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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, 2002
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
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NSD Bancorp, Inc.
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(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 ________
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The number of shares outstanding of the Registrant's common stock as of July 31,
2002 was:
Common Stock, $1.00 par value - 3,222,547 shares outstanding
NSD BANCORP, INC.
FORM 10Q
For the Quarter Ended June 30, 2002
INDEX
Page
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 3
Consolidated Statements of Income For the Three and Six
Months Ended June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows For the Six
Months Ended June 30, 2002 and 2001 5
Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended June 30,
2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 18
Part II. Other Information 19
Item 6. Exhibits and Reports on Form 8K 19
2
NSD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, December 31,
2002 2001
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 17,223,657 $ 15,403,917
Federal Funds Sold 1,800,000 11,300,000
Investment Securities Available for Sale at Market Value (Amortized Cost of
$99,840,867 at June 30, 2002 and $115,597,738 at December 31, 2001) 102,957,855 117,098,802
Loans Held for Sale 4,992,448 4,570,679
Loans, Net of Deferred Fees 341,265,489 318,649,706
Unearned Income (1,574,502) (1,811,283)
Reserve for Loan Losses (4,336,163) (4,090,508)
- ------------------------------------------------------------------------------------------------------------------------
Loans, Net 340,347,272 317,318,594
Premises and Equipment, Net 2,678,007 2,502,749
Accrued Interest Receivable 2,575,216 2,442,796
Other Real Estate Owned and Assets Held for Sale 259,640 288,298
Other Assets, Net of Reserve of $411,000 and $200,000, Respectively 16,003,434 12,914,638
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 483,845,081 $ 479,269,794
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing $ 66,662,569 $ 66,992,372
Interest Bearing 276,627,953 273,990,919
- ------------------------------------------------------------------------------------------------------------------------
Total Deposits 343,290,522 340,983,291
Advances from Federal Home Loan Bank and Other Borrowings 94,000,000 94,000,000
- ------------------------------------------------------------------------------------------------------------------------
Total Borrowed Funds 94,000,000 94,000,000
Accrued Interest Payable 6,167,659 5,768,912
Other Liabilities 1,878,624 1,844,427
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities 445,336,805 442,596,630
Common Stock $1 Par Value; 10,000,000 shares authorized, 3,479,832 issued
and 3,222,547 outstanding at June 30, 2002 and 3,328,802 issued and
3,091,528 outstanding at December 31, 2001 3,321,106 3,170,288
Treasury Stock at cost, 257,285 shares at June 30, 2002 and 225,976 shares at
December 31, 2001 (4,828,244) (4,147,792)
Capital Surplus 21,383,264 18,386,732
Accumulated Other Comprehensive Income 2,057,212 990,703
Retained Earnings 16,574,938 18,273,233
- ------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 38,508,276 36,673,164
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 483,845,081 $ 479,269,794
========================================================================================================================
See notes to consolidated financial statements
3
NSD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
For the Six Months Ended June 30, For the Three Months Ended June 30,
--------------------------------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, Including Fees $ 12,291,209 $ 12,455,403 $ 6,223,855 $ 6,257,612
Investment Securities
Taxable 2,630,410 2,825,162 1,318,663 1,387,835
Tax-Exempt 351,633 195,250 178,000 116,475
Dividends 137,207 192,843 62,510 93,240
Interest Bearing Deposits 4,584 29,349 2,490 24,997
Federal Funds Sold 40,612 260,756 3,210 114,493
- --------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 15,455,655 15,958,763 7,788,728 7,994,652
INTEREST EXPENSE
Deposits 4,303,669 5,385,328 2,115,773 2,661,942
Federal Funds Purchased 8,216 ----- 8,153 -----
FHLB Advances and Other Borrowings 2,711,820 2,666,646 1,368,076 1,358,674
- --------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 7,023,705 8,051,974 3,492,002 4,020,616
Net Interest Income 8,431,950 7,906,789 4,296,726 3,974,036
Provision for Loan Losses 480,000 450,000 240,000 225,000
- --------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 7,951,950 7,456,789 4,056,726 3,749,036
OTHER INCOME
Net Investment Securities Gains 28,854 47,169 19,143 11,167
Service Fees 515,704 580,326 259,670 294,075
Other Operating Income 777,587 737,038 387,012 360,792
- --------------------------------------------------------------------------------------------------------------------------------
Total Other Income 1,322,145 1,364,533 665,825 666,034
OTHER EXPENSES
Salaries and Employee Benefits 2,614,229 2,414,359 1,337,981 1,212,952
Occupancy Expense 562,337 466,441 290,825 236,318
Equipment and Supplies 589,791 564,289 294,756 295,045
Data Processing 401,497 386,971 198,678 196,970
FDIC Insurance 14,614 28,512 3,653 14,499
Advertising 134,843 156,039 95,666 77,777
Other Operating Expenses 1,277,547 1,196,123 736,306 630,258
- --------------------------------------------------------------------------------------------------------------------------------
Total Other Expenses 5,594,858 5,212,734 2,957,865 2,663,819
Income Before Income Taxes 3,679,237 3,608,588 1,764,686 1,751,251
Provision for Income Taxes 1,078,200 1,148,117 493,210 526,000
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 2,601,037 $ 2,460,471 $ 1,271,476 $ 1,225,251
================================================================================================================================
NET INCOME PER COMMON SHARE
Net Income - Basic $ 0.83 $ 0.79 $ 0.40 $ 0.39
Net Income - Diluted $ 0.82 $ 0.78 $ 0.39 $ 0.39
Common Dividends Declared and Paid Per Share $ 0.39 $ 0.35 $ 0.20 $ 0.18
Weighted Average Shares Outstanding - Basic 3,136,157 3,132,690 3,177,927 3,119,604
Weighted Average Shares Outstanding - Diluted 3,178,749 3,152,303 3,221,526 3,142,147
See notes to consolidated financial statements
4
NSD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
For the Six Months Ended
June 30,
2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income $ 2,601,037 $ 2,460,471
Adjustments to Net Income:
Provision for Loan Losses 480,000 450,000
Gain on Sale of Investment Securities Available for Sale (28,854) (47,169)
Loss on Sale of Other Assets 8,387 2,917
Gain on Loan Sales (21,721) --
Loss on Disposition of Premises and Equipment 6,818 4,266
Depreciation and Amortization 273,970 349,179
Net Premium Amortization 151,827 102,361
(Increase) Decrease in Accrued Interest Receivable (132,420) 106,522
Increase (Decrease) in Accrued Interest Payable 398,747 (107,192)
Increase in Cash Surrender Value of Bank-Owned Life Insurance (159,981) --
Increase in Other Assets (485,193) (1,069,114)
Deferred Loan Fees, Net 7,507 16,376
Decrease (Increase) in Other Liabilities (10,542) 1,909,926
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 3,089,582 4,178,543
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Investment Securities Available for Sale 16,376,675 15,360,039
Proceeds from Repayments and Maturities of Investment Securities
Available for Sale 20,342,506 22,701,224
Purchases of Investment Securities (21,047,704) (45,774,183)
Purchase of Bank-Owned Life Insurance (2,985,876) --
Proceeds from Sales of Other Real Estate Owned 247,054 214,815
Net Increase in Loans (24,635,975) (12,091,739)
Proceeds from Loan Sales 914,726 --
Purchases of Premises and Equipment, Net (456,046) (62,228)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (11,244,640) (19,652,072)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Demand and Savings Accounts (3,953,051) 10,257,770
Increase in Certificates of Deposit 6,260,283 1,579,046
Proceeds from Federal Home Loan Bank Advances and Other Borrowings -- 7,000,000
Proceeds from the Exercise of Common Stock Options 52,940 --
Cash Paid in Lieu of Fractional Shares (4,411) (3,755)
Treasury Stock Purchased (680,452) (583,980)
Cash Dividends Paid (1,200,511) (1,107,091)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 474,798 17,141,990
- ---------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (7,680,260) 1,668,461
Cash and Cash Equivalents at Beginning of Period 26,703,917 22,227,012
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 19,023,657 $ 23,895,473
===========================================================================================================================
See notes to consolidated financial statements
5
NSD BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
For The Six Months Ended For The Three Months Ended
June 30, June 30,
---------------------------- -----------------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Net Income $ 2,601,037 $ 2,460,471 $ 1,271,476 $ 1,225,251
Unrealized gains (losses) on securities:
Unrealized holding gains
arising during period 1,644,778 1,823,053 2,519,305 160
Less: reclassification adjustment for
gain realized in net income 28,854 47,169 19,143 11,168
- ----------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) 1,615,924 1,775,884 2,500,162 (11,008)
- ----------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 1,615,924 1,775,884 2,500,162 (11,008)
Tax Expense (Benefit) at 34% 549,415 603,804 850,055 (3,743)
- ----------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), net 1,066,509 1,172,080 1,650,107 (7,266)
- ----------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 3,667,546 $ 3,632,551 $ 2,921,583 $ 1,217,985
================================================================================================================
See notes to consolidated financial statements
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 eleven branch offices located in Western
Pennsylvania, and NorthSide Bank's wholly owned subsidiary, NSB Financial
Services, LLC. NSB Financial Services, LLC is a limited liability corporation
which operates as a licensed title insurance agency providing title searches and
other real estate settlement services to the general public. Material
intercompany accounts and transactions have been eliminated.
2. Earnings Per Share:
Basic earnings per common share is calculated by dividing net income by the sum
of the weighted average number of shares of common stock outstanding during each
period. Diluted earnings per common share is calculated by dividing net income
by the sum of the weighted average number of shares of common stock outstanding
and the number of shares of common stock which would be issued assuming the
exercise of stock options during each period.
3. Recent Accounting Pronouncements:
On March 13, 2002, the Financial Accounting Standards Board ("FASB") cleared
Statement 133, Implementation Issue No. C13, "Scope Explanation: When a Loan
Commitment is Included in the Scope of Statement 133," ("C13"). Financial
Accounting Standard 133 "Accounting for Derivative Instruments and Hedging
Activities" establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. C13 requires entities to account for loan
commitments that relate to the origination or acquisition of mortgage loans that
will be held for resale as derivative instruments in accordance with Statement
133. The effective date of implementation of C13 for the Corporation is July 1,
2002. Management has determined that the adoption of C13 will not have a
material effect on the Corporation's financial condition and results of
operations.
4. Reclassifications:
For comparative purposes, reclassifications have been made to certain amounts
previously reported in the Consolidated Financial Statements.
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, 2002 compared to the three and six months ended June
30, 2001.
Certain information in this discussion and other statements contained in this
report, which are not historical facts, may be forward-looking statements that
involve risks and uncertainties. Such statements are subject to important
factors that could cause actual results to differ materially from those
contemplated by such statements, including without limitation, the effect of
changing regional and national economic conditions; changes in interest rates;
credit risks of commercial, real estate, consumer and other lending activities;
changes in federal and state regulations; the presence in the Corporation's
market area of competitors with greater financial resources than the Corporation
or other unanticipated external developments materially impacting the
Corporation's operational and financial performance.
Results of Operations
Net income for the six months ended June 30, 2002 was $2,601,037, an increase of
$140,566 from $2,460,471 for the six months ended June 30, 2001. Contributing to
the increase was an increase in net interest income of $525,161. Offsetting this
increase in net income were increases in salaries and employee benefits,
occupancy expense, equipment and supplies, data processing and other operating
expenses of $199,870, $95,896, $25,502, $14,526, and $81,424, respectively, for
the six months ended June 30, 2002 compared to the same period in 2001. Also
affecting earnings for the six months ended June 30, 2002 was an additional
$211,000 provision for potential losses related to the Corporation's Cashflow
Maximizer purchased accounts receivable program. The Corporation's annualized
return on average assets (ROA) for the first six months of 2002 was 1.10%
compared to 1.12% for the same period in 2001. 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 14.47% for the
first six months of 2002 compared to 14.54% for the same period in 2001. This
decrease is largely the result of a decline in net interest margin during the
first six months of 2002. This decline was partially offset by significant
growth in average earning assets resulting in a lower equity-to-assets ratio
and, to a lesser extent, the repurchase of common shares into treasury.
Net income for the second quarter of 2002 was $1,271,476, an increase of
$46,225, from $1,225,251 for the second quarter of 2001. Contributing to the
overall increase was an increase in net interest income of $322,690, and a
decrease in provision for income taxes of $32,790. Offsetting these increases to
net income were increases to salaries and benefits, occupancy expense,
advertising and other operating expense of $125,029, $54,507, $17,889 and
$106,048, respectively, for the three months ended June 30, 2002 compared to the
same period in 2001. Also affecting earnings for the three months ended June 30,
2002 was an additional $211,000 provision for potential losses related to the
Corporation's Cashflow Maximizer purchased accounts receivable program. ROA and
ROE for the second quarter of 2002 were 1.06% and 14.09%, respectively, compared
to 1.10% and 14.52% for the same period in 2001.
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 tax-equivalent interest income decreased $437,378 during the six months
ended June 30, 2002 as compared to the same period in 2001 as the result of a
decline in the yield on average earning assets to 7.00% at June 30, 2002 from
7.72% at June 30, 2001 offset by a $30,688,930 increase in average earning
assets. Contributing to the decrease in tax-equivalent interest income was a
decline in the yield on total loans to 7.53% for the first six months of 2002
from 8.26% for the same period in 2001 offset by an increase in average loans
outstanding of $24,806,574. Average federal funds sold outstanding decreased
$5,676,188 during the period along with a decline in the related yield to 1.68%
from 4.98% during the first six months of 2002. Average due from banks balances
also decreased $975,551 compared to the same period in 2001. The yield on
investment securities available for sale decreased from 6.49% for the first six
months of 2001 to 5.77% for the first six months of 2002 offset by an increase
in average investment securities available for sale of $12,534,095.
Total interest expense decreased $1,028,268 during the six months ended June 30,
2002 compared to the same period in 2001 as the result of a decrease in the cost
of interest bearing liabilities to 3.82% at June 30, 2002 from 4.77% at June 30,
2001 offset by a $30,127,706 increase in average interest bearing liabilities.
Contributing to the decrease in the cost of interest bearing liabilities was a
decrease in the cost of interest bearing deposits to 3.16% for the first six
months of 2002 from 4.37% for the same period in 2001 offset by an increase in
average interest bearing deposits of $26,556,159. Offsetting the decrease to the
cost of interest bearing liabilities were increases in average FHLB advances and
average federal funds purchased of $2,717,956 and $853,591, respectively.
8
Total tax-equivalent interest income decreased $181,124 to $7,890,664 during the
second quarter of 2002 as compared to the same period in 2001. This decrease is
the result of a decline in the yield on total earning assets from 7.59% for the
second quarter of 2001 to 7.01% for the second quarter of 2002 offset by growth
in average earning assets of $24,773,530. Contributing to the decrease in
tax-equivalent interest income was a decline in the yield on average loans to
7.45% during 2002's second quarter compared to 8.18% for the same period in 2001
offset by an increase in average loans of $27,963,324. Also contributing to this
decrease was a decline in the yield on average investment securities outstanding
during the quarter to 5.79% from 6.32% for the second quarter of 2001 offset by
an increase in average investment securities outstanding of $9,006,687. Average
due from bank balances and average federal funds sold also decreased $2,509,661
and $9,686,820, respectively, compared to the second quarter of 2001.
Interest expense decreased $528,613 during the second quarter of 2002 compared
to the second quarter of 2001 due to a decrease in the average total cost of
funds from 4.66% for the second quarter of 2001 to 3.76% for the second quarter
of 2002 offset by a $26,917,778 increase in average interest bearing
liabilities. Contributing to the decrease in the cost of interest bearing
liabilities was a decrease in the cost of interest bearing deposits to 3.08% for
the first six months of 2002 from 4.24% for the same period in 2001 offset by an
increase in average interest bearing deposits of $23,332,462. The increase in
average interest bearing deposits consisted of a $15,815,500 increase in average
savings and an $8,694,544 increase in average certificates of deposits, offset
by a decline in money market and interest checking of $1,177,582. The average
cost of borrowings decreased only slightly to 5.72% from 5.79% for the second
quarter of 2002 compared to the second quarter of 2001 while average borrowed
funds increased $1,891,467 during the period. Average federal funds purchased
increased by $1,693,849 compared to the second quarter of 2001.
The Corporation's year-to-date net interest margin remained unchanged at 3.86%
as of June 30, 2002 compared to June 30, 2001, due to a decrease in the average
cost of interest bearing liabilities offset by a decrease in the average yield
on earning assets. The Corporation's 2002 second quarter net interest margin of
3.91% reflects an increase from 3.81% for the same period in 2001. This increase
was the result of a decrease in the average cost on interest bearing liabilities
offset by a decline in the yield on earning assets for the period.
Provisions for Loan Losses
The Corporation recorded a $480,000 and $240,000 provision for loan losses for
the six and three month periods ended June 30, 2002, compared with a $450,000
and $225,000 provision for the same periods in 2001. Provisions for loan losses
are charged to income to maintain the reserve for loan losses at a level that
management considers appropriate based on the factors discussed below in the
"Reserve for Loan Losses" section.
The provision for loan losses for the six months ended June 30, 2002, compared
to the first six months of 2001 provision was affected by the following factors:
. An increase in loans 90 days past due and still accruing interest and
also non-accrual loans from $1,150,630 and $634,659, respectively, at
December 31, 2001 to $1,708,964 and $1,652,972, respectively, at June
30, 2002. The result of these changes was a $1,547,986 increase in
total non-performing assets and loans 90 days past due and nonaccrual
loans. For further discussion, please refer to the Non-performing
Assets section of this report.
. The continued improvement in net loan loss experience in relation to
average loans outstanding, which further supported the use of existing
individual loan portfolio loss factor assignments in calculating
required formula reserves.
. The Corporation's consistent application of strict standards to the
definitions of potential and well-defined weaknesses in the loan
portfolio and the ongoing loan review process, which resulted in a
$733,340 increase in loans classified as substandard, doubtful or
loss.
Other Income
Other income decreased $42,388 to $1,322,145 for the six months ended June 30,
2002 from $1,364,533 for the six months ended June 30, 2001. Sales and calls of
investment securities available for sale during the first half of 2002 resulted
in net gains of $28,854 compared to $47,169 for the same period in 2001. Service
fees decreased to $515,704 for the first six months of 2002, from $580,326 for
the same period in 2001 principally due to $36,133 less in NSF charges collected
in 2002 and also due to decreases in checking account fees and savings account
service charges of $18,885 and $10,776, respectively. Other operating income
increased to $777,587 for the six months ended June 30, 2002, from $737,038 for
the same period in 2001. Contributing to this improvement was $15,321, $19,176
and $21,847 in additional income generated from bank owned life insurance,
MasterCard/Visa commissions and investment services commissions, respectively.
Increases in gains on loan sales and ATM fees contributed $21,721 and $11,965,
respectively, in additional income compared to the first half of 2001.
Offsetting these increases was a $7,824 increase in net losses recognized on the
sale of other assets and decreases in Cashflow Maximizer service fees and title
insurance premiums of $46,532 and 10,077, respectively, during the first half of
2002 compared to the first half of 2001.
Other income decreased $209 to $665,825 for the three months ended June 30, 2002
from $666,034 for the three months ended June 30, 2001. Sales and calls of
investment securities available for sale during the second quarter of 2002
resulted in net gains of $19,143
9
compared to $11,167 for the same period in 2001. Service fees decreased to
$259,670 for the second quarter of 2002, from $294,075 for the same period in
2001 as the result of a $22,172 decrease in NSF charges collected in the second
quarter of 2002 and also due to decreases in checking account fees and savings
account service charges of $7,940 and $5,643, respectively. Other operating
income increased to $387,012 for the three months ended June 30, 2002, from
$360,792 for the same period in 2001. Contributing to this improvement was
$18,951 and $16,205 in additional income generated from bank owned life
insurance and MasterCard/Visa commissions, respectively. Increases in gains on
loan sales and ATM fees contributed $12,035 and $5,057, respectively, in
additional income compared to the three months ended June 30, 2001. Offsetting
these increases was a $25,943 increase in net losses recognized on the sale of
other assets and a decrease in title insurance premiums of $16,443 for the three
months ended June 30, 2002 compared to the same period in 2001.
Other Expenses
Total other expenses for the first six months of 2002 increased $382,124 to
$5,594,858 from $5,212,734 for the same period in 2001. Salaries and employee
benefits increased $199,870 reflecting normal salary and benefit increases,
additional incentive compensation accruals and increased medical insurance costs
to the Corporation. Also contributing to this increase were additional costs
incurred to staff NorthSide Bank's new Franklin Park branch office, opened
during the second quarter of 2001, and additional staffing to support
organizational growth. Occupancy expense increased $95,896 primarily due to
increases in insurance expense, rent, and real estate taxes of $24,216, $32,746,
and $20,437, respectively. Equipment and supplies expense increased $25,502 due
primarily to increases in depreciation, equipment rentals and equipment
maintenance contracts of $6,987, $4,452, and $13,838, respectively. The $14,526
increase in data processing was due to an increase in charges incurred for third
party data processing. FDIC insurance declined $13,898 for the first six months
of the year reflecting a lower premium assessment rate in 2002. Advertising
expense decreased $21,195 corresponding to the Bank's decreased emphasis on
television media during the first quarter of 2002 compared to the same period in
2001. The overall increase in other operating expenses of $81,824 can be
attributed in large part to a $194,911 increase in Cashflow Maximizer expense
related to an additional provision for losses of $211,000 during the second
quarter of 2002. Also contributing to this increase was a $12,058 increase in
director's fees related to the addition of two new directors in November of 2001
and a $13,356 increase in installment loan origination expenses due to added
production in 2002. These increases were offset by an $88,301 reduction in
deposit premium amortization corresponding to the completion of the amortization
schedule in December of 2001. Asset recovery expenses and general losses also
decreased $62,698 and $22,496, respectively.
Total other expenses for the second quarter of 2002 increased $294,046 to
$2,957,865 from $2,663,819 for the same period in 2001. Salaries and employee
benefits increased $125,029 reflecting normal salary and benefit increases,
additional incentive compensation accruals and increased medical insurance costs
to the Corporation. Also contributing to this increase were additional costs
incurred to staff NorthSide Bank's new Franklin Park branch office, opened
during the second quarter of 2001, and additional staffing to support
organizational growth. Occupancy expense increased $54,507 due to increase of
$12,746, $16,393, $7,412, and $5,680 in insurance, rent, property tax and
building maintenance, respectively. Equipment and supplies remained relatively
unchanged. A $1,708 increase in data processing was primarily due to an increase
in charges incurred for third party data processing. Advertising expense
increased $17,890 corresponding to the Bank's increased emphasis on television
media during the second quarter of 2002 compared to the same period in 2001. The
overall increase in other operating expenses of $106,046 can be attributed in
large part to a $208,840 increase in Cashflow Maximizer expense related to an
additional provision for losses of $211,000 during the second quarter of 2002.
Also contributing to this increase was an $8,929 increase in director's fees
related to the addition of two new directors in November of 2001 and a $7,079
increase in installment loan origination expenses due to added production in
2002. These increases were offset by a $44,150 reduction in deposit premium
amortization corresponding to the completion of the amortization schedule in
December of 2001. Asset recovery expenses and general losses also decreased
$24,718 and $19,050, respectively.
Income Taxes
The Corporation recorded an income tax provision of $1,078,200 for the six
months ended June 30, 2002 compared to $1,148,117 for the six months ended June
30, 2001. The decrease in tax provision was primarily the result of an increase
in tax-exempt investment securities and other tax-exempt earning assets
partially offset by the impact of higher pre-tax earnings. The effective tax
rates for the first six months of 2002 and 2001 were 29.3% and 31.8%,
respectively. The decrease in effective tax rate is due mainly to an increase in
income earned on higher average outstanding tax-exempt earning assets during the
first six months of 2002 compared to the same period in 2001.
The Corporation recorded an income tax provision of $493,210 for the three
months ended June 30, 2002 compared to $526,000 for the three months ended June
30, 2001. The decrease in tax provision was primarily the result of an increase
in tax-exempt investment securities and other tax-exempt earning assets
partially offset by the impact of higher pre-tax earnings. The effective tax
rates for the second quarter of 2002 and 2001 were 27.9% and 30.0%,
respectively. The decrease in effective tax rate is due mainly to an increase in
income earned on higher average outstanding tax-exempt earning assets during the
second quarter of 2002 compared to the same period in 2001.
10
Financial Condition
The Corporation's total assets increased $4,575,287 from $479,269,794 at
December 31, 2001 to $483,845,081 at June 30, 2002. Securities available for
sale decreased $14,140,947 from December 31, 2001 to June 30, 2002. There were
no securities held to maturity at June 30, 2002 or at December 31, 2001. Loans
available for sale increased to $4,992,448 at June 30, 2002 from $4,570,579 at
December 31, 2001. The loans available for sale at June 30, 2002 and December
31, 2001, which are carried at the lower of cost or market, were entirely
comprised of Small Business Administration (SBA) loans. Net loans increased from
$317,318,594 at December 31, 2001 to $340,347,272 at June 30, 2002.
Investment Securities
Contributing to the investment securities available for sale decrease during the
first six months of 2002 were decreases in mortgage-backed securities and
corporate bonds of $18,242,974 and $2,689,293, respectively, while U.S.
Treasuries, U.S. Government agencies, obligations of state and political
subdivisions, and marketable equity securities increased by $30,480, $5,245,691,
$927,773, $587,376, respectively due to normal purchasing activity net of any
sales, calls, maturities and changes in unrealized gains classes. The
Corporation experienced a $1,615,924 improvement in net, unrealized gains
(losses) on investment securities available for sale principally due to a
significant positive shift in market pricing related to fixed income investment
securities during the second quarter of 2002. The fair value of marketable
equity securities increased $587,376 during the first six months of 2002, which
was almost entirely due to the improvement in the valuation of stocks in the
portfolio. 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.
A summary of investment securities available for sale is as follows:
June 30, 2002
- ----------------------------------------------------------------------------------------------------------------------
Gross Unrealized
Amortized Holding
-----------------------------
Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------
U. S. Treasury Securities $ 1,646,421 ------ $ 4,851 $ 1,641,570
U.S. Government Agencies 11,624,507 $ 265,868 ------ 11,890,375
Mortgage-backed Securities 47,481,136 815,074 33,722 48,262,488
Obligations of State and Political Subdivisions 15,378,592 238,889 16,697 15,600,784
Other Bonds 17,987,273 300,836 553,956 17,734,153
Marketable Equity Securities 5,722,938 2,106,380 833 7,828,485
- ----------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale $ 99,840,867 $ 3,727,047 $ 610,059 $ 102,957,855
======================================================================================================================
December 31, 2001
- ----------------------------------------------------------------------------------------------------------------------
Gross Unrealized
Amortized Holding
-----------------------------
Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------
U. S. Treasury Securities $ 1,658,992 ------ $ 47,902 $ 1,611,090
U.S. Government Agencies 6,553,153 $ 91,531 ------ 6,644,684
Mortgage-backed Securities 66,223,953 523,611 242,102 66,505,462
Obligations of State and Political Subdivisions 14,722,070 48,975 98,034 14,673,011
Other Bonds 21,181,632 60,383 818,569 20,423,446
Marketable Equity Securities 5,257,938 1,984,064 893 7,241,109
- ----------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale $ 115,597,738 $ 2,708,564 $ 1,207,500 $ 117,098,802
======================================================================================================================
11
Loans
Loans, net of deferred fees, increased to $346,311,424 at June 30, 2002 from
$323,269,353 at December 31, 2001. Commercial loan development efforts resulted
in an increase of $6,357,021 and $4,443,318 in nonresidential mortgages and
commercial, financial and agricultural loans, respectively. Lease financing
declined by $1,115,881 as a result of what is considered a temporary market
trend toward more traditional commercial financing. An increase of $15,695,387
in consumer loans outstanding is partially due to expansion of the Bank's
automobile dealer network and most significantly, to improvement in existing
indirect automobile lending. Residential mortgages declined by $4,753,800
corresponding to slower general market activity while lines of credit and
non-accrual loans increased by $978,932 and 1,018,313, respectively.
June 30, December 31, Increase
2002 2001 (Decrease)
- ---------------------------------------------------------------------------------------------------------------
Consumer Loans to Individuals $ 150,803,989 $ 135,108,602 $ 15,695,387
Mortgage:
Nonresidential 80,059,525 73,702,504 6,357,021
Residential 53,832,208 58,586,008 (4,753,800)
Commercial, Financial and Agricultural 36,016,375 31,573,057 4,443,318
Lines of Credit 7,007,918 6,028,986 978,932
Lease Financing 12,304,052 13,419,933 (1,115,881)
Loans Held for Sale 5,045,935 4,619,647 426,288
Non-Accrual Loans 1,652,972 634,659 1,018,313
- ---------------------------------------------------------------------------------------------------------------
Total Loans 346,722,974 323,673,396 23,049,578
Deferred Fees (411,550) (404,043) (7,507)
- ---------------------------------------------------------------------------------------------------------------
Loans, Net of Deferred Fees $ 346,311,424 $ 323,269,353 $ 23,042,071
===============================================================================================================
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, 2001, 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. There was no average recorded investment in impaired loans for the
six months ended June 30, 2002 and June 30, 2001. Therefore, no interest was
recognized on impaired loans and no additional reserve was required for impaired
loans during the first six months of 2002.
Non-Performing Assets
Non-performing assets and loans 90 days past due and still accruing increased to
$3,621,577 at June 30, 2002 from $2,073,591 at December 31, 2001 due to
increases of $1,018,314 and $558,330 in non-accrual loans and loans 90 days past
due and still accruing interest, respectively. These increases were slightly
offset by a $28,474 decrease in other real estate owned.
The $1,018,314 increase in non-accrual loans was due, in large part, to the
restructuring of one Cashflow Maximizer relationship which was previously
reported in the Corporation's Other Asset totals. As a result of that
restructuring, $756,743 in accounts receivable that were past due more than 90
days were placed on a term loan to facilitate the collection of amounts
outstanding. Also contributing to the increase in non-accrual loans was a
$180,000 increase in equipment leases placed on non-accrual status during the
first six months of 2002; $174,276 of which was attributable to one borrower.
During the first six months of 2002, an additional $334,730 in accounts
receivable previously purchased under the Cashflow Maximizer program were
restructured as a term loan. These receivables were purchased from another
customer, independent of the relationship noted in the above discussion.
Management expects that the renegotiation of payment terms and the customer's
internal business restructuring will significantly improve the performance of
this relationship during the third quarter of 2002 with full recovery expected
over the contractual term of the loan. At June 30, 2002, however, corresponding
amounts outstanding are more than 90 days past due which significantly
contributed to the increase in loans 90 days past due and still accruing
interest. Also contributing to the increase in loans past due 90 days was a
$112,000 increase related to the installment loan portfolio. Total delinquencies
within the installment loan portfolio, however, have decreased by $461,000 since
December 31, 2001.
12
The current quality of the loan portfolio can be demonstrated by the following
table, which details total non-performing assets and past due loans:
June 30, December 31,
2002 2001
- -------------------------------------------------------------------------------------------------------
Non-accrual Loans $ 1,652,973 $ 634,659
Other Real Estate Owned 47,980 76,454
Other Assets Held for Sale 211,660 211,844
- -----------------------------------------------------------------------------------------------------
Total Non-Performing Assets 1,912,613 922,957
Loans 90 Days Past Due and Still Accruing Interest 1,708,964 1,150,634
- -----------------------------------------------------------------------------------------------------
Total Non-Performing Assets and Past Due Loans $ 3,621,577 $ 2,073,591
=====================================================================================================
Reserve for Loan Losses
The Corporation's loan loss reserve at June 30, 2002 was $4,389,650 or 1.27% of
total loans compared to $3,633,149 or 1.16% of total loans at June 30, 2001.
Management anticipates that the loan losses are adequate to absorb reasonably
foreseeable losses on loans.
The Corporation's net charge-off by loan type in the reserve for loan losses
were as follows:
For the Six Months Ended June 30,
- -------------------------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------------------------
Reserve for Loan Losses at Beginning of Year $ 4,139,476 $ 3,364,704
Charge-offs:
Commercial, Financial, and Agricultural Loans ------- 28,400
Real Estate Mortgage Loans ------- -------
Installment Loans 154,931 174,311
Lease Financing 109,400 29,929
- ----------------------------------------------------------------------------------------------
Total Charge-offs 264,331 232,640
Recoveries:
Commercial, Financial, and Agricultural Loans 9,500 13,004
Real Estate Mortgage Loans 700 100
Installment Loans 21,305 36,041
Lease Financing 3,000 1,940
- ----------------------------------------------------------------------------------------------
Total Recoveries 34,505 51,085
- ----------------------------------------------------------------------------------------------
Net Charge-offs 229,826 181,555
Provisions for Loan Losses 480,000 450,000
- ----------------------------------------------------------------------------------------------
Reserve for Loan Losses at End of Period $ 4,389,650 $ 3,633,149
==============================================================================================
The Corporation's policies provide for loan loss reserves to adequately protect
against potential unidentified and/or identified loan losses consistent with
sound and prudent banking practice. These policies consider historical data of
actual losses and loans classified by specific loan credit evaluation. They also
consider loan delinquency and economic conditions.
The Corporation follows a loan review program to evaluate the credit risk in its
loan portfolio for substantially all loans greater than $50,000. Through the
loan review process, the Corporation maintains a classified account list, which,
along with the delinquency list of loans, helps management assess the overall
quality of the loan portfolio and the adequacy of the reserve for loan losses.
Loans classified as "substandard" are those loans with clear and defined
weaknesses such as highly leveraged positions, unfavorable financial ratios,
uncertain repayment sources or poor financial condition, which may jeopardize
recoverability of the asset. Loans classified as "doubtful" are those loans
which have characteristics similar to substandard accounts but with an increased
risk that a loss may occur, or at least a portion of the loan may require
charge-off if immediately liquidated. Although loans classified as substandard
do not duplicate loans classified as doubtful, both substandard and doubtful
loans include some loans that are delinquent or on nonaccrual status. As of June
30, 2002, substandard loans totaled $2,489,578 and doubtful loans totaled
$1,938,318. All substandard and doubtful loans were designated as delinquent or
nonaccrual as of June 30, 2002.
In addition to its classified account list and delinquency list of loans, the
Corporation maintains a separate "watch list," which further aids the
corporation in monitoring its loan portfolio. Watch list loans show warning
elements where the present status portrays one or more deficiencies requiring
attention in the short run, or pertinent ratios of the loan account have
weakened to a point that more frequent monitoring is warranted. These loans do
not have all the characteristics of a classified loan (substandard or doubtful)
but do
13
show weakened elements as compared with those of a satisfactory credit. The
Corporation reviews these loans while assessing the adequacy of the reserve for
loan losses.
The Corporation establishes specific reserves for potential problem loans as
determined by its loan review 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 risks associated within these
loan classifications. Formula reserves, relative to loan delinquency status, are
based on the type of loan and delinquency aging and are determined by
management's judgment of the inherent risk of loss from these delinquency
categories. The Corporation also establishes formula reserves for all loan types
by applying a factor, based on corresponding historical charge-off percentages,
to homogeneous pools of loans.
These formula reserves are based on the Corporation's historical charge-off
experience. If current charge-off levels deviate from the Corporation's
historical experience, the deviation will be reflected in the Corporation's
ongoing formula reserves and will adjust the allowance for loan losses
accordingly. The Corporation maintains an unallocated reserve taking into
consideration the following factors:
. General local and national economic and business conditions affecting
key loan portfolios,
. Credit quality trends (including current and expected trends in
non-performing loans under existing conditions),
. Collateral values,
. Seasoning of the loan portfolio,
. Specific industry conditions within portfolio segments,
. Duration of the current business cycle,
. Delinquency and nonaccrual trends,
. Recent loss experience in particular segments of the portfolio,
. Changes in lending and collection practices,
. Trends in volume and terms of loans,
. Other external factors that could affect the ability of the
Corporation's customers to repay their obligations.
Management reviews these conditions to determine if any of these conditions is
evidenced by a specifically identified problem credit or portfolio segment.
Management's estimate of this condition may be reflected as a specific allowance
applicable to this credit or portfolio segment. Where any of these conditions is
not evidenced by a specifically identifiable problem credit or portfolio segment
as of the evaluation date, management's evaluation of the potential risk
concerning this condition is reflected in the unallocated reserve.
The composition of the Corporation's reserve for loan losses is as follows at
June 30, 2002 and 2001:
June 30,
----------------------------------
2002 2001
-------------------------------------------------------------------------
Specific Reserves $1,485,333 $ 751,993
Formula Reserves 2,701,386 2,405,077
Unallocated Reserves 202,931 476,079
-------------------------------------------------------------------------
Total $4,389,650 $3,633,149
=========================================================================
14
The Corporation made no changes in estimation methods or assumptions that
affected our methodology for assessing the appropriateness of the reserve for
loan losses. Changes in assumptions regarding the effects of economic and
business conditions on borrowers and other factors, which are described below,
have affected the assessment of the unallocated allowance. Estimation risk,
which continues to be present in the allowance for loan losses, is included as
part of attributed factors within the unallocated reserve for loan losses.
Specific reserves increased $733,340 from $751,993 at June 30, 2001, to
$1,485,333 at June 30, 2002, largely due to an $848,342 increase in loans
classified as substandard. This increase in substandard loans is attributable,
in large part, to a $520,044 increase in residential mortgage loans related to
three customers which were classified as substandard during the first six months
of 2002. Also contributing to this increase was a $249,456 increase in equipment
leases classified as substandard.
At June 30, 2002, loans classified as doubtful represented an increase of
$1,172,337 over June 30, 2001 classifications. This increase was largely
attributable to a $966,450 increase in commercial loans classified as doubtful.
As previously stated in the Non-performing Assets section of this report, the
corporation restructured one Cashflow Maximizer customer relationship which was
previously reported in the Corporation's Other Asset totals. As part of this
restructuring, $756,743 in purchased accounts receivable that were past due more
than 90 days were placed on a term loan to facilitate the collection of amounts
outstanding. Although this strategy should improve the likelihood of collecting
outstanding balances, management believes it prudent to classify this loan as
doubtful and accordingly reserve for potential losses. Also contributing to the
increase in doubtful loans was a $231,812 increase in classified equipment
leases, $174,276 of which was attributable to one borrower.
At June 30, 2002, total classified loans were $4,446,154 compared to $2,447,972
at June 30, 2001. Management believes that current reserves appropriately
reflect the level of risk and potential loss of these credits. The reserve
amount specified for these loans may change in the event that there is evidence
of an improvement or further deterioration in a customer's ability to satisfy
contractual requirements.
The formula reserve portion of the reserve for loan losses increased $296,309 to
$2,701,386 at June 30, 2002, from $2,405,077 at June 30, 2001, corresponding to
the overall increase in loans outstanding and most notably, increases in
commercial and installment loans.
At June 30, 2002, the unallocated reserve portion of the reserve for loan losses
decreased to $202,931 from $476,079 at June 30, 2001. This decrease is
attributable, in part to several significant initiatives which were implemented
or were in the process of implementation as of June 30, 2002. These initiatives
serve to enhance the Corporation's ability to more closely identify and monitor
risk elements associated with loan underwriting, review and collection processes
and to more clearly determine the adequacy of loan loss reserves. Specifically,
a management committee was established to monitor loan portfolio performance and
to review, identify and classify individual loan relationships. Also, certain
personnel changes within the business banking division have significantly
improved the risk management process through the addition of several more
experienced underwriters and another experienced analyst to assist in the
underwriting and ongoing credit review processes.
Current local and national economic conditions are expected to be sustained
throughout the course of the 2002 operating year. Management's performance
outlook concerning certain segments of the overall loan portfolio, however, has
improved slightly due to indications that such economic conditions, although
protracted, have not manifested a material adverse impact on the performance or
quality of those segments. Management does feel, however, that market
uncertainty and low growth expectations in the local and national economy are
such that the current outlook must be continuously re-evaluated for the
potential of a more significant impact in the future. New loan volumes and loan
terms appear consistent with historical trends with regard to credit quality and
proportionate composition. In evaluating the appropriateness of the unallocated
reserve, management considered the following factors:
. Specific and inherent loss estimates, which are periodically adjusted
based upon the most recent available information. There is, however, a
possibility that the amount of actual losses may vary for estimated
amounts. Consequently, estimation risk is present and should be
provided for in assessing the appropriateness of the reserve for loan
losses.
. The adverse effects of changes in the current economic and interest
rate environment on those borrowers who have a more leveraged
financial profile,
. The adverse effects of projected slowing trends, by certain external
parties, on automobile manufacturers and the impact on consumer demand
and consumption.
Other Assets
Total other assets of $16,003,434 at June 30, 2002 represents an increase of
$3,088,796 compared to $12,914,638 at December 31, 2002. A significant portion
of this increase is due to the purchase of additional bank owned life insurance
and appreciation in the value of these assets resulting in a net increase of
$3,145,857 during the first six months of 2002. Also, net purchases of accounts
receivable offset by the restructuring of certain receivables through new term
loan arrangements and additional reserves for potential losses resulted in a
$937,490 increase in Cashflow Maximizer accounts receivable balances outstanding
during the first six months of
15
2002. As of June 30, 2002, the total amount reserved for potential Cashflow
Maximizer losses was $411,000 compared to $200,000 at December 31, 2001. As of
June 30, 2002, management was in the process of developing an exit strategy for
the Cashflow Maximizer line of business which includes the cessation of further
business development efforts.
The following table represents a summary of activity related to the
Corporation's Cashflow Maximizer business line for the first six months of 2002
and for the 2001 operating year.
June 30, December 31,
2002 2001
- ----------------------------------------------------------------------------------------------------
Beginning Balance, January 1, $ 2,487,783 $ 1,966,275
Purchases of Receivables, Net of Repayments 1,148,490 721,508
Less:
Receivables Restructured as Term Loans (1,091,473) -----
- ----------------------------------------------------------------------------------------------------
Total Cashflow Maximizer Receivables Outstanding 2,544,800 2,687,783
Provision for Losses (211,000) (200,000)
- ----------------------------------------------------------------------------------------------------
Total Cashflow Maximizer Receivables Outstanding, Net $ 2,333,800 $ 2,487,783
====================================================================================================
Liabilities
Total liabilities were $445,336,805 at June 30, 2002, an increase of $2,740,175
from December 31, 2001. Contributing to the overall increase were increases in
total deposits, accrued interest payable and other liabilities of $2,307,231,
$398,747 and $34,197, respectively.
Deposits
Total deposits increased $2,307,231 from $340,983,291 at December 31, 2001 to
$343,290,522 at June 30, 2002. Contributing to the overall increase were
increases in saving deposits, time deposits over $100,000 and other time
deposits of $2,329,494, $3,395,672 and $2,864,611, respectively, offset by
decreases in non-interest bearing demand deposits, interest bearing demand
deposits and money market accounts of $329,803, $3,453,101 and $2,499,642,
respectively.
The composition of deposits is shown in the following table:
June 30, December 31, Increase
2002 2001 (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------
Non-interest Bearing Demand $ 66,662,569 $ 66,992,372 $ (329,803)
Interest Bearing Demand 29,050,294 32,503,395 (3,453,101)
Savings 73,140,128 70,810,634 2,329,494
Money Market Account 52,784,330 55,283,972 (2,499,642)
Time Deposits equal to or more than $100,000 23,752,040 20,356,368 3,395,672
Time Deposits less than $100,000 97,901,161 95,036,550 2,864,611
- -----------------------------------------------------------------------------------------------------------------------------
Total Deposits $ 343,290,522 $ 340,983,291 $ 2,307,231
=============================================================================================================================
Total Borrowed Funds
At June 30, 2002, the Corporation had total borrowed funds of $94,000,000. There
are no advances that will mature within the next 12 months. The Corporation
borrowed these funds to provide liquidity for specific asset-liability
management strategies. All such advances are collateralized by qualifying
securities and loans and are subject to restrictions or penalties related to
prepayments.
Shareholders' Equity
Consolidated shareholders' equity increased $1,835,112 from $36,673,164 at
December 31, 2001 to $38,508,276 at June 30, 2002. This increase was the result
of an increase in capital surplus primarily due to the exercise of stock options
along with payment of a stock dividend to shareholders and an increase in
accumulated other comprehensive income, which is comprised entirely of
unrealized holding gains/losses on investment securities classified as available
for sale. These increases were offset by the purchase of treasury stock and
payment of cash dividends to shareholders.
The Corporation continues to maintain a strong capital position. Risk-based
capital ratios exceed current regulatory requirements. The Corporation's Tier I
risk-based capital ratio at June 30, 2002 was 9.73% compared to 10.09% at
December 31, 2001. The Corporation's total risk-based capital ratio at June 30,
2002 was 11.24% compared to 11.52% at December 31, 2001. Regulatory requirements
for Tier I and total risk-based capital ratios are 4.00% and 8.00%,
respectively.
16
Liquidity And Cash Flows
Liquidity is the ability to generate cash flows or obtain funds at a reasonable
cost to satisfy customer credit needs and the requirements of depositors. Liquid
assets include cash, federal funds sold, investments maturing in less than one
year and loan repayments. The Corporation's ability to obtain deposits and
purchase funds at reasonable rates determines its liability liquidity. As a
result of liquid asset management and the ability to generate liquidity through
deposit funding, management feels that the Corporation maintains overall
liquidity sufficient to satisfy customer needs. In the event that such measures
are not sufficient, the Corporation has established alternative sources of funds
in the form of wholesale borrowings and repurchase agreements.
Operating activities provided net cash of $3,089,582 during the first six months
of 2002, compared to net cash provided of $4,178,543 during the first six months
of 2001. The primary source of operating cash flows for 2002 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 $11,244,640 during the first six months of
2002, compared to net cash used of $19,652,072 during the first six months of
2001. Proceeds from sales, repayments and maturities of investment securities
available for sale, combined with increases in outstanding retail deposit
balances, were primarily used to fund growth in the loan portfolios, reinvested
in investment securities available for sale, and also the purchase of additional
bank-owned life insurance.
Financing activities provided cash of $474,798 and $17,141,990 for the first six
months of 2002 and 2001, respectively. A net increase in total deposits provided
cash while cash was used by the payment of cash dividends to shareholders and
purchases of treasury stock.
17
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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.
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.
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 April 30, 2002, a simulation analysis
assuming a one-time 200 basis point increase in interest rates, results in an
estimated positive impact of approximately 1.2% or approximately $236,000 on
projected net interest income over a one-year period. Conversely, a 200 basis
point decrease in interest rates results in a decrease in projected net interest
income of 1.9% or approximately $359,000 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 April
30, 2002. 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 April 30, 2002. Therefore, such analysis
is regarded as a fair presentation of the Corporation's market risk as of June
30, 2002.
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 - 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.
10.4 Certification of Principal Executive Officer or
Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350
(b) Reports on Form 8-K: None
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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, 2002 /s/ Lloyd G. Gibson
--------------------------------------------------------
Lloyd G. Gibson, President and Chief Executive Officer
Dated: August 14, 2002 /s/ James P. Radick
--------------------------------------------------------
James P. Radick, Treasurer (Principal Financial and
Accounting Officer)
20