increased $120,383 to $4,273,754 in 1998 from
$4,153,371 in 1997. Salary expense increased $55,773 due to normal inflation
adjustments and growth of the organization. Employee health insurance premiums
also increased $31,449. An increase in the employer portion of payroll taxes of
$9,194 corresponded to the increase in salary expense and an increase in
temporary employee expense of $34,331 also contributed to the overall increase.
Occupancy expense increased $63,511 from $783,068 in 1997 to $846,579 in 1998.
This increase is due almost entirely to an increase in real estate tax expense
of $74,180 which represents the establishment of an accrual of estimated annual
real estate tax expense. A slight increase in building rent of $11,454 also
contributed to the overall increase offset by decreases in insurance expense and
building maintenance of $7,225 and $14,377, respectively. Equipment and supplies
expense decreased $19,463 during 1998 which is primarily the result of decreases
in equipment maintenance contracts, stationary and supplies expense and vehicle
expense of $23,745, $11,875 and $4,541, respectively, offset by increases in
equipment repair expense and general office expense of $22,136 and $3,774,
respectively. Data processing expense increased $53,552 to $629,397 in 1998 from
$575,845 in 1997 which was the result of an increase in contractual monthly
costs assessed by the Corporation's primary data processor and continued
increases in ATM network charges. FDIC insurance expense decreased slightly to
$37,492 in 1998 from $40,233 in 1997 due to a decrease in premium on acquired
SAIF insured deposits. Advertising expense increased slightly to $158,070 in
1998 from $150,708 in 1997. Other operating expenses decreased $145,376 to
$2,058,515 in 1998 from $2,203,891 in 1997 due to the loss of approximately
$289,000 on the merchant credit card portfolio in 1997. Disregarding this loss,
other operating expenses increased approximately $144,000 over 1997. There were
several factors contributing to this amount. Most significant was a $25,460
increase to audit expense due to the cost of a 401(k) plan review and additional
accruals for anticipated charges. An increase in financial services expense of
$20,082 was due to establishing an annual report expense accrual and
correspondent bank service charges increased $10,521. The increase in average
shareholders' equity and average assets during 1998 resulted in additional
Pennsylvania shares tax of $20,436. With a more aggressive approach to reducing
loan delinquencies during 1998, the Corporation experienced a $12,712 increase
in asset recovery expenses. An increase in ATM losses of $10,150 can be largely
attributed to a branch office robbery during
30
<PAGE> 28
- --------------------------------------------------------------------------------
1998. These increases were offset by decreases in legal expense and deposit
premium amortization of $26,624 and $8,333, respectively.
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 $4,135,371 in 1997 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 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 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 in 1997 from $197,333 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, asset recovery
expense, demand deposit account losses and teller shortages of $33,396, $8,925,
$16,542 and $9,800, respectively.
INCOME TAXES
The Corporation recorded an income tax provision of $1,951,715, $1,843,450 and
$1,624,344 in 1998, 1997 and 1996, respectively. The increase in the tax
provision was the result of higher pretax earnings. The effective tax rates for
1998, 1997 and 1996 were 31.9%, 32.0% and 30.5% respectively. These rates were
below the 34% statutory tax rate primarily due to the tax benefits from
tax-exempt interest income. The increases in the effective tax rates during 1997
and 1996 were primarily the result of reduced tax-exempt earnings.
FINANCIAL CONDITION
The Corporation's total assets increased $36,838,422 from $320,329,570 at
December 31, 1997 to $357,167,992 at December 31, 1998. Securities available for
sale increased $34,609,917 while securities held to maturity decreased
$1,849,739. Loans available for sale increased to $3,995,483 at December 31,
1998 from $3,419,440 at December 31, 1997. The loans available for sale at
December 31, 1998 and 1997 were entirely comprised of student loans. Net loans
decreased from $228,835,066 at December 31, 1997 to $226,196,149 at December 31,
1998.
31
<PAGE> 29
NSD Bancorp
- --------------------------------------------------------------------------------
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, 1998 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 $5,225,749 5.60% -- -- -- -- -- --
Obligations of U.S.
Government Agencies -- -- $10,781,094 6.08% $13,994,327 6.18% $ 1,412,030 7.82%
Mortgage-Backed Securities -- -- -- -- 1,750,164 5.88 47,390,160 6.49
Obligations of State and
Political Subdivisions -- -- 49,962 6.22 -- -- 503,567 5.03
Other Bonds -- -- -- -- -- -- 6,802,815 6.29
Marketable Equity Securities -- -- -- -- -- -- 2,216,064 10.18
- -------------------------------------------------------------------------------------------------------------------
$5,225,749 5.60% $10,831,056 6.08% $15,744,491 6.14% $58,324,636 6.63%
===================================================================================================================
</TABLE>
The following summarizes the book value and weighted average yields of the
Corporation's securities held to maturity at December 31, 1998 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 $ 600,000 6.55% $ 2,488,486 6.01% $ 99,094 6.14% -- --
Other Bonds -- -- -- -- 250,000 7.88 -- --
- -------------------------------------------------------------------------------------------------------------------
$ 600,000 6.55% $ 2,488,486 6.01% $ 349,094 7.38% -- --
===================================================================================================================
</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 certain
dividend income in 1998.
32
<PAGE> 30
- --------------------------------------------------------------------------------
LOANS
Loans net of deferred fees, decreased $2,102,740 during 1998, from $233,039,784
at December 31, 1997 to $230,937,044 at December 31, 1998. Improved commercial
loan development efforts resulted in an increase of $2,613,509 in commercial,
financial and agricultural loans during 1998. Decreases in residential mortgage
loans, commercial mortgages and consumer loans of $2,429,954, $1,324,175 and
$3,357,609, respectively, were primarily due to higher prepayments resulting
from the low rate environment throughout the year. Offsetting these decreases
were increases in commercial loans and lease financing of $2,613,509 and
$3,010,345, respectively.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential Mortgage Loans $ 52,695,286 $ 55,125,240 $ 56,641,022 $ 35,830,068 $ 30,906,568
Non-residential Mortgage
Loans 28,060,867 29,385,042 29,470,461 29,897,560 28,283,368
Commercial, Financial and
Agricultural Loans 40,445,049 37,831,540 30,392,059 35,037,875 34,699,061
Consumer Loans to
Individuals 92,000,264 95,357,873 80,107,845 67,709,305 63,021,691
Lines of Credit 5,376,848 5,487,417 5,433,560 5,681,628 5,528,808
Lease Financing 11,910,754 8,900,409 8,248,698 8,797,060 8,171,420
Nonaccrual Loans 785,360 1,355,617 1,234,467 443,727 516,244
- ------------------------------------------------------------------------------------------------------
Total Loans 231,274,428 233,443,138 211,528,112 183,397,223 171,127,160
Deferred Fees (337,384) (403,354) (421,784) (459,234) (461,020)
- ------------------------------------------------------------------------------------------------------
Loans, Net of Deferred Fees 230,937,044 233,039,784 211,106,328 182,937,989 170,666,140
Unearned Income (1,984,393) (1,290,389) (1,212,814) (1,402,670) (1,517,598)
- ------------------------------------------------------------------------------------------------------
Total Loans, Net of
Unearned Income and
Fees 228,952,651 231,749,395 209,893,514 181,535,319 169,148,542
Allowance for Loan Losses (2,756,502) (2,914,329) (2,578,504) (2,676,352) (2,281,598)
- ------------------------------------------------------------------------------------------------------
Net Loans $226,196,149 $228,835,066 $207,315,010 $178,858,967 $166,866,944
======================================================================================================
</TABLE>
The following table shows the Corporation's loan maturities as of December 31,
1998 (in thousands).
<TABLE>
<CAPTION>
ONE YEAR AFTER ONE YEAR AFTER
AND LESS TO FIVE YEARS FIVE YEARS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Residential Mortgage Loans $ 1,969 $ 9,120 $41,606
Nonresidential Mortgage Loans 1,376 3,218 23,467
Commercial, Financial and Agricultural Loans 13,267 18,987 128
Consumer Loans to Individuals (net of unearned income) 26,671 56,880 8,448
Lease Financing (net of unearned income) 2,445 5,914 1,568
- ------------------------------------------------------------------------------------------------------
</TABLE>
NON-PERFORMING ASSETS
At December 31, 1998, nonaccrual loans were $785,360, compared to $1,355,617 in
1997. The $570,257 decrease during 1998 was primarily the result of charged-off
loans related to one commercial customer. Other real estate owned increased
slightly to $191,552 in 1998 from $182,133 in 1997. Loans 90 days past due and
still accruing interest decreased $399,548 during 1998 and represent only .4% of
net loans at December 31, 1998.
33
<PAGE> 31
NSD Bancorp
- --------------------------------------------------------------------------------
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>
December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans $ 785,360 $1,355,617 $1,234,467 $ 443,727 $ 516,244
Other Real Estate Owned 191,552 182,133 371,982 43,966 221,770
Other Assets Held for Sale 115,069 187,283 60,705 31,775 18,137
- -------------------------------------------------------------------------------------------------------
Total Non-Performing Assets 1,091,981 1,725,033 1,667,154 519,468 756,151
Loans 90 Days Past Due and Still
Accruing 813,677 1,213,225 615,466 801,743 802,552
- -------------------------------------------------------------------------------------------------------
Total Non-Performing Assets and
Past Due Loans $1,905,658 $2,938,258 $2,282,620 $1,321,211 $1,558,703
=======================================================================================================
</TABLE>
RESERVE FOR LOAN LOSSES
The Corporation's policies provide for loan loss reserves to adequately protect
against potential unidentified and/or identified loan losses consistent with
sound and prudent banking practice. These policies consider historical data of
actual losses and loans classified by specific loan credit evaluation. They also
consider loan delinquency and economic conditions.
The Corporation follows a loan review program to evaluate the credit risk in its
loan portfolio for substantially all loans greater than $50,000. Through the
loan review process, the Corporation maintains a classified account list which,
along with the delinquency list of loans, helps management assess the overall
quality of the loan portfolio and the adequacy of the reserve for loan losses.
Loans classified as "substandard" are those loans with clear and defined
weaknesses such as highly leveraged positions, unfavorable financial ratios,
uncertain repayment sources or poor financial condition, which may jeopardize
recoverability of the asset. Loans classified as "doubtful" are those loans
which have characteristics similar to substandard accounts but with an increased
risk that a loss may occur, or at least a portion of the loan may require a
charge-off if immediately liquidated. Although loans classified as substandard
do not duplicate loans classified as doubtful, both substandard and doubtful
loans include some loans that are delinquent or on nonaccrual status. As of
December 31, 1998, substandard loans totaled $890,129 and doubtful loans totaled
$393,793. All substandard and doubtful loans were designated as delinquent or
nonaccrual as of December 31, 1998.
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 requiring attention in the
short run or where pertinent ratios of the loan account have weakened to a point
that 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 while 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
reflect losses inherent in the loan portfolio and is based on historical
experience. The entire reserve for loan losses is available to absorb future
loan losses in any category.
34
<PAGE> 32
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------
% OF % of % of % of % of
AMOUNT TOTAL Amount Total Amount Total Amount Total Amount Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Financial and Agricultural
Loans $ 740 26.8% $ 926 31.8% $ 782 30.3% $ 969 36.2% $ 891 39.0%
Real Estate Mortgage Loans 320 11.6 320 11.0 358 13.9 388 14.5 385 16.9
Installment Loans 885 32.1 991 34.0 819 31.8 679 25.4 646 28.3
Lease Financing 277 10.0 239 8.2 229 8.9 180 6.7 136 6.0
Allocation to General Risk 535 19.4 438 15.0 391 15.1 460 17.2 224 9.8
- --------------------------------------------------------------------------------------------------------------------------
Total $2,757 $2,914 $2,579 $2,676 $2,282
==========================================================================================================================
</TABLE>
The Corporation's net charge-offs by loan type and changes in the reserve for
loan losses for each of the past five years were as follows (in thousands):
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for Loan Losses at Beginning of Year $2,914 $2,579 $2,676 $2,282 $1,866
Charge-offs:
Commercial, Financial, and Agricultural Loans 455 78 546 155 53
Real Estate Mortgage Loans -- 30 -- -- --
Installment Loans 483 367 261 322 168
Lease Financing 36 48 36 29 --
- ----------------------------------------------------------------------------------------------------
Total Charge-offs 974 523 843 506 221
Recoveries:
Commercial, Financial, and Agricultural Loans -- 94 5 329 72
Real Estate Mortgage Loans -- 2 2 2 2
Installment Loans 34 42 89 38 103
Lease Financing 3 -- -- 1 --
- ----------------------------------------------------------------------------------------------------
Total Recoveries 37 138 96 370 177
- ----------------------------------------------------------------------------------------------------
Net Charge-offs 937 385 747 136 44
Provision for Loan Losses 780 720 650 530 460
- ----------------------------------------------------------------------------------------------------
Reserve for Loan Losses at End of Year $2,757 $2,914 $2,579 $2,676 $2,282
====================================================================================================
Net Loan Charge-offs to Average Loans 0.41% 0.17% 0.38% 0.08% 0.03%
Loan Loss Reserve to Non-Performing Assets 252.43% 168.94% 154.67% 515.21% 301.74%
- ----------------------------------------------------------------------------------------------------
</TABLE>
LIABILITIES
Total liabilities were $324,773,627 at December 31, 1998, an increase of
$34,783,628 from December 31, 1997. The increases in total deposits and total
borrowed funds of $11,388,546 and $18,000,000, respectively, were used to fund
loan growth and to increase the investment portfolio as part of an overall
leverage strategy.
DEPOSITS
Total deposits increased $11,388,546 from $268,726,614 at December 31, 1997 to
$280,115,160 at December 31, 1998. Noninterest bearing and interest bearing
deposits increased during 1998 by $3,204,735 and $8,183,811 due to continued
emphasis on the development of small business relationships and strategic retail
deposit promotions.
35
<PAGE> 33
NSD Bancorp
- --------------------------------------------------------------------------------
Average deposits and the average cost of deposits for the past three years were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
AVERAGE Average Average Average Average Average
BALANCE Rate Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest Bearing Deposits $ 52,806,947 -- $ 49,144,741 -- $ 45,410,862 --
Interest Bearing Deposits 82,908,733 3.13% 80,482,448 3.17% 67,611,775 2.91%
Savings Deposits 37,620,135 2.62 37,025,880 2.69 37,750,180 3.00
Time Deposits 91,861,612 5.78 94,732,134 5.90 89,352,483 5.60
- ------------------------------------------------------------------------------------------------------------------
Total Deposits $265,197,427 3.35% $261,385,203 3.49% $240,125,300 3.38%
==================================================================================================================
</TABLE>
At December 31, 1998, outstanding Certificates of Deposit are scheduled to
mature as follows (in thousands):
<TABLE>
<CAPTION>
$100,000 and over Less than $100,000
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Three Months or Less $ 5,488 14,738
Over Three Months Through Six Months 1,622 9,628
Over Six Months Through Twelve Months 3,355 27,855
Over Twelve Months 3,674 27,415
- -------------------------------------------------------------------------------------------
Total $14,139 $79,636
===========================================================================================
</TABLE>
REPURCHASE AGREEMENTS
At December 31, 1998, the Corporation had no outstanding repurchase agreements.
FHLB ADVANCES AND OTHER BORROWED FUNDS
At December 31, 1998, the Corporation had outstanding borrowings of $33,000,000,
of which $1,000,000 is due during 1999. The Corporation borrowed these funds to
provide liquidity for specific asset-liability management strategies. At
December 31, 1998 and 1997, the entire amount of outstanding borrowings was made
up 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.
SHAREHOLDERS' EQUITY
Consolidated shareholders' equity increased $2,054,794 from $30,339,571 at
December 31, 1997 to $32,394,365 at December 31, 1998. This increase was the
result of earnings retention, the issuance of new shares of common stock for the
exercise of employee/director stock options offset by a decrease in net
unrealized holding gains on securities available for sale and 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, 1998 was 12.36% compared to 12.53% at
December 31, 1997. The Corporation's total risk-based capital ratio at December
31, 1998 was 14.02% compared to 13.78% at December 31, 1997. 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 10% stock dividend declared January 26, 1999 and payable on March 3,
1999 to shareholders
36
<PAGE> 34
- --------------------------------------------------------------------------------
of record on February 2, 1999, a 3-for-2 stock split paid on December 31, 1997
to shareholders of record on December 1, 1997 and a 5% stock dividend paid on
May 30, 1997 to shareholders of record on April 30, 1997.
<TABLE>
<CAPTION>
Sales Price Cash Dividends
--------------- Declared
High Low Per Share
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
First Quarter $31.95 $27.90 $0.155
Second Quarter 32.63 27.00 0.155
Third Quarter 32.85 23.40 0.155
Fourth Quarter 26.10 22.50 0.155
1997
First Quarter $17.00 $14.86 $0.144
Second Quarter 17.93 15.00 0.152
Third Quarter 20.55 16.50 0.152
Fourth Quarter 31.50 19.35 0.151
- -------------------------------------------------------------------------------
</TABLE>
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 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
37
<PAGE> 35
NSD Bancorp
- --------------------------------------------------------------------------------
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.
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, 1998
(in thousands):
<TABLE>
<CAPTION>
3 MONTHS OVER 3 TO OVER 6 TO OVER 1 TO OVER 5
OR LESS 6 MONTHS 12 MONTHS 5 YEARS YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans, Net of Unearned Income $ 44,819 $ 9,002 $ 18,077 $127,122 $ 31,172 $230,192
Securities Available for Sale 38,580 8,019 13,711 18,830 13,649 92,789
Securities Held to Maturity 200 200 200 2,489 349 3,438
Other Interest Earning Assets 2,500 -- -- -- -- 2,500
Noninterest Earning Assets -- -- -- -- 28,249 28,249
- -------------------------------------------------------------------------------------------------------------------
Total Assets $ 86,099 $ 17,221 $ 31,988 $148,441 $ 73,419 $357,168
===================================================================================================================
Interest Bearing Demand
Deposits $ 88,316 -- -- -- -- $ 88,316
Savings Deposits 37,707 -- -- -- -- 37,707
Time Deposits < $100,000 14,073 $ 10,312 $ 27,275 $ 25,206 $ 2,770 79,636
Time Deposits >$100,000 6,153 519 3,935 3,035 497 14,139
Other Borrowed Funds 8,000 5,000 13,000 7,000 -- 33,000
Other Liabilities -- -- -- -- 71,976 71,976
Shareholders' Equity -- -- -- -- 32,394 32,394
Total Liabilities and Shareholders' Equity $154,249 $ 15,831 $ 44,210 $ 35,241 $107,637 $357,168
===================================================================================================================
Period GAP $(68,150) $ 1,390 $(12,222) $113,200 $(34,218)
Cumulative GAP $(68,150) $(66,760) $(78,982) $ 34,218 $ --
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
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 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
38
<PAGE> 36
- --------------------------------------------------------------------------------
results of operation. Management intends to continue its monitoring and
assessments throughout 1999 to mitigate any such losses.
Non-information technology systems such as the elevator, HVAC, security systems
etc., have been reviewed to determine if there are 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.
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 wholesale borrowings and repurchase agreements.
Operating activities provided net cash of $10,573,914 during 1998, compared to
$4,679,545 and $4,910,907 for 1997 and 1996, respectively. The primary source of
operating cash flows for 1998 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 of $31,358,696 during 1998, compared to
$19,610,435 and $37,778,471 for 1997 and 1996, respectively. 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. Cash flows
from investing activities were primarily used to fund the growth in the loan
portfolio in 1997 and 1996.
Financing activities provided cash of $27,424,481, $9,675,632 and $41,664,124
during 1998, 1997 and 1996, respectively. Increases in demand deposits, savings
deposits, time deposits and borrowings provided cash while cash was used by
payment of cash dividends and the purchase of treasury stock. During 1997, an
increase in demand deposits, savings deposits and borrowings provided cash while
cash was used by payments of cash dividends, repayment of repurchase agreements
and a slight decrease in certificates of deposit. Net proceeds from borrowings
were used to fund growth in the investment portfolio during 1998 and loan growth
during 1997.
Certain information in this discussion and other statements contained in this
report which are not historical facts may be forward-looking statements that
involve risks and uncertainties. Such statements are subject to important
factors that could cause actual results to differ materially from those
contemplated by such statements, including without limitation, the effect of
changing regional and national economic conditions; changes in interest rates;
credit risks of commercial, real estate, consumer and other lending activities;
changes in federal and state regulations; the presence in the Corporation's
market area of competitors with greater financial resources than the Corporation
or other unanticipated external developments materially impacting the
Corporation's operational and financial performance.
39
<PAGE> 1
Exhibit 21
Subsidiaries of NSD Bancorp, Inc.
As of December 31, 1998
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 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-78220 and 33-78222 of NSD Bancorp, Inc. on Form S-8 of our report dated
January 29, 1999, appearing in this Annual Report on Form 10-K of NSD Bancorp,
Inc. for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 30, 1999
<PAGE> 1
PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
600 Grant Street
52nd Floor
Pittsburgh PA 15219-2777
Telephone (412) 355-8000
Facsimile (412) 355-8089
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
NSB Bancorp, Inc. on Forms S-8 (File Numbers 33-78220 and, 33-78222) of our
report dated January 26, 1998, on our audits of the consolidated financial
statements of NSB Bancorp, Inc. and subsidiary as of December 31, 1997, and for
each of the two years ended December 31, 1997, which report is included in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
--------------------------
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL INFORMATION INCORPORATED BY REFERENCE TO THE 1998 ANNUAL
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 19,778,095
<INT-BEARING-DEPOSITS> 219,797,517
<FED-FUNDS-SOLD> 2,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,437,580
<INVESTMENTS-CARRYING> 92,789,341
<INVESTMENTS-MARKET> 3,621,208
<LOANS> 232,948,135
<ALLOWANCE> 2,756,502
<TOTAL-ASSETS> 357,167,992
<DEPOSITS> 280,115,159
<SHORT-TERM> 1,000,000
<LIABILITIES-OTHER> 11,658,468
<LONG-TERM> 32,000,000
0
0
<COMMON> 2,604,172
<OTHER-SE> 29,790,193
<TOTAL-LIABILITIES-AND-EQUITY> 357,167,992
<INTEREST-LOAN> 19,495,192
<INTEREST-INVEST> 4,196,973
<INTEREST-OTHER> 708,878
<INTEREST-TOTAL> 24,401,043
<INTEREST-DEPOSIT> 8,889,770
<INTEREST-EXPENSE> 10,123,896
<INTEREST-INCOME-NET> 14,227,147
<LOAN-LOSSES> 780,000
<SECURITIES-GAINS> 233,027
<EXPENSE-OTHER> 9,027,643
<INCOME-PRETAX> 6,119,406
<INCOME-PRE-EXTRAORDINARY> 4,167,691
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,167,691
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.44
<YIELD-ACTUAL> 3.66
<LOANS-NON> 785,360
<LOANS-PAST> 1,905,658
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (2,914,329)
<CHARGE-OFFS> 974,348
<RECOVERIES> 36,521
<ALLOWANCE-CLOSE> (2,756,502)
<ALLOWANCE-DOMESTIC> (2,756,502)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 535,000
</TABLE>
