<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 September 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 October
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 September 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 3
Consolidated Statements of Income For the Three and Nine
Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows For the Nine
Months Ended September 30, 2000 and 1999 5
Consolidated Statements of Comprehensive Income For the
Three and Nine Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8K 19
</TABLE>
2
<PAGE> 3
NSD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 15,863,081 $ 13,921,122
Investment Securities Available for Sale at Market Value (Amortized Cost of
$99,219,690 at September 30, 2000 and $105,667,201 at December 31, 1999) 97,198,193 103,253,784
Loans Held for Sale 851,837 630,777
Loans, Net of Deferred Fees 307,858,458 269,192,709
Unearned Income (2,855,393) (1,947,108)
Reserve for Loan Losses (3,404,986) (3,088,257)
--------------------------------------------------------------------------------------------------------------------------------
Loans, Net 301,598,079 264,157,344
Premises and Equipment, Net 2,578,091 2,850,773
Accrued Interest Receivable 2,249,740 2,209,494
Other Real Estate Owned and Assets Held for Sale 326,528 262,160
Other Assets 5,006,099 5,000,018
--------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 425,671,648 $ 392,285,472
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing $ 61,706,964 $ 60,429,536
Interest Bearing 231,572,425 229,010,123
--------------------------------------------------------------------------------------------------------------------------------
Total Deposits 293,279,389 289,439,659
Borrowed Funds:
Advances from Federal Home Loan Bank and Other Borrowings 86,254,200 62,650,000
Fed Funds Purchased 7,700,000 3,700,000
--------------------------------------------------------------------------------------------------------------------------------
Total Borrowed Funds 93,954,200 66,350,000
Accrued Interest Payable 5,502,337 4,534,488
Other Liabilities 1,325,799 1,612,063
--------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 394,061,725 361,936,210
Common Stock $1 Par Value; 10,000,000 shares authorized, 3,016,918 issued and
2,868,072 outstanding at September 30, 2000 and 3,017,075 issued and 2,927,502
outstanding at December 31, 1999 3,016,918 2,873,405
Treasury Stock at cost, 148,846 shares at September 30, 2000 and 89,573 shares
at December 31, 1999 (2,794,300) (1,879,310)
Capital Surplus 15,744,863 13,625,727
Accumulated Other Comprehensive Income (1,330,356) (1,589,023)
Retained Earnings 16,972,798 17,318,463
--------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 31,609,923 30,349,262
--------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 425,671,604 $ 392,285,472
================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
NSD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, Including Fees $ 17,553,212 $ 14,591,742 $ 6,311,700 $ 5,055,381
Investment Securities
Taxable 4,764,680 4,371,553 1,545,948 1,457,087
Tax-Exempt 159,191 198,873 52,183 66,169
Dividends 266,144 169,747 101,368 62,425
Interest Bearing Deposits 10,412 34,651 2,386 23,893
Federal Funds Sold 12,190 20,107 3,297 1,724
------------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 22,765,829 19,386,673 8,016,882 6,666,679
INTEREST EXPENSE
Deposits 7,280,233 6,539,071 2,570,460 2,232,714
Federal Funds Purchased 171,380 105,171 76,326 42,757
FHLB Advances and Other Borrowings 3,244,230 1,587,442 1,275,313 627,797
------------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 10,695,843 8,231,684 3,922,099 2,903,268
Net Interest Income 12,069,986 11,154,989 4,094,783 3,763,411
Provision for Loan Losses 675,000 630,000 225,000 210,000
------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 11,394,986 10,524,989 3,869,783 3,553,411
OTHER INCOME
Net Investment Securities Gains (1,433) 169,822 (2,251) 28,763
Service Fees 628,190 675,657 219,935 245,200
Other Operating Income 551,215 456,628 179,491 143,600
------------------------------------------------------------------------------------------------------------------------------------
Total Other Income 1,177,972 1,302,107 397,175 417,563
OTHER EXPENSES
Salaries and Employee Benefits 3,433,745 3,361,644 1,163,638 1,117,850
Occupancy Expense 594,086 610,857 181,149 198,281
Equipment and Supplies 914,049 817,037 313,118 284,956
Data Processing 544,402 534,750 186,698 182,034
FDIC Insurance 44,781 29,877 15,260 9,297
Advertising 154,546 106,272 31,574 26,413
Other Operating Expenses 1,612,455 1,504,361 537,266 505,652
------------------------------------------------------------------------------------------------------------------------------------
Total Other Expenses 7,298,064 6,964,798 2,428,703 2,324,483
Income Before Income Taxes 5,274,894 4,862,298 1,838,255 1,646,491
Provision for Income Taxes 1,722,000 1,612,750 583,000 541,850
------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,552,894 $ 3,249,548 $ 1,255,255 $ 1,104,641
====================================================================================================================================
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Net Income - Basic $1.22 $1.09 $0.44 $0.37
Net Income - Diluted $1.22 $1.08 $0.43 $0.37
Common Dividends Declared and Paid Per Share $0.57 $0.37 $0.19 $0.16
Weighted Average Shares Outstanding - Basic 2,922,083 2,970,137 2,894,646 2,953,231
Weighted Average Shares Outstanding - Diluted 2,908,645 3,001,234 2,884,531 2,976,511
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
NSD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income $ 3,552,894 $ 3,249,548
Adjustments to Net Income:
Provision for Loan Losses 675,000 630,000
Loss (Gain) on Sale of Investment Securities Available for Sale 1,433 (169,822)
(Gain) on Loan Sales -- (37,468)
(Gain) Loss on Sale of Other Assets (2,791) 28,569
Loss on Disposition of Premises and Equipment 2,070 39,024
Depreciation and Amortization 531,244 472,856
Net Premium Amortization 27,568 111,268
(Increase) Decrease in Accrued Interest Receivable (40,246) 53,827
Decrease (Increase) in Accrued Interest Payable 967,849 (320,882)
Increase in Other Assets (425,696) (300,259)
Deferred Loan Fees, Net 6,664 33,105
Decrease in Other Liabilities (128,541) (4,825,789)
-----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities 5,167,448 (1,036,023)
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Investment Securities Available for Sale 2,501,535 10,959,708
Proceeds from Repayments and Maturities of Investment Securities
Available for Sale 7,520,794 21,682,349
Proceeds from Repayments and Maturities of Investment Securities Held
to Maturity -- 1,172,588
Purchases of Investment Securities (3,603,821) (41,262,080)
Proceeds from Sales of Other Real Estate Owned 234,131 342,618
Net Increase in Loans (38,625,899) (27,911,582)
Proceeds from the Sale of Loans -- 3,852,413
Purchases of Premises and Equipment, Net (128,180) (761,738)
-----------------------------------------------------------------------------------------------------------------------------
Net Cash (Used) by Investing Activities (32,101,440) (31,925,724)
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (Decrease) Increase in Demand and Savings Accounts (3,928,445) 2,770,863
Net Increase in Certificates of Deposit 7,768,173 4,071,293
Increase in Federal Funds Purchased 4,000,000 --
Proceeds from Federal Home Loan Bank Advances and Other Borrowings 67,684,300 31,103,900
Repayment of Federal Home Loan Bank Advances and Other Borrowings (44,080,100) (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 (914,991) (1,286,260)
Cash Dividends Paid (1,649,862) (1,465,025)
-----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 28,875,951 25,318,683
-----------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 1,941,959 (7,643,064)
Cash and Cash Equivalents at Beginning of Period 13,921,122 22,278,095
-----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 15,863,081 $ 14,635,031
=============================================================================================================================
</TABLE>
For the nine months ended September 30, 2000 and 1999, the Corporation paid
interest of $9,727,994 and $8,674,776 and income taxes of $1,891,000 and
$1,644,750, respectively. Non-cash investing activity consisted of transfers of
loans in liquidation to foreclosed assets of approximately $111,074 and $92,277
during the first nine months of 2000 and 1999, 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.
5
<PAGE> 6
NSD BANCORP, INC.
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For The Nine Months Ended For The Three Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 3,552,894 $ 3,249,548 $ 1,255,255 $ 1,104,641
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period 390,487 (3,630,151) 979,195 (726,491)
Less: reclassification adjustment for
gain realized in net income (1,433) 169,822 (2,251) 28,763
-----------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) 391,920 (3,799,973) 981,446 (755,254)
-----------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income 391,920 (3,799,973) 981,446 (754,254)
Tax Expense (Benefit) at 34% 133,253 (1,291,991) 333,692 (256,786)
-----------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income, net (258,667) (2,507,982) 647,754 (498,468)
-----------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 3,811,561 $ 741,566 $ 1,903,009 $ 606,173
============================================================================================================================
</TABLE>
6
<PAGE> 7
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. 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 Nos. 137 and 138, 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.
In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities"(SFAS No. 140). The new
Statement replaces Statement 125, issued in June 1996. SFAS 140 is effective for
transfers occurring after March 31, 20000 and for disclosure relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. Management is currently in the process of evaluating the
impact of this statement on the consolidated financial statements.
7
<PAGE> 8
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
nine months ended September 30, 2000 compared to the three and nine months ended
September 30, 1999.
RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 2000 was $3,552,894, an
increase of $303,346 from $3,249,548 for the nine months ended September 30,
1999. Contributing to the increase was an increase in net interest income of
$914,997 and a $94,587 increase in other operating income. Offsetting these
increases in net income were increases in the provision for loan losses,
salaries and employee benefits, equipment and supplies, FDIC insurance,
advertising, other operating expenses and provision for income taxes of $45,000,
$72,101, $97,012, $14,904, $48,274, $108,094 and $109,250, respectively, and
decreases in net investment securities gains and service fees of $171,255 and
$47,467, respectively, for the nine months ended September 30, 2000 compared to
the same period in 1999. The Corporation's annualized return on average assets
(ROA) for the first nine months of 2000 was 1.18% compared to 1.19% for the
same period in 1999. This decrease reflects the impact of significant growth in
average assets and offset by compression of the net interest margin. Annualized
return on average equity (ROE) was 16.15% for the first nine months of 2000
compared to 13.64% for the same period in 1999. This increase is largely due to
significant growth in average assets resulting in a lower equity-to-assets ratio
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 third quarter of 2000 was $1,255,255, an increase of
$150,614, from $1,104,641 for the third quarter of 1999. Contributing to the
overall increase were increases in net interest income and other operating
income of $331,372 and $35,891, respectively, and a decrease in occupancy
expenses of $17,132. Offsetting the increases to net income were increases to
the provision for loan losses, salaries and benefits, equipment and supplies,
other operating expense and provision for income taxes of $15,000, $45,788,
$28,162, $31,614 and $41,150, respectively, and decreases in net investment
securities gains and service fees of $31,014 and $25,265, respectively, for the
three months ended September 30, 2000 compared to the same period in 1999. ROA
and ROE for the third quarter of 2000 was 1.23% and 17.60%, respectively,
compared to 1.15% and 13.96% for the 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 $3,338,783 during the nine months ended
September 30, 2000 as compared to the same period in 1999 as the result of a
$40,059,566 increase in average earning assets and an increase in the yield on
average earning assets to 7.91% at September 30, 2000 from 7.53% at September
30, 1999. The increase in average assets was comprised of an increase in loans
of $44,271,562 while investment securities and federal funds sold declined by
$3,671,951 and $290,573, respectively, for the first nine months of 2000 as
compared to the first nine months of 1999.
8
<PAGE> 9
Total interest expense increased $2,464,159 during the nine months ended
September 30, 2000 compared to the same period in 1999 as the result of a
$41,143,252 increase in average interest bearing liabilities in addition to an
increase in the average cost of such funds to 4.60% at September 30, 2000 from
4.09% at September 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 $8,484,803, $797,438 and
$31,861,011, respectively.
Total interest income increased $1,355,387 to $8,067,032 during the third
quarter of 2000 as compared to the same period in 1999. This increase is the
result of growth in average earning assets of $40,943,194 and an increase in the
yield on total earning assets from 7.44% for the third quarter of 1999 to 8.05%
for the third quarter of 2000. Average loans increased, quarter over quarter, by
$48,895,557. Also contributing to this increase, was an increase in the yield on
average loans to 8.40% during 2000's third quarter compared to 8.00% for the
same period in 1999. A decrease in average investment securities outstanding of
$6,257,153 offset by an increase in the yield on average outstandings during the
quarter to 6.99% from 6.15% for the third quarter of 1999, contributed
significantly to the overall increase in interest income.
Interest expense increased $1,018,831 during the third quarter of 2000 compared
to the third quarter of 1999 due to a $39,258,190 increase in interest bearing
liabilities and an increase in the average total cost of funds from 4.08% for
the third quarter of 1999 to 4.86% for the third quarter of 2000. Average
interest bearing deposits increased $1,882,487 while the cost of total average
interest bearing deposits increased to 4.40% in the third quarter of 2000 from
3.84% for the same period in 1999. The increase in average interest bearing
deposits consisted of a $10,044,984 increase in certificates of deposits, offset
by declines in savings, money market and interest checking of $1,875,547,
$6,286,950, respectively. Average borrowed funds increased $37,375,703 for the
third quarter of 2000 compared to the third quarter of 1999 while the average
cost of borrowings increased to 5.83% from 5.03% during the period.
The Corporation's year-to-date net interest margin decreased from 4.36% as of
September 30, 1999 to 4.22% as of September 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 third quarter net
interest margin of 4.13% reflects a decline from 4.22% 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 $675,000 and $225,000 for the
nine and three month period ended September 30, 2000, respectively, compared to
$630,000 and $210,000, respectively, for the same periods in 1999. The
Corporation had net charge-offs of $358,271 and $336,165 for the first nine
months of 2000 and 1999, respectively.
9
<PAGE> 10
The Corporation's net charge-off by loan type in the reserve for loan losses
were as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 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 7,837
Installment Loans 281,210 283,664
Lease Financing 70,983 19,963
--------------------------------------------------------------------------------------------------
Total Charge-offs 387,004 378,024
Recoveries:
Commercial, Financial, and Agricultural Loans -- --
Real Estate Mortgage Loans -- --
Installment Loans 28,133 40,259
Lease Financing 600 1,600
--------------------------------------------------------------------------------------------------
Total Recoveries 28,733 41,859
--------------------------------------------------------------------------------------------------
Net Charge-offs 358,271 336,165
Provisions for Loan Losses 675,000 630,000
--------------------------------------------------------------------------------------------------
Reserve for Loan Losses at End of Period $3,404,986 $3,050,337
==================================================================================================
</TABLE>
OTHER INCOME
Other income decreased $124,135 to $1,177,972 for the nine months ended
September 30, 2000 from $1,302,107 for the nine months ended September 30, 1999.
Sales of investment securities available for sale during the first nine months
of 1999 resulted in net gains of $169,822 compared to net losses of $1,433 for
the first nine months of 2000. Service fees decreased $47,467 to $628,190 for
the first nine months of 2000, from $675,657 for the first nine months of 1999.
Of this decrease, $57,341 was attributed to decreases in net NSF charges and
savings account fees offset by a $5,982 increase in checking account fees during
the first nine months of 2000. Other operating income increased to $551,215 for
the nine months ended September 30, 2000 largely due to increases in 2000 ATM
surcharge income and checkbook commissions of $72,000 and $12,376, respectively.
Other income decreased $20,388 during the third quarter of 2000 to $397,175 from
$417,563 for third quarter of 1999. The sale of investment securities resulted
in net gains of $28,763 for the three months ended September 30, 1999 compared
to net losses of $2,251 for the same period in 2000. Service fees decreased
$25,264 to $219,935 for the third quarter of 2000 due to decreases in net NSF
charges and checking fees of $24,624 and $3,817, respectively. Other operating
income increased $35,891 over last year's third quarter largely due to an
increase in ATM surcharge income of $28,878. An increase in net gains on asset
sales of $37,938 in the third quarter of 2000, offset by decline in loan sale
gains of $37,468, also contributed to the overall increase in other operating
income.
10
<PAGE> 11
OTHER EXPENSES
Total other expenses for the first nine months of 2000 increased $333,266 to
$7,298,064 from $6,964,798 for the first nine months of 1999. Salaries and
employee benefits increased $72,101, reflecting normal salary and benefit
increases and additional staffing to support the growth of the Corporation and
also a $28,869 increase in temporary staffing expense. Occupancy expense
decreased $16,771 to $594,086 compared to $610,857 for the same period last year
due to reductions in related insurances and real estate tax expense of $15,602
and $18,182, respectively, offset by an increase of $21,369 in building
maintenance. Equipment and supplies expense increased $97,012 principally due to
an $88,412 increase in depreciation expense related to computer equipment and
software purchases in preparation for the Year 2000 and equipment repair
increases of $24,222, offset by a reduction in stationery and supplies expense
of $8,315. Data processing expense increased $9,652 primarily due to increases
in additional core processing vendor charges associated with the Bank's new
contract and system installations. Advertising expense increased $48,274 with
additional emphasis on newspaper and other media publications. Contributing to
the $108,094 increase in other operating expenses were increases in legal,
activities, education, Pennsylvania shares tax, Cashflow Maximizer , general
loss, and demand deposit account losses of $68,668, $17,599, $24,039, $12,611,
$65,358, $16,901 and $11,322, respectively. Offsetting these increases to other
operating expense were decreases in student loan processing, correspondent bank
expenses and ATM expense of $45,222, $19,100 and $11,790, respectively.
Total other expenses for the third quarter of 2000 increased $104,220 to
$2,428,703 from $2,324,483 for the same period in 1999. Salaries and employee
benefits increased $45,788 reflecting the impact resulting from closer expense
control during the period net of normal salary and benefit increases and a
$16,484 increase in temporary staffing expense. Occupancy expense decreased
$17,132 due to reductions in related insurances and real estate tax expense of
$8,558 and 6,605, respectively. Equipment and supplies expense increased $28,162
to $313,118 due to an $18,752 increase in depreciation expense related to
computer equipment and software purchases in the fourth quarter of 1999 in
preparation for the Year 2000, an $11,487 increase in equipment repairs and a
$13,748 increase in office expense, offset by reductions in equipment
maintenance contract and stationery and supplies expenses of $3,442 and $10,909,
respectively. Data processing expense increased $4,664 primarily due to
increases in additional core processing vendor charges associated with the
Bank's new contract and system installations. Contributing to the $31,614
increase in other operating expenses were increases in legal and Cashflow
Maximizer expenses of $44,208 and $13,986, respectively, offset by decreases in
telephone and student loan processing fees of $11,859 and $10,747, respectively.
INCOME TAXES
The Corporation recorded an income tax provision of $1,722,000 for the nine
months ended September 30, 2000 compared to $1,612,750 for the nine months ended
September 30, 1999. The increase in tax provision was the result of higher
pre-tax earnings. The effective tax rates for the first nine months of 2000 and
1999 were 32.7% and 33.2%, respectively. The decrease in effective tax rate is
due mainly to an increase in income earned on tax-exempt earning assets.
The Corporation recorded an income tax provision of $583,000 for the three
months ended September 30, 2000 compared to $541,850 for the three months ended
September 30, 1999. The increase in the tax was the result of higher pre-tax
earnings. The effective tax rates for the first nine months of 2000 and 1999
were 31.7% and 32.9%, respectively. The decrease in effective tax rate is due
mainly to an increase in income earned on tax-exempt earning assets during the
third quarter of 2000 compared to the same period in 1999.
11
<PAGE> 12
FINANCIAL CONDITION
The Corporation's total assets increased $33,386,176 from $392,285,472 at
December 31, 1999 to $425,671,648 at September 30, 2000. Loans available for
sale increased to $851,837 at September 30, 2000 from $630,777 at December 31,
1999. The loans available for sale at September 30, 2000 and December 31, 1999
were entirely comprised of student loans. Net loans increased from $264,157,344
at December 31, 1999 to $301,598,079 at September 30, 2000. Securities available
for sale decreased $6,055,591 from December 31, 1999 to September 30, 2000.
There were no securities held to maturity at September 30, 2000 or at December
31, 1999.
INVESTMENT SECURITIES
Investment securities available for sale decreased $6,055,591 during the first
nine months of 2000. U.S. Government agencies, mortgage-backed securities and
corporate decreased $2,506,456, $4,386,661 and $100,058, respectively, while
U.S. Treasuries, obligations of state and political subdivisions and marketable
equity securities increased by $8,119, $ $80,656 and $848,808, respectively, due
to normal purchasing activity net of any sales, calls, maturities and changes in
unrealized gains classes. 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 $848,808 during the first nine months of 2000, which was due almost
entirely to an increase in the level of FHLB stock offset by changes in
unrealized gains on other equity investments.
During the third quarter of 1999, all obligations of state and political
subdivisions and other bonds, classified as held to maturity, were reclassified
as available for sale as part of a strategy designed to increase the
Corporation's liquidity position. It has been the Corporation's policy to
classify all future purchases of like securities as available for sale.
A summary of investment securities available for sale is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
----------------------------------------------------------------------------------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED ---------------------------
COST GAINS LOSSES FAIR VALUE
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Treasury Securities $ 3,708,098 $ -- $ 18,881 $ 3,689,217
Obligations of U.S. Government Agencies 31,396,909 -- 1,160,566 30,236,343
Mortgage-backed Securities 47,849,881 3,640 1,887,162 45,966,359
Obligations of State and Political Subdivisions 4,066,720 26,415 118,198 3,974,937
Other Bonds 7,111,519 1,782 371,829 6,741,472
Marketable Equity Securities 5,086,563 1,503,302 -- 6,589,865
----------------------------------------------------------------------------------------------------------------------------
$99,219,690 $ 1,535,139 $ 3,556,636 $ 7,198,193
============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------------------------------------------------------------------------------------------------
GROSS UNREALIZED
HOLDING
AMORTIZED -----------------------------
COST GAINS LOSSES FAIR 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>
12
<PAGE> 13
LOANS
Loans, net of deferred fees, increased to $307,858,458 at September 30, 2000
from $269,192,709 at December 31, 1999. Commercial business development efforts
resulted in a net increase of $9,867,475 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 $14,795,063 increase in consumer loans to
individuals. More aggressive residential mortgage loan pricing and the
development of additional broker relationships resulted in an increase of
$9,333,650 while lines of credit increased by $84,675. Equipment leases also
increased $4,625,398 with a re-emphasis on that business line during the first
nine months of 2000. Non-accrual loans decreased $33,848 since December 31,
1999.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, INCREASE
2000 1999 (DECREASE)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consumer Loans to Individuals $ 123,642,456 $ 108,847,393 $ 14,795,063
Mortgage:
Nonresidential 75,842,190 47,730,294 28,111,896
Residential 57,157,408 47,823,758 9,333,650
Commercial, Financial and Agricultural 27,809,036 46,053,457 (18,244,421)
Lines of Credit 5,007,392 4,922,717 84,675
Lease Financing 18,025,195 13,399,797 4,625,398
Non-Accrual Loans 744,113 777,961 (33,848)
-----------------------------------------------------------------------------------------------------------------------
Total Loans 308,227,790 269,555,377 38,672,413
Deferred Fees (369,332) (362,668) (6,664)
-----------------------------------------------------------------------------------------------------------------------
Loans, Net of Deferred Fees $ 307,858,458 $ 269,192,709 $ 38,665,749
=======================================================================================================================
</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 September 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 nine months of 2000. Therefore, no interest was recognized on impaired
loans and no additional reserve was required for impaired loans during the first
nine months of 2000.
NON-PERFORMING ASSETS
Non-performing assets and loans 90 days past due and still accruing decreased to
$1,336,710 at September 30, 2000 from $1,640,076 at December 31, 1999 due
primarily to a $333,886 decrease in loans past due 90 days and still accruing
and decreases in non-accrual loans and other assets held for sale of $33,848
and $11,823, respectively. Offsetting these declines was an increase in other
real estate owned of $76,191.
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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual Loans $ 744,113 $ 777,961
Other Real Estate Owned 208,283 132,092
Other Assets Held for Sale 118,245 130,068
--------------------------------------------------------------------------------------------
Total Non-Performing Assets 1,070,641 1,040,121
Loans 90 Days Past Due and Still Accruing 266,069 599,955
--------------------------------------------------------------------------------------------
Total Non-Performing Assets and Past Due Loans $1,336,710 $1,640,076
============================================================================================
</TABLE>
13
<PAGE> 14
RESERVE FOR LOAN LOSSES
The Corporation's loan loss reserve at September 30, 2000 was $3,404,986 or
1.11% of total loans compared to $3,050,337 or 1.18% of total loans at September
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 NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Beginning Balance $3,088,257 $2,756,502
Provision 675,000 630,000
Net Charge-offs 358,271 336,165
-----------------------------------------------------------------------------------
Ending Balance $3,404,986 $3,050,337
===================================================================================
Reserve for Loan Losses to Total Loans 1.11% 1.18%
===================================================================================
</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.
14
<PAGE> 15
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
September 30, 2000, and 1999:
September 30,
2000 1999
--------------------------------
Specific reserves $ 540,018 $ 619,714
Formula reserves 2,323,124 1,980,591
Unallocated reserves 541,844 450,032
--------------------------------
Total $3,404,986 $3,050,337
--------------------------------
Specific reserves decreased $79,696 from September 30, 1999 to September 30,
2000 primarily due to a decrease in classified loans of $588,040. This decrease
consisted of a $375,367 reduction in classified commercial loans related to two
borrowing relationships and decreases in installment and personal lines of
credit and mortgage loan classifications of $120,484, $30,141 and $85,566,
respectively, corresponding to an improvement in shorter term delinquencies.
Management believes that current reserves appropriately reflect 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 $342,533
reflecting the significant growth in total commercial, residential mortgage and
installment loans outstanding.
15
<PAGE> 16
LIABILITIES
Total liabilities were $394,061,725 at September 30, 2000, an increase of
$32,125,515 from December 31, 1999. The increase was largely the result of an
increase in total borrowed funds of $27,604,200 and total deposits of
$3,839,730. The increase in borrowed funds was primarily used to supplement
funding for loan growth during the first nine months of 2000.
DEPOSITS
Total deposits increased $3,839,730 from $289,439,659 at December 31, 1999 to
$293,279,389 at September 30, 2000. Contributing to the overall increase were
increases in non-interest bearing demand deposits, saving deposits, and time
deposits of $1,277,426, $505,448, $7,768,173, respectively, offset by decreases
in interest bearing demand deposits and money market accounts of $760,024 and
$4,951,293, respectively.
The composition of deposits is shown in the following table:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, INCREASE
2000 1999 (DECREASE)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest Bearing Demand $ 61,706,964 $ 60,429,538 $ 1,277,426
Interest Bearing Demand 29,020,206 29,780,230 (760,024)
Savings 39,043,479 38,538,031 505,448
Money Market Account 57,253,767 62,205,060 (4,951,293)
Time Deposits equal to or more than $100,000 16,871,702 14,057,493 2,814,209
Time Deposits less than $100,000 89,383,271 84,429,307 4,953,964
--------------------------------------------------------------------------------------------------------------------
Total Deposits $293,279,389 $289,439,659 $ 3,839,730
====================================================================================================================
</TABLE>
TOTAL BORROWED FUNDS
At September 30, 2000, the Corporation had total borrowed funds of $93,954,200,
$16,954,200 of which will mature within the next 12 months. The Corporation
borrowed these funds to provide liquidity for specific asset-liability
management strategies. At September 30, 2000, total borrowed funds were
comprised of $86,254,200 in advances from the Federal Home Loan Bank which are
collateralized by qualifying securities and loans and $7,700,000 in federal
funds purchased. Included in total FHLB advances were $77,000,000 in borrowings
which are subject to restrictions or penalties related to prepayments.
SHAREHOLDERS' EQUITY
Consolidated shareholders' equity increased $1,260,661 from $30,349,262 at
December 31, 1999 to $31,609,923 at September 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 classified as available for sale.
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 September 30, 2000 was 10.58% compared to 11.28% at
December 31, 1999. The Corporation's total risk-based capital ratio at September
30, 2000 was 11.90% 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.
16
<PAGE> 17
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
September 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.
17
<PAGE> 18
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 $5,167,448 during the first nine
months of 2000, compared to net cash used of $1,036,023 during the first nine
months 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 $32,101,440 during the first nine months
of 2000, compared to net cash used of $31,925,724 during the first nine months
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 $28,875,951 and $25,318,683 for the first
nine months 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.
18
<PAGE> 19
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 -- None
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
19
<PAGE> 20
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: November 14, 2000 /s/ LLOYD G. GIBSON
------------------------------------------------------
Lloyd G. Gibson, President and Chief Executive Officer
Dated: November 14, 2000 /s/ JAMES P. RADICK
------------------------------------------------------
James P. Radick, Treasurer (Principal Financial and
Accounting Officer)
20
