<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, 1999.
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
-----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K
---
The aggregate market value of Common Stock, $1.00 par value, held by
non-affiliates of March 2, 2000, was $50,193,288.
The number of shares outstanding of the Registrant's Common Stock as of March 2,
2000 was 2,788,516.
Documents Incorporated By Reference:
Portions of the Registrant's Annual Report to Shareholders for the year ended
December 31, 1999 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 25, 2000, 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, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <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, 1999, the
Corporation had total assets, deposits and shareholders' equity of $392,285,472,
$289,439,659 and $30,349,262, respectively. Full-time equivalent employees of
the Corporation were 143 at December 31, 1999.
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, 1999. 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 1999 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
management, 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 1999 Annual Report is incorporated herein by reference. As
of March 17, 2000, the Corporation had XXX shareholders of its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference is the information presented on pages 25 and 28 of the
1999 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 41 of the
1999 Annual Report.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Incorporated by reference to the information presented on pages 38 to 39 of the
1999 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
1999 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 25, 2000.
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
25, 2000.
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 25,
2000.
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 25,
2000.
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 1999 Annual Report, attached as Exhibit 13,
hereto.)
13. 1999 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.
27. Financial Data Schedule.
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 24, 2000 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 24, 2000:
/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/ Gus P. Georgiadis Gus P. Georgiadis, 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
- --------------------------
6
<PAGE> 1
Exhibit 13
NSD Bancorp
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 13,921,122 $ 19,778,095
Federal Funds Sold -- 2,500,000
Investment Securities Available for Sale at Market Value
(Amortized Cost of $105,667,201 at December 31, 1999 and
$90,125,932 at December 31, 1998) 103,253,784 92,789,341
Investment Securities Held to Maturity at Amortized Cost
(Market Value of $3,621,208 at December 31, 1998) -- 3,437,580
Loans Held for Sale 630,777 3,995,483
Loans, Net of Deferred Fees 269,192,709 230,937,044
Unearned Income (1,947,108) (1,984,393)
Reserve for Loan Losses (3,088,257) (2,756,502)
- ------------------------------------------------------------------------------------------
Loans, Net 264,157,344 226,196,149
Premises and Equipment, Net 2,850,773 2,728,434
Accrued Interest Receivable 2,209,494 2,115,343
Other Real Estate Owned and Assets Held for Sale 262,160 306,620
Other Assets 5,000,018 3,320,947
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $392,285,472 $357,167,992
==========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest Bearing $ 60,429,536 $ 60,317,643
Interest Bearing 229,010,123 219,797,517
- ------------------------------------------------------------------------------------------
Total Deposits 289,439,659 280,115,160
Borrowed Funds:
Federal Funds Purchased 3,700,000 --
Advances from Federal Home Loan Bank and Other Borrowings 62,650,000 33,000,000
- ------------------------------------------------------------------------------------------
Total Borrowed Funds 66,350,000 33,000,000
Accrued Interest Payable 4,534,488 4,977,580
Other Liabilities 1,612,063 6,680,887
- ------------------------------------------------------------------------------------------
Total Liabilities 361,936,210 324,773,627
Common Stock $1 Par Value; 10,000,000 shares authorized,
2,873,405 issued and 2,788,097 outstanding at December
31,1999 and 2,864,589 issued and 2,845,051 outstanding at
December 31, 1998 2,873,405 2,604,172
Treasury Stock at cost, 85,308 shares at December 31, 1999
and 17,762 shares at December 31, 1998 (1,879,310) (457,950)
Capital Surplus 13,625,727 7,885,041
Accumulated Other Comprehensive Income (1,589,023) 1,757,851
Retained Earnings 17,318,463 20,605,251
- ------------------------------------------------------------------------------------------
Total Shareholders' Equity 30,349,262 32,394,365
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $392,285,472 $357,167,992
==========================================================================================
</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,
-----------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, Including Fees $19,975,531 $19,495,192 $19,506,012
Investment Securities
Taxable 5,982,224 3,774,062 3,636,691
Tax-exempt 245,929 257,182 443,534
Dividends 243,450 165,729 127,418
Interest Bearing Deposits 41,496 17,128 4,117
Federal Funds Sold 30,505 691,750 94,966
- -------------------------------------------------------------------------------------------------------
Total Interest Income 26,519,135 24,401,043 23,812,738
INTEREST EXPENSE
Deposits 8,816,154 8,889,771 9,129,539
Federal Funds Purchased and Repurchase Agreements 143,045 -- 140,883
FHLB Advances and Other Borrowings 2,346,752 1,234,125 710,154
- -------------------------------------------------------------------------------------------------------
Total Interest Expense 11,305,951 10,123,896 9,980,576
Net Interest Income 15,213,184 14,277,147 13,832,162
Provision for Loan Losses 840,000 780,000 720,000
- -------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 14,373,184 13,497,147 13,112,162
- -------------------------------------------------------------------------------------------------------
OTHER INCOME
Net Investment Securities Gains 265,822 233,027 220,250
Service Fees 923,797 766,737 710,755
Other Operating Income 608,893 650,139 655,409
- -------------------------------------------------------------------------------------------------------
Total Other Income 1,798,512 1,649,903 1,586,414
OTHER EXPENSES
Salaries and Employee Benefits 4,440,821 4,273,754 4,153,371
Occupancy Expense 831,442 846,579 783,068
Equipment and Supplies 1,110,108 1,023,837 1,043,300
Data Processing 707,550 629,397 575,845
FDIC Insurance 39,751 37,492 40,233
Advertising 166,536 158,070 150,708
Other Operating Expenses 1,999,618 2,058,515 2,203,891
- -------------------------------------------------------------------------------------------------------
Total Other Expenses 9,295,826 9,027,644 8,950,416
Income Before Income Taxes 6,875,870 6,119,406 5,748,160
Provision for Income Taxes 2,311,322 1,951,715 1,843,450
- -------------------------------------------------------------------------------------------------------
NET INCOME 4,564,548 4,167,691 3,904,710
=======================================================================================================
Other Comprehensive Income, net of tax (3,346,874) (148,831) 707,600
- -------------------------------------------------------------------------------------------------------
Net Comprehensive Income $ 1,217,674 $ 4,018,860 $ 4,612,310
NET INCOME PER COMMON SHARE (1)
Net Income--Basic $1.62 $1.46 $1.38
Net Income--Diluted $1.60 $1.44 $1.37
Common Dividends Declared and Paid Per Share $0.70 $0.62 $0.60
Weighted Average Shares Outstanding--Basic 2,819,117 2,852,409 2,837,420
Weighted Average Shares Outstanding--Diluted 2,845,773 2,896,279 2,857,511
</TABLE>
(1) Adjusted for a 10% stock dividend declared January 26, 1999, a 3-for-2 stock
split in 1997 and a 5% stock dividend in 1997.
See notes to consolidated financial statements.
5
<PAGE> 3
NSD Bancorp
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,564,548 $ 4,167,691 $ 3,904,710
Adjustments to Net Income:
Provision for Loan Losses 840,000 780,000 720,000
Gain on Sale of Investment Securities Available for Sale (265,822) (233,027) (220,250)
Loss (Gain)on Sale of Other Assets 29,855 (90,075) 6,250
Gain on Loan Sales (37,468) -- --
Loss (Gain) on Disposition of Premises and Equipment 63,449 6,270 (168,462)
Depreciation and Amortization 641,981 623,339 644,399
Net Premium Amortization 70,783 32,019 60,835
(Benefit) Provision for Deferred Income Taxes (10,454) 23,289 (138,915)
(Increase) Decrease in Accrued Interest Receivable (94,151) 1,096 (124,043)
(Decrease) Increase in Accrued Interest Payable (443,092) 194,493 231,294
(Increase) Decrease in Other Assets (315,627) 7,309 (236,904)
Deferred Loan Fees, Net 25,284 (65,969) (18,430)
(Decrease) Increase in Other Liabilities (4,830,996) 5,127,479 19,061
- --------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 238,290 10,573,914 4,679,545
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Investment Securities Available for
Sale 10,957,629 11,028,644 13,938,578
Proceeds from Repayments and Maturities of Investment
Securities Available for Sale 25,737,157 40,884,132 16,929,934
Proceeds from Repayments and Maturities of Investment
Securities Held to Maturity 1,171,667 1,856,000 4,041,000
Purchases of Investment Securities (49,775,103) (86,553,449) (32,197,537)
Proceeds from Sales of Other Real Estate Owned 509,463 913,168 318,124
Net (Increase) Decrease in Loans (32,209,819) 586,154 (22,958,922)
Proceeds from Loan Sales (3,746,811) -- --
(Purchases) Dispositions of Premises and Equipment, Net (651,168) (73,345) 318,388
- --------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (48,006,985) (31,358,696) (19,610,435)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Demand and Savings Accounts 4,612,801 9,809,702 8,140,836
Net Increase (Decrease) in Certificates of Deposit 4,711,698 1,578,844 (401,027)
Net Increase (Decrease) in Federal Funds Purchased and
Repurchase Agreements 3,700,000 -- (1,911,184)
Proceeds from Borrowings 47,650,000 29,000,000 20,500,000
Repayments of Borrowings (18,000,000) (11,000,000) (15,060,000)
Proceeds from the Exercise of Common Stock Options 133,996 257,354 117,247
Cash Dividends Paid in Lieu of Fractional Shares (4,102) -- (11,499)
Treasury Stock Purchased (1,421,360) (457,950) --
Cash Dividends Paid (1,971,311) (1,763,469) (1,698,741)
- --------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 39,411,722 27,424,481 9,675,632
- --------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Cash Equivalents (8,356,973) 6,639,699 (5,255,258)
Cash and Cash Equivalents at Beginning of Year 22,278,095 15,638,396 20,893,654
- --------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 13,921,122 $ 22,278,095 $ 15,638,396
========================================================================================================
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, the Corporation paid
interest of $11,749,044, $9,929,402 and $9,749,282 and income taxes of
$2,150,000, $1,957,715 and $1,811,450, respectively. Non-cash investing activity
consisted of transfers of loans in liquidation to foreclosed assets of
approximately $495,000, $763,000 and $261,000 during 1999, 1998, and 1997,
respectively, and also the transfer of $2,267,294 in held to maturity investment
securities to available for sale during 1999.
See notes to consolidated financial statements.
6
<PAGE> 4
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Common Treasury Capital Comprehensive Retained
Stock Stock Surplus Income (Loss) Earnings
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 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 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
Net Income -- -- -- -- 4,564,548
Stock Dividend 260,977 -- 5,614,946 -- (5,875,923)
Cash Paid in Lieu of Fractional Shares -- -- -- -- (4,102)
Cash Dividends Declared ($.70 per share)
(1) -- -- -- -- (1,971,311)
Stock Options Exercised, Net of Tax
Benefit 8,256 -- 125,740 -- --
Treasury Stock Purchased (67,546 shares) -- $(1,421,360) -- -- --
Change in Unrealized Depreciation in
Securities Available for Sale, net of
tax -- -- -- (3,346,874) --
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $2,873,405 $(1,879,310) $13,625,727 $(1,589,023) $17,318,463
================================================================================================================
</TABLE>
(1) Adjusted for a 10% stock dividend declared January 26, 1999, a 3-for-2 stock
split in 1997 and a 5% stock dividend in 1997.
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, 1999 and December 31, 1998, 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.
8
<PAGE> 6
- --------------------------------------------------------------------------------
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 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 term of the respective lease or the estimated useful life
of the improvement, 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 statutory tax rates.
INTANGIBLE ASSETS:
Included in other assets is a deposit premium of approximately $353,202 and
$529,803, net of accumulated amortization, at December 31, 1999 and 1998,
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
and a 5% stock dividend in 1997.
COMPREHENSIVE INCOME:
Components of comprehensive income are displayed in the income statement net of
income taxes. 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,
--------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the
period $(4,811,004) $ 7,524 $1,292,371
Less: reclassification adjustment for gain realized
in net income 265,822 233,027 220,250
- ---------------------------------------------------------------------------------------------
Net unrealized gains (losses) (5,076,826) (225,503) 1,072,121
- ---------------------------------------------------------------------------------------------
Other Comprehensive Income (5,076,826) (225,503) 1,072,121
Tax Expense (Benefit) at 34% (1,729,952) (76,672) 364,521
- ---------------------------------------------------------------------------------------------
Other Comprehensive Income, net $(3,346,874) $(148,831) $ 707,600
=============================================================================================
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133). 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. SFAS No. 133, as amended by SFAS No. 137, is effective for all quarters
of all fiscal years beginning after June 15, 2000. Management is currently in
the process of evaluating the impact of this statement on the consolidated
financial statements.
RECLASSIFICATIONS:
For comparative purposes, reclassifications have been made to certain amounts
previously reported in the Consolidated Financial Statements.
10
<PAGE> 8
- --------------------------------------------------------------------------------
NOTE 2-INVESTMENT SECURITIES
A summary of investment securities available for sale is as follows:
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------
Gross Unrealized
Holding
------------------------
Amortized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 3,708,419 $ -- $ 27,321 $ 3,681,098
Obligations of U.S. Government
Agencies 34,290,634 -- 1,547,835 32,742,799
Mortgage-Backed Securities 52,784,308 9,108 2,440,396 50,353,020
Obligations of State and Political
Subdivisions 4,126,696 20,965 253,381 3,894,280
Other Bonds 7,110,881 510 269,861 6,841,530
Marketable Equity Securities 3,646,263 2,094,794 -- 5,741,057
- --------------------------------------------------------------------------------------------
$105,667,201 $2,125,377 $4,538,794 $103,253,784
============================================================================================
</TABLE>
<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>
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>
During 1999, all investment securities previously classified as held to maturity
were transferred to available for sale as part of a strategy to enhance the
Corporation's liquidity position. Subsequent to the transfer to available for
sale, the Corporation sold $1,725,340 of securities that were previously
classified as held to maturity.
11
<PAGE> 9
NSD Bancorp
- --------------------------------------------------------------------------------
The amortized cost and estimated market value of the investment portfolio
available for sale at December 31, 1999, by contractual maturity, is 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, 1999
----------------------------
Amortized Fair
Cost Value
- ------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 1,029,587 $ 1,025,448
After one year, within five years 11,208,012 10,922,338
After five years, within ten years 28,138,110 26,898,431
After ten years 65,291,492 64,407,567
- ------------------------------------------------------------------------------------
$105,667,201 $103,253,784
====================================================================================
</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 1999, 1998 and 1997 were $10,957,629, $11,028,644 and
$13,938,578, respectively. Gross gains of $278,156, $202,063 and $233,835 and
gross losses of $12,922, $319 and $21,444 were realized on sales of available
for sale securities in 1999, 1998 and 1997, respectively. Gross gains of $588,
$73,062 and $8,062 in 1999, 1998 and 1997, respectively, and gross losses of
$875 and $202 in 1998 and 1997 , respectively, were realized on calls of
investment securities. There were no gross losses realized on calls of
investment securities during 1999. Investment securities with a total par value
of $3,700,000 and $5,200,000 at December 31, 1999 and 1998, 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, 1999 and 1998, the Corporation held
$3,182,500 and $1,650,000, respectively, of FHLB stock.
NOTE 3-LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Loans to Individuals $108,847,393 $ 92,000,264
Mortgage:
Nonresidential 47,730,294 28,060,867
Residential 47,823,758 52,695,286
Commercial, Financial and Agricultural 46,053,457 40,445,049
Lines of Credit 4,922,717 5,376,848
Lease Financing 13,399,797 11,910,754
Nonaccrual Loans 777,961 785,360
- ------------------------------------------------------------------------------------
Total Loans 269,555,377 231,274,428
Deferred Fees (362,668) (337,384)
- ------------------------------------------------------------------------------------
Total Loans, Net of Deferred Fees $269,192,709 $230,937,044
====================================================================================
</TABLE>
12
<PAGE> 10
- --------------------------------------------------------------------------------
At December 31, 1999 and 1998, the Corporation had $599,955 and $813,677,
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 $78,836, $68,929 and $97,558 for
the years ended 1999, 1998 and 1997, respectively. The Corporation did not
record interest on any nonaccrual loans during 1999, 1998 or 1997.
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 had been
recognized in accordance with SFAS No. 114 as of December 31, 1999 or 1998.
There were no loans considered impaired that have been partially written down
through charge-offs. There was no recorded investment in loans for which
impairment was recognized at any time during 1999, however, the average recorded
investment in impaired loans was $217,468 in 1998. The Corporation did not
recognize any interest on impaired loans during 1999 or 1998.
NOTE 4-RESERVE FOR LOAN LOSSES
The following is a summary of activity in the reserve for loan losses:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Year $2,756,502 $2,914,329 $2,578,504
Provision for Loan Losses 840,000 780,000 720,000
Losses Charged Against Reserve (554,095) (974,348) (522,934)
Recoveries on Loans Previously Charged-Off 45,850 36,521 138,759
- --------------------------------------------------------------------------------------------
Balance at End of Year $3,088,257 $2,756,502 $2,914,329
============================================================================================
</TABLE>
NOTE 5-PREMISES AND EQUIPMENT
Premises and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 472,801 $ 671,987
Buildings 1,943,873 1,943,873
Equipment 3,257,556 2,828,916
Leasehold Improvements 1,018,463 1,006,763
- -------------------------------------------------------------------------------------
6,692,693 6,451,539
Accumulated Depreciation (3,841,920) (3,723,105)
- -------------------------------------------------------------------------------------
Premises and Equipment, Net $ 2,850,773 $ 2,728,434
=====================================================================================
</TABLE>
During 1999, equipment with a book value of $164,263 was rendered obsolete
primarily due to Year 2000 related issues. As a result, total losses on
disposals of $164,063 were recorded during 1999. In addition, the Corporation
sold land with a book value of $199,186 for $300,000 resulting in a gain of
$100,814 which has been included in other operating income in the Consolidated
Statement of Income. 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 is
included in other operating income in the Consolidated Statement of Income.
Depreciation expense, principally calculated using a straight-line method, was
$465,380, $434,271 and $440,764 in 1999, 1998 and 1997, respectively. The
Corporation leases certain offices under various operating leases.
13
<PAGE> 11
NSD Bancorp
- --------------------------------------------------------------------------------
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>
2000 $ 316,773
2001 319,050
2002 303,633
2003 179,708
2004 98,035
thereafter 34,640
----------
$1,251,839
==========
</TABLE>
Rental expense under all operating leases was $274,854, $261,840 and $250,386
for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE 6-INCOME TAXES
The provision (benefit) for income taxes is composed of the following:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $2,280,776 $1,909,711 $1,940,915
State 41,000 18,715 41,450
Deferred (10,454) 23,289 (138,915)
- ------------------------------------------------------------------------------------
$2,311,322 $1,951,715 $1,843,450
====================================================================================
</TABLE>
Reconciliations of the federal statutory and effective tax rates are as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
AMOUNT PERCENT Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal Statutory Tax Rate $2,337,795 34.0% $2,080,598 34.0% $1,954,374 34.0%
Tax-exempt Interest Income (112,545) (1.6) (98,267) (1.6) (164,475) (2.9)
Interest Expense Disallowed 12,742 0.2 11,174 0.2 17,779 0.3
State Income Taxes 27,060 0.4 12,352 0.2 27,357 0.4
Other, Net 46,270 0.6 (54,142) (0.9) 8,415 0.2
- ---------------------------------------------------------------------------------------------------------
$2,311,322 33.6% $1,951,715 31.9% $1,843,450 32.0%
=========================================================================================================
</TABLE>
14
<PAGE> 12
- --------------------------------------------------------------------------------
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,
--------------------------
1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Net Unrealized Holding Losses on Securities Available
for Sale $ 818,588 $ --
Provision for Loan Losses 854,426 741,629
Loan Origination Fees/Costs 25,882 34,510
Other 108,273 71,674
- ------------------------------------------------------------------------------------
Gross Deferred Tax Assets 1,807,169 847,813
Deferred Tax Liabilities:
Net Unrealized Holding Gains on Securities Available
for Sale -- 905,559
Bond Discount Accretion 153,848 95,643
Depreciation 41,127 70,771
Other 10,288 15,432
- ------------------------------------------------------------------------------------
Gross Deferred Tax Liabilities 205,263 1,087,405
- ------------------------------------------------------------------------------------
Net Deferred Tax Assets (Liabilities) $1,601,906 $ (239,592)
====================================================================================
</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 $136,000 in 1999, $117,000 in 1998 and
$117,000 in 1997. During 1999, 1998 and 1997, respectively, the Corporation
expensed $59,159, $58,001, and $63,584 related to 401(k) plan matching
contributions.
Profit sharing assets are primarily invested in mutual funds which are selected
at the discretion of the employee. The plan was also invested in 10,538 shares
of NSD Bancorp, Inc. common stock with a market value of $184,415 at December
31, 1999. Total cash dividends received from plan investments in common stock of
the Corporation were $7,443 in 1999.
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 common 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 and the five percent stock dividend for holders of
record on April 30, 1997, in accordance with the terms of both plans.
15
<PAGE> 13
NSD Bancorp
- --------------------------------------------------------------------------------
A summary of the status of the Corporation's two fixed stock option plans as of
December 31, 1999, 1998 and 1997 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------------
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 105,772 $18.20 100,928 $14.12 87,356 $13.06
Granted 24,650 $22.23 24,090 $31.90 25,405 $17.20
Exercised 8,997 $14.89 18,889 $13.62 9,031 $12.98
Forfeited 3,983 $20.26 357 $30.54 2,802 $12.65
- ------------------------------------------------------------------------------------------------------------------------
Outstanding at End of Year 117,442 $19.23 105,772 $18.20 100,928 $14.12
Options Exercisable at Year-End 117,442 105,772 100,928
Weighted-Average
Fair Value of Options Granted
During the Year $ 6.27 $13.89 $17.20
========================================================================================================================
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
- -----------------------------------------------------------------------------------
Weighted-Average
Number Outstanding Remaining
Range of and Exercisable at Contractual Life Weighted-Average
Exercise Prices 12/31/99 (in Years) Exercise Price
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
$12.51-$13.90 51,979 5.6 $13.10
16.71-17.33 18,483 7.5 17.21
22.15-22.73 24,650 9.4 22.22
31.47-31.95 22,330 8.6 31.90
- -----------------------------------------------------------------------------------
$12.51-$31.95 117,442 7.2 $19.23
===================================================================================
</TABLE>
On January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock
Based Compensation." As permitted by SFAS No. 123, the Corporation has chosen to
apply Accounting Pronouncements Bulletin (APB) No. 25, "Accounting for Stock
Issued to Employees" and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for options granted under
either Plan. Had compensation expense included stock option plan costs,
determined based on the fair value at the grant 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
1999 $4,564,548 $4,462,484
1998 4,167,691 3,940,793
1997 3,904,710 3,727,731
Basic Earnings Per Share
1999 $1.62 $1.58
1998 1.46 1.38
1997 1.38 1.31
Diluted Earnings Per Share
1999 $1.60 $1.57
1998 1.44 1.36
1997 1.37 1.30
=====================================================================================
</TABLE>
16
<PAGE> 14
- --------------------------------------------------------------------------------
For purposes of computing proforma results as if the above plans were accounted
for under the fair value method, the Corporation estimated the fair value of
stock options using the Black-Scholes options pricing model with dividends paid
every quarter at the current rate as of the date of the grant. The following
assumptions were used:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
EMPLOYEE DIRECTOR Employee Director Employee Director
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk Free Interest Rate 6.44% 6.44% 5.56% 5.86% 6.15% 6.80%
Volatility 51.55% 51.55% 46.05% 46.48% 87.00% 87.00%
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 74% 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>
1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $ 5,874,782 $ 5,919,061
New Loans 5,551,399 1,392,957
Repayments (3,907,173) (1,437,236)
- -------------------------------------------------------------------------------------
Balance, December 31 $ 7,519,008 $ 5,874,782
=====================================================================================
</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, 1999, there are various outstanding commitments to extend credit
of approximately $39,960,090 and standby letters of credit of approximately
$454,242. The majority of standby letters of credit expire within the next
fifteen months. Commitments to extend credit are commitments to lend to a
customer as long as there is no violation of any condition established in the
loan agreement. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Corporation evaluates each customer's creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including normal business activities, bond financing and similar transactions.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. The Corporation requires
collateral supporting those commitments as deemed necessary.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party is represented by the contractual amount of the financial instrument
for commitments to extend credit. 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, neither the resolution of these claims nor the funding of
17
<PAGE> 15
NSD Bancorp
- --------------------------------------------------------------------------------
those credit commitments will have a material 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, 1999,
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, 1999. The fair value
of the fixed-maturity certificates of deposit is estimated using the rates
currently offered as of December 31, 1999 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.
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.
18
<PAGE> 16
- --------------------------------------------------------------------------------
The estimated fair values of the Corporation's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1999 1998
------------------------------- -----------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Federal Funds Sold $ 13,921 $ 13,921 $ 22,278 $ 22,278
Investment Securities 103,254 103,254 96,227 96,411
Loans 267,876 267,181 232,948 239,729
Less: Reserve for Loan Losses (3,088) -- (2,757) --
- -------------------------------------------------------------------------------------------------------------
$381,963 $384,356 $348,696 $358,418
=============================================================================================================
Financial Liabilities:
Deposits $289,440 $288,921 $280,115 $281,072
Federal Home Loan Bank Borrowings 66,350 65,534 33,000 33,086
- -------------------------------------------------------------------------------------------------------------
$355,790 $354,455 $313,115 $314,158
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Off-Balance Sheet Financial Instruments:
Commitments to Extend Credit $ 39,960 -- $ 40,125 --
=============================================================================================================
</TABLE>
NOTE 13-REGULATORY RESTRICTIONS
The Corporation and the Bank are subject to the regulations of certain federal
and state agencies and undergo periodic examinations by such regulatory
authorities. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Corporation's and Bank's
financial statements. Neither the Corporation nor the Bank are subject to
written regulatory agreements.
Under capital adequacy regulatory guidelines and the regulatory framework for
prompt corrective action, the Bank 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 and the Bank's financial statements.
Management believes, as of December 31, 1999, that the Corporation and the Bank
meet all capital adequacy requirements to which it is subject.
The Corporation and Bank are 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.
19
<PAGE> 17
NSD Bancorp
- --------------------------------------------------------------------------------
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,
1999 and 1998:
<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, 1999:
NSD Bancorp, Inc.
-----------------
Total Capital (to Risk Weighted Assets) $35,615,997 12.71% $22,410,357 8.00% $28,012,946 n/a
Tier I Capital (to Risk Weighted
Assets) 31,585,083 11.28 11,205,178 4.00 16,807,768 n/a
Tier I Capital (to Average Assets) 31,585,083 8.51 14,849,491 4.00 18,561,863 n/a
NorthSide Bank
--------------
Total Capital (to Risk Weighted Assets) 34,853,175 12.47 22,363,333 8.00 27,954,167 10.00%
Tier I Capital (to Risk Weighted
Assets) 31,643,516 11.32 11,181,667 4.00 16,772,500 6.00
Tier I Capital (to Average Assets) 31,643,516 8.57 14,756,788 4.00 18,445,985 5.00
As of December 31, 1998:
NSD Bancorp, Inc.
-----------------
Total Capital (to Risk Weighted Assets) 34,135,234 14.02 19,480,103 8.00 24,350,128 n/a
Tier I Capital (to Risk Weighted
Assets) 30,106,711 12.36 9,740,052 4.00 14,610,077 n/a
Tier I Capital (to Average Assets) 30,106,711 9.21 13,078,168 4.00 16,347,711 n/a
NorthSide Bank
--------------
Total Capital (to Risk Weighted Assets) 31,993,021 13.36 19,157,406 8.00 23,946,758 10.00
Tier I Capital (to Risk Weighted
Assets) 29,095,457 12.15 9,578,703 4.00 14,368,055 6.00
Tier I Capital (to Average Assets) 29,095,457 8.98 12,964,175 4.00 16,205,218 5.00
</TABLE>
Under regulations of the Federal Reserve, the Bank 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, 1999, the
Corporation was required to maintain $1,620,000 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, 1999 from NorthSide Bank in the form of dividends and loans,
individually, was approximately $27.3 million and $3.2 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.
Earnings per share and dividends per share amounts, appearing in these
consolidated financial statements, 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 67,546 and 17,762 shares purchased during 1999
and 1998, respectively.
NOTE 16-BORROWED FUNDS
Borrowed funds at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- -------------------------
WEIGHTED Weighted
BALANCE AVERAGE RATE Balance Average Rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Advances Due In: 1999 -- -- $1,000,000 5.19%
2000 $15,650,000 5.20%
2002 6,000,000 5.58 8,000,000 5.50
2004 5,000,000 5.27
2008 9,000,000 5.06 24,000,000 4.67
2009 27,000,000 5.31
==========================================================================================
</TABLE>
Advances from the Federal Home Loan Bank (FHLB) are collateralized by qualifying
securities and loans. Qualifying collateral includes U.S. Treasury, obligations
of U.S. Government agencies 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, 1999, the Corporation had approximately $65.0 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 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 163,925 $ 635,060
Securities Available for Sale at Market Value (Amortized
Cost of $377,208 at December 31, 1999 and $389,508 at
December 31, 1998) 2,202,223 2,902,751
Investment in Bank Subsidiary 32,095,830 30,015,120
Other Assets 1,004 --
- ----------------------------------------------------------------------------------------
Total Assets $34,462,982 $33,552,931
- ----------------------------------------------------------------------------------------
Liabilities
Accounts Payable $ 600,571 --
Deferred Tax Liability 616,674 $ 867,816
- ----------------------------------------------------------------------------------------
Total Liabilities 1,217,245 867,816
Shareholders' Equity 33,245,737 32,685,115
- ----------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $34,462,982 $33,552,931
========================================================================================
</TABLE>
21
<PAGE> 19
NSD Bancorp
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Dividends from Bank Subsidiary $ 2,011,129 $ 1,766,404 $ 1,698,741
Dividends from Securities Available for Sale 67,720 69,930 58,908
Net Investment Securities Gains 202,893 201,942 179,391
Other Expenses 71,654 96,260 78,534
- ------------------------------------------------------------------------------------------------------
Income Before Taxes and Equity in Undistributed Net
Income of Bank Subsidiary 2,210,088 1,942,016 1,858,506
Provision for Income Taxes 17,000 5,395 11,450
- ------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Net Income of Bank
Subsidiary 2,193,088 1,936,621 1,847,056
Equity in Undistributed Net Income of Bank Subsidiary 2,371,460 2,231,070 2,057,654
- ------------------------------------------------------------------------------------------------------
Net Income $ 4,564,548 $ 4,167,691 $ 3,904,710
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,564,548 $ 4,167,691 $ 3,904,710
Adjustments to Net Income:
Equity in Undistributed Net Income of Subsidiary (2,371,460) (2,231,070) (2,057,654)
Decrease (Increase) in Other Assets 1,004 66,932 (12,691)
Gains on Investment Securities (202,893) (201,942) (179,391)
Increase (Decrease) in Other Liabilities 585,066 (13,345) 26,514
- ------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 2,576,265 1,788,266 1,681,488
- ------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES
Proceeds from Sale of Investment Securities Available
for Sale 215,193 228,517 191,380
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the Issuance of Common Stock 133,996 257,354 117,247
Cash Dividends Paid (1,971,311) (1,763,469) (1,698,741)
Treasury Stock Purchased (1,421,360) (457,950) --
Cash Dividends Paid in Lieu of Fractional Shares (3,918) -- (11,499)
- ------------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (3,262,593) (1,964,065) (1,592,993)
- ------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash (471,135) 52,718 279,875
Cash at Beginning of Year 635,060 582,342 302,467
- ------------------------------------------------------------------------------------------------------
Cash at End of Year $ 163,925 $ 635,060 $ 582,342
======================================================================================================
</TABLE>
22
<PAGE> 20
- --------------------------------------------------------------------------------
NOTE 18-EARNINGS PER SHARE
Income and shares in thousands:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
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 $4,565 2,819 $1.62 $4,168 2,852 $1.46 $3,905 2,837 $1.38
Effect of dilutive
securities:
Stock options -- 27 -- -- 44 -- -- 21 --
- --------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income Available to
shareholders $4,565 2,846 $1.60 $4,168 2,896 $1.44 $3,095 2,858 $1.37
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
EARNINGS PER SHARE
------------------
<S> <C>
1995 $1.29
1996 1.30
1997 1.38
1998 1.46
1999 1.62
</TABLE>
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
-------------------
<S> <C>
1995 0.45
1996 0.51
1997 0.59
1998 0.62
1999 0.70
</TABLE>
23
<PAGE> 21
NSD Bancorp
- --------------------------------------------------------------------------------
NOTE 19-QUARTERLY EARNINGS SUMMARY (UNAUDITED)
Quarterly earnings for the years ended December 31, 1999 and 1998 are as follows
(in thousands):
<TABLE>
<CAPTION>
1999
-------------------------------------------------------
March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income $6,208 $6,512 $6,666 $7,133
Interest Expense 2,584 2,744 2,903 3,075
- --------------------------------------------------------------------------------------------------------
Net Interest Income 3,624 3,768 3,763 4,058
Provision for Loan Losses 210 210 210 210
- --------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan
Losses 3,414 3,558 3,553 3,848
Other Income 391 493 418 496
Other Expenses 2,210 2,430 2,324 2,331
- --------------------------------------------------------------------------------------------------------
Income Before Taxes 1,595 1,621 1,647 2,013
Income Taxes 549 522 542 698
- --------------------------------------------------------------------------------------------------------
Net Income $1,046 $1,099 $1,105 $1,315
========================================================================================================
Per Share: (1)
Net Income (basic) $ 0.37 $ 0.39 $ 0.39 $ 0.47
Dividends $0.170 $0.170 $0.170 $0.190
Weighted Average Shares Outstanding (basic) 2,840,248 2,833,257 2,812,601 2,790,361
========================================================================================================
</TABLE>
<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 $0.155 $0.155 $0.155 $0.155
Weighted Average Shares Outstanding (basic) 2,852,433 2,852,433 2,860,092 2,844,679
</TABLE>
- ---------------
(1) Adjusted for a 10% stock dividend declared January 26, 1999, a 3-for-2 stock
split in 1997 and a 5% stock dividend in 1997.
24
<PAGE> 22
- --------------------------------------------------------------------------------
COMPARATIVE FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Interest Income $ 26,519,135 $ 24,401,043 $ 23,812,738 $ 21,501,582 $ 19,405,880
Interest Expense 11,305,951 10,123,896 9,980,576 8,724,605 7,485,431
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income 15,213,184 14,277,147 13,832,162 12,776,977 11,920,449
Provision for Loan Losses 840,000 780,000 720,000 650,000 530,000
Other Income 1,798,512 1,649,903 1,586,414 1,339,513 1,741,691
Other Expense 9,295,826 9,027,644 8,950,416 8,152,657 7,958,632
- ---------------------------------------------------------------------------------------------------------------
Income Before Taxes 6,875,870 6,119,406 5,748,160 5,313,833 5,173,508
Income Taxes 2,311,322 1,951,715 1,843,450 1,624,344 1,500,556
- ---------------------------------------------------------------------------------------------------------------
Net Income $ 4,564,548 $ 4,167,691 $ 3,904,710 $ 3,689,489 $ 3,672,952
===============================================================================================================
YEAR END BALANCES
- ---------------------------------------------------------------------------------------------------------------
Assets $392,285,472 $357,167,992 $320,329,570 $305,413,560 $259,132,930
Loans 269,823,486 234,932,527 236,459,224 214,049,576 188,653,465
Investment Securities 103,253,784 96,226,921 63,466,743 64,985,502 54,658,490
Deposits 289,439,659 280,115,160 268,726,614 260,986,805 220,243,135
Repurchase Agreements and Federal
Funds Purchased 3,700,000 -- -- 1,911,184 1,822,433
FHLB Advances and Other
Borrowings 62,650,000 33,000,000 15,000,000 9,560,000 7,380,000
Shareholders' Equity 30,349,262 32,394,365 30,339,571 27,320,253 24,863,854
Number of Shareholders 409 431 453 448 454
AVERAGE BALANCES
- ---------------------------------------------------------------------------------------------------------------
Assets $371,682,636 $327,576,185 $312,219,530 $279,854,944 $248,746,561
Loans 245,736,893 228,648,794 226,006,573 198,720,233 176,706,914
Investment Securities 104,678,538 68,665,948 66,767,405 60,999,113 52,489,567
Deposits 283,363,352 265,197,427 261,385,203 240,125,300 215,564,206
Repurchase Agreements and Federal
Funds Purchased 2,753,907 -- 2,558,518 1,897,694 1,665,397
FHLB Advances and Other
Borrowings 45,825,207 23,523,288 12,354,466 9,232,240 3,569,435
Shareholders' Equity 31,625,424 31,729,974 28,739,768 26,008,987 23,627,621
PER SHARE DATA (1)
- ---------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $1.62 $1.46 $1.38 $1.30 $1.29
Basic Weighted Average Shares
Outstanding 2,819,117 2,852,409 2,837,420 2,837,195 2,837,560
Diluted Earnings Per Share $1.60 $1.44 $1.37 $1.30 $1.29
Diluted Weighted Average Shares
Outstanding 2,845,773 2,896,279 2,857,511 2,840,541 2,837,650
Dividends $0.70 $0.62 $0.59 $0.51 $0.45
Book Value $10.89 $11.39 $10.66 $9.63 $8.76
RATIOS
- ---------------------------------------------------------------------------------------------------------------
Return on Average Assets 1.23% 1.27% 1.25% 1.32% 1.48%
Return on Average Equity 14.43 13.13 13.59 14.19 15.55
Net Interest Margin (2) 4.37 4.69 4.81 5.01 5.31
Equity to Assets 7.74 9.07 9.47 8.95 9.60
Dividend Payout Ratio 43.19 42.31 43.50 39.53 35.32
</TABLE>
- ---------------
(1) Adjusted for a 10 % stock dividend declared January 26, 1999, a 3-for-2
stock split in 1997 and a 5% stock dividend in 1997.
(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 sheets of NSD Bancorp,
Inc. and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income and other comprehensive income, stockholders'
equity, and cash flows for the years 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 audits. The
financial statements of the Corporation for the year ended December 31, 1997
were audited by other auditors whose report, dated January 26, 1998, expressed
an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1999 and 1998 consolidated financial statements present
fairly, in all material respects, the financial position of NSD Bancorp, Inc.
and subsidiary at December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
January 28, 2000
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's") 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 $4,564,548 or $1.62 (basic) per share in 1999, from
$4,167,691 or $1.46 in 1998 and $3,904,710 or $1.38 in 1997. Contributing to the
increase in net income were increases in net interest income of $936,037, net
investment securities gains of $32,795, service fee income of $157,060 and a
decline in other operating expenses of $58,897 and occupancy expense of $15,137.
These contributions to the overall net income increase were offset by a decrease
in other operating income of $41,246 and increases in the provision for loan
losses of $60,000, salary and employee benefits of $167,067, equipment and
supplies of $86,271, data processing costs of $78,153, advertising of $8,466 and
the provision for income taxes of $359,607.
Contributing to the increase in 1998 net income over 1997 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.
Return on average assets (ROA) was 1.23% for 1999 compared to 1.27% for 1998 and
1.25% for 1997. The decrease from 1998 to 1999 reflects the impact of a decline
in net interest margin from 4.69% in 1998 to 4.37%. The increase in ROA from
1997 to 1998 is primarily due to the effect on 1997 earnings of a loss on the
merchant credit card portfolio and a decline in net interest margin from 4.81%
in 1997 to 4.69% in 1998, offset by a gain on the sale of land. Return on
average equity (ROE) was 14.43% for 1999 compared to 13.13% for 1998 and 13.59%
for 1997. The increase in 1999 ROE reflects the overall increase in net income
and the impact on average equity of treasury stock purchases and a decline in
unrealized gains on investment securities available for sale. The decrease in
ROE from 1997 to 1998 is primarily due to net interest margin compression and
also higher average capital 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
pre-tax yields lower than comparable tax assets. Therefore, it is more
meaningful to analyze net interest income on a tax-equivalent basis.
Total tax-equivalent interest income increased $2,006,845 during 1999 as a
result of a $41,328,066 increase in average earning assets offset by a decline
in the average yield on earning assets from 7.95% in 1998 to 7.59% in 1999.
Interest expense on deposits decreased $73,616 due to a reduction in the average
cost of deposits to 3.91% in 1999 from 4.19% in 1998 partially offset by the
impact of a $13,205,232 increase in average outstanding balances. Interest
expense on borrowings increased $1,112,627 due almost entirely to an increase of
$22,301,919 in average outstanding levels offset by a decrease in the average
cost from 5.25% in 1998 to 5.12% in 1999.
Total tax-equivalent 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 the
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
27
<PAGE> 25
NSD Bancorp
- --------------------------------------------------------------------------------
$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.
Net tax-equivalent interest income was $15,384,499 at December 31, 1999,
compared to $14,559,710 at December 31, 1998 and $14,171,227 at December 31,
1997. This consistent improvement has been largely due to increases in average
earning assets which were $351,872,879 in 1999 compared to $310,544,813 and
$294,800,289 in 1998 and 1997, 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 funding
costs. 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 1998 to 1999 From 1997 to 1998
----------------------------------- ---------------------------------
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 $ 40,775 $ (9,716) $ 31,059 $ 43,278 $ (9,342) $ 33,936
All Other Loans 1,020,194 (560,354) 459,840 214,797 (248,016) (33,219)
- --------------------------------------------------------------------------------------------------------------
Total Loans 1,060,969 (570,070) 490,899 258,075 (257,358) 717
Investment Securities
Taxable 2,200,584 (30,711) 2,169,873 157,673 44,826 202,499
Tax-Exempt 6,810 (23,860) (17,050) (291,946) 9,594 (282,352)
- --------------------------------------------------------------------------------------------------------------
Total Investment Securities 2,207,394 (54,571) 2,152,823 (134,273) 54,420 (79,853)
Due From Banks 14,597 9,771 24,368 13,087 67 13,154
Federal Funds Sold (631,227) (30,018) (661,245) 587,009 9,775 596,784
- --------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets 2,651,733 (644,888) 2,006,845 723,898 (193,096) 530,802
Interest Bearing Liabilities
Interest Bearing Deposits Savings and
Interest Bearing Demand Deposits 201,431 (186,339) 15,092 92,001 (59,643) 32,358
Time Deposits 105,203 (193,911) (88,708) (167,232) (104,895) (272,127)
- --------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 306,634 (380,250) (73,616) (75,231) (164,538) (239,769)
Federal Funds Purchased and
Repurchase Agreements 143,045 -- 143,045 (70,441) (70,441) (140,882)
FHLB Advances and Other Borrowings 1,127,772 (15,145) 1,112,627 596,356 (72,385) 523,971
- --------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 1,577,451 (395,395) 1,182,056 450,684 (307,364) 143,320
- --------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $1,074,282 $(249,493) $ 824,789 $ 273,214 $ 114,268 $ 387,482
==============================================================================================================
</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>
1999 1998 1997
------------------------------------ ------------------------------------ ------------
AVERAGE AVERAGE Average Average Average
BALANCE INTEREST YIELD Balance Interest Yield Balance
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Loans
Industrial Revenue and
Tax Exempt $ 1,623,544 $ 131,252 8.08% $ 1,047,119 $ 100,193 9.57% $ 604,370
All Other Loans 244,113,349 19,888,904 8.15 227,601,675 19,429,064 8.54 225,402,203
- -----------------------------------------------------------------------------------------------------------------------
Total 245,736,893 20,020,156 8.15 228,648,794 19,529,257 8.54 226,006,573
Investment Securities
Taxable 100,049,387 6,225,674 6.22 64,210,313 4,055,801 6.32 58,961,980
Tax-Exempt 4,629,151 372,619 8.05 4,455,635 389,669 8.75 7,795,425
- -----------------------------------------------------------------------------------------------------------------------
Total 104,678,538 6,598,293 6.30 68,665,948 4,445,470 6.47 66,757,405
Due from Banks, Interest
Earning 843,174 41,496 4.92 571,441 17,128 3.00 134,777
Federal Funds Sold 614,274 30,505 4.97 12,658,630 691,750 5.46 1,901,534
- -----------------------------------------------------------------------------------------------------------------------
Total Earning
Assets 351,872,879 $26,690,450 7.59 310,544,813 $24,683,605 7.95 294,800,289
Reserve for Loan Losses (2,932,704) (2,804,488) (2,771,915)
Cash and Due From Banks 13,148,351 11,058,342 10,762,215
Premises and Equipment 2,581,996 2,928,189 3,368,864
Other Assets 7,012,114 5,849,328 6,060,077
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $371,682,636 $327,576,184 $312,219,530
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Deposits
Savings Deposits $ 38,371,347 $ 936,000 2.44% $ 37,620,135 $ 984,447 2.62% $ 37,025,880
Interest Checking and
Money Market 92,061,809 2,656,810 2.89 82,908,733 2,593,271 3.13 80,482,448
Time Deposits 95,162,556 5,223,344 5.49 91,861,612 5,312,052 5.78 94,732,134
- -----------------------------------------------------------------------------------------------------------------------
Total Interest
Bearing Deposits 225,595,712 8,816,154 3.91 212,390,480 8,889,770 4.19 212,240,462
Federal Funds Purchased
and Repurchase
Agreements 2,753,907 143,045 5.19 -- -- -- 2,558,518
FHLB Advances and Other
Borrowings 45,825,207 2,346,752 5.12 23,523,288 1,234,125 5.25 12,354,466
- -----------------------------------------------------------------------------------------------------------------------
Total Interest
Bearing
Liabilities 274,174,826 $11,305,951 4.12 235,913,768 $10,123,895 4.29 227,153,446
Demand Deposits 57,767,640 52,806,947 49,144,741
Other Liabilities 8,114,746 7,125,495 7,181,575
Shareholders' Equity 31,625,424 31,729,974 28,739,768
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $371,682,636 $327,576,184 $312,219,530
=======================================================================================================================
Interest Spread 3.47% 3.66%
Interest Margin 4.37% 4.69%
<CAPTION>
1997
---------------------
Average
Interest Yield
<S> <C> <C>
- ------------------------------------------------
ASSETS
Loans
Industrial Revenue and
Tax Exempt $ 66,257 10.96%
All Other Loans 19,462,283 8.63
- ------------------------------------------------
Total 19,528,540 8.64
Investment Securities
Taxable 3,853,302 6.54
Tax-Exempt 672,021 8.62
- ------------------------------------------------
Total 4,525,323 6.78
Due from Banks, Interest
Earning 3,974 2.94
Federal Funds Sold 94,966 4.99
- ------------------------------------------------
Total Earning
Assets $24,152,803 8.19
Reserve for Loan Losses
Cash and Due From Banks
Premises and Equipment
Other Assets
- ------------------------------------------------
TOTAL ASSETS
================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Deposits
Savings Deposits $ 994,503 2.69%
Interest Checking and
Money Market 2,550,857 3.17
Time Deposits 5,584,179 5.89
- ------------------------------------------------
Total Interest
Bearing Deposits 9,129,539 4.30
Federal Funds Purchased
and Repurchase
Agreements 140,883 5.51
FHLB Advances and Other
Borrowings 710,154 5.75
- ------------------------------------------------
Total Interest
Bearing
Liabilities $ 9,980,576 4.39
Demand Deposits
Other Liabilities
Shareholders' Equity
- ------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY
================================================
Interest Spread 3.80%
Interest Margin 4.81%
</TABLE>
(1) Tax exempt income on loans and investments and related yields are shown on a
fully tax-equivalent basis computed using a statutory rate of 34%.
(2) For purposes of calculating loan yields, average loan balances include
nonaccrual loans.
(3) Average yields on available for sale investment securities are calculated
based on average estimated market values for the years 1999, 1998 and 1997.
29
<PAGE> 27
NSD BANCORP
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The Corporation's provision for loan losses was $840,000 in 1999, $780,000 in
1998 and $720,000 in 1997. The increase in the provision for loan losses was
primarily related to the overall increase in average loans outstanding during
1999. Net charge-offs for 1999 were $508,245, compared to $937,827 and $384,175
for 1998 and 1997, respectively. There were no charge-offs to any individual
borrower that represented more than 10% of the annual total in 1999 and 1997,
however, 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 $148,609 to $1,798,512 in 1999 from $1,649,903 in 1998.
Contributing to the improvement was an increase in net gains on the sale of
investment securities of $32,795. Service fees generated an additional $157,060
in revenue during 1999 primarily consisting of increases in overdraft and
checking account fees of $124,302 and $37,210, respectively. Other operating
income declined $41,246 in 1999. This decline was due largely to a $164,263 loss
recognized on the disposal of Year 2000 non-compliant computer hardware and
losses on other assets held for sale of $29,855 in 1999, compared to net gains
of $83,805 on the sale of assets in 1998. Offsetting the impact of the sale or
disposal of equipment and other assets was a $108,272 increase in ATM surcharge
fees as the Bank completed its first full year of assessing such charges and a
$37,468 gain recognized on the sale of student loans.
Other income increased $63,489 from $1,586,414 in 1997 to $1,649,903 in 1998.
This increase was 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 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 EXPENSES
Total other expenses increased $268,182 from $9,027,644 in 1998 to $9,295,826 in
1999. Salary and employee benefits increased $167,067 to $ 4,440,821 in 1999
from $4,273,754 in 1998. Salary expense increased $105,484 due to normal
inflation adjustments which also resulted in a corresponding $10,461 increase in
the employer portion of payroll taxes. Included in 1999 expenses was a $23,929
increase in health insurance costs and an $18,578 increase in the contribution
to the employee profit sharing plan.
Occupancy expense decreased by $15,137 to $831,442 from $846,579 due to a
$74,691 decrease in real estate taxes corresponding to the sales of land in 1998
and 1999 and a reduction in 1999 expense accruals, offset by an escalation in
rent payments of $11,014, additional building maintenance of $25,076, an $8,195
increase in building insurance premiums and a $4,008 increase in utilities.
Equipment and supplies expense increased $86,271 during 1999 due primarily to
increases in depreciation expense, equipment maintenance contracts, equipment
rental, general office expense and stationery and supplies of $21,848, $6,054,
$8,886, $36,806 and $11,670, respectively. Data processing expense increased
$78,153 corresponding to the enhancement of core processing capabilities and
higher ATM network charges resulting from increased transaction volumes at
certain ATM locations. FDIC insurance expense increased by only $2,259 due to an
industry wide reduction in assessment rates offset by overall increases in
deposit levels. Advertising expense increased $8,466 to $166,536 in 1999 from
$158,070 in 1998.
Other operating expenses decreased $58,897 in 1999 to $1,999,618 from $2,058,515
in 1998 due to several factors. Asset recovery expense decreased $66,000 along
with the decline in overall loan delinquencies and also due to higher 1998
expenses resulting from recovery efforts related to one significant loan
relationship. Financial services expense declined by $56,283 in 1999 due in
large part to additional 1998 costs associated with the annual
30
<PAGE> 28
- --------------------------------------------------------------------------------
reporting process and also 1998 costs incurred for an independent review of the
corporation's risk management program. Education expense decreased $12,487 due
to nonrecurring 1998 costs for training on new computer applications and also
1998 costs associated with participation in a video training program. Shares tax
expense decreased $20,199 due to modified accrual methodology. Directors fees
declined by $15,799 due to a reduction in deferred compensation costs and also a
reduction in the number of board members during the year. Teller and ATM losses
declined $16,782 primarily resulting from a branch office robbery during 1998.
General losses were $31,655 lower in 1999 as the Bank experienced nonrecurring
deposit account losses in 1998. Offsetting these expense decreases was an
increase in telephone expense of $59,960 due to operation of parallel network
communication lines during Year 2000 related system replacements. Student loan
processing fee accruals increased $28,607 due to third party fee increases and
anticipated costs attributable to the sale of such loans and the subsequent
outsourcing of future loan originations. Correspondent banking service charges
increased $9,399 resulting from tighter investable fund management. State tax
expenses also increased $27,920 corresponding to overall corporate growth and
taxable earnings increases.
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 for 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, stationery 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 volume related
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 a 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 1998. These increases were offset
by decreases in legal expense and deposit premium amortization of $26,624 and
$8,333, respectively.
INCOME TAXES
The Corporation recorded an income tax provision of $2,311,322, $1,951,715, and
$1,843,450 in 1999, 1998 and 1997, respectively. The increase in the tax
provision was the result of higher pretax earnings. The effective tax rates for
1999, 1998 and 1997 were 33.6%, 31.9% and 32.0%, respectively. These rates were
below the 34% statutory tax rate primarily due to the tax benefits from
tax-exempt interest income.
31
<PAGE> 29
NSD BANCORP
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
The Corporation's total assets increased $35,117,480 from $357,167,992 at
December 31, 1998 to $392,285,472 at December 31, 1999. Securities available for
sale increased $10,464,443 while securities held to maturity decreased
$3,437,580. Loans held for sale decreased to $630,777 at December 31, 1999 from
$3,995,483 at December 31, 1998. The loans available for sale at December 31,
1999 and 1998 were entirely comprised of student loans. Net loans increased from
$226,196,149 at December 31, 1998 to $264,157,344 at December 31, 1999.
INVESTMENT SECURITIES
Investment securities available for sale increased $10,464,443 in 1999 to
$103,253,784 from $92,789,341 in 1998. Increases in Obligations of U.S.
Government agencies and mortgage-backed securities of $6,496,775 and $1,362,345,
respectively, were due to normal purchasing activity net of any sales, calls,
maturities and changes in unrealized gains. Obligations of state and political
subdivisions and other bonds available for sale increased $3,331,170 and
$147,980, respectively, largely due to the reclassification of all such
securities, which were previously classified as held to maturity, as available
for sale. All securities classified as held to maturity were transferred to the
available for sale category as part of a strategy designed to increase the
Corporation's liquidity position in a market that was favorable to the disposal
of such assets. Subsequent to the transfer to available for sale, the
Corporation sold $1,725,340 of securities that were previously classified as
held to maturity. It is the Corporation's policy to classify all future
purchases of like securities as available for sale. These increases were offset
by a decrease in U.S. Treasury securities of $1,572,108. The corporation
experienced a significant overall change in net, unrealized gains (losses) on
fixed income securities principally due to a dramatic shift in market pricing
during 1999 that continues to impact portfolio valuations. Although such
investment securities are categorized as available for sale, the portfolio is
managed based on yield and cash flow. Management considers this change in fair
value to be temporary in nature posing minimal impact to future profitability.
Investment securities held to maturity decreased $3,437,580 due to maturity and
call activity and also due to the transfer of all remaining securities to the
available for sale category. As a member of the Federal Home Loan Bank (FHLB),
the Corporation is required to maintain a minimum investment in FHLB stock which
is calculated based on the level of assets, residential real estate loans and
outstanding FHLB advances. Marketable equity securities increased $698,281
during 1999 almost entirely due to an increase in the level of FHLB stock held
by the Bank.
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, 1999 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 $ 989,587 5.71% $ 2,718,832 5.62% -- -- -- --
Obligations of U.S.
Government Agencies -- -- 7,995,367 5.84 $24,772,192 6.46% $ 1,523,075 7.51%
Mortgage-Backed Securities -- -- -- -- 3,317,793 6.83 49,466,514 6.59
Obligations of State and
Political Subdivisions 40,000 9.70 243,813 10.12 48,125 9.32 3,794,759 7.34
Other Bonds -- -- 250,000 7.63 -- -- 6,860,881 6.79
Marketable Equity Securities -- -- -- -- -- -- 3,646,263 9.08
- ------------------------------------------------------------------------------------------------------------------
$1,029,587 5.87% $11,208,012 5.92% $28,138,110 6.51% $65,291,492 6.82%
==================================================================================================================
</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
32
<PAGE> 30
- --------------------------------------------------------------------------------
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 1999.
LOANS
Loans net of deferred fees, increased $38,255,665 during 1999, from $230,937,044
at December 31, 1998 to $269,192,709 at December 31, 1999. Improved commercial
loan development efforts resulted in increases of $19,669,427 and $5,608,408,
respectively, in nonresidential mortgage and commercial, financial and
agricultural loans during 1999. Consumer loans outstanding increased $16,847,129
due, in large part, to improved auto industry sales volumes and also due to
enhanced business development efforts. Lease financing also increased $1,489,043
during the year due to improved business calling efforts. Offsetting these
increases was a decrease in residential mortgage loans primarily due to higher
prepayments resulting from the low rate environment throughout the year and also
a decline in consumer lines of credit of $454,131.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential Mortgage Loans $ 47,823,758 $ 52,695,286 $ 55,125,240 $ 56,641,022 $ 35,830,068
Nonresidential Mortgage
Loans 47,730,295 28,060,867 29,385,042 29,470,461 29,897,560
Commercial, Financial and
Agricultural Loans 46,053,457 40,445,049 37,831,540 30,392,059 35,037,875
Consumer Loans to
Individuals 108,847,393 92,000,264 95,357,873 80,107,845 67,709,305
Lines of Credit 4,922,717 5,376,848 5,487,417 5,433,560 5,681,628
Lease Financing 13,399,797 11,910,754 8,900,409 8,248,698 8,797,060
Nonaccrual Loans 777,961 785,360 1,355,617 1,234,467 443,727
- --------------------------------------------------------------------------------------------------------
Total Loans 269,555,378 231,274,428 233,443,138 211,528,112 183,397,223
Deferred Fees (362,669) (337,384) (403,354) (421,784) (459,234)
- --------------------------------------------------------------------------------------------------------
Loans, Net of Deferred
Fees 269,192,709 230,937,044 233,039,784 211,106,328 182,937,989
Unearned Income (1,947,108) (1,984,393) (1,290,389) (1,212,814) (1,402,670)
- --------------------------------------------------------------------------------------------------------
Total Loans, Net of
Unearned Income and
Fees 267,245,601 228,952,651 231,749,395 209,893,514 181,535,319
Reserve for Loan Losses (3,088,257) (2,756,502) (2,914,329) (2,578,504) (2,676,352)
- --------------------------------------------------------------------------------------------------------
Net Loans $264,157,344 $226,196,149 $228,835,066 $207,315,010 $178,858,967
========================================================================================================
</TABLE>
The following table shows the Corporation's loan maturities as of December 31,
1999 (in thousands).
<TABLE>
<CAPTION>
One Year After One Year After
and Less To Five Years Five Years
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Residential Mortgage Loans $ 2,501 $ 7,998 $37,325
Nonresidential Mortgage Loans 3,536 9,290 34,904
Commercial, Financial and Agricultural Loans 17,869 17,473 3,293
Consumer Loans to Individuals (net of unearned income) 28,788 68,049 12,010
Lease Financing (net of unearned income) 2,375 6,810 2,268
- ------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 31
NSD BANCORP
- --------------------------------------------------------------------------------
NON-PERFORMING ASSETS
At December 31, 1999, nonaccrual loans were $777,961 compared to $785,360 in
1998. Other real estate owned decreased $59,460 to $132,092 in 1999 from
$191,552 in 1998 primarily due to the net effect of property sales and the
revaluation of one property. Loans 90 days past due and still accruing interest
decreased $213,722 during 1999 and represent only .2% of net loans at December
31, 1999.
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,
--------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans $ 777,961 $ 785,360 $1,355,617 $1,234,467 $ 443,727
Other Real Estate Owned 132,092 191,552 182,133 371,982 43,966
Other Assets Held for Sale 130,068 115,069 187,283 60,705 31,775
- -----------------------------------------------------------------------------------------------------
Total Non-Performing Assets 1,040,121 1,091,981 1,725,033 1,667,154 519,468
Loans 90 Days Past Due and Still
Accruing 599,955 813,677 1,213,225 615,466 801,743
- -----------------------------------------------------------------------------------------------------
Total Non-Performing Assets
and Past Due Loans $1,640,076 $1,905,658 $2,938,258 $2,282,620 $1,321,211
=====================================================================================================
</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, 1999, substandard loans totaled $1,156,724 and doubtful loans
totaled $598,357. All substandard and doubtful loans were designated as
delinquent or nonaccrual as of December 31, 1999.
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 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.
The corporation establishes specific reserves for potential problem loans as
determined by its loan review process described above. The specific reserves on
these loans are determined in accordance with Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan,"
and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures" taking into account the
34
<PAGE> 32
- --------------------------------------------------------------------------------
credit's current operating status, pledged collateral and plans of action for
resolving any deficiencies. The specific reserves are usually only considered
for the Corporation's commercial loan portfolio.
The Corporation maintains formula reserves for all loans not considered by the
specific reserve method. Formula reserves are calculated for each pool of
homogeneous loans based on a loan's risk rating, delinquency status and the
historical charge-off experience pertaining to each loan type. The loss factors
used in calculating formula reserves for substandard, doubtful and loss credits
are based upon management's judgment of inherent risks associated with these
classifications of loans. Formula reserves, relative to loan delinquency status,
are based on the type of loan and delinquency aging and are determined by
management's judgment of the inherent risk of loss from these delinquency
categories. The Corporation also establishes formula reserves for all loan types
based on the historical charge-off percentages for each homogeneous pool of
loans. The historical charge-off percentage used by the Corporation is based on
the two year cumulative losses for each homogeneous loan pool.
These formula reserves are based on the Corporation's historical charge-off
experience. If current charge-off levels deviate from the Corporation's
historical experience, the deviation will be reflected in the Corporation's
ongoing formula reserves and will adjust the allowance for loan losses
accordingly. The Corporation maintains an unallocated reserve taking into
consideration the following factors:
- Concentrations of credit
- Delinquency and nonaccrual trends
- Local and national economic conditions
- Changes in lending and collection practices
- Trends in volume and terms of loans
- Other external factors that could affect the ability of the Corporation's
customers to repay their obligations
Management reviews these conditions to determine if any of these conditions is
evidenced by a specifically identified problem credit or portfolio segment.
Management's estimate of this condition may be reflected as a specific allowance
applicable to this credit or portfolio segment. Where any of these conditions is
not evidenced by a specifically identifiable problem credit or portfolio segment
as of the evaluation date, management's evaluation of the potential risk
concerning this condition is reflected in the unallocated allowance.
The composition of the corporation's allowance for loan losses are as follows at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Specific Reserves $ 573,089 $ 386,626
Formula Reserves 2,054,383 1,836,320
Unallocated Reserves 460,785 533,556
- -------------------------------------------------------------------------------------
Total $ 3,088,257 $2,756,502
=====================================================================================
</TABLE>
Specific reserves increased $186,463 from $386,626 at December 31, 1998 to
$573,089 at December 31, 1999 largely due to an increase in classified loans
relating to four commercial loan relationships. Management believes that current
reserves appropriately reflect the level of risk and potential loss of these
credits. The reserve amount specified for these loans may change in the event
that there is evidence of an improvement or further deterioration in a
customer's ability to satisfy contractual requirements.
The formula reserve portion of the allowance for loan losses increased $218,063
to $2,054,383 at December 31, 1999 from $1,836,320 at December 31, 1998
corresponding to the overall increase in loans outstanding and most notably,
increases in commercial and installment loans.
The unallocated reserve portion of the allowance for loan losses decreased
$72,771 reflecting an overall improvement in loan delinquencies and favorable
local and national economic trends. Also contributing to this decrease has been
the improvement in collection practices. New loan volumes and loan terms appear
consistent with historical trends with regard to credit quality and
proportionate composition.
35
<PAGE> 33
NSD BANCORP
- --------------------------------------------------------------------------------
The following schedule sets forth the allocation of the reserve for loan losses
among individual loan categories. A portion is allocated to general risk to
protect the Corporation against potential yet undetermined losses and is based
on historical experience. The entire reserve for loan losses is available to
absorb future loan losses in any category. (In thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------
% 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 $ 948 30.7% $ 740 26.8% $ 926 31.8% $ 782 30.3% $ 969 36.2%
Real Estate Mortgage Loans 243 7.9 320 11.6 320 11.0 358 13.9 388 14.5
Installment Loans 1,239 40.1 885 32.1 991 34.0 819 31.8 679 25.4
Lease Financing 197 6.4 277 10.0 239 8.2 229 8.9 180 6.7
Allocation to General Risk 461 14.9 535 19.4 438 15.0 391 15.1 460 17.2
- -----------------------------------------------------------------------------------------------------------------------
Total $3,088 $2,757 $2,914 $2,579 $2,676
=======================================================================================================================
</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>
For the Years Ended December 31,
--------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for Loan Losses at Beginning of Year $2,757 $2,914 $2,579 $2,676 $2,282
Charge-offs:
Commercial, Financial, and Agricultural Loans 78 455 78 546 155
Real Estate Mortgage Loans 40 -- 30 -- --
Installment Loans 386 483 367 261 322
Lease Financing 50 36 48 36 29
- ----------------------------------------------------------------------------------------------------
Total Charge-offs 554 974 523 843 506
Recoveries:
Commercial, Financial, and Agricultural Loans -- -- 94 5 329
Real Estate Mortgage Loans 1 -- 2 2 2
Installment Loans 42 34 42 89 38
Lease Financing 2 3 -- -- 1
- ----------------------------------------------------------------------------------------------------
Total Recoveries 45 37 138 96 370
- ----------------------------------------------------------------------------------------------------
Net Charge-offs 509 937 385 747 136
Provision for Loan Losses 840 780 720 650 530
- ----------------------------------------------------------------------------------------------------
Reserve for Loan Losses at End of Year $3,088 $2,757 $2,914 $2,579 $2,676
====================================================================================================
Net Loan Charge-offs to Average Loans 0.21% 0.41% 0.17% 0.38% 0.08%
Loan Loss Reserve to Non-Performing Assets 296.91% 252.43% 168.94% 154.67% 515.21%
- ----------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 34
- --------------------------------------------------------------------------------
LIABILITIES
Total liabilities were $361,936,210 at December 31, 1999, an increase of
$37,162,583 from December 31, 1998. The increases in total deposits and total
borrowed funds of $9,324,499 and $33,350,000, respectively, were used to fund
loan growth and to increase the investment portfolio as part of an overall
leverage strategy.
DEPOSITS
Total deposits increased $9,324,499 from $280,115,160 at December 31, 1998 to
$289,439,659 at December 31, 1999. Noninterest bearing and interest bearing
deposits increased during 1999 by $111,893 and $9,212,606 due to continued
emphasis on the development of small business relationships and strategic retail
deposit promotions.
Average deposits and the average cost of deposits for the past three years were
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE Average Average Average Average
BALANCE RATE Balance Rate Balance Rate
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest Bearing Deposits $ 57,767,640 -- $ 52,806,947 -- $ 49,144,741 --
Interest Bearing Deposits 92,061,809 2.89% 82,908,733 3.13% 80,482,448 3.17%
Savings Deposits 38,371,347 2.44 37,620,135 2.62 37,025,880 2.69
Time Deposits 95,162,556 5.49 91,861,612 5.78 94,732,134 5.90
- --------------------------------------------------------------------------------------------------------
Total Deposits $283,363,352 3.11% $265,197,427 3.35% $261,385,203 3.49%
========================================================================================================
</TABLE>
At December 31, 1999, 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 $ 2,941 $12,912
Over Three Months Through Six Months 3,263 15,458
Over Six Months Through Twelve Months 1,455 13,130
Over Twelve Months 6,398 42,930
- -------------------------------------------------------------------------------------------
Total $14,057 $84,430
===========================================================================================
</TABLE>
FHLB ADVANCES AND OTHER BORROWED FUNDS
At December 31, 1999, the Corporation had outstanding borrowings of $66,350,000
of which $19,350,000 is due during 2000. The Corporation borrowed these funds to
provide liquidity for specific asset-liability management strategies. At
December 31, 1999 outstanding borrowings consisted of $3,700,000 in overnight
Federal Funds Purchased and $62,650,000 in 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.
37
<PAGE> 35
NSD BANCORP
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Consolidated shareholders' equity decreased $2,045,103 from $32,394,365 at
December 31, 1998 to $30,349,262 at December 31, 1999. This decrease 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, 1999 was 11.28% compared to 12.36% at
December 31, 1998. The Corporation's total risk-based capital ratio at December
31, 1999 was 12.71% compared to 14.02% at December 31, 1998. Regulatory
requirements for Tier I and total risk-based capital ratios are 4.00% and 8.00%,
respectively.
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 of record on February 2, 1999.
<TABLE>
<CAPTION>
Sales Price Cash Dividends
--------------- Declared
High Low Per Share
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
First Quarter $24.55 $21.25 $0.170
Second Quarter 25.88 20.25 0.170
Third Quarter 23.00 19.00 0.170
Fourth Quarter 22.06 15.50 0.190
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
- -------------------------------------------------------------------------------
</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, 1999, a simulation
analysis assuming a one-time 200 basis point increase in interest rates, results
in a negative impact of approximately 2.75% or approximately $463,000 on
projected net interest income over a one-year period. Conversely, a 200 basis
point decrease in interest rates resulted in a projected increase in net
interest income of 2.2% or approximately $369,000 over the same
38
<PAGE> 36
- --------------------------------------------------------------------------------
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, 1999. 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
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 or "GAP" analysis. Management, however, recognizes
that a simplified GAP analysis may not adequately reflect the degree to which
assets and liabilities with similar repricing characteristics react to changes
in market interest rates. In addition, repricing characteristics identified
under a specific GAP position may vary significantly under different interest
rate environments. Therefore, simulation modeling is also performed to evaluate
the extent and direction of the Corporation's interest rate exposure under
upward 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 a negative, or liability sensitive, cumulative
interest GAP position of $131,159 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, 1999
(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 $ 25,523 $ 12,245 $ 24,756 $162,733 $ 39,532 $264,789
Securities Available for Sale 18,798 2,687 4,883 21,436 55,451 103,255
Noninterest Earning Assets -- -- -- -- 24,242 24,242
- ------------------------------------------------------------------------------------------------------------
Total Assets $ 44,321 $ 14,932 $ 29,639 $184,169 $119,225 $392,286
============================================================================================================
Interest Bearing Demand Deposits $ 91,985 -- -- -- -- $ 91,985
Savings Deposits 37,659 -- -- -- -- 37,659
Time Deposits (less than) $100,000 13,931 $ 15,490 $ 13,187 $ 40,903 $ 2,328 85,839
Time Deposits (greater than or equal
to) $100,000 2,920 2,131 1,398 5,522 677 12,648
Other Borrowed Funds 19,350 14,000 8,000 25,000 -- 66,350
Other Liabilities -- -- -- -- 67,456 67,456
Shareholders' Equity -- -- -- -- 30,349 30,349
- ------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $ 165,845 $ 31,621 $ 22,585 $ 71,425 $100,810 $392,286
============================================================================================================
Period GAP $(121,524) $ (16,689) $ 7,054 $112,744 $ 18,415
Cumulative GAP $(121,524) $(138,213) $(131,159) $(18,415) $ --
- ------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 37
NSD BANCORP
- --------------------------------------------------------------------------------
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 approached
this initiative with the highest of priorities. With oversight from the Board of
Directors, the Corporation aggressively pursued 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 began the process of renovating systems and applications and validating year
2000 readiness. Management achieved compliance for all critical systems and
substantially all non-critical systems by the end of the second quarter of 1999
and has experienced no negative impact due to Year 2000 issues.
Non-information technology systems such as the elevator, HVAC, security systems
etc., were reviewed to determine if there were any significant year 2000 issues.
Any non-compliant system or related equipment had either already been replaced
or was in the process of being replaced before the year 2000.
It is estimated that the total cumulative cost to the Corporation resulting from
this process was approximately $750,000 which included costs associated with
modifying existing systems, purchasing or leasing certain hardware and software
and the acceleration of depreciation on items which were disposed prematurely
due to noncompliance. The majority of such costs were incurred during 1999.
Purchased hardware and software has been capitalized in accordance with normal
policy. Personnel and all other costs related to this process were expensed as
incurred.
Management believes that there are no remaining uncertainties or contingencies
related to Year 2000 issues. There are no additional foreseeable costs that will
be incurred beyond those already experienced by the Corporation. Although the
Corporation believes that it has addressed all year 2000 compliance issues, 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 has been 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 $238,290 during 1999, compared to
$10,573,914 and $4,679,545 for 1998 and 1997, respectively. The primary source
of operating cash flows for 1999 was net income adjusted for the effect of
noncash expenses such as the provision for loan losses, depreciation of premises
and equipment and amortization of intangible assets.
40
<PAGE> 38
- --------------------------------------------------------------------------------
Investing activities used cash of $48,006,985 during 1999, compared to
$31,358,696 and $19,610,435 for 1998 and 1997, respectively. In 1999, cash was
used to fund loan growth, as well as, the purchase of investment securities
available for sale as part of the Corporation's leverage strategy. In 1998, a
significant portion of borrowings were invested in investment securities
available for sale as part of an overall leverage strategy. Proceeds from the
sales, repayments and maturities of investment securities available for sale and
held to maturity were reinvested primarily in investment securities available
for sale. Cash flows from investing activities were primarily used to fund
growth in the loan portfolio during 1997.
Financing activities provided cash of $39,411,722, $27,424,481 and $9,675,632
during 1999,1998 and 1997, respectively. During 1999 and 1998, increases in
demand and savings accounts, time deposits and borrowings provided cash while
cash was used by the repayment of borrowings, the 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 to fund 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.
41
<PAGE> 1
Exhibit 21
Subsidiaries of NSD Bancorp, Inc.
As of December 31, 1999
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 28, 2000, appearing in this Annual Report on Form 10-K of NSD Bancorp,
Inc. for the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 29, 2000
<PAGE> 1
Exhibit 23.2
PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
One South Market Square
Harrisburg PA 17101-9916
Telephone (717) 231-5900
Facsimile (717) 232-5672
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in registration statement of NSD
Bancorp, Inc. on Form S-8 (File No. 33-78220 and 33-78222) of our report dated
January 26, 1998, on our audit of the consolidated financial statements of NSD
Bancorp, Inc. for the year ended December 31, 1997, which report is
incorporated by reference in the Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Pittsburgh, Pennsylvania
January 28, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,052,113
<INT-BEARING-DEPOSITS> 869,009
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 103,253,784
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 267,245,600
<ALLOWANCE> 3,088,257
<TOTAL-ASSETS> 392,285,472
<DEPOSITS> 289,439,659
<SHORT-TERM> 19,350,000
<LIABILITIES-OTHER> 6,146,550
<LONG-TERM> 47,000,000
0
0
<COMMON> 2,873,405
<OTHER-SE> 27,475,857
<TOTAL-LIABILITIES-AND-EQUITY> 392,285,472
<INTEREST-LOAN> 19,975,531
<INTEREST-INVEST> 6,471,603
<INTEREST-OTHER> 72,001
<INTEREST-TOTAL> 26,519,135
<INTEREST-DEPOSIT> 8,816,154
<INTEREST-EXPENSE> 11,305,951
<INTEREST-INCOME-NET> 15,213,184
<LOAN-LOSSES> 840,000
<SECURITIES-GAINS> 265,822
<EXPENSE-OTHER> 9,295,826
<INCOME-PRETAX> 6,875,870
<INCOME-PRE-EXTRAORDINARY> 4,564,548
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,564,548
<EPS-BASIC> 1.62
<EPS-DILUTED> 1.60
<YIELD-ACTUAL> 4.37
<LOANS-NON> 777,961
<LOANS-PAST> 599,955
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (2,756,502)
<CHARGE-OFFS> 554,095
<RECOVERIES> 45,850
<ALLOWANCE-CLOSE> (3,088,257)
<ALLOWANCE-DOMESTIC> (2,627,472)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> (460,785)
</TABLE>
