<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2000
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File No. 0-22124
-------
NSD Bancorp, Inc.
-----------------
(Exact name of Registrant as specified in its charter)
Commonwealth of Pennsylvania 25-1616814
---------------------------- ----------
(State or other Jurisdiction of (I.R.S. Employer Identification No.
incorporation or organization)
5004 McKnight Road, Pittsburgh, Pennsylvania 15237
--------------------------------------------------
(Address of Principal executive offices) (ZIP Code)
(412) 231-6900
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of the Registrant's common stock as of July 31,
2000 was:
Common Stock, $1.00 par value - 3,016,918 shares outstanding
<PAGE> 2
NSD BANCORP, INC.
FORM 10Q
For the Quarter Ended June 30, 2000
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 2000
and December 31, 1999 3
Consolidated Statements of Income For the Three and Six
Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows For the Six
Months Ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8K 18
2
<PAGE> 3
NSD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 18,806,609 $ 13,921,122
Investment Securities Available for Sale at Market Value (Amortized Cost of
$106,656,150 at June 30, 2000 and $105,667,201 at December 31, 1999) 103,653,207 103,253,784
Loans Held for Sale 868,700 630,777
Loans, Net of Deferred Fees 298,001,788 269,192,709
Unearned Income (2,947,365) (1,947,108)
Reserve for Loan Losses (3,319,470) (3,088,257)
-------------------------------------------------------------------------------------------------------------------------
Loans, Net 291,734,953 264,157,344
Premises and Equipment, Net 2,693,617 2,850,773
Accrued Interest Receivable 2,349,603 2,209,494
Other Real Estate Owned and Assets Held for Sale 285,621 262,160
Other Assets 5,230,671 5,000,018
-------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 425,622,981 $ 392,285,472
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing $ 68,020,736 $ 60,429,536
Interest Bearing 231,416,467 229,010,123
-------------------------------------------------------------------------------------------------------------------------
Total Deposits 299,437,203 289,439,659
Borrowed Funds:
Advances from Federal Home Loan Bank and Other Borrowings 82,250,000 62,650,000
Fed Funds Purchased 6,600,000 3,700,000
-------------------------------------------------------------------------------------------------------------------------
Total Borrowed Funds 88,850,000 66,350,000
Accrued Interest Payable 4,996,196 4,534,488
Other Liabilities 1,444,638 1,612,063
-------------------------------------------------------------------------------------------------------------------------
Total Liabilities 394,728,037 361,936,210
Common Stock $1 Par Value; 10,000 shares authorized, 3,016,918 issued and
2,909,316 outstanding at June 30, 2000 and 2,873,405 issued and 2,788,097
outstanding at December 31, 1999 3,016,918 2,873,405
Treasury Stock at cost, 107,602 shares at June 30, 2000 and 85,308 shares at
December 31, 1999 (2,155,395) (1,879,310)
Capital Surplus 15,744,863 13,625,727
Accumulated Other Comprehensive Income (1,978,110) (1,589,023)
Retained Earnings 16,266,668 17,318,463
-------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 30,894,944 30,349,262
-------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 425,622,981 $ 392,285,472
=========================================================================================================================
See notes to consolidated financial statements
</TABLE>
3
<PAGE> 4
NSD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, Including Fees $11,241,512 $ 9,536,361 $5,761,586 $4,818,251
Investment Securities
Taxable 3,218,732 2,914,466 1,609,032 1,551,622
Tax-Exempt 107,008 132,703 53,652 72,327
Dividends 164,776 107,322 86,301 58,761
Interest Bearing Deposits 8,026 10,758 5,354 9,734
Federal Funds Sold 8,893 18,383 5,339 843
-----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 14,748,947 12,719,993 7,521,264 6,511,538
INTEREST EXPENSE
Deposits 4,709,773 4,306,357 2,401,641 2,182,540
Federal Funds Purchased 95,053 62,414 53,764 46,531
FHLB Advances and Other Borrowings 1,968,917 959,644 1,058,947 515,115
-----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 6,773,743 5,328,415 3,514,352 2,744,186
Net Interest Income 7,975,206 7,391,578 4,006,912 3,767,352
Provision for Loan Losses 450,000 420,000 225,000 210,000
-----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 7,525,206 6,971,578 3,781,912 3,557,352
OTHER INCOME
Net Investment Securities Gains 818 141,059 25 140,991
Service Fees 408,256 430,457 210,292 230,198
Other Operating Income 371,724 313,028 164,855 121,479
-----------------------------------------------------------------------------------------------------------------------------------
Total Other Income 780,798 884,544 375,172 492,668
OTHER EXPENSES
Salaries and Employee Benefits 2,270,108 2,243,794 1,120,472 1,123,830
Occupancy Expense 412,937 412,577 210,239 232,778
Equipment and Supplies 600,931 532,081 292,306 286,179
Data Processing 357,703 352,716 181,044 182,791
FDIC Insurance 29,521 20,579 14,672 11,217
Advertising 122,972 79,859 93,269 58,396
Other Operating Expenses 1,075,189 998,709 521,777 534,669
-----------------------------------------------------------------------------------------------------------------------------------
Total Other Expenses 4,869,361 4,640,315 2,433,778 2,429,860
Income Before Income Taxes 3,436,641 3,215,807 1,723,306 1,620,160
Provision for Income Taxes 1,139,000 1,070,900 558,000 521,650
-----------------------------------------------------------------------------------------------------------------------------------
$ 2,297,641 $ 2,144,907 $1,165,306 $1,098,510
===================================================================================================================================
-----------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Net Income - Basic $ 0.79 $ 0.72 $ 0.40 $ 0.37
Net Income - Diluted $ 0.78 $ 0.71 $ 0.40 $ 0.36
Common Dividends Declared and Paid Per Share $ 0.38 $ 0.32 $ 0.19 $ 0.16
Weighted Average Shares Outstanding - Basic 2,920,702 2,978,590 2,914,186 2,974,920
Weighted Average Shares Outstanding - Diluted 2,935,802 3,013,596 2,924,251 3,016,175
</TABLE>
See notes to consolidated financial statement.
4
<PAGE> 5
NSD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income $ 2,297,641 $ 2,144,907
Adjustments to Net Income:
Provision for Loan Losses 450,000 420,000
(Gain) on Sale of Investment Securities Available for Sale (818) (140,139)
(Gain) Loss on Sale of Other Assets (1,830) 23,717
Loss (Gain) on Disposition of Premises and Equipment 2,070 (976)
Depreciation and Amortization 362,369 307,357
Net Premium Amortization 17,259 69,560
(Increase) in Accrued Interest Receivable (140,109) (282,419)
Decrease in Accrued Interest Payable 461,708 149,113
(Increase) in Other Assets (246,237) (593,363)
Deferred Loan Fees, Net 20,326 (9,730)
Increase (Decrease) in Other Liabilities (39,702) (5,526,267)
-------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities 3,182,677 (3,438,240)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Investment Securities Available for Sale 321,035 5,738,066
Proceeds from Repayments and Maturities of Investment Securities
Available for Sale 2,001,396 14,611,174
Proceeds from Repayments and Maturities of Investment Securities Held
to Maturity -- 471,080
Purchases of Investment Securities (3,327,821) (34,215,680)
Proceeds from Sales of Other Real Estate Owned 105,652 288,729
Net (Increase) in Loans (28,413,142) (11,148,583)
(Purchases) Dispositions of Premises and Equipment, Net (118,981) 167,327
-------------------------------------------------------------------------------------------------------------------
Net Cash (Used) by Investing Activities (29,431,861) (24,087,887)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Demand and Savings Accounts 4,690,860 6,261,937
Net Increase in Certificates of Deposit 5,306,684 1,582,651
Increase in Federal Funds Purchased 2,900,000 2,201,805
Proceeds from Federal Home Loan Bank Advances and Other Borrowings 49,284,300 21,000,000
Repayment of Federal Home Loan Bank Advances and Other Borrowings (29,684,300) (10,000,000)
Proceeds from the Exercise of Common Stock Options -- 127,838
Cash Paid in Lieu of Fractional Shares (3,124) (3,926)
Treasury Stock Purchased (276,085) (487,406)
Cash Dividends Paid (1,083,664) (976,684)
-------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 31,134,671 19,706,215
-------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 4,885,487 (7,819,912)
Cash and Cash Equivalents at Beginning of Period 13,921,122 22,278,095
-------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period 18,806,609 14,458,183
===================================================================================================================
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
NSD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of NSD Bancorp, Inc. (the "Corporation")
include the accounts of the Corporation and wholly owned subsidiary, NorthSide
Bank, a community bank operating ten branch offices located in Western
Pennsylvania, and NorthSide Bank's wholly owned subsidiary, 100 Federal Street,
Inc. Material inter-company accounts and transactions have been eliminated.
2. EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income by the sum
of the weighted average number of shares of common stock outstanding during each
period. Diluted earnings per common share is calculated by dividing net income
by the sum of the weighted average number of shares of common stock outstanding
and the number of shares of common stock which would be issued assuming the
exercise of stock options during each period.
3. COMPREHENSIVE INCOME:
The following represents comprehensive income and its components for the three
and six month periods ended June 30, 1999 and June 30, 2000, respectively. 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 Six Months Ended For The Three Months Ended
June 30, June 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 2,297,641 $ 2,144,907 $ 1,165,306 $ 1,098,510
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period (588,708) (2,903,660) (89,104) (2,449,416)
Less: reclassification adjustment for
gain realized in net income 818 141,059 25 140,991
------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) (589,526) (3,044,719) (89,129) (2,590,407)
------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (589,526) (3,044,719) (89,129) (2,590,407)
Tax Expense (Benefit) at 34% (200,439) (1,035,204) (30,304) (880,738)
------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income, net (389,087) (2,009,515) (58,825) (1,709,669)
------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 1,908,554 $ 135,392 $ 1,106,481 $ (611,159)
==============================================================================================================================
</TABLE>
4. 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 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.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is an analysis of NSD Bancorp, Inc.'s (the
"Corporation") financial condition and results of operations for the three and
six months ended June 30, 2000 compared to the six months ended June 30, 1999.
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 2000 was $2,297,641; an increase of
$152,734 from $2,144,907 for the six months ended June 30, 1999. Contributing to
the increase were increases in net interest income and other operating income of
$583,626 and $58,696, respectively. Offsetting these increases to net income
were increases in the provision for loan losses, salaries and employee benefits,
equipment and supplies, advertising, other operating expenses and provision for
income taxes of $30,000, $26,314, $68,850, $43,113, $76,480 and $68,100,
respectively, and decreases in net investment securities gains and service fees
of $140,242 and $22,201, respectively, for the six months ended June 30, 2000
compared to the same period in 1999. The Corporation's annualized return on
average assets (ROA) for the first six months of 2000 was 1.15% compared to
1.20%. This decrease reflects the impact of significant growth in average assets
and net interest margin compression. Annualized return on average equity (ROE)
was 15.43% for the first half of 2000 compared to 13.48% for the same period in
1999. This increase is largely due to a lower equity-to-assets ratio resulting
from significant growth in average assets and, to a lesser extent, the
repurchase of common shares into treasury. Offsetting this increase was a
decline in net interest margin.
Net income for the second quarter of 2000 was $1,165,306, an increase of
$66,796, from $1,098,510 for the second quarter of 1999. Contributing to the
overall increase were increases in net interest income and other operating
income of $239,560 and $43,376, respectively, and decreases in salaries and
employee benefits, occupancy and other operating expenses of $3,358, 22,539, and
$12,892, respectively. Offsetting the increases to net income were increases to
the provision for loan losses, advertising and provision for income taxes of
$15,000, $34,873 and $36,350, respectively, and decreases in net investment
securities gains and service fees of $140,966 and $19,906, respectively, for the
three months ended June 30, 2000 compared to the same period in 1999. ROA and
ROE for the second quarter of 2000 was 1.31% and 17.87%, respectively, compared
to 1.21% and 13.80% for same period in 1999.
NET INTEREST INCOME
The primary component of the Corporation's earnings is net interest income,
which is the difference between interest earned on loans, investments and other
earning assets and the interest expense on deposits and other interest bearing
liabilities which fund those assets. Tax-exempt securities and loans carry
pretax yields lower than comparable taxable assets. Therefore, it is more
meaningful to analyze net interest income on a tax-equivalent basis.
Total interest income increased $2,030,193 during the six months ended June 30,
2000 as compared to the same period in 1999 as the result of a $38,415,810
increase in average earning assets and an increase in the yield on average
earning assets to 7.84% at June 30, 2000 from 7.58% at June 30, 1999. The
increase in average assets was comprised of an increase in loans of $42,111,065
while investment securities and federal funds sold declined by $3,732,792 and
$473,266, respectively, for the first half of 2000 as compared to the first half
of 1999.
7
<PAGE> 8
Total interest expense increased $1,445,328 during the six months ended June 30,
2000 compared to the same period in 1999 as the result of a $42,085,781 increase
in average interest bearing liabilities in addition to an increase in the
average cost of such funds to 4.47% at June 30, 2000 from 4.09% at June 30,
1999. The increase in average interest bearing liabilities was comprised of
increases in average interest bearing deposits, federal funds purchased and FHLB
advances of $11,785,961, $500,238 and $29,799,582, respectively.
Total interest income increased $994,719 to $7,571,103 during the second quarter
of 2000 as compared to the same period in 1999. This increase is the result of
growth in average earning assets of $39,913,193 and an increase in the yield on
total earning assets from 7.63% for the second quarter of 1999 to 7.88% for the
second quarter of 2000. Average loans increased, quarter over quarter, by
$45,726,433. Also contributing to this increase, was an increase in the yield on
average loans to 8.19% during 2000's second quarter compared to 8.15% for the
same period in 1999. A decrease in average investment securities outstanding of
$7,394,658 offset by an increase in the yield on average outstandings during the
quarter to 7.01% from 6.32% for the second quarter of 1999, contributed
significantly to the overall increase in interest income.
Interest expense increased $770,166 during the second quarter of 2000 compared
to the second quarter of 1999 due to a $40,438,369 increase in interest bearing
liabilities and an increase in the average total cost of funds from 4.09% for
the second quarter of 1999 to 4.57% for the second quarter of 2000. Average
interest bearing deposits increased $9,480,467 while the cost of total average
interest bearing deposits increased to 4.12% in the second quarter of 2000 from
3.90% for the same period in 1999. The increase in average interest bearing
deposits consisted of $1,489,978 and $8,344,940 increases in money market and
interest checking, and certificate of deposit accounts, respectively, while
average savings accounts declined $354,451. Average borrowed funds increased
$31,460,765 for the second quarter of 2000 compared to the second quarter of
1999 while the average cost of borrowings increased to 5.87% from 5.79% during
the period.
The Corporation's year-to-date net interest margin decreased from 4.43% as of
June 30, 1999 to 4.26% as of June 30, 2000, due to an increase in the average
cost of interest bearing liabilities partially offset by an increase in the
average yield on earning assets. The Corporation's 2000 second quarter net
interest margin of 4.22% reflects a decline from 4.45% for the same period in
1999. This decline was the result of an increase in the average cost on interest
bearing liabilities partially offset by an increase in the yield on earning
assets for the period.
PROVISIONS FOR LOAN LOSSES
The Corporation's provision for loan losses was $450,000 and $225,000 for the
six month period ended June 30, 2000, respectively, compared to $420,000 and
$210,000, respectively, for the same periods in 1999. The Corporation had net
charge-offs of $218,787 and $246,610 for the first six months of 2000 and 1999,
respectively. The decrease in net charge-offs reflects the overall improvement
in loan quality and resulting lower delinquency levels.
8
<PAGE> 9
The Corporation's net charge-off by loan type in the reserve for loan losses
were as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C>
Reserve for Loan Losses at Beginning of Year $3,088,257 $2,756,502
Charge-offs:
Commercial, Financial, and Agricultural Loans 10,711 66,560
Real Estate Mortgage Loans 24,100 --
Installment Loans 178,397 196,210
Lease Financing 21,705 19,963
----------------------------------------------------------------------------------------
Total Charge-offs 234,913 282,733
Recoveries:
Commercial, Financial, and Agricultural Loans -- --
Real Estate Mortgage Loans -- --
Installment Loans 15,526 34,923
Lease Financing 600 1,200
----------------------------------------------------------------------------------------
Total Recoveries 16,126 36,123
----------------------------------------------------------------------------------------
Net Charge-offs 218,787 246,610
Provisions for Loan Losses 450,000 420,000
----------------------------------------------------------------------------------------
Reserve for Loan Losses at End of Period $3,319,470 $2,929,892
========================================================================================
</TABLE>
OTHER INCOME
Other income decreased $103,747 to $780,797 for the six months ended June 30,
2000 from $884,544 for the six months ended June 30, 1999. Sales of investment
securities available for sale during the first six months of 1999 resulted in
net gains of $141,059 compared to $818 for the first six months of 2000. Service
fees decreased $22,201 to $408,256 for the first half of 2000, from $430,457 for
the first half of 1999. Of this decrease, $33,067 was attributed to decreases in
net NSF charges and savings account fees offset by a $9,799 increase in checking
account fees during the first six months of 2000. Other operating income
increased to $371,724 for the six months ended June 30, 2000 due to increases in
2000 ATM surcharge income and checkbook commissions of $43,122 and $14,383,
respectively.
Other income decreased $117,496 during the second quarter of 2000 to $375,172
from $492,668 for second quarter of 1999. The sale of investment securities
resulted in net gains of $140,991 for the three months ended June 30, 1999
compared to $25 for the same period in 2000. Service fees decreased $19,906 to
$210,292 for the second quarter of 2000 due to decreases in net NSF charges and
checking fees and also savings account fees of $14,027, $4,113 and $3,446,
respectively. Other operating income increased $43,376 over last year's second
quarter largely due to an increase in ATM surcharge income of $23,355. A decline
in 2000 net losses on asset sales of $23,422 also contributed to the overall
increase in other operating income. A $40,000 write-down of fixed assets was
recognized during the second quarter of 1999 due to Year 2000 related computer
equipment upgrades.
9
<PAGE> 10
OTHER EXPENSES
Total other expenses for the first half of 2000 increased $229,046 to $4,869,361
from $4,640,315 for the first half of 1999. Salaries and employee benefits
increased $26,314, reflecting normal salary and benefit increases and additional
staffing to support the growth of the Corporation. Occupancy expense remained
relatively flat at $412,937 compared to $412,577 for the same period last year.
Equipment and supplies expense increased $68,850 principally due to a $69,660
increase in depreciation expense related to computer equipment and software
purchases in preparation for the Year 2000. Data processing expense increased
$4,987 primarily due to increases in additional core processing vendor charges
associated with the Bank's new contract and system installations. Advertising
expense increased $43,113 with additional emphasis on newspaper and other media
publications. Contributing to the $76,479 increase in other operating expenses
were increases in legal, activities, financial services, education, Cashflow
Maximizer , general loss, and demand deposit account losses of $23,183, $11,524,
$22,222, $23,136, $51,373, $16,510 and $10,934, respectively, offset by
decreases in protection, student loan processing, asset recovery, donations,
correspondent bank expenses of $6,951, $34,475, $8,121, $6,902 and $11,247,
respectively.
Total other expenses for the second quarter of 2000 increased $3,918 to
$2,433,778 from $2,429,860 for the same period in 1999. Salaries and employee
benefits decreased $3,358 reflecting the impact resulting from closer expense
control during the period net of normal salary and benefit increases. Occupancy
expense decreased $22,539 almost entirely due to a timing difference compared to
the same payment cycle in 1999 for rent on bank owned properties. Equipment and
supplies expense increased slightly to $292,306 while data processing expense
declined by $1,747. Advertising expense increased $34,873 primarily due to
additional emphasis on newspaper and other media publications. Contributing to
the $12,892 decrease in other operating expenses were decreases in telephone,
student loan processing and correspondent bank expenses of $11,877, $24,977, and
$6,626, respectively, offset by increases in legal, education, Cashflow
Maximizer expenses and checking account losses of $11,617, $8,991, $24,479 and
$9,749, respectively.
INCOME TAXES
The Corporation recorded an income tax provision of $1,139,000 for the six
months ended June 30, 2000 compared to $1,070,900 for the six months ended June
30, 1999. The increase in tax provision was the result of higher pre-tax
earnings. The effective tax rates for the first half of 2000 and 1999 were 33.1%
and 33.3%, respectively. The decrease in effective tax rate is due mainly to the
increase in income earned on tax-exempt earning assets.
The Corporation recorded an income tax provision of $558,000 for the three
months ended June 30, 2000 compared to $521,650 for the three months ended June
30, 1999. The increase in the tax was the result of higher pre-tax earnings. The
effective tax rates for the first half of 2000 and 1999 were 32.4% and 32.2%,
respectively. The increase in effective tax rate is due mainly to the decrease
in income earned on tax-exempt earning assets.
FINANCIAL CONDITION
The Corporation's total assets increased $33,337,509 from $392,285,472 at
December 31, 1999 to $425,622,981 at June 30, 2000. Loans available for sale
increased to $868,700 at June 30, 2000 from $630,777 at December 31, 1999. The
loans available for sale at June 30, 2000 and December 31, 1999 were entirely
comprised of student loans. Net loans increased from $264,157,344 at December
31, 1999 to $291,734,953 at June 30, 2000. Securities available for sale
increased $399,423 from December 31, 1999 to June 30, 2000 while there were no
securities held to maturity during the same period.
10
<PAGE> 11
INVESTMENT SECURITIES
Investment securities available for sale increased $399,423 during the first
half of 2000. U.S. Government agencies, obligations of state and political
subdivisions and marketable equity securities increased $1,939,291, $270,440 and
$505,515, respectively, while U.S. Treasuries, mortgage-backed securities and
corporate bonds decreased by $3,631, $2,191,895 and $120,296, respectively, due
to normal purchasing activity net of any sales, calls, maturities and changes in
unrealized gains classes. The Corporation experienced a significant change in
net, unrealized gains (losses) on fixed income securities principally due to a
shift in market pricing on bank stocks which comprise the entire marketable
equity securities portfolio of the corporation since the end of 1999. 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. 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. The fair value of marketable equity securities increased $505,515
during the first half of 2000, which was due almost entirely to an increase in
the level of FHLB stock.
A summary of investment securities available for sale is as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------------------------------------------------------------------------------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED -----------------------------
COST GAINS LOSSES FAIR VAE
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Treasury Securities $ 3,708,362 $ -- $ 30,895 $ 3,677,467
Obligations of U.S. Government Agencies 36,320,485 -- 1,638,395 34,682,090
Mortgage-backed Securities 50,427,496 3,798 2,270,169 48,161,125
Obligations of State and Political Subdivisions 4,277,978 34,162 147,420 4,164,720
Other Bonds 7,111,265 -- 390,031 6,721,234
Marketable Equity Securities 4,810,563 1,437,008 -- 6,246,572
-------------------------------------------------------------------------------------------------------------------------------
$106,656,149 $1,473,968 $4,476,910 $103,653,207
===============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------------------------------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED -----------------------------
COST GAINS LOSSES FAIR VAE
-------------------------------------------------------------------------------------------------------------------------------
<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>
11
<PAGE> 12
LOANS
Loans, net of deferred fees, increased to $298,001,788 at June 30, 2000 from
$269,192,709 at December 31, 1999. Commercial business development efforts
resulted in a net increase of $5,938,774 in nonresidential mortgages and
commercial, financial and agricultural loans. Increased production of indirect
automobile loans corresponding to increased demand in the automobile market was
the primary reason for the $9,830,113 increase in consumer loans to individuals.
More aggressive residential mortgage loan pricing and the development of
additional broker relationships resulted in an increase of $8,114,661 while
lines of credit increased by $62,018. Equipment leases also increased $4,912,940
with a re-emphasis on that business line during the first half of 2000.
Non-accrual loans decreased $29,101 since December 31, 1999.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, INCREASE
2000 1999 (DECREASE)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consumer Loans to Individuals $ 118,677,506 $ 108,847,393 $ 9,830,113
Mortgage:
Nonresidential 64,009,803 47,730,294 16,279,509
Residential 55,938,419 47,823,758 8,114,661
Commercial, Financial and Agricultural 35,712,722 46,053,457 (10,340,735)
Lines of Credit 4,984,735 4,922,717 62,018
Lease Financing 18,312,737 13,399,797 4,912,940
Non-Accrual Loans 748,860 777,961 (29,101)
---------------------------------------------------------------------------------------------------------
Total Loans 298,384,782 269,555,377 28,829,405
Deferred Fees (382,994) (362,668) (20,326)
---------------------------------------------------------------------------------------------------------
Loans, Net of Deferred Fees $ 298,001,788 $ 269,192,709 $ 28,809,079
=========================================================================================================
</TABLE>
A loan is considered impaired when based upon current information and events; it
is probable that the Corporation will be unable to collect all amounts due for
principal and interest according to the contracted terms of the loan agreement.
At June 30, 2000, the Corporation had no recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114. There were no
loans considered impaired that have been partially written down through
charge-offs. The average recorded investment in impaired loans was $0 for the
first six months of 2000. Therefore, no interest was recognized on impaired
loans and no additional reserve was required for impaired loans during the first
half of 2000.
NON-PERFORMING ASSETS
Non-performing assets and loans 90 days past due and still accruing decreased to
$1,476,398 at June 30, 2000 from $1,640,076 at December 31, 1999 due primarily
to a $158,038 decrease in loans past due 90 days and still accruing along with
decreases in non-accrual loans and other assets held for sale of $29,101 and
$16,735, respectively. Offsetting these declines was an increase in other real
estate owned of $40,196.
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>
JUNE 30, DECEMBER 31,
2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual Loans $ 748,860 $ 777,961
Other Real Estate Owned 172,288 132,092
Other Assets Held for Sale 113,333 130,068
---------------------------------------------------------------------------------------
Total Non-Performing Assets 1,034,481 1,040,121
Loans 90 Days Past Due and Still Accruing 441,917 599,955
---------------------------------------------------------------------------------------
Total Non-Performing Assets and Past Due Loans $1,476,398 $1,640,076
=======================================================================================
</TABLE>
12
<PAGE> 13
RESERVE FOR LOAN LOSSES
The Corporation's loan loss reserve at June 30, 2000 was $3,319,470 or 1.12% of
total loans compared to $2,929,892 or 1.20% of total loans at June 30, 1999.
Management anticipates that the loan losses are adequate to absorb reasonably
foreseeable losses on loans.
The following is a summary of activity in the reserve for loan losses:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------------
2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Beginning Balance $3,088,257 $2,756,502
Provision 450,000 420,000
Net Charge-offs 218,787 246,610
-----------------------------------------------------------------------------
Ending Balance $3,319,470 $2,929,892
=============================================================================
Reserve for Loan Losses to Total Loans 1.12% 1.20%
=============================================================================
</TABLE>
The Corporation establishes specific reserves for potential problem loans as
determined by its loan review program 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 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 losses from 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 inherent losses 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 charge-off levels, 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, which takes the following
factors into consideration:
o Concentrations of credit
o Delinquency and non-accrual trends
o Local and national economic conditions
o Changes in lending and collection practices
o Trends in volume and terms of loans
o Other external factors that affect the ability of the Corporation's
customers to repay their obligations.
13
<PAGE> 14
Management regularly 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 was as follows at
June 30, 2000, and 1999 (in thousands):
<TABLE>
<CAPTION>
June 30,
2000 1999
-----------------------------
<S> <C> <C>
Specific reserves. . . . . . . . . . . . . . $ 469,627 $ 491,679
Formula reserves. . . . . . . . . . . . . . . 2,231,689 1,921,768
Unallocated reserves. . . . . . . . . . . . . 618,154 516,446
-----------------------------
Total . . . . . . . . . . . . . . . . . . . . $3,319,470 $2,929,892
-----------------------------
</TABLE>
Specific reserves decreased $22,052 from June 30, 1999 to June 30, 2000
primarily due to a decrease in classified installment loans and personal lines
of credit corresponding to an improvement in shorter term delinquencies. This
decrease was offset by an increase in classified commercial loans the largest
portion of which is attributable to smaller loans that are to unrelated
borrowers. Management believes that current reserves appropriately reflects the
level of risk and potential loss of these credits. The reserve amount specified
for these credits may change in the event that there is evidence of an
improvement or further deterioration in the customer's ability to satisfy
contractual requirements.
The formula reserve portion of the allowance for loan losses increased $309,921
reflecting the significant growth in total commercial and installment loans
outstanding offset by a decline in formula reserves related to the residential
mortgage loan portfolio.
14
<PAGE> 15
LIABILITIES
Total liabilities were $394,728,037 at June 30, 2000, an increase of $32,791,827
from December 31, 1999. The increase was largely the result of an increase in
total borrowed funds of $22,500,000 and total deposits of $9,997,544. The
increase in borrowed funds was primarily used to supplement funding for loan
growth during the first half of the year.
DEPOSITS
Total deposits increased $9,997,544 from $289,439,659 at December 31, 1999 to
$299,437,203 at June 30, 2000. Contributing to the overall increase were
increases in non-interest bearing demand deposits, saving deposits, and time
deposits of $7,591,198, $675,650, $5,306,684, respectively, offset by decreases
in interest bearing demand deposits and money market accounts of $1,169,395 and
$2,406,593, respectively.
The composition of deposits is shown in the following table:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, INCREASE
2000 1999 (DECREASE)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest Bearing Demand $ 68,020,736 $ 60,429,538 $ 7,591,198
Interest Bearing Demand 28,610,835 29,780,230 (1,169,395)
Savings 39,213,681 38,538,031 675,650
Money Market Account 59,798,467 62,205,060 (2,406,593)
Time Deposits equal to or more than $100,000 15,570,921 14,057,493 1,513,428
Time Deposits less than $100,000 88,222,563 84,429,307 3,793,256
----------------------------------------------------------------------------------------------------------
Total Deposits $299,437,203 $289,439,659 $ 9,997,544
==========================================================================================================
</TABLE>
TOTAL BORROWED FUNDS
At June 30, 2000, the Corporation had total borrowed funds of $88,850,000,
$26,850,000 of which will mature within the next 12 months. The Corporation
borrowed these funds to provide liquidity for specific asset-liability
management strategies. At June 30, 2000, total borrowed funds were comprised of
$82,250,000 in advances from the Federal Home Loan Bank which are collateralized
by qualifying securities and loans and $6,600,000 in federal funds purchased.
Included in total FHLB advances were $62,000,000 in borrowings which are subject
to restrictions or penalties related to prepayments.
SHAREHOLDER'S EQUITY
Consolidated shareholders' equity increased $545,682 from $30,349,262 at
December 31, 1999 to $30,894,944 at June 30, 2000. This increase was the result
of the retention of earnings offset by the purchase of treasury stock, payment
of cash dividends to shareholders and a decline in accumulated other
comprehensive income which is comprised entirely of unrealized holding
gains/losses on investment securities.
The Corporation continues to maintain a strong capital position. Risk-based
capital ratios exceed current regulatory requirements. The Corporation's Tier I
risk-based capital ratio at June 30, 2000 was 10.72% compared to 11.28% at
December 31, 1999. The Corporation's total risk-based capital ratio at June 30,
2000 was 12.03% compared to 12.71% at December 31, 1999. Regulatory requirements
for Tier I and total risk-based capital ratios are 4.00% and 8.00%,
respectively.
15
<PAGE> 16
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 May 31, 2000, a simulation analysis
assuming a one-time 200 basis point increase in interest rates results in a
negative impact of approximately 2.1% or $308,000 on projected net interest
income over a one-year period. Conversely, a 200 basis point decrease in
interest rates resulted in a slight decrease in projected net interest income of
.1% or approximately $8,000 over the same period. These findings are the result
of normal projected growth in interest earning assets and interest related
liability levels based on the Corporation's position at May 31, 2000. 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 earning assets and interest
bearing liabilities change at varying frequencies and market forces may limit
the ability to appropriately respond to such changes.
There have been no shifts in asset/liability composition or repricing
characteristics of individual portfolios which would materially affect the
results of the analysis performed as of May 31, 2000. Therefore, such analysis
is regarded as a fair presentation of the Corporation's market risk as of June
30, 2000.
INTEREST RATE SENSITIVITY, LIQUIDITY AND CASH FLOWS
The Corporation has an asset/liability management process in place to monitor
and control risks associated with changing interest rates and the potential
impact on future financial performance. Interest rate risk is managed by
analyzing the maturity and repricing relationships between interest earning
assets and interest bearing liabilities at specific points in time or "GAP"
analysis. Management, however, recognizes that a simplified GAP analysis may not
adequately reflect the degree to which assets and liabilities with similar
repricing characteristics react to changes in market interest rates. In
addition, repricing characteristics identified under a specific gap position may
vary significantly under different interest rate environments. Therefore,
simulation modeling is also performed to evaluate the extent and direction of
the Corporation's interest rate exposure under upward or downward changes in
interest rates.
16
<PAGE> 17
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 $3,182,677 during the first half of
2000, compared to net cash used of $3,438,240 during the first half of 1999. The
primary source of operating cash flows for 2000 was net income adjusted for the
effect of non-cash expenses such as the provision for loan losses, depreciation
of premises and equipment and amortization of intangible assets.
Investing activities used net cash of $29,431,861 during the first half of 2000,
compared to net cash used of $24,087,887 during the first half of 1999. A
significant portion of borrowings was used to fund loan growth in excess of
growth in retail deposit funding sources. Proceeds from sales, repayments and
maturities of investment securities available for sale were reinvested primarily
to fund loan growth and, to a more limited extent, reinvested in investment
securities available for sale.
Financing activities provided cash of $31,134,671 and $19,706,215 for the first
half of 2000 and 1999, respectively. A net increase in total borrowed funds and
total deposits provided cash while cash was used by repayment of borrowings, the
payment of cash dividends to shareholders and purchases of treasury stock.
17
<PAGE> 18
Part II - Other Information
Items 1-3 Not applicable pursuant to the instructions to Part II
Item 4 Submission of Matters for a Vote of Security Holders
At an annual meeting of shareholders of the
Corporation was held on April 25, 2000, for the
purpose of (a) electing 5 directors, (b) ratifying
the appointment of Deloitte & Touche, L.L.P.,
Certified Public Accountants, as the independent
auditors and accountants for the Corporation.
(a) All 5 nominees were elected and the votes for and against/withheld
were as follows:
NOMINEE FOR AGAINST
Nicholas C. Geanopulos 2,511,182 17,627
Gus P. Georgiadis 2,511,747 17,062
Lloyd G. Gibson 2,452,688 76,121
Charles S. Lenzner 2,514,658 14,151
Kenneth L. Rall 2,514,658 14,151
(b) The appointment of Deloitte & Touche, L.L.P., as independent auditors
and accountants was ratified with a vote of 2,473,152 for and 55,115
against/withheld or abstaining.
With respect to the above matters, each holder of the Corporation's
common stock was entitled to one vote per share. The number of shares
of common stock outstanding and entitled to vote as of March 14,
2000, the record date, was 2,788,516.
Item 5 Not applicable pursuant to the instructions to Part II.
Item 6 Exhibits and Reports on Forms 8-K.
(a) Exhibits
10.1 Employment agreement dated July 1, 1993, between NSD Bancorp,
Inc. and Lloyd G. Gibson filed as Exhibit 10D to NSD Bancorp,
Inc.'s 10K for the fiscal year ended December 31, 1993, is
incorporated herein by reference.
10.2 NSD Bancorp, Inc. 1994 Stock Option Plan filed as Exhibit 4.1
to NSD Bancorp, Inc.'s Form S-8 filed April 27, 1994 is
incorporated herein by reference.
10.3 NSD Bancorp, Inc. 1994 Non-Employee Director Stock Option Plan
filed as Exhibit 4.1 to NSD Bancorp, Inc.'s Form S-8 filed
April 27, 1994, is incorporated herein by reference.
27 Financial Data Schedule
(b) Reports on Form 8-K: None
18
<PAGE> 19
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NSD BANCORP, INC.
-------------------------------------------
(Registrant)
Dated: August 14, 2000 /S/ Lloyd G. Gibson
-------------------------------------------
Lloyd G. Gibson, President and
Chief Executive Officer
Dated: August 14, 2000 /S/ James P. Radick
-------------------------------------------
James P. Radick, Treasurer (Principal
Financial and Accounting Officer)
19
